Direct Line Insurance Group Plc – Robust Balance Sheet Profile

Direct Line Insurance Group Plc (LON: DLG) is a FTSE 250-listed General Insurance Company, which operates through four segments – Motor, Home, Commercial, Rescue and other personal lines.

On 10 November 2020, the Group will release a trading update for the third quarter of 2020.

Financial Highlights (H1 FY2020)


(Source: Company Website)

On 4 August 2020, the Group released an interim result for the six months ended 30 June 2020, with a return to paying dividends and improving current year profitability. Led by the strong premium growth seen in the first quarter of 2020, the gross written premium increased by 0.4% year-on-year to £1,580.8 million in H1 FY20 (H1 FY19: £1,575.1 million). 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 operating profit reduced by 3.4% year-on-year to £264.9 million, mainly driven by increased weather costs of £30.4 million. 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. It also delivered growth in policy count and premiums in H1 FY20.

Share Price Performance

 
1-Year Chart as of 17 August 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Direct Line Insurance Group Plc’s shares were closed at GBX 312.00 on 17 August 2020, down by 0.61% against the last day closing price. Stock 52 week High and Low were GBX 339.92 and GBX 215.83, respectively.

From the technical standpoint, shares were trading slightly above the short-term support level of 50-day simple moving average price, which reflects an uptrend in the stock and carrying the potential to move up further.

Key Risks

As the industry is closely linked to the broader economic performance, which is widely expected to struggle for the next few quarters, it could have a weigh on the property and causality insurance sector as well.The Covid-19 pandemic could also impact business operations.The Group recognises that climate change potentially poses material long-term financial risks to the business and is receiving increased scrutiny from regulators and investors.

Valuation Methodology



Conclusion

For 2020, the Group continues to anticipate a combined operating ratio of 93% to 95%, normalised for weather and anticipate restructuring costs of £60 million over 2019 and 2020. It is reiterating the expense ratio target of 20% by 2023. It has launched initiatives with an estimated full-year investment of £80 million to £90 million to support the customers and local communities through the unprecedented crisis created by Covid-19. It also expects a net investment yield of around 1.8% in 2020. It has shown a strong solvency position, reflecting financial resilience. DLG reiterated the target of attaining at least a 15% per annum of return on tangible equity (RoTE). Further, it is still making good progress on the strategic and technology transformation. According to the market, the UK insurance industry is well-positioned to sustain the current blow, and the financial impact of COVID-19 pandemic to the insurers would be manageable.
Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Direct Line Insurance Group at the closing market price of GBX 312.00 (as on 17 August 2020) and will recommend fresh buying at the right time.

Arrow Global Group Plc - Increase of Capital Commitments into the Fund

Arrow Global Group Plc (LON: ARW) is a FTSE All-Share listed Asset and Investment Management Company. It focuses on unsecured defaulted loan portfolios from various financial institutions.

On 25 August 2020, the Groupwill announce the results for the six months ended 30 June 2020.

Trading Update (Q1 FY2020)


(Source: Company Website)

On 14 May 2020, the Company provided a trading update for the three months ended 31 March 2020, with a decline of 11% in total income to £77.1 million in Q1 FY20 (Q1 FY19: £86.6 million). In Q1 FY20, the operating profit decreased by 20.5% year-on-year to £22.5 million and profit before tax was significantly down by 43% year-on-year to £9 million. Further, the Group had raised a €356 million of fund management capital. At the end of the first quarter of 2020, the total capital commitments stood at €1.2 billion, with €896 million from third-party investors. The Group witnessed a strong liquidity position, with more than £150 million of available cash headroom (Q1 2020: £129.0 million, FY 2019: £152.9 million). The Company has withdrawn the 2020 financial guidance.

Share Price Performance

 
1-Year Chart as of 17 August 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Arrow Global Group Plc’s shares were closed at GBX 79.40 on 17 August 2020, down by 2.58% against the last day closing price. Stock 52 week High and Low were GBX 306.80 and GBX 60.00, respectively.

From the technical standpoint, 14-day RSI is currently close to an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Key Risks

The second wave of COVID-19 outbreak and a potential slowdown in the British economy, jobs cuts and shrink in the business activities can hit hard to the financial sector. The Company has withdrawn the guidance for FY20 given the level of economic uncertainties.

Valuation Methodology



Conclusion

The Group seems to be well-positioned to capture future investment opportunities within the Investment Business and Fund Management Business. It has shown a strong balance sheet and liquidity, with good financial headroom and robust cash collection. However, the global macroeconomic outlook remains uncertain, and the experience of individual countries will vary considerably. After a steep plunge in the global equity markets which started in February 2020 and extended till March-end, globally market has reported a quick recovery, which gives the positive development for the Group. While it is too early to accurately forecast the extent of the impact on global debt levels, it is widely predicted that coronavirus will lead to a sharp surge in loan default rates and NPL (non-performing loans) stocks across Europe. Overall, the Group is highly optimistic about the asset servicing environment and an increasingly attractive investment.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Arrow Global Group at the closing market price of GBX 79.40 (as on 17 August 2020) and will recommend fresh buying at the right time. 
 
*Dividend Yield may vary as per the stock price movement.
*All forecasted figures and Industry information have been taken from Refinitiv, Thomson Reuters.

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