Direct Line Insurance Group plc, (LON:DLG) has today announced that it has signed an agreement to sell its brokered commercial insurance business lines to RSA Insurance Limited, a wholly-owned subsidiary of Intact Financial Corporation, for:
· Initial consideration of £520 million;
· Potential further consideration of up to £30 million, contingent upon certain earn-out provisions relating to the financial performance of the Brokered Commercial Insurance Business; and
· In addition to receiving the Consideration and the potential Earn-Out, the Company estimates that over time it will release capital of up to approximately £270 million of which approximately £170 million will be released when the Transaction is approved by the Company’s shareholders as a Class 1 transaction.
The Group will retain the back book in relation to business written and earned by the Brokered Commercial Insurance Business prior to 1 October 2023 (the “Risk Transfer Date“; and altogether the “Back Book Policies“).
The sale of the Brokered Commercial Insurance Business facilitates the transfer of all of the Group’s brokered commercial insurance business lines and associated partnerships to RSA through a combination of a reinsurance transaction and a renewal rights transfer. As a result, the economics in relation to the business at the Risk Transfer Date will move to RSA. The Back Book Policies will remain with the Company; however, if the Transaction is approved by the Company’s shareholders, Direct Line Group and RSA intend to enter into discussions regarding the potential transfer of the Back Book Policies to RSA.
The Group will remain active in the direct small business commercial lines insurance space, capitalising on its strong position, through its brands “Direct Line” and “Churchill”.
The Consideration after associated costs and tax together with the regulatory capital release will provide a significant uplift to the Group’s solvency capital ratio, and on day one (being receipt of the Consideration) this uplift is expected to be approximately 45 percentage points.
The Board believes that the sale crystallises an attractive valuation for the Brokered Commercial Insurance Business, allowing the Company to focus on retail, personal and direct small business commercial lines, restore the resilience of its capital position and drive the long-term value potential for its customers and shareholders.
Jon Greenwood, Acting Chief Executive Officer of Direct Line Insurance Group, commented:
“This transaction crystallises an attractive valuation for our brokered commercial insurance business lines and focuses the Group fully on retail personal and direct small business commercial lines insurance customers.
Over the last ten years we have turned around the performance of the brokered commercial insurance business lines by focusing on its strong and extensive partnerships with brokers, underpinned by investment in its technology platform. However, its specialist trading model operates in a different part of the UK insurance market to the rest of the Group and therefore it is the right strategic decision to sell to RSA.
The value created for shareholders will allow the Group to improve its capital resilience and provides a platform for improved performance.”
Transaction Structure
The Transaction will be effected through the combination of: (i) a business transfer agreement (“Business Transfer Agreement“) relating to the transfer of the new business franchise and certain operations, brands, employees, contractors, data, third party contracts and premises (the “Operational Transfer“); (ii) a quota share reinsurance agreement (the “Quota Share Reinsurance Agreement“) relating to the reinsurance of new and certain existing business of the Brokered Commercial Insurance Business (the “Reinsurance“) effective from the Risk Transfer Date; (iii) if approved by the Court, a subsequent insurance business transfer scheme under Part VII of the Financial Services and Markets Act 2000 (the “Part VII Transfer“); and (iv) certain administration and transitional services arrangements. As part of the Transaction, the Company will retain the Back Book Policies (subject to discussions among the parties as described above). Transfer of the operational assets and liabilities to RSA is targeted to take place in Q2 2024 and include the movement of approximately 800 employees to guarantee ongoing support and service delivery for customers. The Earn-Out is contingent on the performance ceded to RSA under the Quota Share Reinsurance Agreement up to the Part VII Transfer and is payable within six months of the Part VII Transfer.
Strategic Rationale
Direct Line Group is a UK-based insurance company and owns some of the most recognisable insurance brands including “Direct Line” and “Churchill”. Through these brands, the Direct Line Group offers a range of insurance products that help protect motor vehicles, homes, holidays, pets and businesses with a number of routes to market. The Group owns 23 Motor Accident Repair Centres, delivering lower repair costs and providing data-led insights.
The largest brand within the Brokered Commercial Insurance Business has been part of the Group since it was acquired in 2003 as part of the acquisition of Churchill. Its success has been driven by its strong and extensive partnerships with brokers, delivering tailored insurance propositions for UK SME customers. This specialist trading model operates in the intermediated space and is therefore different to the rest of the Group.
Since its IPO in 2012, the Company has been focused on improving the operational and financial performance of the Brokered Commercial Insurance Business; most recently that has involved moving onto a new technology platform with new pricing and underwriting tools. Recent performance demonstrates the success of this strategy with the Brokered Commercial Insurance Business generating a profit before tax of £43 million in 2022.
With the operational turnaround of the Brokered Commercial Insurance Business completed and given the differences in the trading model versus the Group’s other businesses, the Board believes that now is an appropriate time to facilitate a sale and crystallise the value that has been created.
Financial Impact and Use of Proceeds
In 2022, the Brokered Commercial Insurance Business generated gross written premiums of £530 million and a profit before tax of £43 million. Over 2021 and 2022, the average combined operating ratio was c.96%. As at 30 June 2023, the total assets of the Brokered Commercial Insurance Business were £8 million. Following the Risk Transfer Date (subject to shareholder approval), the Group will no longer receive the full contribution the Brokered Commercial Insurance Business currently makes to the Group’s operating profit, although will continue to receive earnings from the Back Book Policies and investment yield on the capital within the business.
The proceeds from the Transaction will be used to enhance the capital strength of the Group and for general corporate purposes. The sale will reduce the capital requirements of the Group.On day one (being receipt of the consideration), the Transaction will, through a combination of the realised gain on sale together with the initial capital release, increase the Group’s pro-forma solvency capital ratio by approximately 45 percentage points.
There is no change to the Company’s current risk appetite range or capital allocation approach.
Information on the Brokered Commercial Insurance Business
The Brokered Commercial Insurance Business has over 12 different product lines written under the recognised brands of “NIG”, “FarmWeb”, and “Churchill Expert” within the UKI Business Solutions partnership. It has broad reach across the broker market with relationships from large national brokers to smaller regional independent brokers.
The NIG brand consists of a commercial insurance provider, trading exclusively through brokers, offering a comprehensive suite of insurance products to UK SME customers. Products include Motor Trade, Property Owners, Motor Fleet and Commercial Van.
The FarmWeb brand is a specialist agriculture insurer dedicated to meeting the specific insurance needs of UK farmers, with distribution through a selected network of specialist agriculture insurance brokers. Designed for single or multi-site farm businesses, it provides a wide range of motor, property and liability covers.
The UKI Business Solutions partnership provides affiliate and embedded insurance with white labelling capability, throughout a range of SME, landlord and fleet partners.
Sonya Bryson (Acting Managing Director of Commercial) and Lee Marsh (Financial and Commercial Director) are deemed to be key individuals to the Brokered Commercial Insurance Business and are expected to join the Purchaser’s group on the date of the Operational Transfer (the “Operational Transfer Date“).
Information on the Purchaser
Intact is the largest provider of property and casualty insurance in Canada and a leading provider of global specialty insurance, and is the parent company of RSA in the United Kingdom and Ireland. In Canada, Intact distributes insurance under the Intact Insurance brand through a wide network of brokers, including its wholly-owned subsidiary BrokerLink, and directly to consumers through belairdirect. Intact also provides affinity insurance solutions through the Johnson Affinity Groups. In the United States, Intact Insurance Specialty Solutions provides a range of specialty insurance products and services through independent agencies, regional and national brokers, and wholesalers and managing general agencies.
RSA is a multinational general insurer. In the United Kingdom, Ireland, and Europe, RSA provides a range of personal, commercial and specialty insurance solutions through a wide network of brokers, third party partners and directly to customers through the RSA brands.
Intact is a proven industry consolidator with a track record of successful property and casualty insurance acquisitions since 1988, including the RSA acquisition, which closed in June 2021. The business continues to grow organically and through acquisitions, with over CAD21 billion of total annual premiums.
Intact is headquartered in Toronto, employing approximately 29,000 employees globally and is listed on the Toronto Stock Exchange in Canada with a market capitalisation of CAD34 billion.
Shareholder Approvals and Timetable
Due to the size of the Transaction in relation to the size of the Company, the Transaction constitutes a Class 1 transaction under the Listing Rules and requires the approval of the Company’s shareholders. The combined Class 1 shareholder circular and notice of general meeting will be published as soon as is practicable.
The Company’s Board unanimously recommends that Direct Line Group shareholders vote in favour of the Transaction at the Company’s general meeting.
Subject to shareholder approval:
· Cash consideration for the sale will be payable on the date falling five business days after the Company’s shareholders approve the Transaction
· The Reinsurance will take effect upon the payment of the cash consideration with retroactive effect from the Risk Transfer Date (on which date certain fundamental warranties given by the Direct Line Group in the Business Transfer Agreement are repeated (and if untrue would give the Purchaser a termination right))
· Legal transfer of the operational assets and liabilities supporting the Brokered Commercial Insurance Business will take place on the Operational Transfer Date, which is targeted to take place in Q2 2024
· The Part VII Transfer and any necessary ancillary insurance business transfers are expected to take effect 12 to 18 months after the Operational Transfer Date, subject to court and regulatory approval
· There are certain circumstances in which the Company would be required to pay a break fee under the Business Transfer Agreement. These circumstances include (in summary): (a) withdrawal of the Company’s Board’s recommendation of the Transaction to Shareholders; (b) failure by the Company, in certain circumstances, to post the Circular on or before 11 October 2023 (being the date falling 25 business days after the date of the Business Transfer Agreement); and (c) failure by the Company (in certain circumstances) to convene the Shareholder general meeting by 15 December 2023. If incurred, the break fee is intended to provide cost cover for the Purchaser of up to £20 million (one per cent of the Company’s market capitalisation as at close of business on 5 September 2023 (the business day before the date of the Business Transfer Agreement))
Other
The Company will announce its half year results on 7 September 2023.
