Direct Line announces US$1,164bn GWP in 2021 Q3

The UK insurance giant Direct Line Group (DLG) has announced its financial results for Q3 2021. The company’s GWP amounted to £857.1mn, or US$1.64bn. This is a rise of 0.7% compared with 2020’s Q3 results.

According to reports, Direct Line Group is attributing the rise to “strong growth in commercial and Green Flag Rescue of 12.4% and 9.2% respectively”, which “was offset by lower premiums in motor and travel”.

The insurer is adopting a positive outlook in terms of achieving its medium-term target for combined operating ratio (COR) – normalised for weather, it plans to hit the 93% to 95% range.

The insurer has also said it is focussing on pricing for claims severity inflation – something it believes is not reflected in the broader motor market.

DLG calculated that “claims severity inflation was slightly above our 3% to 5% medium-term expectations” mainly because of “inflation in second-hand vehicles, which impacted total loss settlements”. However, the insurer’s “in-house vehicle accident repair network allowed us to partially mitigate this”.

DGL claims changes

In a statement, it said, “For 2021, following lower than normal claims frequency in motor and strong prior-year reserve releases, we continue to expect a combined operating ratio in the range of 90% to 92%, normalised for weather.”

The group reportedly experienced weather event claims in Q3 of £7.5mn in home and £9.5mn in commercial. Year to date total weather events are estimated at £20 million compared to its annual budget assumption of £69mn for 2021.

However, the GWP boost has not been an across-the-board rise.  In Q3 this year, DLG recorded a substantial 1.4% decrease in its motor GWP. This stood at £440.9m in 2021 compared to £447.2m for the same period in 2020. The insurer’s own motor brands reported a 1.8% GWP drop for Q3, which adds to a 4.4% GWP fall in the first nine months of 2021 so far.

Furthermore, over the past nine months, Direct Line reported a 0.8% drop in overall GWP, down from £2,432.3mn in the prior year period to £2,413.6mn in 2021. This included a decrease in GWP across motor and rescue and other personal lines alongside an uptick in GWP in home and a significant uptick in GWP in commercial, which rose 15% during the nine months.

However, reflecting on the success of its commercial business, Direct Line noted that this continues to see the benefits of its transformation, with strong growth across both direct own brands and NIG and other.

Motor insurance strife

Experts say the news has resulted from a combination of factors that have hit the motor insurance industry over the past two years and that customers may see a rise in costs when it comes to policy renewals. 

Karl Morris, Director of Financials at the investment research company, Edison Group, explains, “Direct Line’s (DL’s) Q321 trading update confirms the group's messaging since its H121 results.  While Q321 group’s headline gross written premiums (GWP) were largely flat year on year (YOY) thanks to the commercial division, motor GWP was down 1.4% with premium rates remaining under pressure. 

Morris says that according to the Confused.com motor premium index, rates fell 16% in Q321 with further disruption from the FCA price walking ban in January of next year. 

He continues,“Nevertheless, the CEO at Confused stated the following “It’s likely that prices could start to creep up as people return to work and people are spending more time travelling on the road. We’re already starting to see this in some areas of the UK. And this will mean that the overall price of insurance will increase, which means the cost of renewal will too.”

In terms of claims frequency, the group states that severity inflation is running above the 3%-5% medium-term expectation driven by higher second-hand vehicle prices.  

Morris points out, "DL’s expense ratio remains on track to hit 20% or better in 2023 driven by digitalization and other initiatives which should underpin confidence in the medium target combined ratio (COR) range of 93% to 95%.  

“Interestingly we note that the company has not disclosed its solvency ratio that was 195% at H121 (target range 140% to 180%) but we expect that this will have remained at the top end or above target range that should support its sector-leading yield of over 8%.

Direct Line Group share value

Morris goes on to say that in general, DLG will hold the line in terms of valuation due to its defensive business modelling.

“In general, sell-side analysts remain bullish on Direct line (5 Buys, 2 Holds and no sell recommendations) despite the shares being down 11% to £2.88 year to date. This compares to the wider UK FTSE 350 non-life index which is down 5.3% respectively. On valuation the shares look decent value with DL is trading at a PE of 10x 22e and a P/Book of 1.4x for an ROE of almost 14%. In addition, a dividend yield of 8% is also supportive."

He adds, “Clearly growth prospects are a concern for some, but the defensive business model and strong management team suggests a decent risk reward profile.”