Rising premiums keep Direct Line afloat ahead of takeover

By Aidan Gregory

March 4 - (The Insurer) - While Direct Line Group’s 2024 results on Tuesday highlighted the decisive actions it has taken to improve its balance sheet and underwriting discipline, analysts have warned that the UK personal lines carrier continues to face challenging margins as it struggles to retain customers.

Under CEO Adam Winslow, who took charge in March last year, Direct Line Group has cut costs, enforced stricter underwriting discipline and reversed its longstanding policy of not using price comparison websites such as GoCompare and Comparethemarket, which dominate the UK consumer insurance market.

In 2024, Direct Line Group made material progress in fixing its balance sheet and capital strength, with the company’s solvency ratio improving by 8 percentage points to 200%. This enabled the insurer to pay its shareholders a final dividend of 7 pence a share for last year.

The company swung to an operating profit of 205 million pounds ($263 million) last year, compared with an operating loss of 189.9 million pounds in 2023. Gross written premium grew 25.3% year on year to 3.7 billion pounds.

However, aggressive price hikes to improve its underwriting results have provoked an outflow of customers, with Direct Line Group’s overall number of insured policies declining by 5% last year to 8.8 million, with an even larger 8% fall in motor.

“The ongoing issue for this company and the reason that they're getting swallowed up and agreeing to the takeover is they just keep losing customers,” said Henry Heathfield, insurance equity analyst at Morningstar in Amsterdam, in an interview with The Insurer. “The premiums are up quite significantly. That is what is keeping them afloat.”

Direct Line Group remains a “shrinking business” with challenging margins, according to Heathfield. Direct Line Group’s net insurance margin was 3.6% in 2024, and just 1% in motor.

“It’s always been a very fragmented and difficult market,” said Helena Kingsley-Tomkins, insurance credit analyst at Moody’s in London, in an interview last week. “It's definitely not surprising that off the back of COVID-19 and claims inflation that it's just been too much for some of them.”

This was the case for Direct Line Group, which was hit by large UK motor losses due to adverse weather conditions and social inflation of claims following the pandemic. This triggered a profit warning and a collapse in the insurer’s share price in January 2023, which led to the resignation of previous CEO Penny James.

Direct Line Group’s historic avoidance of price comparison websites also left its business model behind in a highly cutthroat marketplace where the key driver of purchase for consumers is price.

“One of the features in the UK that differentiates it from the other markets where you see better underwriting results is price comparison websites,” said Kingsley-Tomkins. “That really drives down the pricing. I think we've seen so many players enter the market over the years and just steal market share. It's super tough for anyone.”

The weakness of Direct Line Group’s share price led to takeover interest from its rivals. The company successfully rebuffed two bids from Belgian insurer Ageas last year before accepting a sweetened offer to be acquired by Aviva in December.

Aviva’s revised bid for the company was 275 pence a share, a premium of 73.3% to Direct Line Group’s closing share price on November 27, the day before Aviva made its first offer.

“There is a sense of stability returning to Direct Line Group as it moves to be acquired by Aviva,” said Peel Hunt analyst Andreas Van Embden. “DLG shares now trade broadly in line with Aviva’s offer price.”

Direct Line Group’s shareholders are due to vote on the Aviva takeover on March 10.

Shares in Direct Line Group closed at 274.60 pence on Tuesday, down 0.8% from the previous close.