Direct Line issues profit warning as inflation drives up claims costs | Insurance sector
Direct Line has issued a profit warning, saying soaring prices for used cars, parts and longer repair times have driven up the cost of claims.
Shares in the insurer plunged 13% on Monday – making Direct Line the biggest drop in the FTSE 250 – to its lowest level since 2013, as the company said overall claims costs were up around 10%.
“The auto insurance market experienced significant levels of severity inflation in the first half, driven primarily by higher used car prices, and amplified by higher third-party claims costs, delays longer repair times and inflation in the cost of auto parts,” the company said. . “Market premium inflation continued to lag the increase in claims inflation.”
Direct Line said that as a result, its combined operating ratio – which measures costs as a proportion of premiums – will be between 96% and 98%. The closer the ratio is to 100%, the less profitable the company will be.
In May, Direct Line said it expected it to be between 93% and 95% this year, and last year it was 90.1%.
“Today’s trade update follows a period of heightened volatility in the UK motor insurance market, during which we saw motor claims inflation in the first half of 2022 exceed assumed levels in our pricing,” Direct Line managing director Penny James said. . “We have already taken action, including raising prices and rolling out new pricing capabilities to restore margins.”
Direct Line’s warning also prompted a sell-off in the FTSE 100-listed Admiral’s shares as the insurer fell 7% to a four-year low.
Direct Line said that in light of the current market environment it would not be launching the second £50m tranche of a £100m share buyback program announced earlier in the year. ‘year.
Insurer Saber’s market value fell by more than a third last week after it issued a profit warning and cut its dividend, also blaming rising claims costs. The Saber news sent Direct Line shares down 11% and Admiral shares down 14%.