Interactive Investor

ii view: Direct Line details £100 million cost-saving plan

Recently rejecting takeover offers from a Belgium insurer and now pushing a reinvigorated strategy under a new CEO. We assess prospects.

21st March 2024 15:42

Keith Bowman from interactive investor

Full-year 2023 results to 31 December 

  • Premiums and fees up 27% to £3.1 billion
  • Operating loss of £189 million, up from a loss of £6.4 million in 2022
  • Pre-tax profit of £277 million, up from a loss of £302 million
  • Final dividend payment of 4p

Guidance:

Targeting at least £100 million of annualised cost savings by the end of 2025.

New chief executive Adam Winslow said: I am excited to have joined a company with such a strong customer base and outstanding brands. The group has not always managed volatile market conditions successfully in recent years, particularly in Motor. However, it is clear that the decisive actions that Jon Greenwood and the team have taken over the last year have created a strong platform for recovery.

“While the picture has improved, we need to do more to drive performance and we have identified immediate actions we can take in 2024 to create value.”

ii round-up:

Direct Line Insurance Group (LSE:DLG) today detailed a new £100 million annualised cost-saving plan and restarted the dividend payment as it looked to fend off a recently received takeover offer from Belgium insurer Ageas.

Relatively new chief executive Adam Winslow will now push initiatives including further improvements to its digital capabilities and reducing technology costs with potential cost savings to 2026 of around double that previously hoped for by the City. 

Shares for the FTSE 250 company rose marginally in UK trading having gained by close to a third over the last month and following bid proposals from Ageas, subsequently rejected by Direct Line as undervaluing the company. 

Elevated motoring claims inflation due to factors including higher car-part costs and longer repair times given ongoing supply chain challenges helped push a 2023 operating loss of £189 million, up from 2022’s £6.4 million. 

A 2023 pre-tax profit of £277 million was achieved given proceeds received from the prior sale of its commercial brokering operations.  

A restarted dividend and announced payment of 4p per share was helped by its previous business sale and subsequent boost to its capital cushion or solvency capital ratio to 197% from a prior 147%. 

Broker UBS reiterated its ‘buy’ stance on the shares post the results. 

ii view:

Direct Line was started in 1985, bought by Royal Bank of Scotland (NatWest Group (LSE:NWG)) in 1988 and then separated back out and floated on the UK stock market in late 2012. Today, along with Direct Line itself, its brands include Churchill, Darwin, Green Flag and Privilege. The recent sale of its commercial-brokered insurance business has left it fully focused on retail personal lines and commercial small business customers.

For investors, some bid premium in the current share price could evaporate if no further takeover interest is received. A backdrop of climate change is arguably making the weather evermore unpredictable. The prior exit from commercial-brokered operations reduces its business diversity, while competitors such as Admiral Group (LSE:ADM) and Aviva (LSE:AV.) are not standing still. 

On the upside, planned cost savings, if delivered, will help boost profits. A potential further bid from Ageas, or even another party, cannot be ruled out. The new chief executive brings previous experience from Aviva and AIG, while the dividend is back with the shares sat on an estimated future dividend yield in the region of 2.7%. 

In all, and while some caution is sensible, strong brand names and a reinvigorated strategy are likely to leave existing shareholders at least sitting tight. 

Positives: 

  • Strong brand names
  • Restarted dividend payment   

Negatives:

  • Factors outside its control, such as the weather, influence performance
  • Competition not standing still

The average rating of stock market analysts:

Buy

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