Direct Line Insurance Group Q4 2024 Earnings Call Transcript

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Provided by Quartr
March 4, 2025

There are 2 speakers on the call.

Operator

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 and a new leadership designed to improve our operational, financial and strategic performance.

Operator

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 million increase in ongoing operating profit and a 22 margin improvement in Motor. 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 $0.05 per share.

Operator

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-twenty twenty five, 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. We also have unique assets in our 23 owned accident repair centers and Green Flag, our well known Challenger Rescue brand.

Operator

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 haven't always leveraged our strengths well. Therefore, in March, 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. 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 million to deliver 7% to 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.

Operator

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 enrolled and are making a very real difference. We made significant progress in 2024 and here are some of the highlights.

Operator

In Motor, we committed to putting our strongest brand direct line on price comparison websites, when 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.

Operator

In Home, the new technology stack rollout has progressed at pace. All new policies across our own brand portfolio are now written on the new platform and migration of the back book 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.

Operator

We're the first UK 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 twenty twenty three. We know that our own 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. As I set out at the Capital Markets Day, there is significant cost opportunity for us to go at.

Operator

We've actioned 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 million by the end of this year. And Jane will take you through the numbers shortly.

Operator

And finally, in claims, we're improving the service we provide to customers while unlocking savings across our operations. Marcie Milliner joined us as Managing Director of Claims in October and swiftly launched a comprehensive program of initiatives. 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 are settling claims faster, and this has enabled the team to reduce the volume of outstanding BI claims.

Operator

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 centers. 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. While motor is the biggest area of opportunity in claims, we're also making positive progress in the way we manage claims in home.

Operator

We're simplifying our supply chains and taking a more proactive approach with customers impacted by weather events, visiting flooded homes within forty eight 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 recognized 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. Our Vehicle Technology Centre in Satchford 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.

Operator

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.

Speaker 1

Thanks, Assam, 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%.

Speaker 1

We have increased ongoing operating profit by £395,000,000 and net insurance margin by 12 points. We've made good progress on our cost reduction ambitions and have actioned £50,000,000 of gross run rate cost savings. Operating return on tangible equity improved by 25 points to 10%. And importantly, our capital position remains strong with a pre dividend solvency ratio of 200% and today we announce a final dividend of 5p per share. We've delivered this improvement in our performance whilst also bolstering our financial resilience.

Speaker 1

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 Own Brands, we delivered improved retention through the year and benefited from higher average premiums.

Speaker 1

Despite improved retention, O'Brien's policy count declined by 13% as we traded with discipline in the market which saw rate reductions. 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% to 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.

Speaker 1

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. In 2024, we delivered ongoing operating profit of CHF205 million, a CHF395 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.

Speaker 1

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 million. Operating earnings per share was up year on year and return on tangible equity improved by 25 points to 10%.

Speaker 1

Our results do not yet fully reflect the actions we have taken in 2024 and we see further opportunities to improve performance this year. 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 million was million up on 2023, achieving a 22 increase in margin. As expected, 2024 was a transitional year for Moses' earnings, with the first half still impacted by the loss making business that was written in 2023.

Speaker 1

However, during 2024, we saw an improvement in margins as the actions taken during the last eighteen months start to end 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 option discount rate changes. During 2024, the Motor team continued to drive forward their transformation agenda, delivering multiple initiatives, including successfully launching Direct Line or PCW. 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.

Speaker 1

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 home book 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.

Speaker 1

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 substance perils. We have had a detailed independent review of reserves and we are comfortable that we are now adequately reserved for these perils.

Speaker 1

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. 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 million of gross run rate savings by the end of twenty twenty five.

Speaker 1

In 2024, we made good progress against our efficiency targets. We actioned million of cost savings in the year, driving 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 orientated operating model through increasing customer adoption of digital channels, tighter control over discretionary third party spend and through streamlining technology across our business. In 2025, we expect these activities will drive greater efficiencies, which gives us confidence in our ability to deliver at least million of run rate savings by the end of this year. The cost to achieve this remains at 165,000,000, and we incurred around 40,000,000 of this in 2024.

Speaker 1

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.

Speaker 1

These reviews, alongside audit committee challenged to our own internal actuarial analysis on reserves, provides 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 costs and risk whilst reducing volatility. The two major contracts that we have in place are motor excessive loss and home cat cover. In motor, we have removed the aggregate deductible, which will reduce volatility as we now have unlimited cover above CHF5 million. Our property cat cover limit was increased in line with our exposure to cover a one in two hundred year loss event and retention remains at million.

Speaker 1

Our investment portfolio is well diversified, lower risk and is designed to match our claims liabilities, which is more capital efficient. 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 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.

Speaker 1

Let's move on to capital, where we have delivered a 12 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 million and equated to nine points of capital. Today, we announced a dividend of 5p per share resulting in 195% solvency ratio post final dividend.

Speaker 1

So to summarize with a reminder of the financial headlines. In 2024, we delivered premium growth of 25, increased operating profit by million and achieved a 12 improvement in the net insurance margin. We have made good progress on our cost reduction ambitions and have actioned 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 announced a final dividend of 5p per share.

Speaker 1

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.

Operator

Thanks, Jane. And so 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.

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Direct Line Insurance Group Q4 2024
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