ii view: Direct Line yields over 8% after beefing up dividend

Already a high-yielder, this FTSE 250 insurer is building on its tech investments and cutting costs. We assess prospects.

Full-year results to 31 December 2021

• Total written premiums down 0.3% to £3.17 billion
• Operating profit up 11.8% to £582 million
• Final dividend up 2.7% to 15.1p per share
• Total dividend for the year up 2.7% to 22.7p per share
• Share buyback programme of £100 million

Chief executive Penny James said:

"I am delighted by the Group’s strong performance and proud of the way we have navigated the complexities of a challenging market.

"2021 has been a year of significant strategic progress - we’ve successfully completed the main elements of our technology build and data capability, both key enablers of future growth. The capability we have built is already delivering improved competitiveness and we believe there is plenty more to come in 2022."

ii round-up:

Insurance company Direct Line Insurance (LSE:DLG) today offered confidence in its outlook as it raised investor returns again. 

An 11.4% improvement in operating profit to £582 million, helped by both underwriting performance and investment returns, enabled a 2.7% increase in the dividend payment and the rollout of a further £100 million share buyback programme. 

Direct Line shares were little changed in UK trading having gained by around 15% from pandemic market lows in March 2020. Shares for larger rival Admiral (LSE:ADM) are up by around a fifth over that time, while shares for home repairs insurer Homeserve (LSE:HSV) are down by around a quarter. 

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Direct Line’s disciplined underwriting helped deliver a combined operating ratio of 90.1% over the year, better than 2020’s 91%. Under 100% means that the insurer has earnt more in premiums than it pays out in claims. The FTSE 250 company also reiterated its medium-term combined operating ratio target of between 93% to 95%.  

Costs remained a focus as it lowered its operating expense base by £18 million over the year, while its home insurance partnership with the NatWest Group (LSE:NWG) was extended until 2027. 

Its required offices have been reduced by just over 30% compared to pre-pandemic levels with its focus on technology now enabling every new motor and home claim to be made online. 

ii view:

Launched in 1985, Direct Line today offers UK insurance policies both online and over the telephone to cover a variety of assets and events. Its original motoring insurance still generates its biggest slug of turnover at around 49%, followed by home insurance at around 18% and commercial at around 10%. Roadside rescue, pet and travel insurance all help make up the balance. Along with Direct Line, its other brands include Churchill, Darwin, Green Flag and Privilege.

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Under chief executive Penny James, UK insurer Direct Line has placed data and technology at the top of its agenda. Its claims capabilities continue to be expanded given the previous purchase of its 22nd auto services repair centre, supporting its competitive position in vehicle repairs. 

For investors, changes following the Financial Conduct Authority's review into general insurance pricing practices are expected to pressure motor policy margins over 2022. Claims inflation remains a challenge and events outside of management’s control like the weather offer a core risk for insurance companies broadly.

But rewards from investments in its technology platforms are being seen. A diversified business model persists, while restructuring such as that made to its property portfolio over the year have continued. In all, and with the shares sat on a historic and estimated forward dividend yield of over 8%, income investors are likely to stay patient. 

Positives: 

• Diverse product offering 
• Attractive dividend payment (not guaranteed)

Negatives:

• Factors outside of its control such as the weather influence performance
• Forecast dividend cover of 1.1 times

The average rating of stock market analysts:

Buy