DIRECT LINE INSURANCE GROUP PLC
SALE OF BROKERED COMMERCIAL INSURANCE BUSINESS
THIS IS AN ANNOUNCEMENT AND NOT A CIRCULAR OR EQUIVALENT DOCUMENT AND INVESTORS AND PROSPECTIVE INVESTORS SHOULD NOT MAKE ANY VOTING DECISION ON THE BASIS OF ITS CONTENTS. A CIRCULAR IN RELATION TO THE TRANSACTION DESCRIBED IN THIS ANNOUNCEMENT WILL BE PUBLISHED IN DUE COURSE.
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION.
Direct Line Insurance Group plc, (the “Direct Line Group”, the “Group”, or the “Company”) today announces that it has signed an agreement to sell its brokered commercial insurance business lines (the “Brokered Commercial Insurance Business”) to RSA Insurance Limited (“RSA” or the “Purchaser”), a wholly-owned subsidiary of Intact Financial Corporation (“Intact”), for:
- Initial consideration of £520 million (the “Consideration”);
- Potential further consideration of up to £30 million, contingent upon certain earn-out provisions (the “Earn-Out”) relating to the financial performance of the Brokered Commercial Insurance Business (the “Transaction”); and
- In addition to receiving the Consideration and the potential Earn-Out, the Company estimates that over time it will release capital of up to approximately £270 million of which approximately £170 million will be released when the Transaction is approved by the Company’s shareholders as a Class 1 transaction.
The Group will retain the back book in relation to business written and earned by the Brokered Commercial Insurance Business prior to 1 October 2023 (the “Risk Transfer Date”; and altogether the “Back Book Policies”).
The sale of the Brokered Commercial Insurance Business facilitates the transfer of all of the Group’s brokered commercial insurance business lines and associated partnerships to RSA through a combination of a reinsurance transaction and a renewal rights transfer. As a result, the economics in relation to the business at the Risk Transfer Date will move to RSA. The Back Book Policies will remain with the Company; however, if the Transaction is approved by the Company’s shareholders, Direct Line Group and RSA intend to enter into discussions regarding the potential transfer of the Back Book Policies to RSA.
The Group will remain active in the direct small business commercial lines insurance space, capitalising on its strong position, through its brands “Direct Line” and “Churchill”.
The Consideration after associated costs and tax together with the regulatory capital release will provide a significant uplift to the Group’s solvency capital ratio, and on day one (being receipt of the Consideration) this uplift is expected to be approximately 45 percentage points.
The Board believes that the sale crystallises an attractive valuation for the Brokered Commercial Insurance Business, allowing the Company to focus on retail, personal and direct small business commercial lines, restore the resilience of its capital position and drive the long-term value potential for its customers and shareholders.
Jon Greenwood, Acting Chief Executive Officer of the Company, commented:
“This transaction crystallises an attractive valuation for our brokered commercial insurance business lines and focuses the Group fully on retail personal and direct small business commercial lines insurance customers.
Over the last ten years we have turned around the performance of the brokered commercial insurance business lines by focusing on its strong and extensive partnerships with brokers, underpinned by investment in its technology platform. However, its specialist trading model operates in a different part of the UK insurance market to the rest of the Group and therefore it is the right strategic decision to sell to RSA.
The value created for shareholders will allow the Group to improve its capital resilience and provides a platform for improved performance.”
The Transaction will be effected through the combination of: (i) a business transfer agreement (“Business Transfer Agreement”) relating to the transfer of the new business franchise and certain operations, brands, employees, contractors, data, third party contracts and premises (the “Operational Transfer”); (ii) a quota share reinsurance agreement (the “Quota Share Reinsurance Agreement”) relating to the reinsurance of new and certain existing business of the Brokered Commercial Insurance Business (the “Reinsurance”) effective from the Risk Transfer Date; (iii) if approved by the Court, a subsequent insurance business transfer scheme under Part VII of the Financial Services and Markets Act 2000 (the “Part VII Transfer”); and (iv) certain administration and transitional services arrangements. As part of the Transaction, the Company will retain the Back Book Policies (subject to discussions among the parties as described above). Transfer of the operational assets and liabilities to RSA is targeted to take place in Q2 2024 and include the movement of approximately 800 employees to guarantee ongoing support and service delivery for customers. The Earn-Out is contingent on the performance ceded to RSA under the Quota Share Reinsurance Agreement up to the Part VII Transfer and is payable within six months of the Part VII Transfer.
Direct Line Group is a UK-based insurance company and owns some of the most recognisable insurance brands including “Direct Line” and “Churchill”. Through these brands, the Direct Line Group offers a range of insurance products that help protect motor vehicles, homes, holidays, pets and businesses with a number of routes to market. The Group owns 23 Motor Accident Repair Centres, delivering lower repair costs and providing data-led insights.
The largest brand within the Brokered Commercial Insurance Business has been part of the Group since it was acquired in 2003 as part of the acquisition of Churchill. Its success has been driven by its strong and extensive partnerships with brokers, delivering tailored insurance propositions for UK SME customers. This specialist trading model operates in the intermediated space and is therefore different to the rest of the Group.
Since its IPO in 2012, the Company has been focused on improving the operational and financial performance of the Brokered Commercial Insurance Business; most recently that has involved moving onto a new technology platform with new pricing and underwriting tools. Recent performance demonstrates the success of this strategy with the Brokered Commercial Insurance Business generating a profit before tax of £43 million in 2022.
With the operational turnaround of the Brokered Commercial Insurance Business completed and given the differences in the trading model versus the Group’s other businesses, the Board believes that now is an appropriate time to facilitate a sale and crystallise the value that has been created.
Financial Impact and Use of Proceeds
In 2022, the Brokered Commercial Insurance Business generated gross written premiums of £530 million and a profit before tax of £43 million. Over 2021 and 2022, the average combined operating ratio was c.96%. As at 30 June 2023, the total assets of the Brokered Commercial Insurance Business were £8 million. Following the Risk Transfer Date (subject to shareholder approval), the Group will no longer receive the full contribution the Brokered Commercial Insurance Business currently makes to the Group’s operating profit, although will continue to receive earnings from the Back Book Policies and investment yield on the capital within the business.
The proceeds from the Transaction will be used to enhance the capital strength of the Group and for general corporate purposes. The sale will reduce the capital requirements of the Group. On day one (being receipt of the consideration), the Transaction will, through a combination of the realised gain on sale together with the initial capital release, increase the Group’s pro-forma solvency capital ratio by approximately 45 percentage points.
There is no change to the Company’s current risk appetite range or capital allocation approach.
Information on the Brokered Commercial Insurance Business
The Brokered Commercial Insurance Business has over 12 different product lines written under the recognised brands of “NIG”, “FarmWeb”, and “Churchill Expert” within the UKI Business Solutions partnership. It has broad reach across the broker market with relationships from large national brokers to smaller regional independent brokers.
The NIG brand consists of a commercial insurance provider, trading exclusively through brokers, offering a comprehensive suite of insurance products to UK SME customers. Products include Motor Trade, Property Owners, Motor Fleet and Commercial Van.
The FarmWeb brand is a specialist agriculture insurer dedicated to meeting the specific insurance needs of UK farmers, with distribution through a selected network of specialist agriculture insurance brokers. Designed for single or multi-site farm businesses, it provides a wide range of motor, property and liability covers.
The UKI Business Solutions partnership provides affiliate and embedded insurance with white labelling capability, throughout a range of SME, landlord and fleet partners.
Sonya Bryson (Acting Managing Director of Commercial) and Lee Marsh (Financial and Commercial Director) are deemed to be key individuals to the Brokered Commercial Insurance Business and are expected to join the Purchaser’s group on the date of the Operational Transfer (the “Operational Transfer Date”).
Information on the Purchaser
Intact is the largest provider of property and casualty insurance in Canada and a leading provider of global specialty insurance, and is the parent company of RSA in the United Kingdom and Ireland. In Canada, Intact distributes insurance under the Intact Insurance brand through a wide network of brokers, including its wholly-owned subsidiary BrokerLink, and directly to consumers through belairdirect. Intact also provides affinity insurance solutions through the Johnson Affinity Groups. In the United States, Intact Insurance Specialty Solutions provides a range of specialty insurance products and services through independent agencies, regional and national brokers, and wholesalers and managing general agencies.
RSA is a multinational general insurer. In the United Kingdom, Ireland, and Europe, RSA provides a range of personal, commercial and specialty insurance solutions through a wide network of brokers, third party partners and directly to customers through the RSA brands.
Intact is a proven industry consolidator with a track record of successful property and casualty insurance acquisitions since 1988, including the RSA acquisition, which closed in June 2021. The business continues to grow organically and through acquisitions, with over CAD21 billion of total annual premiums.
Intact is headquartered in Toronto, employing approximately 29,000 employees globally and is listed on the Toronto Stock Exchange in Canada with a market capitalisation of CAD34 billion.
Shareholder Approvals and Timetable
Due to the size of the Transaction in relation to the size of the Company, the Transaction constitutes a Class 1 transaction under the Listing Rules and requires the approval of the Company’s shareholders. The combined Class 1 shareholder circular and notice of general meeting will be published as soon as is practicable.
The Company’s Board unanimously recommends that Direct Line Group shareholders vote in favour of the Transaction at the Company’s general meeting.
Subject to shareholder approval:
- Cash consideration for the sale will be payable on the date falling five business days after the Company’s shareholders approve the Transaction
- The Reinsurance will take effect upon the payment of the cash consideration with retroactive effect from the Risk Transfer Date (on which date certain fundamental warranties given by the Direct Line Group in the Business Transfer Agreement are repeated (and if untrue would give the Purchaser a termination right))
- Legal transfer of the operational assets and liabilities supporting the Brokered Commercial Insurance Business will take place on the Operational Transfer Date, which is targeted to take place in Q2 2024
- The Part VII Transfer and any necessary ancillary insurance business transfers are expected to take effect 12 to 18 months after the Operational Transfer Date, subject to court and regulatory approval
- There are certain circumstances in which the Company would be required to pay a break fee under the Business Transfer Agreement. These circumstances include (in summary): (a) withdrawal of the Company’s Board’s recommendation of the Transaction to Shareholders; (b) failure by the Company, in certain circumstances, to post the Circular on or before 11 October 2023 (being the date falling 25 business days after the date of the Business Transfer Agreement); and (c) failure by the Company (in certain circumstances) to convene the Shareholder general meeting by 15 December 2023. If incurred, the break fee is intended to provide cost cover for the Purchaser of up to £20 million (one per cent of the Company’s market capitalisation as at close of business on 5 September 2023 (the business day before the date of the Business Transfer Agreement))
The Company will announce its half year results on 7 September 2023.
Results and Transaction Presentation Webcast:
The half year results presentation webcast will be held at 9:30am (UK time) and a copy of the presentation will be made available from 9:15am (UK time) on Thursday 7 September 2023 for download at https://www.directlinegroup.co.uk/en/investors/results-reports-and-events.html. The half year results release will be published at 7:00am (UK time).
For further information, please contact:
DIRECTOR OF BUSINESS PERFORMANCE, REPORTING AND INVESTOR RELATIONS
GROUP COMMUNICATIONS DIRECTOR
Mobile: +44 (0)7795 811263
Mobile: +44 (0)7385 481295
Mobile: +44 (0)2074 045959
+44 (0)20 7425 8000
(Lead Financial Adviser, Joint Sponsor, and Joint Corporate Broker to Direct Line Group)
Jasper van Schaik
RBC Capital Markets
+44 (0)20 7653 4000
(Financial Adviser, Joint Sponsor and Joint Corporate Broker to Direct Line Group)
+ 44 (0)20 7774 1000
(Joint Corporate Broker to Direct Line Group)
Direct Line Insurance Group plc
The Company is one of the UK’s leading insurance companies. The Company’s vision is to create a world where insurance is personal, inclusive and a force for good. Through its well-known brands which include Direct Line, Churchill, Privilege, Darwin, and Green Flag, the Company helps people to carry on with their lives, giving them peace of mind now and in the future. Its brands offer a wide range of general insurance products across motor, home, commercial, travel, pet and rescue, both direct to customers and through price comparison websites and it underwrites insurance products distributed by its third-party partners. The Company believes that by embracing sustainable practices it creates a better corporate culture able to provide more reliable products and bring long-term rewards for its customers, people and shareholders.
For more information, please visit www.directlinegroup.co.uk/en/investors.
This announcement contains inside information. The person responsible for arranging the release of this announcement on behalf of the Company is Neil Manser, Chief Financial Officer.
Allen & Overy LLP is advising Direct Line Insurance Group plc on the Transaction.
This announcement is not intended to, and does not, constitute or form part of any offer, invitation or solicitation of any offer to purchase, otherwise acquire, subscribe for, sell or otherwise dispose of, any securities or the solicitation of any vote or approval in any jurisdiction, whether pursuant to this announcement or otherwise. The release, distribution or publication of this announcement in jurisdictions outside the United Kingdom may be restricted by laws of the relevant jurisdictions and therefore persons into whose possession this announcement comes should inform themselves about, and observe, any such restrictions. Any failure to comply with the restrictions may constitute a violation of the securities law of any such jurisdiction.
FORWARD-LOOKING STATEMENTS DISCLAIMER
Certain information contained in this document, including any information as to the Group’s strategy, plans or future financial or operating performance, constitutes “forward-looking statements”. These forward-looking statements may be identified by the use of forward-looking terminology, including the terms “aims”, “ambition”, “anticipates”, “aspire”, “believes”, “continue”, “could”, “estimates”, “expects”, “guidance”, “intends”, “may”, “mission”, “outlook”, “over the medium term”, “plans”, “predicts”, “projects”, “propositions”, “seeks”, “should”, “strategy”, “targets”, “vision”, “will” or “would” or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They may appear in several places throughout this document and include statements regarding intentions, beliefs or current expectations, including of the Directors, concerning, among other things: the Group’s results of operations, financial condition, prospects, growth, strategies, the industry in which the Group operates and the Group’s approach to climate related matters. Examples of forward-looking statements include financial targets which are contained in this document with respect to return on tangible equity, solvency capital ratio, combined operating ratio, percentage targets for current year contribution to operating profit, prior-year reserve releases, cost reductions, reduction in expense ratio, investment income yield, net realised and unrealised gains, capital expenditure and risk appetite range; and targets, goals and plans relating to climate and the Group’s approach and strategy in connection with climate-related risks and opportunities. By their nature, all forward-looking statements involve risk and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and/or are beyond the Group’s control and/or they rely on assumptions that may or may not transpire to be correct. Forward-looking statements are not guaranteeing future performance.
The Group's actual results of operations, financial condition and the development of the business sector in which the Group operates may differ materially from those suggested by the forward-looking statements contained in this document, for example directly or indirectly as a result of, but not limited to:
- United Kingdom (“UK”) domestic and global economic business conditions;
- the direct and indirect impacts and implications of the coronavirus Covid-19 pandemic on the economy, nationally and internationally, on the Group, its operations and prospects, and on the Group’s customers and their behaviours and expectations;
- the Trade and Cooperation Agreement between the UK and the European Union (“EU”) regarding the terms of the trading relationships between the UK and the EU and its implementation, and any subsequent trading and other relationship arrangements between the UK and the EU and their implementation;
- the terms of trading and other relationships between the UK and other countries following Brexit;
- the impact of the FCA’s PPR regulations and of responses by insurers, customers and other third parties and of interpretations of such rules by any relevant regulatory authority;
- market-related risks such as fluctuations in interest rates, exchange rates and credit spreads, including those created or exacerbated by the war in Ukraine following the Russian invasion;
- the policies and actions and/or new principles, rules and/or regulations, of regulatory authorities and bodies, and of changes to, or changes to interpretations of, principles, rules and/or regulations (including changes made directly or indirectly as a result of Brexit or related to capital and solvency requirements or related to the Ogden discount rates or made in response to the Covid-19 pandemic and its impact on the economy and customers) and of changes to law and/or understandings of law and/or legal interpretation following the decisions and judgements of courts;
- the impact of competition, currency changes, inflation and deflation;
- the timing, impact and other uncertainties of future acquisitions, disposals, partnership arrangements, joint ventures or combinations within relevant industries; and
- the impact of tax and other legislation and other regulation and of regulator expectations, interventions, enforcements, fines and requirements and of court, arbitration, regulatory or ombudsman decisions, judgements and awards (including in any of the foregoing in connection with the Covid-19 pandemic) in the jurisdictions in which the Group and its affiliates operate.
In addition, even if the Group’s actual results of operations, financial condition and the development of the business sector in which the Group operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods.
The forward-looking statements contained in this document reflect knowledge and information available as of the date of preparation of this document. The Group and the Directors expressly disclaim any obligation or undertaking to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise, unless required to do so by applicable law or regulation. Nothing in this document constitutes or should be construed as a profit forecast.
Neither the content of Direct Line Insurance Group’s website nor the content of any other website accessible from hyperlinks on the Group’s website is incorporated into, or forms part of, this document.
MORGAN STANLEY DISCLAIMER
Morgan Stanley & Co. International plc (“Morgan Stanley”), which is authorised by the Prudential Regulation Authority (“PRA”) and regulated by the PRA and the Financial Conduct Authority (“FCA”) in the United Kingdom, is acting exclusively for Direct Line Insurance Group plc and for no one else in connection with the possible offer and neither Morgan Stanley nor any of its affiliates, nor their respective directors, officers, employees or agents will be responsible to anyone other than Direct Line Insurance Group plc for providing the protections afforded to its clients or for providing advice in relation to the possible offer, the contents of this announcement or any other matters referred to in this announcement.
RBC EUROPE DISCLAIMER
RBC Europe Limited, which is authorised by the Prudential Regulation Authority (“PRA”) and regulated by the PRA and the Financial Conduct Authority (“FCA”) in the United Kingdom, is acting exclusively for Direct Line Insurance Group plc and for no one else in connection with the possible offer and neither RBC Europe Limited nor any of its affiliates, nor their respective directors, officers, employees or agents will be responsible to anyone other than Direct Line Insurance Group plc for providing the protections afforded to its clients or for providing advice in relation to the possible offer, the contents of this announcement or any other matters referred to in this announcement.