Direct Line Insurance Group PLC (LON: DLG) – Recently Priced GBP 260 Million Notes Offering to Withstand Heightened Market Volatility

The United Kingdom-based, Direct Line Insurance Group PLC is a General Insurance Company, which operates through four segments – Motor, Home, Rescue and other personal lines and Commercial. Its Motor division covers legal protection and personal motor insurance. The Home segment covers legal protection against the home property. The Rescue and other personal lines comprise of rescue products, and other personal lines insurance, including travel, pet, and creditor. The Commercial segment covers medium and small enterprises. The Company was admitted to the LSE (London Stock Exchange) on 16^th October 2012 and currently a constituent of FTSE 250 index.

The Company will report its half-yearly results of FY20 on 4^th August 2020.

  
(Source: Presentation, Company Website)

Key Fundamental Statistics



Segments at a Glance

The Group has multiple products, brands, and distribution channel to protect homes, cars, holidays, businesses, and pets. All its operating segments are based in the United Kingdom, which is segregated by product types. The description of each segment can be seen in the image below:

 
(Source: Annual Report, Company Website)

Non-Financial KPIs in FY2019
 

1. The Group has been maintaining a solvency capital ratio in the range of 140 per cent to 180 per cent.

2. The Group has consistently shown significant developments in improving employee engagement, enhancing net promoter score and reducing customer complaints.
 

 
(Source: Annual Report, Company Website)

Synopsis of Recent Significant Developments

29^th May 2020: The Group announced the pricing of its GBP 260 million subordinated debt at 4.0 per cent, due in 2032. It will improve the financial liquidity and flexibilityof the Company during the prevailing macroeconomic environment of heightened uncertainties.

14^th May 2020: The Board of DLG announced that Danuta Gray would succeed as Chairperson of the Group from 4^th August 2020 since Mike Biggs decided to step down from its position.

Top Shareholders Statistics

 

Trading Update and Actions taken to Mitigate the Impact of Covid-19

On 6^th May 2020, Direct Line Insurance Group released an update on the trading performance for Q1 FY2020 and actions taken to combat Covid-19. Driven by growth in Motor, Motor performance and Green Flag businesses, the Gross written premium surged by 4.7 per cent in Q1 FY2020 versus Q1 FY2019 data. The group is focused on doing the right things for society, people, customers and for its stakeholder’s peace of mind, it will take necessary measures, which will incur the cost of around GBP 70 million. DLG will support its clients in financial difficulty and provide free breakdown services to all NHS workers. The company expects travel restrictions imposed by FCO (Foreign and Commonwealth Office) to remain till September end and will have the impact of around GBP 44 million on Travel business and expects reinsurance recoveries of GBP 18.5 million, having a totalnet impact of GBP 25 million approximately. In Motor business, the claims notifications are expected to decline by 70 per cent in April with an increase in the average severity. The Group has enabled remote access for its employees, and its repair centres are open and working at reduced capacity to repair automobiles for essential travel. DLG is committed to its transformation agenda and started new Rescue claims system roll-out and launched Van and Tradesperson on DL4B (Direct Line for Business) platform. The group expects its solvency capital ratio to increase from an estimated 174 per cent on 31^st March 2020 to an estimated 177 per cent on 1^st May 2020. The Board has decided not to pay any dividend until the situation gets normal. Based on the uncertainties related to coronavirus pandemic, the group expects to achieve a combined operating ratio in between 93 per cent to 95 per cent and is expected to improve its operating expense ratio to 20 per cent by 2023 with a long-term target to achieve nearly 15 per cent tangible equity returns annually.

Financial Highlights- Good financial Performance for the Year ending 31^st December 2019


(Source: Presentation, Company Website)

For the financial year ending 31^st December 2019,the direct own brand in-force policies increased by 1.4 per cent in FY19, with robust growth in Green Flag and Commercial direct own brands. Led by an underwriting discipline resulted in lower premiums, and fewer Motor and Home policies, the total Group gross written premium for the financial year 2019 were broadly steady. The motor loss ratio in the current year was majorly stable. The Board had proposed a final ordinary dividend per share of 14.4 pence. It delivered a robust capital position with a 165 per cent of solvency capital ratio after recommended capital distributions. In 2019, the group delivered an operating profit of GBP 546.9 million, a return on tangible equity of 20.8 per cent and a combined operating ratio of 92.2 per cent.

Financial Ratios – Decent Insurance Metrics for FY2019 versus FY2018

 

The Loss ratio for the financial year 2019 stood at 61.9 per cent, which was lower than the Industry Median data. The Expense ratio for the financial year 2019 stood at 16.3 per cent versus 16.1 per cent in the financial year 2018. It remained significantly lower than the Industry Median of 31.0 per cent. The combined ratio stood at 78.2 per cent for FY2019, which was higher than the FY2018 data. On leverage front, the debt-equity ratio of the Direct Line Insurance Group PLC’s was 0.31x, which was lower as compared to the industry median of 0.35x.

Share Price Performance Analysis


Daily Chart as on 8^th June 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On June 8, 2020, at the time of writing (before the market close, at 8:57 AM GMT+1), Direct Line Insurance Group PLC’s shares were trading at GBX 288.20, up by 0.63 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 355.00/GBX 225.40.

Bullish Technical Indicators

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average price, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Method 1: Price/Earnings Approach (NTM)



To compare Direct Line Insurance Group Plc with its peers, Price/Earnings multiple has been used. The peers are Standard Life Aberdeen Plc(NTM Price/Earnings was 18.36), Sabre Insurance Group Plc (NTM Price/Earnings was 15.19), Sampo Plc (NTM Price/Earnings was 14.11), RSA Insurance Group Plc (NTM Price/Earnings was 9.84) and Prudential Plc (NTM Price/Earnings was 8.91). The average of Price/Earnings (NTM) of the company’s peers was 13.28x (approx.)

Method 2: Price/Book Value Approach (NTM)

 

To compare Direct Line Insurance Group Plc with its peers, Price/Book Value multiple has been used. The peers are Prudential Plc(NTM Price/ Book Value was 2.12), Beazley Plc(NTM Price/ Book Value was 1.77), Legal & General Group Plc(NTM Price/ Book Value was 1.47), Phoenix Group Holdings Plc(NTM Price/ Book Value was 1.22) and Standard Life Aberdeen Plc(NTM Price/ Book Value was 0.99). The Average of Price/ Book Value (NTM) of the company’s peers was 1.51x (approx.)

Valuation Metrics


(Source: London Stock Exchange)
 
As on 29^th May 2020, EV to EBITDA multiple of the Direct Line Insurance Group Plc was around 5.5x, which was lower as compared to the industry. It reflects, shares are undervalued against its peers. 


(Source: London Stock Exchange)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that are driving ROE.

Direct Line Insurance Group Plc Vs FTSE-Mid 250 Index (6 Months)


(Source: Refinitiv, Thomson Reuters)

In the last six months, Direct Line Insurance Group Plc share price has delivered a negative 3.93 per cent return as compared to negative 12.75 per cent return of FTSE-mid 250 index, which shows that the stock has outperformed the index during the last six months.

Industry Outlook Dynamics

As per Statista, the value of Gross written premium for the non-life insurance industry in the United Kingdom is projected to reach GBP 67.9 billion by 2020, which was recorded as GBP 59.8 billion in 2018. It is mindful to note that the United Kingdom is the largest non-life insurance market in Europe. The property insurance market was approximately 25 per cent of the EU market in 2018.

Growth Prospects and Risk Assessment

The Group has become the first major insurance company to tie up with Starling Bank for offering Churchill home insurance. It has also introduced a new travel system and platform to provide a digital solution to more than 1.6 million customers, which is equipped to handle for services related to online medical screening, self-service upgrades and automated to manage certain claims. Overall, the technology is a crucial enabler across channels, brands, and products.


(Source: Annual Report, Company Website)
 
The Company has been focussing on improving customer support, which has resulted in a higher level of customer satisfaction. The Group has a strong financial discipline, which helped the company to have a robust and effective balance sheet. Investment in future business helps in achieving further sales growth and operational efficiencies. To meet the new regulations, group needs to implement new processes, failing to do so would increase the compliance risk. Acquisitions to match rapid transformation may increase integration risks and expected synergies may not be achieved. The Group’s performance is also subject to certain risks such as volatility and fluctuations arising from the prevailing COVID-19 mayhem, Brexit and US-China tension can significantly impact the market prices of assets, liabilities, equity, and credit markets. During the heightened uncertainties, the Group must maintain substantial capital adequacy and liquidity to meet the rising claims requirements.

Business Outlook Scenario

The Company has seen great progress across the five sustainability pillars, including customers, people, society, planet, and governance. Green Flag delivered strong growth throughout the year and carried the same momentum in Q1 FY2020. The Company has delivered a good result in the current period and continued to enhance its quality. Led by all the product lines, the model of disciplined underwriting and cost reductions helped to maintain a 92.2 per cent of combined operating ratio in FY2019 and expects to achieve a combined operating ratio in between 93 per cent to 95 per cent and improving operating expense ratio to 20 per cent by 2023. The Company released the launch of a share buyback of 150 million pounds which DLG expects to accomplish by the end of July 2020. The Company stays on track to attain the financial and operational targets. DLG expects to attain a net investment income yield of approx. 2 per cent in 2020 with minimal gains. DLG expects capital expenditure to be approx. £150 million in 2020 and around £100 million in 2021. The Group is committed to its transformation agenda and started new Rescue claims system roll-out and launched Van and Tradesperson on DL4B (Direct Line for Business) platform.

Over the course of 3 years (FY16 - FY19), the company’s operating income surged from GBP 403.50 million in FY16 to GBP 546.90 million in FY19. Compounded annual growth rate (CAGR) stood at 10.67 per cent.

Based on the decent growth prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current market price of GBX 288.20 (as on 8th June 2020, before the market close at 8:57 AM GMT+1), with lower double-digit upside potential based on 13.28x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 1.51x NTM Price/Book Value (approx.) on FY20E book value per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.