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(Alliance News) - Direct Line Insurance on Monday cautioned on "heightened volatility across the UK motor insurance market", adding another warning from London-listed insurers.
"We have seen claims inflation in motor in the first half of 2022 spike above the levels assumed in our pricing. As a result, we are revising our combined operating ratio target range for 2022 to 96% to 98%," Chief Executive Officer Penny James commented.
Direct Line had previously targeted a combined operating ratio range of 93% to 95%. A ratio below 100% indicates an insurer is making underwriting profit. A ratio of 98% would be only barely profitable.
James said Direct Line has already undertaken measures to increase prices and "restore margins". It expects its 2023 combined operating ratio to improve to around 95% and reiterated its medium-term target range of 93% to 95%.
Direct Line added: "The motor insurance market experienced significant levels of severity inflation in H1, primarily resulting from higher used car prices, and amplified by higher third-party claims costs, longer repair times and inflation in the cost of car parts. Market premium inflation has continued to lag the increases in claims inflation. Whilst the group has been pricing claims inflation over the last 12 months, experience has been in excess of the levels assumed. The group now estimates overall motor claims severity inflation for 2022 of around 10%.
"The group's other business units are performing largely in line with expectations, demonstrating the benefit of the group's diversified business model."
For the first half of 2022 alone, Direct Line expects a combined operating ratio of 96.5%, worsened from 84.2% a year prior, and gross written premiums of GBP1.52 billion, down from GBP1.56 billion.
In addition, the company said it will not proceed with a second GBP50 million tranche of a GBP100 million buyback. It expects an unchanged interim payout of 7.6p.
Shares in London-listed insurers, including Direct Line and Admiral, had dropped on Thursday last week, after smaller peer Sabre Insurance reported a big drop in half-year profit and similarly warned about claims inflation.
Jefferies on Monday cut Direct Line to 'hold' from 'buy' and Admiral to 'underperform' from hold. It has a 'hold' rating on Sabre as well.
Direct Line shares are down 20% over the past week, Admiral down 25% and Sabre down 44%.
Here is what you need to know at the London market open:
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MARKETS
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FTSE 100: up 0.9% at 7,226.58
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Hang Seng: up 2.4% at 20,786.70
Nikkei 225: Tokyo market closed for holiday
S&P/ASX 200: closed up 1.2% at 6,687.10
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DJIA: closed up 658.09 points, or 2.2%, at 31,288.26
S&P 500: closed up 72.78 points, or 1.9%, at 3,863.16
Nasdaq Composite: closed up 201.24 points, or 1.8%, at 11,452.42
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EUR: up at USD1.0107 (USD1.0074)
GBP: up at USD1.1907 (USD1.1853)
USD: down at JPY138.20 (JPY138.56)
GOLD: up at USD1,713.92 per ounce (USD 1,704.08)
OIL (Brent): up at USD103.59 a barrel USD101.57)
(changes since previous London equities close)
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ECONOMICS AND GENERAL
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Monday's key economic events still to come
Japan Marine Day holiday. Financial markets closed.
1000 EDT US NAHB housing market index
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The International Monetary Fund's UK head has warned Conservative Party rivals against promising tax cuts as part of their leadership bids. Amid soaring inflation, Mark Flanagan said debt-financed tax cuts at the current time "would be a mistake". Speaking to BBC News, the IMF's top official said, if anything, the tax ratio needed to be lifted. Flanagan added: "At some point you have to decide, do we want to invest in the climate transition? Do we want invest in digitalisation? Do we want to invest in skills for the public. "Well, if you do you need the resources to do it. And the way to realise those resources is to lift the tax ratio a little bit." Flanagan said that tax cuts may even boost inflation by strengthening consumer spending.
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London is predicted to be hotter than the Caribbean, the Western Sahara and popular holiday destinations in Europe as temperatures soar. The Met Office has forecast the capital could see highs of 38C when the heatwave sweeps across England. The rise in temperatures has forced the UK Health Security Agency to issue a level 4 heat-health alert – described as an "emergency" – while the Met Office has issued the UK's first red extreme heat warning, with both running from Monday to Wednesday. Tuesday is predicted to be even hotter than Monday, with temperatures possibly reaching 40C – a new record for England.
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London-listed companies have issued a series of profit warnings this year as cost inflation bites and customers start thinking about their spending. A new report has found the number of firms which issued the warnings jumped by 66% in the first six months of this year compared to the same period in 2021. Consultancy EY found that 136 profit warnings were issued by companies listed in London, up from 82 a year earlier. For most it was about rising costs, with 58% citing that as one of the main reasons behind their profit misses. For others it was about workers – 19% said they were having problems in the labour market.
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BROKER RATING CHANGES
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Jefferies cuts Admiral to 'underperform' (hold) - price target 1,525 (2,300) pence
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Jefferies cuts Direct Line Insurance to 'hold' (buy) - price target 215 (330) pence
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Jefferies cuts Fevertree Drinks to 'hold' (buy) - price target 900 (3,100) pence
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COMPANIES - FTSE 100
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Haleon, the consumer healthcare product arm of GSK will start trading on Monday, becoming effectively by far the biggest new listing in London in 2022. Haleon will go straight into the FTSE 100 index, where GSK also will remain. As a result, the lowest ranked FTSE 100 stock based on closing prices on Monday will be demoted to the FTSE 250 to make room for Haleon, index provider FTSE Russell said. A consolidation of GSK shares will be implemented on Monday, after the market close. The ratio for the consolidation depends on "fluctuations in the volume and price of the GSK shares" on Monday.
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COMPANIES - FTSE 250
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Business media and events group Euromoney Institutional Investor accepted a takeover tilt from a consortium of Luxembourg-based private equity firm Astorg Asset Management and London-based private equity firm Epiris. The offer from Becketts Bidco values Euromoney at GBP1.61 billion on a fully diluted basis and GBP1.66 billion on on an enterprise value basis. Becketts will pay 1,461 pence per Euromoney share, a 10% premium to its 1,328.00 close price on Friday. The bid is a 34% premium to Euromoney's last "undisturbed" stock price of GBP10.94 on June 17, the final trading day before Euromoney confirmed the takeover approach on June 20. "The board believes the offer represents value for shareholders and reflects the attractions of Euromoney's business model and performance," Chair Leslie Van de Walle commented. In addition, Euromoney said it now expects annual results to top board expectations. Revenue in the nine months to June 30 surged 30% to GBP304.3 million, it said. Euromoney's financial year ends in September.
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COMPANIES - SMALL CAP
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Deliveroo lowered annual gross transaction value growth guidance, as the takeaway delivery firm has been hit by tumbling consumer confidence and pandemic tailwinds unwind. Total GTV climbed just 2% at constant currency in the second quarter of 2022, slowing markedly from 12% growth in the first quarter. For the whole of the first half, it grew 7%. GTV had more than doubled in the first half of 2021. For the full year, it expects GTV growth in the range of 4% to 12%, its guidance cut from a previous range of 15% to 25%. Deliveroo affirmed margins guidance, however. It expects an adjusted earnings before interest, tax, depreciation and amortisation margin between minus 1.5% and minus 1.8% for 2022, improved from 2.0% in 2021.
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COMPANIES - GLOBAL
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Australia & New Zealand Banking reported a solid performance for the third quarter of its financial year, with growth in revenue and a rise in the group's net interest margin. The Melbourne-based lender also announced that it will acquire Suncorp Bank from Suncorp Group for AUD4.9 billion, around USD3.33 billion. In order to fund the acquisition, ANZ will conduct an accelerated renounceable entitlement offer to raise around AUD3.5 billion in shares. Under the offer, shareholders will be entitled to subscribe for one new share for every 15 existing shares held, at a price of AUD18.90 per share. Around 187 million shares are expected to be issued under the entitlement offer. The acquisition of Suncorp Bank is expected to include AUD47 billion of home loans with a strong risk profile, AUD45 billion in deposits and AUD11 billion in commercial loans, ANZ said. For the three months ended June 30, ANZ said revenue rose 5% year-on-year, driven be strong lending and margin momentum. All businesses reported growth over the period, with Markets revenue up 7% at AUD435 million despite conditions remaining volatile.
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Monday's shareholder meetings
Audioboom Group PLC - AGM
JPMorgan European Discovery Trust PLC - AGM
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By Tom Waite; thomaslwaite@alliancenews.com
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