Direct Line shares crash as winter cold snap and inflation leave its results ‘as ugly as they can be’

Direct Line today posted a £45m loss for the year 2022 as the insurer suffered a hit from soaring inflation, extreme weather, and market volatility, in what analysts described as one of the “worst years” in the Bromley firm’s history.

Shares in Direct Line fell by 5.79 per cent on the news, as the insurer told investors its operating profits fell 94.6 per cent over the previous year, from £590.3m in 2021 to just £32.1m in 2022.

The sharp drop in Direct Line’s operating profits came as the surging inflation pushed up the costs the insurer faced in fixing its customers cars and homes.

The insurer’s profitability was also hit by new Financial Conduct Authority (FCA) rules, introduced in 2022, that block insurance companies from hitting loyal customers with higher premiums.

Shares in Direct Line previously collapsed in January after the insurer said December’s winter freeze had led to £95m worth of claims, as prolonged periods of sub-zero temperatures caused a surge in burst pipes and water tanks

Direct Line chief executive Jon Greenwood acknowledged Direct Line had failed to “navigate” the “substantial headwinds” it faced, as he said the firm is now focused on “rebuilding” its margins by hiking its premiums.

Greenwood, called 2022 a “tough year” for the firm as he said the insurer has “taken pricing actions that will support restoration of margins in Motor and mitigate the impact of further claims inflation.”

Analysts at AJ Bell, however, warned that Direct Line’s falling share price signals investors remain “doubtful” about the firm’s ability to “bounce back quickly” and that the results were “as ugly as can be”.

“After one of its worst years in living memory, Direct Line was forced into the pits a few months ago and is now hoping to get back on the road, albeit likely stuck in the slow lane for a while.

“There is a lot to do – it needs to improve its capital strength, rebuild margins and get the business in a shape where it can start paying dividends to shareholders again.

“Its recent problems have been well-documented. A rise in inflation made it more expensive to fix vehicles and homes when someone claimed on their insurance policy. Unfavourable weather conditions also caused a spike in claims, making matters worse.

“The financial results for the year are as ugly as can be, with all the key metrics worse than a year earlier. Profits have been wiped out and the company said the value of claims from weather events were more than twice as big as forecast, illustrating the severity of the situation.

“The plan now is to push up motor insurance prices in a similar way to what others including Admiral are doing, as well as improve its solvency position.

“Shareholders will have to wait until the half-year results in August to see when the dividend might be restored.

Direct Line said its 2023 earnings are expected to be impacted by “higher than assumed claims inflation on UK motor businesses written during 2022 and in early 2023, alongside the continued economic uncertainty.

It comes as the group is also battling some internal struggles following the resignation of its former chief Penny James in January.

James joined the general insurance firm as chief financial officer in 2017 and became chief executive in May 2019 – however announced her departure at the start of this year.

Jon Greenwood, who was Direct Line’s chief commercial officer, has stepped in as acting chief executive officer until a permanent replacement is found.

Last week Aviva  vowed to buy back another £300m worth of its owns shares from investors after the insurer outstripped analysts expectations by posting a 35 per cent uptick in its operating profits in 2022.