An accounting blunder at Direct Line led the troubled motor insurer to overstate the financial strength of its balance sheet.
The FTSE 250 company said the error had been identified when Adam Winslow, its chief executive, asked Deloitte, the company’s auditor, to carry out a separate review of its financial controls and key performance metrics.
The mistake meant the business had incorrectly told investors in its annual results five months ago that it had a solvency capital ratio of 197 per cent at the end of 2023, when the true figure was 188 per cent. This ratio is a gauge of the buffer held by insurers to absorb losses. The higher the figure, the bigger the cushion.
“The group has taken action to strengthen the control environment in relation to the specific area where the miscalculation occurred,” Direct Line said in a stock exchange filing. The Bank of England, which supervises insurers through its Prudential Regulation Authority, did not comment on the error.
It is a blow to Winslow, the company’s chief executive since March, who was already facing the task of trying to revive its fortunes after a string of profit warnings led to the abrupt departure of Penny James, his predecessor, in January last year and prompted it to shelve its dividend.
His immediate challenge was to fight off an unwanted £3.2 billion takeover approach from Ageas, a Belgian rival.
Winslow, 45, who previously was a senior executive at Aviva, another insurer, has set out a recovery plan for Direct Line that involves finding annual cost savings of £100 million and a significant shift in strategy to allow its main brand to start appearing on price comparison websites, something it has not done previously. In a boost to investors, the group also resumed dividend payments when it published annual results, albeit at a lower level than before the recent problems.
Direct Line’s revised solvency capital ratio remains above its “risk appetite range” of 140 per cent to 180 per cent and it estimated that the half-year ratio, which will be confirmed in interim results next month, will be about 200 per cent. The mistake is nevertheless likely to dent investors’ confidence in the company at a time when sentiment is already fragile.
Direct Line was founded 39 years ago by Sir Peter Wood and Martin Long, initially as a motor insurer, although it now sells other cover, including home, pet and travel policies.
Under James, 54, Direct Line was caught out by the rising cost of handling motor claims, which has been pushed up in recent years by sharply rising prices for second-hand cars and spare parts, as well as by higher labour costs in repair shops. The final straw was a profit warning caused by a jump in claims for burst pipes and other damage to homes caused by freezing weather at the end of 2022, which led to the cancellation of the dividend and James’s exit shortly afterwards.
Shares in Direct Line were down 3¾p, or 2 per cent, at 185¼p at the close.