Direct Line Insurance Group PLC (LON: DLG) – Resilient high-quality portfolio and incremental cost savings

Direct Line Insurance Group PLC is a General Insurance Company, which operates across four segments – Motor, Home, Rescue, and other personal lines and Commercial. The Motor division covers legal protection and personal motor insurance. Moreover, 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. DLG is currently a constituent of the FTSE 250 index.

On 13 May 2021, the Company will have its Annual General Meeting.

 

(Source: Company presentation)

Recent Trend of Dividend payments

The Company has recommended a final dividend of 14.7 pence per share to be paid on 20 May 2021, while the ex-dividend was 08 April 2021. Moreover, it had also paid a special interim dividend of 14.4 pence per share which illustrated the catch up of the cancelled FY19 final dividend.

Growth Prospects and Risk Assessment

The Company had launched a new “Mileage MoneyBack” proposition which offers Direct Line Motor customers a flexible approach to manage their car insurance. Moreover, the Company had distributed approximately £1.2 billion in dividends over the past three years, illustrating an impressive track record of delivering strong returns for shareholders. DLG had achieved approximately 19.9% of Return on tangible equity during FY20, well above its long-term target of at least 15% per annum. The Company invested around £93 million to tackle various operational headwinds caused by climate change and the Covid-19 pandemic.

 

(Source: Company presentation)

Nonetheless, DLG witnessed stable growth in direct own brands gross written premium across Home & Commercial direct own brands and Green Flag Rescue during FY20.

DLG is exposed to various risks, such as the risk of a loss due to fluctuations in the timings, amount, frequency, and severity of an insured event relative to the expectations at the time of underwriting. Moreover, the Company may suffer loss due to inadequate or failed internal processes or systems, human error or from external events. Furthermore, acquisitions to match rapid transformation may increase integration risks, and expected synergies may not be achieved.

After understanding growth prospects and risk assessments, we will analyse some key fundamental and shareholders statistics of Direct Line Insurance Group PLC.

Financial and Operational Highlights for the twelve months ended 31 December 2020 (as of 08 March 2021)

(Source: Company result)

• The Company saw strong growth in segments across the business, with an increase of 2.2% year-on-year in direct own brands in-force policies from 7.29 million during FY19 to 7.45 million during FY20.
• However, DLG has reduced the total in-force policies by 1.2% during FY20 due to lower partnerships and travel volumes.
• The overall gross written premium declined by 0.7% year-on-year during FY20.
• With regards to profitability, the profit before tax had dropped by £58.3 million to £451.4 million during FY20.
• Meanwhile, the Company had reported a normalised combined operating ratio of 91.7% during FY20.

Share Price Performance Analysis

 (Source: Refinitiv, Thomson Reuters)

On 19 April 2021, at 10:51 AM GMT, DLG shares were trading at GBX 304.50, up by 0.76% against the previous day closing price. Stock 52-week High and Low were GBX 342.10 and GBX 247.04, respectively.

From a technical standpoint, 200-day SMA (GBX 300.60) supports the upside potential. DLG's prices are trading in a rising channel formation for more than a year and forming a series of higher highs and higher lows. DLG's prices are trading above an upward sloping trend line for the past one year. Price recently took the support of the trend line and started to move upside, indicating a positive movement for the stock. The momentum indicator RSI (14-period) is trading at ~43 levels and indicating a sideways to a positive direction.

In the last five years, DLG’s stock price has delivered a positive return of ~44.94%; and it has outperformed the FTSE All-Share Non-Life Insurance index with a return of around 31.20% and the FTSE 250 index with a return of about 32.60%.

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

Business Outlook Scenario

DLG had improved the profitability levels and accelerated on a long-term growth platform underpinned by the transition from technology transformation into business transformation. The Company had anticipated an operating expense ratio of approximately 20% by 2023, driven by an increased digitalization and self-serve. Moreover, it targets a combined operating ratio ranging from 93% to 95% during FY21 and over the medium term.

The Company saw strong growth in Darwin, with more than 50,000 in-force policies at the end of 2020. DLG believes that outstanding customer service and market-leading brands will enhance the growth trajectory in the future. Meanwhile, the Company launched a new 'superhero' creative campaign and a new property site strategy during FY20. It has also launched a new Green Flag claims system and updated the customer 'Rescue Me' App to serve digitally for claims. Overall, DLG is giving a consistent performance, with a strong balance sheet and well-positioned for achieving long-term growth.

(Source: Company presentation)

Considering the diversified business model, incremental cost savings, good operational progress, decent financial performance, increased FY20 dividend levels, 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 304.50 (as on 19 April 2021 at 10:51 AM GMT), with lower-double digit upside potential based on 1.79x Price/NTM Book (approx.) on FY21E book value per share (approx.).

 

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

*The dividend yield is subject to change as per the stock price movement.

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