Direct Line Insurance Group Plc

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

Investment Highlights - Direct Line Insurance Group Plc – Buy at GBX 285.00

• The Company has made decent progress on strategic transformation agenda, with the migration to the new mainframe platform and moved trading teams to agile ways of working.
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings, Price/Cash Flow and Price/Book Value multiples of the Direct Line Insurance Group Plc are currently lower as compared to the corresponding multiples of the Insurance industry. It reflects, shares are undervalued as compared to the industry.
• In the last six months, the Company delivered a decent return of ~ 13.07% and delivered a significantly higher return compared to the benchmark Index (FTSE-250 Index).
• From the technical standpoint, shares were trading well above the support level of 20-day simple moving average prices (278.10), which reflects an uptrend in the stock and can move up further.

Key Risks

• 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 integration risks and expected synergies may not be achieved.

Trading Update Q3 FY2020 (30 September 2020) (released on 10 November 2020)

• The Motor direct own brands in-force policies in Q3 remained flat; however, average premiums declined, due to lower new car sales and fewer entry of young drivers to the market.
• The home business continues to show improved performance, with an increase in gross written premium and in-force policies by 1% and 1.5%, respectively, compared to Q3 FY2019.
• The Green Flag Rescue showed strong growth and returned to pre-covid-19 levels during the period, with an increase of 9.6% in Q3 FY2019, reflecting the brand's competitiveness.
• The Company’s Commercial direct own brands, NIG and other businesses also delivered a strong performance during the third quarter.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company has shown a decent business performance in the third quarter of the financial year 2020, despite the covid-19 related disruption. As the customer shopping activity started to recover, the Company saw strong growth in Commercial and Green Flag businesses and some improvement in Home own brands and Motor businesses. The Company 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 the financial year 2023, as growth trajectory has been impacted by covid-19.

The FCA report into pricing practices will bring significant changes to the market, and the Company may face uncertainty to navigate the transition. However, based on its operating model, outstanding customer service and market-leading brands, the Company will be able to deliver growth in the future. DLG continues to make progress with the migration to a new mainframe platform, which will bring agility to the trading teams and will help in delivering good operational progress, providing extra support for customers and navigating through the Covid-19 pandemic. The stock made a 52-week low and high of GBX 215.83 and GBX 339.92, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Direct Line Insurance Group Plc at the current price of GBX 285.00 (as on 11 November 2020, before the market close at 8:00 AM GMT), with lower double-digit upside potential based on 1.70x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

Beazley Plc

Beazley Plc (LON: BEZ) is an FTSE 250 listed Specialist Insurance Company. The major operations are based in Europe, the United States and the Pacific region.

Investment Highlights – Beazley Plc – Buy at GBX 339.80

• The Company has seen robust double-digit premium growth across businesses, driven by rate rises across all divisions.
• As per valuation metrics, EV/Sales, Price/Cash Flow and Price/Book Value multiples of the Beazley Plc are currently lower as compared to the corresponding multiples of the Insurance industry. It reflects, shares are undervalued as compared to the industry.
• In the last one week, the Company delivered a decent return of ~ 13.04% and delivered a significantly higher return compared to the benchmark Index (FTSE-250 Index).
• From the technical standpoint, shares were trading well above the support level of 20-day simple moving average prices (317.20), which reflects an uptrend in the stock and can move up further.

Key Risks

• The ongoing market volatility arising from geopolitical and economic uncertainties can dampen investor sentiments.
• The falling equity markets and interests' rates could put pressure on the insurers' balance sheets in the short-term.

Trading Update for Q3 FY2020 (30 September 2020) (released on 6 November 2020)

• In the Q3 FY2020, the gross premiums surged by 16% and were ahead of management’s expectations.
• The premium rates increased by 14% on renewal business, while first-party loss estimate net of reinsurance related to covid-19 remain unchanged at $340 million.
• The catastrophe estimate net of reinsurance stood approximately $ 80 million in the third quarter of the financial year 2020.
• The investment return in Q3 stood at $124 million as on 30 September 2020 (Q3 FY2019: $215 million).

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company has shown strong performance in the third quarter of the financial year 2020, with double-digit growth in gross premiums and premium rates. The Company continue to support customers and provide excellent claims service. At present, pricing conditions are positive, and the Company have capital and expertise to take advantage of market conditions. BEZ is expecting to deliver mid-teens growth in the financial year 2021 along with strong shareholder returns. The stock made a 52-week low and high of GBX 287.60 and GBX 613.50, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Beazley Plc at the current price of GBX 339.80 (as on 11 November 2020, before the market close at 8:35 AM GMT), with lower double-digit upside potential based on 1.71x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

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

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

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