PENNY JAMES, CEO OF DIRECT LINE GROUP, COMMENTED

"Trading across the Group was broadly in line with our expectations given the challenging market backdrops in Motor and Home, whilst we continued to deliver strong growth in Commercial. The pricing actions we have taken to restore margins in Motor led to a reduction in new business sales; however, we were encouraged to see this improve steadily across the quarter as the market hardened. Having restored our Motor targeted written loss ratios, based on our claims assumptions, we maintained these throughout Q3, with inflation developing in line with our expectations.

"We continued to work on the actions we set out at our H1 results to restore the resilience of our balance sheet, including reducing our exposure to credit risk in our investment portfolio, reducing costs and considering the use of strategic reinsurance. We have also made good strategic progress with the deployment of further pricing capability in Motor. In Q4, we will launch a new product for customers challenged by the cost of living crisis and start rolling out more advanced digital claims capability.

"In these challenging economic conditions, the business is strong and actions we have taken continue to underpin the Group's future earnings power.”

Trading summary

 

Group trading update

We traded throughout the third quarter with care, taking actions to negotiate the uncertain economic environment, especially in relation to inflation. In Motor, we saw reduced new business early in the quarter as we increased prices to restore margins, based on our claims assumptions, however our market position improved through the quarter as we saw premium rate increases in the market accelerate. In Home, retention remained strong whereas the new business market conditions remain very challenging. We are deploying our multi-brand strategy thoughtfully as we focus on maintaining portfolio value.

Outside Home and Motor, Green Flag direct was broadly stable year to date and Commercial continued its strong growth across all channels. Overall, Group adjusted gross written premium was 3.5% lower than for the first three quarters of 2021.

Claims and costs

Motor inflation is tracking closely to our expectations of around 10% for 2022. There remains pressure in the supply chain elongating repair times, especially for third party repairs, whereas used car prices have come off their peak. In Home and Commercial, inflation has been slower to emerge to date and we have priced for this to increase over the coming year. In addition, we have experienced a modest increase in subsidence claims in Home, which is within our annual weather expectation.

As we have previously disclosed, claims are taking longer to settle, for example due to court backlogs, and this is slowing down the recognition of prior-year reserve releases, particularly from Motor large bodily injury claims. The measure used to inflate the majority of periodic payment orders was published in early November⁴ and was within the range covered by our reserving assumptions.

We continue to make progress on improving the Group's efficiency and expect operating expenses (excluding restructuring and one-off costs) to be around £700 million, a reduction compared to 2021 notwithstanding the inflationary backdrop.

Capital and Investments

As we said we would at our half year results, in August we reduced our exposure to credit risk in the investment portfolio, which has reduced our sensitivity to credit spreads by an estimated 33% and increased our solvency capital ratio by around 6 percentage points. This was achieved by the sale of £670 million of US dollar investment grade bonds which incurred a realised loss of £19 million.

The investment markets continue to be volatile. The impact of interest rate movements is expected to be broadly neutral to capital coverage, in line with our disclosed sensitivity. We expect to see some downward fair value adjustments to our investment property portfolio, in line with market indices.

The increase in interest rates has improved reinvestment rates and we currently estimate a net investment income yield of 2.1% in 2022 increasing to 2.8% in 2023.

Science-based targets

As a supporter of the Race to Zero, the Group has a target of reducing emissions based on a 1.5°C pathway. We are pleased to have received validation from the Science-Based Targets initiative (“SBTi”) for the Group’s carbon reduction plans, covering our operational emissions and parts of our investment portfolio.⁵

Outlook

We are in a period of economic volatility which makes an assessment of inflation more uncertain than usual. Based on our latest view of inflation, the current-year underwriting performance remains in line with our expectations, however principally due to changes in the phasing of recognition of prior-year reserve releases, the full year 2022 combined operating ratio, normalised for weather, is now expected to be around 98% or moderately above.

Based on current economic conditions and actions we have already taken and others in progress, our 2023 and medium-term targets and the outlook for dividend capacity remain unchanged.

For further information, please contact

Paul Smith

DIRECTOR OF BUSINESS PERFORMANCE, REPORTING  AND INVESTOR RELATIONS

Mobile: +44 (0)7795 811263

Will Sherlock

GROUP CORPORATE AFFAIRS AND SUSTAINABILITY DIRECTOR

Mobile: +44 (0)7786 836562

APPENDIX 1: Adjusted gross written premium²

APPENDIX 2: In-force policies by segment (thousands)

Notes:

1.  Direct Line Group’s Trading Update relates to the three months and nine months ended 30 September 2022 and contains information to the date of publication.

2. Adjusted gross written premium includes the impact of a contractual change to Green Flag Rescue premium such that a portion of income that was previously included in gross written premium is now included in service fees. The measure supports comparability with prior period gross written premium. This measure was introduced with effect from 1 January 2022.

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.   Annual Survey of Hours and Earnings SOC 6115 inflation published by the Office for National Statistics, representing the cost of care workers (80th percentile).

5. More information can be found on the Group's website.

This announcement contains inside information. The person responsible for arranging for the release of this announcement on behalf of the Company is Neil Manser, Chief Financial Officer.