The Surprising Buy Case for Direct Line Insurance Group plc

Today I am looking at why I believe expanding operations overseas are set to drive shares in Direct Line Insurance Group (LSE: DLG) higher.

Foreign invasion continues to strike gold

British insurance behemoth Direct Line Insurance Group carries extraordinary popularity with domestic shoppers via its stable of long-established product brands, from its Churchill and Direct Line labels through to its Green Flag motor recovery service. What attracts fewer headlines, however, is the stunning progress that the firm’s International division is making, and I expect earnings from these operations to continue heading northwards well into the future.

Specifically, Direct Line is a major player in the lucrative motor insurance sectors of Italy and Germany, and holds first and third spot in these markets respectively. The company, which has operated in these regions under its Direct Line brand for more than a decade, continues to display excellent momentum in these markets.

The firm’s interims, released at the start of the month, showed that Direct Line was operating 1.6m active international policies during July-September, up 0.7% from the prior quarter and a stonking 10.6% from the corresponding period in 2012. Direct Line has seen growth abroad rise relentlessly each quarter in recent years, helped particularly by improving market conditions in Germany.

While progress in the UK has proved trickier due to rising competition — live motor insurance policies actually ducked 1% at home during the third quarter, to 3.79m — the business is finding conditions much easier versus its rivals on the continent. In particular, I believe that a steadily improving presence in Europe’s largest economy bodes extremely well for future earnings.

Shares in Direct Line have stormed 13% higher in little over a month, boosted this month’s bubbly interims. But I believe that the business still offers decent value for money, trading on a prospective P/E rating of 11.1 versus 12.3 for the wider non-life insurance sector.

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On top of this, I believe that Direct Line is also a great value dividend pick. Forecasters expect the company to build last year's full-year payout of 8p per share to 13.7p in 2013, a figure that creates a bumper yield of 6%. This comfortably outstrips a forward average of 4.5% for its industry rivals.

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