Direct Line announces strategic review as it fights Ageas bid interest

Direct Line (DLG) has rarely left the headlines recently after the company received an improved bid approach of 239p a share from Belgian's Ageas (BE:AGS) earlier this month. The approach has helped to support the share price at a time when the company is undergoing a management change, in the form of new chief executive Adam Winslow, and dealing with the aftermath of some poor underwriting decisions in 2022.

The results illustrated that the bid process and discussions around an eventual sale to Ageas cannot be allowed to distract from the serious remedial work that is still required to improve the group’s underwriting position.

The net underwriting margin of -8.3 per cent – mainly due to unprofitable motor policies written in 2022 and the first half of last year – shows the scale of the problem that the new chief executive must tackle. When the motor polices are excluded, the other insurance lines generated a margin of 12 per cent. The company has now set an underwriting target of 13 per cent. Ongoing problems were also clear from the company’s capital allocation to its reserves; out of £141mn of reserve additions, £138mn was earmarked for motor.  

Management said it would now conduct a strategic review of the business and will present the results at a capital markets day in July.

Peel Hunt forecasts a price/earnings ratio of 11 for 2024, with a restored dividend yield of 4 per cent – a very big discount to near peer Admiral (ADM). The Ageas bid is very likely undervalued, and management should be given the chance to turn the business around. Buy.

Last IC view: Buy, 173p, 7 September 2023