Insurer Direct Line unveiled plans for another special dividend yesterday as its cost-cutting programme proved cheaper and more effective than expected.
Britain’s largest motor insurer, which was floated off from Royal Bank of Scotland in 2012, also confirmed it was in talks to sell its foreign businesses.
Chief executive Paul Geddes said: ““We delivered good results in the first half of 2014, despite major weather events and competitive markets, by maintaining our disciplined underwriting approach and from the continued delivery of our strategic initiatives.
“This continued performance and our strong capital position have enabled us to declare a special interim dividend of 10p per share as well as increase the regular interim dividend by 5 per cent.”
The group reported an 8 per cent rise in first-half profit, to £225.1 million, despite the value of car premiums it sold falling amid intense competition in the motor industry.
It said average car insurance prices were 2 per cent lower in the second quarter and 4 per cent lower in the previous period, while in-force car policies fell 1.9 per cent to 3.7 million in the six months to 30 June.
It said that while pressure on prices eased in the second quarter, it was unclear if the market had hit bottom, or whether prices would fall again in the second half of 2014.
Direct Line began a cost-cutting programme last year, including plans to cut about 2,000 jobs. The company said that it was almost halfway towards meeting its cost-savings target of £1 billion this year.
In a tough household insurance market, Direct Line said the value of gross premiums fell 5 per cent to £216.8m.
The firm added that winter storms cost the business £64m in the first six months, compared to nothing at all a year ago.
It said it was in talks with “a number of parties” to sell its concerns in Germany and Italy. Rumours that it was seeking to divest the businesses, which could be worth more than £400m combined, began to circulate last month.
By selling its German and Italian businesses, which combined make up the company’s international division, Direct Line would leave itself with a presence only in Britain.
Chief financial officer John Reizenstein said: “There is a question of whether the businesses might be worth more to someone else than us.”
Gross written premiums from Direct Line’s international division were £328.8m for the first half of 2014, about 18 per cent of the company’s total.
Gordon Aitken, an analyst at RBC Capital Markets, said the announcement of a third special dividend signalled that investors can expect future excess capital to be returned, including one from the sale of the foreign businesses.
He said the sale was “sensible” given these businesses should be worth more to an insurer with an established motor presence in those markets.
“We value the international operations at £427m [28p per share] and would expect the proceeds, if a disposal were to occur, to be passed back to shareholders,” he said.