Direct Line brings back dividend but warns there’s still work to be done

Insurer Direct Line has posted an annual operating loss of £189.5m for 2023 as it battled claims inflation, but it has restored its dividend in a boost for income investors.

The operating loss compares with a figure of £6.4m in 2022. The firm plans to complete a “comprehensive strategic review” within the first half of 2024 and report back to shareholders in July.

The news comes after Direct Line’s board unanimously rejected two takeover offers from Belgian insurer Ageas in February and March, calling them “uncertain, unattractive” and “highly opportunistic”. Ageas has until 27 March to announce a firm intention on whether to make another offer.

Despite the operating loss, Direct Line reported an annual pretax profit of £277.4m last year, up from a loss of £301.8m in 2022. The figure was lifted by the disposal of Direct Line’s brokered commercial business.

It agreed to sell the arm to Canadian property and casualty insurer Intact Financial for £520m, gaining £443.9m after transaction costs.

The firm said it had identified a “significant opportunity” to cut around £100m in costs on a run-rate annualised basis by the end of 2025. It is now targeting a new net insurance margin, normalised for weather, of 13 per cent in 2026.

Direct Line has proposed a final dividend of 4p. It axed its dividend last January after warning of higher claims inflation, weather-related events and commercial property devaluations.

It added: “While the board is confident in the actions taken in Motor, it recognises that the period over which to judge the sustainability of motor’s capital generation has been short, and consequently, this dividend should not be regarded as a resumption of regular dividends.”

Elsewhere, Direct Line’s gross written premium jumped 27 per cent to £3.1bn on the back of price hikes driven by inflation. Its net insurance margin grew 7.4 percentage points to 8.3 per cent.

While the company has had to hike prices to offset claims costs, the higher prices have put off some customers, with 383,000 of its own-brand insurance walking out the door last year.

Direct Line has set aside £150m for remediation costs tied to two internal reviews of past business, with one related to the Financial Conduct Authority’s pricing practice regulations.

The firm agreed last July to repay £30m in compensation to existing customers who were charged more than new ones for car and home insurance.

Matt Britzman, an equity analyst at Hargreaves Lansdown, said: “Direct Line has brought back its dividend. This will be a welcome relief to investors who’ve had to wait for performance to improve before the board felt comfortable reinstating the dividend. Things have picked up, but there’s a long way to go before this turnaround is complete.”

Chief executive Adam Winslow, who only joined the firm from Aviva earlier this month, said: “The group has not always managed volatile market conditions successfully in recent years, particularly in Motor.

“However, it is clear that the decisive actions that Jon Greenwood and the team have taken over the last year have created a strong platform for recovery, including significant pricing and underwriting actions to improve our Motor margins and the sale of our brokered commercial business.”

He added: “While the picture has improved, we need to do more to drive performance and we have identified immediate actions we can take in 2024 to create value, including substantially reducing our cost base, driving claims excellence and optimising pricing capabilities whilst returning us back to higher quotability levels.”