Direct Line Insurance Group PLC

Direct Line Insurance Group Plc (DLG) is a UK based general insurance company. The company, along with its subsidiaries, provides a range of personal and commercial non-life insurance products. The group operates multiple brands, products and distribution channels, covering home, motor, holidays, businesses and pets. The company differentiates its business in four operating segments: Home, Motor, Commercial and Rescue and other personal lines.

Recent News
On 31st July 2019, Wednesday, the Direct Line Insurance issued its Interim results for the financial year 2019.

Financial Highlights – H1 Financial Year 2019 (£, million)

(Source: Interim Report, Company Website)
 
In the First half of the financial year 2019, the gross written premium declined by 2.2 per cent to £1,575.1 million, from £1,610.3 million in H1 FY2018. The gross written premium from direct-own-brands declined by 2.4 per cent to £1,072.2 million in H1 FY2019 from £1,099.0 million in H1 FY2018. Driven by lower investment return and reduction in the underwriting profit, Operating profit decreased by 10.2 per cent to £274.3 million in H1 FY2019 from £305.5 million in H1 FY2018. The profit before tax declined by 10.2 per cent to £261.3 million in H1 FY2019, against £292.8 million in H1 FY2018. The profit after tax for the year decreased by 11 per cent in H1 FY2019 to £211.8 million, from £238 million in H1 FY2018. Return on tangible equity stood at 20.9 per cent in H1 FY2019 against 21.9 per cent in H1 FY2018. The company's combined operating ratio was 92.5 per cent in H1 FY2019, an increase of 0.4 percentage points, while the expense ratio increased to 24.5 per cent in H1 FY2019 from 24.3 per cent in H1 FY2018. The company’s basic earnings per share declined by 11.3 per cent to 14.9 pence in H1 FY2019 from 16.8 pence in H1 FY2018. The company’s diluted earnings per share declined by 11.4 per cent to 14.7 pence in H1 FY2019 from 16.6 pence in H1 FY2018.

Share Price Performance

Daily Chart as at August-1-19, before the market close (Source: Thomson Reuters)

On August 1, 2019, at the time of writing (before the market close, at 10:38 AM GMT), Direct Line Insurance Group Plc shares were trading at GBX 322.80, up by 0.12 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 358.69/GBX 293.85.

Valuation Methodology

*Peers: Sabre Insurance Group Plc, Phoenix Group Holdings Plc, Aviva Plc, Beazley Plc and Saga Plc.

Conclusion
The company’s financial performance for the first half of the financial year 2019 had declined as compared to H1 FY2018 data. The company faces the risk of loss resulting from fluctuations in the level and the volatility of market prices of assets, or loss resulting from a default in cash inflows and/or changes in the market value of issuers of securities. The market risk has gained prominence in recent times given the volatility market has experienced due to Brexit uncertainties.

However, the company's disciplined underwriting and diversified product and channel portfolio put it on a firm footing to capitalise future opportunities. The group expects to improve the company's flexibility to deal with changing business requirements, digital offering, customer experience and operational efficiency through an ambitious plan to upgrade and better integrate the significant IT systems within the group's technology infrastructure.
Based on the above rationale and the valuation done using the above method, we have given a “Hold” recommendation at the closing price of GBX 322.40 (as on 31st July 2019) based on 12.00x NTM Price/Earning (approx.) on FY19E earnings per share (approx.).

Admiral Group PLC

Admiral Group plc (ADM) offers motor insurance and household insurance. It offers insurance products for car, multi-car, home, van and travel. It also offers personal loans, car finance, short-term insurance policies and price comparison services. It has operations in the UK, Canada, Italy, Spain, Mexico, France, India, and the US. Its price comparison websites are confused.com; compare.com; Rastreator; and LeLynx.

Recent News
The Admiral Group will issue its Interim results for the financial year 2019 on August 14, 2019, Wednesday.

Financial Highlights – Financial Year 2018 (£, million)

(Source: Annual Report, Company Website)
 
For the financial year 2018,the group’s turnover increased to £3.28 billion from £2.96 billion in 2017 and customer numbers surged by 14 per cent to 6.51 million. The company’s net insurance premium revenue rose by 8.5 per cent to £671.8 million as compared with the financial year 2017 of £619.1 million. Underwriting profit climbed by 18.85 per cent to £211.2 million against the £177.7 million in FY17. The operating profit rose from £414.9 million in FY2017 to £487.5 million in FY2018. The Group’s share of profit before tax (excluding the Ogden impact) surged by 2 per cent to £413.3 million as compared to £405.4 million in 2017. The group’s combined ratio increased by 1.6 per cent to £89.3 per cent as compared with the prior year data. Earnings per share (Ogden-0.75%) stood at 118.2 pence. The return on capital employed increased by 1 per cent to 56 per cent. The Group’s solvency ratio remained robust at 194 per cent (205 per cent in 2017). The full-year dividend per share for 2018 stood at 126.0 pence, up by 11 per cent against the last year.

Share Price Performance

Daily Chart as at August-1-19, before the market close (Source: Thomson Reuters)

On August 1, 2019, at the time of writing (before the market close, at 1:42 PM GMT), Admiral Group Plc shares were trading at GBX 2,176.00, up by 0.42 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 2,300.00/GBX 1,901.00

Valuation Methodology

*Peers: St. James's Place Plc, Phoenix Group Holdings Plc, FBD Holdings Plc, Standard Life Aberdeen Plc and Beazley Plc.

Conclusion
Although the company hadperformed decently in terms of financial performance, but thecompany describes an uncertain outlook in the UK motor industry, which slowed its growth in the second half of 2018, and which may continue into 2019. ADM's household segment reported a combined ratio above the level of 100%, which is a cause for concern. Fluctuations in interest rates could hinder the group’s profitability. However, the group is also exposed to a variety of risks, particularly a hard Brexit and sterling's fall against the major currencies.

Based on the above rationale and the valuation done using the above method, we recommend investors to keep a “Watch” on the stock at the closing price of GBX 2,167 (as on 31^st July 2019), while any correction with support from few catalysts needs to be evaluated at a later stage.
 
*All forecasted figures and peer information have been taken from the Thomson Reuters.

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