Direct Line Insurance Group PLC
Preliminary Results for the year ended 31 December 2022 (Unaudited)

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JON GREENWOOD, ACTING CEO OF DIRECT LINE GROUP, COMMENTED

"2022 was a tough year for Direct Line Group. Motor and Home market conditions were challenging, with high claims inflation and regulatory reforms creating substantial headwinds for the business, and we did not navigate these challenges as effectively as we would have wished. Exceptional weather and difficult investment markets also significantly impacted our results.

"Motor, in particular, was affected by high claims inflation, which remained ahead of our expectations throughout the year, as well as the impact of regulatory changes. We have taken pricing actions that will support restoration of margins in Motor and mitigate the impact of further claims inflation. We have also accelerated a range of other actions including deploying additional resources in Motor.

"All our other businesses performed broadly in line with our expectations, and within our target combined operating ratio, when normalised for weather claims. Adverse weather was a major factor in 2022, with storms and extremes of heat and cold resulting in the highest claims costs from large weather events since the Group listed over a decade ago.

"Since the year end we have taken action to begin to rebuild the resilience of our balance sheet, and we have further self-help options available, as well as organic capital generation to enhance our solvency ratio during 2023.

"Whilst our 2022 performance was disappointing, the fundamentals of our business remain strong and we are now fully focused on rebuilding our margins, further improving our capital strength and generating attractive sustainable returns for shareholders."

Results summary

Financial summary

–     Group operating profit from ongoing operations fell to £32.1 million (2021: £590.3 million) reflecting a volatile operating environment with elevated motor claims inflation, higher than expected weather event claims, new regulatory changes and challenging investment markets. Total Group operating profit was £20.6 million (2021: £581.8 million).

–     Claims inflation was most acute in Motor, where severity inflation of around 14% was above the levels assumed in the Group’s pricing. Alongside disruption to supply chains causing delays in third party claims, this led to a Motor combined operating ratio of 114.7% (2021: 92.4%). In our other businesses, pricing kept pace with claims inflation and combined operating ratios were broadly in line with expectations, when normalised for weather.

–     2022 saw the highest weather event costs since the Group listed over a decade ago with £149 million of claims, well above the 2022 £73 million budget assumption. The largest event was December’s freeze, which delivered around £95 million of claims costs due to prolonged periods of sub-zero temperatures across Scotland and North West England.

–     Group combined operating ratio for ongoing operations was 105.8% and 103.3% when normalised for weather. The Group's total combined operating ratio including run-off partnerships was 106.0%.

–     Solvency capital ratio reduced during 2022 as a result of lower profit as well as unrealised losses on investments. A new 10% quota share reinsurance arrangement was agreed with effect from 1 January 2023 and, including the benefit from this, the solvency capital ratio was 147%. At the end of February the Group solvency ratio has further improved by approximately 5 percentage points due to positive credit movements on the bond portfolio and a reduction in ineligible capital on adoption of IFRS 17 'Insurance Contracts'.

–     In line with the expectation previously disclosed, the Group is not proposing a final dividend for 2022, resulting in a total dividend for 2022 of 7.6 pence per share.

Business highlights

–     Commercial delivered gross written premium growth of 14.7% at a combined operating ratio lower than 2021, driven by a strong customer focus across both the broker and direct-to-consumer brands, supported by Commercial’s new platform.

–     In Motor, we launched our new Churchill Essentials product into the price comparison website ("PCW") channel, designed to enhance our competitiveness in this market.

–     The Group continues to review where it deploys capital to target the highest returns, consequently we are exiting some low margin packaged bank accounts. The new 10-year partnership with Motability Operations starts in the second half of 2023 and is expected to generate annual gross written premium of around £500 million, 80% of which will be reinsured.

–     Home made good progress with its new technology platform, which remains on track for roll out in 2023.

–     Green Flag started to roll out its own fleet of Green Flag patrol vehicles, designed to improve claims efficiency and to broaden the availability of products and services, such as batteries and tyres direct to customers at the roadside.

–     Our Science-Based Targets were approved by the Science Based Targets initiative.

Dividend and outlook

The Group paid an interim dividend of 7.6 pence per share in 2022; however, given the year-end solvency ratio, as indicated at the January trading update, the Board is not recommending a final dividend. The Board understands the importance of dividends to shareholders and will update the dividend outlook at the half-year results.

2023 earnings are expected to be impacted by higher than assumed claims inflation on Motor business written during 2022 and in early 2023, alongside continued macroeconomic uncertainty.

With effect from the start of 2023, the Group has adopted IFRS 17 and moved from combined operating ratio to net insurance margin ("NIM") as a key performance indicator. The Group has an ambition over time to generate a NIM of above 10%, normalised for weather.

The Group continues to believe it has a fundamentally strong business and is pursuing a range of actions designed to both restore earnings and improve its solvency position.

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

Notes:

1.     Ongoing operations – the Group has excluded a number of Rescue and other personal lines partnerships from its ongoing operations results. The run-off partnerships relate to a Rescue partnership with NatWest Group that expired in December 2022 and Travel partnerships with NatWest Group and Nationwide Building Society which expire in 2024, and which the Group has already indicated that it will not be seeking to renew. Relevant prior-year data has been restated accordingly. See glossary for definitions and appendix A – Alternative Performance Measures for reconciliation to financial statement line items.

2.    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 under the Direct Line for Business and Churchill brands.

3.    See glossary for definitions and appendix A – Alternative Performance Measures for reconciliation to financial statement line items.

4.   A reduction in the ratio represents an improvement as a proportion of net earned premium, while an increase in the ratio represents a deterioration. See glossary for definitions.

5.    Estimates based on the Group’s Solvency II partial internal model.

6.    Adjusted solvency capital ratio as at 31 December 2021 excluded £250 million Tier 2 debt which was redeemed on 27 April 2022. See appendix A – Alternative Performance Measures for reconciliation to financial statement line items.