Direct Line Earnings: It Still Has an Immense Amount of Work to Do

It is hard to dress up what is ultimately a bad set of full-year results for Direct Line. While a change of management can lead to a depression in earnings and an elevation in one-off items, the earnings announcement on March 21 reveals all has not been well for a while. There are nascent signs of an improvement and a better outlook. However, we think it is going to take a lot to convince the investment community that that is truly a turnaround. Motor insurance continues to be a problem line and management are holding off announcing the decision to place Direct Line on price comparison websites until the capital markets day in July. The board is proposing a GBX 4.0 per-share dividend versus our full-year estimate of GBX 5.6 per share. The sale of the commercial insurance business has helped bolster the group’s solvency ratio to 201% at year-end. The dividend is sensible. We maintain our fair value estimate and no moat rating.