Following an estimated £140m in claims thanks to Q4’s poor weather in the UK, insurer Direct Line Group’s share price tanked in January when it cancelled its dividend. Analysts say that the group must now demonstrate a credible plan to restore its capital reserves when it announces 2022 earnings.
- Direct Line Group expected to post 84% drop in EPS year-over-year.
- Analysts are looking for pathways to capital coverage recovery following dividend cut.
- iShares UK Dividend UCITS ETF gains 5.6% year-to-date.
Direct Line Group [DLG.L] is announcing 2022 results before UK markets open on 13 March.
Analysts polled by Refinitiv expect a large drop in earnings from the insurer. After having generated earnings of 31.58p per share in 2021, earnings for 2022 are expected to fall 84.3% year-over-year to 4.95p. Analysts expect revenue to increase slightly from £2.96bn to £3.01bn.
Then-CEO Penny James announced in an 11 January trading update that there would be no final dividend for the 2022 financial year given the impact of “a volatile and challenging operating environment,” during the fourth quarter (Q4).
According to the update, severe cold weather in the UK during Q4 led to 3,000 insurance claims for burst pipes, water tanks and other weather-related damage, which Direct Line estimates will amount to £90m in payments. Together with subsidence claims over the summer, Direct Line estimates weather-related claims for the year to approximate £ 140m. The latest forecast is nearly double the £73m it had expected for the year.
The announcement led Direct Line’s share price to fall 23.5% on the day. Direct Line’s shares have fallen 20.9% in the year to date, and 26% over the past 12 months.
A year of losses
As such, analysts and investors are now pricing in a lacklustre set of results. The group exceeded expectations for 2021 with an EPS of 31.58p beating analyst estimates by 24%. 2021’s revenue of £2.96bn slightly undershot analyst expectations of £3.06bn. The company also announced a £100m share buyback.
The Direct Line share price gained 9.2% within a week of these positive results, but the positivity did not survive the summer. The impact of soaring inflation on the cost of motor repair claims led Direct Line to cut its profitability outlook and postpone the second leg of the buyback in July. While repair claim costs stabilised by Q4, they were elevated again by the weather, which led to an increase in the number of claims made.
Direct Line’s share price fell 26% between 12 and 18 July. The stock had been on its way to recovering these losses by January, when it was trading at just below the levels it had prior to the summer profitability warning, but the news has instead pulled Direct Line shares down to their lowest levels since listing in 2013.
Credible plan needed
The focus for investors when Direct Line announces its results on Monday will be how it can rebuild its capital reserves.
The reason for the dividend cut was that the outsize claims payments seen last year had reduced its capital coverage/solvency II ratios to the low end of its 140% to 180% target range.
In the wake of the cancellation, Jefferies analysts proposed five ways in which Direct Line could rebuild its capital coverage, including rebasing its dividend, purchasing additional reinsurance, de-risking its investment portfolio, raising new capital, or reducing partnerships exposure.
Direct Line, under the guidance of former chief commercial officer and stand-in CEO Jon Greenwood, will need to demonstrate a credible plan along one or more of these lines to rebuild its reserves when full results are announced.
Funds in focus: iShares UK Dividend UCITS ETF
In its note, Jefferies lowered its price target from 220p to 175p. UBS also reviewed its price target and Buy rating in response to the news.
The median 12-month price target for Direct Line among analysts polled by Refinitiv is 180.00p, just 2.9% above the 9 March close of 175.00p. At the most optimistic end, 350.00p implies a doubling of Direct Line’s share price over the next 12 months. However, the low target of 136.00p implies the stock could fall 22.3% during that period.
ETFs carrying Direct Line’s shares have been hit by the news. The stock has a 1.78% weighting in the iShares UK Dividend UCITS ETF [IUKD.L] as of 8 March.
The fund has gained 5.6% year-to-date, but is down 0.8% in the past month and down 0.7% over the past 12 months.
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