Direct Line’s bumper dividend supported by rising motor premiums, says RBC

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Motor insurance premiums have started to rise again, which is good news for Direct Line PLC if less so for motorists, says RBC.


According to ONS consumer data, prices have been turning since April after falls during the Covid lockdown and RBS expects this trend to continue over the rest of the year.


“Compared to pre-COVID levels, UK traffic levels in Q3 so far are 4% lower, compared to 11% lower in 1H21 and 21% lower in 2H20.


“Claims frequencies stend to lag traffic frequencies, and we believe current year attritional loss ratios will increase in 2H21.


“The key inputs of Motor claims inflation (parts and repair costs, used car prices and road-traffic accident personal injury claims) all continued to increase in August. We expect increased traffic levels and high claims inflation will be drivers of pricing in 2H21”.


Direct Line has strong solvency, adds the broker, which means its 8.6% forecast yield for 2022 is well-supported while operating expenses are coming down through a technology upgrade and the buyout of the office lease. Underwriting targets also look achievable.


The broker’s price target is 390p while ‘Outperform’ is its investment rating.


Shares today were 296p, up 0.7%.

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