Proactive Investors - Direct Line Insurance Group PLC (LON:DLGD) shares stormed ahead more than 13% after it sold its brokered commercial insurance business lines to Intact Financial (TSX:IFC) Corp for £520 million as it aims to put the firm on “a more stable footing”.
"We believe this transaction makes strategic and financial sense despite there being a tail risk of the run-off of the back book reserves if no further deal can be reached to transfer this. In our view, this is a welcome support to the solvency position," said analysts at Peel Hunt (LON:PEEL).
The news came as the FTSE 250-listed insurer unveiled a sharp rise in half-year pre-tax losses to £76.3 million from £11.1 million the year before.
The sale is “estimated to increase the group's solvency ratio on a pro forma basis by approximately 45 percentage points”, said Jon Greenwood, acting chief executive.
The insurer could net a further £30 million dependent on earn-out provisions relating to the financial performance of the business being sold.
Greenwood described the sale price as an “attractive valuation”.
Direct Line estimates the sale will release capital of up to £270 million of which approximately £170 million will be released when the deal is approved.
The company also reported progress in improving margins in its motor division, reporting gross written premium growth of 7%.
“We now believe that we are underwriting profitably, consistent with a 10% net insurance margin,” Greenwood said.
Excluding motor, the group delivered gross written premium and associated fees growth of 12% and a net insurance margin of 12.2%.
Operating profit in 2023 is expected to continue to be adversely affected by the earn-through of previously written motor business while the outlook for motor claims inflation remains in line with its assumption of high single digits.
Looking forward, the improved motor margins now being achieved should provide a platform to support an improvement in operating profit into 2024, the firm said.
No dividend was paid.