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What’s Telling Me To Buy Direct Line Insurance Group Plc Today

Today, I am looking at Direct Line Insurance Group (LSE: DLG), and deciding whether to add the stock to my own personal investment portfolio.

Profits continue to surge at transformed group

Direct Line reported at the start of August that operating profit leapt a gargantuan 27.8% in the first six months of 2013, to £286.6m, as the effect of mild weather patterns helped to reduce the number of claims it received. Fewer applications also helped the group’s combined operating ratio for continuing operations drop to 94.6% from 101.1% in the first half of 2012.

Profits have also taken off in recent times as the group’s restructuring plan has taken hold, with Direct Line’s cost-cutting initiatives also critical in driving first half operating profits. And the firm has pencilled in another £1bn worth of cuts to be implemented next year. The company’s transformation programme has helped to improve performance across the entire group, and specifically operating profit from its Commercial and International arms doubled in January-June versus the same 2012 period.

Direct Line is operating in an increasingly competitive space in its core UK markets, however, and the business saw gross written premiums fall 4% in the first half. Still, the home and motor insurance giant is expanding its already-weighty product portfolio to take the fight to the competition. I am also confident that rising business activity in Europe should also keep earnings ticking higher.

Insurer well placed to ride out short-term pressure

City brokers expect Direct Line’s transformation strategy to keep the company heading in the right direction, even though earnings are expected to remain under the cosh in the near term. A 12% slip in earnings per share, to 19p, is pencilled in for 2013. But a 25% snapback is anticipated next year, to 24p.

The insurer currently changes hands on a P/E rating of 11.3 and 9.1 for 2013 and 2014 respectively. Given that the firm looks on course to deliver blistering growth looking further ahead, in my opinion this represents excellent value — the FTSE 100 and non-life insurance sector carry forward P/E values of 18.6 and 11 correspondingly.

Take the direct line… to marvellous dividends

Although Direct Line trails its industry rivals in terms of P/E ratio, the former far outstrips its competitors in terms of forward dividend yield. The company currently boasts a yield of 5.9% versus 4.6% for the rest of the UK’s non-life insurers. And an expected rise in Direct Line’s earnings next year supports an eye-watering yield of 6.4%.

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> Royston does not own shares in Direct Line Insurance Group.