Our customers Our business model starts with our customers, who are the most important element in what we do. We aspire to give our customers the products that best suit their needs and encourage them to expect a high quality of service throughout their relationship with us. From the moment customers select our products, through to making a claim and resolving an unexpected event, we treat each phase of the journey as an opportunity to give our customers the best service and outcome.
Governance and Board changes The year saw a number of changes to our Board’s composition, which meant we were compliant with the UK Corporate Governance Code at the time of Admission to the Official List of the London Stock Exchange.
Relationship with RBS Group Our ongoing relationship with RBS Group is set out in a number of agreements of which the Relationship Agreement and the Transitional Services Agreement (“TSA”) are the most important.
Separation from RBS Group Following the implementation of a comprehensive programme of initiatives, we are now operating on a substantially stand-alone basis from RBS Group. These initiatives included appointing the Direct Line Group Board of Directors, harmonising employee service contracts, developing a stand-alone risk and compliance department, and agreeing an arm’s length TSA with RBS Group for residual services. We have also recently appointed Capgemini to support the migration of our IT as well as to design, deliver and run a new IT infrastructure to support the business.
We have successfully grown DL4B in these segments; it now represents 13% of our Commercial gross written premium having launched in 2007.
We have recently made a major investment in technology in our Commercial division, when we launched ‘TheHub’. This is NIG’s new, easy-to-use, full-cycle eTrading platform which is designed to capture the shift in broker distribution towards a high-volume low-cost model suitable for small business customers.
Where we operate 23Direct Line Group Annual Report & Accounts 2012
Aim We have adopted a progressive dividend policy and aim to grow the dividend in real terms each year.
Operational risk The risks of direct or indirect losses resulting from inadequate or failed internal processes, fraudulent claims or from systems and people, or from external events including changes in the competitor, regulatory or legislative environments. In particular we have IT systems risk, as the Group is highly dependent on the use of third-party information technology, software, data and service providers.
• We have developed a robust customer conduct risk management framework, to minimise our exposure to conduct risk
The Commercial COR improved by 4.1 percentage points to 108.2% for 2012. This was driven by a reduction in the expense ratio together with loss ratio improvements. The improvements in loss ratio reflect underwriting actions taken to improve attritional performance as well as the continued release of prior-year reserves. This was partially offset by a number of larger than normal fire claims in the first half of 2012.
Reductions in solicitors’ referral fee income and vehicle replacement referral income primarily reflect a reduction in non-fault claims volumes. This is due to reduced accident frequency, which has also benefited claims costs over the period. The reduction in revenue from vehicle recovery and repair services has resulted from fewer repairs relating to third-party claims and lower revenues at the tracker recovery business.
Restructuring and other one-off costs Restructuring and other one-off costs rose to £189.5 million in 2012, up from £54.0 million in 2011. Costs associated with the Group’s separation and divestment from RBS Group were £148.9 million, with the remainder relating mainly to the Group’s cost savings programme.
Corporate 41% Sovereign 26% Cash, cash equivalents, loans and receivables 26% Investment property 1% Supranationals 4% Local government 2%
2) Invest in our leadership We recognise it is critical to have a strong and diverse leadership team that recognises the technical, people and general business leadership skills required to achieve our vision. A new leadership group has been identified, which has collective accountability for and ownership of our strategy. We have introduced a new leadership programme in partnership with Ashridge Business School, and have worked with Henley Business School to identify emerging talent to become future senior managers. A new leadership competency framework has been designed to help our leaders become best in class.
Direct Line Group is proud to be involved in educating young children about road safety.
28 May: The Company declared an interim dividend in an aggregate amount of £500m to be paid on 6 June 2012 to RBS Group.
Experience and qualifications Glyn was Chairman of Towry Holdings Limited between 2006 and 2011. He also served as Chairman of Hermes Fund Managers from 2008 to 2011 and was Chairman of its sister company, BT Pension Scheme Management, for a part of this period. Glyn was Chief Executive Officer of the independent investment group, Thames River Capital, from 2005 to 2006. From 2000, he served as Chief Executive Officer of Gartmore Investment Management in the UK for four years. Before this, Glyn was Chief Executive Officer of Coutts NatWest Group and Coutts Group, having joined in 1997. Glyn joined Standard Chartered in Hong Kong in 1990 where he became the General Manager of Global Private Banking. He was a consulting partner with Coopers & Lybrand/Deloitte Haskins & Sells Management Consultants from 1981 to 1990. He is a graduate of the University of Cambridge and a Fellow of the Institute of Chartered Accountants in England and Wales. Glyn is 60.
7 Angela Morrison Chief Information Officer Appointment Angela became Chief Information Officer (CIO) in 2010.
Robust governance was established, with strong technical and project management input. This involved all the main business stakeholders and the Executive Committee with appropriate escalation to and oversight by the Board and the participation of the RBS Group and Direct Line Group Divestment Steering Group where appropriate.
The primary aim of the Fit for Listing work stream was to deliver the compliance, regulatory and governance obligations of the FSA, the UK Listing Authority and the Financial Reporting Council (“FRC”). It was also to embed this work within an overall philosophy of achieving good governance.
High level controls Under the provisions of the Group’s governance framework, the Group operated a system of high level controls, covering areas relating to the Board, Board Committees, strategic planning, risk management, internal audit, delegated authorities, monitoring and reporting on internal control, and the policy framework. This document was revised during the year to reflect the separation from RBS Group and the Company’s own premium listing.
• Monitoring and overseeing the Group’s operations to ensure competent and prudent management and sound planning.
• Discharging its responsibilities in accordance with relevant legislation and guidance.
Chief Executive Officer • To develop and deliver the Group’s strategy within the policies and values established by the Board.
Our Directors have had a considerable work load during 2012 and showed great commitment to meeting the requirements of the business in a year of transformation. In all, 22 Board meetings were held during the year, 11 of which were scheduled and a further 11 ad hoc.
• On an annual basis, the Audit Committee receives a report on all services provided during the year and their related costs.
• The Group’s economic capital and liquidity positions, particularly in light of the evolving Eurozone uncertainty. The Committee also considered in detail the management actions being taken to address the impact of the economic environment.
Minimum number of meetings The Committee is to meet at least four times a year.
The Remuneration Committee’s terms of reference are available on our website at: www.directlinegroup.com.
• Briefings with investors and banks to convey key messages on performance and strategy.
We will provide proxy appointment forms for each resolution, with the option for shareholders to vote for, or against, or to withhold their vote. We have instructed our registrars, Computershare Investor Services plc, to ensure that all valid proxy appointments are properly recorded and counted.
In determining Executive Directors’ remuneration levels in the Group, we have endeavoured to provide fair pay for the job whilst also taking into account the context of pay in the wider market and their individual performances.
• To secure the appointment and promotion of high-calibre executives to strengthen the management team and secure the skill sets to deliver our strategic aims.
Directors’ remuneration report continued 80 Direct Line Group Annual Report & Accounts 2012
Details of the terms of appointment of the serving Non-Executive Directors are set out in the table below: Non-executive director Position Effective date of contract
3. This figure represents the cash equivalent received in lieu of pension whilst an employee of RBS Group and Direct Line Group.
Notes: 1. The RBS Group share price on 31 December 2012 was £3.245 and the range of prices in year (1 January 2012 to 31 December 2012) was £1.966 to £3.250.
Directors’ remuneration report continued 90 Direct Line Group Annual Report & Accounts 2012
Immediately following the subdivision of the Company’s issued share capital described above, the deferred shares were acquired and cancelled by the Company in accordance with sections 659(1) and 662(1)(c) respectively of the Companies Act 2006.
Following the IPO on 16 October 2012, the Ordinary Shares have a premium listing on the London Stock Exchange. As at the date of this report, 65.27% of the Company’s issued shares are held by The Royal Bank of Scotland Group plc.
Transfer from non-distributable reserve – – – – (167.3) – 167.3 – Capital contribution1 – – – – – – 55.9 55.9 Movement in net assets of Direct Line Versicherung AG2 – – – 0.5 – 4.5 (11.3) (6.3)
1.11 Investment property Investment property comprises freehold and long-leasehold properties that are held to earn rentals or for capital appreciation or both. Investment property is not depreciated but is stated at fair value based on valuations by independent registered valuers. Fair value is based on current prices for similar properties in the same location and condition. Any gain or loss arising from a change in fair value is recognised in the income statement.
The Group accrues for all insurance industry levies, such as the Financial Services Compensation Scheme and Motor Insurance Bureau in the UK, as a provision in the balance sheet and not within insurance liabilities. The levy accruals are based on past underwriting levels at the best estimate rate given the available information at the balance sheet date.
Direct Line Group Annual Report & Accounts 2012 110 1. Accounting policies continued 1.21 Capital instruments The Group classifies a financial instrument that it issues as a financial liability or an equity instrument in accordance with the substance of the contractual arrangement. An instrument is classified as a liability if it is a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms, or as equity if it evidences a residual interest in the assets of the group after the deduction of liabilities.
The table above shows the discounted and undiscounted provision estimates for PPO claims split between those which have already settled as PPOs (approved PPO claims reserves) and those expected to settle as PPOs in the future (anticipated PPOs). Anticipated PPOs consists of both existing large loss case reserves including estimated incurred but not reported (“IBNR”) on these claims as well as claims yet to be reported to the Group. The results are produced from cash flow projections of individual PPO claims. For settled PPOs, these projections allow for the terms of settlement including assumed future life expectancy and indexation. Both the Group’s and the claimant’s medical expert advice of life expectancy are considered. Reinsurance is applied at claim level and the net cash flows are discounted for the time value of money. The discount rate is consistent with the long duration of the claims payments and the assumed future indexation of the claims payments. Future PPO settlements are estimated using a similar projection of cash flows based on a sample of the claim characteristics from settled PPOs adjusted for timing differences.
In the majority of cases the inflation index agreed in the settlement is the Annual Survey of Hours and Earnings inflation, for which the long-term rate is assumed to be 4.0% (2011: 4.5%). The rate of interest used for the calculation of present values is 4.0% (2011: 4.5%), which results in a real discount rate of 0.0% (2011: 0.0%). All future payments in respect of approved PPOs are discounted to the current valuation date. All future payments in respect of anticipated PPO claims are discounted to the assumed settlement date of each claim, rather than the current valuation date.
3. The sensitivities set out above reflect one-off impacts at 31 December.
The Group has policies and limits approved by the Board for managing the market risk exposure. These set out the principles that the business should adhere to for managing market risk and establishing the maximum limits the Group is willing to accept considering strategy, risk appetite and capital resources.
Property risk Property risk results from adverse price fluctuations on real estate investments. In 2012, the Board authorised the allocation of 5% of the UK subsidiary investment portfolio into real estate assets. At 31 December 2012, the value of these investments in property was £128.9 million (2011: £69.5 million). The property investments are located in the UK and are subject to the asset admissibility rules as defined by the FSA.
5. The selection of these sensitivities should not be interpreted as a prediction.
The Group sells rescue and recovery insurance as a stand-alone product through the Green Flag brand or as an insurance add-on to all Group own brand and certain partner motor policies, or as part of packaged bank accounts. Rescue insurance policies range from basic roadside rescue to a full Europe-wide breakdown recovery service.
The table below is an analysis of the Group’s segment assets and liabilities at 31 December 2011: Motor £m
Solicitors’ referral fee income 21.2 27.9 Vehicle replacement referral income 17.5 21.9 Revenue from vehicle recovery and repair services 25.9 39.3 Fee income from insurance intermediary services 1.9 3.4 Other income 6.8 2.6 Other operating income 73.3 95.1 8. Insurance claims
Net asset and tangible net asset value per share are as follows: £m 2011 £m
Impairment testing inherently involves a number of judgemental areas: the preparation of cash flow forecasts for periods that are beyond the normal requirements of management reporting; the assessment of the discount rate appropriate to the business; and estimation of the fair value of CGUs and the valuation of the separable assets of each business whose goodwill is being reviewed.
The principal subsidiary undertakings of the Group are shown below. Their capital consists of ordinary shares which are unlisted.
Cash at bank and in hand: Third parties 132.6 153.5 Related parties 69.1 48.4
The effective interest rate on short-term deposits with credit institutions for the year ended 31 December 2012 was 0.35% (2011: 0.78%) and has an average maturity of 11 days (2011: 85 days).
Issued and fully paid: equity shares Ordinary Shares of £1 each – 1,500.0 Ordinary Shares of 10 pence each 1,500.0 –
Unearned premium reserve 1,775.0 1,872.6 146 Direct Line Group Annual Report & Accounts 2012
The assumptions in respect of the defined benefit scheme and the amounts accounted for under IAS 19 are set out below.
Profit for the year 184.3 249.0 Adjustments for: Investment revenues (199.3) (249.0) Instalment income (125.4) (145.0) Other operating loss 2.1 12.4 Net fair value gains on assets at fair value through income statement 4.8 14.0 Finance costs 28.7 2.7 Equity-settled share-based payment transactions 0.3 – Tax charge 64.8 93.9 Depreciation and amortisation expenses 43.1 31.5 Non-cash movement in demerger reserve 24.6 55.9 Impairment of property, plant and equipment, goodwill and intangible assets 10.7 18.9 Impairment losses on financial investments – 2.0 Impairment losses on reinsurance contracts 6.8 44.7 Profit on sale of available-for-sale financial investments (89.4) (52.9) Loss on sale of property, plant and equipment 4.8 0.2 Profit on disposal of subsidiary – (1.6)
The Group also leases vehicles and other assets under cancellable operating lease agreements.
Trade and other payables including insurance payables – – – 805.0 105.2 910.2 Deferred tax liabilities – – – – 12.1 12.1 Current tax liabilities – – – – 218.0 218.0
Interest income received from deposits held with related parties were at rates ranging from 0.51% to 9.50% (2011: 0.71% to 5.94%).
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