The insurer’s second tranche of its £100m share buyback programme has been cancelled as a result

Direct Line Insurance Group Plc (DLG) has predicted a profit drop for H1 2022 in a trading update released today (18 July 2022) – leading to the insurer cancelling the second £50m tranche of its £100m share buyback programme launched earlier this year (8 March 2022).

Inflation accelerating through the first half of 2021 is a key contributor to the predicted profit drop – primarily resulting from higher used car prices and third-party claims costs, longer repair times and increases in the cost of car parts.

The group now estimates that motor claims inflation in 2022 has risen to an unexpected 10% – up from 6.2% in 2021 and drastically higher than 2020’s rate of 2.1%, according to Willis Tower Watson’s (WTW) Claims Metrics benchmarking data published last week (14 July 2022).

DLG’s H1 2022 current year motor loss ratio, as a result, is now predicted to be in the region of 86%.

The company’s combined operating ratio (COR) for FY 2022, meanwhile, should range from 96% to 98% – up three percentage points from its target range of 93% to 95%.

In its trading update, DLG specified that its predictions should not be construed as a profit forecast. Its actual results may differ from those suggested by any forward looking statements made in the update. 

‘Confidence in sustainability’

Chief executive Penny James said: “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.

“We have already taken actions including increasing prices and deploying new pricing capability to restore margins.

“This, combined with our diversified business model, our strong balance sheet and our continuing actions to further improve resilience, gives us confidence in the sustainability of our regular dividends for this year and as we look ahead.”

In H1 2022, DLG’s solvency capital ratio reduced by around 7% due to the market effect of widening credit spreads on the group’s investment portfolio – however, DLG expected this to move towards its face value over time.

On 30 June 2022, the group estimated a solvency capital ratio of around 150%, which assumed an unchanged interim dividend of 7.6 pence per share.

The firm further stated that its current solvency ratio is comfortably within the risk appetite range of 140% to 180%.

DLG will publish its 2022 half year report on Tuesday 2 August.