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The prospect of higher compensation payments for large bodily injuries has wiped £175m off full year profits at Direct Line.
The government last week changed the way that these payments are calculated, which is likely to mean higher payouts to road accident victims.
The insurer said on Tuesday that its operating profits for 2016 were £404m, a 22 per cent drop on 2015. Without the impact of the government’s announcement, profits would have been £579m.
That offset higher income from other sources, such as interest from customers who pay for their premiums by installments rather than all at once.
The regular full year dividend rose 6 per cent to 14.6p per share, but Direct Line has paid less in special dividends in 2016 meaning that the total payout halved to 24.6p.
Paul Geddes, chief executive of Direct Line, 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 per cent combined operating ratio in 2017. We will continue to target improved efficiency and invest in customer and technology trends affecting our markets.