Car insurers fall as cost of claims dents profits
Direct Line shares slumped after it warned soaring inflation was pushing up the costs of car insurance claims.
The FTSE 100 insurer tumbled 10.5pc, or 22.75p, to 193.65p, its lowest level in nearly a decade, after flagging that the motor insurance market was experiencing ‘significant levels’ of inflation.
This has been caused by higher used car prices as well as longer repair times and the increasing cost of parts.
It means it is having to pay out more to customers who make a claim on their car insurance.
Direct Line said while it has increased prices, these were lagging behind inflation in the cost of claims which had weighed on the group’s profit margins.
As a result, boss Penny James said the group expected its combined operating ratio (COR) for 2022 would be between 96pc and 98pc, higher than its target range of 93pc to 95pc.
The COR measures the amount of claims paid out and costs as a percentage of premiums. A figure closer to 100pc indicates lower profits. As a result of the inflation squeeze, Direct Line also decided to shelve plans for a £50m share buyback, although James said the firm was still confident in the ‘sustainability’ of its regular dividend payments.
The bleak assessment also hit the shares of rival motor insurer Admiral, which tanked 7.7pc, or 144p, to 1738p.
Direct Line’s predicament followed a similar warning from Sabre insurance (down 2pc, or 2.2p, to 105.8p), which plunged last week after flagging ‘extraordinary inflationary pressures’.
Analysts at broker Jefferies were also downbeat on the sector, saying inflation was ‘accelerating at a pace that UK motor insurers cannot keep up with’ and as a result they expected profit margins to ‘deteriorate significantly’.
Jefferies also predicted Direct Line would cut its dividend for 2022, prompting them to downgrade the stock to ‘ hold’ from ‘buy’ and slash their target price on the shares to 215p from 330p.
The FtSe 100 rose 0.9pc, or 64.23 points, to 7223.24 and the FtSe 250 gained 1pc, or 181.35 points, to 19015.15. The rally came as traders’ appetite for risk returned after recent sell-offs, boosted by a positive session in Asia.
Mining stocks helped lead the blue- chips higher, with Antofagasta rising 4.5pc, or 44.6p, to 1037p, Anglo American adding 3.4pc, or 87.5p, to 2637.5p, rio tinto climbing 2.9pc, or 132p, to 4711p and Glencore up 3.2pc, or 12.95p, to 419.8p.
Oil companies received a boost after President Biden left talks in the Middle East without a deal on raising supply. The US president failed to secure an agreement with
Saudi Arabia to hike its output and ease a global supply crunch, pushing Brent crude up to nearly $106 a barrel. Shell shares were up 2.4pc, or 47.4p, to 2037p, BP gained 2.5pc, or 9.25p, to 382.35p and Harbour energy climbed 3.5pc, or 11.4p, to 338.3p.
Investors also took the opportunity for bargain hunting, snapping up stocks that have recently been hit hard by market volatility and the cost-of-living crisis.
Online supermarket Ocado jumped 2.7pc, or 20.4p, to 779.8p, Burberry gained 3.6pc, or 57p, to 1643.5p and tech-focused fund Scottish Mortgage investment trust rose 2.2pc, or 17.2p, to 799.2p.
The strong session in Asia also boosted firms with heavy exposure to the region, with HSBc up 1.2pc, or 5.9p, at 519.8p, Standard chartered rising 2.1pc, or 11.6p, to 566p and insurer Prudential growing 3.3pc, or 31.9p, to 1010.5p.
Chemicals group Johnson Matthey shot up 1.5pc, or 31p, to 2087p as it unveiled plans for an £80m ‘gigafactory’ to make components for hydrogen fuel cells.