Direct Line Profit Rises as Lower Claims Offset Investments

Direct Line Insurance Group Plc, the U.K.’s biggest home and motor insurer, posted a 28 percent gain in first-half profit as lower claims from major weather events and cost cuts helped mitigate a drop in investment returns.

Operating profit climbed to 286.6 million pounds ($433.3 million) in the six months ended June 30 from 224.2 million pounds in the year-earlier period, the Bromley, England-based company said today in a statement. That beat the 254.5 million-pound average estimate of four analysts surveyed by Bloomberg. Returns from investments fell 33 percent to 97.5 million pounds.

“Results have been driven by exceptionally benign weather, but it also includes the sustainable benefit from our transformation,” Paul Geddes, chief executive officer of Direct Line said on a call with reporters. “We have made further progress in cost reduction.”

The insurer, which was split off from Royal Bank of Scotland Group Plc last year, is cutting costs and attempting to sell more profitable policies amid falling premiums in the U.K. and lower investment returns driven by record low interest rates. The company in June said it may cut about 2,000 jobs to help reduce costs to 1 billion pounds by next year.

Combined Ratio

Expenses from ongoing operations were 408.5 million pounds in the first half, 13 percent lower than a year earlier, when RBS’s owned the company and booked charges to manage parts of Direct Line’s operations. Geddes said the insurer isn’t planning to announce further cost reductions this year.

Direct Line reduced its combined ratio, or claims and expenses as a percentage of premiums, to 94.6 percent in the first half from 2012’s 101.1 percent, indicating improved underwriting. It raised its first-half dividend by 5 percent to 4.2 pence.

“The group is on track to meet its combined operating ratio target of 98 percent after normalising for claims from major weather events,” Direct Line said in the statement. The final dividend should be at a “similar level” to the first-half payout if current trends continue.

Direct Line, which is still 49 percent owned by RBS, rose 0.6 percent to 230.8 pence at 11:03 a.m. in London trading after earlier rallying as much as 3 percent. The shares have climbed about 7 percent this year, trailing the 22 percent increase for the FTSE 350 Insurance Index.

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