On Monday, shares of British car insurers recorded declines, after Direct Line reduced its profitability outlook for this year. The company also pushed back the second part of its share buyback program, citing the increased volatility in the market and high inflation.
Motor insurer problems
Motor insurance companies were doing quite well at the beginning of the COVID-19 pandemic because the number of cars on the roads had declined drastically and this meant that they had to deal with fewer claims.
However, the cost of motor repairs has surged sharply because of the soaring inflation in the market. According to Direct Line, the number of claims for motor insurance had risen significantly in the first half of the year. This was mainly because of higher prices of used cars, the rise in prices of the spare parts, and longer repair times as well.
Therefore, Penny James, the chief executive of Direct Line, said in a statement that they had to revise their profit outlook for the year to around 96% to 98%. Back in May, the company had asserted that its target was between 93% and 95%. Reduced profitability is reflected when the ratio is close to 100%.
James stated that they had already taken necessary actions for restoring their profit margins, which include giving prices a boost and also using new price capability. The CEO said that they expected their combined operating ratio to improve in 2023 by 95%. They also said that their target range for the medium-term would also be between 93% and 95%.
After the announcement, there was a 14% decline in the shares of Direct Line, which hit lows of eight years. It also become the worst performer in the domestically focused mid-cap FTSE 250 index. There was also an 8% drop in shares of rival company Admiral, as it came down to four-year lows. They had hit the bottom of the FTSE 100 at the end of the day.
Last week, Sabre Insurance Group saw its total market capitalization lose more than one third of its value. This was because the motor insurer issued a profit warning and also announced a reduction in dividends because of higher claim costs. This prompted its shares to reach a record low. On Monday, its shares were still down.
No buyback program
As far as Direct Line is concerned, the company said that while it was confident about being able to sustain its regular dividends, the same could not be said for their share buyback program. It said that the board had decided not to go ahead with the second leg of the 50 million pound program that had been announced this year.
Market analysts said that after the profit warning from Sabre, it is quite evident that the claims inflation is rising at a higher speed and that most UK car insurers are unable to keep pace with it. This means that the margins are likely to see a lot of deterioration, even if prices rise.