Chief executive points to pricing, claims, and prior-year benefits

Paul Geddes

Direct Line will continue to perform well in the second half after chalking up an 83% profit hike in its interim results, chief executive Paul Geddes has said.

The UK’s largest motor insurer posted a profit after tax of £151.8m for the first half, up from £82.8m in the same period last year. It made an underwriting profit of £95.9m compared a loss of £20m in H1 2012.

“It was great insurance weather for the first half and that was fortuitous,” Geddes told Insurance Times after the interim results were released. “But if you take that out, a lot of things giving us performance will continue to give us performance.

“We will continue to get benefits because we get positive prior-year benefits. We reserve in a very cautious and competitive way and we have a good record in terms of account performance. And we expect pricing and claims to continue to give us positive momentum.”

The separation of the business from RBS Group is helping the company to reduce its cost base, which had been £1.13bn at the time of the flotation and is set to be £1bn or less in 2014.

Some businesses are being turned around: commercial and international operating profit has doubled. “Our commercial business is targeted to improve further, with an underwriting profit next year,” Geddes said.

Commercial continued to run at a loss in the first half although its combined operating ratio (COR) improved 7.4 points to 105.3 on the same period in 2012.

“In motor, we reduced our rates about 3% year-on-year,” said Geddes. “We think that’s a bit less than the market and we felt able to do so because of our  favourable trends in claims.

“We were happy to make that reduction. It is a bit less than the market but we were still able to have pretty stable policy counts in the second quarter. It was down 1%.”

Chief Finance Officer John Reizenstein said Direct Line expected to continue to achieve substantial reserve releases because it reserved in a “very conservative” way.

“We price to be competitive and to make a profit but that profit is not recognised by our auditors in the first year,” he said. “They will allow one, two or even three years before they fully recognise the profitability of the business we write and then they will make the releases. That’s how we know we can have strong releases.”