The shares of Direct Line Insurance (LSE: DLG) gained 3p to 210p during early trade this morning after the insurer said it would pay a 4p per share special dividend following the sale of its life-insurance division.
Direct Line, whose brands include Churchill, Privilege and Green Flag, said it would sell Direct Line Life to Chesnara (LSE: CSN) for £62m. Direct Line said the disposal represented 85% of the embedded value of the division and would produce a £12m accounting gain.
Direct Line Life had 150,000 policies in force at the end of July and reported a £7m post-tax profit last year.
Direct Line said this morning that the transaction represented “inorganic capital generation” and that it was “appropriate to return the sale proceeds to shareholders“.
Graham Kettleborough, the chief executive of Chesnara, said:
“We are very pleased to have reached agreement to acquire a complementary UK business which we can integrate with our existing UK life book.
It is of benefit to our shareholders as it fits with our strategy, is accretive to our embedded value and will also help support our dividend paying capacity in the medium term.“
Prior to today, City brokers had been expecting Direct Line’s current-year earnings to climb 10% to 23.9p per share and the underlying annual dividend to improve 5% to 12.6p.
Based on those estimates, Direct Line’s shares may trade at 9 times possible profits and offer a 6% potential income.
