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Direct Line - On track for the full year

Nicholas Hyett | 7 November 2017 | A A A
Direct Line - On track for the full year

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Direct Line Insurance Group plc Ordinary

Sell: 216.20 | Buy: 216.60 | Change 0.00 (0.00%)
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In-force policies across all segments increased slightly to 15.8m at the end of the third quarter, of which 6.8m were Direct Line own brands, 5.1% higher than this time last year. The group expects its full year combined operating ratio to be in the middle of its 93-95% target range.

The shares fell 1% following the announcement.

Our View

Highly competitive with broadly generic products; few companies can maintain any semblance of pricing power in personal insurance.

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. Price comparison websites haven't helped.

Fortunately for Direct Line (DLG), the strength of its brands mean it's able to bypass price comparison sites altogether, while also supporting high levels of customer retention. That has helped keep pricing and margins strong. As the market leader, DLG enjoys access to more information on claims and customer behaviour than competitors, helping it to price more accurately, while scale provides opportunities for cost cutting.

The decision to upwardly rebase the dividend at the half year was welcome, not only for the immediate cash infusion but because of the confidence it implies in the long term future of the business. Recent results have benefited from bumper reserve releases, but those are unlikely to continue forever. Improving operating expenses and higher in-force policies are more important to the group's long term future.

Looking ahead to the full year, investors will be eyeing Direct Line's improved Solvency II ratio with interest.

Even after dividend payments, it sat at 173% at the half year. Management say they are looking to operate in the middle of the 140% to 180% range in the normal course of business, so there's scope for a healthy special dividend. Analysts are forecasting a prospective yield of 7.6% for 2018 - although as ever there are no guarantees where dividends are concerned.

Direct Line is delivering a respectable underwriting performance in a sector which is currently enjoying a bit of a let up in pricing pressure. If it can maintain its brand position, and resulting price advantage, then the group should continue to generate strong returns.

Third Quarter Results

Total gross written premiums at the end of the third quarter stood at £907m, up 2.8%. That reflects particular strength in the group's own brands, which saw gross premiums rise 8.3% to £607m.

Motor was by far the strongest segment, with gross written premiums rising 7.1% to £462m. That reflects an increase in own brand policies as well as premium growth. Commercial and Rescue & Other Personal Lines also delivered positive performances. However, Home continues to struggle, with gross written premiums falling 3.9% to £217m.

The group investment portfolio has generated a return of 2.8% so far this year, up 0.1 percentage point on last year.

Direct Line continues to expect a combined operating ratio of between 93-95% in the medium term, and is targeting a Return on Tangible Equity of at least 15%.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.