A grim 2022 continues to haunt the high-profile insurer and these figures have dealt the share price another blow. Our head of markets makes sense of the latest numbers.
There is precious little in these annual results from Direct Line Insurance Group (LSE:DLG) to assuage the concerns which investors had previously identified.
Weather-related claims scored a direct hit on profitability and, for the year as a whole, had even more of an impact than the market had been expecting. The extremes of hot and cold temperatures culminated in the December freeze where, for example, £95 million of claims were made. This contributed to an overall figure of £149 million for the year, more than double the £73 million budget assumption.
The higher level of claims were part of an annus horribilis for the group, with regulatory reforms and the uncertainty of finding a new CEO to tackle the overall issues adding to the woes which Direct Line is facing.
At the same time, the Combined Operating Ratio, which needs to be below 100% to indicate profitable underwriting, rose to 105.8% from the previous year’s level of 89.5%, and was weaker than the expected number of 104.7%. Within the Motor business, a figure which rose to 114.7% from 92.4% was particularly indicative of the challenges being faced and the unit will be the subject of particular remedial action in the coming year. This will include actions on pricing, the restoration of margins and a better understanding of claims generally, although an outlook which remains generally cautious is indicative of the hurdles to come.
The Solvency Capital Ratio, a traditional indicator of capital strength, also fell from 176% to 147% alongside the headline numbers which saw a pre-tax loss of £45.1 million recorded, in contrast to a profit of £446 million the previous year. Operating profit came in at £32.1 million, compared to £590 million, and rather worse than the anticipated figure of £70 million.
The previously announced passing of the final dividend is another indication of a group looking to batten down the hatches. That being said, even after the cut the dividend yield remains at a creditable 4.5% which is of some solace to suffering shareholders. On a more cautionary note, the dividend cover figure is uncomfortably near to hitting just one time, below which the further payment of dividends would need to be taken from reserves rather than profit.
The strength of the brand and the scale of the business remain the lynchpins of any turnaround which the group might be able to engineer. By the same token, the insurance space remains one of high competition, with pricing a key feature. Any reduction in premium prices to keep up with the competition would of course put further pressure on margins and profitability.
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The share price reaction to the numbers is one of understandable disappointment, and adds to a decline of 35% over the last year, as compared to a dip of 4.2% for the wider FTSE250 index.
The halcyon days of FTSE100 membership, which ended in September 2019, are a distant memory and the group has a mountain to climb to regain any such strength. In the meantime, the market consensus of the shares as a 'hold' may come under some downward pressure given the enormity of the task ahead.
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