Direct Line Insurance Group PLC's (LSE:DLG) profit warning, issued on Wednesday after a worse-than-expected fourth quarter was a “major surprise” to analysts at Jefferies International.
In response, the US broker's analysts have slashed their target price for Direct Line to 175p from 220p after cutting estimates.
Weather-related losses are expected to be £67mln higher than the budget for 2022 according to the insurer, leading the Jetteries analysts to cut earnings per share forecasts by 92% for 2022.
Direct Line's results went against a seemingly improving UK motor insurance market, at least according to figures from the Office for National Statistics, the analysts noted.
They noted that Direct Line said Solvency II ratio forecasts remain unchanged but are expected to come in at the lower end of its target range of 140% to 180%, with Jefferies forecasting a Solvency II ratio of 141% in 2022.
The Solvency II ratio is used to determine whether a company can continue to meet its debt obligations going forward. Higher ratios indicate stronger financial strength, while a lower figure shows potential weakness, with a Solvency II ratio of 150% usually considered average.
The Jefferies analysts said that investor attention will turn to how Direct Line can bolster its depleted capital. Rebasing the dividend, purchasing additional reinsurance, de-risking the investment portfolio, capital raising, or reducing partnerships exposure are five potential ways to generate extra cash, although the analysts believe that all the actions will be expensive for the company.