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2 Troubling Reasons To Avoid Direct Line Insurance Group plc

In recent days I have looked at why I believe Direct Line Insurance Group (LSE: DLG) is poised to reach for the stars (the original article can be viewed here).

But, of course, the world of investing is never a black and white business — it take a variety of views to make a market, and the actual stock price is the only indisputable factor. With this in mind I have laid out the key factors which could, in fact, push Direct Line Insurance Group’s share price to the downside.

Competition continues to crimp turnover

I noted in my previous article that the effect of price comparison websites on the UK’s largest insurers could be on the wane. Still, the problem of galloping competition across Direct Line’s major insurance lines — most notably the Motor and Home divisions — continues to Direct Line 2hamper the firm’s revenues outlook.

Direct Line saw Motor gross written premiums slump 10.8% during 2013, while the number of active policies dropped 5.4% last year. The insurer noted that “after some signs in the fourth quarter of 2013 of market stabilisation, early 2014 has seen increased competition. A number of market participants have reduced prices, putting additional pressure on new business volumes.”

Direct Line has introduced a number of measures to stay at the front of the pack, from rolling out telematic black boxes to bring down premiums through to investing heavily in customer service. But with household budgets remaining under considerable pressure, Direct Line will have to paddle extremely hard just to stand still in the face of rising competition.

Weather claims could be poised to climb

Severe flooding during the back end of 2013 and continuing into the first quarter has weighed heavily across the UK insurance sector. Direct Line noted in February that the eventual cost of higher Home claims is likely to ring in at between £70m and £90m — compared with the firm’s £80m per annum projection for major weather events — although a final bill is yet to be calculated.

Meanwhile the firm’s Commercial arm is also likely to see claims in the region of £20m. And due to the high levels of land saturation across large swathes of the country, Direct Line is in severe danger of facing further hefty claims bills in the future. Indeed, the insurer pointed out that “with elevated ground water levels, the potential for future claims is increased in the event of further storms.”

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Royston does not own shares in Direct Line Insurance Group.