Does Direct Line Insurance Group PLC Have More Investment Appeal Than Aviva plc, Prudential plc, Barclays PLC And Standard Chartered PLC After Results?

Is Direct Line Insurance Group PLC (LON:DLG) (LSE:DLG.L) a better investment than Aviva plc (LON:AV) (LSE:AV.L), Prudential plc (LON:PRU) (LSE:PRU.L), Barclays PLC (LON:BARC) (LSE:BARC.L) and Standard Chartered PLC (LON:STAN) (LSE:STAN.L)?

Direct Line Insurance Group PLC
Direct Line Insurance Group PLC

Direct Line Insurance Group PLC (LON:DLG) (LSE:DLG.L) has released 2016 results to investors today. Gross written premiums for ongoing operations are 3.9% higher at £3274.1 million, which was driven by growth in Motor and Home own-brand in-force policies.

Investors are probably aware Direct Line’s 2016 results include the one-off impact of using the new Ogden discount rate of minus 0.75%. This has meant a fall in profitability against previous forecasts. Operating profit from ongoing operations was £403.5 million against a pre-Ogden discount rate reduction figure of £578.6 million. Profit before tax in 2016 was £353 million against a pre-Ogden forecast figure of £570.3 million. Return on tangible equity declined to 14.2% from 18.5% in 2015.

Direct Line’s investment appeal remains relatively high in my opinion. Its combined operating ratio may have increased to 97.7%, but this was due to the change in the Ogden discount rate. The company is still targeting a combined operating ratio of 93-95% in 2017. It will also continue to target improved efficiency and will make investments in customer and technology trends affecting its markets.

The final dividend per share has risen 5.4% to 9.7p. Direct Line’s estimated Solvency II capital coverage ratio post dividend is 165%, which is above the middle of the company’s risk appetite range of 140% – 180%.

In the last 3 months, an investment in Direct Line has declined 4%. This is a worse performance than financial services sector peers Aviva plc (LON:AV) (LSE:AV.L), Prudential plc (LON:PRU) (LSE:PRU.L), Barclays PLC (LON:BARC) (LSE:BARC.L) and Standard Chartered PLC (LON:STAN) (LSE:STAN.L). Shares in Prudential are flat, an investment in Aviva has moved 6% higher, Barclays is down 3% and Standard Chartered’s share price is 8% up on 3 months ago.

In my opinion, Direct Line has investment appeal. I think there was some disappointment when the Ogden discount rate was changed. However, I think the additional costs to the company could be recouped by premium rises across the industry. I feel Aviva, Prudential, Barclays and Standard Chartered all have investment appeal in the long run and I believe their business models to be sound. But I think Direct Line could be a relatively strong investment performer in future years.

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