The straight-line accounting error resulted in the “miscalculation” of the solvency measure

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Direct Line has admitted an accounting error which caused the UK car insurer to overstate a key regulatory measure of the group’s financial strength.

The FTSE 250 insurer said on Friday that the 197% solvency ratio it reported in its March annual report was too high due to “a calculation error”.

The ratio – its capital as a percentage of the regulatory minimum – was actually 188% at the end of last year.

“The group has taken steps to strengthen the control environment in relation to the specific area where the miscalculation occurred,” Direct Line said in a statement.

The company added that it had notified UK regulators about the error. The Bank of England’s Prudential Regulation Authority, which oversees Britain’s biggest insurers, declined to comment on individual company matters.

Shares in Direct Line traded down nearly 2% at 185.4p in afternoon trade in London.

Chief executive Adam Winslow, who joined the group in March, is trying to improve the insurer’s fortunes after it fought off a £3.1bn takeover bid by Belgian rival Ageas earlier this year.

The company said the motor insurance operation had “turned the corner” after a difficult period marked by a rise in claims costs following the Covid-19 pandemic, a series of profit warnings and the departure of its chief executive.

Direct Line said the reporting error was discovered by an independent review of its financial controls commissioned by Winslow when he took over as chief executive.

Deloitte, Direct Line’s auditor, declined to comment.

Direct Line’s solvency ratio, which reflects an insurer’s ability to withstand unexpected shocks from higher liabilities or declining asset values, improved in the first half of the year to about 200 percent by the end of June, the company said , after “good capital generation in the first half of a combination of operating gains, one-off benefits from partnerships and market movements.”

The figure exceeds the company’s target range of 140 to 180 percent.