(Alliance News) - Hastings Group Holdings PLC on Thursday reported a sharp drop in profit due to changes in the discount rate applicable for personal injury damage awards but saw a rise in gross premiums.
Shares in the FTSE 250-listed insurer were 7.1% lower in London in early trade at 177.50 pence, making it the worst performer in the midcap index.
In the six months to June 30, the car and home insurer's pretax profit halved to GBP46.1 million from GBP86.8 million the year before. Hastings blamed the sharp decline in profit on claims inflation running ahead of earned premium inflation, combined with legislative changes which increased underwriting levies.
After the company's half year ended, the UK government in July unveiled a rise to the rate used to calculate the amount insurers must pay for personal injury claims. The personal discount rate, or Ogden rate, has been raised to minus 0.25% from the minus 0.75% implemented in 2017.
The higher the rate, the better the outcome is for insurers.
The Ogden rate is a calculation used by courts to work out how much insurance companies need to pay out in the event of life-changing injuries to customers, taking into account the likely return from the investment of such awards.
Despite the improvement in the rate from the perspective of insurers, Hastings was expecting a larger increase. The company's insurance unit previously held its best estimate reserves consistent with an Ogden rate in the range of 0% to 1%. As a result, Hastings was forced to take a GBP8.4 million charge in the accounts for the recent half.
The smaller-than-expected increase in the Ogden rate also hurt the insurer's loss ratio in the first half. Further hurting profit.
Hastings' calendar loss ratio was 79.1%, at the top of its targeted range of 75% to 79%. This increased due to claims inflation being higher than premium inflation. The calendar year loss ratio including the impact of the Ogden rate change, which increased claims reserves for current period and previous years, is 81.1%.
Hasting's gross written premiums edged 2.8% higher to GBP499.2 million from GBP485.6 million. The insurer's net earned premiums, however, slipped 1.6% to GBP215.6 million.
Net revenue slipped 1.6% to GBP370.3 million from GBP376.3 million.
"Following a period of market rate reductions that began in the second half of 2017, the market has seen early signs of rate increases during the second quarter of 2019. Hastings has maintained its underwriting discipline throughout and underlying average premium prices increased 3% during the six month period, without significantly impacting its competitiveness on price comparison websites," the insurer said.
Hastings said average written premiums are down 3%, with the increase in premium prices being offset by a reduction in the risk profile of business written.
Hastings added: "This change in risk mix was achieved through a combination of reduction in younger drivers and the introduction of new data sources which allows targeted pricing aimed at lower risk segments."
Hastings combined operating ratio worsened significantly, rising to 96.9% compared to 87.7% the year before. A ratio below 100% indicates that the company is making an underwriting profit, while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums.
"Claims inflation remains at 6% to 7% and ahead of earned premium inflation, reflecting increased cost in vehicle repairs due to enhanced vehicle sophistication, continued inflation in paint, parts and labour and third party credit hire cost increases," explained Hastings.
The insurer's live customer policies grew 3.7% to 2.8 million. Hastings market share of UK private car insurance increased to 7.8% from 7.5% at the end of 2018.
"I am pleased by the strong progress we have made on our strategic initiatives whilst navigating current market conditions. We remain focused on pricing discipline," said Chief Executive Toby van der Meer.
The insurer's solvency II coverage ratio dropped to 160% from 171% the year before.
Hastings interim dividend was unchanged at 4.5 pence.
Looking ahead to the rest of 2019, Hastings left its full year guidance unchanged.
Hastings' gross written premiums for 2018 rose 3% on the year to GBP958.3 million, while net revenue climbed 6% to GBP756.4 million.
The insurer added: "The board remains confident in the group's profitable growth opportunities thanks to its competitive advantages in the large motor and home markets, and the continuing progress on key initiatives, including renewals, anti-fraud capabilities and digital proposition, along with successfully embedding its new claims service partners."
