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Direct Line - Partnership deals see policy numbers tumble

Nicholas Hyett | 1 August 2018 | A A A
Direct Line - Partnership deals see policy numbers tumble

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Direct Line Insurance Group plc Ordinary

Sell: 215.20 | Buy: 215.60 | Change -0.60 (-0.28%)
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Total in-force policies fell 3.1% to 15m with gross written premiums down 5% in the year to £1.6bn. That reflects a fall in partnership policies, more than offsetting increases in the number of own brand policies, up 4.1%, and own brand premiums, up 3.3%. Operating profit fell 15.7% to £303.1m.

Long serving CEO Paul Geddes has said that he'll step down in Summer 2019.

The board announced a 2.9% increase in the interim dividend to 7p a share.

The shares fell 2.9% 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 its own lines are 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 slackening of pricing pressure, and bumper reserve releases. But those tailwinds now look like they're unwinding. Improving operating expenses and in-force policy growth are more important to the group's long term future.

In that light, the decision to rebase the dividend upward 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 8% once special dividends are included - although it'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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Half Year Results

The fall in policies and premiums was driven by the end of white label home insurance agreements with Sainsbury and Nationwide, without which gross written premiums actually rose 0.5%.

However, operating profits were also affected by a worse combined operating ratio. This ratio measures underwriting performance and was 4.4 percentage points worse this half than a year earlier, at 93%. This reflects exceptional reserve releases in 2017, and adverse weather in the first half of 2018, partially offset by lower operating expenses.

At a divisional level, Motor saw inforce policies grow 2.1% to 4m and premiums rise 1.9% to £840m. The number of Home policies fell 10.9% year-on-year, with premiums down 25.1%. Commercial policy numbers rose 4.3% to 0.7m with premiums up 0.6% to £269.9m. Rescue and other personal lines saw policy numbers fall 3%, with premiums down 34% following the sale of fewer packaged products and some partnership exits.

The investment book delivered a return of £95.4m, up from £93m last year.

DLG's Solvency ratio rose slightly to 169%.

The group is targeting a medium term combined operating ratio of 93-95%, supported by lower operating expenses and commission paid to third parties. Total investment return in 2018 is expected to be in the region of £150m.

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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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