The Direct Line Insurance Group (LSE: DLG) share price gained an early 16% on H1 results day, 7 September.
It’s at 175p, as I write. But how high could it soar?
Direct Line doesn’t do all sorts of fancy investment products. No, it sells mostly personal insurance – we’ve all seen the TV ads for car and home insurance.
Unprepared
It was hit by the 2022-23 cold winter, leading to more claims. Rising inflation pushed the costs of dealing with them up too.
A company that focuses solely on insurance might have the provisions for dealing with short-term rises in claims? Well, it seems not, and the firm suspended its final dividend for 2022.
And that speeded up a share price decline that had been going on for a few years. We’re looking at a fall of nearly 50% in the past five years.
Cash bonanza
So what’s pushing the Direct Line share price up now? The big news is that it has agreed a deal to sell its brokered commercial lines business to RSA Insurance Group.
It should generate a fair bit of much-needed cash. There’s an initial consideration of £520m, and an extra £30m to come, depending on subsequent performance.
The board also reckons that, over time, the sale should free up capital of up to £270m. This should boost Direct Line’s solvency capital ratio, and make the balance sheet look a good bit better.
H1 results
The news did overshadow the actual H1 results. But the best I think I can say about them is they’re, well, not too bad.
Gross written premiums are up 9.8%, which is good. But it does follow a tough year last year. And we had a loss before tax of £76.3m. There’s some way to go yet, and we’re still in risky days.
Speaking of the outlook for 2023, the company said: “Operating profit in 2023 is expected to continue to be adversely affected by the earn through of previously written Motor business“.
Dividends back?
There’s one key thing I want to see, and that’s the return of dividends. And Direct Line reckons that will happen under two conditions.
One is an improved capital position, which should come from this new disposal. The other is a return to organic capital generation in the firm’s motor insurance division. That hasn’t happened yet, so we’ll have to wait and see how the second half goes.
Above 300p?
Some forecasts put the price-to-earnings (P/E) at only about five by 2025. They also suggest a double-digit dividend yield by then. Could that support the share price doubling? Maybe.
But these forecasts look optimistic to me. If the motor division isn’t fixed by the end of the year, I think we could see a new share price crunch.
But we have a new cash infusion. And new CEO Adam Winslow is due on board in early 2024. I reckon a much higher share price could become reality, if forecasts aren’t too far off.
