Direct Line revs up against takeover bid with £100 million efficiency drive

Direct Line Insurance Group (LSE: DLG) is revving up its engines to fight off a takeover attempt by Ageas SA, a Belgian insurance giant. The UK insurer announced a £100 million cost-saving plan alongside an ambitious target to improve profitability, aiming to make itself a less attractive target.

Direct Line has already rejected two proposals from Ageas, the most recent one valuing the company at 237 pence per share. The UK firm branded the offer "uncertain" and "unattractive," arguing it significantly undervalues their future prospects.

Taking the reins at the beginning of March, new CEO Adam Winslow acknowledged the need for improvement. He set a new target of achieving a 13% net insurance margin by 2026, significantly higher than the previous target of 10% "over time". Winslow plans to complete a strategic review by July to identify further opportunities.

"We have a strong platform to build from, with some of the most recognisable brands in the market," said Winslow, expressing confidence. He highlighted positive signs, including what he believes is a turnaround in the motor insurance business and strong performance in other sectors during 2023.

The CEO outlined a two-pronged approach to reach the 13% target: a combination of immediate cost-cutting measures and mid-term strategic initiatives. However, implementing these changes won't be without upfront costs. Direct Line expects to incur non-recurring expenses of up to £165 million by 2025.

While 2023 resulted in a pre-tax profit of £277.4 million, a significant improvement from the previous year's loss, the company's operating loss widened. However, there were bright spots: gross written premium and associated fees surged 27%, with particularly strong growth in the second half. The company's financial strength is also reflected in a healthy post-dividend solvency ratio of 197%.

Looking ahead, Direct Line said that while the dividend payout has been reduced, it shouldn't be seen as a return to regular dividends. A future update on the dividend policy is expected alongside the strategic review.

Direct Line is optimistic about 2024, reporting positive trading in the first two months with premium growth across all segments. With a sharpened focus on efficiency and a clear path to profitability, Direct Line is determined to stay independent and steer its own course.

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