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Direct Line skips final special dividend

Direct Line omits a final special dividend as a result of the Ogden rate change
March 7, 2017

Headline numbers from motor and home insurer Direct Line (DLG) were muddied by a change in the Ogden rate used to calculate damages payments. Operating profits from ongoing operations took a £175m hit as a result of the change in the discount rate from 2.5 per cent to minus 0.75 per cent, while the combined operating ratio (of claims as a percentage of premium income) rose to 97.7 per cent from 94 per cent. Without the Ogden effect, the ratio would have been 91.8 per cent.

IC TIP: Hold at 341p

The adjustment took the shine off what was a solid performance, with strong business growth. The home and private insurance partnership with Royal Bank of Scotland (RBS) was extended for a further three years, while a telematics tie-up with PSA Peugeot Citroën was extended by a further four years.

In the motor division, where the group operates through its eponymous brand, Churchill and Privilege - and the Green Flag breakdown service - in-force policies grew by 4.5 per cent, although claims inflation was at the top end of expectations as a result of higher than anticipated damage costs. Own-brand, in-force policies in home insurance were up by 2.3 per cent, although this was more than offset by a fall in policy numbers through its partnership channel. Direct Line also boosted its commercial business, with more small businesses signing up, and in-force policy numbers rose by 6.4 per cent.

Total costs relating to ongoing operations were flat, although there was an additional non-cash impairment against ongoing IT projects, while the Flood Re levy absorbed an additional £24m. Yield pressure from low UK interest rates saw the investment return fall (see table), now down £110m on that secured in 2012. However, the income yield was nudged up to 2.5 per cent as the portfolio was diversified to include commercial real estate loans and subordinated debt.

Analysts at Peel Hunt are forecasting adjusted pre-tax profits for the year to December 2017 of £492m (2016: £353m) and EPS of 28.8p.

DIRECT LINE (DLG)
ORD PRICE:341pMARKET VALUE:£4.69bn
TOUCH:340.5-341p12-MONTH HIGH:390pLOW: 318p
DIVIDEND YIELD:4.3%PE RATIO:17
NET ASSET VALUE:183p**COMBINED RATIO:97.7%

Year to 31 DecGross premiums (£bn)Pre-tax profit (£m)Investment return (£m)Dividend per share (p)*
20124.052492828
20133.2340719812.6
20143.1045721513.2
20153.1150819813.8
20163.2035317214.6
% change+3-30-13+6

Ex-div: 16 Mar

Payment: 18 May

*Excludes special dividends of 8p per shares in 2013, 14p in 2014, 36.3p in 2015 and 10p in 2016 **Includes intangible assets of £509m or 37p a share