Direct Line profits drop as RBS split continues

Direct Line Group’s profits dropped almost £60m during the first half of 2012 as the insurer was hit by restructuring and other one-off costs relating to the split from its parent RBS Group.

The insurer, which plans to launch its initial public offering (IPO) before the end of the year, posted after-tax net income of £82.8m for the six months ended 30 June 2012 (H1 2011: £142.2m).

Restructuring and other one-off costs amounted to £108.7m in the first half of the year (H1 2011: £9.8m).

The company also set a new key financial target of a 15% return on tangible equity (RoTE), which is likely to be a major key performance indicator once it has listed, and which the company has made significant progress towards achieving during the first half of the year.

RBS has to sell its stake in Direct Line by the end of 2014 under the conditions of its 2008 bailout by the government. The insurer said in its first-half results that the separation from its parent was “substantially complete”, having established independent corporate functions and governance in July 2012.

Direct Line Group chief executive Paul Geddes said the company had essentially achieved its goal of operating as a “standalone” insurer.

“This has been an important period for Direct Line Group. We are now beginning to see the benefits of our transformation plan in pricing, risk, claims, as well as capital management actions and operational efficiency,” he said.

“Other than some transitional services provided by RBS Group, we have essentially achieved the goal of operating as a standalone insurance company.

“This means we have full ownership of our cost base and have launched initiatives to target £100 million of gross annual cost savings across the business.”

Direct Line launched a number of initiatives during the period aimed at generating £100m in gross annual cost savings by the end of 2014 through reducing administration costs in central functions and improving marketing efficiency.

Operating profit from ongoing operations climbed 7% in H1 2012 to £224.2m (H1 2011: £209.5m) as adverse weather costs, including approximately £90m of claims in home, were offset by higher reserve releases.

The company’s combined operating ratio improved slightly to 101.1% during the first half of the year (H1 2011: 102.5%) on the back of a significantly improved loss ratio of 67.3% (H1 2011: 74.2%).

In-force policy sales rose 4% to £20.1m during the period (H1 2011: £20m).

Gross written premium (GWP) remained flat at around £2.1bn for the first half (H1 2011: £2.1bn). Motor and home GWP were down slightly at £842.1m (H1 2011: £866m) and £484.4m (H1 2011: £500.8m) respectively.

During the period, Direct Line renewed or extended its long-term distribution deals with key partners Nationwide Building Society and Sainsbury’s Bank, and expects to reach a five-year distribution agreement with RBS this month for the continued provision of general insurance after it is divested.

The insurer’s investment return increased £20m to £145m for the first half of 2012 (H1 2011: £125.5m).

Direct Line paid a total of £800m in dividends to RBS Group during H1 2012, with an additional £200m approved and paid today.