Direct Line shares motor on deal to bolster the balance sheet

(Video Transcript)

Insurance firm's shares among top performers on LSE

Shares in the insurance company Direct Line are among the best performers on the London markets in today's session. It has reported earnings, but today's story is really not about earnings at all. Direct Line is to sell its brokered commercial insurance business for £520 million.

This isn't a bid to show off its balance sheet, which has been under strain recently because of a string of profit warnings at the company. Let's take a look at the shares because today's move is quite clearly to be seen here on the right-hand side, that big move up.

Technically, this is an interesting move, not just because it's gone beyond what had previously been the resistance at 164p. This stock opened down here at 150p this morning. It's now trading at 175. So not only has it gone past that line of resistance, it has gone past the 200-day moving average (MA) as well.

The group said today that its first-half pre-tax loss had widened to £76.3 million in the first half of June compared with the £11.1 million lost in the same period last year, rising premiums taking longer than expected to improve its margins.

Sector hit hard by claims inflation

But the company, like a lot of insurance businesses, is really finding it going tough because of the inflation that's coming through for claims. So if someone was underwritten on the policy, let's say this time last year, they would be paying a certain amount of money and none of that money would be attributable to the amount of inflation you've seen.

So if there had been a situation where one of their clients had gone into an insurance crash situation and they wanted to make a claim, the company would have made certain provision against the value of that vehicle. Now it's going to cost more to replace the parts of that vehicle because of inflation. And so the company is having to pay a lot of money.

Now, this big red candle we've seen here on 12 January was another profit warning. You can see these profit warnings have come through, and a string of them, really. This is a company that was owned once by Royal Bank of Scotland.

But Direct Line has got the highs back in 2018 at around £44 a share, giving our trade at £1.64. It's a shadow of its former self at £1.75. And this rise today, in the context of losses that we've seen, is only a small way of some sort of compensation for those that have been in the stock a long while.