Direct Line takes a hit and ITV’s blurry picture

“After another bad day for stocks in the US, it is interesting to see the UK market remain relatively calm. Investors have been worried about US President Donald Trump causing disruption again with trade tariffs, triggering several negative sessions on stock markets around many parts of the world. On Wednesday the FTSE 100 slipped 0.2% which is only a minor movement in the context of wider events.

“Helping the FTSE to stay relatively stable were miners and oil producers, fighting off downwards pressure from tobacco maker Imperial Brands and insurer Direct Line,” says Russ Mould, Investment Director at AJ Bell.

Direct Line

“Competition in the insurance industry has taken its toll on Direct Line after it reported a drop in gross written premiums.

“In particular, the falling cost of motor policies is good news for drivers but bad news for insurers trying to profit from this type of cover.

“Making matters worse is claims inflation which is running at the upper end of Direct Line’s 3% to 5% long-term expectation.

“Direct Line is not alone in battling such pressures. Hastings last month said it was cutting prices to improve its retention rate and attract new business. It warned that the full year loss ratio – the ratio of insurance claims to premiums earned – may be at the top end of its estimates. It blamed claims inflation on repair costs and higher third party property damage costs.”

“Insurance may seem like the most straightforward industry but that’s far from the truth. There is a constant juggling act where insurers need to increase scale, attract large amounts of customers and make sure the amount of money paid out as claims is less than the income from premiums.

“They are constantly having to tweak pricing, offer additional services to customers to help stand out from the crowd, and keep costs under control.

“The sector is also under regulatory pressure over effective penalties for customer loyalty. There is now pressure on the industry – as well as other sectors like broadband – to stop giving the best prices only to new customers.”

ITV

“It has been a bit of a baptism of fire for Carolyn McCall since she joined free-to-air broadcaster ITV in early 2018.

“For all the progress made under her predecessor Adam Crozier and her own efforts at diversification, ITV remains reliant on TV advertising for a big chunk of its revenue.

“Today’s update shows the first quarter decline in advertising revenue was at the top end of guidance.

“Several factors are conspiring to make the picture blurry here. In the first three months of the year the timing of Easter and Brexit uncertainty weighed, and the lack of a men’s football World Cup tournament will result in a big year-on-year fall in the current quarter.

“It is little wonder that ITV is reaching for new initiatives like its Britbox streaming joint venture with the BBC, on track to launch in the second half. Though this itself will constrain earnings in the short-term given the heavy upfront investment involved.

“Investors can take some succour from underlying trends which show people still like to watch ITV – which is critical if the company is going to remain relevant to advertisers in the longer term.

“Its share of viewing is up and more people are registering for its ITV Hub platform. In delivering her growth strategy McCall needs to ensure she doesn’t take her eye off these basics.”

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