13th Mar 2023 14:56
(Alliance News) - Direct Line Insurance Group PLC on Monday announced it swung to an annual loss in 2022, as it suffered the highest weather catastrophe costs since its listing.
Richard Hunter, head of markets at interactive investor, said the higher level of claims were part of an "annus horribilis" for the motor and home insurer, with regulatory reforms and the uncertainty of finding a new chief executive to tackle the overall issues "adding to the woes which Direct Line is facing."
"There is precious little in these numbers to assuage the concerns which investors had previously identified," Hunter added.
The Bromley, London-based firm reported a pretax loss of GBP45.1 million in 2022, swinging from a pretax profit of GBP446.0 million in 2021.
Gross earned premiums fell by 1.1% to GBP3.13 billion from GBP3.17 billion a year ago.
The company's combined operating ratio was 106%, up from 90% in 2021. A combined operating ratio above 100% means a loss on underwriting. The combined operating ratio normalised for weather was 103%.
Russ Mould, investment director at AJ Bell, said that, after "one of its worst years in living memory", the financial results for 2022 were "as ugly as can be" as all the key metrics came in worse than a year earlier.
"Profits have been wiped out and the company said the value of claims from weather events were more than twice as big as forecast, illustrating the severity of the situation," he said.
This was in addition to recent "well-documented" issues such as a rise in inflation, which has made it more expensive to fix vehicles and homes when someone claimed on its insurance policy, he added.
Direct Line noted that 2022 saw the highest weather event costs since the company's listing, with GBP149 million in claims, well above the company's budget assumption of GBP73 million.
The company explained prolonged periods of sub-zero temperatures in Scotland and North West England accounted for GBP95 million of these claims.
ii's Richard Hunter pointed to the company's Motor business as "particularly indicative of the challenges being faced," noting its combined operating ratio rose to 114.7% from 92.4%.
"The unit will be the subject of particular remedial action in the coming year. This will include actions on pricing, the restoration of margins and a better understanding of claims generally, although an outlook which remains generally cautious is indicative of the hurdles to come," he said.
Aarin Chiekrie, equity analyst at Hargreaves Lansdown, agreed: "The Motor division continues to struggle and improvement in this area will be key to driving the group's financial performance going forward."
"Pricing action has already been taken to try and restore margins, but this will likely put a dent in future volumes. And in the meantime, higher than expected claim inflation on business written during 2022 will continue to affect Motor earnings during 2023.
"This is a challenging situation for a new, and as yet unappointed, CEO to come in and pick up. Turning the group's fortunes around will not be easy, and the road to restoring the dividend looks to be an uncertain one," Chiekrie concluded.
Direct Line declared no final dividend as part of its results, resulting in a total dividend of 7.6 pence per share in 2022, down 67% from 22.7p per share a year ago.
Hunter at ii said this was an indication the group was looking to "batten down the hatches."
"That being said, even after the cut the dividend yield remains at a creditable 4.5% which is of some solace to suffering shareholders. On a more cautionary note, the dividend cover figure is uncomfortably near to hitting just one time, below which the further payment of dividends would need to be taken from reserves rather than profit," he continued.
Hunter added that the strength of the Direct Line brand and the scale of the business remain the "lynchpins" of any turnaround which the group might be able to engineer. However, he cautioned that the insurance space remains one of high competition, with pricing a key feature.
"Any reduction in premium prices to keep up with the competition would of course put further pressure on margins and profitability," he said.
Shares in Direct Line were down 6.8% at 156.20 pence on Monday afternoon in London. Over the past 12-months, the stock is down 43%.
"The halcyon days of FTSE 100 membership, which ended in September 2019, are a distant memory and the group has a mountain to climb to regain any such strength. In the meantime, the market consensus of the shares as a hold may come under some downward pressure given the enormity of the task ahead," ii's Hunter concluded.
By Heather Rydings, Alliance News senior economics reporter
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