Financial Times18 Jul 2022 16:47
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James said there were signs that premiums across the market were rising to offset some of the inflationary pain. “You are starting to see the pricing move?.?.?. [but] certainly there is a lag,” she told the Financial Times.
As a result of the higher than expected inflation, the company’s combined operating ratio — a measure of claims and costs as a proportion of premiums — should be between 96 per cent and 98 per cent this year. That is worse than its 93-95 per cent target range, and the 90.1 per cent it delivered last year.
Direct Line said it would cancel the second half of its £100mn share buyback plan but added it was “confident in the sustainability of its regular dividends”.
The insurer’s shares fell 14 per cent in early trading, and are down more than a fifth over the past five days. Its FTSE 100 peer Admiral fell almost 10 per cent.
Month-to-month industry data suggested that used-car prices have peaked, James said. The company has launched a new pricing model and expects it will return to near a 95 per cent combined ratio next year, and to its 93-95 per cent range over the medium term.
“The thing that should make people confident is that we have built the pricing on those elevated car price levels into our current position?.?.?. which is how we are restoring margins,” said James.
Rival Sabre last week warned on profits because of “extraordinary inflationary pressures”, pushing shares across the sector down.
“Market conditions have clearly deteriorated over the course of [the second quarter] and even the largest players are struggling with the inflationary pressures,” said Derald Goh, an analyst at RBC Capital Markets.
Analysts at Jefferies said they see “further headwinds” to Direct Line’s capital under Solvency II rules, because of the combination of expected motor insurance growth and deteriorating profits, which could put the ordinary dividend at risk.
“We don’t see the ordinary dividend under threat,” James said. “We’re comfortable with the long-term dividend approach and that we’ve taken the actions we need to there.”
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