Direct Line slashes £700m as car parts costs hit profits

DIRECT LINE is slashing costs as soaring prices for car parts and repairs ramp hammer its profits.

The Bromley-based insurer suspended the second half of its £100m share buyback plan yesterday after admitting the pace of inflation had exceeded its assumptions.

It is cutting £700m of costs this year in response and said it had put up prices to help restore margins.

Cost-cutting will include leasing or selling off some space at its head office in Bromley, south-east London, while speeding up its transition to online operations and phasing out old IT systems.

The insurer said that it has no specific plans to lay off staff. Penny James, the chief executive, said yesterday: “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.”

Higher claims are down to rising used car prices, as well as higher third party claims costs, longer repair times, and inflation in the cost of car parts.

Premiums tend to lag the rises in claims costs and it is unclear whether there are further price hikes in the pipeline. Direct Line assured investors that while the buyback programme has been suspended, it is confident that its regular dividends are sustainable.

Shares dropped 9.3pc, while rival Admiral sunk by 9pc amid fears the same problems are plaguing the wider market.

Last week rival insurer Sabre warned of “extraordinary inflationary pressures” and said it was putting up prices to support profitability, at the expense of pursuing new customers.

Sabre’s shares dropped 40pc last Thursday, but fell another 4pc yesterday following Direct Line’s update.

Due to the higher than expected inflation, Direct Line revised its combined operating ratio – a measure of costs and claims as a proportion of premiums – to between 96pc and 98pc for the remainder of 2022.

The company’s target range is 93pc to 95pc, while operating expenses last year came in at 90.1pc.