- Shares fall 12.5% on profit warning
- Rising claims inflation the main issue
- Management postpone share buyback
Shares in motor insurance group Direct Line (DLG) skidded 12.5% to a five-year low of 189.3p following the announcement of a damaging profit warning.
Management is now guiding to a combined operating ratio in the range of 96-98% for 2022. This compares with previous guidance of 93-95%.
The combined ratio is calculated as expense claims and costs divided by the earned premium, and is a simplified way of measuring an insurance company’s profitability and financial health.
Equally disconcerting for investors is the decision to pause the second £50 million tranche of its £100 million share buyback.
However on a more optimistic note the group has reiterated its commitment to paying the dividend.
CLAIMS INFLATION STRIKES AGAIN
Direct Line has become the second motor insurer to warn on profits in recent days, coming hot on the heels of a similar alert issued (14 July) by rival motor insurer Sabre (SBRE).
Sabre estimates that claims inflation is currently running at 12% compared with high single digits at the end of 2021 and 10% in May 2022.
To compensate for the marked increased in the cost of claims, Sabre has gradually increased its core motor premium rates over the course of the first half.
However it is apparent from both the Direct Line and Sabre profit warnings that market motor insurance pricing has been unable to keep up with the elevated level of claims inflation.
Broker Jefferies estimates that car damage inflation increased by 13% in the second quarter, whilst new business premiums only rose by 9% year-on-year in May.
Crucially for motor insurance specialists, writing less business can have an adverse impact on operating leverage, incentivising them to defend market share.
EXPERT VIEW
James Pearse, Jefferies insurance analyst, said: ‘We cut our earnings forecasts by 5%f for 2022, and 7% for 2023, and 4% for 2024, which leads us to reduce our dividend estimates by 36%.’
Over at Peel Hunt, insurance analyst Andreas van Embden commented: ‘Whilst we had built some caution into our earnings and dividend per share forecasts, there will be an inevitable cut to out numbers. The share price has over-reacted and trades at 7x 2024 prospective price earnings ratio with an attractive yield.’
