Direct Line cancels dividend, shares tumble

Direct Line shares tumbled on Wednesday after the insurer said it was axing its final dividend for 2022 as it took a hit from claims related to severe cold weather and increases in motor inflation.

The company noted the recent cold snap in the UK and said that while it is still relatively early, it expects associated claims to be around £90m across Home and Commercial. This, together with the freeze event from January 2022 and subsidence related claims over the summer means that it currently expects total weather claims of around £140m for 2022, versus its previous expectations of £73m.

Direct Line also pointed out that motor claims inflation remains a feature of the market.

"Inflation in relation to own managed damage claims remains broadly in line with expectations; however, we have seen a further increase in third party claims inflation during the fourth quarter," it said.

"Additionally, the fourth quarter has seen an increase in claims frequency, in part relating to the adverse weather conditions."

It estimated that these factors will increase the motor loss ratio in 2022 by around six percentage points.

Direct Line said it now expects the group combined operating ratio normalised for weather for last year to be around 102% to 103%, versus previous expectations of 98%. Meanwhile, higher motor claims inflation is estimated to increase the 2023 group combined operating ratio by about 2 to 3 percentage points, relative to the target of around 95%.

The company also said that capital coverage is now expected to be at the lower end of its risk appetite range of 140% to 180%.

Chief executive Penny James said the board no longer expects to declare a final dividend for 2022.

"The board recognises the importance of the dividend to our shareholders, and continues to take actions to restore balance sheet resilience and dividend capacity as a priority, consistent with our track record of delivering returns for shareholders," she said.

"Despite the impact of these external factors, we continue to make good progress, including enhancing our technological capabilities, introducing new products and improving our efficiency. We have taken actions to respond swiftly to further inflation in motor claims and will continue to navigate market volatility as it arises."

At 1450 GMT, the shares were down 25% at 174.43p.

Victoria Scholar, head of investment at Interactive Investor, said: "Traders are selling the stock aggressively on the back of the abandonment of its dividend, adding to the negativity after a tough year for the business, weighed down by higher-than-expected claims, cost inflation and a slowdown in the commercial property market.

"Direct Line is on track for its biggest one-day share price drop in its history, shedding more than a quarter of its market valuation, dragging other stocks in the sector like Admiral and Aviva down with it. Shares in Direct Line are down by nearly 45% over a one-year period."

Russ Mould, investment director at AJ Bell, said: "If you thought everything bad has gone wrong for Direct Line, it’s important to consider the knock-on effect of these events. Questions are going to be asked about the strength of the company’s balance sheet and whether it has enough capital. The company admits that its capital coverage is now at the lower end of its risk appetite, so might we see a big fundraise soon?

"Saving money by not paying a dividend is one way to preserve cash yet the thousands of pensioners owning the stock for income won’t be happy. Direct Line has historically been a generous dividend payer and a lot of people have got used to a growing stream of cash rewards from the business.

"Last August it declared confidence in being able to sustain regular dividend payments but hinted at nervousness over the market conditions after scrapping the second part of a £100 million share buyback programme announced earlier in the year."

Peel Hunt analyst Andreas van Embden said: "The key is how soon Direct Line can start to reinstate the dividend pe rshare again, which will largely depend on a recovery of the UK motor market with the weather losses and commercial property impacts largely a one-off.

"At a P/E of 12x our 2023E earnings per share (which is already 20% below consensus), the shares are not expensive but this will be another knock in the confidence of the UK motor insurers to address the lack of rate adequacy in an inflationary environment," he said.