Direct Line issues profit warning as inflation drives up cost of claims

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Direct Line has issued a profit warning, saying that the soaring prices of used cars, parts and longer repair times have pushed up the cost of claims.

Shares in the insurer plunged 13% on Monday – making Direct Line the biggest faller on the FTSE 250 – to its lowest level since 2013 as the company said that overall claim costs are rising at about 10%.

“The motor insurance market experienced significant levels of severity inflation in the first half, 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,” the company said. “Market premium inflation has continued to lag the increases in claims inflation.”

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Direct Line said that as a result, its combined operating ratio – which measures costs as a proportion of premiums – will be between 96% and 98%. The closer the ratio is to 100% the less profitable the company will be.

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

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“Today’s trading update follows a period of heightened volatility across the UK motor insurance market, in which we have seen claims inflation in motor in the first half of 2022 spike above the levels assumed in our pricing” said the Direct Line chief executive, Penny James. “We have already taken actions including increasing prices and deploying new pricing capability to restore margins.”

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Direct Line’s warning also prompted a sell-off of shares in the FTSE 100-listed Admiral, with the insurer down 7% to a four-year low.

Direct Line said that in light of the current market environment it will not launch the second £50m tranche of a £100m share buyback programme announced earlier in the year.

Last week, the market value of the insurer Sabre slumped more than a third after it issued a profit warning and cut its dividend, also blaming higher claim costs. Sabre’s news dragged Direct Line shares down 11% and Admiral down 14%.