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Direct Line Group - Market remains competitive

Nicholas Hyett | 8 May 2019 | A A A
Direct Line Group - Market remains competitive

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Direct Line Insurance Group plc Ordinary

Sell: 216.60 | Buy: 217.00 | Change 0.10 (0.05%)
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Competitive pressure in Home and Motor insurance meant gross premiums from both divisions fell in the first quarter. Better results in breakdown cover and commercial insurance meant total gross written premiums only declined 2.1% to £753.9m.

Total in force policies fell 0.7% to 14.9m, with own brand policies up 0.5% to 7.2m.

The shares moved 1% lower in early trading.

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Our view

Personal insurance can be a tough industry. It's highly competitive, and with rivals offering pretty generic products, few companies can maintain any semblance of pricing power.

That tends to have negative consequences for 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 DLG, the strength of its brands means its own lines are usually able to bypass price comparison sites altogether, and also supports high levels of customer retention. That's helped keep pricing and margins strong. As one of the larger players in the market, 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.

There's a bit of a changing of the guard going on at the moment - as long serving CEO Paul Geddes passes the reins to CFO Penny James. And that means we could be in for a change of direction.

In recent times the group's been stepping back from large white label deals in order to focus on developing its own brands. That strategy has benefits - since the lack of commission payments to partners means own brand sales are potentially higher margin and direct access can also make them stickier customers. We'll have to wait and see if James sticks to that plan.

For now the group's delivering healthy dividend growth, and a special dividend will be welcome too (even if it's lower than last year following the non-recurrence of certain reserve releases) with a prospective yield of 9.1% this year. The group's Solvency II ratio has been towards the top of the target range, which should help sustain the ordinary payment. However, the special dividend will likely fade as reserve releases decline, and no dividend is guaranteed.

For now Direct Line is delivering a respectable performance in a tough sector. 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

Gross written Motor premiums fell 4.2% year-on-year to £386.9m, despite the number of in-force policies remaining broadly unchanged from the previous quarter. That reflects pricing initiatives introduced to mitigate claims inflation, which was at the upper end of the group's long term expectations, reducing the number of higher risk in the book.

In Home, Own Brand premiums rose 0.6% to £96.6m, but that was offset by a 5.7% decline in Partnership premiums, to £44.6m. Weather was generally benign compared to last year.

Rescue and other personal lines saw premiums rise 1.7% to £105.4m, with Direct Line's own Green Flag brand enjoying 15.8% growth in gross premiums.

Direct Line's Commercial insurance offering saw premiums rise 1.2% to £120.4m, with Direct Line for Business premiums rising 8.1%.

The group continues to target a combined operating ratio of 93%-95% this year and over the medium term, with operating expenses of less than £700m in 2019.

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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.