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Direct Line Group - Ordinary Dividend up 6.5%, plus 10p special

Nicholas Holt | 2 August 2016 | A A A
Direct Line Group - Ordinary Dividend up 6.5%, plus 10p special

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Direct Line Insurance Group plc Ordinary

Sell: 215.00 | Buy: 215.20 | Change -1.00 (-0.46%)
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In half year results announced this morning, Direct Line Group announced a 6.5% increase in the ordinary dividend, to 4.9p, and a 10p special dividend. Direct Line Group shares rose 4.5% in early trading.

The group saw 3.9% growth in gross written premiums, supported by strong growth in Motor in-force policies (up 2.5%) and premium rates (up 9.5%). Operating profit from ongoing operations decreased £12.2m to £323.6m, due largely to an £18.5m reduction in investment gains.

The Group's combined operating ratio in the half was strong at 89.6%, even after the negative 1.6 percentage point impact of the Flood Re levy. Return on equity fell by 5.4pts, but remained strong at 17.8%.

The Group's estimated Solvency II capital coverage ratio is 184% (post-dividend)

Motor - 47% of gross written premium: In force Motor policies rose 2.5% versus a year earlier, with own brand up 3.1% and pricing improving 9.5% (largely a reflection of claims inflation). Motor gross written premium increased by 9.8% as the Direct Line brand performed well.

Home - 24% of gross written premium: A 2.8% gain in Direct Line branded in-force policies was more than offset by a 5.4% fall in partnership policies. Pricing remained broadly flat with the overall gross written premium down 3.5%.

Rescue and other personal - 12% of gross written premium: In-force policies fell 6.1%, primarily driven by lower packaged bank account volumes from partners, with gross written premium up 1.5%.

Commercial - 17% of gross written premium: In-force policies rose 4.9%, with gross written premiums increasing 2.3%.


The Group continues to expect a full year combined operating ratio of between 93% and 95%, assuming normal weather. The group expects total costs for 2016 to be slightly below 2015 levels, even after absorbing the Flood Re levy.

Our View

Motor and Home insurance is a tough industry.

Highly competitive and selling broadly generic products; few companies can maintain any semblance of pricing power. That tends to drive combined operating ratios (the percentage of premiums that are paid out as claims or expenses) closer to 100% as companies are forced to attract customers through cutting their prices. The advent of price comparison websites has not helped.

Fortunately for Direct Line (DLG), the strength of the Direct Line brand means that it is able to bypass price comparison sites altogether, while also supporting high levels of customer retention. That has helped support pricing, keeping margins strong.

As the market leader DLG enjoys access to more information on claims and customer behaviour than competitors, helping the Group to price more accurately, while scale also provides opportunities for cost cutting (we're impressed that Direct Line can reduce its costs sufficiently to absorb an otherwise challenging scale of Flood Re levy).

Today's special dividend follows the approval of the group's partial internal Solvency II model by the Prudential Regulatory Authority (PRA). The group has said that it will be targeting a Solvency range of 140%-180% under the new model. Dividends announced today take the group to 184%, suggesting potential for further returns to shareholders, if the board think there remains surplus capital in the business.

Overall Direct Line Group is delivering a respectable underwriting performance in a challenging and highly competitive sector. If it can maintain its brand position, with the resulting price advantage then the group should continue to generate strong returns on equity though of course there are no guarantees. As with any insurer though the group's exposure to wider market movements through its investment operations should not be taken lightly. The group is currently yielding 6.9%.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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