Notes: 1. See glossary on pages 191 to 192 for definitions and Appendix A – Alternative performance measures on pages 193 and 194 for reconciliation to financial statement line items.
We have a track record of delivering strong returns to shareholders having distributed £2.5 billion in dividends over the past six years. This together with our share price performance has delivered an attractive total shareholder return.
16 Oct 2012 31 Dec 2012 31 Dec 2013 31 Dec 2014 31 Dec 2015 31 Dec 2016 31 Dec 2017 31 Dec 2018
IT infrastructure The Board continues to provide oversight of the ambitious programme of activity to upgrade and better integrate the major IT systems within the Group’s technology infrastructure, aimed at improving the Group’s digital offering, customer experience and operational efficiency. Good progress has been made in this area and 2019 is set to be an important year for the Group in terms of the delivery of the new platform.
Customer, culture and conduct Meeting the needs of our customers is central to the Group’s strategy and sustainability. The Board recognises that opportunities will arise to improve further the services offered to customers, and along with its investment in IT capability to improve the efficiency and effectiveness of the business, it has also encouraged a range of customer experience initiatives which are designed to deliver increased levels of customer satisfaction.
Our latest generation IT capabilities went into testing at the end of 2018. These are designed to allow us to provide more targeted products with improved customer journeys, by delivering greater pricing agility with increased data flows, more product flexibility and increased self-service, amongst other benefits.
The Group has taken several steps to tackle this issue in recent years. In 2016 we backed the Association of British Insurers’ and the British Insurance Brokers’ Association’s Code of Good Practice to ensure that our people were trained to identify potential vulnerable consumers. We believe that renewal premiums should not become excessive over time so we put in place checks and balances for our long-standing customers. Increasing numbers of long-standing customers have seen their renewal premium either frozen or reduced as a result. This year we welcomed the Association of British Insurers’ principles which are intended to help embed best practice across the industry.
Cost control Once again, we reduced our expense ratio during 2018, absorbing our investment in future capability. We aim to continue to make progress against our strategic initiatives with a focus on cost and efficiency.
Our objectives are to create value for all our stakeholders, putting our customers first and investing in our people, to support the communities we live and work in, and to generate sustainable profits for our shareholders.
We aim to make an underwriting profit. For 2019, we expect to achieve a COR in the range of 93% to 95% normalised for weather.
The launch of our customer experience strategy, along with a new transactional feedback tool and improved propositions have increased our overall brand score.
– Demonstrating the value in the Group’s diversified product base, current-year underwriting profitability was stable despite a reversal of the benign motor conditions in 2017. The expense ratio reduced to 23.4%.
5. The Group’s dividend policy states its expectation that one-third of the annual dividend will generally be paid in the third quarter as an interim dividend and two-thirds will be paid as a final dividend in the second quarter of the following year.
Direct Line for Business 132.0 122.6 NIG and other 379.0 378.9
Solvency capital requirement at 1 January 1.39 Model and parameter changes (0.07) Exposure changes (0.06) Solvency capital requirement at 31 December 1.26
Gross written premium £606.9m £799.1m Loss ratio 61.8% 50.6% Commission ratio 9.4% 17.7% Expense ratio 22.4% 21.1% Combined operating ratio 93.6% 89.4% Operating profit £83.1m £128.8m
Performance Rescue and other personal lines in-force policies fell by 2.7% to 7.5 million. Gross written premium for Rescue and other personal lines increased by 0.4% compared with 2017. Green Flag continued to grow its higher margin direct business during 2018, increasing in-force policies by 11.5% to over 894,000 as 2018’s extreme weather events reminded potential customers of the benefits of having breakdown cover. Gross written premiums grew by 14.3% to £69.6 million which was driven by higher volumes and a shift towards higher levels of cover which attracted higher average premiums.
Risk appetite Our risk appetite statements define the risks we are prepared to accept to achieve our business objectives. The processes for setting risk appetite, particularly the cascade, assessment, mitigation and reporting of risk exposures against risk appetite, are documented in the Group’s policies and underlying minimum standards. To monitor whether the business remains within risk appetite, we use key risk indicators, among other information.
The risk management framework enables us to manage the business with the necessary understanding of our risks and controls, while also having the appropriate levels of oversight to ensure risks are managed proactively. The risk management framework is aligned to the Three Lines of Defence model, and provides a comprehensive approach for managing our risks. Our Policy Framework is a central part of the risk management framework, and includes policies and minimum standards which provide the context and risk appetite boundaries within which the business conducts its activities.
Under the leadership of our Board, responsibility is at the heart of how we think about our business. Our five pillar ESG strategy ensures that we target delivering long-term sustainability for our customers, our people and our shareholders and that we consider the impact we have on our society and our planet.
In absolute terms, we have reduced our emissions significantly after rationalising and implementing an energy-savings plan across our estate over the last six years, resulting in a 46% reduction in GHG emissions.
This year our recruitment team has received training on removing gender-biased language when advertising for roles, including how to use tools which identify gender specific wording.
The Nomination Committee led the recruitment of Gregor Stewart and Mark Gregory, who joined the Board as NEDs on 1 March 2018, and Fiona McBain, who was appointed as a NED with effect from 1 September 2018. The selection processes were informed by the Nomination Committee’s annual review of the Board’s balance of skills, experience and expertise.
Biography Paul is the CEO and will be succeeded by Penny James with effect from the conclusion of the Annual General Meeting on 9 May 2019. He has served as CEO for close to 10 years and led the Group’s transformation, its separation from RBS Group, its initial public offering and its entry into the FTSE 100. After joining RBS Group in 2004 as Managing Director responsible for products and marketing, Paul became the CEO of RBS Group’s mainland UK retail banking business. Before joining RBS Group, he held various senior multi-channel retailing roles in the Great Universal Stores and Kingfisher groups. Paul started his career in marketing, with UK and European roles at Procter & Gamble.
Current external appointments Sebastian is Senior Vice President of Walgreens Boots Alliance and President and Managing Director of Boots. He is also a trustee of the charity Save the Children.
The Board Risk Committee: – Provides oversight and advice to the Board in relation to current and potential future risk exposures of the Group and the future risk strategy, including determination of risk appetite and tolerance
Mark Gregory, Gregor Stewart and Fiona McBain, who were appointed as NEDs during the year, each had bespoke induction programmes which included sessions on the Group’s strategy, operational businesses, financial performance, capital management, risk management, regulatory landscape and governance framework.
Based on the responses to the questionnaire and resulting reports, the Directors are satisfied that the Board and each of its Committees operated effectively in 2018. The Directors are also satisfied that they made significant progress in areas identified for potential improvement in 2017.
The Committee reviewed and concluded that the Annual Report & Accounts taken as a whole was fair, balanced and understandable and provided sufficient information to enable the reader to assess the Group’s position and performance, business model and strategy.
The non-audit fee of £0.6 million related primarily to assurance activities on IT projects in relation to the development of new systems.
– The Committee considered medium to long-term risks to the Group to gain assurance that management is taking timely actions to manage risks. The Committee received reports from management on the emerging risks the Group faces and evaluated how the Group could be affected by potential developments. During the year, the Committee reviewed all key risks in the Emerging Risk Register, focusing particularly on political and economic risks, and considered the impacts of autonomous technology on the motor market. The Committee considered climate change and its impact both on the Group’s current book of business and the Group’s longer-term strategy.
Compliance and regulatory risk During the year, the Committee considered the Group’s compliance with regulatory requirements including conduct and financial crime. The Committee approved the annual Compliance Plan which sets out the compliance activities which will be undertaken in the coming year with the objectives of: (i) ensuring compliance; (ii) maintaining an open and co-operative relationship with regulators; and (iii) ensuring the Board and employees understand their regulatory responsibilities.
Operational risk The Committee continued to review and challenge IT controls, including those relating to IT systems’ stability, cyber security and technology resilience. The Committee assessed the level of prevention, protection and detection controls in relation to cyber risk and the residual risk for each of the IT control areas, taking into account any compensating controls and/or mitigating actions. The Committee challenged the progress made in relation to technology risk, in particular to ensure that plans were in place to ensure the Group took action where IT hardware was due to reach the end of its useful life or would no longer be supported. The Committee also reviewed IT risk appetite statements to gain assurance that these were appropriate and in line with the overarching Group risk appetite.
Membership, attendance and responsibilities of the Committee can be found on pages 67 and 68.
The Group launched a new CSR strategy for 2018 which focused on two overarching goals: ‘Protecting Britain’s road users’ and ‘Reflecting an ever-changing Britain’. Information on the key strategies for these goals is set out below.
The Board carried out a thorough recruitment process and identified Penny James as the ideal candidate for the role: after considering the needs of the Group, the role and her experience, the Committee agreed to match the remuneration from her previous employer to secure her services. The Board was satisfied that Penny was the right person for the job and this was considered the only way to bring Penny into the organisation. The Committee Chair and the Board Chair engaged with shareholders to understand any concerns. Shareholders were supportive of the decisions that the Board and Committee had made and understood the reasons for them. Engagement with investors in relation to remuneration will continue with regards to new appointments to the Board.
– No salary increase for the outgoing CEO – CEO-designate salary to increase to £800,000 (effective from appointment on 9 May 2019)
– Awards typically granted as nil-cost options – Awards typically granted every March and August at half the annual level
During the year, FIT advised on market practice, corporate governance and regulations, incentive plan design and target-setting, recruitment, investor engagement and other matters that the Committee was considering. FIT did not provide the Company with other services. The Committee is satisfied that the advice FIT provided was objective and independent.
2. The revised 2016 annual bonus figure for John Reizenstein relates to an adjustment of 20% of maximum opportunity of the original award of £308,294, resulting in an increase of £143,393.
– Significant improvements in the stability and performance of the technology transformation programme, supporting our people perform their roles more efficiently, resulted in increased internal customer satisfaction, with savings for the programme on track.
Notes: 1. 2016 RoTE elements are based on the three-month average share price to 31 December 2018 of £3.20042. 2. John Reizenstein stepped down from the Board on 10 May 2018. His 2016 LTIP awards are pro rated accordingly and will be disclosed as a payment to past directors in the 2019 annual report on remuneration. John Reizenstein’s 2018 single figure disclosure will therefore only include the amount vesting in relation to the March 2015 TSR component of the LTIP.
3. Danuta Gray was appointed as Chair of the Remuneration Committee with effect from the AGM on 10 May 2018. 4. Mark Gregory was appointed to the Board with effect from 1 March 2018. He was appointed as Chair of the Investment Committee and as a member of the
Base salaries of all employees, including our Executive Directors, are set with reference to a range of factors including market practice, experience and performance in role. For reference, the CEO base salary median pay ratio is 33:1. In reviewing the ratios the Committee also noted that the CEO’s remuneration package is weighted more heavily towards variable pay (including the AIP and LTIP) than the wider workforce due to the nature of the role, and this means the ratio is likely to fluctuate depending on the performance of the business and associated outcomes of incentive plans in each year.
Approval of Directors’ Remuneration Report (2018 AGM) 766,710,834 76.58% 234,492,835 23.42% 7,284,313 0.72% Approval of Directors’ Remuneration Policy (2017 AGM) 881,046,703 98.29% 15,349,348 1.71% 32,669,059 3.52%
Direct Line Group share awards Direct Line Group Deferred Annual Incentive Plan awards (Audited) This table details the Directors’ interests under the Direct Line Group DAIP.
Notes: 1. These awards take the form of nil-cost options over the Company’s shares. Awards granted before 2014 accrue dividend entitlements until the date of transfer of shares. Awards granted from 2014 accrue dividend entitlement from the grant date to the date on which an award vests. 2. Dividends added post-vesting are shown to 31 December 2018, although these are not realised until exercise. 3. Paul Geddes exercised 139,961 options on 26 March 2018 when the share price was £3.728 resulting in a notional gain of £521,775. 4. Mike Holliday-Williams exercised 83,975 options on 26 March 2018 when the share price was £3.728 resulting in a notional gain of £313,059. 5. John Reizenstein exercised 72,499 options on 26 March 2018 when the share price was £3.728 resulting in a notional gain of £270,276. 6. John Reizenstein stepped down from the Board at the AGM on 10 May 2018 and his share interests are as that date. However, the movements in his DAIP
Notes: The Company’s share price on 31 December 2018 was £3.187, and the range of prices in the year was £3.049 to £3.932. 1. These awards take the form of nil-cost options over the Company’s shares and are subject to performance conditions to be assessed by the Committee. Awards granted before 2014 accrue dividend entitlements until the date of transfer of shares. Awards granted from 2014 accrue dividend entitlement from the grant date to the date on which an award vests.
The awards accrue dividend equivalent shares until vesting, as per the terms of the legacy awards.
Director Position 2019 base salary £’000 2018 base salary £’000 Annual change in base salary
The Committee reviewed the performance targets and decided to maintain the RoTE target range at the same level as in 2018 as follows: Performance measure Vesting for threshold performance
Strategic report The Company’s Strategic report is on pages 1 to 59. It includes the following information that would otherwise need to be disclosed in this Directors’ report: Subject Pages
Use of financial instruments 30 and 36 Important events since the financial year end 12 to 17 Likely future developments in the business 17 Employee involvement 56 to 59 Research and development 18 to 21
How the scope of our audit responded to the key audit matter We assessed the design and implementation of key controls over the impairment of intangible assets. This included senior management review and approval of the impairment review.
Instalment income 119.9 116.4 Other operating income 7 72.1 62.9 Total income 3,436.1 3,489.7
IFRS 17 was issued by the IASB in May 2017 to replace IFRS 4 and is expected to be effective for reporting periods beginning on or after 1 January 2022, with comparative figures required. IFRS 17 is a comprehensive new accounting standard for all insurance contracts covering recognition and measurement, presentation and disclosure. The overall objective of IFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers and to replace the requirements of IFRS 4 that allowed insurers to apply grandfathering of previous local accounting policies.
Notes: 1. These sensitivities are net of reinsurance and exclude the impact of taxation. 2. These sensitivities reflect one-off impacts at 31 December and should not be interpreted as predictions. 3. The sensitivities relating to an increase or decrease in the real discount rate used for PPOs illustrate a movement in the time value of money from the assumed level of 0% for reserving. The PPO sensitivity has been calculated on the direct impact on the change in the real discount rate with all other factors remaining unchanged.
Derivative liabilities At fair value through the income statement: Foreign exchange contracts (forwards) 1,716.2 20.6 – – 20.6 Designated as hedging instruments: Interest rate swaps 341.2 0.4 0.4 4.5 5.3
Spread Impact of a 100 basis points increase in spreads on financial investments2,3,5 – – (171.1) (183.5) Interest rate Impact of a 100 basis points increase in interest rates on financial investments and derivatives2,3,4,5 15.6 17.3 (101.1) (98.3) Investment property Impact of a 15% decrease in property markets (48.3) (46.4) (48.3) (46.4)
156 DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS FINANCIALS V6.1 3. Risk management continued 3.3.4 Operational risk This is the risk of loss due to inadequate or failed internal processes, people, systems, or from external events. Material sources of operational risk for the Group include: Change risk This is the risk of failing to manage the Group’s change portfolio resulting in conflicting priorities and failure to deliver strategic outcomes to time, cost or quality.
Note: 1. The Motor segment for the year ended 31 December 2017 includes the Run-off segment, which comprised other segment assets of £642.7 million and other segment liabilities of £512.8 million.
Salaries, fees, bonuses and benefits in kind 5.9 5.6 Gains on exercise of share options 4.2 5.3
20. Subsidiaries The principal subsidiary undertakings of the Group, over which it exercises 100% voting power, are shown below. Their capital consists of Ordinary Shares which are unlisted. All subsidiaries (a full list of which is included in note 2 of the Parent Company’s financial statements) are included in the Group’s consolidated financial statements.
Notes: 1. The liquidity fund is an investment in an open-ended fund incorporated in the Republic of Ireland which targets capital stability and income in the UK. It is invested in short-term fixed income and variable rate securities (such as Treasury Bills) listed or traded on one or more recognised exchange. 2. The absolute return bond fund is an investment in an open-ended fund incorporated in Luxembourg which targets positive returns in all market conditions. It is invested in short-term fixed income asset classes and seeks additional returns via a range of additional investments including certificate of deposits, rates and global currencies.
The most recent funding valuation of the Group’s defined benefit scheme was carried out as at 1 October 2017. This showed an excess of assets over liabilities. The Group agreed with the trustees to make contributions of up to £1.5 million per annum in 2019, 2020 and 2021 in the event that a deficit subsequently emerges on the anniversary of the funding valuation date. As a result of the most recent funding update, no contributions are expected to be payable in 2019 (2018: £nil).
Notes: 1. The interest rate swaps relate to the Group’s 10-year designated hedging instrument which exchanges the fixed rate of interest for a floating rate of 3-month LIBOR
Differences arise between carrying value and fair value where the measurement basis of the asset or liability is not fair value (e.g. assets and liabilities carried at amortised cost). Fair values of the following assets and liabilities approximate their carrying values: – insurance and other receivables; – cash and cash equivalents; – borrowings; and – trade and other payables, including insurance payables (excluding provisions).
182 DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS FINANCIALS V6.1 £m
The Company’s financial statements are prepared in accordance with Financial Reporting Standard FRS 101 ‘Reduced Disclosure Framework’. In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of IFRSs issued by the IASB as adopted by the EU but makes amendments where necessary to comply with the Companies Act 2006.
At each balance sheet date, the Company assesses on a forward-looking basis, whether there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as held at amortised cost or fair value through other comprehensive income, is expected. This assessment depends on whether there has been a deterioration in the instrument’s credit quality since initial recognition. The Company measures the expected loss as the difference between the carrying amount of the asset or group of assets including the allowance for expected losses, and the present value of estimated future cash flows from the asset or group of assets, discounted at the effective interest rate of the instrument. The expected loss allowance is based on assumptions about risk of default and expected loss rates. The Company uses judgement in making these assumptions and selecting the inputs to the impairment calculation based on the credit quality and history of the financial asset or group of financial assets, as well as existing market conditions and forward-looking expectations.
Appendix A – Alternative performance measures continued Additionally, the current-year attritional loss ratio within the analysis by division section has also been identified as an alternative performance measure, similarly reconciled to the financial statements and notes on page 29 and defined in the glossary on page 191.
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