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Direct Line Shares Gain on Disposal of a Business Unit
Global Markets

Direct Line Shares Gain on Disposal of a Business Unit

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Direct Line Insurance Group yesterday reported its half-yearly earnings with larger losses. Nevertheless, the shares garnered attention as the company announced the divestment of one of its business lines, which positively impacted the stock.

The UK-based insurer Direct Line Insurance Group PLC’s (GB:DLG) shares gained yesterday after the company announced the disposal of its brokered commercial insurance business unit in its first-half earnings of 2023. The company agreed to sell its unit to RSA Insurance, a subsidiary of Intact Financial Corp., for £520 million in a move to strengthen its balance sheet.

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The Direct Line share price rose by 15% yesterday after the results. This provides a degree of relief to investors, given that the shares have largely remained in negative territory throughout 2023. YTD, the shares have incurred a trading loss of 23.4%.

Increased Losses, Improved Solvency

For the first half, the company reported a pre-tax loss of £76.3 million, up from £11.1 million reported in the first half last year. The gross written premium grew by 9.8% to £1.62 billion as compared to £1.47 billion in 1H22. Direct Line experienced a shift, moving from a £166.5 million profit to a £93.4 million insurance service loss. However, this was partially mitigated by an increase in net investment income, which rose from £53.8 million to £78.9 million.

At the end of the first half, the solvency ratio stood at 147%, which was slightly below analysts’ expectations. However, the recently announced £520 million sale is expected to increase this measure by approximately 45%. The solvency ratio of an insurance company is used to assess its financial well-being and its outstanding obligations, including debts and liabilities.

Citi analyst Alexander Evans acknowledged that the results were “very poor,” but he also noted positive indications regarding the outlook. They emphasized that the sale of the brokered commercial insurance unit had eliminated any possibility of an equity raise.

Nine days ago, Evans reiterated his Buy rating on the stock, predicting an upside of 12.4% in the share price.

Is Direct Line a Good Share to Buy?

DLG stock has a Hold rating on TipRanks, backed by one Buy, four Hold, and one Sell recommendation. The average price forecast is 168p, which is 3.18% lower than the current trading level.

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