Direct Line Earnings: Sale of Commercial Insurance Broker Will Lift Solvency; Shares Undervalued

Direct Line DLG has reported results for the first half of 2023 and there is one thing that investors are focusing on: solvency. On the evening of Sept. 6, the company announced the sale of its commercial insurance broker business called NIG. This sale sketches out Direct Line’s intention to focus on its core operations of personal-line insurance and insurance for small-size businesses. The sale of the NIG business to Royal Sun Alliance, owned by Intact Financial Corporation, is being transacted at an upfront price of GBP 520 million with an earnout of up to GBP 30 million. This sale is expected to release GBP 170 million in capital upfront, GBP 270 million in total, and that should result in a 45-percentage-point rise in solvency. The transfer of NIG is expected to take place in the second quarter of 2024. At the end of first-half 2023, Direct Line’s solvency still stood at 147%, so it remains weak and the business has decided again to not pay an interim dividend. The sale of NIG brings much-needed capitalization as Direct Line continues to struggle in U.K. motor insurance. The company has been battling the rising cost of motor insurance claims and now estimates claims inflation of 17 percentage points for underwriting in 2022. That resulted in a substantial deterioration in the company’s motor claims ratio. Price rises are still being put through with average premium renewals of 19% over this interim. As of June 2023 rate rises were more like 30%. The number of motor policies Direct Line has been writing declined as a result by 4.2%. There is continued emphasis on better underwriting standards and exiting some bank partnerships. Further action that has been taken includes more fraud prevention, better use of premium discounts, and opening the company’s 23rd accident repair center, so Direct Line has better control over the claims process.

We maintain our GBP 2.20 fair value estimate and no-moat rating for the stock.