Interactive Investor

Direct Line profit rockets as weather behaves

4th August 2015 11:25

Lee Wild from interactive investor

Motor insurer Direct Line has gone from strength to strength since it was spun out of Royal Bank of Scotland at 175p three years ago. The share price has more than doubled since to a record high, and there's an historic dividend yield of almost 4% excluding special payouts. Now, the ratio of costs to premiums is down sharply and half-year profit is up almost half.

In the six months ended 30 June, the owner of insurer Churchill and breakdown cover provider Green Flag made a pre-tax profit of £315 million, up from less than £212 million a year ago. Better customer service has improved retention rates allowing the firm to hold gross written premium flat in competitive markets. No major weather claims and higher-than-expected reserve releases helped, too.

Direct Line's combined operating ratio (COR) - a measure of total claims costs, commission and expenses as a percentage of net earned premium generated - fell to 89.4% for the period, down 6.7 percentage points. Even adjusting for a normal level of weather claims, COR dropped to 92%. Management now predict a range of 92-94% for the full-year compared with 94-96% previously, largely because of higher than expected prior-year reserve releases. Underlying trends remain "broadly in line" with expectations.

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Costs were also much lower, down 7.6% to £438.3 million. Direct Line cut marketing spend by £5.6 million and other costs by almost £26 million. Claims handling expenses fell by £14 million and the expense ratio reduced 0.4 percentage points to 23.6%.

"Our efforts on efficiency have improved our expense ratio, while improvements in claims and pricing continue to support strong reserve releases from previous years and a good loss ratio so far this year," explains chief executive Paul Geddes. "Action on our investment portfolio has contributed to improving our yield, despite the low interest rate environment."

Group gross written premium edged up by 0.4% to £1.55 billion, with 5.9% price growth in motor following a stronger second-quarter and 7.5% boost in rescue and other personal lines premiums, partially offset by home - down 4.5%.

And less than a fortnight after Direct Line paid a 27.5p a share special dividend following the sale of its Italian and German operations for £438 million cash, the insurer has announced an interim dividend of 4.6p, up 4.5%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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