FTSE 250 movers: Direct Line motors, Sythomer sinks after rights issue

(Sharecast News) - Shares in Direct Line Insurance Group surged on Thursday as the company slapped drivers with a 25% premium hike to improve operating profit next year while it also picked up £520m via the sale of its commercial lines business.

The news came as the home and motor insurer saw half-year losses widen as inflation continued to push up the cost of motor claims.

Pre-tax losses increased from £11.1m to £76.3m, while operating profits swung to a loss of £78.3m from a £197m profit last year. Direct Line earlier this year axed its dividend which triggered the departure of chief executive Penny James.

On Wednesday, Canadian property and casualty insurer Intact Financial said it was buying Direct Line's brokered commercial lines operations for £520m to expand its UK unit RSA. Analysts at Citi said the deal removed the risk of an equity raising.

High inflation, supply chain issues following the Covid-19 pandemic and the war in Ukraine have pushed up the costs of motor repairs adversely and hitting margins for insurers.

"Our primary focus in motor for the first half of the year has been to improve margins by ensuring our pricing reflects latest claims inflation whilst, at the same time, launching new cost-effective products for customers. We have made good progress and believe we are now underwriting at levels consistent with our ambition of a net insurance margin above 10%, Direct Line said.

'SIGNIFICANT' RENEWAL PREMIUMS

It had introduced "significant" rate increases over the first half of 2023, driving a 25% increase in renewal average premiums, taken targeted action on its underwriting footprint, and looked for opportunities to mitigate claims inflation including expanding the company's own managed repair network.

"The outlook for motor claims inflation remains in line with our assumption of high single digits, however the opportunity for prior-year reserve releases in the short-term remains low given this inflationary backdrop," it added.

"Looking forward, the improved motor margins now being achieved should provide a platform to support an improvement in operating profit into 2024."

This comes as the company conducts two reviews into underpaying motor claims and overcharging existing customers for renewals. In July the Financial Conduct Authority ordered Direct Line to go back through five years of claims after admitting it had underpaid some customers who had their cars and vans written off.

Only last Monday, the FCA revealed it had stepped in and forced the company to repay customers it had overcharged. Direct Line said it had put aside £70m to rectify both matters.

Matt Britzman, equity analyst at Hargreaves Lansdown, said the results "could just mark a pivot point as the cycle looks like it might finally be turning, with price hikes catching up to claims inflation".

"Average renewal premiums are running 25% higher, meaning Motor insurance written now is back at profitable levels. That will not be a pretty sight for drivers, with financial pressures mounting from all angles.," he said.

"Direct Line has lost some customers, likely due to shopping around for better deals, but prices across the market are rising rapidly, so there's not much let-up wherever they turn."

"Investors can look at today's results with a sense that conditions are turning. The announced sale of Direct Line's brokered commercial insurance business will free up some capital. But until Motor insurance shows signs of consistent profitability again, don't expect the dividend to be back on the table."

Shares of Pets at Home and CVS Group tumbled on Thursday after the Competition and Markets Authority said it was launching a probe into the £2bn veterinary services market for household pets.

The competition watchdog said it will explore how well the market is working for pet owners and whether they are receiving the information they need at the right time to get appropriate treatment for their pets.

The CMA said it was keen to hear more about pet owners' and vet practitioners' experiences of pricing of services, including whether pet owners were aware of how much a treatment would cost, and how they pay for it.

It also wants to hear about how prescriptions and medication for pets are arranged and sold and how pet owners choose a vet surgery - whether they are aware that their vet may be part of a larger chain which might also own other surgeries in the area.

The use of out-of-hours and emergency vet services where options might be limited will also be looked into.

CMA chief executive Sarah Cardell said: "Caring for an ill pet can create real financial pressure, particularly alongside other cost of living concerns. It's really important that people get clear information and pricing to help them make the right choices.

"There has been a lot of consolidation in the vet industry in recent years, so now is the right time to take a look at how the market is working.

"When a pet is unwell, they often need urgent treatment, which means that pet owners may not shop around for the best deal, like they do with other services. This means they may not have the relevant information to make informed decisions at what can be a distressing time. We want to hear from pet owners and people who work in the sector about their experiences."

Pets at Home owns veterinary groups Companion Care Vets and Vets4Pets and has a network of more than 450 vet practices across the UK. CVS Group, meanwhile, is one of the largest integrated veterinary services providers in the UK.

Responding to the news, CVS said in a statement: "Our purpose at CVS is to give the best possible care to animals and we continually invest in our colleagues, practices and clinical equipment to enhance the care to our clients and their patients. The Group has always sought to ensure its prices are appropriate and reflect fair value to our clients. Our pricing structures are set by clinicians to ensure these align with our purpose.

"As the CMA have recognised, there continues to be a significant shortage of vets in the UK and employment costs represent the most significant proportion of our cost base. Our pricing reflects this and other inflationary pressures experienced in recent years."

Shares in specialty chemicals firm Synthomer were well into the red on Thursday morning, after the company announced a £276m rights issue alongside a fall in first-half revenue and earnings.

Safestore Holdings warned that full-year earnings were likely to come in at the lower end of analyst forecasts on Thursday, as it continued to invest in new sites.

The self-storage landlord opened two stores in Madrid and Barcelona during the third quarter, as well as acquiring two sites in the UK and in Pamplona and extending existing sites in London and Paris.

Frederic Vecchioli, chief executive, said there had been "some softness" in the UK's business customer segment, due to the weaker economic backdrop, but that trading elsewhere remained "robust".

He continued: "We anticipate that our pipeline will continue to grow in the coming months.

"While the pipeline and associated financing will be dilutive to earnings in the near term, the returns generated by new stores are reliable and we are confident that it will be significantly value-accretive as the new sites mature."

The London-listed firm now expects adjusted diluted earnings per share to come in towards the lower range of analyst forecasts, of between 47.3p and 50.3p.

In the 2022 full-year, Safestore reported adjusted diluted EPS of 47.5p.

Safestore, which has 187 stores in the UK, reported group revenues of £56.5m in the three months to 31 July, an 2.9% increase on a constant currency basis. Like-for-like revenues rose 1.2% on the same basis to £52.7m.

Revenue per available square foot in the year-to-date was £27.56, an 1.5% increase year-on-year, or 0.7% on a constant currency basis.

Warehouse Reit, TBC Bank Group, Greggs, BlackRock World Mining Trust and BBGI Global Infrastructure fell after trading without entitlement to the dividend.

Market Movers

FTSE 250 (MCX) 18,359.14 -0.50% FTSE 250 - Risers

Direct Line Insurance Group (DLG) 172.90p 15.19% Darktrace (DARK) 380.10p 5.58% Chemring Group (CHG) 299.00p 2.57% Vistry Group (VTY) 791.00p 2.46% Mitie Group (MTO) 103.20p 2.38% Babcock International Group (BAB) 396.60p 2.22% PureTech Health (PRTC) 203.00p 2.01% Barr (A.G.) (BAG) 493.00p 1.86% FirstGroup (FGP) 153.50p 1.86% easyJet (EZJ) 427.40p 1.52%

FTSE 250 - Fallers

Synthomer (SYNT) 44.56p -26.71% Pets at Home Group (PETS) 345.00p -8.87% Safestore Holdings (SAFE) 798.50p -7.31% Genus (GNS) 2,080.00p -6.89% Harbour Energy (HBR) 239.60p -5.71% Warehouse Reit (WHR) 80.40p -4.40% Big Yellow Group (BYG) 1,023.00p -4.03% TBC Bank Group (TBCG) 2,690.00p -3.24% Ithaca Energy (ITH) 141.60p -3.15% BBGI Global Infrastructure S.A. NPV (DI) (BBGI) 135.40p -3.01%