Direct Line Still Overvalued, say Analysts

Morningstar analysts note that the FTSE 100 insurer's dividend is now approaching 6%, but an increasingly competitive car insurance sector brings risks

Morningstar Analysts 5 March, 2019 | 3:05PM

Cars

Direct Line Insurance Group (DLG) reported full-year results with profit before tax of £583 million, slightly above our full-year estimate. This is higher than the £539 million in 2017. Gross written premium was down at £3.2 billion versus £3.4 billion, but the business achieved 180 basis-point growth in gross written premium coming from its own brands. We will maintain our fair value estimate of 260p for the time being while we roll our valuation model, but we think there are some warning signs coming out of these results. 

The final dividend being proposed is 14p with a 8.3p special payout. Combined with the 7.0p interim payment, the normal dividends give the stock a near 6.0% dividend yield. While the business is entering a phase of rollout of the latest generation of IT systems for personal lines, following the launch of these systems for small businesses in 2018, Direct Line management continues to target a 93.0%-95.0% combined ratio over the medium term across the group. Operating profit declined by £43.6 million as the group had lower prior-year reserve releases. What we basically have is a flattened profit before tax because of improved financing costs.

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