After last week’s unwelcome surprise of a £30 million provision for overcharging some motor and home insurance customers, Direct Line (DLG) delivered some more positive news this week with its half-year results and the sale of its large commercial insurance arm.

The shares jumped 14% to 171p, the biggest one-day move since the group joined the stock market, despite the board passing the interim dividend to conserve cash.

WHY HAVE THE SHARES RALLIED SO MUCH?

Gross written premiums for the six months to June were up 9.8% to £1.615 billion, thanks principally to a 25% increase in average renewal premiums in the motor business which helped offset a decline in volumes and in-force policies.

Meanwhile, premiums in the home insurance arm increased 9% thanks to price hikes intended to offset the impact of claims inflation.

Acting chief executive Jon Greenwood, who was appointed in January and steps down at the end of this year, said he had taken ‘decisive action over the last six months to put the group back on a more stable footing’.

In March, the firm set out its key priorities of ‘restoring capital resilience’, improving its performance in motor insurance and maintaining the performance of the non-motor business, so on that basis the first half could be considered to be ‘job done’.

Moreover, the interim boss also engineered the sale of the brokered commercial insurance business to RSA for an initial price of £520 million plus up to £30 million in potential earn-out payments, releasing £270 million of capital which sat behind the operations.

‘This transaction crystalises an attractive valuation for our brokered commercial insurance business lines and focuses the group fully on retail personal and direct small business commercial lines insurance customers’, commented Greenwood.

NO DIVIDEND, NO PROBLEM

The good news on increased premiums and the sale of the brokered commercial business was enough to distract attention from the dramatic swing in the firm’s operating result from a profit of £197 million last year to a loss of £78 million this year.

The group blamed ‘the earn-through of motor policies written during 2022 and continued high claims inflation’ for a negative operating result in its motor business and therefore the group loss.

Earnings per share were minus 4.6p against minus 0.3p last year, meaning the firm won’t pay an interim dividend as it seeks to ‘improve its financial position’.

The company said it would restart dividends once two conditions were met – an improvement in the capital coverage at the upper end of its target range, and a return to organic capital generation in the motor arm.

While technically the first condition would be met through the sale to RSA, for the second condition ‘the board will assess the performance of motor over the second half of the year to ensure that actual performance is consistent with pricing assumptions’.

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