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Why Direct Line Insurance Group Plc Is A Buy For Me

Direct Line Group (LSE: DLG) is an insurance group with businesses in the UK, Italy and Germany. It is most famous for the Direct Line brand that, 20 years ago, pioneered the direct selling of insurance by phone and online, but it also owns brands such as Churchill and Privilege.

In its time it led the way, and revolutionised the insurance industry in Britain, eliminating the need for insurance brokers. Yet, it recent years it has itself been caught up in another revolution: the increasing dominance of price-comparison sites in the insurance business.

Finding a niche in the market

Price-comparison websites now are the channels through which most insurance is now sold.

The argument is simple: instead of checking prices with just one or two insurance companies, why not go and compare the whole market?

But is Direct Line now suddenly a dinosaur? Not necessarily. All insurance is not merely a race to the bottom, competing only on price. There is a place for companies that provide a premium, value-added service. Where the number of features and customer service provided is the comparator, rather than how cheap it is. I think this is Direct Line’s niche.

The potential to innovate

Direct Line is aiming to be the Apple to the price-comparison sites’ Google Android. Having said this, I suspect the company is battling a gradual decline in its market.

To beat this decline, in a market where barriers to entry are low and moats are narrow or non-existent, it needs to innovate, perhaps launching price-comparison sites and budget brands of its own, and investing its marketing spend on these brands. The model in this instance is Admiral Group, which owns Confused.com, Admiral and a host of other insurance brands.

I think Direct Line Group really can reinvent itself in this way and, if it can, its share price could really rebound.

The simple numbers show how cheap the company is: the P/E ratio is 8, the dividend yield is nearly 6%. This makes the company a little cheaper and higher yielding than a company which we at the Fool have often talked about as a value play: Aviva.

So if you have been considering companies such as Aviva and RSA as investments, I would say you should also consider Direct Line Group as a value and high-yield investment. In my view, Direct Line is a buy.

A worthy addition to your income portfolio

If you are seeking out income investments, I think Direct Line is a strong candidate. And our resident panel of expert stock-pickers have found another company which we think would be a worthy addition to your income portfolio.

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> Prabhat owns shares in RSA, but in none of the other companies mentioned in this article. The Motley Fool owns shares in Apple and Google.