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Direct Line - a strong performance and higher dividends

George Salmon | 27 February 2018 | A A A
Direct Line - a strong performance and higher dividends

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Direct Line Insurance Group plc Ordinary

Sell: 217.80 | Buy: 218.00 | Change 2.30 (1.07%)
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Total gross written premiums increased 3.6% at Direct Line last year. Together with a 5.9 percentage point improvement in the group's combined operating ratio (a key measure of underwriting performance) which fell to 91.8%, this helped underlying operating profit rise 51.4% to £611m

In line with the recently rebased dividend policy, the group has declared a 13.6p final dividend, up 40.2% on last year. The 15p special dividend brings 2017's total dividend to 35.4p per share.

The shares rose 1.6% on the news.

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Our View

Highly competitive with broadly generic products; few companies can maintain any 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's 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.

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

Direct Line is delivering a respectable 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, the group should continue to generate strong returns. That makes the prospective yield of 7.1% a clear attraction, although please remember there are no guarantees.

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Trading details

The Motor division grew in-force polices 3.8% in the year, taking the total to 4m. Premiums grew 8.5% to £1.7bn.

Against a 2016 number that included a £150m one-off charge, operating profit more than doubled to £365m.

In Home, own brand in-force policies rose 2% to 1.8m, with premiums rising 1.2% to £410m. However, these increases were more than offset by continued falls in the partnership channel. This led total in-force policies down 3.8% and premiums down 4.2% to £799m. Operating profit fell 22.7% to £129m.

In Rescue and other personal lines, an increase in Green Flag policies saw gross written premiums rise 5% to £421m, but operating profit dipped 5% to £43.6m. Total in-force policies fell 1.8% to 7.7m.

A non-repeat of charges from the Ogden rate saw operating profits in the Commercial business rise 77% to £74m. Commercial premiums were flat at £502m as increases in Direct Line for Business were offset by falls in the broking business NIG.

Post-dividend payments, the group's solvency II capital ratio was 162%, in the middle of its target range of 140-180%.

Looking ahead, to 2018 and over the medium term, the Group is targeting a 93% to 95% combined operating ratio, assuming a normal annual level of claims from major weather events and no further change to the Ogden discount rate.

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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.


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