Profits on the rise as Direct Line shuns the risky drivers

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Direct Line Group, the car insurer spun out of Royal Bank of Scotland, reported better-than-expected 2012 profits after raising prices and turning away risky drivers.

The company, the UK’s biggest car insurer, reported an annual operating profit of £461.2m, up nine per cent on the year and ahead of the £454m pencilled in by analysts.

In its first set of results since the company’s stock market debut last October, Direct Line said the improvement reflected a turnaround in its core insurance business.

The insurance division turned a £72m loss in 2011 into a £28.2m profit. The insurer has managed to cut costs by shunning high-risk drivers and pushing up prices to boost profits.

Direct Line’s chief executive Paul Geddes said that stiff competition and regulatory changes will pose a challenge in 2013.

“There is no room for complacency as we face a competitive market, particularly in UK motor, where there are also expected to be significant legal reforms,” he said.

UK regulators are investigating the motor insurance market after a probe by consumer watchdogs found that ineffective competition is inflating drivers’ insurance costs.

RBS, which was ordered by European regulators to dispose of Direct Line as a condition of its 2008 taxpayer bailout, sold about a third of the company to stock market investors in October.

Shares in the insurer have risen by around 20 per cent since then.

Direct Line is paying a final dividend of 8p per share, ahead of the 7.8p pencilled in by analysts.

The insurance group employs about 15,000 staff, with about a quarter of its workforce, around 3,750 staff, based in Yorkshire at sites in Leeds and Doncaster.

Direct Line, which also owns the Churchill brand, has been axing jobs to save £100m in an attempt to turn around its core insurance business over the past two years.

The group said it had achieved 70 per cent of its cost savings goal and is in “advanced plans” for the remainder.

It warned over more redundancies in November after cutting 236 jobs, on top of nearly 900 call centre and other roles that were shed last year. It also shed around 70 senior management jobs. Direct Line Group pushed up average new business premiums by two per cent for motor insurance last year, although existing customers saw a six per cent fall in renewal costs as it tried to boost retention rates.

Charges relating to its restructuring hit bottom-line profits in 2012, down from £342.9m in 2011 to £249.1m.

Mr Geddes said the group has made “good progress” on its transformation plan after all five of its divisions were profitable last year.

RBS floated 30 per cent of Direct Line valuing the company at around £3bn in the biggest initial public offering of 2012. The bank must sell a majority stake by the end of next year and divest of the entire company by the end of 2014 as part of the conditions of its £45.5bn bailout.

Kevin Ryan, analyst at Investec Securities, said further share placings would be a “good opportunity” for investors.

“A powerful attraction, in our view, of the company is its leading market share of the UK motor and home insurance markets. In addition, its travel, pet and SME business in the UK is capable, we believe, of becoming more profitable.”

Analyst Eamonn Flanagan at Shore Capital said: “Our fears over the implications of the ongoing Competition Commission investigation into the UK personal motor market and its potential consequences for the industry leave us particularly fearful over the sustainability of ancillary lines.”