Direct Line FY profit takes £175m hit from Ogden discount rate cut
(ShareCast News) - Direct Line Insurance Group reported a drop in full-year profit on Tuesday as it took a £175m hit from the change in the discount rate used to calculate lump sum payouts.
In the year to the end of December, gross written premiums for ongoing operations were up 3.9% to £3.27bn, driven by growth in Motor and Home own-brand-in-force policies.
Operating profit from ongoing operations came in at £403.4m, down from £520.7m in 2015. Before the impact of the Ogden discount rate reduction, operating profit stood at £578.6m. Direct Line had said at the time of the announcement of the reduction in the discount rate that its profits could be hit by up to £230m.
Meanwhile, pre-tax profit fell to £353m from £507.5m the year before including the impact of the Ogden change, but was up at £570.3m pre-Ogden.
The group's combined operating ratio was 97.7% including the impact of the discount rate change, from 94% in 2015, but 91.8% pre-Ogden.
The company proposed a final dividend of 9.7p per share, up 5.4%, making a total regular dividend for 2016 of 14.6p, up 5.8% on the year.
Going forward, the board has decided that, in the normal course of events, it will consider whether or not it is appropriate to pay a special dividend only once a year, alongside the full year results.
Chief operating officer Paul Geddes said: "2016 was a successful year for Direct Line Group and I'm proud of the strong own brand growth achieved in a switching market, proving our competitiveness in all our key categories and channels.
"This positions us well in a market disrupted by the reduction in the discount rate, and allows us to target a 93-95% combined operating ratio in 2017. We will continue to target improved efficiency and invest in customer and technology trends affecting our markets."
The company said it does not expect any material residual impact on 2017 profit as a result of adopting the reduction in the Ogden discount rate.
Last month, the government cut the Ogden discount rate to -0.75% from 2.5%, with Lord Chancellor Liz Truss saying the move reflected the fall in index-linked gilt yields, which are used in the calculation.
The Ministry of Justice said that when victims of life-changing injuries accept lump sum compensation payments, the actual amount they received was adjusted according to the interest they could expect to earn by investing it.
In finalising the compensation amount, courts apply the discount rate, with the percentage linked in law to returns on the lowest risk investments, typically index-linked gilts.
The law states that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life.
Compensation awards using the rate should put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs, the MoJ said.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: "The change of an obscure financial ratio has blasted DLG's full year profits this year. That's a one off effect though, albeit a large one, and progress in the underlying business seems pretty steady.
"The value of the group's written insurance premiums is on the up, thanks to growth in the higher value own brand businesses, while underwriting performance is also improving."
At 1108 GMT, the shares were down 2.9% to 338.40p.