Full year results from non-life insurer Direct Line (DLG) suggest the profitability of its underwriting operations is on a knife edge following recent changes to the way compensation payments are calculated.
The shares are down a touch to 346.5p having already priced in the impact of the change to the Ogden rate when it was announced on 27 February.
OGDEN SHOCK
As a reminder, the Ogden rate is used to work out awards to victims of car accidents based on the return any money paid out can earn when invested. The rate was reduced from 2.5% to -0.75% - the market had expected a cut to 1%.
Having warned the new discount rate would involve a 2016 pre-tax profit hit of between £230m to £215m, the company narrows this to £217.3m, although it says there will not be a material impact on 2017 profit.
PROFIT UNDER PRESSURE
Total dividends for the year (including special dividends) at 24.6p are half the 50.1p paid in 2015 and short of expectations. The company’s combined ratio climbs to 97.7% from a level of 91.8% pre-Ogden.
A ratio above 100% means an insurance company is paying out more in claims than it receives in premiums - anything below implies the opposite. The ratio for 2017 is expected to be between 93% and 95%.
This leaves little margin for error and as ETX Capital market analyst Neil Wilson notes: ‘The group will be hoping the chancellor doesn't take aim at insurers again in the Budget tomorrow.'
