Direct Line Slumps 25% As It Axes Dividend On Claims Spike

Direct Line Insurance Group’s share price collapsed on Wednesday as it cancelled dividends due to a tough end to 2022.

At 175p per share the FTSE 250 company was last trading 25% lower on the day.

Direct Line chief executive Penny James described the fourth quarter as a “volatile and challenging” period which yielded “a significant increase in claims as a result of the prolonged period of severe cold weather in December.”

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Claim Costs Soar

Due to December’s ‘Big Freeze’ the insurer now expects total weather-related claims to total £140 million in 2022. This is almost double the £73 million cost it had previously expected.

This sum includes the impact of subsidence-related claims over the summer. Direct Line estimates claims of £90 million related to last month’s freeze alone.

The business said that it has so far helped 3,000 people deal with burst pipes, water tanks and other weather-related damage.

Underwriting Loss

James noted that the recent spike in claims and further rises in motor inflation “have had a significant impact on our underwriting result for 2022.”

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Direct Line now expects its 2022 combined operating ratio to stand at between 102% to 103%. A ratio north of 100% shows that a business is making a loss on its underwriting operations.

Direct Line added that motor claims inflation would increase its combined operating ratio by around 2% to 3%.

Claims Inflation Rises

Elsewhere, Direct Line said that commercial property valuations in its investment portfolio had declined in line with movements in the broader property market. These dropped 15% from 2021 levels, equivalent to a whopping £45 million.

In better news trading at the firm’s core Motor division “improved against a hardening market backdrop,” the company said. The number of own-brand in-force policies were flat across quarter four, whilst gross written premiums were down 2%.

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However, Direct Line said that claims inflation “remains a feature of the market” and that third party claims inflation rose further between October and December. Moreover, Direct Line said that claims frequency picked up due to the freezing weather. As a result its motor loss ratio is expected to have risen around 6% last year.

Trading at the group’s other divisions remained in line with expectations during the final three months of 2022.

Dividend Axed As Capital Coverage Falls

Direct Line commented that its capital coverage is now expected to be “at the lower end of our risk appetite range” following the tough end to 2022. As a result it said it would be scrapping the dividend.

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The insurer had previously guided within a range of 140% to 180%.

James said that the company is continuing “to take actions to restore balance sheet resilience and dividend capacity.”