Shares in motor insurance giant Direct Line soared on Thursday after the firm announced the sale of its brokered commercial insurance business and revealed half-year trading numbers.
At 176.2p per share, the Direct Line Insurance Group share price was trading 17.4% higher in the session.
The firm announced it will sell its brokered commercial insurance business to Intact Financial’s RSA Insurance arm for an initial £520 million. It said that a further £30 million would be payable depending upon earn-out provisions related to the financial performance of the division.
Direct Line’s acting chief executive Jon Greenwood — who took over from former incumbent Penny James in the spring — said that “this transaction crystallises an attractive valuation for our brokered commercial insurance business lines and focuses the group fully on retail personal and direct small business commercial lines insurance customers.”
He added that “the value created for shareholders will allow the group to improve its capital resilience and provides a platform for improved performance.”
Premiums Up, Losses Rise
During the six months to June gross written premiums and associated fees at the FTSE 250 company leapt 9.8% between January and June, to £1.6 billion. It said that this reflected “growth in Commercial and rate increases implemented to improve Motor written margins.”
At its core Motor unit, the business enjoyed a 25% increase in its average renewal premiums.
However, the number of in-force policies across the group dropped to 9.36 million as price rose. This represented a 3.2% year-on-year reversal.
Pre-tax losses, meanwhile, widened to £76.3 million in the first half from £11.1 million a year earlier. Direct Line said that this was due to “the earn through of previously written Motor business.”
The company paid no dividend for the first half. It delivered a shareholder reward of 7.6p per share in the corresponding 2022 period.
Mixed Reaction from the City
Analyst Matt Britzman of Hargreaves Lansdown commented that Direct Line’s recent performance “could just mark a pivot point” for an insurance industry smacked by soaring claims inflation.
He noted that the FTSE 250 firm’s Motor division is profitable again as price rises have caught up with the elevated rate of cost inflation. Supply chain issues and labour costs have driven motor repair costs through the roof since the beginning of 2022.
Britzman said that “Direct Line has lost some customers, likely due to shopping around for better deals, but prices across the market are rising rapidly, so there’s not much let-up wherever they turn.”
However, the Hargreaves Lansdown man said investors shouldn’t expect dividend to return soon despite the sale of the brokered commercial insurance business.
He said that shareholder payouts would remain off the table “until Motor insurance shows signs of consistent profitability again.”
Mark Crouch, analyst at eToro, took a more sombre view of Direct Line’s update, commenting that its half-year numbers “make for uncomfortable reading for investors.”
He said that “increased pricing means gross premiums are up comfortably year-on-year but the actual number of policies in force has shrunk, disappointingly.”
Crouch added that the size of Direct Line’s half-year losses indicates that “its approach to underwriting has not been conducive to turning a profit.” He said that while the company is taking steps to improve performance, he added that “it is far from being out of the woods and so we should expect continued underperformance for a while yet.”
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