Direct Line Insurance Group H2 2024 Earnings Report

Direct Line Insurance Group EPS Results

• Actual EPS: GBX 11.20
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Direct Line Insurance Group Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Direct Line Insurance Group Announcement Details

• Quarter: H2 2024
• Date: 3/5/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, March 4, 2025
• Conference Call Time: 2:00AM ET

Direct Line Insurance Group (LON:DLG) engages in the provision of general insurance products and services in the United Kingdom. The company operates through Motor, Home, Rescue and Other Personal Lines, and Commercial segments. It offers motor, home, van, landlord, rescue, pet, tradesperson, business, creditor and select, and travel insurance products, as well as commercial insurance for small and medium-sized enterprises. The company also provides management, motor accident vehicle repair, insurance intermediary, support and operational, legal, software development, and breakdown recovery services. It sells its insurance products directly, through price comparison websites and phone, and through partners and brokers under the Direct Line, Churchill, Privilege, Darwin, Green Flag, Direct Line for Business, DLG Partnerships, DLG Auto Services, and DLG Legal Services brands. The company was formerly known as RBS Insurance Group Limited and changed its name to Direct Line Insurance Group plc in February 2012. Direct Line Insurance Group plc was founded in 1985 and is based in Bromley, the United Kingdom.

Direct Line Insurance Group H2 2024 Earnings Call Transcript

Key Takeaways

• DLG returned to profit in 2024, increasing ongoing operating profit by £395 m year-on-year and improving net insurance margin by 12 points to 3.6%, driving a pre-dividend solvency ratio of 200%.
• The group has actioned £100 m of gross run-rate cost savings in 2024 and remains on track to achieve at least £250 m by end-2025 through simplification, digital adoption and procurement discipline.
• Operational enhancements include launching Direct Line on price comparison websites, rolling out two mobile apps with nearly 300,000 downloads, replatforming Home on a new tech stack, and expanding the Green Flag-owned patrol fleet to over 60 vehicles.
• DLG announced a recommended cash and share offer from Aviva, subject to shareholder and regulatory approval, with a vote scheduled next week and expected completion in mid-2025.
• A final dividend of 5p per share was declared, reflecting strong capital generation and supporting the company’s focus on shareholder returns.

Presentation

[Adam Winslow, CEO at Direct Line Insurance Group]

Hello everyone, and welcome to our full year 2024 results update. I'm joined by Jane Poole, our new Group CFO, who'll take you through our financial performance. Let's start with the key messages. 2024 was a significant year of progress for DLG. We launched a clear turnaround strategy under new leadership designed to improve our operational, financial, and strategic performance. The new management team joined the group throughout the second half of the year, and I'm proud of the significant progress we've made to date, executing at pace and delivering against many of the key initiatives, such as launching Direct Line on PCW, delivering cost reduction, and claims indemnity. We said 2024 would be a transitional year for the business. The group returned to profit in 2024 with a GBP 395 million increase in ongoing operating profit and a 22-point margin improvement in motor.

[Adam Winslow, CEO at Direct Line Insurance Group]

We exited the year with a robust balance sheet and a strong solvency ratio of 200%. In addition, we're announcing a final dividend of five pence per share. As you're all aware, we also announced the agreement with Aviva on the terms of a recommended cash and share offer for DLG. Bringing Direct Line and Aviva together offers the opportunity to create a strengthened and enlarged business, with both organizations sharing a deep passion for serving customers and for supporting our people. Our shareholders will vote on the offer next week, and if approved, we expect the deal to complete sometime in mid-2025, subject to regulatory approvals. As I've said before, Direct Line Group has been built on strong foundations, with a portfolio of insurance brands, including the iconic Direct Line and Churchill.

[Adam Winslow, CEO at Direct Line Insurance Group]

We also have unique assets in our 23-owned accident repair centres and Green Flag, our well-known challenger rescue brand. This vertically integrated model gives us more control to deliver excellent customer and commercial outcomes with fewer mouths to feed in the value chain. But we hadn't always leveraged our strengths well. Therefore, in March last year, I introduced a range of actions to improve our capabilities and set out new targets to reduce our cost base and deliver a 13% net insurance margin. In July, at our Capital Markets Day, we laid out a new strategy for the group.

[Adam Winslow, CEO at Direct Line Insurance Group]

We unveiled our objective to become the customer's insurer of choice and deliver sustainable and profitable growth underpinned by three key targets: to reduce our cost base by at least GBP 100 million, to deliver 7%-10% premium growth in our non-motor business, and to achieve a 13% net insurance margin in 2026, supported by a range of initiatives across our core portfolio. We've made great strides to deliver against our objectives, to realize the opportunities, deliver better outcomes for customers, and grow value for shareholders. In 2024, we focused on strengthening our performance in our core businesses of motor, home, Commercial Direct, and rescue, alongside reducing costs and improving our claims capabilities. To deliver the turnaround, I also recruited an entirely new high-caliber executive team with a proven track record of delivery. All nine are now in role and are making a very real difference.

[Adam Winslow, CEO at Direct Line Insurance Group]

We made significant progress in 2024, and here are some of the highlights. In motor, we committed to putting our strongest brand, Direct Line, on price comparison websites where 90% of motorists purchase their insurance. We delivered on this promise in December, launching three new Direct Line branded motor products on one of the leading price comparison websites. The motor team continued to deliver at pace across a range of pricing initiatives, enhancing our pricing sophistication through the implementation of new models, delivering further data enrichment, whilst also improving customer journeys to drive more sales. In addition, we're driving increased customer adoption of digital channels, allowing our motor customers to self-serve by using one of the two new apps we launched. These apps have almost 300,000 downloads. In home, the new technology stack rollout has progressed at pace.

[Adam Winslow, CEO at Direct Line Insurance Group]

All new policies across our own brand portfolio are now written on the new platform, and migration of the backbook is well underway. This new technology is a significant step forward. Our new pricing and risk models deliver greater agility across pricing, underwriting, and new product development, enabling more frequent rating and risk model updates. Our rescue business also made progress in 2024, with a first U.K. breakdown brand to offer rescue services as part of Apple's roadside assistance via satellite. We also accelerated the growth of our owned patrol network, and we now have over 60 vehicles across more regions compared with 13 vehicles at the end of 2023. We know that our owned patrols provide a brilliant service to customers, as demonstrated by the high NPS scores. Not only are these patrols helping customers, but they also generate additional revenue from roadside sales.

[Adam Winslow, CEO at Direct Line Insurance Group]

As I set out at the Capital Markets Day, there is significant cost opportunity for us to go at. We've actioned GBP 50 million of gross cost savings that we'll fully earn through this year. We're implementing a new target operating model, including reducing spans and layers to drive greater efficiencies. We've invested further in digital transformation, and this work will continue alongside increasing our discipline in areas such as procurement and change management. We exited 2024 confident in our ability to deliver our cost reduction target of at least GBP 100 million by the end of this year, and Jane will take you through the numbers shortly, and finally, in claims, we're improving the service we provide to customers while unlocking savings across our operations. Martin Milliner joined us as Managing Director of Claims in October and swiftly launched a comprehensive program of initiatives.

[Adam Winslow, CEO at Direct Line Insurance Group]

One of his first actions was to change the operating model to deliver end-to-end claims ownership in motor and home under new leadership and take on the management of the entire claims supply chain. The operational improvements Martin is making are already having a positive impact on customer outcomes and claims costs. For example, in bodily injury, we're settling claims faster, and this has enabled the team to reduce the volume of outstanding BI claims, and in repair, we're reducing the proportion of cars we write off by repairing more damaged cars in one of our 23 auto repair centres. This is better for customers and better for us. Effective claims management also relies on robust counter fraud capabilities, and following the introduction of data analytics and voice analysis profiling, we delivered a 21% increase in fraud savings year on year.

[Adam Winslow, CEO at Direct Line Insurance Group]

While motor is the biggest area of opportunity in claims, we're also making positive progress in the way we manage claims in home. We're simplifying our supply chains and taking a more proactive approach with customers impacted by weather events, visiting flooded homes within 48 hours where it's safe to do so. The progress we've made is testament to the hard work of our people right across the entire organization and reflects our focus on improving accountability, control, and customer outcomes. Our progress has been recognised externally. In September, Direct Line Home was rated Which? Best Buy, while the latest survey by the Institute of Customer Service has Churchill ranked second in the insurance sector, and Green Flag ranked second in the services sector, ahead of both the AA and the RAC.

[Adam Winslow, CEO at Direct Line Insurance Group]

Our Vehicle Technology Centre in Stechford has received industry accreditation to carry out training on repairing electric vehicles, providing an exciting opportunity in an industry that's speaking loudly about skill shortages, particularly in EV repair. I'd like to thank all our colleagues for their continued focus and commitment to deliver this great progress against our goals during a significant year for our business. Jane, over to you for the financials.

[Jane Poole, CFO at Direct Line Insurance Group]

Thanks, Adam, and hello everyone. I'm delighted to present our full year results today, having joined DLG just five months ago. 2024 was a significant year of operational and financial progress for the group, and today's results reflect both our achievements and the areas where we continue to focus in order to deliver further improved financial performance. We have ended 2024 in a stronger position, having improved our business performance. We have delivered premium growth of 25%. We have increased ongoing operating profit by GBP 395 million and net insurance margin by 12 points. We've made good progress on our cost reduction ambitions and have actioned GBP 50 million of gross run rate cost savings. Operating return on tangible equity improved by 25 points to 10%. Importantly, our capital position remains strong, with a pre-dividend solvency ratio of 200%, and today we announce a final dividend of GBP 0.05 per share.

[Jane Poole, CFO at Direct Line Insurance Group]

We've delivered this improvement in our performance while also bolstering our financial resilience. Since joining, I've focused on improving balance sheet strength and reducing earnings volatility, and we've done this through enhancing our reinsurance program, increasing diversification of our investment portfolio, and seeking assurance over the adequacy of our claims reserves. Now let's take a closer look at each of those five elements of our financial results, starting with growth. We have delivered double-digit premium growth of 25% in 2024, supported by excellent performance across both motor and non-motor. In motor, premiums were 32% ahead of prior year, driven by growth in our Motability Partnership. In owned brands, we delivered improved retention through the year and benefited from higher average premiums. Despite improved retention, owned brands policy count declined by 13% as we traded with discipline in the market, which saw rate reductions.

[Jane Poole, CFO at Direct Line Insurance Group]

Policy count in the PCW channel grew 3% during the year, and this is why we are so excited about having launched our most powerful brand, Direct Line, onto PCW. In non-motor, we performed well, delivering 11% growth ahead of the 7%-10% CAGR target that we set at the Capital Markets Day. That was supported by an impressive 16% growth in home, where market rates were higher and our retention rates remained strong. Commercial Direct delivered 9% growth following another good year in landlord and SME, where both lines delivered policy count growth at higher average premiums and were supported by high retention rates. In rescue, lower premiums were the result of reduced sales linked to our motor policies. So overall, we are pleased with the growth that we have delivered, and it provides a good foundation as we enter 2025. Now turning to operating profit.

[Jane Poole, CFO at Direct Line Insurance Group]

In 2024, we delivered ongoing operating profit of GBP 205 million, a GBP 395 million increase versus 2023. This was primarily driven by performance improvements in motor and strong current year margins in non-motor, which I'll cover in more detail shortly. The ongoing net insurance margin was 3.6%. That's a 96.4% combined ratio, which is 12 points better than 2023. Our investment portfolio benefited from higher rates, driving a 44% increase in income. We also saw a positive contribution from the brokered commercial and non-core businesses, which helped to offset restructuring and one-off costs, resulting in a profit after tax of GBP 163 million. Operating earnings per share was up year on year, and return on tangible equity improved by 25 points to 10%. Our results do not yet fully reflect the actions we have taken in 2024, and we see further opportunities to improve performance this year.

[Jane Poole, CFO at Direct Line Insurance Group]

Importantly, we are moving in the right direction and showing progress across both motor and non-motor segments. Turning to motor, we have returned to profit. Operating profit of GBP 107 million was GBP 427 million up on 2023, achieving a 22-point increase in margin. As expected, 2024 was a transitional year for motor's earnings, with the first half still impacted by the loss-making business that was written in 2023. However, during 2024, we saw an improvement in margins as the actions taken during the last 18 months start to earn through, with the full benefit yet to be seen in earnings. The improvement in margins was supported by a positive prior year impact on earnings driven by the Ogden discount rate changes. During 2024, the motor team continued to drive forward their transformation agenda, delivering multiple initiatives, including successfully launching Direct Line on PCW.

[Jane Poole, CFO at Direct Line Insurance Group]

We believe these actions, along with rating actions, provide a stable foundation for further recovery during 2025. In non-motor, we achieved double-digit premium growth, which is tracking ahead of our growth target, and our margins remain strong. The premium growth was highest in home at 16%, followed by Commercial Direct at 9%, with rescue 3% lower. In home, growth was supported by higher rates, new business growth, and strong retention. The replatforming of our homebook brings new capability, particularly in pricing, underwriting, and product development, which should help support future growth. In Commercial Direct, we continue to grow our landlord and SME products through rating action, compelling customer propositions, and high retention rates. These two products make up around 60% of our commercial portfolio and deliver healthy margins.

[Jane Poole, CFO at Direct Line Insurance Group]

Having established ourselves as a leading Direct and PCW player, we are enhancing our core capabilities to enable us to expand our footprint in multi-property landlord and SME trades to further accelerate our growth. The headline net insurance margin for non-motor was 8.9%, or 7% when normalized for event weather. However, the underlying margin was significantly higher at 10.5% when you adjust for weather in home and prior year development. The prior year strengthening was driven by escape of water and substantive perils. We have had a detailed independent review of reserves, and we are comfortable that we are now adequately reserved for these perils. Overall, we believe the non-motor segment is well positioned to continue to deliver top-line growth at good margins. Turning to costs where we have made good progress, starting with ongoing operating expenses.

[Jane Poole, CFO at Direct Line Insurance Group]

As we expected, the operating expense ratio was broadly stable at 20.2%, as the full year of Motability costs, alongside higher amortization charges and general inflation, were largely offset by premium growth. Moving to the overall cost base, where we are targeting at least GBP 100 million of gross run rate savings by the end of 2025. In 2024, we made good progress against our efficiency targets. We actioned GBP 50 million of cost savings in the year, driving GBP 25 million of in-year savings with the full run rate benefit expected to earn through in 2025. These savings are being achieved through role reductions as we continue to move to a simpler, more performance-oriented operating model, through increasing customer adoption of digital channels, tighter control over discretionary and third-party spend, and through streamlining technology across our business.

[Jane Poole, CFO at Direct Line Insurance Group]

In 2025, we expect these activities will drive greater efficiencies, which gives us confidence in our ability to deliver at least GBP 100 million of run rate savings by the end of this year. The cost to achieve this remains at GBP 165 million, and we incurred around GBP 40 million of this in 2024. Moving on to the balance sheet, financial resilience is fundamental to the health and success of the group. Since joining DLG in October, I've focused on improving balance sheet strength and ensuring we are disciplined in our use of capital. Reserve strength is a key underpin to balance sheet strength, and the setting of best estimate liabilities is a key accounting judgment in the group's financial statements. Alongside the independent reprojections performed by our auditors, the board annually commissions an independent review of our claims reserves.

[Jane Poole, CFO at Direct Line Insurance Group]

These reviews, alongside audit committee challenge to our own internal actuarial analysis on reserves, provide us with additional comfort that our best estimate liabilities are within a reasonable range. At the end of the year, we successfully secured our reinsurance programs for 2025 and have enhanced the level of cover to optimize cost and risk while reducing volatility. The two major contracts that we have in place are motor excess loss and home CAT cover. In motor, we have removed the aggregate deductible, which will reduce volatility as we now have unlimited cover above GBP 5 million. Our property CAT cover limit was increased in line with our exposure to cover a one in 200 year loss event, and retention remains at GBP 100 million. Our investment portfolio is well diversified, lower risk, and is designed to match our claims liabilities, which is more capital efficient.

[Jane Poole, CFO at Direct Line Insurance Group]

In the second half of the year, we continue to move towards our target allocations by reinvesting cash into investment-grade credit. We also introduced index-linked gilts into the portfolio as a further match against our PPO liabilities. Overall, group investment income increased by 32% to GBP 235 million, and the net income yield was in line with our expectation at 4.1%. Collectively, these actions have improved our balance sheet strength and reduced earnings volatility. Let's move on to capital, where we have delivered a 12-point increase in the solvency ratio to 200% pre the final dividend. In 2024, we generated 20 points of capital, mainly driven by the improvement in profitability. Market movements were positive and contributed to eight points of capital as we benefited from interest rate movements. Capital expenditure was broadly in line with our expectation of around GBP 100 million and equated to nine points of capital.

[Jane Poole, CFO at Direct Line Insurance Group]

Today, we announced a dividend of GBP 0.05 per share, resulting in a 195% solvency ratio post final dividend, so to summarize with a reminder of the financial headlines, in 2024, we delivered premium growth of 25%, increased operating profit by GBP 395 million, and achieved a 12-point improvement in the net insurance margin. We have made good progress on our cost reduction ambitions and have actioned GBP 50 million of gross run rate cost savings, and importantly, our capital position remains strong with a pre-dividend solvency ratio of 200%, and today, we announce a final dividend of GBP 0.05 per share. 2024 performance illustrates the early stages of our turnaround. We are delivering on what we said we would do and have a strong foundation upon which to build as we accelerate delivery of our strategy. I'll now hand back to Adam.

[Adam Winslow, CEO at Direct Line Insurance Group]

Thanks, Jane.

[Adam Winslow, CEO at Direct Line Insurance Group]

In summary, in 2024, we've made significant progress against our objectives to realize the opportunities, deliver better outcomes for customers, and grow value for shareholders. I'd like to finish by thanking our people. It's their hard work, resilience, and determination that has got us to this point, and I'm immensely proud of what DLG has achieved since I started. We'll continue doing our best every day for our customers, our shareholders, and each other.

Participants

Executives

• Adam Winslow, CEO
• Jane Poole, CFO