Direct Line Insurance Group plc (DLG) Ordinary Shares 10.9090909p

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Direct Line reported a 25% increase in gross written premiums to £3.7bn. That was mainly due to the Motability partnership, which was only partially included in last year’s figures. In-force policies were down 5.5% over the year, ending at 8.8mn.

Underlying Operating profit of £205.0mn was an improvement from a loss of £189.9mn the prior year, largely driven by a return to profitability from the Motor business.

The solvency capital ratio after dividends, a measure of balance sheet strength, improved from 188% to 195%. A 5.0p final dividend was announced, taking the total to 7.0p, up 75%.

The sale to Aviva is on track, expected to complete midway through the year.

The shares were flat in early trading.

Our view

Direct Line if finally starting to bear the fruits of its price hikes, with motor insurance back in the land of profit, just in time for Aviva to come in and take the reins.

Aviva’s upgraded £3.7bn deal offered enough juice to get a green light back in December. The next steps are shareholder and regulatory approval, so this isn’t a done deal just yet.

It’s no secret that Direct Line has struggled over the past few years to deal with a challenging motor insurance market, and operational missteps have been a drag on performance. But there’s a fresh management team focussing on core areas like motor and home insurance, and recent results have painted a better picture.

Since motor insurance makes up nearly half of all active policies, unprofitable contracts written in recent times have been weighing on performance, but things have turned a corner. Insurance contracts take time to earn through, so price hikes always have a lag before the numbers see an impact. Direct Line was slower to raise prices than the wider market which means it’s taken longer to feel the benefits than peers.

But motor customer numbers are still falling, and the pace ticked higher again in the final quarter. That’s okay in the short term, while margins are the priority. Further out, we’ll be hoping to see the introduction of Direct Line to price comparison sites as a catalyst for customer growth.

Aside from Motor, performance across other business lines has been pretty good. Home insurance is a big part of the operation and remains profitable despite an uptick in claims inflation. Price hikes are again being called on, but customer numbers are proving a little more resilient than in Motor.

Capital levels are back at comfortable levels, and it’s taking a more prudent approach to dividends with a new policy based on paying out 60% of post-tax earnings. We think this is a good move given the market's cyclical nature.

This version of Direct Line looks more attractive than it has been for some time. However, with so much change in senior positions and a turnaround effort that’s far from complete, there are ongoing challenges.

The Aviva deal offers a quick win, and the valuation has risen in anticipation of a successful completion. That limits the upside from here, and investors should bear in mind that there are still hurdles to clear before this deal closes.

Environmental, Social and governance (ESG) risk

The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security are also an increasingly important risk for banks and diversified financial firms. Business ethics, ESG integration and labour relations are also worth monitoring.

According to Sustainalytics, Direct Line’s management of material ESG issues is strong.

Direct Line’s offering of responsible products is adequate, but it falls short in areas such as monitoring, regular training, and thorough processes for investigating complaints. Improvements could be made in data privacy due to a lack of regular risk assessments and insufficient training and auditing on cybersecurity. On a positive note, the company scores well in governance, featuring a strong board structure and remuneration policies linked to appropriate targets, including environmental, social, and governance (ESG) criteria.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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