- Business hit by ‘perfect storm’
- Company cuts dividend for the first time
- Focus on rebuilding the balance sheet
Insurance company Direct Line (DLG) shocked investors on Wednesday after pulling the final dividend to restore its balance sheet and raising the spectre of a possible rights issue.
The shares dropped 28% to 167.3p to sit almost 50% below where they were a year ago.
The company appears to have been hit by the perfect storm of weather-related costs combined with continued claims inflation. In addition, the firm’s investment property portfolio has suffered a worse than expected 15% drop in values.
WHAT WENT WRONG?
December’s sub-zero temperatures together with the January 2022 freeze and subsidence-related claims over the hot summer means total weather-related costs are now expected to be almost double prior expectations of £73 million.
Chief executive Penny James said: ‘These claims, combined with further increases in motor inflation, have had a significant impact on our underwriting result for 2022.
‘We have also seen reductions in the valuations of the commercial property holdings in our investment portfolio in line with movements in the broader property market.’
CURRENT TRADING UNDER PRESSURE
The company warned claims inflation remains a feature of the market, while the fourth quarter also saw an increase in claims frequency.
These pressures are expected to impact the motor loss ratio (claims and operating expenses divided by premiums) in 2022 by around 6%.
The group’s overall combined ratio for 2022 is estimated to be around 102% to 103%. A ratio over 100% represents an underwriting loss.
Higher motor claims inflation on premiums already written is likely to increase the 2023 combined ratio by 2% to 3% relative to the group’s target of 95%.
REBUILDING THE BALANCE SHEET
The combination of negative headwinds has resulted in the group’s capital ratio falling towards the bottom end of its risk appetite range of between 140% to 180%.
Direct Line has returned over £1.5 billion of capital over the last five years and has not skipped a dividend since listing in October 2012.
EXPERT VIEW
Investment director at AJ Bell Russ Mould commented: ‘Spare a thought for the insurance industry which is going from bad to worse.
‘After suffering from inflationary pressures which made it more expensive to cover the costs of repairing vehicles that had been in an accident, insurers are now having to contend with a winter of discontent.
‘Saving money by not paying a dividend is one way to preserve cash yet the thousands of pensioners owning the stock for income won’t be happy.
‘Direct Line has historically been a generous dividend payer and a lot of people have got used to a growing stream of cash rewards from the business.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article Martin Gamble and the editor (Ian Conway) own shares in AJ Bell.
