Anyone who has bought UK car insurance lately will have been shocked by soaring prices. They have not helped Direct Line so far. It warned of pressure on profits on Tuesday. The goal of an incoming chief executive should be to tease a turnround from higher policy prices.
The market for motor insurance is tough. The company says claims inflation will hit earnings this year. It was already struggling. Direct Line scrapped dividends and waved goodbye to chief executive Penny James in January.
Steeper costs for repairs and injuries have curbed profits across motor insurance. Direct Line trailed more than most and suffered a £167mn underwriting loss last year.
The market is now finding its equilibrium. That should help Direct Line restore profitability, forecast at £220mn for this year according to updated Visible Alpha consensus.
The company’s average motor renewal premiums rose 19 cent in the first quarter compared with 2022 but policy volumes fell 2.5 per cent. That compares with drops of 5 per cent and 3 per cent respectively last year.
The shares fell 7 per cent on Tuesday, taking the decrease to one-third over the past year. Those with an eye on the top job at Direct Line should keep the other one on Admiral. Shares in the rival insurer persistently trade at 17 times forward earnings, double Direct Line’s valuation.
A more conservative approach to reserves is one reason. These have supported Admiral’s earnings over the past five years. At Direct Line their contribution to earnings has shrunk dramatically.
Capital is also higher. Admiral’s Solvency II ratio has averaged 190 per cent over the past five years compared with 170 per cent for Direct Line. A good run might get Direct Line back to 160 per cent this year.
A small capital raise would guarantee this, thinks Ivan Bokhmat of Barclays. It would give Direct Line a steadier route to capitalise on rising policy prices and deal with increased volatility in claims costs.
Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore
