Direct Line Insurance Group PLC (LON:DLG) reported a 12% decline in profits for 2019 but hiked its dividend and said it was launching a share buyback.
The FTSE 250 home and motor insurer said its cost cutting efforts and discipline on underwriting enabled it to keep the combined operating ratio – a key measure of an insurer’s profitability – from deteriorating too much, up slightly to 92.2% from 91.6%.
READ: Direct Line puts the pedal to the metal on cost-cutting
With policy numbers falling 1.9% to 14,789 and gross written premium just below flat at £3.2bn, profit before tax fell to £509.7mln as benign weather last year was more than offset by lower reserve releases.
But the final dividend was lifted 2.9% to 14.4p and the board launched a share buyback of up to £150mln that is expected to be completed by the end of July, and is awarding staff “£500 of free shares each”.
Chief executive Penny James, who joined last May, said: “The motor insurance market began to show signs of improvement in the second half of 2019, helping us return to growth while our other major markets were competitive, with pricing largely keeping pace with inflationary cost pressures.”
Since unveiling a new plan to improve its operating expense ratio through a mixture of automation and process improvement, self-service and digitalisation, James said momentum had been maintained by adding its new Darwin brand to another price comparison website, after years of avoiding them, as well as adding other functionality on other platforms.
Direct Line also said that chairman Mike Biggs will step down this year after eight years in the role, with the search for a successor underway.
Shares in the company jumped 6% to 330.72p on Tuesday morning.
Analysts at UBS said the headline numbers beat consensus forecasts and the buyback was also ahead of expectations, which predicted it would be below £110mln.
“A positive aspect is the earnings quality improvement is coming through as expected,” analysts said, noting that second-half operating profit was 16% ahead of consensus, driven by stronger underwriting profit, while the group attritional loss ratio was 3.8% better than consensus, driven by home and some benefit from lower motor loss picks.
William Ryder, analyst at Hargreaves Lansdown, said despite the fall in both premiums and profits, Direct Line’s results were “pretty reasonable”, as the group paid out a lower proportion of premiums as claims this year, and underlying operating costs also fell.
“However, results have been flattered in the past by large prior year reserve releases. These have fallen precipitously, and are expected to fall further going forwards, although they will still make a meaningful contribution to profits.
“The group recently announced a new strategic plan which focusses on bringing costs down and leveraging new IT investments to improve underwriting. We think the group faces its share of challenges, but the market is rewarding steady progress.”
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