Lower investment income eats into profit

Paul Geddes, Direct Line Group

Direct Line Group reported a combined operating ratio (COR) of 89.6% in the first half of 2016, almost unchanged from the 89.4% it reported in the same period last year.

This was despite the insurer being hit with a £24m levy for using the Flood Re affordable flood insurance scheme, which added 1.6 percentage points to the COR.

Direct Line Group H1 results

 H1 2016H1 2015change (%)
Gross written premium (£m) 1,613.10 1,552.00 3.9
Underwriting profit (£m) 154.2 153.2 0.7
Investment return 91 109.8 -17.1
Profit before tax 298.5 315 -5.2
Key ratios H1 2016 H1 2015 change (points)
Loss ratio 53.4 54.2 -0.8
Commission ratio 10.9 11.6 -0.7
Expense ratio 25.3 23.6 1.7
COR 89.6 89.4 0.2

The company also paid out £13m for claims from major weather events.

These negatives were offset by a 9.8% increase in reserve releases to £236.1m (H1 2015: 215m), which shaved 16 points from the COR (H1 2015: 14.9%).

The company repeated its warning that it expects reserve releases to reduce in future years.

Direct Line Group’s profit before tax fell 5.2% to £298.5m (H1 2015: £315m) because of a 17% drop in investment return to £91m (H1 2015: £109.8m) and a drop in profit from run-off operations.

Gross written premiums grew 3.9% to £1.61bn (H1 2015: £1.55bn) thanks in part to 9.5% of rate increases in personal motor, as well as a 2.5% increase in motor in-force policies.

Direct Line Group chief executive Paul Geddes (pictured) said: “I am pleased with our results over the first half of 2016, as we delivered an excellent performance against a very strong comparator from the previous year.

“We have generated operating profits of over £320m in spite of weaker investment markets and the addition of the new Flood Re levy.

“Our customers continued to respond well to the refreshed propositions of our brands, which is reflected in another increase in the number of our own brands policies. Together, this demonstrates the benefits of the improvements we have made to strengthen our business.”

He added: “Although there remains a range of uncertainties in the macro-economic environment, we gain confidence from the strength of this performance, the transformation of the business and the approval of our partial internal model.”

Direct Line Group said it was “well prepared” to the UK’s pending exit from the European Union. It said there was no operational impact, and that it had managed the immediate investment volatility.

COR breakdown by line

 H1 2016H1 2015change (points)
Motor 92.3 91.4 0.9
Home 80.9 80.8 0.1
Rescue/other personal lines 92.7 91 1.7
Commercial 95 98.8 -3.8