LONDON (Reuters) - Admiral’s (ADML.L) pretax profit fell by 25 percent in 2016 after the car insurer took most of the hit from a change in the discount rate used to calculate personal injury payouts.
Last week’s surprise reduction to the rate, which determines the scale of lump sum payouts to claimants, from 2.5 percent to minus 0.75 percent, has also hit other insurers, including Direct Line (DLGD.L).
The government’s decision to make the change to better reflect the interest-rate environment, was “eccentric” as it did not reflect how people invested their payments, Admiral Chief Financial Officer Geraint Jones told Reuters.
“We fully support a rate that gives people fair compensation... we think setting a rate of minus 0.75 ignores the reality of what people actually do with their compensation, which is not to invest in index-linked gilts,” he said.
“The unfortunate consequence of this is that customers will pay more for their car insurance... I expect the consultation that the government will launch will look at that in some detail and hopefully come to a less eccentric conclusion.”
As a result of the rate change, which impacts ongoing claims, Admiral took the bulk of the pretax profit hit in its 2016 results, resulting in it falling to 284.3 million pounds from 376.8 million pounds in 2015.
Jones said after Wednesday’s results that the remaining hit to profits, of around 60-70 million pounds, net of tax, would be spread over the next 3-5 years.
Stripping out the impact of the discount rate cut, the firm said profit was up 3 percent, boosted by strong revenue growth across its business. Revenue was up 22 percent to 2.6 billion pounds ($3.17 billion).
The company said it would pay a final dividend of 51.5 pence, made up of a normal dividend of 15 pence per share and a special dividend of 36.5 pence.
Bernstein analysts said the underlying results were slightly ahead of forecasts, including in the firm’s UK car insurance market, which despite the firm diversifying into other countries and products, remains Admiral’s main source of revenue.
“Today’s results do not materially affect our investment thesis: we continue to rate Admiral as Market-Perform with a target price of 1,915 pence,” they wrote in a note to clients.
Shares in Admiral were 0.8 percent lower at 0842 GMT, underperforming the broader FTSE 100 .FTSE.
Editing by Maiya Keidan and Alexander Smith