Direct Line beats profits forecasts with maiden results

Direct Line Group, the insurance company which floated in London back in October, managed to beat consensus expectations with its maiden set of full-year results, causing shares to edge higher on Thursday.

The insurer, spun out of UK lender Royal Bank of Scotland (RBS) last year, proposed a final dividend of 8.0p per share, but said that it will aim to raise the dividend in 2013. Analysts had forecast a payout of 7.8p per share.

The company reported an operating profit of £461.2m from ongoing operations for 2012, up 9.3% year-on-year and ahead of the £454m analyst estimate. Direct Line said that four of its five divisions experienced profit growth last year, with the exception of Home, which was hit by the worse-than-average claims from "weather events".

However, due to the £189.5m in restructuring and one-off costs booked during 2012 (2011: £54m), owing mainly to the separation from RBS, profit before tax slumped from £342.9m to £249.1m.

Restructuring and one-offs are expected to fall to £140m in 2013, comprising of costs associated with the cost savings programme and IT migration.

Gross written premiums fell by 3.3% over the year from £4.12bn to £3.99bn, driven by falling premiums in the Motor division.

"We have made good progress since the beginning of our transformation plan and our 2012 performance is further evidence that we have made the right strategic decisions and are executing our plans well," said Chief Executive Officer Paul Geddes.

However, he said that there's "no room for complacency" in a competitive market, "particularly in UK motor, where there are also expected to be significant legal reforms".

Direct Line confident about targetsGeddes said that the company has made "substantial progress" on its target to achieve £100m of gross annual cost savings in 2014.

Return on tangible equity (RoTE) increased from 10% to 11.5% over the period, helped by an improved operating result and capital actions taken to improve the efficiency of the capital position, the group said. Direct Line is aiming to raise the RoTE to 15% at some point in the future.

Analyst Kevin Ryan from Investec said in a research report: "We believe the scope of Direct Line's personal insurance product offerings gives it plenty of scope to boost returns; it is a lot more than just the UK's largest motor insurer."

The broker retained its 'buy' rating and 237p target price for the stock.

Shares were up 0.56% at 211.68p by 09:43 on Thursday.