Aviva to book £385m charge on Ogden discount rate change

Aviva said it expects to take an exceptional charge to its 2016 IFRS profit after tax of around £385m as a result of the government's cut to the discount rate on personal injury damages payouts.

The estimated impact on the group Solvency II capital ratio is approximately 2 percentage points.

The insurer said that reflecting this charge as an exceptional item recognises the magnitude of the change in policy and the potential for future revisions to the discount rate to cause unnecessary volatility in its results.

Accordingly, it will not affect the company's operating profit and there will be no change to its dividend policy.

On Monday, the government cut the Ogden discount rate to -0.75% from 2.5%, with Lord Chancellor Liz Truss saying the move reflected the fall in index-inked gilt yields, which are used in the calculation.

The Ministry of Justice said that when victims of life-changing injuries accept lump sum compensation payments, the actual amount they received was adjusted according to the interest they could expect to earn by investing it.

In finalising the compensation amount, courts apply the discount rate, with the percentage linked in law to returns on the lowest risk investments, typically index-linked gilts.

The law states that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life.

Compensation awards using the rate should put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs, the MoJ said.

At end-June 2016, Aviva's Solvency II ratio was 174%, with a capital surplus of £9.5bn. In 2015, operating profit before tax was £2.bn.

Craig Bourke, an analyst at Whitman Howard, said the amount announced by Aviva is "quite a sizeable level" compared to the £215-230m announced by Direct Line on Monday, with about 20% smaller market share, suggesting that unlike other players, it had not made a provision below the former 2.5%.

"As Aviva points out, the new -0.75% level is likely to eventually be changed under the forthcoming review, although the timing of such a review, given the length of the one that set the current rate, is uncertain," Bourke said.

"However, we would expect this to be a more bullish point going forward than the ability of the personal motor market to recover the increase reserving given its differential impact across the market."

At 1450 GMT, the shares were down 1.4% to 494.60p.