Direct Line (DLG) The company is one of the most frustrating companies for investors to follow in the insurance industry. The company always seemed to struggle with drawing the line between the troubled ownership by its predecessor and the subsequent sale of the shotgun. Natwest (NWG) On the one hand, it seeks to carve out an independent niche as the UK’s second largest car and home insurer.
bullpoint
- Motor prices are starting to rise
- The new car market is recovering steadily
- Direct Line still has high market share
- A cluster of smaller competitors
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- Pricing will face fierce competition after regulatory action
The group has recently been hit hard by a combination of operational missteps and regulatory changes, forcing the departure of its CEO and a thorough reassessment of its life purpose. The drop in stock prices under these conditions is predictable, and direct lines have lost more than a quarter of their value over the past 12 months during a period when the FTSE All Stock Index rose.
But it makes no sense to contradict that. Direct Line offers investors an opportunity to test the theory that individual corporate actions can have a positive impact on companies that have lost their way in basic management. office work. In the process, Direct Line can restore investor confidence and his one of the highest dividends on the market. But it will take the right mix of internal dynamics and external factors for stocks to regain some luster.
The first immediate area for improvement is Direct Line’s basic underwriting capabilities. One of the former management’s criticisms was that they appeared to be more concerned with vague concepts such as ‘AI in customer experience’ than with underwriting basics. This criticism seems to be backed up by the volatility of management, where most of the key management decisions were made at the lower board level.
However, DirectLine’s underperforming performance over the past two years was largely due to its underestimating the cost of inflation in the automotive supply chain after the dampening effect on claims subsided, and increasing premiums to maintain market share. I was trying to keep it low. in the face of fierce competition. It also didn’t help that a surprisingly early and widespread cold snap last winter added £90m to the income statement due to burst pipes and the kind of accidents that are common in winter.
This approach forced direct lines into a low-yield policy, constrained regulatory capital and contributed to a growing balance sheet. Fortunately, with clear underwriting objectives, it is very easy to reverse this approach and create insurance with better margins against inflation.
There are signs that the industry is reaching a turning point in pricing policy this year. For example, the comparison site “Gocompare” reports that the average auto insurance renewal rate has increased by 20% overall this year. This suggests that insurers are taking no risks to keep inflation under control.
Broker Berenberg estimates that direct line underwriting results are also expected to be profitable next year and the year after. This is doubly important as the company warns that auto insurance claim inflation will continue to be a problem this year. For Direct Line, the company’s most recent trading update said the deal has been steady, rather than getting better and worse. It’s unclear how much of that dividend will be returned, but that will depend on how much capital the balance sheet will generate once the company gets back on its feet. It is unlikely that the dividend will be fully restored before the start of fiscal 2024.
| DLG-GB | ||||
| Company Profile | name | macto cap | price | 52 weeks high/low |
| Direct Line Insurance (DLG) | £2.14 billion | 163p | 264p/133p | |
| size/debt | NAV per share* | Net cash/debt (-) | Net Debt/EBITDA | Operating funds/EBITDA |
| 176p | £598 million | – | – | |
| evaluation | Anterior PE (+12 months) | Forward DY (+12 months) | FCF yield (+12 months) | cape |
| 9 | 7.2% | – | 6.8 | |
| quality/growth | EBIT margin | Rosé | 5-year sales CAGR | 5-year EPS CAGR |
| – | – | -2.9% | – | |
| Forecast/Momentum | Forward EPS growth NTM | Forward EPS growth STM | 3 month old mom | 3-Month Expected EPS Change (%) |
| 424% | 33% | -7.5% | -5.4% | |
| December 31st | Turnover (£bn) | Profit before tax (£m) | EPS (p) | DPS (p) |
| 2020 | 2.96 | 439 | 27.9 | 36.6 |
| 2021 | 2.96 | 474 | 31.7 | 23.3 |
| 2022 | 2.84 | -47 | -4.3 | 7.7 |
| f’cst 2023 | 2.95 | 291 | 16.0 | 8.4 |
| f’cst 2024 | 3.12 | 438 | 24.1 | 17.1 |
| change (%) | +6 | +51 | +51 | +104 |
| Source: FactSet, adjusted PTP and EPS figures | ||||
| NTM = next 12 months | ||||
| STM = second 12 months (i.e. 1 year from now) | ||||
| *Including intangible assets of £822m or 63p per share | ||||
One reason Direct Lines may benefit from its optimism on premium sales is that the new car market appears to be on a rapid uptrend, with the impact of the pandemic on sales and supply chain shortages likely to end. It’s basically being eliminated from the system. The latest statistics for April showed new car registrations growing at a double-digit rate, up 11% from 2022 to 132,990 units, according to statistics from the Automobile Industry Trade Association. In total, about 627,000 have been sold so far this year. Vehicle registrations increased by 16% year-on-year. For insurers, these numbers are a positive sign that increased sales are returning to the market, which should simply boost total policies by default. By some standards, the total number of new car registrations in the first four months of 2023 will match the total new registration inventory for 2021.
Another factor that investors must consider is that direct lines still hold a sizeable share of the UK motor insurance market, despite their various problems. According to Statista, the company is in his second place behind the market leader. Admiral (ADM), 10.8% of the UK insurance market Aviva (AV.) It was a close second to third at 10.5%. Scale matters in a highly competitive and cutthroat business like auto insurance, which is why smaller companies are starting to fall by the wayside. Saga (SAG) The company recently announced it would sell its underwriting business following disappointing results.
In addition, exits or consolidations of smaller companies are underway in motor insurance. In other words, having a strong brand appeal and a strong underwriting business is less likely than a regulatory ban on the easy money created by “price walking” (charging higher premiums to renewal policy holders than to new policy holders). very important in the market we are in. Overall, insurers have less room to offer unsustainable teaser rates that loyal customers have unknowingly funded, but for established businesses like Direct Lines. may be good in the long run.
Unlike the more diversified Admiral, which has extensive US operations and a sideline personal loan business, DirectLine’s strategy is very focused on the health of the UK insurance market. Without a dividend, investors will soon have to rely on new management to prove their worth and clean up underwriting to bring the stock back to its long-term average. As the graph shows, comparing his one-year stock performance of Direct Line to Admiral’s stock performance alone would represent a profitable uptick.
Meanwhile, brokerage Berenberg expects the stock to trade just 7.3 times earnings in 2024, when net return on tangible assets is expected to return to 20%. This would mean a re-rating of about 30% to the current share price, which would represent an acceptable return for short-term risk. Like other insurers with asset-based balance sheets, direct lines are also expected to see higher returns on consolidated risk capital as interest rates rise.
In summary, Direct Line is an example of corporate activity that has brought the company back to its average performance over the past several years, yielding substantial returns for investors willing to pay no dividend. If the company can secure the means to resume payments, buying at just seven times its expected profit in 2024 could help secure a decent profit yield. buy.
