Direct Line Group progress continues with 6% H1 profit increase

Direct Line Group has reported a first-half 2012 operating profit of £219m, up 6% on the £206m it reported in last year’s first half.

The improvement came despite “worse than expected” home weather claims of £40m. Direct Line said the claims were offset by “significant” releases from prior year reserves.

While the first half 2012 technical profit (underwriting profit minus expenses) dropped 23% to £56m (H1 2011: £73m), the result was boosted by a 23% surge in investment income to £163m (H1 2011: £133m).

The insurance group’s combined ratio improved by one percentage point to 102% as a lower loss ratio just offset increases in the commission and expense ratios (see table below).

For the second quarter alone, the combined ratio was a profitable 98% (Q1 2012: 106%; Q2 2011: 99%).

Return on equity for the half improved by 0.6 points to 10.1% (H1 2011: 9.5%). At 30 June 2012, shareholders’ equity was £2.9 billion, with tangible shareholders’ equity of £2.6 billion.

The improved performance came despite a 1.4% drop in gross written premium to £2bn (H1 2011: 2.1bn).

Commenting on the results, Direct Line Group chief executive Paul Geddes said: “This has been an important quarter for Direct Line Group. We are now seeing the benefits of our transformation plan in pricing, risk, claims as well as capital and operational efficiency.”

Direct Line Group will begin the split from its current parent, Royal Bank of Scotland (RBS) in the second half of this year.

Geddes said on the separation process: “Aside from certain transitional services provided by RBS Group, we have essentially achieved the goal of operating as a standalone insurance company. This means we have full ownership of our cost base and have identified initiatives to realise £100m of cost savings across the business.”

He added: “Real strides have been made during the first half of the year, but we must build on this to achieve our aim of being Britain’s best retail general insurer.”