Tempted to invest here8 Jun 2020 11:05
This is cheap from a fundamental point of view, using DLG's 2019 results, and I feel there may be an opportunity here due to COVID-19 because drivers have to maintain/renew their car insurance by law, and yet must have driven far less in the past 2-3 months already so there claims frequency must be a fraction of what it would have been ordinarily.
Also feel that with far less people commuting, rushing to get to work in time, or rushing to catch a particular train, average speeds may have fallen, and perhaps people are driving more carefully than before.
On the other hands, claims severity could worsen if drivers return to the roads out of practice (from 10 weeks without driving lets say), and seeing as there's now more cyclists than ever, some of whom are perhaps not ready for roads to return to normal.
Total premiums will have fallen a little too due to people declaring that they're expecting to drive fewer miles in the year etc. It's possible more people have paid more attention this year so haven't let their policies tacitly renew, and instead haggled on price, bringing premiums down, even if it is from new customers coming in. But there cannot be many drivers who have deliberately non-renewed or held off from renewing their policies seeing as it is compulsory to have insurance by law. So I reckon the impact from all of this will be a single digit decrease in premiums.
Taking all these factors into account is very difficult but my gut feeling is premiums will rather marginally (5-10% lets say) but claims frequency across the year will fall much more significantly (by 20-25% lets say), so the question then becomes whether there'll be enough high value losses to ruin what otherwise appears to be a very attractive gap.
My hunch is that the Combined Ratio of 92% last year will come down to 85-87% for this policy period- a huge improvement in underwriting profitability. This would explain why Admiral have chosen to return £110m in car premiums to policyholders during the lockdown.
Profits from the investment of premium is expected to fall from 2% to 1.8% which does not appear too bad, and certainly does not offset the significant improvement in underwriting profitability.
DLG have underwritten some Business Interruption policies but they say that their wording excludes pandemics/infectious disease; and, as far as I can tell, the "Hiscox Action Group" are not disputing this, so hopefully they're in the clear and won't have to pay out hundreds of millions from this.
On this basis, I feel DLG's profits will increase quite considerably in this particular year. This one-off boost should see the dividend returned quite quickly, and you could see a special dividend being announced once it becomes clear that profits have been given a one-off boost.
What's people's thoughts?
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