(Alliance News) - Direct Line Insurance Group PLC on Wednesday said its third quarter performance was encouraging as motor returned to growth and announced new cost-cutting targets.
The FTSE 250-listed insurance company said its total gross written premiums for the three months to September 30 rose 0.4% to GBP858.0 million from GBP854.5 million the year before. This included a return to growth for motor to GBP457.8 million, up 0.3% from GBP456.4 million.
Rescue & other personal lines posted 3.5% premium growth to GBP117.4 million from GBP113.4 million, while commercial was up 5.3% at GBP124.2 million versus GBP118.0 million year-on-year.
The only detractor was home, which saw gross written premium drop 4.9% to GBP158.6 million from GBP166.7 million.
Total in-force policies fell 2.3% to GBP14.84 billion from GBP15.18 billion.
In terms of financial targets, Direct Line is aiming to improve its operating expense ratio to 20% by the end of 2023 so it is more sustainably competitive.
In 2018, Direct Line's operating expenses came to GBP722 million, or GBP644 million before depreciation and amortisation. The company hopes to cut this GBP644 figure by over 50 million by 2021 to under GBP590 million.
However, non-cash amortisation and depreciation charges are likely to rise as technology assets are bought into use, with reported operating expenses likely to be under GBP700 million in 2019, in line with company expectations.
Restructuring and other one-off costs of around GBP60 million are forecast for 2019 and 2020, though Direct Line will take more steps to cut costs when it believes the payback is "compelling".
Capital expenditure is expected to fall as "major technology assets" come into use, falling to under GBP100 million in 2021 versus GBP155 million in 2018. The forecast for 2019 is GBP175 million.
In addition to the drop in operating expenses before depreciation and amortisation, this fall in capital expense is expected to positively impact Direct Line's capital generation to the tune of more than GBP100 million a year before tax.
In 2021, Direct Line aims to grow its 2019 operating profit to more than half via lower costs, modest growth, and an improved year loss ratio. In 2020, the firm's income yield is forecast at 2.0% with no material gains.
Direct Line also reiterated is expectation for a combined operating ratio of between 93% and 95% in the medium term, normalised for weather and before restructuring and other one-off costs.
Looking ahead, Direct Line has launched six new targets which include becoming the UK's leading direct insurer and making it easier for customers to buy, as well as delivering a step change in its pricing and trading capability to as to win customers from its competitors through price comparison websites.
Other objectives include extending its partnership reach so as to participate in sector consolidation and bringing its cost base in line with the market to as to obtain a "sustainable competitive advantage".
Chief Executive Penny James said: "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."
James added: "We are starting to conclude a phase of high capital expenditure aimed at bringing our technology to the forefront of the industry...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.
Shares in Direct Line closed down 0.5% at 274.70 pence in London on Wednesday.
By Anna Farley; annafarley@alliancenews.com
Copyright 2019 Alliance News Limited. All Rights Reserved.
Direct Line (DLG)