Interactive Investor

Dividend boost as Direct Line hits 16-month high

1st August 2017 15:57

Graeme Evans from interactive investor

A new dividend policy and strong half-year results ensured Direct Line's telephone on wheels was ringing for investors on Tuesday.

Taking the opportunity to rebase its dividend for the first time since its IPO five years ago, the insurer increased its interim payout by 38.8% to 6.8p a share.

From now on, chief executive Paul Geddes expects to grow the regular dividend in line with business growth, which is expected to be 2% to 3% a year.

The rebasing, which contributed to a 7.5% share price rise to a 16-month high 403p, came as Direct Line said profits from ongoing operations increased 9.5% to £354.2 million. This was 32% stronger than the consensus forecast, according to UBS.

The improvement reflected the company's "strong competitive position" in motor insurance, where the gross written premium jumped nearly 10%.

The trend on bodily injury claims has also continued to be more favourable than expected, while the group now predicts a lower-than-forecast increase to claims costs stemming from the review of the Ogden discount rate - the formula used for calculating lump-sum compensation payments for personal injuries.

Direct Line was left particularly exposed by the new -0.75% rate in its annual results earlier this year. It had previously made a provision in claims reserves for a rate of 1.5%, compared to the long-standing rate of 2.5% and the 0% budgeted for by rival esure.

The group, whose brands include Churchill, Privilege and Green Flag, said it had 15.8 million in-force policies at the end of the half-year. This included an increase of 4.9%, or 187,000, in the motor segment.

In-force policies for its home insurance brands increased by 1.5% but partnership volumes reduced by 7.6% due to the loss of new business with Sainsbury's and a slow-down in other arrangements. The gross written premium was 3.7% lower.

The home division's results were described as robust, helped by low weather losses, partially offsetting higher-than-expected claims inflation.

And whereas the first half of 2016 benefited from an unusually high reserve release resulting from 2015 weather events, this was not repeated in the most recent half-year period.

The group also reiterated its financial targets for 2017, including a combined operating ratio (COR) in the range of 93% to 95% and investment income yield at 2.4%.

The COR is the sum of the claims, commissions and expenses divided by net earned premium. Less than 100% indicates profitable underwriting. The figure in today's results was 88.9%, an improvement on the 89.6% of a year earlier.

UBS has a buy rating on the stock, with a price target of 375p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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