Direct Line gross written premiums dip but combined ratio guidance reaffirmed

Direct Line posted a dip in first-quarter gross written premiums on Wednesday but reiterated its 2019 combined ratio guidance.

The insurer said gross written premiums slipped 2.1% to £753.9m. Premiums in the home partnerships segment declined 5.7% to £44.6m mostly as a result of the continued run-off of certain partnership contracts. Premiums in the motor division were 4.2% lower at £386.9m, with claims inflation at the upper end of the group's long-term expectations of 3% to 5%, primarily due to the continuation of higher motor third-party property damage costs.

In the home own brands segment, premiums edged up 0.6% to £96.6m, while rescue and other personal lines and commercial saw gross written premiums rise 1.7% and 1.2% to £105.4m and £120.4m, respectively.

Chief financial officer and chief executive officer designate Penny James said the first quarter was characterised by "significant operational progress in a tough trading environment".

"The motor market remained highly competitive, with market premiums failing to keep pace with claims inflation. Our response, as usual, was to focus on achieving our target loss ratios and continuing to improve pricing effectiveness. The home market has been slightly less challenging than motor but remained competitive. Elsewhere, Green Flag and Direct Line for Business continued their growth, increasing premiums by 15.8% and 8.1% respectively.

"As we said at the full year results, 2019 is a pivotal year for the delivery of our technology transformation programme and I'm delighted that we've had a successful start with the launch of our new PCW focused brand Darwin and the start of the roll-out of our new Motor and Travel systems. We are in the early stages of our plan to progressively roll out the new systems across our brands, products and channels so as to improve our competitiveness and customer experience."

The company said it remains on track to achieve its 2019 operating expenses target of less than £700m and reiterated its target of a 93% to 95% combined operating ratio for this year and over the medium term.

At 0845 BST, the shares were down 1.7% at 311.94p.

RBC Capital Markets said gross written premiums came in 4% below its expectation of £786.6m and attributed the drop to margin over volume focus in the motor division. The Canadian bank trimmed its price target on the stock to 395p from 400p but kept its 'outperform' rating, saying it sees reasons why Direct Line should be more resilient than some motor insurance peers.

"We expect in the longer run, Direct Line will benefit from an improving accident year loss ratio and expense ratio offset by a lower reliance on prior year reserve releases," it said.

RBC also pointed to the fact that management was "confident enough" to commit to its 2019 guidance.

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: "General insurers are in a cyclical downturn at the moment, with increased competition squeezing pricing. Prices have been rising more slowly than claims, and that’s likely to have negative consequences for profitability across the sector. DLG hasn’t escaped unscathed.

"The group’s responded by focussing on underwriting quality, and reducing risk in some parts of the portfolio. That may reduce the amount of business DLG’s able to write, but all being well it should mean its insurance contracts remain profitable.

"Ultimately DLG faces the same challenges as any other general insurer. As long as the insurance is valid, most drivers and homeowners don’t care too much which company’s logo is on the headed paper. That leaves the industry competing on price alone, sparking regular races to the bottom. In the past DLG has navigated these ups and downs well - hopefully it will do so again."

Russ Mould, investment director at AJ Bell, said that in particular, the falling cost of motor policies is good news for drivers but bad news for insurers trying to profit from this type of cover.

"Making matters worse is claims inflation which is running at the upper end of Direct Line’s 3% to 5% long-term expectation.

"Direct Line is not alone in battling such pressures. Hastings last month said it was cutting prices to improve its retention rate and attract new business. It warned that the full year loss ratio - the ratio of insurance claims to premiums earned – may be at the top end of its estimates. It blamed claims inflation on repair costs and higher third party property damage costs.

"Insurance may seem like the most straightforward industry but that’s far from the truth. There is a constant juggling act where insurers need to increase scale, attract large amounts of customers and make sure the amount of money paid out as claims is less than the income from premiums.

"They are constantly having to tweak pricing, offer additional services to customers to help stand out from the crowd, and keep costs under control.

"The sector is also under regulatory pressure over effective penalties for customer loyalty. There is now pressure on the industry - as well as other sectors like broadband - to stop giving the best prices only to new customers."