Direct Line Insurance Group PLC (LON: DLG) – Made good progress on strategic transformation and delivered encouraging trading performance.

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 has been admitted to the LSE (London Stock Exchange) since 16 October 2012 and currently a constituent of FTSE 250 index. Further, it intends to utilise its investments and capabilities through acquisition and brand partnerships to win more customers.

On 3 March 2021, the Company expects to announce preliminary results for FY20.

 (Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

DLG has a track record of delivering robust returns to shareholders as it has distributed GBP 2.2 billion in dividends in the past five years. Further, the Company is on track to generate at least 15% on tangible equity per annum over the long-term and a combined operating ratio of 93% to 95% in FY20. Moreover, It has become the first major insurance provider 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, technology is a crucial enabler across channels, brands, and products. It has been maintaining a competitive edge in the market by consistently transforming the technology as it launched three new IT platforms in 2019. During the financial year 2019, Darwin brand had gone live on Confused.com; DL4B brand had introduced Tradesperson and Van products; Green Flag brand had rolled out Direct Line and Churchill on the new Motor platform. Furthermore, it has achieved Its FY20 climate targets and now intends to set Science Based Targets.

However, there are certain risk and uncertainties to the business. To meet the new regulations, it 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 Company’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, DLG must maintain substantial capital adequacy and liquidity to meet the rising claims requirements.

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. In 2018, the UK households spent more than GBP 2 billion on motor insurance. Meanwhile, according to the report from Research and Markets, the market size for the global insurance industry is projected to grow at a CAGR of ~6% between 2020 to 2023 and reach US$6,840.7 billion in 2023 from the market size of US$$5,807.3 billion in 2020. It is noteworthy that, that industry slowed down in 2020 as compared to 2019 due to economic slowdown owing to the COVID-19 outbreak.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Direct Line Insurance Group Plc.

Q3 FY20 Trading Update (as on 10 November 2020)

(Source: Company Website)

• The Company has shown decent trading performance in Q3 FY20, with some improvement in Motor and Home own brands and strong growth in Green Flag and Commercial.
• It has also made good progress on the strategic transformation agenda, with a launch of a new mileage moneyback proposition in Direct Line Motor.
• On a year-on-year basis, the Company’s gross written premium and in-force policies surged by 1% and 1.5%, respectively.
• DLG's commercial direct own brands, NIG, and other businesses also delivered a strong performance during the third quarter.
• As the customer shopping activity started to recover, the Company saw strong growth in Commercial and Green Flag business and some improvement in Home own brands and Motor business.
• Looking ahead, it is on track to deliver a combined operating ratio in 2020 while reiterating combined operating ratio target for medium-term.
• The Company has also reiterated its expense ratio target of 20% by FY23, as Covid-19 has impacted growth trajectory.
• DLG believes that outstanding customer service and market-leading brands will give fundamental strengths and will be able to deliver growth in the future.
• Overall, the Company is giving a consistent performance, with a strong balance sheet.
• The Board is also confident of performing well through the rest of this financial year and in the longer-term.

Financial and Operational Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 4 August 2020)

(Source: Company Website)

• In H1 FY20, the gross written premium increased by 0.4% year-on-year to £1,580.8 million (H1 FY19: £1,575.1 million), as the strong premium growth seen in the first quarter of 2020 which was offset by coronavirus related disruption in the second quarter of 2020.
• Overall, Direct Line Insurance has shown a decent performance in H1 FY20 with improved profitability margins.
• Direct own brand in-force policies increased by 2.0% year-on-year in H1 FY20, with continued growth across Green Flag, Motor and Commercial direct own brands.
• The Group witnessed a strong capital position with a solvency capital ratio of 192% after dividends.
• The Board proposed an interim ordinary dividend per share (increased by 2.8% year-on-year) of 7.4 pence.
• Furthermore, the Group has proposed 14.4 pence of special dividend alongside to make up for 2019 final dividend, cancelled in April 2020 in light of pandemic.
• It delivered growth in policy count and premiums in H1 FY20, driven by strong growth in Van.
• The Company has launched initiatives with an estimated full-year investment of £80 million to £90 million to support the customers and local communities.
• It launched a new Green Flag claimed system and updated the customer 'Rescue Me' App.

Financial Ratios

Share Price Performance Analysis

On 1 February 2021, at the time of writing (before the market close, at 8:00 AM GMT), Direct Line Insurance Group PLC’s shares were trading at GBX 297.70, down by 0.73% against the previous day closing price. Stock 52-week High and Low were GBX 342.10 and GBX 215.83, respectively.

From the technical standpoint, 100-day SMA (297.72), 200-day EMA (295.65), and 14-day RSI (12.16) are supporting the upside potential. 

In the last three months, DLG’s stock price has remained resilient with a positive return of ~12.88%; however, it underperformed against ~18.12% return of FTSE 250 index and ~17.78% return of FTSE All Share Nonlife Insurance index.

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Business Outlook Scenario

Following the strong Q3 FY20 results, DLG has reiterated its target for a combined operating ratio of 93% to 95% in FY20 and anticipate restructuring cost of £60 million to maximise the opportunity for operational efficiencies. Further, it has reiterated its expense ratio target of 20% by 2023. However, it may not be able to achieve the planned cost savings of £50 million (outlined in Capital Markets Day in November 2010) due to Covid-19 disruption. In FY20, the Group expects a net investment yield of nearly 1.8%, and it has reaffirmed its target of achieving at least a 15% return on tangible equity per annum over the long term. Previously in H1 FY20, DLG demonstrated financial resilience despite the Covid-19 disruption, which enabled them to declare an interim dividend (2.8% increase over H1 FY19) alongside a special dividend of 14.4 pence per share. Even after dividends, it has a strong capital ratio of 192%. It has launched a new Green Flag claims system and updated the customer 'Rescue Me' App to serve digitally for claims.

(Source: Presentation, Company Website)

Considering the strong growth in Green Flag and Commercial, some improvement in Motor and Home own brands, good operational progress, decent financial performance, improved current year loss ratio, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Direct Line Insurance Group at the current price of GBX 297.70 (as on 1 February 2021, before the market close at 8:00 AM GMT), with lower-double digit upside potential based on 1.78x Price/NTM Book Value (approx.) on FY21E book value per share (approx.). 

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

*Dividend Yield may vary as per the stock price movement.

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