Blue chip insurers Admiral Group PLC (LON:ADM) and Direct Line Group PLC (LON:DLG) saw their shares drop sharply today after both revealed that they will take big one-off charges in 2016 results to account for the impact of a cut announced to the discount rate used by courts in England and Wales to calculate personal injury damages awards.
After a review, the Lord Chancellor announced today that the figure used, commonly referred to as the Ogden discount rate, will be cut to -0.75% from +2.5% currently.
In a statement Admiral said the reduction in the discount rate will have “the effect of increasing the cost of personal injury claims, therefore also increasing the ultimate loss ratio for all business written up to the effective date, part of which will be earned and part unearned.”
It added that the majority of the financial impact in respect of premiums earned during 2016 and prior years will be reflected as a one-off charge against 2016 second half profits.
The group said the estimated total net financial impact of all claims settling at the new rate is £140mln to £175mln.
It added that the estimated net financial impact on its 2016 reported profit is £70mln to £100mln.
In reaction, Admiral shares shed over 3%, or 58p at 1.812p.
Result postponed …
Admiral said that in order for the impact of the new discount rate to be reflected in the company's 2016 results, it has decided to postpone the preliminary announcement its full-year 2016 results announcement from March 1 to March 8.
The firm added that, given its strong capital position, and reflecting the non-recurring nature of this charge, it expects to maintain its 2016 final dividend at last year's level of 51.5p per share.
It said it “anticipates that if market pricing adjusts future premiums to reflect the lower discount rate, there will be no significant impact on future business and its profitability after the change.”
Meanwhile, fellow FTSE 100-listed insurer Direct Line Insurance Group PLC (LON:DLG) revealed that it will take a one-off pre-tax charge of £20mln in its results for the financial year ended 31 December 2016 as a result of the Ogden rate change.
The firm said the charge will reduce the group's year end Solvency II capital coverage ratio, before dividends, to towards the higher end of its target range of 140%-180%.
The group said the charge will not have any impact on the board's “deliberations regarding the proposed 2016 final dividend recommendation. “
It added that it does not expect the Ogden rate change to “have a material impact on the Group's financial outlook for 2017.”
Direct Line said: “The Group is disappointed at the Lord Chancellor's decision, but will take the time to review the full statement of reasons given.
“The Group welcomes the consultation to consider options for reform to achieve a better and fairer framework for claimants and defendants. “
Direct Line shares topped the FTSE 100 fallers list in late morning trading, dropping 7.8%, or 28.6p to 333.6p.
Mid cap insurers rise …
Hastings Group PLC (LON:HSTG), however, saw its shares edge higher, up 0.6p to 232.1p even though it said it would also include a one-off pre-tax charge of £20m in its full-year 2016 results.
The FTSE 250-listed firm also added that the charge will not have any impact on its board’s deliberations regarding the proposed 2016 final dividend recommendation.
And Hastings said as well that it “does not expect the Ogden rate change to have a material impact on the Group's financial outlook for 2017.”
Peer esure Group PLC (LON:ESUR) also saw its shares rally as it said the announced discount rate was lower than the group had allowed for as at December 31 2016 and subsequently it will only see a “further net impact of £1m in 2017.”
It added: “As a consequence of the discount rate moving to minus 0.75%, the Group's capital position in 2017 will be impacted by £2m.”
Stuart Vann, Chief Executive Officer, said: "Our low risk approach to underwriting and conservative reinsurance programme mitigated much of our exposure to the change in the Ogden discount rate and leaves us well placed within the market compared to our peers.”
Esure also provided an update on current trading in its statement, saying it believes group profit “will be ahead of market expectations largely driven by a strong investment return.”
The firm said its gross written premiums in 2016 were up 19% to £655m, while in-force policies rose by 9% to 2.2 mln
esure shares bounced from earlier falls to gain 2.7%, or 5.5p at 213.0p.