Impact on profits prompts Direct Line to raise cost of insurance

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Higher costs for used cars, more expensive parts and longer repair times have hit profits at Direct Line, the UK’s second-largest car insurer.

The group’s shares were among the worst performers yesterday in London following a trading update in which it warned that overall claims costs were rising by around 10%. Direct Line has begun raising car insurance prices in an effort to restore profit margins, but analysts at Jeffries have questioned how effective this might prove.

Direct Line, which also owns the Churchill and Green Flag brands, is the second UK car insurer to issue a profit warning in the space of a week after Saber Insurance Group said claims inflation was at around 12% vs around 8% in 2021. The wider sector is grappling with higher claims costs, with shares of market leader Admiral falling nearly 8% yesterday following news from Direct Line.

“Following the Saber profit warning, it is clear that claims inflation is accelerating at a rate that UK car insurers cannot keep up with,” Jeffries said in a note to investors yesterday. “Even with rising prices, we expect margins to deteriorate significantly.”

Direct Line said its combined operating ratio – a measure of costs as a proportion of premiums charged – will be between 96% and 98% this year. The closer this figure is to 100%, the less profitable the company is.

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In May, Direct Line said it expected to be between 93% and 95% this year, down from 90.1% last year.

“We have already taken action, including increasing pricing and deploying new pricing capabilities to restore margins, which means we expect our 2023 combined operating ratio to improve to around 95% and we reiterate our mid-term target range of 93% to 95%,” said Managing Director Penny James.

Auto insurers performed well early in the pandemic as lockdowns resulted in fewer cars on the roads and fewer claims. As a result, insurance premiums fell over the year until last fall.

However, global shortages of semiconductors and other materials have reduced the availability of new cars and driven up used prices. According to Auto Trader, the average price of a used car in May was £3,400 more than it was a year earlier.

Direct Line said it was “confident” of maintaining its regular dividend payments, but will now refrain from a second £50million share buyback announced earlier this year.

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“The group is confident in the sustainability of its regular dividends and continues to take steps to improve yields and further increase resilience in the face of macroeconomic uncertainty, including by reducing credit exposure and, as previously reported, is considering the use of strategic reinsurance,” Direct Line said.

“Given the current market environment, the Board of Directors has decided not to launch the second £50 million tranche of the £100 million share buyback program announced earlier in the year. year.”

Direct Line said its other business units – which cover home, travel, pet and life insurance as well as the Green Flag roadside recovery service – were performing broadly to expectation “demonstrating the benefits of the group’s diverse business model”. .

The group recorded an 11% increase in operating profit for 2021, although pre-tax profit fell by £5.4m to £446m after taking into account restructuring costs. Shares of Direct Line closed yesterday’s session down 22.75p to 193.65p.

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