Direct Line hints at special dividends as annual profits surge

In a pre-close update ahead of its results at the end of the month, the FTSE 100 insurer said operating profit from ongoing operations had come in at around £610m and profit before tax at about £540m, up 51% and 53% over the year.

The level of the final dividend will not be confirmed until the announcement on 27 February, but the insurer revealed a bulging solvency capital ratio and said it "will consider any return of capital". At the half-year results in August, the board said it was 'rebasing' the dividend upwards as they updated a payout policy that had been set at the time of the IPO five years ago.

"We aim to grow the regular dividend in line with business growth, which we expect to be in the region of 2% to 3% per annum over the medium term," chief executive Geddes said at the time.

On Friday, Geddes said: "The combination of our operating performance and favourable claims result has delivered financial results ahead of market expectations. Therefore we are publishing our headline results early and look forward to giving more details on the progress of the business in our preliminary results on 27 February 2018."

Operating profits included a £57m impairment to IT intangible assets, while PBT saw a one-off charge related to the refinancing of debt in November 2017 and a strong result from insurance run-off, which covers claims made against businesses that have been acquired, merged or have ceased operations.

Direct Line's solvency capital ratio, a measure used to show an insurer's capitalisation, was estimated at circa 185-190% of solvency capital requirements, before the payment of a final dividend, which reflected lower capital requirements and better than expected profits.

As of 31 December, surplus above SCR is estimated to be circa £1.2bn and the group expects to operate around the middle of its Solvency II capital ratio risk appetite range of 140-180% of SCR.

A gross written premium of circa £3.40bn is expected, up from £3.27bn in 2016, and approximately 350,000 more direct own brand in-force policies at the year-end.

The combined operating ratio fell to circa 92% from 97.7% but the underlying expense ratio and commission ratio are expected to be lower than the previous year.

Shares in Direct Line were up 2.4% 377.5p following the announcement, which came out just after midday.

“An unscheduled trading update on a Friday lunchtime is rarely good news," said analyst Nicholas Hyett at Hargreaves Lansdown. "However, in Direct Line’s case it’s difficult to find things not to like."

Hyett said the final "gem" of the announcement was the Solvency II ratio. "This arcane measure of insurers’ capitalisation is set to come in some way ahead of the group’s target range, and it looks like the board is considering special dividends or a share buyback to return the spare cash to shareholders. Some of that surplus cash comes from reserve releases that might not be repeated next year – but it’s not something we’ll complain about too much.”