TIDMDLG
RNS Number : 1198U
Direct Line Insurance Group PLC
20 November 2019
20 November 2019
Direct Line Group announces Q3 update and its medium-term
strategy and new targets
Direct Line Insurance Group plc is today announcing its Q3
trading update and medium-term strategy and new financial targets
ahead of its inaugural Capital Markets Day tomorrow, 21 November,
2019.
Penny James, CEO, comments:
"I'm encouraged with the Group's performance in Q3, with motor
returning to modest growth, helped by some improvement in market
conditions. Although we are only halfway through Q4 the improving
trends have continued.
"Looking ahead I'm excited by our potential. At the heart of our
business is the passion to provide our customers with outstanding
service and peace of mind, and these qualities have been the
foundation of the Group's good financial returns, supported by our
robust balance sheet. My new executive team and I are building a
platform that combines our strengths of customer and brand with
technology, and is a simpler, leaner and more agile business to
deliver the real potential we see, unlocking value for
shareholders.
"I believe that our strategy, supported by our five
sustainability pillars of People, Customer, Society, Planet and
Governance, enables us to continue to deliver benefits to all our
stakeholders including attractive and sustainable shareholder
returns.
"We are starting to conclude a phase of high capital expenditure
aimed at bringing our technology to the forefront of the industry.
We are in the process of rolling out much of this technology now,
and while there remains more to do, we are pleased with the
progress so far. We expect capital expenditure to begin to decline
from its peak in 2019 and for all our major IT platforms to be
substantially rolled out by the end of 2021.
"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.
"I am looking forward to welcoming investors and analysts to our
Doncaster contact centre tomorrow to share more details on our
plans, introduce you to our exceptional people and to show, first
hand, the really special culture we have at Direct Line Group."
Strategic objectives
We are first and foremost a people business which aims to give
our customers peace of mind. We benefit from the focus of operating
in the UK only while also having scale and flexibility from
providing all major retail general insurance products through
different leading brands and all major distribution channels.
Today our strategic advantage is grounded in our culture of
serving our customers well, through brands, distribution, deep
technical expertise and excellent claims management. This
combination has helped provide our customers with excellent service
and shareholders with reliable and attractive cash returns.
At the same time, we have been making significant investments in
our technology to help us reach and serve even more customers, more
efficiently, and improve their experience further.
Today we are launching the Group's vision, purpose and six key
strategic objectives to drive improvements in how we reach our
customers and to deliver the skills and capabilities that are
critical to win them:
Best at Direct
A direct relationship with our customers provides opportunity
for profitable growth by meeting a broader set of customer needs
and the foundation for future product and service innovation.
We are aiming to be the UK's leading direct insurer "by a mile"
by anticipating our customers' needs and making it easy for them to
buy from us.
Win on Price Comparison Websites
Price comparison websites ("PCWs") are the biggest market for
new business in the UK and are a key route for profitable
growth.
Our new technology enables us to deliver a step change in our
pricing and trading capability, so that our PCW brands win
customers from our competitors.
Extend our reach
Our new IT platforms, when combined with our experience in
brands and customer service, will give us a scale platform to make
it easier for us to extend our partnership reach and to participate
in the consolidation of the sector.
Technical edge
We want to give our customers a great experience and create a
sustainable competitive advantage for the Group by better utilising
our inherent scale advantage in repair, data and claims insight and
management.
To achieve this, we will use our data, scale, skill and insight
across claims, pricing and underwriting to deliver valued products
to customers.
Nimble and cost efficient
We are taking action to bring our cost base in line with the
market to compete better, in particular through PCWs and
partnerships. Alongside, we are also introducing new ways of
working designed to leverage our advantages within each product and
channel.
We are taking these steps to transform into an agile, cost
effective business to drive efficiency and simplicity for us and
our customers.
Great people
Direct Line Group is a people focused business and we are proud
of the top quartile engagement of our people which is the underpin
to our strong customer service.
As disruption in our market increases, we also need to become
brilliant at innovation and change. We can only do this by
empowering and developing the best people.
Therefore, we want to be a home for empowered people who
celebrate difference and challenge the status quo to deliver for
our customers.
These six strategic objectives are intrinsically supported by
our focus on sustainability: People, Planet, Customers, Society and
Governance. We are proud of our strong ESG ratings(1) , and our
culture is that we instinctively put our people first, care for our
customers and act for the benefit of our community and planet. We
are now putting these sustainability pillars at the heart of our
strategic thinking, ensuring the sustainability lens is constantly
in our thinking as we shape our business for the future.
Note:
1. Please see our Environmental, Social and Governance page at
our Group website
https://www.directlinegroup.co.uk/en/investors/esg.html
Financial targets
Costs: We are announcing today that we aim to improve our
operating expense ratio to 20% by the year ending 31 December 2023,
bringing us to a sustainably competitive level. We expect to
achieve this through a combination of automation and process
improvement, self-service and digitalisation, lowering our cost of
change and improving organisational agility.
For the year ended 31 December 2018 operating expenses were
GBP722 million and before amortisation and depreciation were GBP644
million. We aim to reduce operating expenses before amortisation
and depreciation by more than GBP50m by year ending 31 December
2021 to below GBP590 million, absorbing the cost of planned growth
and expected inflation. We expect an increase in non-cash
amortisation and depreciation charges as our technology assets are
brought into use, resulting in reported operating expenses of less
than GBP700 million, in line with our expectations for 2019.
The Group expects to incur restructuring and other one-off costs
totalling approximately GBP60 million across the years ending 31
December 2019 and 2020. We will take further steps to reduce costs
when we believe the payback on implementation is compelling.
We expect to reduce our capital expenditure as our major
technology assets are brought into use, to less than GBP100 million
from the year ending 31 December 2021 compared with GBP155 million
for the year ended 31 December 2018 (2019 guidance: approximately
GBP175 million).
This, and the reduction in operating expenses before
amortisation and depreciation, have a direct positive impact on our
operational capital generation of over GBP100 million per annum
pre-tax.
Quality of earnings: We aim to grow the current year
contribution to operating profits(1) to more than a half by the
year ending 31 December 2021 through a combination of lower costs,
improved current year loss ratio and modest growth. We expect
investment income yield of 2.0% in 2020 with no material gains. We
are also reiterating our combined operating ratio of between 93%
and 95% through the medium term(2) . This is supported by the
benefits of our technology transformation, the major part of which
we expect to complete by the end of 2021.
Notes:
1. Operating profit normalised for weather less prior year
reserve releases.
2. Normalised for weather and before restructuring and other
one-off costs.
Capital Management
The Group reiterates its capital management policy and solvency
risk appetite range of between 140% and 180% of solvency capital
requirements. In normal circumstances we would not expect to need
to hold in excess of 160%. In the event the Group holds surplus
capital the Board will consider both special dividends and share
buybacks.
At the Group's current valuation, where the regular dividend
yield is materially higher than market comparators, the Board's
preference is to return any surplus capital, after ordinary
dividends, by way of a buyback programme.
Furthermore, we intend to use our capital and risk management
expertise to fully explore and execute the opportunities available
to us, including reinsurance, to optimise returns on the capital we
hold.
Q3 trading update
Overall, trading since the middle of the year showed signs of
improvement, and highlighted some of our key strengths,
particularly in motor where our claims inflation experience remains
within our 3% to 5% long-term expectation.
Trading update for the 3 months to 30 September 2019
Q3 2019 Q3 2018 Change
GBPm GBPm
================================ ======= ======== ======
Gross written premium
Motor 457.8 456.4 0.3%
Home 158.6 166.7 (4.9%)
Rescue and other personal lines 117.4 113.4 3.5%
Commercial 124.2 118.0 5.3%
-------------------------------- ------- -------- ------
Total 858.0 854.5 0.4%
Of which direct own brands1 612.7 610.4 0.4%
-------------------------------- ------- -------- ------
30 Sep 30 Sep Change
2019 2018
Total in-force policies 14,837 15,183 (2.3%)
Of which direct own brands1 7,235 7,078 2.2%
================================ ======= ======== ======
Financial highlights
- Motor gross written premium increased by 0.3% compared to Q3
2018, a significant improvement on previous quarters and the
positive trend has continued into Q4. This improvement arose
principally from better new business trading, in particular from
Churchill on price comparison websites, which has supported in
force policy count stabilising in the quarter. Darwin2 contributed
to growth during the period and continued to cautiously expand
within the Group's existing footprint.
- The Group continued to price for its view of motor claims
inflation, maintaining pricing discipline in a market that,
overall, experienced broadly flat pricing. Motor claims severity
inflation remained at the upper end of long-term expectations of 3%
to 5%, with frequency in 2019 continuing to improve compared to
2018.
- Home gross written premium was 4.9% lower compared to Q3 2018,
driven by the run-off of partnerships. Total in-force policies were
down 1.0% in the quarter.
- Home claims inflation in 2019 has benefited from favourable
experience on escape of water, contributing to claims inflation to
date in 2019 which is lower than the Group's expectations of the
long-term average. Very early estimates for the November floods are
approximately GBP10 million across both Home and Commercial.
- Rescue and other personal lines gross written premium
increased by 3.5% compared to Q3 2018. Green Flag, the Group's
direct Rescue brand, passed a landmark of over one million in force
polices with gross written premiums up 15.5% compared to Q3 2018.
This growth was partially offset by a reduction in packaged bank
account volumes.
- Commercial gross written premium increased by 5.3%, compared
to Q3 2018. This reflected growth in both Direct Line for Business,
in particular in its products for small and micro enterprises and
tradespeople, and in NIG and other.
For information: gross written premium for the 9 months to 30
September 2019
9 months 9 months Change
2019 2018
GBPm GBPm
================================ ======== ======== ======
Gross written premium
Motor 1,258.3 1,296.2 (2.9%)
Home 441.9 457.4 (3.4%)
Rescue and other personal lines 333.9 323.3 3.3%
Commercial 399.1 387.9 2.9%
-------------------------------- -------- -------- ------
Total 2,433.2 2,464.8 (1.3%)
Of which direct own brands1 1,684.9 1,709.4 (1.4%)
-------------------------------- -------- -------- ------
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
policies under the Direct Line for Business brand.
2. Darwin is a new brand aimed at price comparison website
customers.
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" or "will" or, in each case, their negative or other
variations or comparable terminology, or by discussions of or
references to strategy, plans, objectives, goals, future years,
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, prior-year reserve releases, cost
reduction, reductions in expense and commission ratios, investment
income yield, new technology implementation, net realised and
unrealised gains 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 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 outcome of the UK general election on 12 December 2019 and the
views and policies of any government following such election, the
outcome of discussions within the UK parliament and discussions
between the UK and the European Union ("EU") regarding a withdrawal
agreement and/or the manner and terms on which, if any, the UK
leaves the EU (usually called "Brexit") and the terms in due course
of any future trading relationship between the UK and the EU,
market-related risks such as fluctuations in interest rates and
exchange rates, the policies and actions of and changes to the
approaches by regulatory authorities (including (without
limitation) changes arising out of the FCA market study on general
insurance pricing practices and/or changes related to capital and
solvency requirements or the Ogden discount rate or rates), the
impact of competition, currency changes, inflation and deflation,
the timing impact and other uncertainties of future acquisitions,
disposals, joint ventures or combinations within relevant
industries, as well as the impact of tax and other legislation and
other regulation 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 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.
Corporate information
Direct Line Insurance Group plc is a public limited company
registered in England & Wales, number 02280426. The address of
the registered office is Churchill Court, Westmoreland Road,
Bromley BR1 1DP.
LEI: 213800FF2R23ALJQOP04
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Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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