Direct Line Insurance Group PLC (LSE:DLG)’s shares dropped as much as 15% after the company said it expects its full-year operating ratio to be worse than previously guided due to the impact of inflation on its motor insurance business in the first half.
The FTSE-250 group now expects its full year combined operating ratio to be in the range of 96% to 98%, up from the 93% to 95% guidance given in May. Underwriting becomes unprofitable if the ratio exceeds 100%.
“The motor insurance market experienced significant levels of severity inflation in H1, primarily resulting from higher used car prices, and amplified by higher third-party claims costs, longer repair times and inflation in the cost of car parts,” Britain’s leading private motor insurer said in a trading update.
As a result, it expects its motor loss ratio in the first half to be in the region of 86%, as market premium inflation continues to fall behind increases in claims inflation.
"Today's trading update follows a period of heightened volatility across the UK motor insurance market, in which we have seen claims inflation in motor in the first half of 2022 spike above the levels assumed in our pricing,” said chief executive Penny James.
The company said its other business units are performing largely in line with expectations and that overall, it expects to report a combined operating ratio for the first half of about 96.5% and gross written premium of about £1.52bn.
The insurer estimates that overall motor claims severity inflation for the year will reach 10%.
Due to the current market uncertainty, the insurer said it has suspended the second tranche of its £100mln share buyback programme, which was announced earlier in the year.
The company said it had already taken action, such as increasing prices and deploying new pricing capability, to restore margins. It also continues to target significant cost reductions across the business.
It is looking to reduce operating expenses to between £690mln and £700mln, and is targeting operating expenses of £670mln in 2023 which would represent a 15% reduction over 2021.
As a result, the group said it expects a combined operating ratio of around 95% for 2023 and a return to a target range of 93% to 95% over the medium term.
The shares, which fell as low as 184.70 pence, were down 13% at 187.50 pence by mid- morning.
Direct Line will publish its half year results on 2 August.