Direct Line's Potential 6% Yield

LONDON -- The shares of Direct Line (ISE: DLG.L) slipped 2 pence to 197 pence during early London trade this morning after the insurer published its first results following its sale by Royal Bank of Scotland.

Direct Line said underlying profits for the first nine months of the year had advanced 3% to 348 million pounds. However, the firm admitted its third-quarter profits had slipped 4% to 124 million pounds due to lower investment returns.

Still, July, August and September did see Direct Line record a 28 million-pound underwriting profit -- versus a 20 million-pound loss reported during the first half of the year. The policy count remains at 20 million, with some 4 million car insurance policies generating 40% of the group's premiums.

Paul Geddes, Direct Line's chief exec, commented today:

Against the backdrop of a competitive market and subdued investment returns, we continue to focus on disciplined pricing and underwriting, delivering claims improvements and lowering our expenses through our cost savings initiatives. This, together with the improved capital structure and performance, helped to increase our proforma return on tangible equity to 13.5% for the first nine months of 2012.

Mr Geddes added that Direct Line continues to aim for a 15% return on equity and cost savings of 100 million pounds.

Annualizing the nine-month performance, earnings for 2012 are set for 22 pence per share and therefore support a potential P/E of 9.

In addition, Direct Line's policy of distributing between 50% and 60% of profits as a dividend could therefore see a payout of around 12 pence per share next year. As such, shareholders may be in line for a possible 6% income.

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