Weather events batter Direct Line’s 2022 operating profit

Direct Line Group (DLG) saw its profits nosedive in 2022 after it was hit by the highest level of claims from major weather events since it listed a decade ago.

The insurer’s full year underlying gross written premiums (GWP) fell 3.2% to £2.97bn last year.

Of this GWP, £2.09bn was generated via own brand policies, although premium from this sector fell 5.5% year on year.

DLG’s combined operating ratio (COR) also soared from 89.5% to 105.8% as operating profit fell 94.6% to £32.1m – operating profit in 2021 sat at £590.3m.

The insurer’s preliminary results, published today (13 March 2023), saw shares fall by 4.6% within minutes of the announcement.

Aarin Chiekrie, equity analyst at Hargreaves Lansdown, said the results and departure of former chief executive Penny James earlier this year had left Direct Line with a “massive” task.

“Direct Line continues to struggle in the face of significant headwinds,” Chiekrie explained.

“Rising claim inflation, new regulatory changes and severe weather events all contributed to a material fall in the group’s operating profits.

“All of these factors pushed the combined operating ratio, a measure of profitability, above the dreaded 100%.

“Anything above 100% suggests underwriting was loss-making in the period.”

Weather the storm 

Direct Line said the costs of weather events were higher than they had faced since it became a public limited company.

Claims from weather events were £149m, significantly above DLG’s £73m budget assumption for 2022.

“Pricing kept pace with claims inflation and combined operating ratios were broadly in line with expectations, when normalised for weather,” a statement added.

The largest event was December’s freeze, which delivered around £95m of claims costs due to prolonged periods of sub-zero temperatures across Scotland and North West England.

Meanwhile, the group said claims inflation was felt most in motor, where severe inflation of around 14% was above the level assumed in the group’s pricing.

Alongside disruption to supply chains, this led to a motor COR of 114.7% – compared to 92.4% in 2021.

Acting chief executive Jon Greenwood said the results highlighted the difficulty the group had encountered when faced with an exceptional series of challenges.

“Last year was a tough year for Direct Line Group,” he said.

“Motor and home market conditions were challenging, with high claims inflation and regulatory reforms creating substantial headwinds for the business and we did not navigate these challenges as effectively as we would have wished.

“Exceptional weather and difficult investment markets also significantly impacted our results.”

He added that Direct Line had “taken action” to rebuild the “resilience of its balance sheet”.

“We have further self-help options available, as well as organic capital generation to enhance our solvency ratio during 2023,” Greenwood said.

“Whilst our 2022 performance was disappointing, the fundamentals of our business remain strong and we are now fully focused on rebuilding our margins, further improving our capital strength and generating attractive sustainable returns for shareholders.”