Direct Line shares soar as hiking car insurance premiums pays off and it strikes £550m deal
- Deal will see firm sell its brokered commercial insurance to RSA
- FTSE 250 company saw pre-tax losses risen to £76.3m from £11.1m in Q1
Direct Line’s shares skyrocketed this morning as the insurer revealed it had struck a deal to sell part of its business and that hiking car insurance premiums was paying off.
The insurance company said it had reached a deal with RSA insurance to sell its brokered commercial insurance for a total that could reach £550million.
Despite the sale, the FTSE 250 company saw pre-tax losses rise to £76.3million from £11.1million year-to-year, in the first half of the year ending 30 June.
But Direct Line stressed that it believed operating profit in 2024 was likely to improve due to increased motor insurance margins.
The insurance company revealed that it had struck a deal with RSA insurance to sell its brokered commercial insurance, which could total £550million
Direct Line’s acting chief executive officer, Jon Greenwood, said the sale of the business was welcome and on its priorities for the year.
He added: ‘Our second priority this year has been to improve margins in Motor. We have made good progress and with increased pricing together with other underwriting actions, delivered gross written premium growth of 7 per cent and we now believe that we are underwriting profitably, consistent with a 10 per cent net insurance margin.
‘This has taken longer than expected and will take time to flow through into reported earnings.’
Direct Line shares have risen by 17.02 per cent to 175.65p in morning trading on Thursday.
The deal will see the business pocket an initial £520million with a further £30million dependent on certain earn-out provisions relating to the financial performance of the business.
The firm predict the sale will lead to a release of £270million in capital with approximately £170million being released when the deal is approved.
Car insurance premiums have been on the rise with insurers blaming increased repair costs as more expensive parts and labour inflation send repair bills spiralling. Rising used car prices have also driven up the cost of replacing written off vehicles.
But customers have born the brunt of the post-Covid rebound in premiums.
In July, Confused.com revealed that that car insurance premiums was at its highest-ever level, with the average driver now paying £776 a year.
During the pandemic, fewer cars were on the road, as a result car insurance premiums fell as there were fewer crashes to pay out for.
With a surge in driving after lockdowns ended, insurers faced more claims and were hit by a double whammy as the cost of those claims has soared.
Commenting on the potential £550million deal, Greenwood said: ‘This transaction crystallises an attractive valuation for our brokered commercial insurance business lines and focuses the Group fully on retail personal and direct small business commercial lines insurance customers.
‘Over the last ten years we have turned around the performance of the brokered commercial insurance business lines by focusing on its strong and extensive partnerships with brokers, underpinned by investment in its technology platform.’
Earlier this month, Direct Line revealed it could pay approximately £30million in compensation after admitting to overcharging some consumers.
The insurer has agreed to conduct a business review regarding the application of pricing practices rules introduced last year by the Financial Conduct Authority.
Such regulations were brought in to stamp out ‘price walking,’ whereby insurance providers charge higher premiums to longstanding 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 therefore it is the right strategic decision to sell to RSA.
‘The value created for shareholders will allow the group to improve its capital resilience and provides a platform for improved performance.’