Direct Line Insurance Group PLC (LON: DLG)

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 10 November 2020, it expects to provide the trading update for Q3 FY20.

 (Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

DLG 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.

(Source: Refinitiv, chart created by Kalkine Group)

(Source: Refinitiv, chart created by Kalkine Group)

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 has slowed down in 2020 as compared to 2019 due to economic slowdown owing to the COVID-19 outbreak.

(Source: Statista, chart created by Kalkine Group)

Key Fundamental Statistics

Key Shareholders Statistics

Recent Developments

On 12 October 2020: The Company has announced donations of £150,000 to the charity emergency fund and £100,000 to Mind’s Infoline.

On 22 September 2020: The Company stated that DLG responded to the FCA’s (Financial Conduct Authority) General Insurance Pricing Practices Final Report. This report sets out remedies seeking to improve outcomes for long-standing customers.

FY19 Key Performing Indicators (KPI’s)

(Source: Company Website)

A Glimpse of Business Segments (for the period ended 30 June 2020)

(Source: Company Website)

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

(Source: Company Website)

• Direct Line Insurance has shown a decent performance in H1 FY20 with improved profitability margins.
• 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.
• 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.
• 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.
• For 2020, it 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.
• DLG also expects a net investment yield of around 1.8% in 2020.
• Further, DLG is reiterating the expense ratio target of 20% by 2023.
• Direct Line Insurance reiterated the target of attaining a return on tangible equity (RoTE) of at least 15%.
• The Company saw strong growth in Churchill new business, with an increase in the share of new business in the price comparison website (PCW) channel across Motor and Home.
• It has launched a new Green Flag claims system and also updated the customer ‘Rescue Me’ App.

Financial Ratios – Strong Profitability Margins versus the Previous Year

The loss ratio and expense ratio recorded by the Company in the past three years was considerably below the industry median, which shows the Company will be more profitable in the future. Direct Line Insurance Plc has delivered a decent return for the shareholders’ as pre-tax return on equity of 8.8% was higher as compared with the industry median of 4.7%  On leverage front, the debt-equity ratio was 0.39x, which was in line as compared to the industry median of 0.38x.

Share Price Performance Analysis

(Source: Refinitiv, chart created by Kalkine Group)

On 19 October 2020, at the time of writing (before the market close, at 1:05 PM GMT+1), Direct Line Insurance Group Plc shares were trading at GBX 280.10, down by 0.50% against the previous day closing price. Stock 52-week High was GBX 339.92 and Low of GBX 215.83, respectively.

From the technical standpoint, the shares were trading above the short-term support level of 20 (GBX 277.30) simple moving average price. Also, the 14-day RSI (49.48 level) is supporting the upside movement. The Company’s stock has delivered a positive return of around 11.73% in the last six months.

 (Source: Refinitiv, chart created by Kalkine Group)

 

In the last one year, DLG’s stock price has remained resilient with a positive return of ~1.52% whereas the benchmark index (FTSE Mid 250) and FTSE All-Share Nonlife Insurance have taken a hit of negative ~11.58% and ~12.92%, respectively.

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

Business Outlook Scenario

During 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.

The Company 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.

Considering the decent operating & 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 280.10 (as on 19 October 2020, before the market close at 1:05 PM GMT+1), with lower-double digit upside potential based on 1.78x Price/NTM Book Value (approx.) on FY20E 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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