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July 31 (Reuters) – Britain’s largest motor insurer Direct Line reported a 10% fall in first-half profit on Wednesday while pushing its dividend marginally higher, as it dealt with strong competition and government-ordered changes in how it calculates compensation.
Traders expected shares in the company to gain 2% after the statement, which raised its interim dividend by 2.9% and stuck to its target of a combined operating ratio, an industry measure of underlying profitability, of between 93% and 95% for 2019.
The FTSE 100 company reported an operating profit of 274.3 million pounds for the six months ended June 30, compared to the 305.5 million pounds it reported in the same period a year ago, and said in-force policies had fallen 3.2% to 14.8 million.
Profit at its motor insurance business, the largest contributor to earnings, slumped 36%, partly hampered by a 15.9 million pounds charge relating to Britain’s plans to change the discount rate used to calculate compensation for personal injuries.
While the cost of a motor insurance policy in the UK rose last quarter after falling in the first three months of this year, Britain’s plans to change the discount rate have brought in more uncertainty for insurers, who now have to make larger initial lump sum payments for claims.
Direct Line has already called the new rate “very disappointing”, while rival Hastings this month said the planned change would led to a $10 million hit to profits.
Direct Line, whose brands include Churchill, Green Flag and Privilege, reported a 2.2% dip in gross written premiums to 1.61 billion pounds, while combined operating ratio, adjusted for normal weather, stood at 94.6% versus 90.7% last year. A ratio below 100% means the insurer earns more in premiums than it pays out in claims. (Reporting by Muvija M in Bengaluru; editing by Patrick Graham)