Today I am looking at the earnings prospects of Direct Line Insurance Group (LSE: DLG) for the coming year.
Earnings uptick expected despite difficult environment
Make no mistake: Direct Line is set to face the increasing wrath of aggressive competition across the UK insurance space next year and beyond. The choice available to consumers has been greatly enhanced in recent years by the accelerating popularity of price comparison websites — responsible for around nine-tenths of all business — a phenomenon that has forced firms across the board to slash premiums.
Direct Line announced that rival activity pushed group gross written premiums 4.8% lower during July-September, to £977.7m. With premiums having slipped by a more modest 4.3% during the first nine months of 2013, this suggests that the issue is becoming more problematic. Indeed, the company has seen the number of policies fall across many of its divisions, particularly at its Motor and Home arms.
Although troubles at these two core areas — which account for two-thirds of gross written premiums — are clearly a massive headache for the business, Direct Line is developing a class-leading reputation in niche areas such as ‘telematics’ to move ahead of the pack. As well, the company is also pulling up trees in other areas, and saw International and Commercial gross written premiums surge 8.9% and 6.9% correspondingly in quarter three.
Elsewhere, Direct Line’s restructuring drive to whack its cost base and divest non-core operations continues to pay huge dividends. This is reflected by a rapid improvement in its combined operating ratio, which fell to 95.4% in January-September from 99.7% in the corresponding 2012 period. And the firm’s efficiency programme has further to run, with a cost reduction target of £1bn on course to be hit next year.
Although City brokers expect Direct Line to punch a 3% earnings decline in the current year, to 21.1p per share, the firm is anticipated to punch an 8% rebound in 2014 to 22.8p. Such figures leave the insurer dealing on a P/E multiple of 10.8 for next year, just above the value benchmark of 10 and comfortably beating an average forward readout of 12.7 for the entire non-life insurance sector.
