ii view: roadside service rescues high-yielding Direct Line

Covid has made for mixed premiums at this insurer, but dividend prospects remain central for investors. 

Third-quarter trading update to 30 September

• Total written premiums down 0.8% to £851.5 million
• Motor written premiums down 2.3% to £447 million
• Home written premiums down 1.3% to £157 million
• Reiterating expense ratio target of 20% by 2023

Chief executive Penny James said:

"We are encouraged by our trading performance in Q3 where we saw a return to strong growth in Green Flag and Commercial and some improvement in Motor and Home own brands, particularly in the price comparison website channel as customer shopping activity started to recover."

ii round-up:

Insurer Direct Line (LSE:DLG) reported a near 1% fall in overall quarterly premiums, hindered by reduced new car sales and a lack of new drivers passing their test given restrictions under the pandemic.

Motor premiums, which account for just over half of the total, fell by 2.3%. Home insurance premiums, its second-largest category, also retreated, although demand for its roadside rescue service Green Flag rose by nearly a tenth. Income constrained Covid hit drivers chose to shop around more, switching to its competitive offering. 

Direct Line shares fell by just over 2% in UK trading, bringing their year-to-date fall close to 10%. Shares for recent bid target RSA Insurance (LSE:RSA) are up just over 15%, while shares for Admiral Group (LSE:ADM) have gained by around a fifth in 2020. 

Pandemic related travel insurance and business interruption claims remain unchanged at £25 million and £10 million respectively. The group, which also operates under the Churchill brand, remains on track to deliver a combined operating ratio slightly below its target range of between 93% and 95% for the year. Under 100% means it earns more in premiums than it pays out in claims.

It is also too early to fully assess the impact of the industry regulator’s General Insurance Pricing Practices report announced back in September. A consultation period runs until 25 January, although management remains confident in the outlook. 

First-half profit retreated by just over 3% to £265 million, aided by lower claims as motorists stayed off the roads under the original lockdown. Both an interim dividend of 7.4p and a special dividend of 14.4p per share were previously declared. 

Direct Line under current chief executive has been overhauling its platform technology. Rollouts for both Direct Line and Churchill are expected before the end of 2020. 

ii view:

The group’s brand name remains high profile. Its markets, particularly its biggest, motor insurance, continue to prove highly competitive. The insurer previously outlined a series of strategic objectives, including making its products easier to use, and reducing group costs. Targets include improving the group’s operating expense ratio to 20% by the end of 2023, down from over 24% in early 2019.

For investors, although reiterating its 2023 operating expense ratio, Covid-19 has hindered the company’s push to make progress. New current lockdowns are also yet to be quantified. But recent dividend payments, including the special payout, leave the shares sat on a historical yield of over 7%, while current analyst estimates point to a similar yield going forward – an income yield hard to find in today’s ultra-low interest rate world. In all, while unexpected events such as the weather can reduce shareholder returns and special dividends are far from guaranteed, income orientated investors have reason to pay attention. 

Positives: 

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

Negatives:

• Car insurance market highly competitive
• Factors outside of its control such as the weather influence performance

The average rating of stock market analysts:

Strong buy