MARKET REPORT: Insurers slide as inflation drives up costs of claims


Direct Line shares slumped after it warned soaring inflation was pushing up the costs of car insurance claims.

The FTSE 100 insurer tumbled 10.5 per cent, or 22.75p, to 193.65p, its lowest level in nearly a decade, after flagging that the motor insurance market was experiencing ‘significant levels’ of inflation.

This has been caused by higher used car prices as well as longer repair times and the increasing cost of parts.

Direct Line fell 13.6% after flagging that the motor insurance market was experiencing ‘significant levels’ of inflation

It means it is having to pay out more to customers who make a claim on their car insurance.

Direct Line said while it has increased prices, these were lagging behind inflation in the cost of claims which had weighed on the group’s profit margins.

As a result, boss Penny James said the group expected its combined operating ratio (COR) for 2022 would be between 96 per cent and 98 per cent, higher than its target range of 93 per cent to 95 per cent.

The COR measures the amount of claims paid out and costs as a percentage of premiums. 

A figure closer to 100 per cent indicates lower profits. As a result of the inflation squeeze, Direct Line also decided to shelve plans for a £50million share buyback, although James said the firm was still confident in the ‘sustainability’ of its regular dividend payments.

The bleak assessment also hit the shares of rival motor insurer Admiral, which tanked 7.7 per cent, or 144p, to 1738p.

Direct Line’s predicament followed a similar warning from Sabre Insurance (down 2 per cent, or 2.2p, to 105.8p), which plunged last week after flagging ‘extraordinary inflationary pressures’.

Stock Watch – CentralNic

CentralNic shares surged following an upgrade to its profit forecasts.

The firm, which provides registration services for websites, reported revenues of £280million for the six months to the end of June, up 92 per cent year-on-year. 

The jump was driven by higher demand in the company’s online marketing division.

As a result, CentralNic predicted its results for the full year would at least be at ‘the upper end’ of market expectations. Shares climbed 14.5 per cent, or 16.5p, to 130p.

 

Analysts at broker Jefferies were also downbeat on the sector, saying inflation was ‘accelerating at a pace that UK motor insurers cannot keep up with’ and as a result they expected profit margins to ‘deteriorate significantly’.

Jefferies also predicted Direct Line would cut its dividend for 2022, prompting them to downgrade the stock to ‘hold’ from ‘buy’ and slash their target price on the shares to 215p from 330p.

The FTSE 100 rose 0.9 per cent, or 64.23 points, to 7223.24 and the FTSE 250 gained 1 per cent, or 181.35 points, to 19015.15. The rally came as traders’ appetite for risk returned after recent sell-offs, boosted by a positive session in Asia.

Mining stocks helped lead the blue-chips higher, with Antofagasta rising 4.5 per cent, or 44.6p, to 1037p, Anglo American adding 3.4 per cent, or 87.5p, to 2637.5p, Rio Tinto climbing 2.9 per cent, or 132p, to 4711p and Glencore up 3.2 per cent, or 12.95p, to 419.8p.

Oil companies received a boost after President Biden left talks in the Middle East without a deal on raising supply. 

The US president failed to secure an agreement with Saudi Arabia to hike its output and ease a global supply crunch, pushing Brent crude up to nearly $106 a barrel. 

Shell shares were up 2.4 per cent, or 47.4p, to 2037p, BP gained 2.5 per cent, or 9.25p, to 382.35p and Harbour Energy climbed 3.5 per cent, or 11.4p, to 338.3p.

Investors also took the opportunity for bargain hunting, snapping up stocks that have recently been hit hard by market volatility and the cost-of-living crisis.

Online supermarket Ocado jumped 2.7 per cent, or 20.4p, to 779.8p, Burberry gained 3.6 per cent, or 57p, to 1643.5p and tech-focused fund Scottish Mortgage Investment Trust rose 2.2 per cent, or 17.2p, to 799.2p.

The strong session in Asia also boosted firms with heavy exposure to the region, with HSBC up 1.2 per cent, or 5.9p, at 519.8p, Standard Chartered rising 2.1 per cent, or 11.6p, to 566p and insurer Prudential growing 3.3 per cent, or 31.9p, to 1010.5p.

Chemicals group Johnson Matthey shot up 1.5 per cent, or 31p, to 2087p as it unveiled plans for an £80million ‘gigafactory’ to make components for hydrogen fuel cells.

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