Direct Line reports 106% Q1 COR as weather claims hit

Direct Line Group reported an unprofitable combined operating ratio of 106% in Q1 2012 because of seasonal weather claims.

However,  the ratio was an improvement over the 107% it reported in the same period of 2011 thanks to a lower weather claims bill.

Despite the unprofitable combined ratio, Direct  Line Group also continued its profitable run on an overall operating basis. It posted a first quarter operating profit of £84m, up 25% on the £67m is reported in the first quarter of 2011.

The company said that while the result had been hit by adverse weather, it had also benefited from reserve releases from prior years.

The group was profitable throughout 2011 after reporting a heavy2010 loss of £295m on the back of rising bodily injury claims.

The company, formerly known as RBS Insurance, is preparing to split  from parent company the Royal Bank of Scotland (RBS). The plan is to float part of the company in the second half of this year, with a further flotation in 2013. RBS has to sell its entire stake in the insurer by the end of 2014 under the terms of its 2008 bail-out by the UK government.

“This was another solid quarter of performance, as Direct Line Group continues to make good progress on its transformation plan,” chief executive Paul Geddes said in a statement. “Key milestones have been achieved ahead of our planned divestment from the Royal Bank of Scotland Group. However, there is still more to be done as we prepare to run a successful standalone business. We will continue to rebuild competitive advantage and ensure that we deliver a sustainably profitable business.”

In addition to continued profitability, Direct Line also reported that its motor business had started to stabilise. From 2009 to 2011, motor in-force policies had decreased by 27% as the company looked to reduce the risk in the portfolio and exit unprofitable areas. However in-force policies grew by 1% to 4.14 million in Q1 2012 (Q4 2011: 4.10 million)

The insurer also noted progress in a number of its partnership arrangements, where it sells insurance products through high-street brands. It extended an existing home insurance contract with Nationwide Building Society to the end of 2015, and built on its car insurance partnership with Sainsbury’s bank by extending the contract to include home insurance.

Direct Line is also concluding a five-year contract with RBS’s UK retail division that will allow it to continue to provide general insurance products to the division’s customers after the insurer splits from the group.

Direct Line’s first quarter gross written premium was flat at $1.04bn.