Penny James, the insurer’s chief executive says inflation is ‘developing in line with expectations’

Direct Line reported strong growth in its commercial lines results as adjusted gross written premiums (GWP) reached £552.2m for the first nine months of 2022.

This represented a rise from £489.5m in the same period last year, despite a slump in motor and home insurance premiums.

Published this week (8 November 2022), the insurer’s third quarter trading update showed that motor premiums dipped by 8.9% in the first nine months of 2022 while home insurance premiums fell by 10.1%.

The insurer reached £174.4m in adjusted GWP just in Q3, representing 31.6% of the total figure for the first nine months of this year.

Penny James, Direct Line Group’s chief executive, said: “Trading across the group was broadly in line with our expectations given the challenging market backdrops in motor and home, whilst we continued to deliver strong growth in commercial.”

The insurer saw reduced new business in motor early on in Q3 and increased prices to restore its margins based on claims assumptions. It will be launching a new basic car insurance product in Q4 this year, for customers hit by the cost of living crisis. 

Motor inflation levels were close to its expectations of around 10% for the year, said the update.

James continued: “The pricing actions we have taken to restore margins in motor led to a reduction in new business sales, however we were encouraged to see this improve steadily across the quarter as the market hardened.

”Having restored our motor targeted written loss ratios, based on our claim’s assumptions, we maintained these throughout Q3, with inflation developing in line with our expectations.”

Direct Line’s update added that it expected the 2022 full-year combined operating ratio (COR) to reach 98% or “moderately above” this figure. 

Trading with care

The insurer stated that it traded with care by “taking actions to negotiate the uncertain economic environment – especially in relation to inflation”.

The trading statement said: “We continued to work on the actions we set out at our H1 results to restore the resilience of our balance sheet, including reducing our exposure to credit risk in our investment portfolio, reducing costs and considering the use of strategic reinsurance.”

However, it said that its market position improved as the third quarter got underway due to premium rates in the market increasing.

Meanwhile, retention rates for home remained strong despite challenging market conditions.

No mean feat

Hargreaves Lansdown believes that Direct Line’s targets are ”ambitious but not unachievable”.

A statement from the financial services firm said: ”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 mean insurers can 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.”

Hargreaves Lansdown explained the insurer has two key advantages – its brand, which has helped it price more aggressively than competitors in the past secure a relatively high proportion of direct sales without the need to sell via price comparison sites. 

Its second advantage is scale, because the new, leaner cost base can be spread across more policies.