Operating profit down, but Direct Line remains confident

Insurance company Direct Line Group posted its half year report for the six months to 30 June on Tuesday, with gross written premiums for ongoing operations 3.9% higher, driven by strong growth in motor in-force policies - up 2.5% - and a 9.5% increase in premium rates.

The FTSE 100 firm said its combined operating ratio from ongoing operations continued to be strong at 89.6%, or 0.2pts higher, including the Flood Re levy impact of 1.6pts.

Motor current-year attritional loss ratio improved by 1.0pt, the board reported.

Operating profit from ongoing operations decreased £12.2m to £323.6m, which Direct Line attributed to £18.5m lower investment gains

Its return on tangible equity was 23.1%, up from 21.2%, while profit before tax decreased £16.5m to £298.5m.

The board declared an interim dividend per share of 4.9p, up from 4.6p, and a special interim dividend of 10.0p per share.

Post dividends, Direct Line's estimated Solvency II capital coverage ratio was 184%, or 199% pre-dividends.

“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,” said CEO Paul Geddes.

“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,” Geddes added.

He said that demonstrated the benefits of the improvements the board has made to strengthen the business.

“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.

“These factors enabled us to increase the interim dividend to 4.9p and to declare an additional special interim dividend of 10.0p, representing a total payout to shareholders of £204.9m,” Geddes explained.

During the period, the board said it made continued investment in brand differentiation through enhancements and initiatives to Direct Line and Churchill propositions.

In-force policies for Motor and Home own brands were up 3.0%, with strong customer retention. growth in Green Flag direct and Commercial direct

An extension was agreed with RBS of the Home and Private Insurance partnership for a further three years.

“This encapsulates an innovative proposition in the market to support the RBS customer-led strategy,” the board said in a statement.

“[We are] well prepared for the UK's referendum on EU membership, [with] immediate investment volatility actively managed and no operational impact.”

Direct Line said it maintains its combined operating ratio expectation for 2016 in the range of 93% to 95% for ongoing operations, assuming normal annual weather.

It did say that if current trends continue, the ratio is expected to be towards the lower end of that range, reflecting improved trading and higher than expected prior-year reserve releases.