Direct Line Insurance Group PLC (LSE:DLG) pre-tax profit fell by nearly a third in the first half to £178.1mln as the insurer faced an increase in higher-severity motor claims costs.
“Uniquely complex motor market conditions during the first half, due to significant regulatory changes, heightened inflation claims and macroeconomic uncertainty, have challenged our short-term profitability,” chief executive Penny James said.
“However, the longer-term fundamentals of the business remain strong. Through pricing action, steps taken in our garage repair network and through deployment of enhanced pricing capability, we have now returned to writing at our target margins based on latest claims assumptions.”
The insurer said the UK car market experienced “significant levels of severity inflation” this year and premium increases have “continued to lag behind the increases in claims inflation”.
It estimates motor claims severity inflation will rise by about 10% in 2022.
Direct Line’s gross written premium of £1.52bn was 2.1% lower than in the first half of 2021, as it navigated “challenging market conditions” and regulation following the UK’s Financial Conduct Authority’s review of pricing practices in the motor industry.
The insurer maintained its interim dividend of 7.6p per share.
In its half-year financial statement today, the group plans to restore margins by raising prices and expects to improve its combined operating ratio to 95% in 2023.
Earlier this month, the FTSE-250 company said it expects its combined operating ratio to be in the range of 96% to 98% in 2022 – up from the 93% to 95% guidance given in May. Underwriting becomes unprofitable if the ratio exceeds 100%.