Direct Line loses connection

Motor insurer Direct Line (DLG) had the good sense to “kitchen sink” most of the bad news in its statement in an earlier trading update, which meant its inability to match premium price increases with inflation were priced into the shares before these results. Nevertheless, with cost inflation running at 10 per cent in its insurance claims pipeline, the company will take a significant hit this year to the bottom line. Taken together, the company pitches its range for combined operating ratio to between 96 per cent and 98 per cent, with so sign that this will fall back to normal levels until after next year.  

Car insurers generally have struggled to hold the line between increased price inflation, particularly for second-hand cars, and much higher claim levels as the dampening effect of the pandemic wore off within the sector. This was obvious in Direct Line’s huge loss ratio rise, up from 52 to 65 per cent, as more car journeys per household on average translated into higher numbers of claims.

The company is currently transitioning to a different pricing model after the FCA’s ban on so-called “price walking” came into effect in the half. New business prices have been hiked by 15 per cent to get ahead of inflation, though it is estimated that the new business market is up to 20 per cent smaller because of more customers sticking with their existing insurer, rather than switching out when teaser deals expire.

Shareholders won’t be pleased that the second £50mn tranche of Direct Line’s share buyback is now cancelled, though the need to conserve capital to preserve its liquidity ratio is understandable. Consensus estimates currently put Direct Line on a forward price earnings ratio of 8 for 2023. That looks about right. Hold.  

Last IC View: Hold, 313p, 03 Aug 2021