The Ministry of Justice announced a new formula for calculating compensation payments for those who suffer long-term injuries, which means insurers will have to increase payouts.
As a result, Direct Line said profits for 2016 had fallen 30% to £353m.
However, it said it had seen strong growth in home and car insurance.
While the changes to compensation calculations affected Direct Line's results for 2016, the company added that it did "not expect any material residual impact on 2017 profit" as a result of the reform.
When the change to the payout formula was announced, a number of insurance companies said their profits would be hit.
The Ministry of Justice said it was reducing what is known as the discount rate from 2.5% to minus 0.75%.
The move will result in more money for the victims of accidents, and so increase costs for insurance companies.
Insurance company Direct Line has said last week's changes to the way accident victims are compensated has dented pre-tax profits by £217m.