Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Direct Line has reported weaker than expected first-half profits, as one of the UK’s biggest motor insurers takes steps to repair a business badly hit by a post-pandemic surge in the cost of claims.
Chief executive Adam Winslow said in a results announcement that the measures the insurer had already taken to improve its performance “are beginning to make a difference but there is more to do”.
The group said it was still being affected by the weaker profitability of motor policies written in the first half of last year, when it had not yet increased prices enough to match inflation in claims costs.
“The initial progress isn’t yet reflected in today’s results, we never expected that it would be,” Winslow told the Financial Times.
The group’s operating profit from ongoing operations for the first half was £63.7mn, below expectations of £85mn. Its net insurance margin — a measure of underwriting profits as a proportion of revenues — was 1.8 per cent, against forecasts of 3 per cent.
Although the cost of car insurance reached record levels last year, it has now started to fall, making it harder for insurers to improve profitability further.
Winslow said Direct Line had “a range of levers at our disposal which aren’t dependent on the wider rating cycle”, citing a £100mn cost savings plan. Trading was much stronger in its non-motor business, which includes home and commercial insurance. The net insurance margin for the division was 11.6 per cent.
Insurers have increased their prices for car and home insurance in recent years to catch up with spiralling inflation in claims costs. A series of profit warnings at Direct Line led to the departure of its chief executive Penny James last year and forced the company to scrap its dividend.
It then fought off a takeover attempt by Belgian rival Ageas that was announced just days before Winslow took the top job in March.
Direct Line took in £1.8bn of premiums and associated fees from ongoing operations in the first half of this year, up 54 per cent from the same period last year and beating analyst forecasts.
The results come just weeks after Direct Line admitted to an accounting error that had presented an overly flattering picture of its solvency ratio, a measure of its capital compared with the regulatory minimum. Winslow said it was a “very disappointing issue, but very specific and isolated”, and the group had been investing in its controls.
At the end of June, the company’s solvency ratio was broadly in line with expectations at 200 per cent. It said it would pay an interim dividend of 2p per share, below the 2.6p hoped for by analysts.
Direct Line shares were down 1 per cent by late morning trading.
