- Loss rates increase over the winter
- Dividend cut to preserve capital
Direct Line (DLG) had its own car crash on Wednesday after a dreadful trading update which sent the non-life insurer's shares tumbling by 28 per cent. Dividend investors who had counted on the company’s ability to generate income will not receive their final dividend.
The problem for the company relates to claims cost inflation across its business lines, sparked just as the frequency of claims picked up as the weather worsened during the winter.
This has caused the motor loss percentage ratio to increase by six percentage points. The perfect storm continued in Direct Line’s investment property portfolio with management booking a 15 per cent, or £45mn, reduction in value. The trading update is particularly surprising as just two months ago management reported “In these challenging economic conditions, the business is strong and actions we have taken continue to underpin the group's future earnings power”.
Analysts pinpointed why Direct Line had to act to conserve its capital, given solvency is now "at the lower end of the [company's] risk appetite range of 140 per cent to 180 per cent. Derald Goh at RBC Capital Markets had estimated "153 per cent [solvency] including a 10p final dividend, equivalent to 10 points of solvency. This implies a circa 20-point hit to solvency from the 4Q impact alone.”
