Direct Line Insurance Group PLC (LSE:DLG) caught the City by surprise today by axing its dividend and stating its capital is at the lower end of the targeted range, sending shares tumbling by 26%.
After taking a hit in the summer from hot weather which led to a rise in subsidence-related claims, the FTSE 250-listed insurer has now reported a cold snap in December had led to more accidents on the road and customers experiencing burst pipes and water tanks, sparking a surge in claims.
Russ Mould at AJ Bell pointed out: “This is all beginning to sound like the train operators who complain about the weather either being too hot and the sun bending the rails or too rainy or windy which puts leaves on the line. Where’s Goldilocks when you need her?”
Consensus earnings could be halved
UBS said the update was “significantly below our estimates” and suggested consensus 2022 earnings could be about halved, a cut in the region of £120mln post-tax, (equivalent to c.4% of its market value).
The bank highlighted the weather costs coming in around £60mln higher than its forecast at £140mln, higher motor claims inflation in quarter four driving a group underlying combined operating ratio of around 102% to 103% (UBS forecast 100.2%) and a fall in commercial property valuations (£20mln higher than forecast).
“We expect the motor inflation will cause greatest concern for the sustainability potential, with the increase in third party claims inflation and an increase in frequency, partly due to the adverse weather conditions,” it suggested.
UBS had expected the solvency ratio to be above the mid-point, rather than at the bottom, of the 140% to 180% range and that a quota share would be undertaken in order to unlock close to a further 10ppts.
But given there is no mention of the quota share, “we assume agreement with reinsurers could not be made, which would have secured the dividend”.
2023 dividend up for grabs
UBS now expects the debate on the dividend to move to 2023 and the potential for a payout and given a need for balance sheet build and also that 2023 combined ratio guidance has worsened to 97%-98% from the previously weakened 95% level.
This would lower 2023 forecast consensus expectations by 11%-17%, UBS estimated, and result in the 2023 pay-out ratio being in the region of 115%-125%.
In the light of the news, UBS placed its 'buy' rating and price target under review.
Analysts at Peel Hunt agreed that the dividend cut was worse than expected, they had pencilled in a final pay-out of 9.2p and had forecast a solvency ratio of 165%.
The broker said “this will be another knock in the confidence of the UK motor insurers to address the lack of rate adequacy in an inflationary environment“.