By Carolyn Cohn
LONDON (Reuters) -Shares in Direct Line lost more than a quarter of their value on Wednesday after the British motor and home insurer unexpectedly scrapped its 2022 final dividend, with stocks in rivals Admiral and Aviva (LON:AV) also falling sharply.
Motor insurers performed strongly when the COVID-19 pandemic first hit in 2020, as restrictions meant fewer drivers on the road and fewer accidents.
But Direct Line said it expected an underwriting loss in 2022, after inflationary pressures and supply chain issues due to the pandemic and the war in Ukraine pushed up the cost of motor repairs.
Extreme hot and cold weather spells in Britain in the past year have also led to more claims due to issues such as subsidence and burst pipes.
"The Board recognises the importance of the dividend to our shareholders, and continues to take actions to restore balance sheet resilience and dividend capacity as a priority, consistent with our track record of delivering returns for shareholders," CEO Penny James said in a statement.
Direct Line said it expected its 2022 combined operating ratio - a key indicator of underwriting performance in which a level above 100% indicates a loss - to be 102-103%.
It also expected higher motor claims inflation to add two to three percentage points to its 2023 combined operating ratio.
Direct Line in July cut its profitability outlook for the year and delayed the second leg of a share buyback.
"Things have gone from bad to worse," analysts at Jefferies said in a note, though they reiterated their "hold" rating on the stock.
Direct Line shares lost as much as 30%, wiping off more than 900 million pounds in market value at one point. They were down 28% at 1010 GMT, at the bottom of the FTSE mid-cap index and on course for their biggest one-day loss on record.
Admiral's shares dropped 8.5%, taking them to the bottom of the FTSE 100, while Aviva, which offers life as well as home and motor insurance, was down 4%.
Direct Line's 2032 bond was trading at a yield of 7.3%, up 38 basis points. [XS2183817407=TE] Bond yields move inversely to price.
But Moody's analyst Helena Kingsley-Tomkins said the ratings agency viewed "positively" Direct Line's actions to scrap the dividend and restore economic capital, given the risks to British motor and home insurers from "high claims inflation, challenging pricing conditions and higher than expected weather related claims".
($1 = 0.8221 pounds)