Direct Line swings to loss as motor insurance claims climb

UK insurer Direct Line swung to a loss last year as surging inflation tore through its margins, with its acting chief executive saying the business did not manage cost increases and regulatory changes to pricing “as effectively as we would have wished”.

In full-year results released on Monday, the FTSE 250 insurer said it was “pursuing a range of actions designed to both restore earnings and improve its solvency position” after a few months of turmoil that saw the company scrap its dividend and lose its chief executive.

It swung from a £446mn net profit in 2021 to a £45mn loss in 2022 as the cost of motor insurance claims spiralled on rising parts and labour costs. It also suffered the highest weather-related costs since listing a decade ago, at £149mn.

Jon Greenwood, acting chief executive, highlighted claims inflation and regulatory changes to pricing as major challenges for the year and said the business “did not navigate these challenges as effectively as we would have wished”.

“Since the year end we have taken action to begin to rebuild the resilience of our balance sheet, and we have further self-help options available, as well as organic capital generation to enhance our solvency ratio during 2023,” he added.

Direct Line’s solvency ratio, its capital as a percentage of the regulatory minimum, fell to 147 per cent, slightly below analyst expectations.

The insurer had been expected to take action to reinforce its balance sheet after a string of profit warnings beginning last July, when it warned inflation in its claims costs had squeezed margins, forcing it to shelve £50mn in share buybacks.

In January, it scrapped its final dividend as motor claims worsened further and a cold snap triggered a swath of home insurance claims. Later that month, chief executive Penny James stepped down.

Direct Line’s shares have fallen by 39 per cent over the past year, compared with a 28 per cent drop for peer Admiral, which revealed last week that similar motor and weather effects had pushed it to a group underwriting loss last year. That prompted a cut in its dividend.

Direct Line was founded in 1985 with £20mn funding from the Royal Bank of Scotland and a mission to cut out insurance brokers and sell insurance directly by telephone. It floated in 2012.