9th May 2023 11:47
(Alliance News) - After Direct Line Insurance Group PLC warned on Tuesday that claims in its motor division will hurt its annual profit, many analysts said that the road ahead for the insurer continues to looks bumpy.
"Just as weather-related claims ease back to more normal levels, there's little in the way of a let-off for the Motor division as damage-related claims tick higher. Add in claims inflation that continues to run at high single-digit levels, and the outlook for insurance profitability gets a little murky," said Matt Britzman, equity analyst at Hargreaves Lansdown.
Direct Line said adjusted gross written premiums in the first quarter of 2023 amounted to GBP805.7 million, up 9.7% on-year from GBP734.3 million.
Motor premiums rose 3.3% to GBP358.7 million, while in its Home offering, premiums increased 2.1% to GBP129.0 million. Commercial premiums were up 28% to GBP219.3 million.
However, Direct Line warned it suffered "further adverse claims development in respect of late 2022 and early 2023" in its Motor arm, particularly related to damage.
"This is expected to put pressure on earnings in 2023 including from prior-year reserve releases," Direct Line cautioned.
Direct Line added that its forward view of claims inflation remains unchanged at high single digits across Motor and Home. Though it cautioned that there continues to be a "range of potential outcomes" depending on future economic conditions."
For Russ Mould, investment director at AJ Bell, this expectation of high single-digit claims inflation shows that Direct Line is "crossing its fingers that we don't get a hot summer that causes widespread subsidence, nor a brutally cold autumn/winter that freezes up pipes."
"All insurers want a Goldilocks scenario where the weather is not too hot or not too cold, but the impact of climate change would suggest this is a big ask," Mould said.
Analysts at UBS said that, given the further adverse claims development, Direct Line's 2023 earnings are set to come under "even more" pressure, though the bank ultimately left its guidance unchanged.
The company's solvency ratio was also an area of concern.
Direct Line estimated that its solvency capital ratio at March 31 was "broadly unchanged" compared with 147% at year-end. UBS analysts noted that was "materially weaker" than its own estimate of 154%.
"While 3 percentage points of this is timing of IFRS change, the remainder feels more of the 'real' miss (we suspect a mix of OCG and MTM). We believe that mechanical and self-help actions can allay more severe capital actions, however, this print is a disappointment," UBS analysts said.
Hargreaves Lansdown's Britzman also expressed disappointment: "Solvency remained broadly unchanged from the prior year-end level, which meant an unwind of some of the improvement management saw early in the quarter. Along with pressure on earnings, the lack of solvency improvement could mean the dividend is under some pressure this year."
Shares in Direct Line were down 5.0% at 156.23 pence on Tuesday in London.
By Heather Rydings, Alliance News senior economics reporter
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