Direct Line says oper profit rises; sees lower restructure costs

Reuters
A photo illustration shows insurance renewal notices from Direct Line in London
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A photo illustration shows insurance renewal notices from Direct Line in London October 10, 2012. REUTERS/Suzanne Plunkett

(Reuters) - Direct Line Insurance Group (DLGD.L), Britain's largest motor insurer, reported a 6 percent rise in third-quarter operating profit, and expected restructuring costs for this year and next to be 12 percent lower than anticipated.

Direct Line, spun out of Royal Bank of Scotland (RBS.L) in a 787 million pound float last year, said it expected aggregate restructuring and other one-off costs in 2013 and 2014 to be about 220 million pounds, 30 million pounds lower than previously expected.

State-backed RBS floated nearly a third of Direct Line's shares last October, fulfilling conditions of a government bailout during the 2008 financial crisis that left the bank 82 percent state-owned. Direct Line promised shareholders before its London float that it would restructure itself.

The company has a greater ability to cut costs than peers, and it is expected it to meet its 2014 target cost base with ease, said RBC Capital Markets analyst Gordon Aitken in a note.

"The quarterly run rate of 260 million pounds is already close to the 2014 target of 250 million pounds, even though the efficiency plan extension was only announced in June 2013," Aitken said.

The insurer, whose brands include Churchill, Privilege and the Green Flag roadside recovery service, said in June that it planned to axe about 2,000 jobs and trim 130 million pounds in annual costs by 2014 to remain competitive in the face of intense competition from price-comparison websites.

The company said on Friday that operating profit from ongoing operations rose to 131.2 million pounds in the three months ended September 30 from 123.7 million pounds a year earlier, driven by higher net investment gains.

While underwriting profits fell about 7 percent to 26.5 million pounds, net investment gains more than doubled to 14.6 million pounds during the period.

Numis Securities analyst Nick Johnson said investment earnings were stronger than expected, but were offset by a slight shortfall in underwriting profit due to German hail losses of 9 million pounds.

"Any disappointment on underwriting is more than offset by positive news elsewhere," Morgan Stanley analyst Marcus Rivaldi said in a note to clients.

Net insurance claims fell 7.2 percent to 547.7 million pounds.

Direct Line said it was too early to assess claims costs from the St. Jude's Day storm with certainty, but they were likely to fall within its fourth-quarter expectation of about 25 million pounds from major weather events.

The company added that its vehicle-tracking devices would become increasingly important in the UK motor market and it was installing about 400 devices each week.

The Financial Times reported on Thursday that Direct Line was in advanced talks to sell a telematics business to a private equity house. (http://r.reuters.com/jaf44v)

If it goes ahead with the disposal, Direct Line would retain other telematics-related interests, including a mobile phone app it launched in June, FT said.

Shares in Direct Line were trading up 2 percent at 229.4 pence at 0943 GMT on the London Stock Exchange. The stock was among the top percentage gainers on the FTSE-250 Midcap Index (.FTMC).

(Reporting by Richa Naidu and Roshni Menon in Bangalore; Editing by Supriya Kurane and Gopakumar Warrier)

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