Direct Line Insurance Group (LSE: DLG) celebrated six months of boring weather as reduced claims from customers helped boost operating profits 28% to £287m through the first half of the year.
The improved profitability came despite net earned premiums — the premiums from insurance policies Direct Line gets to keep after paying off reinsurers — dropping 4.8% from a year ago as the company becomes more selective with the insurance policies it writes.
With fewer claims resulting from weather damage, Direct Line’s loss ratio — the amount of claims paid as a percentage of net earned premiums — improved from 67.3% to 60.3%. In addition to fewer claims, which is outside management’s control, the company’s operating expenses were cut by 18% falling from 25.4% of net earned premiums to 23%.
These reduced costs were enough to more than offset a rise in commission costs and pushed the company’s combined ratio — an industry metric that provides a quick look at how profitably an insurer underwrites risk — down from 101.1% to 94.6%. This means Direct Line was able to profitably write policies during the first half of 2013.
Direct Line’s commercial and international insurance activities also had a good start to the year, more than doubling operating profits to £21m.
Direct Line appears to be delivering on its strategic goals of reducing costs and writing better policies in order to improve profitability. But the insurance market remains highly competitive, which will likely strain the company’s ability to continue growing profits so impressively.
The shares have increased 23% since the company listed last October but investors need to ask themselves where the company goes from here.
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> Neither Nate nor The Motley Fool own shares of Direct Line Insurance Group.
