Direct Line hit by move to standalone status

Direct Line Group is starting to feel the strain of setting itself up as a standalone entity while remaining part of its parent company.

The insurer continued its run of profitability, reporting a first-quarter 2012 operating profit of £84m - a 25% increase on £67m in the first quarter last year.

This improvement came in spite of a stubbornly high 106% COR (Q1 2011: 107%). While part of this was down to seasonal weather claims, the ratio was also hit by changes related to its new status.

One of the changes was that the results of Direct Line’s run-off business, including broker personal lines, were rolled back into the insurer’s results for the first quarter. The run-off business results had previously been reported under parent company The Royal Bank of Scotland’s non-core business segment, rather than Direct Line Group’s.

Direct Line Group finance director John Reizenstein explained: “This means the loss ratio, the commission ratio and the expense ratio are all higher than if you just looked at the ongoing business.”

If the discontinued business has been excluded, the insurer’s COR would have been 104% in the first quarter of 2012.

Direct Line Group’s expense ratio increased by three points to 25% (Q1 2011: 22%). This was partly a result of the insurer still being charged for internal group functions, such as human resources and treasury, while incurring the expenses of setting up its own.

“There is some dual-running of costs,” Direct Line Group chief executive Paul Geddes said.

Some of the additional costs, however, were down to marketing spend. For example, the company launched a campaign for its Churchill brand during the quarter.

Despite the distortions caused by Direct Line Group’s pending split, Geddes hailed the company’s progress, and in particular the flat gross written premium of £1.04bn after a prolonged period of reduction.

Geddes said: “The thing that is really gratifying, having very deliberately taken down the size and risk of the book over the past couple of years, is to see stabilisation of policy numbers and gross written premium.”

RBS is planning to divest Direct Line through an initial public offering (IPO) of a minority of the business in the second half of this year, with a secondary offering to follow in 2013.

Under the terms of its 2008 government bail-out, RBS must sell the majority of its Direct Line stake by the end of 2013 and the entire stake by the end of 2014.

There are rumours that private equity will bid for the firm - the most recent company said to be interested is Tungsten. But Geddes said: “We and the [RBS] group have a plan, which is the IPO, and that is what we are putting all our efforts into.”