Direct Line lowers profit outlook after spike in motor claims inflation

The company revised its combined operating ratio target range to 96-98% from a previous 93% - 95% outlined in May. A ratio closer to 100% indicates reduced profitability.

“We have already taken actions including increasing prices and deploying new pricing capability to restore margins, which mean we expect our 2023 combined operating ratio will improve to around 95% and we reiterate our medium-term target range of 93-95%,” the company said on Monday.

Direct Line said the motor insurance market experienced “significant levels” of severity inflation in the first half, mainly due to higher used car prices, and amplified by higher third-party claims costs, longer repair times and rising car parts costs.

Market premium inflation has continued to lag the increases in claims inflation, it added.

“Whilst the group has been pricing claims inflation over the last 12 months, experience has been in excess of the levels assumed. The group now estimates overall motor claims severity inflation for 2022 of around 10%.”

The company also decided not to go ahead with the second £50m tranche of its £100m share buyback after a fall in its solvency ratio during the first half of the year by around 7 percentage points due to the mark to market effect of widening credit spreads on its investment portfolio.