Shares in car insurance giant Admiral dropped six per cent this morning after profits took an additional hit following the government's decision to slash the personal injury discount rate.
The insurer said the overall cost of the February decision to cut the discount – or Ogden – rate would be £150m. Of this amount, £87m has already been recognised and it plans to release £20m over the current year.
The following two to four financial years will be impacted by the justice ministry's decision, the FTSE 100 firm added.
Chief executive David Stevens said: “Most of the adverse impact from the increase in the costs of large injury claims, resulting from the change in the Ogden discount rate, was captured in our 2016 second half result. However, some extra costs carry into 2017."
Cutting the discount rate increases how much insurers pay out for personal injury claims. In many circumstances, insurers ultimately pass on such costs to customers by charging higher premiums.
Group profit before tax was, however, one per cent higher a £195m. The firm increased its interim dividend by 10 per cent to 56p per share – however in 2016 it paid a capital return that took half-year shareholder payouts to 62.9p per share.
In these circumstances, we are happy to report a marginal increase in profitability and to deliver a more material increase in the underlying dividend.
As a result, the firm's loss ratio – an important metric by which insurance firms are measured – rose to 87.5 per cent from 85.9 per cent one year earlier.
A lower loss ratio is usually seen as a good thing for insurers. Analysts from Bernstein had pencilled in a loss ratio of 83 per cent.