Direct Line Insurance Group PLC (LSE:DLG) has boosted its solvency capital ratio through strategic reinsurance agreements as it tries to recover ground after a shock profit warning earlier this month.
In a brief statement, the FTSE 250-listed insurer announced that its principal underwriter, UK Insurance Limited, has entered into strategic reinsurance agreements that together comprise a 3-year structured 10% quota share arrangement.
The contracts start with effect from 1 January 2023 and are expected to increase the group's year-end 2022 solvency capital ratio by around 6 percentage points. The group said it has been advised by Gallagher Re on these agreements.
On January 11, Direct shares slumped after the firm announced that it is axing its 2022 dividend in response to increased weather-related claims and continued inflation in its motor division.
As a result, the FTSE 250-listed insurer said it expects its 2022 combined operating ratio to be around 102% to 103%, with a level above 100% indicating a loss.
The group said a prolonged spell of severe cold weather in December had led to a “significant increase in claims” which combined with further increases in motor inflation have had a significant impact on the underwriting result for 2022.
The cold weather is expected to result in claims of around £90mln, taking the annual total of weather claims to around £140mln, well above the company's expectation of £73mln.
The motor loss ratio is forecast to have increased in 2022 by around six percentage points, reflecting rising third-party claims inflation and an increase in claims frequency.
The insurer also noted it has also seen reductions of around 15% in the valuations of the commercial property holdings in its investment portfolio in line with movements in the broader property market.
In axing the dividend, Direct Line acknowledged the importance of a pay-out to shareholders and said actions to restore balance sheet resilience and dividend capacity were “a priority”.
Berenberg downgraded on Wednesday
On Wednesday, Berenberg analysts downgraded Direct Line's rating to 'hold' from 'buy' and cut their share price target to 160p from 272p as they said investors should be prepared for a passing of the dividend by the company for 2023 as well.
The Berenberg analysts said: "The company is trying to recapitalise itself and questions persist about how best and how quickly it can do this. Our base-case assumption - this is the part investors may need to brace themselves for - is that Direct Line will also not pay a dividend for the whole of FY 2023 (this is in addition to not paying the final 2022 dividend, which has already been announced)."
The analysts said that while they believe Direct Line has the ability to generate good returns in the long term if the cancelling of the dividend is announced, this would lead to further underperformance - hence the downgrade.