LONDON (Reuters) - Direct Line (DLGD.L) has taken a one-off hit to earnings after the UK government last week changed the way personal injury claims are calculated and the change should have little material impact on its 2017 profits, the insurer’s chief financial officer said.
Direct Line, whose brands include Churchill, Green Flag and Privilege, reported a 22 percent drop in 2016 operating profit after Britain’s justice ministry cut the discount rate to minus 0.75 percent from 2.5 percent in a shock move.
The discount rate cut pushes up the cost of insurers’ upfront lump sum payments to meet compensation claims.
“We outlined a one-off impact of moving to the new rate,” Direct Line CFO John Reizenstein said on a call with media.
“This doesn’t impact our underlying position going forward.”
Direct Line said operating profit from continuing operations was 403.5 million pounds for the year ended Dec. 31, down from 520.7 million a year earlier.
Direct Line’s operating profit would have been 578.6 million pounds without the discount rate change, the insurer said in a trading statement, helped by strong new business growth in motor and home insurance.
RBC analysts said the results were better than expected when taking account of the discount rate change, reiterating their ‘outperform’ rating on the stock and raising their target price to 410 pence from 400 pence.
Gross written premiums for ongoing operations rose 3.9 percent to 3.27 billion pounds in the period, Direct Line said. The company achieved a full-year combined operating ratio from continuing operations of 97.7 percent, also hit by the discount rate change.
A level below 100 percent indicates an underwriting profit. Direct Line has a 93-95 percent target range for the rate and said it maintained that target for 2017.
Direct Line's shares were trading at 346.8 pence at 0830 GMT, down 0.46 percent on the day versus a 0.12 percent rise in the FTSE 100 index .FTSE.The insurer said it would pay a final dividend of 9.7 pence per share, for a total dividend, including an interim special dividend, of 24.6 pence per share, down 50 percent from a year earlier.
The insurer did not pay a full-year special dividend.
Reizenstein said that without the impact of the discount rate change, “you could probably assume that there would have been a special dividend”.
Additional reporting by Noor Zainab Hussain; editing by Simon Jessop and Jason Neely