Direct Line confirms profits crash

A year without major floods or storms would usually be cause for celebration among insurers. Unfortunately, for Direct Line Insurance Group and others in the sector, the regulatory headwinds are blowing in harder than ever before.

Most of the damage in Direct Line's annual results stemmed from the much-publicised change in the Ogden rate, which is the formula used for calculating lump-sum compensation payments for personal injuries.

Direct Line was left particularly exposed by the new -0.75% rate, having made a previous provision in claims reserves for a rate of 1.5%, compared to the long-standing rate of 2.5% and the 0% budgeted for by rival eSure.

This had the impact of reducing operating profits from ongoing operations for 2016 by £175 million, but, crucially, the company does not expect a material impact on 2017 profits.

However, the developments put paid to hopes that the group — whose brands include Churchill, Privilege and Green Flag — would repeat last year's special dividend payment. The company still increased its regular dividend by 5.8%.

Operating profits fell 23% to £404 million last year, but would have risen 11% without Ogden. The combined operating ratio (COR) increased by 5.9 percentage points, mostly relating to the impact of Ogden on 2015 and prior years business.

The COR is the sum of the claims, commissions and expenses divided by net earned premium. A figure of less than 100% indicates profitable underwriting.

This year, Direct Line is targeting a COR of 93%-95% assuming normal major weather events.

With Ogden mentioned no less than 79 times, Direct Line's resilient performance in 2016 was somewhat overshadowed in today's results. Chief executive Paul Geddes called it a successful year and said the company had been competitive in all its key markets.

The motor division grew in-force policies by 4.5% in the year, although claims inflation has remained at the top of the long-term expectation of 3%-5%, driven by higher damage costs.

The group said it was able to continue to write motor business at attractive margins, as a result of a successful pricing strategy and a slightly improved risk mix.

In home, own-brand policies rose by 2.3% but this was offset by the continuing decline in its partnership channel.

Weather-related losses were £18 million versus £90 million in 2015 and much lower than the normal annual level of claims costs expected from major weather events of approximately £70 million.

Direct Line shares crashed 10% following the Ogden announcement and were down 3% following today's results.

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