Operating profit down 13% as premiums continue to fall at the insurer

Profit at Direct Line Group (DLG) has fallen by 13.1% over the first six months of 2014 as gross written premium (GWP) continues to fall at the insurer.

DLG reported an operating profit of £249.1m for H1 2014, down from £286.6m for the same period in 2013.

This comes off the back of a 5.1% reduction in GWP to £1.9bn from £2bn as the insurer continues its “disciplined underwriting” approach to writing business and a fall in the level of reserve releases compared to the previous year.

Increased weather claims also dented underwriting profit as the insurer’s combined operating ratio (COR) deteriorated by two percentage points to 96.6% (H1 2013: 94.6%).

This, combined with falling GWP, means that underwriting profit at the insurer has fallen by almost 60% to £56.4m for the half year (H1 2013: £95.9m).

And Shore Capital analyst Eamonn Flanagan said the insurer’s reliance on non-underwriting profit was a concern for investors.

“Our issue remains that the group’s profitability is heavily reliant upon instalment income and other ancillary income, accounting for around 31% of total on-going profits in H1 2014, with 21 percentage points from instalment income,” he said. “We remain of the view that these lines are vulnerable to regulatory scrutiny especially given the margins earned on such products.”

The insurer has, however, made progress in cutting its cost base, with a 0.5% reduction in its expense ratio to 22.5%, and DLG said it had cut its total cost base by 5.4% over the period.

This means it is now on target to achieve its aim of having costs for the year of about £1bn.

Chief executive Paul Geddes said: “We delivered good results in the first half of 2014, despite major weather events and competitive markets, by maintaining our disciplined underwriting approach and from the continued delivery of our strategic initiatives. This continued performance and our strong capital position have enabled us to declare a special interim dividend of 10 pence per share as well as increase the regular interim dividend by 5%.”