Insurance company shares
were boosted as the government backtracked on rules governing the way personal injury claims are calculated.
The Ministry of Justice on Thursday announced draft legislation will be submitted to change the discount rate to calculate personal injury claim awards.
Commonly known as the 'Ogden rate', this discount was reduced to -0.75% from 2.5% in February and forced most insurers into sizeable write-downs as the new rate meant they had to pay out more to personal injury claimants, and which the industry said would increase the cost of personal injury claims in England and Wales.
"Based on the evidence currently available the government would expect that if a single rate were set today under the new approach the real rate might fall within the range of 0% to 1%, but the new framework will only apply if the proposed law is enacted and will not operate retrospectively," a statement from Lord Chancellor and Justice Secretary David Lidington said.
Last year, Direct Line halved its dividend as operating profits year fell 23% to £404m, while if the rate had been left alone, without the £175m hit, profits would have been 11% higher.
Admiral took a £105m hit last year with profits down 25% thanks to the changes. Under the old rate they would have been up 3%.
Aviva said full-year net profits were 22% lower due to the Ogden change.
Analyst Neil Wilson at ETX Capital said it was a "a welcome bit of backtracking by the government as far as insurers (and the NHS) are concerned".
He added: "While the industry was prepared for a change to the discount rate, it was a lot harsher than anyone had planned. Today's changes won't be applied retrospectively and will take time to take effect, but they should be cheered by investors."
RBC Capital Markets had expected the Ogden rate to move to 0%. "Therefore the Ministry of Justice suggesting that the rate could be 0-1% is therefore positive in our view. However, if there are multiple rates across different time periods this could ultimately make the process more complicated than it is currently."
RBC analysts said Direct Line and Admiral are set to have the largest benefits if the rate increases again: "We estimate that a move to 0% would add 8ppts to Direct Line's Solvency ratio and 15ppts to Admiral's Solvency ratio as at 1H17."