Insurer’s performance would have improved without discount rate impact

Discount rate impact

Direct Line Group’s profit before tax fell 30.4% in 2016 because of the decision to cut the personal injury discount rate to -0.75%.

The insurer was also hit by a series of other charges, including a one-off IT-related impairment of £39.3m, a £24.1m charge for the Flood Re levy, and a £5m FSCS bill related to the collapse of insurers Enterprise and Gable.

Profit cut

Direct Line Group made a profit before tax of £353m in 2016, down from £507.5m in 2015. Without the discount rate impact, the 2016 profit would have been £570.3m, up 12.4% on 2015. The insurer had warned the market to expect a drop in profit of between £215m and £230m, and the actual reduction came in at £217.3m.

Direct Line Group 2016 results at a glance

 20162015change (%/points)
Profit before tax (£m) 353.0 507.5 -30.4
COR (%) 97.7 94.0 3.7
GWP (£m) 3,274.1 3,152.0 3.9
Reserve releases (£m) 266.7 378.9 -29.6
Results excluding discount rate hit      
  2016 2015 change (%/points)
Profit before tax (£m) 570.3 507.5 12.4
COR (%) 91.8 94.0 -2.2
Reserve releases (£m) 429.6 378.9 13.4

Underwriting performance was also hit. Direct Line Group reported a 2016 combined operating ratio (COR) of 97.7%, 3.7 percentage points worse than 2015’s 94%.

Reserve releases, a big contributor to Direct Line Group’s operating profit, fell 29.6% to £266.7m (2015: £378.9m).

Excluding the discount rate hit, the COR would have been 2.2 points better than 2015’s at 91.8% and reserve releases 13.4% higher at £429.6m.

The bulk of the discount rate impact fell on the motor book, where the COR jumped 13.9 points to an unprofitable 106.3% (2015: 92.4%).

On a positive note, Direct Line Group grew gross written premium by 3.9% to £3.27bn (2015: £3.15bn).

The company said it is not expecting any material impact to its 2017 results from the discount rate cut.

It has also confirmed that it is working with smart car manufacturer Tesla to offer insurance to its customers, and has joined a partnership called MOVE_UK with the UK government, technology providers and car manufacturers to accelerate the development, market readiness and deployment of Automated Driving Systems.

‘Huge disappointment’

Direct Line Group chief executive Paul Geddes said: “2016 was a successful year for Direct Line Group and I’m proud of the strong own brand growth achieved in a switching market, proving our competitiveness in all our key categories and channels.

“This positions us well in a market disrupted by the reduction in the discount rate, and allows us to target a 93-95% combined operating ratio in 2017. We will continue to target improved efficiency and invest in customer and technology trends affecting our markets.”

Shore Capital analyst Eamonn Flanagan said the results would be “clearly of huge disappointment” to the insurer, as it had delivered “excellent underlying performance” once the discount rate impact is stripped out.

Direct Line Group COR breakdown

 20162015change (points)
Motor 106.3 92.4 13.9
Home 85.0 92.2 -7.2
Rescue and other 93.3 91.2 2.1
Commercial 98.7 104.5 -5.8