ii view: Direct Line calls for lower costs

The relatively new chief executive looks to galvanise Direct Line. Investors take note. 

Third-quarter trading update, strategy and new financial targets

• Aim to reduce operating expenses by more than £50 million by end of 2021
• Expects restructuring and other one-off costs of around £60 million up to the end of 2020
• Motor insurance returned to modest growth

Penny James, CFO and CEO-designate said:

"Assisted by the technology change, we will transform our business by working in a faster and nimbler way to deliver the potential of the group. This includes improving our cost efficiency, enabling faster and more accurate pricing and continuing to improve customer experience. All this aims to strengthen margins on the business we write and increase our competitiveness to deliver growth."

ii round-up:

Multi-product and multi-channel insurance company Direct Line Insurance (LSE:DLG) reported a modest return to growth for its largest business segment motor insurance, along with outlining a number of positive financial targets. 

Gross written motor premiums grew by 0.3% year-over-year compared to a 5% fall in the second quarter, aided by some improvement in market conditions, while a goal to reduce costs by more than £50 million by year end 2021 was outlined. 

The share price rose by more than 6% in following day afternoon trading. 

The chief executive, who joined Direct Line in February, also detailed plans to cut capital expenditure to less than £100 million from the end of 2021 compared with the current year's likely £175 million as its major technology assets are brought into use. 

A preference to return surplus capital to shareholders through share buy-backs, as opposed to previously made special dividend payments, was expressed, while restructuring and other one-off costs totalling around £60 million are expected to be taken over 2019 and 2020 as expenses are reduced.

The insurer, whose brands also include Churchill and Green Flag, also outlined six strategic objectives including winning on price comparison websites and extending its partnership reaches. 

ii view:

The group's brand name remains high profile. Its markets, particularly its biggest, motor insurance, continue to prove highly competitive. German insurer Allianz has earlier this year added to its UK insurance operations. 

The relatively new chief executive is looking to further squeeze group costs with the aim of improving the company's operating expense ratio to 20% by the end of 2023, down from 24.5% in the first half. 

For investors, shareholder returns, whether by previous special dividend payments or likely share buy-backs going forward, offer a key attraction. A historic dividend yield, excluding any special dividend, of over 7% cannot be ignored, while a forward price/earnings ratio below the three-year average offers further enticement. Less favourably, analyst forecasts currently indicate decreasing profits. 

Positives: 

• Diverse product offering 
• Attractive dividend payment

Negatives:

• Car insurance market highly competitive
• Factors outside of its control such as the weather influence performance

The average rating of stock market analysts:

Strong hold