Direct Line’s recent trading update highlights the group is benefiting from substantial motor insurance price increases.
To remediate margins, however, Panmure Gordon says it is having to increase prices above the market average, meaning volumes continued to shrink over the first quarter.
It is too early to judge how the course-correction measures are faring, adds the broker, but it takes confidence in the fact that current business is being written at or close to target margins.
“We think it will take 18-24 months for the recent pricing action to be reflected in the accounts.
“Adam Winslow, the new CEO, has balanced the narrative of getting the bad news out, reinstating a partial dividend, and sensible forward-looking actions and targets.
“The motor insurance cycle remains favourable, [but] Sabre is better placed to play this trend, having reacted a year earlier to claims inflation and now benefiting from margin and volume expansion.
It is a clean play on the motor insurance sector with no regulatory overhang versus peers.
Direct Line currently trades on 17.2 time 2024 earnings, materially above the five-year historical average, having fixed its balance sheet and now facing a favourable underwriting cycle with plenty of self-help levers to pull.
Direct Line, which offers a 7.8% prospective dividend yield, has scheduled a Capital Markets Day on 10th July.