Our multiple leading brands offer differentiated propositions through a range of distribution channels, answering the needs of different customers. 2017 has continued a trend of growth in own brand in-force policy count. As a result of listening to our customers we challenged the trend of commoditisation, and invested in our Direct Line brand. We did this because we are convinced that great brands and propositions attract customers and build great relationships which deliver real shareholder value. Since its relaunch in 2014, Direct Line has grown consistently year on year.
Brand power We are Britain’s leading motor and home insurer1, offering our customers decades of experience, knowledge and service delivery via our trusted household brands. This scale provides a platform for new product development.
144.0pts Net Promoter Score2 engagement3 of staff fundraised or volunteered on
The Board’s ability to return a substantially higher regular dividend to shareholders is despite the backdrop of a challenging economic environment during the UK’s ongoing negotiations regarding its withdrawal from the European Union. Whilst the day-to-day operations remain substantially unaffected, the Group continues to monitor the consequences of the volatility of Sterling, inflation and uncertain financial markets.
its SCR and expects the Group to operate around the middle of this range in normal circumstances where there is no material opportunity or threat.
• Over the longer term, autonomous vehicles could impact the nature of the risk being insured and the customers being served – as the risk shifts from the driver to the vehicle and more customers move from owning to renting cars
• Signed a letter of intent with Volkswagen Insurance Service (Great Britain) Limited covering five well known brands – Volkswagen, Audi, SEAT, Škoda and Volkswagen Commercial Vehicles
We focus on training our contact centre employees to understand and better respond to our customer needs. We also invest in our brands, which are a key differentiator in a competitive environment.
• We launched two headline propositions in Direct Line with Onward Travel in Motor that promises to keep customers moving after an accident, by arranging and paying for a taxi to continue their journey. We are the only insurer who offers this end-to-end service and since launch, our customers have travelled over 46,000 miles in taxis organised by Direct Line
• In Direct Line Home, we launched our Alternative Accommodation proposition, providing hotels for customers within one hour, following incidents which left their homes uninhabitable
• We are backing Green Flag to disrupt the rescue business through our smart, connected network and embracing our challenger status. To support this ambition, this year we recruited a new Managing Director for Rescue and launched a fresh advertising campaign, with further investment in Green Flag planned in 2018
Smart & efficient manufacturer Efficiency and flexibility to deliver better claims and customer service at lower cost
• We have extended our distribution reach into the strategically important motor manufacturer space: our partnership with PSA Finance UK (part of Groupe PSA, owners of the Peugeot and Citroën brands) and our introducer arrangement with Tesla, positions the Group as one of the leading motor partnership insurers in the UK
• We’ve continued to make good progress on developing alternative pricing approaches using machine learning capabilities. These are intended to help us increase our competitiveness at good loss ratios
• We are also progressing a broad diversity and inclusion agenda through a range of activities, including signing the Women in Finance Charter and sponsoring the Dive-In Festival for Diversity & Inclusion in insurance
• We also continue to monitor our external environment for risk and look to put mitigating actions in place as required. This year we performed an ad hoc Own Risk & Solvency Assessment (“ORSA”) in response to the change in risk profile as a result of the decrease in the Ogden discount rate
We aim to reduce our expense ratio during 2018, absorbing our investment in future capability. We also aim to deliver a lower commission ratio in 2018, normalised for major weather events.
Viability statement In accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors have assessed the prospects of the Group for a period longer than the 12 months required by the going concern statement.
Performance The Group’s focus on being a great retailer was demonstrated again with the launch of another Direct Line Home proposition in 2017 with ‘Emergency Hotel sorted within one hour’; in the event of a major home fire, the Group provides rapid support to its customers at the point of need. Propositions such as this continue to differentiate Direct Line from its peers. The Group’s investment in its digital capabilities has strengthened its partnership capabilities as demonstrated by a faster quote and buy journey that its partners RBS and NatWest can now provide to their customers, increasing new business sales by 50% in 2017.
Instalment and other operating income from Ongoing operations of £179.3 million increased 8.5% (2016: £165.3 million). Instalment income increased by £9.3 million compared to 2016, primarily as a result of higher Motor volumes. Other operating income increased £4.7 million to £62.9 million (2016: £58.2 million).
Restructuring costs Restructuring costs were significantly lower at £11.9 million (2016: £39.9 million), following the exit of a major site in 2016.
Reconciliation of International Financial Reporting Standard (“IFRS”) shareholders’ equity to Solvency II own funds
Capital surplus at 1 January 0.91 0.78 Underlying movement in capital generation 0.49 0.19 Market movements – 0.12
The Group will continue to support proportionate reforms which result in a level playing field across the industry.
Our shareholders Communication with shareholders is extremely important to us. By maintaining dialogue with you, we aim to ensure that your views are considered and our objectives are understood. I would like to thank you for your support and look forward to discussing the Group’s progress with you at our forthcoming AGM on 10 May 2018.
Work together Collaborate across all levels and functions; leverage the skills, knowledge and experience, irrespective of hierarchy, to deliver the best possible results; develop relationships based on trusting each other, partnerships and win-wins; recognise and celebrate success.
Current external appointments Andrew is a Non-Executive Director of Royal London Mutual Insurance Society Limited and Royal London Asset Management Limited. He is also a member of the Financial Reporting Review Panel of the Financial Reporting Council, a Trustee of the Royal School of Needlework and a Trustee and Treasurer of Cancer Research UK.
The Board’s specific duties are set out in the Schedule of Matters Reserved for the
The Audit Committee: • Monitors the integrity of the Group’s financial statements • Oversees and challenges the effectiveness of the Group’s systems of financial and other controls • Monitors the work and effectiveness of the Group’s internal and external auditors and actuaries • Meets privately with the External Auditor and Group Head of Audit in the absence of management • The chair of the Audit Committee has regular one-to-one meetings with the CFO
Strategy The Board sets the Group’s strategy, and monitors management’s performance and progress against the strategic aims and objectives.
• Available to shareholders if they have any concerns they cannot resolve through normal channels
The Executive Committee The Executive Committee is the principal management committee that helps the CEO manage the Group’s operations. It helps him: • Set performance targets • Implement the Board-determined Group strategy and direction • Monitor key objectives and commercial plans to help achieve the Group’s targets • Evaluate new business initiatives and opportunities
Scheduled Board meeting discussions (set out on the timeline above) focused on four main themes in 2017: Strategy & execution, including: setting the Group’s key strategic targets and monitoring the Group’s performance against those targets; reviewing customer experience and monitoring the Group performance against external brand metrics; reviewing and approving key projects aimed at developing the business or rationalising costs; reviewing the approach to mergers and acquisitions; and reviewing the individual strategy of key business lines.
During 2017, the CFO and the Investor Relations team held calls with credit rating agencies on a quarterly basis with each published set of results and an annual review meeting in December.
Dealing with employees We shall maintain a working environment that attracts, motivates and retains employees, and is intolerant of any type of discrimination, harassment or victimisation.
Reserves Twice a year, the Committee reviews and challenges the key assumptions and judgements, emerging trends, movements and analysis of uncertainties underlying the ABE of technical provisions. At the same time, the Committee considers and challenges the appropriateness of the CFO’s proposals for MBE of reserves. These are informed by actuarial analysis, wider commercial and risk management insights, and principles of consistency from period to period. After reviewing the ABE and MBE of reserves, the Committee recommends them to the Board.
During the year, the Committee discussed the position on its external audit services contract and examined a number of options regarding the timing of tendering for the external audit, including the mandatory rotation of the Group’s audit firm, taking into account the reforms of the audit market by the Competition and Markets Authority and the EU. This included whether it was appropriate to tender the external audit contract for the year ending 31 December 2019.
During the year, the Committee approved fees of £0.2 million to Deloitte for services unrelated to audit work. The following is a breakdown of fees paid to Deloitte for the year ended 31 December 2017.
Throughout the year the Committee received reports on the IECM, including independent validation results and the IECM Owners’ report. This outlined the scope of the IECM, key outputs, risk drivers, significant parameters, expert judgements and key assumptions. The Committee challenged management on the assumptions in relation to the reinsurance decisionmaking process in the context of the Group’s risk appetite as a result of reviewing the IECM Owners’ report.
Additional information The Committee has unrestricted access to management and external advisers to help discharge its duties. It is satisfied that in 2017 it received sufficient, reliable and timely information to perform its responsibilities effectively.
In addition to monthly one-to-one meetings with the Chair, the CRO also met privately with the Committee without management being present.
Areas of focus in the reporting period • The Committee’s principal focus during 2017 was on
• The Committee reviewed the Group’s liquidity needs under stress scenarios in order to assess the adequacy of liquidity held within the investment portfolio. The Committee looked to strike a balance between possible short-term liquidity requirements (without the need to sell assets, potentially incurring capital losses) and income foregone. The overall requirement was reduced in response to outputs from catastrophe modelling, while overnight requirements were increased in the light of collateral requirements observed following the depreciation of Sterling immediately after the EU referendum. The Committee also received a separate report on planned changes under EU money market reform which will impact the future investment of cash assets.
• The Committee reviewed the effect of the change in the ODR on the outcome of the 2016 AIP. Whilst the ODR change was not announced until the end of February 2017, it materially impacted the financial results for 2016 and AIP payout. As the return on tangible equity (“RoTE”) for 2016 was impacted, the vesting level of the long term incentive plan (“LTIP”) awards granted in 2014 and which vested during 2017 was also reduced. The Committee agreed to keep their assessment of the 2016 AIP outcome under review if the ODR was raised during the year as a result of a further government review. Given the announcements in 2017 from the Ministry of Justice and the Treasury with regards to the process for setting the ODR, the Committee agreed to keep their assessment of the 2016 AIP under review for 2018.
The Committee considered the impact of John Reizenstein’s planned retirement as CFO on his variable remuneration arrangements and confirmed his “good leaver” status without the exercise of any discretion.
Solvency II-identified staff The Committee reviewed and approved the Group’s remuneration policy statement and register of identified staff before submission to the PRA in January 2018. The Committee’s remit includes oversight of the remuneration of Solvency II-identified staff. Remuneration for control functions, which are Corporate Actuarial, Compliance, Group Audit and Risk, was considered against specific arrangements appropriate to those roles.
Approach to pay in 2018 The policy was renewed at the 2017 AGM and included a number of developments in best practice, including the addition of holding periods to new LTIP awards.
Financial element (55% weighting) As discussed above, there is no pre-set scale around the PBT target for the 2017 financial year and, in accordance with the AIP terms, the Committee determined the appropriate payout for the performance achieved. The outturn was 26% ahead of the target and, therefore, considerably ahead of the indicative maximum of 10% ahead of target resulting in a maximum payout for this element. As noted in the Chair’s letter, PBT performance included the neutralisation of the capital transactions, which had no impact on the outturn.
2017 saw the introduction of a basket of people measures to the AIP scorecard to reflect the importance of this agenda to the success of the Group. Progress on these measures was also considered to be very strong, with key focus areas such as succession strength, diversity and employee engagement showing notable development.
4. It should be noted that the bonus shows a high increase as the AIP was depressed in 2016 due to the significant reduction arising from the Ogden discount rate change. This remains subject to review if the rate is subsequently increased following the Government’s review.
Note: 1. Mike Holliday-Williams exercised on 4 May 2017 at £3.5752 resulting in an aggregate gain of £194,788.
No. of dividend shares added post vesting No. of share options exercised
The list below sets out the gateway criteria for the AIP for 2018.
The Committee reviewed the performance targets and, in line with its commitment to both reflect the impact of the capital transactions and to ensure that awards to Executive Directors would only be payable if significant value has been created for shareholders, decided to increase the RoTE target range as follows: Performance required for threshold vesting Performance required for maximum vesting
• Performance is measured against targets set at the beginning of the performance period, which may be set by referring to the time of grant or financial year
• Maximum and target bonus levels for Executive Directors are set by taking into account annual bonus practice throughout the organisation and referring to practice at other insurance and general market comparators
The elements of remuneration included in each scenario are as follows: Minimum Consists of fixed remuneration only (base salary, benefits and pension): • Base salary is the salary to be paid from 1 April 2018 • Benefits measured as benefits paid in 2017 as set out in the single figure table on page 79, including the value of matching shares under the SIP where relevant • Pension measured as the defined contribution or cash allowance in lieu of Company contributions, as a percentage of salary (25% of base salary for the CEO and CFO-designate, and 15% of salary for the MD Personal Lines)
Use of financial instruments 40 and 41 Important events since the financial year end
Details of shareholder dividend waivers 101 Controlling shareholder agreements Not applicable
The final dividend resolution provides that the Board may cancel the dividend and, therefore, payment of the dividend at any time before payment, if it considers it necessary to do so for regulatory capital purposes. You can find detailed explanations about this in the Notice of AGM. The special interim dividend can also be cancelled if necessary.
Secretary Roger Clifton is the Company Secretary of Direct Line Insurance Group plc. He can be contacted at the Company’s Registered Office, details of which are on page 181.
Political donations The Group made no political donations during the year (2016: nil).
Global GHG emissions data for Reporting Year 1 January 2017 – 31 December 2017
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose, with reasonable accuracy, the Company’s financial position at any time; and enable them to ensure the financial statements comply with the Companies Act 2006. Additionally, the Directors are responsible for safeguarding the Company’s assets and, hence, taking reasonable steps to prevent and detect fraud and other irregularities. The Directors are responsible for maintaining and ensuring the integrity of the corporate and financial information included on the Company’s website at www.directlinegroup. com. Legislation in the UK governing preparing and disseminating financial statements may differ from legislation in other jurisdictions.
Conclusions relating to going concern, principal risk and viability statements Going concern We have reviewed the Directors’ statement on page 103 to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group’s and Parent Company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements.
In performing this impairment assessment, the assets were tested for impairment as part of the assets’ cash generating unit (“CGU”) in accordance with IAS 36 as the future cash flows will not be generated independently from the Motor, Home and Rescue and other personal lines CGUs. In addition, a significant level of judgement is required in determining the valuation of this impairment charge given the uncertainty over end-state system architecture and successful project delivery. As a result of these factors we identified the valuation of these intangible assets as a potential fraud risk.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
Use of our report This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
• the Parent Company financial statements are not in agreement with the accounting records and returns
Colin Rawlings FCA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Statutory Auditor London, United Kingdom 26 February 2018
Shares distributed by employee trusts – 25.6 – – – – (25.6) – – – Tax on share-based payments – – – – – – 1.5 1.5 – 1.5
Other operating income Vehicle replacement referral income Vehicle replacement referral income comprises fees in respect of referral income received when a customer or a non-fault policyholder (claimant) of another insurer has been provided with a hire vehicle from a preferred supplier.
Expenditure on internally generated goodwill and brands is written off as incurred. Direct costs relating to the development of internal-use computer software and associated business processes are capitalised once technical feasibility and economic viability have been established. These costs include payroll costs, the costs of materials and services and directly attributable overheads. Capitalisation of costs ceases when the software is capable of operating as intended. During and after development, accumulated costs are reviewed for impairment against the projected benefits that the software is expected to generate. Costs incurred prior to the establishment of technical feasibility and economic viability are expensed as incurred, as are all training costs and general overheads.
Notes to the consolidated financial statements continued 1. Accounting policies continued When the Group has an onerous contract, it recognises the present obligation under the contract as a provision. A contract is onerous when the unavoidable costs of meeting the contractual obligations exceed the expected future economic benefit. In respect of leasehold properties, a provision is recognised when the Group has a detailed formal plan to vacate the leasehold property, or significantly reduce its level of occupancy, the plan has been communicated to those affected and the future property costs under the lease exceed future economic benefits.
In July 2014, the IASB issued the final version of IFRS 9 ‘Financial Instruments’ that replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’ and all previous versions of IFRS 9; it was endorsed by the EU in 2016. IFRS 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets; it is effective for annual periods beginning on or after 1 January 2018.
In May 2014 the IASB issued IFRS 15 ‘Revenue from Contracts with Customers’ to establish a single comprehensive model to use in accounting for revenue recognition and measurement. The standard provides guidance on when and how combined contracts should be unbundled and when a contract price includes a variable consideration element.
The Group is mainly exposed to the following insurance risks: Reserve risk Reserve risk relates to both premium and claims. This is the risk of understatement of reserves arising from: • the uncertain nature of claims; • data issues and changes to the claims reporting process; • operational failures; • failure to recognise claims trends in the market; and
The Group cedes insurance risk to reinsurers but, in return, assumes counterparty default risk against which a reinsurance bad debt provision is assessed. The financial security of the Group’s panel of reinsurers is therefore important and both the quality and amount of the assumed counterparty default risk are subject to an approval process whereby reinsurance is only purchased from reinsurers that hold a credit rating of at least A– at the time cover is purchased. The Group’s leading counterparty exposures are reviewed on a monthly basis by the Head of Reinsurance and Corporate Insurance. The Group aims to contract with a diverse range of reinsurers on its contracts to mitigate the credit and / or non-payment risks associated with its reinsurance exposures.
Associated interest rate risk on hedged items (3.0) (3.7) 9.3 (27.6) Net losses on interest rate derivatives (1.2) (5.4) (7.6) (6.9)
8. Net insurance claims Gross Reinsurance Net Gross Reinsurance Net £m £m £m £m 2016 £m
Earnings attributable to owners of the Company 434.0 278.8 Weighted average number of Ordinary Shares (millions) 1,366.1 1,368.7 Basic earnings per share (pence) 31.8 20.4
WWW.DIRECTL INEGROUP.COM 147 16. Net assets per share and return on equity Net asset value per share is calculated as total shareholders’ equity divided by the number of Ordinary Shares at the end of the period excluding shares held by employee share trusts.
Charge for the year – 54.1 54.1 Impairment losses2 – 56.9 56.9
Receivables arising from insurance contracts: Due from policyholders 840.4 820.8 Impairment provision of policyholder receivables (1.2) (0.3) Due from agents, brokers and intermediaries 71.3 66.4 Impairment provision of agent, broker and intermediary receivables (0.9) (1.0)
Experience adjustment gains / (losses) on scheme liabilities 1.5 1.2 1.2 1.0 (0.2) Experience adjustment gains / (losses) on scheme assets 1.0 13.7 (1.9) 12.9 (1.3)
Accident year 2008 £m 2011 £m £m £m £m £m 2017 £m Total £m
Repayment of subordinated liabilities 326.8 – Interest paid on subordinated liabilities2 51.6 – Interest rate swap cash settlement – (19.9) Financing cash flows 378.4 (19.9) Premium paid to buy back of debt issued (76.8) – Amortisation of arrangement costs and discount on issue of subordinated liabilities (2.2) – Accrued interest expense on subordinated liabilities (47.5) – Unrealised gain on associated interest rate risk on hedged item 11.7 – Realised gain on associated interest rate risk on hedged item 11.3 10.7 Net accrued interest on interest rate swap – (1.2) Fair value movement in interest rate swap – (11.7) Non-cash changes (103.5) (2.2)
The accounting policies that are used in the preparation of these separate financial statements are consistent with the accounting policies used in the preparation of the consolidated financial statements of Direct Line Insurance Group plc as set out in those financial statements.
Credit to the income statement 0.4 – 0.4 Credit to other comprehensive income – 0.1 0.1 Other movements (0.7) – (0.7)
Note: 1. The AFS debt securities are fixed interest UK Sovereign debt classified as level 1 within the Group’s fair value hierarchy which is set out in note 40 of the consolidated financial statements.
Group subsidiaries are repayable on demand and are subject to interest on outstanding balances based on the average 3 month LIBOR rate.
How to avoid share fraud • Remember that FCA-authorised firms are unlikely to contact you unexpectedly offering to buy or sell shares
These are claims payments as awarded under the Courts Act 2003. PPOs are used to settle large personal injury claims. They generally provide a lump-sum award plus inflation-linked annual payments to claimants who require long-term care.
This is a representation of the underlying earnings over the number of shares in issue adjusted for potential dilutions from the exercise of options and contingently issuable shares.
Tangible net asset per share is defined as tangible equity (as above) expressed as a value per share and is reconciled in note 16 on page 147.
Total costs from Ongoing operations is defined as operating expenses adjusted to remove restructuring costs and operating expenses charged to the Run-off segment (reconciled in note 10) plus claims handling expenses incurred in net insurance claims on Ongoing operations (note 8). This is reconciled on page 37.
This represents the total value of operating expenses including those allocated to the insurance claims line as claims handling expenses excluding business in Run-off and restructuring costs.