Direct Line Insurance Group PLC (LON:DLG) declared a special dividend as the insurance firm achieved an 8.1% increase in 2018 pre-tax profit.
Pre-tax profit rose to £582.6mln last year, reflecting the non-repeat of finance costs in relation to debt repurchased in 2017.
READ: Direct Line suffers overall decline in third quarter premiums despite own brand uptick
Operating profit, however, dropped 6.4% to £601.7mln due to reductions in the release of reserves – the money earmarked for eventual claim payments – and investment returns a year ago.
The decline in reserve releases in 2017 reflected a £57mln impairment charge related to IT projects.
Beast from the East pushes weather-related claims higher
Direct Line saw increased weather-related claims of £75mln mainly due to the Beast from the East in the first quarter of 2018.
The group was also hit by changes to the Odgen discount rate, used to calculate compensation for personal liabilities, that meant the cost of a comprehensive motor insurance policy declined.
Normalised for weather and adjusted for the assumed Ogden discount rate, Direct Line’s combined operating ratio – a key measure of profitability for insurers – was 93%, towards the lower end of the group’s medium-term target range of 93% to 95%.
The total gross written premium fell 5.3% to £3.2bn due to the decision to exit from Nationwide and J Sainsbury PLC (LON:SBRY) Home partnerships.
Return on tangible equity dropped to 21.5% from 23.0%, largely as a result of a 6.4% decrease in adjusted profit after tax to £457.1mln.
Direct Line said its solvency capital ratio before dividends was 194%, resulting from good capital generation and lower capital requirements.
Direct Line declares special dividend and hikes ordinary dividend
The board has therefore recommended a 2.9% increase in the final ordinary dividend to 14p per share along with a special dividend of 8.3p.
The solvency ratio after both dividends will be 170%.
Looking to the 2019 financial year, the company is targeting a combined operating ratio of 93% to 95%, a reduction in operating costs below £700mln and a 15% return on tangible equity.
Outgoing chief executive Paul Geddes, who will be replaced by chief financial officer Penny James in May, said: "We enter a pivotal year of operational delivery in 2019.
"This includes starting the roll-out of the latest generation IT systems for personal lines, following the successful launch of our new systems for small businesses in 2018, which we believe will deliver benefits for customers, colleagues and shareholders over the coming years.
"This aims to provide the springboard from which to deliver a step change in both capability and efficiency to help to grow the contribution from current-year profitability.”
Focus on own brand products should be good news in the long run, says analyst
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said the company's increased focus on own-brand products is the main driver of today's figures with the end of Sainsbury and Nationwide Home insurance partnerships hitting premiums and profits.
“In the long run an increased proportion of own-brand sales should be good news though – the lack of commission payments to partners means own brand sales are potentially higher margin and direct access can also make them stickier customers," he said.
He added: "It’s not all plain sailing of course – the personal insurance industry is going through one of its periodic pricing squeezes at the moment and Direct Line hasn’t escaped unscathed.
"However, the strength of the group’s brands mean it seems to be holding its own for now, and cost savings elsewhere in the business have allowed Direct Line to hike marketing expenses this year. If marketing pounds are well spent that bodes well for the future.”
In morning trading, shares edged up 0.4% to 357.7p.