ii view: Direct Line shares plunge as dividend axed

Shares for this major motor and house insurer are now down more than 40% over the last year. We assess prospects. 

Fourth-quarter trading update

ii round-up:

Insurance company Direct Line Insurance Group (LSE:DLG) today cancelled its 2022 final dividend as it battled claims from the recent severe cold weather along with continued elevated motor claims inflation.

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The FTSE 250 insurer has so far helped around 3,000 customers with burst pipes and related damage and, although still early days, expects associated claims for its home and commercial businesses to be in the region of £90 million. 

Direct Line shares slumped by more than a quarter in UK trading having come into this latest news already down by around a fifth over the last year. Shares for rival insurer Admiral Group (LSE:ADM) also fell by around a tenth, with life and general insurance provider Aviva (LSE:AV.) retreating more than 3%.

Added together with subsidence related claims over the summer, Direct Line now estimates 2022 weather related claims to be in the region of £140 million, almost twice its previous estimate of around £73 million. 

An increase in motor claims frequency due to the adverse weather was also flagged and comes alongside an increase in third party claims inflation during the final quarter.  

Higher used car prices, longer repair times because of supply chain challenges and inflation in the cost of car parts have all proved factors across the industry to fuel claims inflation. Management previously estimated claims inflation of around 10% for 2022. 

Prices falls in the wider property market had also resulted in a 15%, or £45 million reduction in the value of its investment portfolio, although occupancy levels had stayed strong at around 95%. 

Overall Direct Line’s combined operating ratio for 2022 is now expected to be between 102% and 103%. A figure above 100% means it is paying out more in claims than it has earned in premiums. Its capital coverage is now expected to be at the lower end of its risk appetite range of 140% to 180%, resulting in the decision to axe the final dividend. 

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Broker UBS estimated that the consensus analyst estimate for Direct Line’s 2022 profit could be halved. Full-year 2022 results are scheduled for 7 March. 

ii view:

Launched in 1985, Direct Line today offers UK insurance policies both online and over the telephone to cover a variety of assets and events. Its original motoring insurance still generates its biggest slug of premiums at just under half of its overall total. Along with Direct Line, its other brands include Churchill, Darwin, Green Flag and Privilege.

For investors, a need to strengthen its finances following an extremely challenging 2022 will likely see future dividends rebased lower or even suspended for a period of time. A backdrop of climate change is arguably making the weather even more unpredictable, while the challenges of claims inflation continue. 

On the upside, tentative signs that inflation, at least in the US, may have already peaked, could ease the challenge of claims inflation going forward. Management’s existing focus on costs is expected to see group costs for 2022 fall year over year, while a focus on data and technology continues to be made. 

Some investors will take a chance that Direct Line shares have been oversold in reaction to the latest news. However, despite strong brand names and quick management action, many others will likely demand further clarity on dividend policy and prospects.

Positives:

• Strong brand names
• Ongoing focus on costs 

Negatives:

• Factors outside of its control such as the weather influence performance
• Rising interest rates impacting property investments

The average rating of stock market analysts:

Strong hold