Earnings season: why the Direct Line share worth simply crashed

The Direct Line Insurance coverage Group (LSE: DLG) share worth crashed when markets opened this morning after the FTSE 250 insurer scrapped its dividend.

The agency stated it had confronted a surge of claims after December’s chilly snap and not had sufficient spare money to assist the payout. That is dangerous information for shareholders — together with me — so right here I’ll clarify precisely what’s occurred and the way I plan to deal with this case.

Key information: the massive freeze

Direct Line says that December’s “extended interval of sub-zero temperatures” throughout the UK brought about a spike in claims for harm because of burst pipes, water tanks, and associated harm.

To this point, 3,000 clients have made claims. Some additional prices might nonetheless come up, however the firm estimates that complete prices referring to “the freeze occasion” can be round £90m. That’s round £30,000 per declare, together with some enterprise clients whose prices could also be larger.

Climate-related claims for this 12 months at the moment are anticipated to complete £140m, together with subsidence claims from the summer time drought.

Claims prices are nonetheless rising

Sadly, the massive freeze wasn’t the one downside highlighted in at the moment’s replace. Final 12 months, Direct Line (and most different motor insurers) noticed a giant enhance in claims inflation. Repairs have been taking longer, because of elements shortages. They have been additionally costing extra to settle, because of excessive used automobile costs.

This downside hit the entire trade, so I wasn’t too involved. By November, the scenario appeared to be underneath management. The corporate stated motor insurance coverage costs had been elevated and claims prices have been “monitoring intently to our expectations”.

Sadly, it appears to be like like prices are literally nonetheless rising. In at the moment’s replace, the agency stated that whereas its in-house restore prices are underneath management, claims made by different insurers are nonetheless rising.

The icy climate in December resulted in additional claims too, as drivers crashed on slippery roads.

Direct Line shares: purchase, promote, or maintain?

Insurance coverage corporations must preserve a certain quantity of surplus capital to make sure they will payout on claims. Usually, the quantity required is pretty predictable. However typically dangerous climate or different issues come up, inflicting a sudden spike in claims prices.

That appears to be what has occurred right here. In consequence, the ultimate dividend has been scrapped to save lots of money. As a shareholder, I’m disenchanted, however I additionally perceive that this stuff can occur.

Nevertheless, I’m beginning to marvel if Direct Line’s claims assumptions have merely been unrealistically low. The inventory’s 10% dividend yield — earlier than at the moment — was maybe a warning I ought to have heeded.

I’m undecided, however the harm has been carried out. For that reason, I’m not planning to promote my shares in the meanwhile. Direct Line stays one of many UK’s largest motor insurers and I don’t see any elementary danger to the enterprise.

My plan now’s to attend for the corporate’s 2022 accounts to be revealed on 7 March. These ought to present a clearer image of the corporate’s monetary scenario. Hopefully, they will even embody up to date dividend steering for 2023 and past.