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Motor insurers slide as Direct Line warns on profit

·2-min read

By Huw Jones and Carolyn Cohn

LONDON (Reuters) - British motor insurer shares slid on Monday as Direct Line cut its profitability outlook for the year and delayed the second leg of a share buyback, blaming claims inflation and heightened market volatility.

Motor insurers performed well during the earlier part of the COVID-19 pandemic, as lockdowns led to fewer cars on the roads, and fewer claims.

But high inflation this year has driven a sharp increase in the cost of motor repairs.

Direct Line said the motor insurance market saw "significant" levels of claims inflation in the first half, mainly due to higher used car prices, longer repair times and inflation in the cost of spare parts.

"As a result, we are revising our combined operating ratio target range for 2022 to 96-98%," CEO Penny James said in a statement.

In May, the company said its target was 93% to 95% for this year. 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%," James said.

Direct Line shares fell more than 14% to eight-year lows, the worst performer in the FTSE mid-cap index. Shares in rival Admiral dropped 8% to four-year lows and were trailing at the bottom of the FTSE 100.

Sabre Insurance Group last week lost more than a third of its market cap, with the motor insurer's shares hitting a record low after it issued a profit warning and flagged dividend cuts due to higher claim costs.

Its shares were hovering at record lows on Monday.

Direct Line said it was "confident" in the sustainability of its regular dividends, but the board has decided not to launch the second 50 million pound ($59.72 million) tranche of a 100 million pound share buyback programme announced earlier in the year.

"Following Sabre's profit warning, it is clear that claims inflation is accelerating at a pace that UK motor insurers cannot keep up with. Even with prices rising, we expect margins to deteriorate significantly," broker Jefferies said in a note to clients on Monday.

($1 = 0.8372 pounds)

(Reporting by Huw Jones and Carolyn Cohn; editing by Jason Neely)

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