PENNY JAMES, CEO OF DIRECT LINE GROUP, COMMENTED

“In an important quarter for Motor and Home markets, prices adjusted for the introduction of the FCA Pricing Practices review, but we believe have not fully reflected claims inflation. In this context, we achieved a lot, pushing forward key elements of the strategy, increasing customer retention in Motor and Home and delivering double-digit growth in Commercial. Trading was broadly in line with our expectations.

“Looking forward, we are focused on driving benefits from our new Motor platform and continue to deliver significant new pricing capability, including machine learning models, with more to come through the rest of the year.

"The disciplined approach we have taken during Q1 and the operational progress we have made mean we can reiterate our combined operating ratio target of 93% to 95% in 2022.”

Trading summary

Trading update

Overall gross written premium in Q1 2022 was 2.4% lower than Q1 2021, as we traded to protect value in Motor and Home as those markets stabilised following the implementation of the FCA’s pricing practices reforms, whilst we continued to grow Commercial.

In Motor, market new business premiums increased by mid-single digits early in January and were flat through the rest of the quarter. Across the market, we do not believe this adequately covers the level of claims inflation experienced over the last 18 months. Against this backdrop we remained disciplined and held back marketing whilst still increasing customer retention. This, together with the effect of 2021 premium reductions, reflecting lower claims frequency expectations, resulted in a 5.4% reduction in gross written premium. In April, we have seen some premium increases in the market.

Motor claims severity inflation remains high with continued elevated used car prices, which impact total loss and theft claims, and supply chain disruption further increasing repair cycle times across the quarter. We continue to believe that our in-house accident repair centres give us competitive advantage. The increase in severity was broadly offset by claims frequency which remained modestly below expectations.

In Home, market new business premiums increased by high-single digits in January and continued modest increases for the rest of the quarter compared to a strong Q1 in 2021. We have always said that the FCA pricing reforms would have a bigger impact on the home market and this can be seen in our trading performance. Whilst we have seen customer retention increase in the first quarter, this was more than offset by lower new business volumes.

Commercial maintained its momentum from 2021 with double-digit gross written premium growth. NIG continued to see benefits from its improved pricing capability and strong broker relationships, whilst Direct Line for Business and Churchill's business brand made good progress in building the micro and small to medium enterprise (“SME”) market. Premium inflation in Commercial remained ahead of claims inflation during the quarter. Strong growth continued in April.

Weather costs from storms Dudley, Eunice and Franklin are expected to be around £40 million, compared with an early estimate of £30 million to £40 million, across Home and Commercial, which is within our weather budget assumption of £73 million for the year.

Strategic update

We aim to deliver significant capability during 2022 and we are excited with the progress that we have made. In Motor we developed new pricing techniques, including the use of machine learning models designed to improve speed and accuracy. Our risk pricing is now materially more advanced than our existing capabilities and we have more models due to go live in Q2.

In April, we launched our latest Direct Line superhero campaign, which underlines our strong customer propositions. We have a pipeline of compelling brand marketing in Direct Line, Churchill and Green Flag to come during the year.

Alongside extending our long-term Home partnership with NatWest Group until 2027 earlier in the quarter, we have also made good progress towards welcoming across over 640,000 new Motability customers, representing around £500 million of gross written premium⁵, expected to start from September 2023.

Capital management

On 27 April 2022 we redeemed the remaining £250 million of the £500 million subordinated notes which were issued on 27 April 2012. This redemption significantly reduces our average financing costs with the redeemed notes paying a 9.25% coupon compared to a 4.0% coupon on the £260 million 2020 Tier 2 issue.

We have bought back £23.9 million of shares as at close of business on 29 April 2022 at an average price of 267 pence in relation to the first £50 million tranche of the £100 million share buyback programme announced earlier this year.

On 27 April 2022 Moody's Investors Service confirmed the 'A1' rating with a stable outlook for the Group's principal underwriter, U K Insurance Limited.

Outlook

We reiterate our target of achieving a combined operating ratio in the range of 93% to 95%, normalised for weather, in 2022 and over the medium-term.

Notes:

1. Direct Line Group’s Trading Update relates to the three months ended 31 March 2022 and contains information to the date of publication.
2. Green Flag Rescue includes £1.1 million of service fees recognised as other income In Q1 2022. For certain new customers, the amount they pay is split between premium and a service fee where prior to 2022 this was entirely premium.
3. Direct own brands include in-force policies for Home and Motor under the Direct Line, Churchill, Darwin and Privilege brands, Rescue policies under the Green Flag brand and Commercial policies under the Direct Line for Business and Churchill brands.
4. The reduction in in-force policies relates to the removal of Travel insurance cover from a partner's bank account proposition.
5. As reported previously, of which we expect 80% to be reinsured

APPENDIX 1: In-force policies by segment (thousands)

Notes:

1. Direct own brands include in-force policies for Home and Motor under the Direct Line, Churchill, Darwin and Privilege brands, Rescue policies under the Green Flag brand and Commercial policies under the Direct Line for Business and Churchill brands.
2. The reduction in in-force policies relates to the removal of Travel insurance cover from a partner's bank account proposition.

For further information, please contact

PAUL SMITH
DIRECTOR OF INVESTOR RELATIONS
Mobile +44 (0)7795 811263

WILL SHERLOCK
GROUP CORPORATE AFFAIRS AND SUSTAINABILITY DIRECTOR
Mobile: +44 (0)7786 836562