TIDMDLG
RNS Number : 7340S
Direct Line Insurance Group PLC
18 July 2022
This announcement contains inside information.
Direct Line Insurance Group plc
Trading update
18 July 2022
Direct Line Insurance Group plc ("the Group") is today providing
an update on current trading and outlook.
Penny James, Chief Executive Officer, said:
"Today's trading update follows a period of heightened
volatility across the UK motor insurance market, in which we have
seen claims inflation in motor in the first half of 2022 spike
above the levels assumed in our pricing. As a result, we are
revising our combined operating ratio target range for 2022 to
96-98%.
We have already taken actions including increasing prices and
deploying new pricing capability to restore margins, which mean we
expect our 2023 combined operating ratio will improve to around 95%
and we reiterate our medium-term target range of 93-95%.
This, combined with our diversified business model, our strong
balance sheet and our continuing actions to further improve
resilience, gives us confidence in the sustainability of our
regular dividends for this year and as we look ahead."
Current trading
The motor insurance market experienced significant levels of
severity inflation in H1, primarily resulting from higher used car
prices, and amplified by higher third party claims costs, longer
repair times and inflation in the cost of car parts. Market premium
inflation has continued to lag the increases in claims
inflation.
Whilst the Group has been pricing claims inflation over the last
12 months, experience has been in excess of the levels assumed. The
Group now estimates overall motor claims severity inflation for
2022 of around 10%.
As a result, the H1 2022 current year motor loss ratio is now
expected to be in the region of 86%. Due to conservative reserving
during 2021, the Group's prior year reserve releases in the first
half remain in line with expectations.
The Group's other business units are performing largely in line
with expectations, demonstrating the benefit of the Group's
diversified business model. Overall, the Group expects a combined
operating ratio for the first half of 2022 of around 96.5%,
normalised for weather, and gross written premium of approximately
GBP1,520 million.
2022 outlook
The Group has taken action in the second quarter to restore
margins through increased prices to reflect higher than expected
claims inflation. In addition, the Group has recently launched an
updated motor risk pricing model which it believes materially
improves risk selection.
Given the higher current year loss ratio, the Group now expects
the full year 2022 combined operating ratio to be in the range of
96% to 98%, normalised for weather.
Costs
The Group continues to target significant cost reductions across
the business. In 2022, the Group expects to reduce operating
expenses in absolute terms, despite market wide inflation, to
between GBP690 million and GBP700 million. For 2023, the Group is
targeting operating expenses in the region of GBP670 million. Given
the increase in amortisation and market levies over the period this
represents a GBP76 million (15%) reduction in controllable expenses
from 2021 to 2023.
The Group continues to target a 20% expense ratio, but given the
reduction in motor market average premiums since the target was
set, predominantly driven by structurally lower claims frequency,
it is now unlikely this will be achieved in 2023.
2023 combined operating ratio outlook and over the medium
term
Following the trading actions already taken and continued strong
cost control referred to above, the Group expects a combined
operating ratio of around 95% for 2023 (normalised for weather) and
to return to a target range of 93% to 95% over the medium term.
Investment return outlook
Recent rises in interest rates have increased the Group's yield
outlook. Whilst the Group still expects 2022 net investment income
yield to be around 1.7%, based on current reinvestment rates and
maturity profile it expects this to increase to around 2.2% in
2023.
Dividend and capital management
The Group believes its balance sheet and outlook for capital
generation in the medium term remains strong due to pricing and
operational improvements arising from the Group's transformation
programme.
In the first half of 2022, the solvency capital ratio has
reduced by an estimated 7 percentage points due to the mark to
market effect of widening credit spreads on the Group's investment
portfolio, albeit this is expected to pull to par over time. Based
on this and other movements in the first half of the year, the
Group estimates a solvency capital ratio at 30 June of around 150%
assuming an unchanged interim dividend of 7.6 pence per share.
The Board understands the importance of the regular dividend to
shareholders and notes that the current solvency ratio is
comfortably within the risk appetite range of 140% to 180%. The
Group is confident in the sustainability of its regular dividends
and is continuing to take action to both improve returns and
further increase resilience given macro-economic uncertainty,
including reducing credit exposure and, as previously disclosed, is
considering the use of strategic reinsurance.
In the light of the current market environment, the Board has
decided not to launch the second GBP50 million tranche of the
GBP100 million share buyback programme announced earlier in the
year.
The Group will publish its 2022 half year report on Tuesday 2
August.
The person responsible for arranging for the release of this
announcement on behalf of the Company is Neil Manser, Chief
Financial Officer.
For further information please contact:
Paul Smith
Director of Investor Relations
Tel: +44 (0)7795 811 263
Will Sherlock
Group Corporate A airs and Sustainability Director
Tel: +44 (0)7786 836 562
Forward-looking statements disclaimer
Certain information contained in this document, including any
information as to the Group's strategy, plans or future financial
or operating performance, constitutes "forward-looking statements".
These forward-looking statements may be identified by the use of
forward-looking terminology, including the terms "aims",
"ambition", "anticipates", "aspire", "believes", "continue",
"could", "estimates", "expects", "guidance", "intends", "may",
"mission", "outlook", "over the medium term", "plans", "predicts",
"projects", "propositions", "seeks", "should", "strategy",
"targets", "will" or "would" or, in each case, their negative or
other variations or comparable terminology, or by discussions of
strategy, plans, objectives, goals, future events or intentions.
These forward-looking statements include all matters that are not
historical facts. They appear in several places throughout this
document and include statements regarding the intentions, beliefs
or current expectations of the Directors concerning, among other
things: the Group's results of operations, financial condition,
prospects, growth, strategies, the industry in which the Group
operates and the Group's approach to climate-related matters.
Examples of forward-looking statements include financial targets
which are contained in this document specifically with respect to;
return on tangible equity, solvency capital ratio, combined
operating ratio, percentage targets for current-year contribution
to operating profit, prior-year reserve releases, cost reductions,
reduction in expense ratio, investment income yield, net realised
and unrealised gains, capital expenditure and, risk appetite range;
and targets, goals and plans relating to climate and the Group's
approach and strategy in connection with climate-related risks and
opportunities. By their nature, all forward-looking statements
involve risk and uncertainties because they relate to events and
depend on circumstances that may or may not occur in the future
and/or are beyond the Group's control and/or they rely on
assumptions that may or may not transpire to be correct.
Forward-looking statements are not guaranteeing future
performance.
The Group's actual results of operations, financial condition
and the development of the business sector in which the Group
operates may differ materially from those suggested by the
forward-looking statements contained in this document, for example
directly or indirectly as a result of, but not limited to:
- United Kingdom (" UK ") domestic and global economic business
conditions;
- the direct and indirect impacts and implications of the
coronavirus Covid-19 pandemic on the economy, nationally and
internationally, on the Group, its operations and prospects, and on
the Group's customers and their behaviours and expectations;
- the Trade and Cooperation Agreement between the UK and the
European Union (" EU ") regarding the terms, following the end of
the Brexit transition period, of the trading relationships between
the UK and the EU and its implementation, and any subsequent
trading and other relationship arrangements between the UK and the
EU and their implementation;
- the terms of trading and other relationships between the UK
and other countries following Brexit;
- the impact of the FCA pricing practices report and the rules
and regulations arising as a result of that report and of responses
by insurers, customers and other third parties and of
interpretations of such rules by any relevant regulatory
authority;
- market-related risks such as fluctuations in interest rates,
exchange rates and credit spreads, including those created or
exacerbated by the Russian invasion of Ukraine;
- the policies and actions and/or new principles, rules and/or
changes to, or changes to interpretations of principles, rules
and/or regulations, of regulatory authorities and bodies (including
changes made directly or indirectly as a result of Brexit or
related to capital and solvency requirements or related to the
Ogden discount rate or rates or made in response to the Covid-19
pandemic and its impact on the economy and customers) and changes
to law and/or understandings of law and/or legal interpretation
following the decisions and judgements of courts;
- the impact of competition, currency changes, inflation and
deflation;
- the timing, impact and other uncertainties of future
acquisitions, disposals, partnership arrangements, joint ventures
or combinations within relevant industries; and
- the impact of tax and other legislation and other regulation
and of regulator expectations, interventions, enforcements, fines
and requirements and of court, arbitration, regulatory or ombudsman
decisions, judgements and awards (including in any of the foregoing
in connection with the Covid-19 pandemic) in the jurisdictions in
which the Group and its affiliates operate.
In addition, even if the Group's actual results of operations,
financial condition and the development of the business sector in
which the Group operates are consistent with forward-looking
statements contained in this document, those results or
developments may not be indicative of results or developments in
subsequent periods.
The forward-looking statements contained in this document
reflect knowledge and information available as of the date of
preparation of this document. The Group and the Directors expressly
disclaim any obligations or undertaking to update or revise
publicly any forward-looking statements, whether because of new
information, future events or otherwise, unless required to do so
by applicable law or regulation. Nothing in this document
constitutes or should be construed as a profit forecast.
Neither the content of Direct Line Group's website nor the
content of any other website accessible from hyperlinks on the
Group's website is incorporated into, or forms part of, this
document.
LEI: 213800FF2R23ALJQOP04
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END
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