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    DLG   GB00BY9D0Y18

DIRECT LINE INSURANCE GROUP PLC

(DLG)
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Direct Line Insurance : Announcemnet

08/03/2021 | 06:13am EDT

3 August 2021

DIRECT LINE INSURANCE GROUP PLC

HALF YEAR REPORT 2021

STRONG FINANCIAL PERFORMANCE, MOMENTUM IN STRATEGIC

TRANSFORMATION

PENNY JAMES, CEO OF DIRECT LINE GROUP, COMMENTED

"I'm delighted we've made significant progress on our strategic transformation during the first half of the year at the same time as delivering strong operating profit. We returned to growth in Q2, which is testament to our diversified business model, with Commercial, Home and Rescue performing strongly. We have declared an interim dividend of 7.6 pence per share, up by 2.7% over 2020. We are also launching the second £50 million tranche of the £100 million share buyback programme we announced with our last year end results.

"In Motor we saw claims frequency remain below normal levels, fewer new car sales and a reduction in new drivers entering the market. These factors were strongest in Q1 and have started to reverse in Q2 at the same time as motor market premium stabilised. We maintained underwriting discipline throughout the first half, continuing to price for our view of risk, and this, combined with the benefits of achieving a major technology milestone with our new Motor platform now rolled out across Direct Line, Churchill and Privilege, positions us well as we look ahead. We recently announced a new partnership, with Motability Operations, demonstrating the value others place on our exemplary customer service and claims capabilities. This partnership is expected to come into effect in 2023 and to increase our Motor customer base by around 15%.

"This is an exciting and pivotal point for the business, we've completed the majority of our tech transformation, and we're starting to reap the benefits of what the new systems offer us. This is driving real momentum and means we are entering the second half of the year with ambition and confidence."

Results summary

H1 2021

H1 2020

Change

£m

£m

In-force policies (thousands)

14,471

14,633

(1.1%)

Of which: direct own brands1 (thousands)

7,465

7,370

1.3%

Gross written premium

1,556.5

1,580.8

(1.5%)

Of which: direct own brands1

1,063.7

1,090.3

(2.4%)

Operating profit2

369.9

264.9

39.6%

Combined operating ratio2,3

84.2%

90.3%

6.1pts

Profit before tax

261.3

236.4

10.5%

Return on tangible equity annualised²

30.1%

19.9%

10.2pts

Dividend per share - interim (pence)4

7.6

7.4

2.7%

- special (pence)

-

14.4

n/a

30 Jun 2021

31 Dec 2020

Change

Solvency capital ratio post-dividends and share buyback5

195%

191%

4pts

Financial highlights

  • Direct own brands in-force policies grew by 1.3% with growth across Commercial direct own brands, Green Flag and Home more than offsetting declines in Motor. Total policies reduced 1.1% as lockdown restrictions impacted partnership volumes in Travel.
  • Gross written premium reduced by 1.5% as continued growth in Commercial, Home and Green Flag Rescue was offset by declines in Motor and Travel. During H1, we focused on maintaining the quality of our Motor book resulting in some lost competitiveness and saw reduced risk mix from lower new car sales and fewer new drivers entering the market, with Motor gross written premium falling 6.2%. The reduction was lower in Q2, as pricing in the motor market stabilised and risk mix trends started to reverse. Overall, gross written premium increased by 1.6% in Q2 compared to Q2 2020, demonstrating the benefits of our diversified business model.
  • Motor's current-year attritional loss ratio was relatively stable at 66.9% (H1 2020: 65.5%), driven by claims frequency remaining below normal levels together with lower premium. In July, claims frequency returned close to the level assumed in our pricing and consequently we expect our Motor current-year attritional loss ratio in H2 to return closer to underlying 2020 levels, which we estimated was around 79%.
  • Operating profit increased by £105.0 million to £369.9 million benefiting broadly equally from benign weather conditions, strong prior-year reserve releases, the non-repeat of Covid-19 impacts on Travel claims and the reversal of investment losses. Progress continued on underlying profitability following a reduction in operating expenses and good current-year trading across the book.
  • Profit before tax of £261.3 million was £24.9 million higher than H1 2020 following the increased operating profit partially offset by £91.5 million of restructuring and one-off costs which primarily relate to the Group's site strategy announced with the full year 2020 results.

1

  • Proposed interim ordinary dividend of 7.6 pence per share, an increase of 2.7% over H1 2020. On or about 4 August 2021, we expect to commence the second £50 million tranche of the £100 million share buyback programme announced in March 2021. There was strong capital generation during H1 with a solvency ratio after dividends of 195%.
  • We reiterate our medium-term target of achieving a combined operating ratio in the range of 93% to 95%, normalised for weather. For 2021, following lower than normal claims frequency in Motor and strong prior-year reserve releases, we expect a combined operating ratio in the range of 90% to 92%, normalised for weather.

Strategic highlights

We continued to transform into a data and technology-led insurer. With the major elements of the Motor technology transformation now complete, our focus turns to extracting the benefits from this new capability.

  • We rolled out successfully our new Motor platform to our biggest brands, Direct Line and Churchill. We are already seeing benefits in pricing sophistication and digitalisation with further benefits scheduled to come through over the next 18 months.
  • We saw gross written premium growth of 16.2% in Commercial which is furthest through its transformation and is demonstrating what can be achieved when new technology is paired with great service for our customers and brokers.
  • We announced our new partnership with Motability Operations demonstrating our core strengths in delivering great customer service and efficient car repair. The partnership is forecast to increase Motor gross written premium by around £500 million each year from H1 2023, with 80% reinsured back to Motability Operations.
  • We continued to expand our claims capabilities through the acquisition of our 22nd auto services repair centre. This acquisition supports our competitive advantage in vehicle repairs and we continue to invest in capability to repair more advanced and electric vehicles.
  • We delivered strong growth in Darwin as we continued to enhance pricing across the four main price comparison websites ("PCWs"), growing policy count to over 90,000 at the end of H1 2021, an increase of over 66% compared to the end of 2020.
  • We continue to find new areas to innovate, including an online customer portal in claims which enables digital claims management and a new cloud-based telephony system in Green Flag which enables enhanced customer service and more efficient claims handling.
  • We remain focused on achieving our 20% expense ratio target in 2023. We completed the first key step in our new property site strategy by purchasing our head office, giving us the flexibility to fundamentally reposition the way we use our buildings and deliver long-term savings, which are incremental to our original cost target plans, in excess of £10 million each year from 2022.

For further information, please contact

PAUL SMITH

WILL SHERLOCK

DIRECTOR OF INVESTOR RELATIONS

GROUP CORPORATE AFFAIRS AND SUSTAINABILITY DIRECTOR

Mobile: +44 (0)7795 811263

Mobile: +44 (0)7786 836562

Notes:

  1. Direct own brands include in-force policies for Home and Motor under the Direct Line, Churchill, Darwin and Privilege brands, Rescue policies under the Green Flag brand and Commercial under the Direct Line for Business and Churchill brands.
  2. See glossary on pages 46 to 48 for definitions and appendix A - Alternative performance measures on pages 49 to 52 for reconciliation to financial statement line items.
  3. A reduction in the ratio represents an improvement as a proportion of net earned premium, while an increase in the ratio represents a deterioration. See glossary on pages 46 to 48 for definitions.
  4. The Group's dividend policy includes an expectation that generally one-third of the regular annual dividend will be paid in the third quarter as an interim dividend and two-thirds will be paid as a final dividend in the second quarter of the following year.
  5. Estimates based on the Group's Solvency II partial internal model.

2

Forward-looking statements disclaimer

Certain information contained in this document, including any information as to the Group's strategy, plans or future financial or operating performance, constitutes "forward-looking statements". These forward-looking statements may be identified by the use of forward-looking terminology, including the terms "aims", "ambition", "anticipates", "aspire", "believes", "continue", "could", "estimates", "expects", "guidance", "intends", "may", "mission", "outlook", "over the medium term", "plans", "predicts", "projects", "propositions", "seeks", "should", "strategy", "targets", "will" or "would" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in several places throughout this document and include statements regarding the intentions, beliefs or current expectations of the Directors concerning, among other things: the Group's results of operations, financial condition, prospects, growth, strategies and the industry in which the Group operates. Examples of forward-looking statements include financial targets and guidance which are contained in this document specifically with respect to the return on tangible equity, solvency capital ratio, the Group's combined operating ratio, percentage targets for current-year contribution to operating profit, prior-year reserve releases, cost reductions, reductions in expense and commission ratios, investment income yield, net realised and unrealised gains, capital expenditure and risk appetite range. By their nature, all forward-looking statements involve risk and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and/or are beyond the Group's control. Forward-looking statements are not guaranteeing future performance.

The Group's actual results of operations, financial condition and the development of the business sector in which the Group operates may differ materially from those suggested by the forward-looking statements contained in this document, for example directly or indirectly as a result of, but not limited to:

  • United Kingdom ("UK") domestic and global economic business conditions;
  • the direct and indirect impacts and implications of the coronavirus Covid-19 pandemic on the economy, nationally and internationally, on the Group, its operations and prospects, and on the Group's customers and their behaviours and expectations;
  • the Trade and Co-operation Agreement between the UK and the European Union ("EU") regarding the terms, following the end of the Brexit transition period, of the trading relationships between the UK and the EU and its implementation, and any subsequent trading and other relationship arrangements between the UK and the EU and their implementation;
  • the terms of trading and other relationships between the UK and other countries following Brexit;
  • the impact of the FCA pricing practices report and any new rules and regulations arising as a result of that report and of responses by insurers, customers and other third parties;
  • market-relatedrisks such as fluctuations in interest rates, exchange rates and credit spreads;
  • the policies and actions and/or new principles, rules and/or changes to, or changes to interpretations of existing principles, rules and/or regulations, of regulatory authorities and bodies (including changes related to capital and solvency requirements or to the Ogden discount rate or rates or in response to the Covid-19 pandemic and its impact on the economy and customers) and changes to law and/or understandings of law and/or legal interpretation following the decisions and judgements of courts;
  • the impact of competition, currency changes, inflation and deflation;
  • the timing, impact and other uncertainties of future acquisitions, disposals, partnership arrangements, joint ventures or combinations within relevant industries; and
  • the impact of tax and other legislation and other regulation and of regulator expectations, interventions and requirements and of court, arbitration, regulatory or ombudsman decisions and judgements (including in any of the foregoing in connection with the Covid-19 pandemic) in the jurisdictions in which the Group and its affiliates operate.

In addition, even if the Group's actual results of operations, financial condition and the development of the business sector in which the Group operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods.

The forward-looking statements contained in this document reflect knowledge and information available as of the date of preparation of this document. The Group and the Directors expressly disclaim any obligations or undertaking to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise, unless required to do so by applicable law or regulation. Nothing in this document constitutes or should be construed as a profit forecast.

Neither the content of Direct Line Group's website nor the content of any other website accessible from hyperlinks on the Group's website is incorporated into, or forms part of, this document.

3

Financial summary

H1 2021

H1 2020

Change

£m

£m

In-force policies (thousands)

14,471

14,633

(1.1%)

Of which: direct own brands (thousands)

7,465

7,370

1.3%

Gross written premium

1,556.5

1,580.8

(1.5%)

Of which: direct own brands

1,063.7

1,090.3

(2.4%)

Net earned premium

1,455.6

1,474.4

(1.3%)

Underwriting profit

229.3

143.6

59.7%

Instalment and other operating income

72.2

80.0

(9.8%)

Investment return

68.4

41.3

65.6%

Operating profit

369.9

264.9

39.6%

Restructuring and one-off costs

(91.5)

(15.0)

510.0%

Operating profit after restructuring and one-off costs

278.4

249.9

11.4%

Finance costs

(17.1)

(13.5)

(26.7%)

Profit before tax

261.3

236.4

10.5%

Tax

(57.5)

(43.8)

(31.3%)

Profit after tax

203.8

192.6

5.8%

Key metrics

Current-year attritional loss ratio1,2

62.3%

65.3%

3.0pts

Loss ratio1,2

52.0%

59.0%

7.0pts

Commission ratio1,2

7.3%

6.1%

(1.2pts)

Expense ratio1,2

24.9%

25.2%

0.3pts

Combined operating ratio1,2

84.2%

90.3%

6.1pts

Return on tangible equity annualised²

30.1%

19.9%

10.2pts

Investment income yield annualised²

2.0%

2.1%

(0.1pts)

Net investment income yield annualised²

1.7%

1.8%

(0.1pts)

Investment return yield annualised²

2.3%

1.4%

0.9pts

Basic earnings per share (pence)

14.5

13.6

6.6%

Diluted earnings per share (pence)

14.3

13.4

6.7%

Return on equity annualised

14.7%

13.7%

1.0pt

Dividend per share - interim (pence)

7.6

7.4

2.7%

- special (pence)

-

14.4

n/a

Share buyback actioned

50.3

30.0

n/a

Share buyback - 2nd tranche

50.0

-

n/a

30 Jun 2021

31 Dec 2020

Change

Net asset value per share (pence)

195.1

199.7

(2.3%)

Tangible net asset value per share (pence)

134.6

141.5

(4.9%)

Solvency capital ratio post-dividends and share buyback3

195%

191%

4pts

Notes:

  1. A reduction in the ratio represents an improvement as a proportion of net earned premium, while an increase in the ratio represents a deterioration. See glossary on pages 46 to 48 for definitions.
  2. See glossary on pages 46 to 48 for definitions and appendix A - Alternative performance measures on pages 49 to 52 for reconciliation to financial statement line items.
  3. Estimates based on the Group's Solvency II partial internal model.

4

CEO REVIEW

I am delighted with the progress we have made in the first half of the year towards being a digital and technology driven business whilst delivering another strong set of results.

We've successfully rolled out our new Motor platform, the largest component of our technology transformation, and have continued to enhance our claims management capability by purchasing another DLG Auto Services garage and expanding our digital offering. Across much of the business we have now completed our technology transformation and we are focusing on how we embed and optimise the capability we have delivered to drive competitive advantage. A key enabler of this is our new Agile operating model, which was implemented at the end of last year and provides the platform from which to deliver change at pace and at lower cost.

These strategic changes underpin our strong financial performance, with own brand policy growth in the first half, and also support our new partnership with Motability Operations, which will be expected to increase our Motor customer base around 15% from 2023. This new partnership demonstrates the competitive advantage that can be delivered by our vertically integrated claims model and leading customer service levels.

We are at an incredibly exciting point in our transformation and we look ahead with confidence.

Business performance

In the first half of 2021 we delivered another strong set of results, growing our own brand policy count and increasing profitability, enabling us to increase the interim dividend. We continued to make good progress in improving our underlying profitability and, alongside benign weather conditions, a strong contribution from prior-year reserve releases, the non-repeat of the Covid-19 travel claims from last year and the reversal of investment losses, we increased operating profit by £105.0 million to £369.9 million, compared to H1 2020.

We grew policy count and gross written premium across Commercial, Home and Green Flag Rescue. In Motor, average premiums across the market continued to deflate in Q1, before stabilising in Q2, as insurers reflected frequency below historic levels in their pricing. We were disciplined in our trading, focusing on maintaining the quality of our book and pricing to our best view of risk. Our prices therefore reduced by less than the market and we lost some competitiveness as a result, leading to Motor gross written premium reducing by 6.2% in the first half with most of the fall coming in the first quarter. As our average premiums came down less than the market, we remain well placed as lockdown restrictions are removed and claims frequency increases back towards pre-Covid-19 levels.

We continue to focus on the quality of our earnings and increasing the proportion of operating profit that comes from the current year. We are targeting above 50% in 2021 when normalised for weather, and achieved 55% in the first half. The current year contribution benefited from low claims frequency in Motor, and this was partially offset by higher prior year reserve releases. Increasingly the contribution from prior year reserve releases is coming from more recent accident years and therefore we see these as more sustainable than the prior year releases we were generating a few years ago. We believe this is an important inflection point in the quality of our earnings.

Supporting our current year earnings is our cost transformation and we made good progress during the first half. Excluding levies, amortisation and depreciation, which increased by £20.6 million, primarily due to the roll out of our new Motor platform, our operating expenses fell by £30.0 million as our cost saving initiatives took effect, alongside the non-repeat of £9 million of "Force for Good" initiatives in 2020. Our property strategy continues as we completed the acquisition of our Bromley office and have now put actions in place to reduce its site footprint significantly.

To have sustainable success every business, including ours, needs to move at pace to address the effects of climate change. We continue to work towards our own ambitious sustainability targets as well as helping to drive change across the industry and beyond. We have signed the Business Ambition for 1.5°C as part of the UN-led Race to Zero campaign where we are aiming to set Science-Based Targets by 2022. This builds on the action we took last year in becoming carbon neutral from 2020, by offsetting our emissions under our direct control by investing in high impact international social projects. This year we have engaged in prominent sustainability initiatives through forums such as the UK Government's Build Back Better Business Council, which is looking to accelerate electric vehicle adoption, the ABI's Climate Change Roadmap and the Sustainable Markets Initiative's Insurance Taskforce because we want to influence how the green transition can support our business.

Impact of Covid-19

Consistent with last year, the effects of Covid-19 were a feature of our results, most notably within the Motor segment. We saw similarly low levels of Motor claims frequency across the first half of 2020 and 2021 as lockdown restrictions reduced driving levels. This was partially offset by increased claims severity, from additional cleaning costs and higher used vehicle prices, and increasingly the impact of lower frequency on market premium levels. As motor claims frequency increases we expect the current-year attritional loss ratio in Motor, which was 66.9% in the first half, to return closer to underlying 2020 levels in the second half, which we estimated was around 79%.

We also continued to offer our customers premium refunds, either in the form of a direct refund, or via donations to charity, which so far has raised nearly £950,000 for Mind, NSPCC and the UK Sepsis Trust.

Outside of Motor, new business shopping in Rescue reduced, as did Travel premiums. Other than the non-repeat of Covid-19 related travel claims, the impact on earnings outside of Motor was less marked, with modest claims frequency benefits in Rescue, and Home seeing a different mix of claims with a broadly neutral effect on profit.

5

This is an excerpt of the original content. To continue reading it, access the original document here.

Disclaimer

Direct Line Insurance Group plc published this content on 03 August 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 03 August 2021 09:55:14 UTC.


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Financials
Sales 2021 3 062 M 4 224 M 4 224 M
Net income 2021 343 M 473 M 473 M
Net Debt 2021 - - -
P/E ratio 2021 11,3x
Yield 2021 8,68%
Capitalization 3 731 M 5 140 M 5 146 M
Capi. / Sales 2021 1,22x
Capi. / Sales 2022 1,16x
Nbr of Employees 10 807
Free-Float 97,8%
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Number of Analysts 17
Last Close Price 282,10 GBX
Average target price 362,24 GBX
Spread / Average Target 28,4%
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Managers and Directors
Penelope Jane James Chief Executive Officer & Executive Director
Neil David Manser Chief Financial Officer & Executive Director
Danuta Gray Chairman
Steven Maddock Chief Operating Officer
Sebastian Richard Edward James Independent Non-Executive Director
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