Direct Line slumps as cold snap, motor inflation force dividend suspension

By Geoffrey Smith 

Investing.com -- Shares in Direct Line (LON: DLGD ) lost over a quarter of their value on Wednesday after the U.K. insurer reported a surge in claims for home damage caused by the cold snap at the end of last year.

Direct Line said it had also been hit by inflation in the car repair business and by a drop in the value of its commercial property holdings as interest rates rose last year.

As such, it expects its core underwriting business to lose money in 2022 and no longer expects to pay a final dividend for 2022. That's likely to cost it dearly with dividend-focused funds and investors, given that the group is one of the country's more reliable payers, having paid out over £1.5 billion (£1 = $1.2165) in the last five years.

Direct Line's final dividend typically accounts for two-thirds of total dividends during the year. Last year, it was 15.1 pence out of a total payout of 22.7p. Chief executive Penny James said the group will make restoration of dividend capacity a priority.

Direct Line said it expects its combined operating ratio - which measures operating costs and claims expenses relative to revenue - to be between 102-103% for the full year, well above its target of 95%, after a week-long spell of sub-zero temperatures in December generated an estimated £90M in claims for burst water pipes, tanks, and other related damage.

The cold snap bookended a tough year for Home and Commercial, given a similar incident at the start of 2022. Having budgeted for around £73M of weather-related claims last year, the group now faces a final bill of £140M.

The weather was also partly responsible for a worsening performance at Direct Line's motor insurance division, bumping up the repair bill at a time of double-digit inflation in such services. Claims inflation and weather-related accidents will lead to a six-point deterioration in the motor loss ratio in 2022's results, Direct Line said. It also expects motor claims inflation to add 2-3% to the combined operating ratio in 2023.

Analysts at RBC said the news was an "unwelcome surprise" and said they don't expect an improvement in the motor business until the end of 2023 at the earliest.

Direct Line's warning was so dire that it also dragged other U.K. insurance stocks down with it, Admiral (LON: ADML ) shares losing 8.8% and Aviva (LON: AV ) shares falling 3.8% by 05:30 ET (10:30 GMT). Direct Line shares, meanwhile, were down 27.6% at a 10-year low.