Good question. I haven't seen seen analysis of the effects of autonomous cars on DLG and other motor insurers.
The expectation is clearly fewer accidents and claims once a significant proportion of vehicles are AV. Until then I would think the unpredictable human driver will find plenty of opportunities for crashing into things including AVs. That would seem unlikely to be the case for at least 10 years as the existing manual drive fleet is gradually replaced, starting when, 2-5 years out? On that timescale I can't see AVs are significantly affecting valuations yet.
When they do what happens? Maybe the catastrophe insurers like LRE give some idea. They had several years of no major storms or claims, so premiums fell and LRE wrote less business. That freed up a lot of capital previously required to cover potential claims and they paid a series of generous special dividends. There was also considerable consolidation in the industry, with several nice premium bids on offer. Maybe motors could see something similar as AVs took over.
The dividend policy was update at H1 2017 as below, indicating regular dividend one third interim, two thirds final. 6.8p paid in August so expect 13.4p final total 20.4p. Key points are:-
In the normal course of events the Board will consider whether or not it is appropriate to distribute any surplus capital to shareholders once a year, alongside the full year results.
"Group expects to operate around the middle of its solvency II capital coverage ratio risk appetite range of 140% to 180% of the Groups solvency capital requirement, and it will take this into account when considering the potential for any special dividends."
After paying Interim dividend the SCR was 173%, so depending on H2 performance, special dividend could be considered.
Forecast dividends from 4-Traders and Digital Look are 27.4p and 28.51p, which would imply 7-8p special along with final, but nothing guaranteed.
7.7-8% is well up there and reflects some risks, but I recall a provision being taken when Ogden was changed, so the softening of that policy may cause some write-back and create more room for a special.
The Group aims to manage its capital efficiently and generate long-term sustainable value for shareholders, while balancing operational, regulatory, rating agency and policyholder requirements.
The Group aims to grow its regular dividend in line with business growth.
Where the Board believes that the Group has capital which is expected to be surplus to the Group's requirements for a prolonged period, it would intend to return any surplus to shareholders. In normal circumstances, the Board expects that a capital coverage ratio around the middle of its risk appetite range of 140% to 180% of the Group's solvency capital requirement ("SCR") would be appropriate and it will therefore take this into account when considering the potential for special distributions.
In the normal course of events the Board will consider whether or not it is appropriate to distribute any surplus capital to shareholders once a year, alongside the full year results.
The Group expects that one-third of the annual dividend will generally be paid in the third quarter as an interim dividend, and two-thirds will be paid as a final dividend in the second quarter of the following year. The Board may revise the dividend policy from time to time. The Company may consider a special dividend and/or a repurchase of its own shares to distribute surplus capital to shareholders.
"These all suggest to me that SP will rise. Attractive as an income investment with a good chance of capital gain IMO."
I agree and have a decent chunk of these for that reason. The issues which have affected the profitability and valuation included increased claims in homes business (implied false or inflated claims) which they claim to have addressed through revised claims procedures.
The Ogden formula impact (discount rates on awards for long term care required due to accidents). Discount rate was revised up from -0.75% to 0-1% is September, I'm not sure if that has come into effect but will reduce claims exposure. I was expecting a recovery on that basis but it fizzled out.
The yield is excellent, cover not great, forecast at 1.2 in 2017. The 2016 adjusted EPS was 21.2p, with forecast 32.51p in 2017 and 31.27p in 2018 so cover is an ongoing concern.
DLG have a strong competitive position and brand covering a range of insurance business areas, road recovery etc. Their volume and own brands should protect against tough times.
I have enough of these at ~4.5% so will not be adding unless price gets much lower but plan to hold.
The fall of 13% in SP since August looks overdone given forecast PE of 10.9%. A forecast yield of 7.9% covered x1.2 and forecast growth of 54% in pre-tax profit. These all suggest to me that SP will rise. Attractive as an income investment with a good chance of capital gain IMO. Broker consensus is buy.
In-force policies across all segments increased slightly to 15.8m at the end of the third quarter, of which 6.8m were Direct Line own brands, 5.1% higher than this time last year. The group expects its full year combined operating ratio to be in the middle of its 93-95% target range.
The shares fell 1% following the announcement.
Highly competitive with broadly generic products; few companies can maintain any semblance of 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 has 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.
The decision to upwardly rebase the dividend at the half year was welcome, not only for the immediate cash infusion but because of the confidence it implies in the long term future of the business. Recent results have benefited from 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.
Looking ahead to the full year, investors will be eyeing Direct Line's improved Solvency II ratio with interest.
Even after dividend payments, it sat at 173% at the half year. Management say they are looking to operate in the middle of the 140% to 180% range in the normal course of business, so there's scope for a healthy special dividend. Analysts are forecasting a prospective yield of 7.6% for 2018 - although as ever there are no guarantees where dividends are concerned.
Direct Line is delivering a respectable underwriting 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, then the group should continue to generate strong returns.
Third Quarter Results
Total gross written premiums at the end of the third quarter stood at £907m, up 2.8%. That reflects particular strength in the group's own brands, which saw gross premiums rise 8.3% to £607m.
Motor was by far the strongest segment, with gross written premiums rising 7.1% to £462m. That reflects an increase in own brand policies as well as premium growth. Commercial and Rescue & Other Personal Lines also delivered positive performances. However, Home continues to struggle, with gross written premiums falling 3.9% to £217m.
The group investment portfolio has generated a return of 2.8% so far this year, up 0.1 percentage point on last year.
Direct Line continues to expect a combined operating ratio of between 93-95% in the medium term, and is targeting a Return on Tangible Equity of at least 15%.
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. http://www.hl.co.uk/shares/share-research/201711/direct-line-on-track-for-the-full-year?utm_source=Silverpop&utm_medium=email&utm_campaign=E00RN&utm_content=Share%20research&theSource=E00RN&Override=1&cid=halDM10145&bid=44727950&e_cti=1096016&e_ct=T&utm_source=AdobeCampaign&utm_medium=email&utm_campaign=E00RN_Share%20research%20update_07.11&theSource=E00RN&Override=1
Motor insurance pricing is set to hold steady as companies benefit from another shift in the sector's dynamics, Deutsche Bank said as it recommendation on Admiral and kept Direct Line and Esure at 'buy'.
Direct Line is the preferred stock in the UK motor space for its attractive yield and long-term growth prospects of 2-3% leading to a 10%-plus total shareholder return. "We also like its relative defensive position against the UK motor pricing cycle due to its control over distribution and relative diversification of its business."
A partial reversal in a change affecting personal injury payouts has been proposed - marking a victory for insurers but potentially reducing compensation for accident victims.
In March, the government introduced a new formula for calculating compensation payments for those who suffer long-term injuries.
The Ministry of Justice decided to reduce the discount rate from 2.5% to minus 0.75% - a move which it said was determined by existing law....
Now the government is planning to change the rules. The Ministry of Justice said that, if the rate were set today under the new approach, it might end up within the range of 0% to 1%.
"SharePad gives a forecast yield of 5.5% and forecast PE of 13.8. Digital figures you quote seem a bit over optimistic to me."
Could well be, although I note 4-Traders and DL are forecasting very similar numbers for 2017 consensus
EPS at 32.4p and 32.5p
Divi at 26.9p and 26.8p
These numbers were both updated recently with substantial increases from forecasts early Aug. DL EPS was 29.3p Div 23.1p , I don't use Sharepad so not sure how often they update.
The point of my post however was less the absolute numbers than that the EPS and dividend estimates have been significantly raised. If that is how it plays out, it seems it should be supportive moving forward. That's why I like to keep track of how the forecasts are moving.
Broker estimates tend to be erratic, but consensus numbers close to the end of current year tend not to be too far from the mark so I am inclined to add and watching for a good point to buy.
SharePad gives a forecast yield of 5.5% and forecast PE of 13.8. Digital figures you quote seem a bit over optimistic to me.
I have held DLG since IPO in Oct 2012 and topped up 5 times since then. Now 4.5% by value of my share portfolio. I feel I have a large enough holding now but if that were not true I would be topping up again at current price.
Have held these for 2.5 years now and enjoyed dividends in that time of over 20% in addition to a 7% book profit.
Agree with the first 2 risks and agree that Ogden could be a [Big] upside.
Autonomous vehicles could also be positive news - there are an awful lot of very poor drivers on our roads and I would expect accident rates to fall before premiums
As with any UK centric stock the potential impact of a "hard" Brexit could be painful.
The other upside is that as it changes culture from being part of a bank I would expect it to become more profitable
SP spiked well in August after the good results but have drifted back down from 411 to 380p.
I see that the Digital Look forecast EPS and DPS has been raised since the results 2017 forward PE falling from 12.9 to 11.8 and foreward yield forecast to rise to 7%, detail below.
I have been looking to increase holding in solid yield stocks, I hold just over 3% here, built over the last year, moderately up on capital and divs, and am minded to raise that.
I guess the risks are
-Pension which seems not quite nailed down, but feels manageable
-Investment returns any major slump would hurt, but then it would hit most assets. I don't have a clear picture here but my impression is that they invest more in fixed interest which would seem a reasonable position at present.
-Ogden seems like an upside risk as (if) interest rates are ever restored to normal
-Autonomous vehicles- who knows what impact this would have (I guess the aim is lack of impacts), but can't see this one being material for some time to come.
Anyone see any other big risks or issue here?
Early Aug Latest
29.36p : 32.51
30.38p : 31.27
"There's been plenty to cheer over the past few days. A sweep of positive corporate earnings, the likelihood that UK interest rates will remain glued to record lows deep into next year, and a slightly weaker pound all gave stocks a lift.High ..."
DS - no I certainly would not expect external auditors to pick up any fishy deals between adjusters and repair shops, as you note they seem oblivious to even the most egregious accounting scams in many industries. Sorry I should have clarified I was referring to internal audit processes for checking consistency and appropriate levels of repair costs agreed etc. Not having worked in the industry I idea what arrangements exist for this but would hope there is something fairly rigorous to discourage employees from straying from the straight and narrow.
I doubt the insurers were working as a cartel to increase charges (allowing them to ramp up premiums?). More likely that, yes, each company squeezed their garage suppliers to their favour as much as possible. But if push came to shove they would be able to demonstrate to any regulator that their actions have in fact squeezed suppliers so much, to policyholders' advantage, that if there is a bit of the balloon popping out somewhere else it is inevitable but not evidence that consumers have been ripped off.
I don't see this as motor insurers' version of PPI........!
GS thanks for interesting perspective on this. I guess the article was implying that the insurers were colluding or instigating the overcharge - but unclear why they would, I cold understand if individuals might come to some arrangement for a kick-back but I suspect that would get get picked up by some of the procedures/auditing any competent insurance Co must have in place.
Certainly the market agrees with your conclusion that there is nothing to see here and has focused on the good results.
H2 Looking forward to an unwind of the Ogden Nash formula.
That was happening when I worked in motor insurance claims 20 years ago+!!! The repair bill for the non-fault driver was always at the very top end (or above) what "your" engineer was saying it would cost. Why? Well the repair garages who desperately need the insurers' work (and are contractually screwed by them) know that they will have to repair the "fault" driver's car for a bare minimum of margin, but when they are repairing the non-fault car they can push up the charges knowing that the paying insurer has little push back provided it is within reason. The cost of paying a claims department employee/ engineer to argue a £3k repair bill down to £2.5k doesn't make it worthwhile.
There are loads of ways in which motor insurers (and therefore their policyholders) are screwed somewhere in the system.
Motor premiums are high because of:
(i) High (and rising) personal injury costs, including the currently disputed discount rate.
(ii) Increased cost of spare parts, integrated parts, technical parts to cars. (It's not just bits of bumper and panels, cars are more computer than mechanical it seems)
(iii) High levels of fraud - both fictitious and exaggerated claims
(iv) High levels of administration, red-tape etc
(v) High costs of compliance etc
(vi) Low returns on investments
Every driver in Britain is being overcharged for motor cover because insurers are using secret deals to grossly inflate repair bills, a Telegraph investigation has established.
Insurers are routinely inflating repair costs by as much as 100 per cent, while receiving undisclosed kickbacks for the difference, it can be revealed.
The system is used by insurers representing drivers involved in accidents which were not their fault to rip off rival firms representing the at fault drivers for repair work.
Across the industry the process is creating a hidden cost layer potentially affecting all drivers, which could be worth as much as £750m, equivalent to around 5 per cent of the UK's 34 million drivers' annual insurance premiums.
Motor insurance premiums reached a record high this year, with the average price paid for comprehensive car cover now £462 a year.
My reading of the update is that the directors are now sufficiently content to pay out the divi as an ordinary divi (interim and final) rather than lower ordinaries topped up with a special when they know the final score. It's a matter of confidence in future returns and thus is a good thing.
It probably doesn't mean much of a difference to the total amount paid, just it should be a bit more dependable.
A very well run company that knows their industry and has a super-strong brand. I wish I had more (currently about 5% of the portfolio by value) but I am overweight insurers in general (life and non-life) so shouldn't take on more exposure. And this is insurance so a couple of major events can put a big dent in the returns for a particular year.
At this price it is a solid hold. Buy (for others) if it drops back below 380p.
My reason for being long on these over 3 years has been mentioned in earlier posts.
It is flirting with 350 again today, which is almost 360 inc the recent divi which arrives in our accounts in a few days, so nicely off the bottom immediately ex divi and post the Ogden news, as I expected.
But is this a sign that the nadir has passed? Or is it misleading?
Hastings quarterly update this morning (where I am also a holder) is incredible and whilst DGL is larger, and so a harder beast to add growth to, I suspect they are also making good progress on all KPI's and their next update, unclouded by the Ogden stuff of recent updates, could be very encouraging.
Would appreciate intelligent views though.
Yesterday DLG spiked briefly to 350 but fell back but today has-so far - held on to most of an even bigger gain. Anyone know why?
Two weeks since going ex the 9.7p dividend it has recovered all the ex dividend drop and some- circa 4% gain in 2 weeks. My reasons for being bullish are in earlier posts so I won't repeat. But on a 3 year view I would expect a blended return of at least 10-15% pa with modest material downside risk
I did eventually buy yesterday at 335.6 at what I thought was close to the bottom after yesterdays drop in the FTSE. It's gone a bit lower today though, at 333.6 as I write this, but whatever - you can never catch the exact bottom.
Looking at the charts it looks to me as if the bottom should be around here, unless there is to be a more significant drop for reasons not currently apparent............
IMO this looks to be a solid company with good business model and prospects. Ogden rate thing is unfortunate but should benefit the most competitive in the sector and will doubtless be addressed by revisions in insurance premiums in future years. Planning to hold for the attractive dividend yield.
Watched them for the first 15 mins and wasn't sure if they were going to drop further. Dropped to 332.5 in the first few minutes before recovering to 334+. Had to go out then so set a limit order to buy at 333.5, by the time I came back they were up at 338, so may have missed my chance. We'll see.
Time will tell whether a floor was established around 332
Therein lies the conundrum. After a steady rise over recent years the SP peaked in January at 400. Since then DLG has been in a downtrend, and the Ogden episode will not support a reversal. The rise since that event is probably attributable to the close proximity of the ex-divi date, today.
I still have a limit buy in place at 330, and am concerned it is set too high.
Indeed, time will tell.
Almost breached 350 this morning. Has been a nice run up following the sell off after results. Time will tell whether a floor was established around 332 and ( excluding the ex dividend 10p drop due this week) these will now consolidate on business fundamentals. that is my view and including the dividend this strikes me as a relatively safe earner in the medium term
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