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Direct Line Group - Policy and premium numbers struggle

Nicholas Hyett | 2 May 2018 | A A A
Direct Line Group - Policy and premium numbers struggle

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Direct Line Insurance Group plc Ordinary

Sell: 216.50 | Buy: 216.90 | Change 0.50 (0.23%)
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Total in-force policies fell 2.2% in the first quarter to 15.5m, with total premiums of £769.9m down 5%. That reflects a fall in partnership policies, more than offsetting increases in the number of own brand policies, up 5%, and own brand premiums, up 4.7%.

Full year targets remain unchanged.

The shares fell 4.2% in early trading.

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Our View

Personal insurance can be a tough industry. It's highly competitive, and rivals offer broadly generic products. This means few companies can maintain any pricing power.

That tends to negatively impact combined operating ratios (the percentage of premiums that are paid out as claims or expenses) as companies are forced to cut prices to attract customers. Price comparison websites haven't helped either.

Fortunately for Direct Line (DLG), the strength of its brands means it's able to bypass price comparison sites altogether, and also supports 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 a recent slackening of pricing pressure, and 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.

In that light, the decision to upwardly rebase the dividend at the full year was welcome - not only for the immediate cash infusion but for the confidence it implies in the long term future of the business. It also means the shares currently offer a prospective yield of 7.4% once special dividends are included - although that's expected to fade as reserve releases decline.

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.

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First Quarter Results

The headline decline in total premiums was driven by a 52.3% fall in white labelled Home insurance products, as the group exited agreements with Sainsbury and Nationwide. Together these accounted for £48.8m of premiums, or 49% of last year's partnership Home insurance premiums.

Elsewhere performance was more positive. Motor saw premiums rise 2.9%, to £404m, and remains by far the largest contributor to group. Own Brand Home insurance, Commercial and Rescue were all broadly flat.

Claims associated with the cold weather earlier in the year are expected to be in the region of £50m, using up the group's full annual weather budget.

DLG's Solvency ratio rose slightly to 165%.

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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.