Direct Line profit rises, special dividend declared

Direct Line declared a special dividend on Tuesday as the insurer reported a drop in full-year operating profit but a rise in pre-tax profit.

In the year to 31 December 2018, operating profit fell 6.4% to £601.7m as gross written premiums declined 5.3% to £3.21bn, but pre-tax profit was up 8.1% to £582.6m. Operating profit included a £55m benefit from moving to an assumed 0% Ogden discount rate. Analysts had been expecting a much smaller benefit of £28m.

The company's direct own brands gross written premiums increased by 1.8%, but total premiums were down as as expected due to the exits from Nationwide and Sainsbury's Home partnerships.

Direct Line said the decline in operating profit was more than offset by the non-repeat of finance costs in relation to the debt repurchased in 2017.

Meanwhile, the combined operating ratio came in at 91.7%, which was slightly worse than 2017's 90.8% but above analysts' expectations of 92.7%. A ratio below 100% indicates that the company is making an underwriting profit, while a ratio above 100% means it is paying out more in claims that it is receiving from premiums.

Normalised for weather and adjusted for the assumed Ogden discount rate change, the combined operating ratio was around 93.5%, towards the lower end of the company's medium-term target range of 93% to 95%.

Return on tangible equity was 21.5% versus 23% and the insurer declared a final dividend of 14p a share, up 2.9% on the year, and a special dividend of 8.3p a share.

Direct Line reiterated its financial targets for 2019 and over the medium term of achieving a combined operating ratio in the range of 93% to 95% normalised for weather, operating expenses below £700m and at least a 15% return on tangible equity.

As far as the UK's divorce from the EU is concerned, the group said it "will not be immune" in the event of a "disruptive Brexit", as it does have exposure to financial markets and imports good and services to fulfil insurance claims.

Chief executive officer Paul Geddes said: "I am pleased to announce a strong set of results driven by our resilient business model which performed well in a highly competitive market. We have added a million direct own brand policies since 2014 showing that our customers value our brands, propositions and service.

"We enter a pivotal year of operational delivery in 2019. This includes starting the roll-out of the latest generation IT systems for personal lines, following the successful launch of our new systems for small businesses in 2018, which we believe will deliver benefits for customers, colleagues and shareholders over the coming years. This aims to provide the springboard from which to deliver a step change in both capability and efficiency to help to grow the contribution from current-year profitability."

At 1545 GMT, the shares were down 0.1% to 355.80p.

Numis said the results were "strong", with operating profit 6% ahead of consensus and 14% ahead of its estimates.

Analyst Paul de'Ath said: "Insurance is an industry where scale matters and Direct Line remains the largest Motor and home insurer in the UK. The business is focused on the core market and has advantages over its peers through its network of repair centres and comprehensive offer to customers.

"While there is some scope for growth in commercial and rescue, the main focus for investors should be on dividends. With an ordinary yield of 6.1% in 2019F, boosted by a further 2.5% of special, the shares remain undervalued, in our view."