Direct Line Sees Cost of U.K. Floods at Up to 110 Million Pounds

Direct Line Insurance Group Plc (DLG), seen as one of the insurers most vulnerable to losses from the recent U.K. storms, said weather claims may cost as much 110 million pounds ($183 million) as full-year profit jumped.

Pretax profit rose to 423.9 million pounds in 2013 from 249.1 million pounds in the year-earlier period, the insurer said in a statement today. That beat the 367 million-pound average estimate of 16 analysts provided by the company. The results were helped as the insurer released 291.9 million pounds it had set aside to cover claims in previous years. The firm said it plans to release more reserves in 2014.

Direct Line estimated that the cost of the storms that have battered Britain since December may total 90 million pounds to 110 million pounds. Major weather events typically cost the insurer 80 million pounds a year, the firm said. The Bromley, England-based company said its reinsurance will take effect once losses exceed 150 million pounds.

“With elevated ground water levels, the potential for future claims is increased in the event of further storms,” Chief Executive Officer Paul Geddes said today in the statement.

The storms may cost the industry as much as 1 billion pounds, according to estimates by Deloitte LLP. Direct Line, the U.K.’s biggest home and motor insurer, Aviva Plc (AV/) and RSA Insurance Group Plc (RSA) were expected by analysts at firms including Goldman Sachs Group Inc. to bear the brunt of the losses.

The insurer will pay a final dividend of 8.4 pence a share and a special dividends of 4 pence, bringing the total for the year to 20.6 pence.

‘Unexpected’ Positive

Direct Line, which split from Royal Bank of Scotland Group Plc in 2012, has been cutting costs and attempting to sell more profitable policies amid falling premiums in the U.K. and lower investment income. The company said in June that it may cut about 2,000 jobs to help reduce costs to 1 billion pounds by end-2014. Direct Line said today it’s on track to meet the goal.

“The second special dividend is unexpected and positive for the stock,” Hari Sivakumaran, an analyst at Oriel Securities Ltd. in London, wrote in a note to clients today. “However, we would note profits were driven by significantly higher-than-expected reserve releases and profits from run-off business. We view these sources of earnings as finite and we would expect to see these at lower levels going forward.”

The stock was up 0.5 percent at 262.30 pence as of 8:06 a.m. in London trading today, for a market value of about 3.95 billion pounds. The shares have advanced 25 percent in the past 12 months.

RBS, which reports full-year results tomorrow, sold a 630 million-pound stake in in Direct Line in September. Britain’s biggest government-owned lender still owns 28.5 percent of the insurer, according to data compiled by Bloomberg.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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