Direct Line sets ‘conservative’ IFRS 17 target following motor headwinds

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Direct Line aims to achieve a 10% net insurance margin – a new key performance indicator since the adoption of IFRS 17 this year – but cannot say when the firm will meet this “conservative” target.

The group moved from the combined operating ratio – a common metric used by many non-life insurers to measure profitability – to NIM under IFRS 17. The general insurer already introduced the new KPI in December, saying “it more closely resembles how we run the business”.

Presenting Direct Line’s 2022 results yesterday, chief financial officer Neil Manser told analysts a 10% NIM under IFRS 17 would equate to a 96% CoR under the old accounting standard IFRS 4. 

Asked why the group decided to have a less ambitious target than the 93% to 94% CoR set previously, Manser acknowledged the new figure was “a bit more conservative” than under the previous accounting measure, but the firm aimed to meet that target over time “given the headwinds in motor we are facing, which is earned through the premiums”.

He stressed that the 10% NIM was “an ambition” so could not confirm whether the group would meet the new target in 2024. 

“We have not put a time horizon around it given the headwinds in motor coming through. Clearly, we will not meet that in 2023 because the motor earnings lack. We are working hard to restore the margins that we need to hit that ambition. We are not giving you the exact timeframe on it. I think making earnings out of 2024, sitting here today, is quite an early thing to do.”

What happened to Direct Line’s motor?

Group operating profit from ongoing operations fell to £32.1m in 2022 from £590.3m in 2021. The 94.6% drop was attributed to volatilities due to “elevated motor claims inflation, higher than expected weather event claims, new regulatory changes and challenging investment markets”.

The group CoR was 105.8% at the end of 2022, worsening from 89.5% the year before. Under normalised conditions, the figure was adjusted to 103.3%, compared with 90.5% in 2021. 

The worst performing segment was motor, with 114.7% CoR. Excluding motor, the group figure would have been 92.2% under normal conditions. 

How does the NIM work?

The new KPI is based on the ratio of an insurance service return divided by a view of net insurance contract revenue. 

Source: Direct Line

An insurance service return is defined as the sum of the net insurance contract revenues, net insurance contract claims, acquisition costs and operating expenses, compared to the net insurance contract revenues generated. 

What IFRS 17 KPIs do you use to reflect how you run your business?

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