Direct Line agrees £520mn sale of brokered commercial insurance unit

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Shares in Direct Line jumped 14 per cent after the UK motor insurer agreed to sell its brokered commercial insurance unit for £520mn in a bid to shore up its balance sheet after a string of profit warnings.

The group on Thursday said its first-half pre-tax loss had widened to £76.3mn in the six months to June, compared with an £11.1mn loss in the same period last year as rising premiums took “longer than expected” to improve its margins.

“First-half earnings are not where we would like them to be,” said interim chief executive Jon Greenwood, adding that the company was, however, now writing business at improved margins.

Analysts at Citi said although the results were “very poor”, there were positive signs on the outlook, and the sale of the brokered commercial insurance unit had “completely removed” the chance of an equity raise.

The results come after a series of profit warnings from Direct Line in the last year as rising prices for car parts and second-hand cars drove up the cost of payouts. The company cut its annual final dividend this year as bad weather added to the pressure.

The solvency ratio, a measure of capital as a percentage of the regulatory requirement, came in at 147 per cent at the end of June, worse than what analysts were expecting, but the company said the newly announced sale would add about 45 percentage points to this measure.

Greenwood said the £520mn sale put the insurer’s solvency in a “very healthy position” and the group was not considering raising capital through share issues to strengthen its balance sheet.

Direct Line on Thursday reported a combined operating ratio — a key measure of underwriting profitability that measures claims and expenses as a percentage of premiums — of 106.4 per cent, up from 88.7 per cent last year. Anything above 100 per cent represents an underwriting loss.

The FTSE 250 insurer added it would aim to restart dividends when it was able to generate organic capital in its motor division. Improving margins in its motor business were materialising slower than expected and would remain challenging until the early part of 2024 due to high inflation, notably in labour costs, said Greenwood.

The earnings come after Direct Line appointed Aviva senior executive Adam Winslow as chief executive last week following the departure in January of Penny James. He will take up the role next year.

Direct Line has also come under regulatory scrutiny this year after the Financial Conduct Authority in June ordered it to review claims paid out between 2017 and 2022. This prompted the insurer to say earlier this month that it would spend £30mn refunding customers it overcharged for their home and motor cover.

Shares in Direct Line have retreated 22 per cent since the start of the year.