By Alistair Gray, Insurance Correspondent

Direct Line is set to increase its dividend this year by almost a third, after agreeing to dispose of all its historic life policies, cementing its position among the 10 highest yielding stocks in the FTSE 350.

The general insurer, which stopped writing life insurance two years ago, is selling about 150,000 outstanding policies to Chesnara, which specialises in acquiring and running “back book” operations.

Direct Line, spun off from Royal Bank of Scotland in an initial public offering last year, is planning to return the total £62m proceeds to shareholders through a one-off special dividend, worth 4p a share.

This will lift the total forecast payouts for the year to 16.6p and the prospective dividend yield from 6.1 per cent to 8 per cent, said Nick Johnson, analyst at Numis.
The life insurance policies formed part of Direct Line’s “rescue and other personal lines” division, which accounted for about a tenth of the group’s premium income in the first half of the year.
Some analysts admitted on Tuesday they were not even aware Direct Line had a life insurance business, and said the disposal raised questions about what other “under the radar” assets the company might sell.
Although best known for its UK motor and home business, Direct Line also offers other types of general cover, including travel and pet insurance. It owns the Green Flag roadside rescue business and has operations in Germany and Italy.

Direct Line has been considering re-entering the life insurance market. It has run a pilot scheme since January, under which it distributes products that use its brand name but are underwritten by Legal & General.

However, insiders said life insurance was unlikely to form a material part of the group and added that Direct Line was acting only as an intermediary.
“That’s probably the way investors want it,” said Mr Johnson. “Life is a very different discipline to general insurance and it would just complicate the story.”
Chesnara is paying for the acquisition with existing cash and a new loan facility with RBS. It plans to hire outsourcers HCL to administer the policies, which include mortgage and critical illness cover.
Graham Kettleborough, chief executive of Chesnara, said the company was eyeing further acquisitions of back books in the UK and western Europe, with estimated values of between £50m and £200m.
Shares in Chesnara rose 4.2 per cent to 283.25p. Direct Line rose almost 1 per cent to 209p.