Insurers feel the chill after claims surge at Direct Line

Direct Line sent shockwaves through the insurance industry when it scrapped its dividend after a surge in claims during last month’s deep freeze.

In an update that sent stocks plummeting across the industry, the FTSE 250 firm said it has so far treated 3,000 homes and businesses with burst water pipes, water tanks and other damage due to sub-zero temperatures.

It expects the bill to total £90m – bringing ‘bad weather claims’ for the whole of 2022 to £140m if the cold spell early last year and the heat wave in the summer are taken into account.

That’s much higher than Direct Line’s previous forecast of £73m.

With higher auto insurance claims also expected due to rising prices of cars and parts, and an increase in claims due to icy weather traffic accidents, bosses scrapped the final dividend.

The update stunned the city and shares fell 23.5 per cent, wiping £763 million off the company’s value. FTSE 100 rivals Admiral and Aviva were also on the line, with the three companies losing £1.46 billion in value.

Direct Line CEO Penny James stressed that the board “recognizes the importance of the dividend to our shareholders”: “It’s just so frustrating if I’m being honest because it’s been a challenging fourth quarter.”

While investors will factor in the cost of lower dividend payments and the stock slump, customers are also being hit as insurers jack up the price of general insurance policies.

Money Mail revealed yesterday that households are facing increases of 30 percent or more as their housing and car policies are updated.

Rising inflation and increasing supply chains have increased the cost of covering home and auto repairs, leading to price increases as insurers strengthen their finances.

Russ Mold, investment director AJ Bell, said: “The insurance industry is going from bad to worse.

After suffering from inflationary pressures that made it more expensive to cover the cost of repairing vehicles involved in an accident, insurers are now facing a winter of discontent.

“Questions will be asked about the strength of the company’s balance sheet and whether it has sufficient capital.

The company admits its capital funding is now at the lower end of its risk appetite, so maybe we’ll see a big fundraiser soon?

Saving money by not paying a dividend is one way to conserve money, but the thousands of retirees who own the stock for income will not be happy.

Direct Line has traditionally been a generous dividend payer and many people have grown accustomed to a growing stream of cash rewards.”

Direct Line’s update comes after two turbulent years in which its shares have nearly halved since early 2021.

Peel Hunt said the dividend cut was more than expected and said the update would be “another blow to UK motor insurance confidence” in a challenging environment.