What Direct Line Insurance Group plc’s Streamlining Drive Means For Earnings Growth

Royston Wild evaluates what Direct Line Insurance Group plc’s (LON: DLG) transformation package is likely to mean for future earnings.

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Today I am looking at why I believe Direct Line Insurance Group‘s (LSE: DLG) restructuring drive should deliver solid returns in coming years.

Strategic investments ready to pay off

Direct Line is undergoing a vast transformation programme in order to cut costs and rid itself of non-core and underperforming assets. These streamlining plans are undoubtedly delivering the goods, the firm having seen operating profit advance 14% during 2013 to £526.5m.

The company announced in October that it had shorn off its Direct Line Life Insurance division to Chesnara for £39.3m, and was Direct Line 2followed by the sale of its TRACKER stolen vehicle recovery unit to Lysanda in February. I expect further disposals to occur as it throws off the shadow of previous owner Royal Bank of Scotland.

However, the company is also splashing the cash in areas in which it sees high growth potential. In January Direct Line announced that it had received the necessary authorisation from the Solicitors Regulation Authority to launch DLG Legal Services in conjunction with Parabis Law.

The new division will provide a variety of its legal services to existing home and motor customers who have selected additional legal cover, as well as non-customers for a one-off fee. The legal services arena is considered a potentially-explosive sub-sector by the country’s biggest insurers, with Admiral establishing two joint ventures in this area last year.

As well, Direct Line is also investing heavily in other areas to cotton onto changing consumer trends. The firm has introduced smartphone and tablet PC-specialised websites in order to latch onto galloping trend of mobile commerce — or ‘m-commerce’ — while it is also ramping up its product range in the increasingly-popular telematics field.

The company is also investing heavily in behind-the-scenes technology, and recent initiatives include the roll-out of a new full-cycle eTrading platform — known as TheHub — for commercial brokers.

Earnings expected to rebound next year

But in the near term, City analysts expect Direct Line to experience significant earnings turbulence. The company is anticipated to experience a 13% earnings dip in 2013, although a solid 19% bounceback is anticipated in the following 12-month period.

These projections leave the insurer dealing on a P/E rating of 10.8 for this year, and which falls within bargain territory below 10 for the following 12-month period at 9. These readings also trample a forward average of 12.5 for the complete non-life insurance sector.

In my opinion Direct Line is poised to deliver solid shareholder returns in coming years. Driven by its strong stable of market-leading brands such as Privilege and Churchill, and solid footprint across a range of insurance markets, I believe that the company is on track to punch solid long-term growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston does not own shares in Direct Line Insurance Group.

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