You are currently viewing Direct Line warns of fresh pressure on earnings from inflation

Direct Line warns of fresh pressure on earnings from inflation

Direct Line said the rising costs of repairing damaged motor vehicles could hit its earnings this year, the latest warning from the UK insurer that rising inflation was harming its business.

Rising claims costs were expected to “put pressure” on earnings this year, including the level of reserves it could release from prior-year claims, the FTSE 250 insurer said in an update on Tuesday. Its shares fell 5 per cent in early trading.

After a lull in claims during the pandemic, motor insurers have suffered more recently as the price of second-hand cars, car parts and labour have surged. Insurers have struggled to keep their prices rising fast enough to cope with the acceleration in the cost of repairing or replacing cars.

Direct Line’s chief executive Penny James stepped down in January, just weeks after the company issued its latest profit warning and scrapped its final dividend. The group has since admitted it had been guilty of “over-optimism” about the threat from inflation.

Hopes had risen in recent weeks that prices were catching up across the sector. The latest quarterly index, from price comparison website and broker Willis Towers Watson, said the cost of car insurance had grown by a fifth in the past 12 months to its highest since 2011. That put the average policy in the UK at £657.

The company’s acting chief executive Jon Greenwood said the earnings outlook “continues to be challenging” but stressed that Direct Line continued to “take the actions required to drive business performance” including on margins.

Direct Line’s motor insurance renewal premiums were up 19 per cent year on year as the company continued to push up prices to try to counter the effects of inflation.

It expects claims inflation in motor and home insurance to run at a high single-digit percentage.

The group had “made good progress towards target margins”, it said, but this focus on driving prices higher meant a 2.5 per cent fall in overall in-force policies across the quarter.

There was better news on severe weather-related claims, which were “modest” in the first quarter and “well within” expectations, which project an £80mn hit across the year.

In home insurance, a smaller business line for the group, Direct Line said it had “observed significant price increases across the market”.

The group’s solvency level was “broadly unchanged” since the year-end, and the insurer reiterated its expectations that it had several “tailwinds” to its capital level, including accounting changes.

Analysts at RBC Capital Markets said the fresh numbers meant there was a higher risk to Direct Line’s dividend outlook “in the absence of tangible signs of recovery to both capital and earnings”. The warning on rising claims costs “cements our expectations of a dividend reset this year”, they added.

Jefferies analysts said the premium growth and accompanying commentary were positive, but the adverse claims development and largely unchanged solvency ratio were “likely to disappoint”.

Source link

Leave a Reply