By Radhika Anilkumar and Khushi Mandowara
(Reuters) -Shares of Britain's Direct Line soared 18% on Thursday after it agreed to sell its brokered commercial insurance business for 520 million pounds ($648 million) to bolster its capital as it struggles with financial losses.
The sale to Canada's Intact Financial announced late Wednesday would help in increasing the company's solvency ratio on a pro forma basis by about 45 percentage points, Direct Line said.
"This transaction makes strategic and financial sense, despite there being a tail risk of the run-off of the commercial back book reserves," Peel Hunt (LON:PEEL) analyst Andreas Van Embden said in a note.
Shares in the home and motor insurer, which have fallen more than 30% this year, rose 15% to 173.4 pence, as the deal overshadowed results showing it fell to a first-half loss.
Direct Line has had a tumultuous time as high inflation and supply constraints due to the war in Ukraine and the pandemic pushed up motor repair costs.
Its CEO stepped down in January.
"First-half earnings are clearly not at an acceptable level yet," acting CEO Jon Greenwood told Reuters.
"We have been taking significant pricing actions, which are starting to take effect."
In its results statement, the company said it would reviewing its motor business.
"The improved Motor margins now being achieved should provide a platform to support an improvement in operating profit into 2024," it said.
It logged an operating loss of 78.3 million pounds for ongoing operations in the six months ended June 30, compared with a profit a year ago.
"The weakness of Direct Line's motor insurance arm remains a concern although, again, the firm is taking steps to bolster its performance," analyst at trading and investment platform eToro Mark Crouch said.
"However, it is far from being out of the woods."
($1 = 0.8022 pounds)