Direct Line Misses the Market; Restorative Actions in Motor; Unlikely Interim Dividend

Direct Line DLG has reported full-year 2022 results today that have not been taken well. Estimates from PitchBook place consensus estimates of earnings per share at around GBP 0.02. Yet, negative GBP 0.03 is the actual. In terms of the business’s group profit, this amounted to negative GBP 39 million for the year. That is versus the negative GBP 55 million that we forecast. There is a lot to digest in the results but we reduce our fair value estimate to GBP 2.65 per share and we maintain our rating of no economic moat.

Motor is really the division that is feeling all the pressure at Direct Line. The business has ultimately struggled to read inflation, which has led to a delay in the earn-through of rate rises as well as a delay in the adequacy of rate rise actions. Direct Line has increased new business prices at the start of the year by 7% and then 22% throughout the remainder of 2022. But, as the business has looked to improve retention to lower costs and we assume retain preferred risks, along with the regulatory changes to prices at the start of the year, renewal prices have dropped throughout the year by 6%. Motor retention is up to 82% though there is still a lot of pressure as motor policies have dropped by 3.4%, which is quite a lot higher than the 2.2% drop we forecast. The inability to put through rate rises in a timely manner has meant a substantial loss ratio deterioration. The motor combined ratio came in at 114.7% versus 92.4% that we forecast.

In excluding the abnormal weather that has had an impact on commercial and home, the remainder of Direct Line’s divisions have performed well. However, the business is no longer selling low-margin travel policies that are bundled with bank accounts. And the critical factor in today’s results is the 147% solvency ratio. While there are capital actions being taken to restore this, we anticipate an interim dividend would not be sound. The outlook is for another poor 2023 before rate rises start to earn.