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Motor leads profit growth for Direct Line as insurer hikes premiums

Motor insurance led growth in profits for Direct Line Insurance Group Plc in the first half of 2017, as the company hiked prices and saw positive trends in bodily injury claims, CFO John Reizenstein told analysts during a first-half earnings call.

Operating profit in the motor segment was £233.9 million in the first six months of the year, up from £168.8 million during the same period of 2016 after the insurer increased prices by 11%, Reizenstein said. He added that the price hike was to mitigate the change to the Ogden discount rate and due to the fact that claims inflation came in at the higher end of the expected range during the half.

"We priced slightly ahead of what the market has done," he said. "Younger drivers saw the biggest increase in prices, and as a result, the risk mix has changed."

The insurer is favoring lower-risk segments after recent changes in the market, but saw a good retention rate among existing customers, Reizenstein added.

A recent study by the AA showed that U.K. motor insurance premiums had risen by 39% over the previous two years and forecast a further increase of over 10% for the remainder of 2017, while a study by EY predicted a rise of 11%.

In February, the U.K. government cut the Ogden rate — a discount rate used to calculate personal injury payouts — from 2.5% to negative 0.75%, a move that has been widely expected to hit the bottom lines of insurers.

Commenting on changes to the Ogden rate, Reizenstein said he was confident that Direct Line Insurance Group had priced its impact in already, "unless the reinsurers do something irrational."

In motor, costs related to the Ogden rate changes resulted in a lower-than-expected increase in claims costs. This led to a reserve release of £49 million in the first half, according to the insurer's results presentation.

The loss ratio in motor was 81.7% for the first half, compared with 84.6% in the year-ago period. The combined operating ratio for motor was 85.1%, compared with 92.3% a year earlier.

Home insurance profits down

By contrast, profits in home insurance fell to £68 million, compared with £102 million a year ago. This was partly due to inflation in claims for escape of water, which came in above forecasts.

"The pricing environment in home insurance continues to lag claims inflation in the second quarter, but there are some signs that the market is starting to respond to escape-of-water claims inflation," Reizenstein said.

The insurer's group-wide profits in the first half stood at £275.5 million, up from £235.9 million a year earlier. The Solvency II capital coverage ratio post-dividend was 173% for the period, compared to 165% in the first half of 2016. The combined operating ratio from ongoing operations was 88.9% at the end of the first half, compared to 89.6% a year earlier.