By Carolyn Cohn
LONDON (Reuters) - A British exit from the European Union could hurt UK insurer Direct Line's (L:DLGD) investment portfolio and cause regulatory uncertainty, it said on Tuesday after posting a 3 percent rise in 2015 operating profit.
Britain will hold a referendum on EU membership on June 23. and the possibility of "Brexit" has kept sterling near a seven-year low against the dollar.
Direct Line chief financial officer John Reizenstein said that if Britain left the EU: "We'd see some instability in investments and we have a large investment portfolio - sterling might weaken, gilts might weaken".
Such a move could also raise questions over the new European Solvency II capital rules for insurers, which were nearly two decades in the making and came into force in Jan 2016.
"The industry has spent billions - to have a question mark over (Solvency II) would be difficult," Reizenstein said on a media call following the results.
Britain's largest motor insurer reported a 2015 operating profit from continuing operations of 520.7 million pounds ($726 million), this compared with an average analyst forecast of 493 million pounds, according to figures compiled by Direct Line.
The firm said it would no longer write insurance business for British supermarket Sainsbury's (L:SBRY) from 2017, following the loss of a deal with Nationwide Building Society last year.
However, it said it was in discussions with RBS (L:RBS) on a three-year extension to its home insurance partnership.
Direct Line reported a solvency capital ratio of 147.4 percent under the standard model and said it had applied for its own "internal model" which it hoped to start using by mid-year.
A ratio of 100 percent means an insurer has set aside enough capital to meet underwriting, investment and operational risks.
Direct Line's shares rose 2.7 percent to 399 pence at 0835 GMT, outperforming the FTSE 100 (FTSE) index.
It said it would pay a special dividend of 8.8 pence per share, and a final dividend of 9.2 pence per share, up 4.5 percent.
Total dividends for 2015, including a special interim dividend of 27.5 pence per share following the sale of the firm's international division, were 50.1 pence per share.
Some analysts expect another special dividend.
"We anticipate the internal model to free up additional capital, which could be returned to shareholders in a Solvency II-related special dividend," Barclays (L:BARC) analysts said in a note.
