A first special dividend of 27.5 pence per share was paid in relation to the sale of the International division. In addition, the Board has resolved to pay a further special interim dividend of 8.8 pence per share.
NIG is our specialist commercial insurance brand, focused on SMEs. We sell our products through brokers, including an in-house intermediary that arranges RBS1 and NatWest commercial insurance.
Managing bodily injury claims costs remains key UK road accidents have fallen for a number of years, but this trend has recently reversed. The cost per claim is also climbing, with bodily injury and repair costs being aspects of this increase. The UK still has one of the highest whiplash claims rates in Europe, over double that of many other European countries. This raises the potential for claims fraud. Insurers need to keep focusing on anti-fraud activities, without compromising service for genuine claimants. Civil justice reforms in 2013 have helped, but the industry and Government need to do more to tackle this fully. The recently announced Government intention to change the approach to soft tissue injury claims should be a step in the right direction.
Our business has operated on a large scale for almost 30 years, giving us a deep insight into the risks we underwrite. This insight enables us to make our pricing more accurate. It also allows us to invest substantially in data and increase efficiencies. Again, this means we are better able to set accurate prices for the risks we underwrite.
Additionally, we have improved our trading capability. This boosted our competitiveness significantly, including on PCWs. Together, this activity has led to us improving performance, with Motor and Home in-force policies up 1.4% in 2015 in our own brands.
Operating as a smart and efficient manufacturer We know that staying efficient and flexible is key to increasing our competitiveness and improving our customers’ experience. Everyone working together to improve efficiency reduced our costs by 4.6% this year. Furthermore, our strategic leaders are spearheading a programme that will get the entire organisation thinking differently about how we spend our money.
Leading and disrupting our marketplace We have a strong heritage in leading and disrupting our marketplace, and we want to build on our strong market positions. We will do this by identifying and investing in market developments that we believe can drive future growth.
Our objectives for 2016 We will aim to sustain high performance whilst building on our improvements in people engagement in 2015. Improving efficiency and effectiveness across the organisation will also be an important part of our 2016 plans.
We consider our main emerging risks to be the following: Technological change in driving habits reduces consumer need for motor insurance New car technologies, such as crash-prevention technologies and driverless cars, could significantly affect the size and nature of the insurance market, and the role of insurers.
We also sponsored PACTS’ Road Safety Summit. This saw practitioners, civil servants, academics and enforcement services discussing changes to the law associated with drink, drugs and using mobile phones while driving. Additionally, policymakers and campaigners attended the annual PACTS Westminster lecture.
Living wage We comply with the principles of the Living Wage Foundation, relating to our employees.
The market experienced continued high levels of shopping behaviour, especially during the fourth quarter following the rise in IPT. In this context, Motor’s retention ratio remained strong and for 2015 was 1.0 percentage point higher than for 2014.
The current-year attritional loss ratio improved by 3.5 percentage points to 85.0%. Of this improvement, 2.0 points related to the refinement in approach to determining the level of risk margin above the actuarial best estimate for the current year. The underlying loss ratio, excluding the change in risk margin, improved by 1.5 points compared to last year, primarily arising from lower levels of large bodily injury claims which were elevated in 2014. Motor’s experience in relation to large bodily injury claims has improved during the second half of 2015 versus 2014 and the first half of 2015, but remains elevated versus 2013. In addition, Motor has experienced a modest increase in accident frequency during the second half of 2015. Operating profit improved by 13.8% to £338.0 million in 2015, reflecting better underwriting performance on lower net earned premium.
• In-force policies overall decreased 3.1% following a reduction in partner in-force policies, while own brands increased by 1.5% with strong retention
• COR improved by 0.5 percentage points, despite higher than normal claims from major weather events, and currentyear attritional loss ratio improved 3.5 percentage points
Home’s strong own brands maintained their competitiveness in a deflationary market supported by previous investments in claims and pricing initiatives. Risk-adjusted Home prices decreased by 3.0% in the fourth quarter of 2015 compared with the same quarter last year, while risk mix decreased by 2.6%. Own brands retention continued to be strong, supported by previous investments in propositions.
Outlook The market remained highly competitive during 2015 and in early 2016. The market experienced deflation in 2015 overall, although underlying market pricing was broadly stable in the fourth quarter after adjusting for the change in IPT. Overall, the increase in IPT has increased shopping in the market modestly. Home continues to adopt a disciplined approach to managing the trade-off between margin and volumes, and the effect on retention.
Highlights • Operating profit from ongoing operations1 increased to £520.7 million for 2015 (2014: £506.0 million). COR1 from ongoing operations of 94.0% for 2015, an improvement of 1.0 percentage point
Investment income yield1 – continuing operations1 2.4% 2.4% Investment return1 – continuing operations 2.9% 2.9% Basic earnings per share – continuing operations (pence) 27.9 24.0 Adjusted diluted earnings per share1 (pence) 26.6 25.5 Return on tangible equity1 18.5% 16.8% Net asset value per share (pence) 192.2 188.2 Tangible net asset value per share (pence) 153.8 153.1 Dividend per share
2. Home claims from major weather events, including inland and coastal flooding, and storms.
The significant level of prior-year reserve releases in recent years (2015: £378.9 million; 2014: £397.6 million) has arisen primarily from reductions in the actuarial best estimate. Over these time periods, the percentage margin above actuarial best estimate has been broadly maintained or increased. Looking forward, the Group will continue to set its initial management best estimate for future accident years conservatively, and provided that the risk outlook remains stable, it does not expect to need to increase the overall margin further. Over time, the share of the Group’s underwriting profit attributable to current year is expected to increase. Assuming current claims trends continue, the contribution from prior-year reserve releases is expected to remain significant, albeit lower than in 2015.
• Catastrophe reinsurance to protect against an accumulation of claims arising from a natural peril event. The retained deductible is £150 million and cover is purchased up to a modelled one-in-200 years loss event of £1,350 million
Taxation The Board recognises that the Group has an important responsibility to its stakeholders to manage its tax position effectively. The Board has delegated day-to-day management of taxes to the Chief Financial Officer and oversight is provided by the Audit Committee.
Investment portfolio The investment strategy is designed to deliver several objectives, which are summarised below: • To ensure there is sufficient liquidity available within the investment portfolio to meet stressed liquidity scenarios determined by the Risk function
Investment-grade credit 54.0% 59.5% High yield 6.0% 4.8% Investment-grade private placements 4.0% 0.2%
Statement of the Directors in respect of the Strategic report The Board reviewed and approved our Strategic report on pages 1 to 45 on 29 February 2016.
Take ownership Treat it like it’s OUR business; take the initiative, if you can see a better way, go and make a difference; take decisions, be accountable for your actions in whatever role you carry out; take responsibility for your own personal development and performance.
Biography Paul is Chief Executive Officer. He led one of the UK’s largest retail banking businesses during a challenging period, improving its customer and financial performance against peers. In 2009, this experience singled him out as a Chief Executive who could turn around Direct Line Group and lead its divestment from RBS Group.
On behalf of the Board, the Nomination Committee assessed the NEDs’ independence, skills, knowledge and experience as part of its annual review of each Director’s performance. The Board concluded that every current NED was independent, continued to contribute effectively, and showed they were committed to the role. The Nomination Committee’s work during the year led to the appointment of Richard Ward as an additional NED. It also resulted in changes to the membership of the Committees. The Group announced these changes in May 2015 and February 2016. You can find out more about these activities and the Nomination Committee’s work during the year on pages 66 to 67.
Considering the Group’s current position, four-year strategic plan and principal risks, the Board has a reasonable expectation that the Company and the Group can continue in operation and provide the appropriate degree of protection to those that are, or may become, policyholders or claimants in the period to 31 December 2019.
Meetings The Audit Committee held five scheduled meetings in 2015, at appropriate times in the financial and regulatory reporting and audit cycle. This table shows attendance at the scheduled meetings: Scheduled meetings
Sub-committees of the Audit Committee met in May and November 2015 to approve the Group’s Interim Management Statements for the first and third quarters of 2015. The quorum of both sub-committee meetings comprised Andrew Palmer, Paul Geddes and John Reizenstein.
Note: 1. You can find further information in note 11 to the consolidated financial statements.
Responsibilities The Committee’s main responsibilities are to: • Consider and recommend the Group’s risk appetite, framework and tolerance to the Board for its approval
The Committee received regular reports regarding the three strategic risk appetite statements: maintain capital adequacy; stable and efficient access to funding and liquidity; and maintain stakeholder confidence. The Committee also received reports on the risks pertaining to the lower level risk appetite statements that support the three main statements. The Committee monitored the Group’s exposure to these appetites, and assessed the drivers that affect its risk appetite status.
Operational risk The Committee considered and monitored the risks associated with the migration of the Group’s IT infrastructure away from RBS Group. The Committee monitored the Company’s risk management and internal control systems, and reviewed their effectiveness. The monitoring and review covered all material risks, including financial, operational and compliance, reviewing the net risk position after the operation of controls, and also considered the effectiveness of any associated mitigating actions. The Committee is overseeing the ongoing work to improve the performance across the board of the Group’s IT systems, including focusing on risks relating to IT systems’ stability, cyber security and the internal control environment.
Clare Thompson was appointed Chair of the Committee on 13 May 2015, after the AGM and when Glyn Jones stepped down as a NED and Committee member.
Priscilla Vacassin (Chair) 5 of 5 100% Mike Biggs 5 of 5 100% Sebastian James 5 of 5 100% Andrew Palmer 5 of 5 100%
• We continue to build on the focus on customer measures and will be increasing the allocated AIP weighting for this element from 20% to 25% to reflect this. At the same time, we will increase the range of the specific customer measures taken into account in order to better reflect the focus of the business in the upcoming year
• At least 50% of bonus is based on financial measures. The Committee considers various non-financial and individual performance measures. It bases its judgement over the payment outcome at the end of the performance period on its assessment of the level of stretch inherent in targets
Paul Geddes Chief Executive Officer 795 775 2.5% John Reizenstein Chief Financial Officer 481 469 2.5%
During 2015, the Committee reviewed the AIP performance measures' weightings and composition. It also reviewed the overall framework's operation to make sure it is still fit for purpose. The review concluded that, whilst the framework successfully linked Executive Directors' variable pay with the Group's performance, in order to further align the Executive Directors’ interests with those of shareholders and the objectives of the business, the Committee would implement the following changes in 2016: • To further align Executive Directors with shareholders, profit before tax will replace ongoing operating profit as the primary financial measure and will account for 55% of the total AIP outcome, increased from 50%
• Additional customer context, for example, conduct, experience, brand and franchise health
Notes: 1. The Company operates a flexible benefits policy and salary is reported before any personal elections are made.
The chart below illustrates the Committee’s assessment of the level of achievement under the AIP. The outcomes reflect strong performance during the year, particularly in terms of the financial measures, as highlighted in the Group highlights and Chairman’s statement on pages 2 to 3 and 10 to 11 respectively. Notwithstanding this success, the Committee felt that it was appropriate, within the wider economic context and our continued ambitions for improvement, to moderate the achievement under the AIP by 4.4% for each Executive Director, from 87.4% to 83% for Paul Geddes and from 90.4% to 86% for John Reizenstein, as illustrated in the chart below.
We anticipate including similar disclosures next year in respect of the 2016 AIP outcome which, consistent with market practice, are not included on a prospective basis on the basis of commercial sensitivity.
2. There were no changes in benefits provision between 2014 and 2015. The value increase shown above for all employees is mainly due to an increase in the average value of matching shares provided to employees taking part in the BAYE plan over this period.
Notes: 1. Based on actual vesting under the 2010, 2011 and 2012 RBS Group LTIP. The value included in the single figures in respect of these awards is £205,000 in 2012, £728,000 in 2013 and £2,437,428 in 2014.
2. The terms on which Paul Geddes’ 2012 bonus outcome was deferred meant that 60% of the outcome was deferred, with deferral split broadly evenly between deferral into deferred cash and deferred shares, with phased vestings of the deferred amounts over the three-year deferral period.
• Malus and clawback provisions apply to both the cash and deferred elements and are explained in more detail in the notes to the policy table 2012 Long-Term Incentive Plan (the “LTIP”)
• Vested options will remain exercisable for a period of seven years • Malus and clawback provisions apply to the LTIP and are explained in more detail in the notes to the policy table • Awards under the LTIP may be made at various times during the financial year.
• Targets are set at the beginning of each financial year by the Committee • No more than 10% of the bonus is paid for threshold performance (30% for the individual performance element). No more than 60% of the maximum opportunity pays out for target performance. However, the Committee retains flexibility to amend the level of payout at different levels of performance for future bonus cycles based on its assessment of the level of stretch inherent in the targets that have been set and will disclose any such determinations appropriately
• All employee share plans – the Committee considers it is important for all employees to have the opportunity to become shareholders in the Company. The HMRC-approved Buy-As-You-Earn Share Incentive Plan in the UK and an International plan mirroring the UK plan for Italy were both launched during 2013. At year-end, approximately 2,700 employees throughout the Group had signed up to the UK plan.
Principles for recruitment remuneration • In terms of the principles for setting a package for a new Executive Director, the starting point for the Committee will be to look to the policy for Executive Directors as set out in the policy table and structure a package in accordance with that policy. Consistent with the Regulations, the caps contained within the policy table for fixed pay do not apply to new recruits, although the Committee would not envisage exceeding these caps in practice
Any commitments made before promotion to the Board (except when made in connection with the appointment to the Board) can continue to be honoured under the policy even if they are not consistent with the policy prevailing when the commitment is fulfilled.
If a leaver is a ‘bad leaver’, for example leaving through resignation or summary dismissal
Including the special, interim and final dividends, the total dividend for the 2015 financial year is 50.1 pence per share (2014: 27.2 pence). Of this, 36.3 pence relates to special interim dividends (2014: 14.0 pence).
All issued shares are fully paid and free from any restrictions on their transfer, except where law requires, such as insider trading rules. All employees must conform to the Company’s share dealing rules. These rules restrict particular employees’ ability to deal in the Company’s shares at certain times, and mean they need to obtain permission to deal before doing so. Some of the Company’s employee share plans also include restrictions on transfer of shares while the shares are held within the plans.
Each general meeting notice will specify the time for determining a shareholder’s entitlement to attend and vote at the meeting. This will not be more than 48 hours, excluding any part of a day that is not a working day, before the time fixed for the meeting. To be valid, all proxy appointments must be filed at least 48 hours before the meeting’s time.
Notes to the consolidated financial statements 1. Accounting policies 111 2. Critical accounting estimates and judgements 118 3. Risk management 121 4. Segmental analysis 133 5. Discontinued operations and disposal group 136 6. Net earned premium 138 7. Investment return 138 8. Other operating income 139 9. Net insurance claims 139 10. Commission expenses 139 11. Operating expenses 139 12. Finance costs 141 13. Tax charge 141 14. Current and deferred tax 142 16. Earnings per share 143 17. Net assets per share and return on equity 144 18. Goodwill and other intangible assets 145 19. Property, plant and equipment 147 20. Investment property 147 22. Reinsurance assets 148 23. Deferred acquisition costs 148 24. Insurance and other receivables 149 25. Derivative financial instruments 149 26. Financial investments 149 27. Cash and cash equivalents and borrowings 150 28. Share capital 150 29. Other reserves 151 30. Subordinated liabilities 151 31. Insurance liabilities 152 32. Unearned premium reserve 154 33. Retirement benefit obligations 155 34. Share-based payments 157 35. Trade and other payables including insurance payables 36. Notes to the consolidated cash flow statement 160 37. Contingent liabilities 160 39. Fair value 162 40. Related parties 163
Having done this, we worked with those specialists to: • consider the suitability of the methodology used in setting insurance reserves against industry benchmarks; • challenge management’s key assumptions and judgements particularly in relation to the cost per claim for the floods against industry benchmarks; • assess whether the reserving methodology has been applied consistently across periods; • evaluate prior-year reserve releases and emerging trends for consistency with management’s methodology; and
Gain on disposal of subsidiary 21 – 2.3 Profit before tax 507.5 456.8
Direct Line Group Annual Report & Accounts 2015 110 £m 2014 £m
1.8 Goodwill and other intangible assets Acquired goodwill, being the excess of the cost of an acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary, associate or joint venture acquired, is initially recognised at cost and subsequently at cost less any accumulated impairment losses. Goodwill arising on the acquisition of subsidiaries, associates and joint ventures is included in the balance sheet category ‘goodwill and other intangible assets’. The gain or loss on the disposal of a subsidiary, associate or joint venture includes the carrying value of any related goodwill.
1.23 Accounting developments In July 2014, the IASB issued IFRS 9 ‘Financial Instruments’ that will replace IAS 39 ‘Financial instruments: Recognition and Measurement’ in its entirety. The classification and measurement of financial assets and liabilities will be directly linked to the nature of the instrument’s contractual cash flows and the business model employed by the holder of the instrument.
Distribution risk This is the risk of material change in the volume of policies, written through a distribution channel, which may result in losses or reduced profitability.
The investment management objectives are to: • Maintain the safety of the portfolio’s principal both in economic terms and from a capital, accounting and reporting perspective; • Maintain sufficient liquidity to provide cash requirements for operations, including in the event of a catastrophe; and
Note: 1. Securitised credit consists of prime mortgage backed securities, collateralised loan obligations, securitised student loans and commercial mortgage backed securities.
Note: 1. Interest rate futures are settled daily with variation margin and therefore have a fair value of £nil. The notional value is included in the above table to reflect the fact that the Group has exposure to open positions.
Current taxation 98.9 91.1 Deferred taxation (note 14) 9.4 6.4 Tax charge for the year 108.3 97.5
In addition, the Group has an unrecognised deferred tax asset at 31 December 2015 of £4.1 million (2014: £1.9 million) in relation to capital losses.
Proposed dividends: 2015 final dividend of 9.2 pence per share 126.5 – 2014 final dividend1 of 8.8 pence per share – 132.0 2015 second special interim dividend of 8.8 pence per share 121.0 – 2014 second special interim dividend of 4.0 pence per share – 60.0
Earnings attributable to owners of the Company arising from: Continuing operations 399.2 359.3 Discontinued operations 181.2 13.3 Continuing and discontinued operations 580.4 372.6 Opening shareholders’ equity 2,810.5 2,790.0 Closing shareholders’ equity 2,630.0 2,810.5 Average shareholders’ equity 2,720.2 2,800.2 Return on equity 21.3% 13.3%
Motor 3.0 11.6 816.6 (201.6) (276.9) (26.1) Home 3.0 11.6 764.6 (72.2) (99.8) (9.7) Rescue and other personal lines 3.0 11.6 603.7 (55.2) (75.5) (6.9) Commercial 3.0 11.6 46.9 (37.4) (50.8) (4.5)
Receivables arising from insurance and reinsurance contracts: Due from policyholders 800.1 790.7 Impairment provision of policyholder receivables (0.7) (0.6) Due from agents, brokers and intermediaries 60.0 53.7 Impairment provision of agent, broker and intermediary receivables (1.3) (0.7)
Direct Line Group Annual Report & Accounts 2015 150 27. Cash and cash equivalents and borrowings £m 2014 £m
Issued and fully paid: equity shares Ordinary Shares of 10 pence each – 1,500 – 150.0 Ordinary Shares of 10 10/11 pence each 1,375 – 150.0 –
Revaluation during the year – gross (100.5) 97.2 Revaluation during the year – tax 22.0 (23.2) Realised gains – gross (12.5) (22.8) Realised gains – tax 2.5 5.6 Realised gain on disposal of subsidiary – gross (31.8) – Realised gain on disposal of subsidiary – tax 10.1 –
The Group recognised total expenses in the year ended 31 December 2015 of £12.1 million (2014: £6.6 million) relating to equity-settled share-based compensation plans.
Liabilities Subordinated liabilities 10 503.9 503.1 Derivative financial instruments 6 0.4 0.6 Trade and other payables 11 6.6 1.1 Current tax liabilities 5 3.0 – Total liabilities 513.9 504.8 Total equity and liabilities 3,645.5 3,763.0
Profit for the year 539.5 436.7 Other comprehensive (loss) / income Items that may be reclassified subsequently to income statement: Cash flow hedges (1.2) 1.2 Other comprehensive (loss) / income net of tax (1.2) 1.2 Total comprehensive income for the year attributable to owners of the Company 538.3 437.9
AFS debt securities 7.1 5.1 8. Cash and cash equivalents £m 2014 £m
The aggregate fair value of subordinated guaranteed dated notes at 31 December 2015 was £623.2 million (2014: £651.9 million).
Gross written premium The total premiums from contracts that began during the period. International Accounting Standards Board (“IASB”)
A not-for-profit public interest organisation that is overseen by a monitoring board of public authorities. It develops IFRS. These standards aim to make worldwide markets transparent, accountable and efficient.
The profit or loss from operational activities, excluding investment performance. It is calculated as net earned premium less net insurance claims and total expenses.