Direct Line Group (LON: DLG) bounced back by 16.1% to 174.275p even though its loss increased. The motor and home insurer is selling its brokered commercial insurance business to RSA Insurance for an initial £520m with potential for up to £30m.
The company, whose brands include Direct Line and Churchill, will focus on its core retail, personal and small business markets and the deal significantly improves its financial position. There should be a capital release of up to £270m, with an initial release of £170m when the transaction is approved by shareholders. The business generated an operating profit of £34m in 2022.
Gross written premium and associated fees grew 10% to £1.62bn in the first half of 2023, although the number of policies was lower. The loss jumped from £11.1m to £76.3m. There was a positive investment return, but the interest income fell.
The solvency capital ratio is 147%. Tangible net asset value is 72.8p/share.
There is no dividend and there are two conditions that have to be met before they restart. The first is capital coverage reaching the upper end of the agreed range and the second is when it starts generating cash from the motor division. Direct Line has to compensate home and motor clients because of overcharging and that will cost around £30m.
The second half is likely to continue to be poor, but there is the prospect of motor margins improving in 2024.