Direct Line has scrapped its dividend after a bout of severe cold weather in December helped push up the cost of claims, sending shares in the UK insurer down more than a quarter and sparking a sector sell-off.
The announcement by the motor and home insurer on Wednesday comes just months after the group warned that higher inflation was eroding profits by driving up the cost of claims.
“It’s just so frustrating if I’m honest because it’s been a challenging fourth quarter,” said Direct Line’s chief executive Penny James.
About 3,000 customers experienced burst pipes and water tanks as well as other damage from the sub-zero temperatures in December, creating an expected £90mn in claims across the home and commercial business. That included about 500 major losses, particularly in the north of England and Scotland, as customers were forced into alternative accommodation.
Analysts at Citigroup noted that “management credibility will likely be under pressure following this profit warning and dividend cut given reassurances only as recently as November”.
Direct Line shares plunged as much as 30 per cent in early trading, with rival Admiral falling 8 per cent and Aviva dropping 4 per cent as investors braced for a jump in claims across the sector.
Rising inflation has rocked the motor and home insurance sectors over the past year, as surging costs for second-hand cars, materials and labor have inflated the value of claims, triggering profit warnings at insurers and forcing share prices lower.
“I have no doubt that these are marketwide effects,” James said, adding that prices across the sector had risen sharply since last summer.
After scrapping the final dividend for 2022, James said that “it remains the philosophy of this company and this board” to return excess capital.
The tougher backdrop for claims meant that the insurer needed to push up prices further, James said. Direct Line had increased motor premiums by 25 to 30 per cent over 2022 to adjust for claims inflation, she said, part of a dramatic hardening in the market.
Combined with subsidence claims from last year’s heatwave, weather-related claims are expected to reach about £140mn, well above its £73mn estimate for 2022.
“You usually expect a burst pipe here or there, and what happened this time is that it was so prolonged and such a deep freeze that actually it [was] bigger than Beast from the East,” James said.
The mix of extreme heat and cold feeding into the numbers partly reflected the impact of climate change, James said. “We’ve seen more medium-sized weather events. . . than we have historically seen.”
The group’s motor division has seen the cost of meeting third-party claims rise further, a trend compounded by customers suffering more motoring crashes on the December ice.
Analysts at Jefferies said things at Direct Line had gone “from bad to worse”, following the company’s move to shelve a buyback last year.
Direct Line is now expecting a combined operating ratio — claims and expenses as a proportion of premiums — at about 102 per cent to 103 per cent for 2022, representing an underwriting loss. Claims inflation is expected to worsen this measure for 2023 by 2 or 3 percentage points above the target of 95 per cent.
The “unwelcome surprise to start the year” suggests that Direct Line’s turnround had been delayed until the end of 2023 at the earliest, said analysts at RBC Capital Markets.