Direct Line Earnings: Core Policies and Prices Under Pressure

All in all Direct Line DLG has reported quite a disappointing set of numbers for the first quarter of 2023 as the business continues to remain under pressure. While the company has reported a 19% rise in average motor insurance premiums quarter on quarter, much of that has actually been the result of increased premiums in partnerships that the business has been exiting over the long term. Within the split, motor insurance own-brand average premiums are down 7.9% and motor partnership average premiums are 19.2% higher. All in there has been an 11% quarter-on-quarter rise. There has been some small low-single-digit increases in average motor premiums since the end of 2022. Together, it was not enough to offset the 14% motor claims inflationary management that was reported with full-year numbers, higher than the peak 9.6% rise in consumer price inflation. As a result, the business has guided this year could be another difficult one in terms of earnings. Motor policies are not looking much better with a 2.3% and 10.0% decrease in own-brands and partnerships respectively, since the end of 2022.

Trading is looking a little better in home insurance. Own-brand average premiums are down 8.1% with partnerships similarly showing a 5.0% rise. But the policy count has also fallen as the business has seen compression in own-brands by 0.1% and partnerships by 0.5%. The bright spot for the company remains commercial where the unit looks on track to again post a high-single-digit policy count increase over the year. The impact of weather across the home and commercial units is currently within the GBP 80 million budget.

As we incorporate these numbers into our full-year estimates we revise our fair value estimate down to GBP 2.35 per share. We maintain our no moat rating.