Direct Line stays in ditch but now faces right way

LONDON, Sept 7 (Reuters Breakingviews) - Direct Line (DLGD.L) is still in the ditch. Shares in the 2.3 billion pound UK insurer are not far off half where they were in early 2022, when the group was slow to hike the price of premiums paid by motorist customers to reflect the inflating cost of payouts. Grisly first-half results ensued: costs were 106% of premiums, leading to an unseemly loss before tax that was even worse than expectations.

The good news is that the company is at least now facing the right way. Wednesday’s 520 million pound sale of its brokered commercial insurance arm to RSA and Intact Financial (IFC.TO) means an inadequate solvency ratio of 147% of regulatory requirements is now at an acceptable level, 45 percentage points higher. The fact a painful equity hike is now off the table explains why shares jumped over 15% on Thursday.

Direct Line’s scope to actually exit its ditch hinges on customers swallowing the price rises it’s belatedly pushing through. The cost of premiums has soared and will still rise next year. But a recession is on the cards, and rivals like Admiral (ADML.L), which had a stronger first-half, may be better-placed to compete in a tougher market. That implies incoming CEO Adam Winslow will have his work cut out. (By George Hay)

(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

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