Shares in insurance group Direct Line Group (DLG) slumped by 7% to 238p following the announcement of a disappointing first quarter trading update.
Premiums have declined by 2.4% through the first quarter to 31 March, which is considerably below market expectations.
Critically market premiums have failed to match the levels of elevated claims inflation.
Direct Line Group’s premiums declined to £734 million. Motor premiums declined by 5%, and Home premiums fell by 10%. These declines were partially offset by a 12% increase in the premium on commercial lines.
There is no change to management’s outlook with the group reiterating a combined ratio target of 93-95% for 2022.
The combined ratio is the total of claims paid plus operating expenses, divided by premium income.
If the combined ratio is below 100% then the insurer is earning in premiums more than it is paying out in claims and costs, and will be making an operating profit.
DOUBLE HIT
A combination of a sharp drop in motor insurance premiums and record-high claims inflation has created a toxic backdrop for the sector.
Lower levels of traffic on the roads as a result of Covid-19 have resulted in a 15% decline in UK motor insurance premiums since March 2020, according to CPI data provided by the ONS (Office for National Statistics).
Meanwhile, claims inflation has been running at record levels of 7-8% in recent years due to the rising costs of spare parts.
These headwinds have been compounded by new rules introduced by the FCA (Financial Conduct Authority), that ban insurance companies from lifting the premiums of loyal customers.
On a more encouraging note motor premiums have started to rise again in April.
Peel Hunt analyst Andreas VanEmbden remains positive ‘The shares trade on a 2023 price to earnings ratio of 10 times, and are supported by a 7% yield, and despite some short term headwinds in UK Motor and Home we see long term value in the stock’.
