Direct Line to Triple Property Holdings Amid Low Yields

Direct Line Insurance Group Plc (DLG), the U.K. motor insurer that sold shares to the public in October, is planning to more than triple its investments in commercial property as low interest rates erode returns.

Britain’s biggest home and motor insurer plans to increase property holdings to 5 percent of its 10 billion pounds ($15.2 billion) of investments from 1.4 percent at the end of 2012, Chief Financial Officer John Reizenstein said on a call with reporters today.

Direct Line will invest in “warehouses, offices, fully let institutional quality, managed by one of the large global real estate firms,” Reizenstein said. “What we want is our investment line to be steady, not too volatile, if we can grow it that’s great but it’s going to be tough in this environment.”

U.K. insurer RSA Insurance Group Plc (RSA) cut its dividend 33 percent last week as low bond yields squeezed investment returns. Direct Line’s dividend is “very safe” because the full-year payout amounts to just 55 percent of its earnings, Reizenstein said. The firm also has cash left over from its initial public offering that can be invested at higher rates, he said.

Direct Line will pay a final dividend of 8 pence a share, which equates to 12 pence for the full-year.

Profit Falls

Pretax profit for 2012 fell 27 percent to 249.1 million pounds from a year earlier after the firm booked losses on restructuring its operations, the Bromley, England-based insurer said in a statement today. That missed the 251.5 million-pound average estimate of 12 analysts surveyed by Bloomberg, and beat the 233 million-pound average estimate of 19 analysts provided by the company.

The stock rose 0.7 percent to 212 pence a share at 8:48 a.m. in London, while the Bloomberg 500 Insurance Index (BEINSUR) climbed 0.4 percent.

Direct Line is cutting costs and jobs as it attempts to increase profitability amid falling premiums, surging whiplash motor-insurance claims and higher-than-usual flooding in the U.K. last year. Royal Bank of Scotland Group Plc, which owns 65 percent of the insurer, raised 787 million pounds by selling a 30 percent stake in the company in October. The shares have since risen 12 percent.

“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,” Chief Executive Officer Paul Geddes said today in the statement.

Annual Costs

Restructuring costs rose to 189.5 million pounds from 54 million pounds, with about four-fifths relating to the firm’s separation from RBS. The remainder were one-time charges as the firm seeks to cut annual costs by 100 million pounds by 2014.

Operating profit for 2012, which excludes discontinued operations, rose 9.3 percent to 461.2 million pounds, Direct Line said. The firm paid out 99.2 pence in claims for every pound it took in premiums, indicating an underwriting profit. That improved from paying out 1.02 pounds for every pound of premium in 2011.

Competitor Esure Group Plc, which like Direct Line was founded by insurance entrepreneur Peter Wood, said yesterday pretax profit doubled as it paid out 92.8 pence for every pound it took in premiums in 2012. Esure also announced a plan for an IPO that would raise 50 million pounds.

To contact the reporter on this story: Kevin Crowley in London at kcrowley1@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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