Shares of Direct Line rise as higher motor insurance premiums bear fruit and £550m deal is struck

Shares of Direct Line skyrocketed this morning as the insurer revealed it had struck a deal to sell part of its business and that higher auto insurance premiums paid off.

The insurance company said it had reached a deal with RSA Insurance to sell its commercial insurance business for a total of £550 million.

Despite the sale, the FTSE 250 company saw pre-tax losses rise from £11.1m year-on-year to £76.3m in the first half of the year ended June 30.

But Direct Line stressed that it believed operating profit was likely to improve in 2024 as a result of higher auto insurance margins.

Acting Direct Line CEO Jon Greenwood said the sale of the company was welcome and on the priority list for the year.

He added: “Our second priority this year was to improve margins in Auto. We made good progress and thanks to higher prices and other underwriting measures, we achieved gross premium growth of 7 percent. We now believe that we are profitable, consistent with a net underwriting margin of 10 percent.

“This has taken longer than expected and will take some time to feed through to reported earnings.”

Direct Line Stocks were up 17.02 percent in morning trading Thursday to 175.65p.

The deal will see the company pocket an initial £520 million, with a further £30 million contingent on certain earn-out provisions related to the company’s financial performance.

The company predicts the sale will trigger a release of £270 million in capital, with approximately £170 million to be released when the deal is approved.

Auto insurance premiums have risen, with insurers blaming higher repair costs as more expensive parts and labor inflation push repair costs up. Rising used car prices have also pushed up the cost of replacing depreciated vehicles.

But customers have been hardest hit by the post-Covid uptick in premiums.

In July, Confused.com revealed that car insurance premiums were at an all-time high, with the average driver now paying £776 a year.

There were fewer cars on the road during the pandemic, which reduced auto insurance premiums as fewer accidents had to be covered.

With the increase in driving after lockdowns ended, insurers faced more claims and suffered a double whammy as the cost of those claims has skyrocketed.

Commenting on the potential £550 million deal, Greenwood said: ‘This transaction crystallises an attractive valuation for our brokered commercial insurance business and fully focuses the Group on retail private and direct small business insurance customers.

“Over the past decade, we have turned around the performance of the brokered commercial insurance business by focusing on strong and extensive brokerage partnerships, supported by investments in the technology platform.”

Earlier this month, Direct Line revealed it could pay around £30m in compensation after admitting it had overcharged some consumers.

The insurer has agreed to conduct a corporate investigation into the application of the pricing policy rules introduced by the Financial Conduct Authority last year.

Such regulations were introduced to eliminate ‘price hikes’, where insurers charge higher premiums to existing customers for the same services.

Greenwood added: ‘However, its specialist trading model operates in a different part of the UK insurance market to the rest of the Group and it is therefore the right strategic decision to sell to RSA.

“The value created for shareholders will enable the group to improve its capital resilience and provide a platform for better performance.”