Car insurer Direct Line aims to shore up profit margins

By Richa Naidu

(Reuters) – Direct Line Insurance Group , Britain’s largest car insurer, will pursue “value over volume” in 2014 to safeguard its profit margins after more than a year of heavy discounting across the sector.

Direct Line Chief Executive Paul Geddes said he would make profitability his priority this year, in a market where competition has intensified due to the popularity of price comparison websites and market reforms introduced last April.

“We will price according to the value that we want to get and according to the claims trends we see,” Geddes told Reuters in an interview after Direct Line reported its 2013 results.

The Automobile Association (AA), which has tracked car and home insurance in Britain since 1994, said the downward trend in motor premiums could be about to end.

The association said it expected premiums to rebound by up to 12 percent this year as car insurers come under increasing pressure from their directors to stop writing higher volumes at unprofitable rates.

“They won’t be able to cut prices any more. They’ll have to start putting prices up,” Simon Douglas, director of the AA, told Reuters on Tuesday.

He said it would take a “bigger player” – a company such as Direct Line, Aviva or newly listed esure Group – to make the first move and trigger a rise in premiums.

Geddes declined to comment on whether Direct Line would raise its premiums in 2014.

“The market is set by some players that are prepared to set low prices,” he said. “Profit will stay down while there are enough people prepared to write at those prices.”

Geddes said that Direct Line cut its motor premiums by 3-4 percent over the last year, versus a drop of 6-8 percent in the wider market.

Over 8.2 million Direct Line shares had changed hands by 1136 GMT on Wednesday. The London-listed stock rose as much as 4 percent to 271.5 pence in early trade.

The intrinsic value of Direct Line’s stock is 497.4 pence, according to Thomson Reuters StarMine’s model of how much a stock should be worth when considering expected growth rates over the next 15 years.

RISING CLAIMS

In a bid to reduce the number of personal injury claims made annually in Britain, the government in April banned the payment of referral fees to solicitors, insurers and claims management firms, driving premiums down.

Despite this, claims rose last year, the AA’s Douglas said, adding that many insurers would not have enough income to compensate for this increase.

British motor insurers are expected to report a combined ratio, a measure of profitability, of about 114 percent in 2014, compared with 109.4 percent last year, according to a report by Ernst & Young.

A ratio above 100 percent means an insurer pays out more in claims than it earns in premiums.

The insurer, spun out of Royal Bank of Scotland in the wake of the financial crisis, said it aimed to achieve a combined ratio of between 95 percent and 97 percent in 2014.

Direct Line, which also offers home, travel and pet cover, posted a 70 percent rise in full-year pretax profit, helped by fewer home insurance claims. Net earned premiums fell 5 percent to 3.52 billion pounds.

It said it would pay a total dividend of 20.6 pence per share and that it was on track to meet its 1 billion pound cost target for 2014.

“2013 earnings and adverse weather losses so far in 2014 are better than our expectations,” RBC Europe analyst Gordon Aitken said, maintaining his “outperform” rating on the stock.

(Editing by Supriya Kurane and Robin Paxton)

Car insurer Direct Line aims to shore up profit margins