ii view: does Direct Line's dividend make the shares a 'buy'?

Covid is hindering performance, but shareholder returns remain a management focus. 

First-quarter trading update to 31 March

• Total written premiums down 4.7% to £752 million
• Motor written premiums down 10.6% to £367 million
• Home written premiums up 1.8% to £140 million

Chief executive Penny James said:

"The first quarter saw similar motor market trends to those at the end of 2020, namely subdued claims frequency, low levels of new car sales and fewer new drivers entering the market. This led to further motor market premium deflation in the quarter. 

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“Against this backdrop, we maintained our disciplined underwriting and our 5% reduction in average premium versus Q1 2020 was less than the market reduction. This focus on maintaining the quality of our business leaves us well placed as lockdown restrictions are eased.”

ii round-up:

Insurer Direct Line (LSE:DLG) reported a 4.7% fall in quarterly premiums year-over-year to £752 million, hindered by reduced new car sales and a lack of new drivers passing their test given restrictions under the pandemic.

Motor premiums, its biggest segment, fell by nearly 11% to £367 million in the period to the end of March. Reduced travel under the pandemic had also been pressuring policy prices lower. But management pointed to a stabilisation in pricing during April and reiterated its previously detailed positive full-year expectations.

Direct Line shares rose marginally in UK trading, leaving them up by around 9% since late October and just prior to the announcement of vaccine development success. Shares for larger rival Admiral (LSE:ADM) are up by 13% over the same time, while shares for takeover confirmed target RSA (LSE:RSA) are up by over 60%.

Direct Line, which also operates under the Churchill, Darwin and Privilege brands, remains on track to deliver a combined operating ratio of between 93% and 95% for the year. Under 100% means it earns more in premiums than it pays out in claims.

Premiums for home and commercial insurance both rose, aided by a buoyant housing market and the implementation of new technology to customer platforms. Pay outs for home insurance over the quarter came in at just £3 million, given benign weather conditions.  

Reduced travel under the pandemic also hit demand for its roadside rescue products. Premiums for its Green Flag brand fell by 1.5% year-over-year while premiums for its overall rescue and other personal lines fell by 16% to £91 million.

The acquisition of its 22nd auto services repair centre was made during the quarter. It also continues to invest in its capability to repair more advanced and electric vehicles.

ii view:

Direct Line previously outlined a series of strategic objectives under chief executive Penny James, including making its products easier to use and reducing group costs. Targets included improving the group’s operating expense ratio to 20% by the end of 2023. But the ratio rose to 24.5% at the end of 2020, hindered by additional costs in relation to the pandemic.

For investors, Covid-19 has hindered the company’s push to make progress. Pre-tax profit over the year to December 2020 fell by 11% to £451 million. But its branded policies grew by 2.2%, and its model of disciplined underwriting delivered a combined operating ratio of 91% - under 100% means it earns more in premiums than it pays out in claims. Its focus on shareholder returns continues, with a share buy back programme recently announced and the dividend for 2020 totalling 36.5p per share – including a special dividend of 14.4p per share. In all while room for caution persists, a historic and forecast dividend yield of over 7% continues to attract income orientated investors.  

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 0.9 times

The average rating of stock market analysts:

Strong buy