RE: Buyer15 Mar 2022 12:53
Yep, must be most popular date for companies.
Hargreaves Landsdown view on results - A large part of why the yield's so high, is the reduction in Direct Line's share price.
It's true that on the face of it, the group's profits are now covering the dividend - an area we were concerned about previously. But only just. And there are some challenges remaining meaning we can't rule out changes to shareholder returns.
Personal insurance remains highly competitive, and with rivals offering pretty generic products, few companies can maintain any semblance of pricing power. That has tended to have negative consequences for combined operating ratios (the percentage of premiums that are paid out as claims or expenses) as companies are forced to cut prices to attract customers. Price comparison websites have only exacerbated the problem.
New rules also mean insurers will no longer be allowed to automatically hike home and car renewal quotes. This is a headwind felt by the whole industry. However, we must admit that amongst this unhelpful development, Direct Line's ability to keep its medium-term targets intact is no mean feat.
We're also encouraged by Direct Line's strong retention rates in key areas, made more difficult by changes to automatic renewals. The money invested in launching a new integrated Motor platform should also help with this in the long run, as well as boosting efficiency (more on that later).
One of Direct Line's key advantage is its brand. This has helped it price more aggressively than competitors and also secure a relatively high proportion of direct sales (without selling though price comparison sites). The second is scale, because the new, leaner cost base can be spread across more policies. New technology infrastructure helps the group compete on price comparison sites, and is improving underwriting accuracy.
Insurers must set aside a portion of the premiums they receive to meet future claims, called reserves. But, if claims turn out to be lower than expected or the rules around how much must be set aside change, the excess can be released as profit. In recent years profits have been flattered by the release of prior years' reserves. That's not a long-term source of growth, so we're also heartened to see reserve releases becoming a less significant part of total profit.
CEO Penny James has instead focused on cutting costs, capitalising on recent investments in technology and increasing the contribution of underwriting.
Overall, we think Direct Line's targets are ambitious but not unachievable - although a lot's riding on the new technology investments living up to their billing. Direct Line has a strong offering in a difficult market. The challenges are reflected in a below-average price to earnings ratio, which could rerate should we see continued accelerated momentum. As ever, all share prices can go down as well as up.
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