Direct Line has scrapped its dividend after a spell of severe cold weather in December pushed up the cost of claims, sending shares in the UK insurer down more than a quarter and sparking a sector sell-off.
“It’s just so frustrating if I’m honest because it’s been a challenging fourth quarter,” said chief executive Penny James.
About 3,000 customers experienced burst pipes and water tanks as well as other damage from 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 fell as much as 30 per cent in early trading, with rival Admiral falling 8 per cent and Aviva losing 4 per cent as investors braced for a rise in claims across the sector.
Rising inflation has had a significant effect on the motor and home insurance industry over the past year: surging costs for parts and labour have made claims more costly, triggering profit warnings and pushing down share prices.
The industry is also under pressure from regulators to support customers affected by the cost of living crisis. The Financial Conduct Authority said on Wednesday insurers should consider waiving cancellation and other fees to support struggling customers.
“I have no doubt that these are market-wide effects,” James said, adding that prices across the sector had risen sharply since last summer.
Direct Line increased motor premiums by 25 to 30 per cent over 2022 to adjust for claims inflation, she said.
Although the final dividend for 2022 has been scrapped, James said “it remains the philosophy of this company and this board” to return excess capital.
She also alluded to climate change and the mix of extreme heat and cold that was feeding into claims. “We’ve seen more medium-sized weather events . . . than we have historically seen.”
Combined with subsidence claims from last year’s heatwave, weather-related claims are expected to reach about £140mn, well above Direct Line’s £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 the Beast from the East [cold snap in 2018],” James said.
For the group’s motor division, the cost of meeting third-party claims rose further, compounded by more car crashes on the December ice.
Analysts at Jefferies said the situation at Direct Line had gone “from bad to worse”, following the company’s decision to shelve a buyback last year.
The company now expects a combined 2022 operating ratio — claims and expenses as a proportion of premiums — of about 102 to 103 per cent, an underwriting loss.
The “unwelcome surprise to start the year” suggested that Direct Line’s turnround had been delayed until the end of 2023 at the earliest, said analysts at RBC Capital Markets.
