Direct Line Earnings: Higher Prices and Lower Policy Sales; Shares Undervalued

Direct Line DLG has reported gross written premiums of GBP 2.7 billion for the first nine months, a more than 20% rise on the same period in 2022 as the business incorporates 725,000 customers from mobility. This places the business ahead of the GBP 2.9 billion in gross premiums written that we forecast for the full year. Without the mobility partnership, Direct Line’s motor insurance policies declined by 8.5% year to date. That is versus the 10.1% decline that we have forecast for the full year. Active home insurance policies have declined by 2.7% year to date versus the 6.5% decline we have penciled in.

We expect Direct Line’s core motor and home insurance books to continue shedding policies in 2023. We expect this as the business persists in adjusting its pricing to the new environment in the U.K. after the Financial Conduct Authority introduced new business pricing rules as well as putting through inflation-based price increases. Since the end of 2022, Direct Line’s average motor insurance prices have risen by 30% with a 12% rise in prices for home insurance. We expect these price rises to start to earn through to its profits in 2024.

We maintain our GBP 2.20 per share fair value estimate and no moat rating. We view shares as undervalued currently.