Outsourcing risk This is the risk of failing to implement a robust framework for the sourcing, appointment and ongoing contract management of third party suppliers, outsourced service providers and intragroup relationships. This includes both domestic and offshore outsourcing activities.
The measurement and management of liquidity risk within the Group is undertaken within the limits and other policy parameters of the Group’s liquidity risk appetite and is detailed within the liquidity risk minimum standard. As part of this process the Investment and Treasury team are required to put in place a liquidity plan which must consider expected and stressed scenarios for cash in-flows and out-flows that is reviewed at least annually by the Investment Risk Committee. Compliance is monitored in respect of both the minimum standard and the regulatory requirements of the PRA.
Commercial real estate loans 4.3 56.6 108.1 – – 169.0 Cash and cash equivalents1 1,358.6 – – – – 1,358.6
Trade and other payables, including insurance payables 547.6 5.2 0.7 0.6 – 554.1 554.1
The Group’s regulatory capital position is assessed against the solvency II framework. From 1 July 2016, the Group gained approval to assess its SCR using a partial internal model, including a full internal economic capital model for the UKI underwriting entity. The model is calibrated to a 99.5% confidence interval and considers business written to date and one year of future written business over a one-year time horizon, in line with solvency II requirements.
3.5 Capital adequacy (unaudited) Using the Group’s partial internal model, there is a capital surplus of approximately £0.89 billion above an estimated SCR of £1.26 billion as at 31 December 2018 (31 December 2017: £0.91 billion and £1.39 billion respectively). The Group’s capital requirements and solvency position are produced and presented to the Board on a regular basis.
Home This segment consists of home insurance together with associated legal protection cover. The Group sells home insurance products through our brands Direct Line, Churchill and Privilege, and our partnership brands (RBS, NatWest and Prudential), as well as through price comparison websites.
158 DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS FINANCIALS V6.1 4. Segmental analysis continued No inter-segment transactions occurred in the year ended 31 December 2018 (2017: £nil). If any transaction were to occur, transfer prices between operating segments would be set on an arm’s length basis in a manner similar to transactions with third parties. Segment income, expenses and results will include those transfers between business segments which will then be eliminated on consolidation.
For each operating segment, there is no individual policyholder or customer that represents 10% or more of the Group’s total revenue.
The table below analyses the Group’s revenue and results by reportable segment for the year ended 31 December 2018.
The table below analyses the Group’s assets and liabilities by reportable segment at 31 December 2018.
The table below analyses the Group’s revenue and results by reportable segment for the year ended 31 December 2017.
160 DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS FINANCIALS V6.1 5. Net earned premium £m 2017 £m
Investment income: Interest income from debt securities 124.0 137.5 Interest income from cash and cash equivalents 6.2 3.0 Interest income from infrastructure debt 6.9 6.8 Interest income from commercial real estate loans 6.2 3.6 Interest income 143.3 150.9 Rental income from investment property 15.9 16.2
Associated interest rate risk on hedged items (24.3) 3.2 (3.0) (3.7) Net (losses) / gains on interest rate derivatives (2.2) 1.4 (1.2) (5.4)
Vehicle replacement referral income 17.2 16.9 Revenue from vehicle recovery and repair services 11.7 11.3 Legal services income 11.2 11.0 Other income1,2 32.0 23.7
8. Net insurance claims Gross Reinsurance Net Gross Reinsurance Net £m £m £m £m 2017 £m
Current accident year claims paid 1,308.5 (0.2) 1,308.3 1,165.0 (0.2) 1,164.8 Prior accident year claims paid 878.2 (30.9) 847.3 847.0 (13.8) 833.2 (Decrease) / increase in insurance liabilities (219.8) (24.0) (243.8) (440.9) 197.1 (243.8)
Note: 1. Results for the year ended 31 December 2018 are based on total Group operations including the Run-off segment. Comparative data has been re-presented accordingly.
Commission expenses 188.5 225.4 Expenses incurred under profit participations 11.9 61.0 10. Operating expenses £m 2017 £m
162 DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS FINANCIALS V6.1 10. Operating expenses continued
The aggregate remuneration of those employed by the Group’s operations comprised: £m 2017 £m
Wages and salaries 374.9 363.6 Social security costs 41.2 40.4 Pension costs 28.7 25.5 Share-based payments 21.0 14.8
Audit-related assurance services 0.1 0.1 Other assurance services 0.1 – Non-audit services 0.6 0.1
Interest expense on subordinated liabilities 23.1 44.8 Net interest received on designated hedging instrument1 (3.8) (8.0) Unrealised losses on designated hedging instrument1 5.0 10.4 Unrealised gains on associated interest rate risk on hedged item1 (5.6) (11.7) Realised gain on associated interest rate risk on hedged item1 – (11.3) Premium paid to repurchase subordinated liabilities and associated transaction costs – 77.4 Amortisation of arrangement costs and discount on issue of subordinated liabilities 0.4 2.2
Current taxation: Charge for the year 114.4 114.4 (Over) / under provision in respect of prior year (4.8) 5.3
Deferred taxation (note 13): Credit for the year (4.2) (5.8) Under / (over) provision in respect of prior year 3.5 (8.9)
Current taxation 109.6 119.7 Deferred taxation (note 13) (0.7) (14.7) Tax charge for the year 108.9 105.0
Profit before tax 582.6 539.0 Expected tax charge 110.7 103.8 Effects of: Disallowable expenses 5.4 5.4 Non-taxable items (2.5) (0.3) Effect of change in corporation taxation rate (0.2) (0.2) Over provision in respect of prior year (1.3) (3.7) Deductible Tier 1 notes coupon payment in equity (3.2) –
164 DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS FINANCIALS V6.1 13. Current and deferred tax continued
Credit to the income statement – – 1.5 4.8 8.2 0.2 – 14.7 (Charge) / credit to other comprehensive income – (0.4) – – – – 2.2 1.8 Charge direct to equity – – – – – (1.0) – (1.0) Other movements (0.6) – – – – – – (0.6)
Note: 1. The non-distributable reserve was a statutory claims equalisation reserve calculated in accordance with the rules of the PRA. With the introduction of solvency II on 1 January 2016, the requirement to maintain the claims equalisation reserve ceased and the balance at 31 December 2015 was released to retained earnings. The taxation of this release is spread over six years from the change in regulation. It is provided for in deferred tax above as it represents the future unwind of previously claimed tax deductions for transfers into the reserve.
Proposed dividends: 2018 final dividend of 14.0 pence per share 192.5 – 2017 final dividend of 13.6 pence per share – 187.0 2018 special dividend of 8.3 pence per share 114.1 – 2017 special dividend of 15.0 pence per share – 206.3
The proposed final and special dividends for 2018 have not been included as a liability in these financial statements.
Earnings attributable to owners of the Company 473.7 434.0 Coupon payments in respect of Tier 1 notes (16.6) – Profit for the calculation of earnings per share 457.1 434.0 Weighted average number of Ordinary Shares (millions) 1,366.5 1,366.1 Effect of dilutive potential of share options and contingently issuable shares (millions) 15.8 12.9 Weighted average number of Ordinary Shares for the purpose of diluted earnings per share (millions) 1,382.3 1,379.0 Diluted earnings per share (pence) 33.1 31.5 16. Net assets per share and return on equity Net asset value per share is calculated as total shareholders’ equity (which excludes Tier1 notes) divided by the number of Ordinary Shares at the end of the period excluding shares held by employee share trusts.
Net assets 2,573.1 2,715.1 Goodwill and other intangible assets1 (566.8) (471.1) Tangible net assets 2,006.3 2,244.0 Number of Ordinary Shares (millions) 1,375.0 1,375.0 Shares held by employee share trusts (millions) (10.4) (9.9) Closing number of Ordinary Shares (millions) 1,364.6 1,365.1 Net asset value per share (pence) 188.6 198.9 Tangible net asset value per share (pence) 147.0 164.4
Note: 1. Goodwill has arisen on acquisition by the Group of subsidiary companies and on acquisition of new accident repair centres. Intangible assets are primarily comprised of software development costs.
Accumulated amortisation and impairment At 1 January 2017 – 272.3 272.3 Charge for the year – 54.1 54.1 Impairment losses2 – 56.9 56.9
Included within other intangible assets, are assets still in development of £269.9 million (2017: £171.4 million). These assets are reviewed for potential indicators of impairment at each reporting date.
The table below analyses the goodwill of the Group by CGU.
There have been no impairments in goodwill for the year ended 31 December 2018 (2017: £nil).
Rescue and other personal lines 3.0 11.5 557.7 (56.0) (75.7) (6.6)
Accumulated depreciation and impairment At 1 January 2017 3.1 92.1 95.2 Depreciation charge for the year 1.1 26.8 27.9
Additions at cost 0.1 – Increase in fair value during the year 12.7 21.6 Disposals – (41.3)
The Group did not dispose of any subsidiaries in the years ended 31 December 2018 and 31 December 2017.
Reinsurers’ share of general insurance liabilities 1,159.9 1,141.1 Impairment provision1 (54.7) (59.9) Total excluding reinsurers’ unearned premium reserves 33 1,105.2 1,081.2 Reinsurers’ unearned premium reserve 34 103.5 97.3
FINANCIALS V6.1 WWW.DIRECTLINEGROUP.CO.UK 169 23. Insurance and other receivables £m 2017 £m
Receivables arising from insurance contracts: Due from policyholders 740.4 840.4 Due from agents, brokers and intermediaries 82.9 71.3 Impairment provision of policyholder receivables (0.9) (1.2) Impairment provision of agent, broker and intermediary receivables (0.5) (0.9)
25. Retirement benefit obligations Defined contribution scheme The pension charge in respect of the defined contribution scheme for the year ended 31 December 2018 was £28.7 million (2017: £25.5 million).
The weighted average duration of the defined benefit obligations at 31 December 2018 is 20 years (2017: 20 years) using accounting assumptions.
Rate of increase in pension payment 2.2 2.2 Rate of increase of deferred pensions 2.2 2.2 Discount rate 2.9 2.5 Inflation rate 3.3 3.3
170 DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS FINANCIALS V6.1 25. Retirement benefit obligations continued
The majority of debt instruments have quoted prices in active markets. The absolute return bond fund holds bonds that, rather than being traded on exchange, are traded through agents, brokers or investment banks matching buyers and sellers.
Income statement: Net interest income / (cost)1 2.4 (2.1) 0.3 Administration costs (0.2) – (0.2) Prior service costs2 – (0.2) (0.2)
Statement of comprehensive income: Actuarial losses arising from experience adjustments (3.5) – (3.5) Actuarial gains arising from changes in demographic assumptions – 0.4 0.4 Actuarial gains arising from changes in financial assumptions – 5.8 5.8
Notes: 1. The net interest income / (cost) in the income statement has been included under other operating expenses. 2. This results from the outcome of a court case ruling in October 2018 involving the Lloyds Bank pension schemes but leading to a one-off increase in liabilities for
Present value of defined benefit scheme obligations (78.6) (87.3) (90.5) (72.0) (79.6) Fair value of defined benefit scheme assets 95.6 101.7 102.5 85.1 83.1
Discount rate 0.25% increase in discount rate (0.2) (0.2) (3.9) (4.4)
Inflation rate 0.25% increase in inflation rate – – 2.0 2.2 0.25% decrease in inflation rate – – (2.0) (2.2) Life expectancy 1 year increase in life expectancy 0.1 0.1 2.7 3.1 1 year decrease in life expectancy (0.1) (0.1) (2.7) (3.1)
HTM debt securities Corporate 101.0 103.6 Total debt securities 4,246.6 4,555.0 Total debt securities Fixed interest rate1 4,211.1 4,540.1 Floating interest rate 35.5 14.9
Note: 1. The Group swaps a fixed interest rate for a floating rate of interest on its US Dollar, Euro and a small amount of its sterling corporate debt securities by entering into interest rate derivatives. The hedged amount at 31 December 2018 was £1,206.1 million (2017: £1,591.5 million).
Notes: 1. This represents money market funds with no notice period for withdrawal. 2. Bank overdrafts represent short-term timing differences between transactions posted in the records of the Group and transactions flowing through the accounts at the bank. 3. Cash and bank overdrafts disclosure note is included for the purposes of the consolidated cash flow statement.
The effective interest rate on short-term deposits with credit institutions for the year ended 31 December 2018 was 0.58% (2017: 0.29%) and average maturity was 10 days (2017: 10 days).
At 31 December 2018, 10,432,376 Ordinary Shares (2017: 9,945,473 Ordinary Shares) were owned by the employee share trusts with a cost of £35.2 million (2017: £34.1 million). These Ordinary Shares are carried at cost and at 31 December 2018 had a market value of £33.2 million (2017: £38.0 million).
30. Other reserves Movements in the AFS investments revaluation reserve £m 2017 £m
Revaluation during the year – gross (121.4) 8.8 Revaluation during the year – tax 20.6 (1.5) Realised gains – gross (19.5) (23.2) Realised gains – tax 3.3 4.0 172 DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS
The Group has the option, in certain circumstances, to defer interest payments on the notes but to date has not exercised this right.
Current estimate of cumulative claims 3,595.1 3,418.5 2,247.4 1,915.9 1,739.5 1,881.7 1,882.2 2,017.7 2,101.1 2,300.1
Estimate of ultimate net claims costs: At end of accident year 3,790.6 3,902.0 2,644.4 2,271.8 2,093.9 1,971.0 1,926.7 1,922.2 2,016.9 2,125.9 One year later 70.0 (125.2) (131.5) (146.7) (123.6) (29.7) (67.0) (18.9) (79.7) Two years later (17.4) (120.4) (82.1) (107.8) (134.4) (42.0) (77.8) (38.2) Three years later (54.1) (44.0) (76.5) (35.6) (27.8) (100.7) (30.4) Four years later (67.0) (93.6) (48.7) (11.6) (64.3) (41.3) Five years later (29.6) (52.3) (37.3) (54.2) (38.9) Six years later (74.6) (43.9) (37.0) (30.4) Seven years later (38.2) (24.8) (20.4) Eight years later (0.4) (17.4) Nine years later (35.1)
Cash paid for claims settled in the year (2,186.7) 31.1 (2,155.6) Increase / (decrease) in liabilities: Arising from current-year claims 2,490.4 (174.2) 2,316.2 Arising from prior-year claims (523.5) 119.1 (404.4)
Incurred but not reported 924.9 (295.4) 629.5 Claims handling provision 80.0 – 80.0
Note: 1. Included within the incurred but not reported claims provision is a £55 million net release (gross: £175 million release) relating to assumed changes to the Ogden discount rate which have not yet been reflected in claims reported (31 December 2017: gross and net £nil; 1 January 2017: £217 million net provision increase; £542 million gross provision increase).
Movement in prior-year net claims liabilities by operating segment £m 2017 £m
176 DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS FINANCIALS V6.1 35. Share-based payments The Group operates equity-settled, share-based compensation plans in the form of an LTIP, a Restricted Shares Plan, a DAIP and Direct Line Group Share Incentive Plans, including both the Free Share awards and a Buy-As-You-Earn Plan, details of which are set out below. All awards are to be satisfied using market purchased shares.
The estimated fair value of the LTIP share awards with market-based performance conditions was calculated using a Monte-Carlo simulation model.
Weighted average assumptions during the year: Share price (pence) 355 359 Exercise price (pence) 0 0 Volatility of share price 21% 20% Average comparator volatility 30% 30% Expected life 3 years 3 years Risk-free rate 0.9% 0.2%
Deferred Annual Incentive Plan To incentivise delivery of performance over a one-year operating cycle, Executive Directors and certain members of senior management are eligible for awards under the AIP, of which at least 40% is granted in the form of a nil-cost option under the DAIP with the remainder being settled in cash following year end. During the year awards were made over 1.3 million Ordinary Shares (2017: 0.9 million Ordinary Shares) under this plan with an estimated fair value of £4.9 million (2017: £2.9 million) using the market value at the date of grant.
The awards outstanding at 31 December 2018 have no performance criteria attached; there is a requirement that the employee remains in employment with the Group for three years from the date of grant.
In the year ended 31 December 2018, matching share awards were granted over 0.4 million Ordinary Shares (2017: 0.4 million Ordinary Shares) with an estimated fair value of £1.5 million (2017: £1.3 million). The fair value of each matching share award is estimated using the market value at the date of grant.
The Group recognised total expenses in the year ended 31 December 2018 of £21.0 million (2017: £14.8 million) relating to equity-settled share-based compensation plans.
36. Trade and other payables, including insurance payables £m 2017 £m
178 DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS FINANCIALS V6.1 37. Notes to the consolidated cash flow statement £m 2017 £m
Operating cash flows before movements in working capital 411.6 513.9 Movements in working capital: Net decrease in net insurance liabilities including reinsurance assets, unearned premium reserves and deferred acquisition costs (325.2) (186.7) Net decrease / (increase) in prepayments and accrued income and other assets 18.2 (15.2) Net decrease in insurance and other receivables 105.3 7.1 Net decrease in trade and other payables, including insurance payables (103.9) (41.2)
Cash generated from operations 106.0 277.9 Taxes paid (102.6) (76.5) Cash flow hedges 0.8 2.6 Net cash generated from operating activities before investment of insurance assets 4.2 204.0 Interest received 303.6 316.6 Rental income received from investment property 15.9 16.2 Purchase of investment property (0.1) – Proceeds on disposal of investment property – 41.3 Proceeds on disposal / maturity of AFS debt securities 2,159.2 1,948.4 Proceeds from maturity of HTM debt securities 2.5 – Advances made for infrastructure debt and commercial real estate loans (59.3) (108.5) Repayments of infrastructure debt 49.2 31.8 Purchase of AFS debt securities (2,002.9) (1,885.4) Purchase of HTM debt securities – (18.5) Cash generated from investment of insurance assets 468.1 341.9 178 DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS
Repayment of subordinated liabilities – 326.8 – – Interest paid on subordinated liabilities2 23.1 51.6 – – Interest rate swap cash settlement – – (5.8) (19.9)
Premium paid to buy back of debt issued – (76.8) – – Amortisation of arrangement costs and discount on issue of subordinated liabilities
Lease payments under operating leases recognised as an expense in the year 21.3 18.8
For disclosure purposes, fair value measurements are classified as level 1, 2 or 3 based on the degree to which fair value is observable: – level 1 financial assets are measured in whole or in part by reference to published quotes in an active market. In an active market quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
– level 2 financial assets and liabilities are measured using a valuation technique based on assumptions that are supported by prices from observable current market transactions. These are assets for which pricing is obtained via pricing services, but where prices have not been determined in an active market, or financial assets with fair values based on broker quotes or assets that are valued using the Group’s own models whereby the majority of assumptions are market-observable.
Assets held at fair value: Investment property (note 19) 322.1 – – 322.1 322.1
Commercial real estate loans (note 26) 169.0 – – 169.0 169.0
41. Related parties Transactions between the Group’s subsidiary undertakings, which are related parties, have been eliminated on consolidation and accordingly are not disclosed.
There were no sales and purchases of products and services to or from related parties in the year ended 31 December 2018 (2017: £nil).
Current tax assets 4 – 16.1 Derivative financial instruments 5 1.4 1.0
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2018
Total comprehensive income for the year – – – (0.1) 449.6 449.5 – 449.5 Dividends and appropriations paid (note 13) – – – – (503.8) (503.8) – (503.8) Credit to equity for equity-settled share-based payments – – 21.0 – – 21.0 – 21.0 Shares distributed by employee trusts – – (18.4) – – (18.4) – (18.4)
Errors’ to include a list of new IFRSs that have been issued but that have yet to be applied; and – FRS 101.8 (k): the requirements of IAS 24 ‘Related Party Disclosures’ to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary which is party to a transaction is wholly owned by such a member.
The Company completed an impact assessment on transition to IFRS 9, including an assessment of its financial assets under the new impairment model, and concluded there was no impact on the Company’s equity at 1 January 2018. The Company will continue applying the hedge accounting requirements of IAS 39 as permitted under IFRS 9.
The Company assessed its business model for managing the financial assets held by the Company and classified its financial assets into the appropriate IFRS 9 categories. The impact of the reclassification was as follows: Measurement category Carrying amount Difference
UK sovereign debt securities were reclassified from AFS to fair value through other comprehensive income as the AFS category has been removed under IFRS 9. This is appropriate as the Company’s business model is achieved by collecting contractual cash flows and selling these investments, and contractual cash flows are solely payments of principal and interest. The treatment of changes in fair value remain consistent and as a result there is no impact on equity. There is no difference in the carrying amount of any financial assets under IAS 39 and IFRS 9. IFRS 9 accounting policies adopted in the period are presented in note 1.5.
1.3 Investment in subsidiaries Investment in subsidiaries is stated at cost less any impairment.
FINANCIALS V6.1 WWW.DIRECTLINEGROUP.CO.UK 185 1.5 Financial assets Financial assets are classified at initial recognition and subsequently measured at amortised cost or fair value through other comprehensive income. The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Company’s business model for managing them. The Company initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs.
Amortised cost Assets which are held to collect contractual cash flows, and with contractual terms which give rise to cash flows which are solely payments of principal and interest on the principal amount outstanding, are subsequently measured at amortised cost, unless designated as fair value through profit or loss. Financial assets at amortised cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognised in the income statement when the asset is derecognised, modified or impaired.
Additional investment in subsidiary undertakings 20.9 14.8 Impairment of investment in subsidiary undertakings (1.0) –
The subsidiary undertakings of the Company are set out on page 186. Their capital consists of Ordinary Shares which are unlisted. In all cases, the Company owns 100% of the Ordinary Shares, either directly or through its ownership of other subsidiaries, and exercises full control over their decision making.
186 DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS FINANCIALS V6.1 2. Investment in subsidiary undertakings continued
Directly held by the Company: Direct Line Group Limited1 United Kingdom Intermediate holding company DL Insurance Services Limited1 United Kingdom Management services Finsure Premium Finance Limited1 United Kingdom Non-trading company Inter Group Insurance Services Limited1 United Kingdom Non-trading company UK Assistance Accident Repair Centres Limited1 United Kingdom Motor vehicle repair services UK Assistance Limited1 United Kingdom Dormant7
DL Support Services India Private Limited5 India Support and operational services DLG Legal Services Limited6 United Kingdom Legal services DLG Pension Trustee Limited1 United Kingdom Dormant7
Notes: 1. Registered office at: Churchill Court, Westmoreland Road, Bromley, BR1 1DP. 2. Registered office at: The Wharf, Neville Street, Leeds, LS1 4AZ. 3. U K Insurance Limited has a branch in the Republic of South Africa. 4. Registered office at: 22 Grenville Street, St Helier, JE4 8PX, Jersey. 5. Registered office at: 4 Aradhana Enclave, Sector 13, Rama Krishna Puram, New Delhi, South West Delhi, Delhi, 110066, India. 6. Registered office at: 42 The Headrow, Leeds, LS1 8HZ. 7. In accordance with the requirements under sections 394A and 448A of the Companies Act 2006, there is no requirement to audit a dormant company.
Loans to subsidiary undertakings1 531.9 612.2 Trade receivables due from subsidiary undertakings 15.1 – Other debtors 1.3 1.3
5. Derivative financial instruments Notional amount Fair value Notional amount Fair value £m £m
Derivative assets Designated as hedging instruments: Derivative liabilities Designated as hedging instruments: Notes: 1. The derivative assets and liabilities are both classified as level 2 within the Group’s fair value hierarchy set out in note 40 of the consolidated financial statements. 2. The foreign exchange cash flow hedges have been entered into on behalf of the Group’s subsidiary companies.
Note: 1. The fair value through other comprehensive income 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.
9. Tier 1 notes Full details of the Tier 1 notes of the Company are set out in note 31 to the consolidated financial statements.
188 DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS FINANCIALS V6.1 10. Subordinated liabilities £m 2017 £m
The aggregate fair value of subordinated guaranteed dated notes at 31 December 2018 was £297.8 million (2017: £328.7 million).
Note: 1. Included in the above is a loan of £73.0 million (2017: £61.5 million) from UK Assistance Accident Repair Centres Limited. Other loans of £23.7 million from fellow Group subsidiaries are repayable on demand and are subject to interest on outstanding balances based on the average 3-month LIBOR rate.
Payables to subsidiary undertakings – 0.1 Payables to third parties 1.7 1.3 13. Dividends Full details of the dividends paid and proposed by the Company are set out in note 14 to the consolidated financial statements.
15. Risk management The risks faced by the Company, arising from its investment in subsidiaries, are considered to be the same as those in the operations of the Group. Details of the key risks and the steps taken to manage them are disclosed in note 3 to the consolidated financial statements. The Company also holds, on behalf of its subsidiaries, designated hedging instruments which relate to foreign currency supplier payments.
17. Post balance sheet event On 28 February 2019, the Board of U K Insurance Limited, a subsidiary undertaking of the Company, agreed to repay £250 million of its £500 million subordinated loan to the Company. This transaction is expected to occur in March 2019.
Shareholders can arrange to receive their cash dividend payments in a bank or building society account by completing a dividend mandate form. This is available from the Company’s registrar, Computershare Investor Services Plc (“Registrar”), in the UK. You can find the Registrar’s contact details on page 196. Alternatively, shareholders can access their shareholdings online and download a dividend mandate form from the Investor Centre. You can find details of this below.
Shareholders can access their current shareholding details online at www.investorcentre.co.uk/directline. Investor Centre is a free-to-use, secure, self-service website that enables shareholders to manage their holdings online. The website allows shareholders to: – check their holdings; – update their records, including address and direct credit details; – access all their securities in one portfolio by setting up a personal account; – vote online; and – register to receive electronic shareholder communications. To access information, the website requires shareholders to quote their shareholder reference number. Shareholders can find this number on their share certificates.
How to avoid share fraud – Remember that FCA-authorised firms are unlikely to contact you unexpectedly offering to buy or sell shares; – Do not converse with them. Note the name of the person and firm contacting you, then end the call; – To see if the person and firm contacting you are authorised by the FCA, check the Financial Services Register at www.fca.org.uk; – Beware of fraudsters claiming to be from an authorised firm; copying its website; or giving you false contact details; – If you want to phone the caller back, use the firm’s contact details listed on the Financial Services Register at www.fca.org.uk; – If the firm does not have contact details on the Register or they tell you the details are out of date, call the FCA on 0800 111 6768; – Search the list of unauthorised firms to avoid at www.fca.org.uk/consumers/scams; – Remember that if you buy or sell shares from an unauthorised firm, you cannot access the Financial Ombudsman Service or Financial Services Compensation Scheme; – Get independent financial and professional advice before handing over any money, and
Tips on protecting your shares – Keep all your certificates in a safe place. Alternatively, consider holding your shares in the UK’s electronic registration and settlement system for equity, called CREST, or via a nominee; – Keep correspondence from the Registrar that shows your shareholder reference number in a safe place, and shred unwanted correspondence; – Inform the Registrar as soon as you change your address; – If you receive a letter from the Registrar regarding a change of address and you have not recently moved, contact them immediately; – Find out when your dividends are paid and contact the Registrar if you do not receive them; – Consider having your dividends paid direct into your bank account. You will need to complete a dividend mandate form and send it to the Registrar. This reduces the risk of cheques being stolen or lost in the post; – If you change your bank account, inform the Registrar of your new account details immediately; – If you are buying or selling shares, only deal with brokers registered in the UK or in your country of residence; and
– Be aware that the Company will never call you concerning investments. If you receive such a call from a person saying they represent the Group, please contact the Company Secretary immediately, by calling +44 (0)1132 920 667.
You can call or email the Registrar regarding its share-dealing facility using this contact information: – For telephone sales, call +44 (0)370 703 0084 between 8.00 am and 4.30 pm, Monday to Friday, excluding public holidays, and
– For internet sales, go to www.investorcentre.co.uk/directline. You will need your shareholder reference number, as shown on your share certificate, or your welcome letter from the Chairman.
Dividend tax allowance From April 2018, the dividend tax-free allowance was reduced from £5,000 to £2,000 across an individual’s entire share portfolio. Above this amount, individuals will pay tax on their dividend income. The rate of this tax depends on their income tax bracket and personal circumstances. The Company will continue providing registered shareholders with a confirmation of the dividends paid. Shareholders should include this with any other dividend income they receive when calculating and reporting total dividend income received to HMRC. The shareholder is responsible for including all dividend income when calculating tax requirements. If you have any tax queries, please contact your financial adviser.
Financial calendar 2019 Date Event 05 March Preliminary Results 2018 announcement 04 April “Ex-dividend” date for 2018 final dividend and special interim dividend 05 April Record date for 2018 final dividend and special interim dividend 24 April Final date for election under the
Dividend Reinvestment plan 06 September1 Payment date for 2019 interim dividend 05 November1 Trading update for the third quarter
Buy-As-You-Earn Plan The HM Revenue & Customs approved Buy-As-You-Earn Share Incentive Plan gives all employees the opportunity to become shareholders in the Company.
Capital The funds invested in the Group, including funds invested by shareholders and retained profits. Claims frequency The number of claims divided by the number of policies per year. Claims handling provision (provision for losses and loss-adjustment expense)
Clawback The ability of the Company to claim repayment of paid amounts for equity-settled share-based payments.
The sum of the loss, commission and expense ratios. The ratio measures the amount of claims costs, commission and operating expenses, compared to net earned premium generated. A ratio of less than 100% indicates profitable underwriting. Normalised combined operating ratio adjusts loss and commission ratios for a normal level of expected major weather events in the period.
Commission expenses Payments to brokers, partners and price comparison websites for generating business. Commission ratio The ratio of commission expense divided by net earned premium. Company Direct Line Insurance Group plc (the “Company”). Current-year attritional loss ratio
Investment income yield The income earned from the investment portfolio, recognised through the income statement during the period divided by the average assets under management (“AUM”). This excludes unrealised and realised gains and losses, impairments, and fair value adjustments. The average AUM derives from the period’s opening and closing balances for the total Group. (See Appendix A – APM from page 194).
Investment return The investment return earned from the investment portfolio, including unrealised and realised gains and losses, impairments, and fair value adjustments.
Investment return yield Investment return divided by the average AUM. The average AUM derives from the period’s opening and closing balances. (See Appendix A – APM from page 194).
Net earned premium The element of gross earned premium less reinsurance premium ceded for the period where insurance cover has already been provided.
The net investment income yield is calculated in the same way as investment income yield but includes the cost of hedging. (See Appendix A - APM from page 194).
Reserves Funds that have been set aside to meet outstanding insurance claims and IBNR. Restructuring costs Restructuring costs are costs incurred in respect of the business activities where the Group has a constructive obligation to restructure its activities. Return on equity Return on equity is calculated by dividing the profit attributable to the owners of the Company after deduction of the Tier 1 coupon payments by average shareholders’ equity for the period. Return on tangible equity (“RoTE”)
Return on tangible equity is adjusted profit after tax divided by the Group’s average shareholders’ equity, less goodwill and other intangible assets. For 2018 profit after tax is adjusted to include the Tier 1 coupon payments dividend and for 2017 profit after tax is adjusted to exclude one-off costs in relation to the buy-back of subordinated liabilities. It is stated after charging tax using the UK standard tax rate of 19% (2017: 19.25%). The profit after tax for comparative periods prior to 2017 is adjusted to exclude operating profit from the Run-off segment and restructuring and other one-off costs. (See Appendix A – APM from page 194).
Solvency II The capital adequacy regime for the European insurance industry, which became effective on 1 January 2016. It establishes revised capital requirements and risk management standards. It comprises three pillars: Pillar I, which sets out capital requirements for an insurer; Pillar II, which focuses on systems of governance; and Pillar III, which deals with disclosure requirements.
Solvency capital ratio The ratio of solvency II own funds to the solvency capital requirement. Total Shareholder Return (“TSR”)
Appendix A – Alternative performance measures The Group has identified alternative performance measures (“APMs”) in accordance with the European Securities and Markets Authority’s published Guidelines. The Group uses APMs to improve comparability of information between reporting periods and reporting segments, by adjusting for either uncontrollable or one-off costs which impact on IFRS measures, to aid the user of the Annual Report in understanding the activity taking place across the Group. These APMs are contained within the main narrative sections of this document, outside of the financial statements and notes, and may not necessarily have standardised meanings for ease of comparability across peer organisations.
Investment income yield is defined in the glossary on page 191 and is reconciled on page 194.
Investment return yield is defined in the glossary on page 192 and is reconciled on page 194.
Expresses a relationship between the investment income and the associated opening and closing assets adjusted for portfolio hedging instruments.
194 DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS GLOSSARY & APPENDICES V5.2
Operating profit 601.7 642.8 Finance costs (19.1) (103.8) Profit before tax 582.6 539.0 Finance costs adjustment for one-off subordinated debt buy back – 66.1 Coupon payments in respect of Tier 1 notes (16.6) – Adjusted profit before tax 566.0 605.1 Tax charge (108.9) – Tax charge (using the 2017 UK standard tax rate of 19.25%) – (116.5) Adjusted profit after tax 457.1 488.6 Opening shareholders’ equity 2,715.1 2,521.5 Opening goodwill and other intangible assets (471.1) (508.9) Opening shareholders’ tangible equity 2,244.0 2,012.6 Closing shareholders’ equity 2,573.1 2,715.1 Closing goodwill and other intangible assets (566.8) (471.1) Closing shareholders’ tangible equity 2,006.3 2,244.0 Average shareholders’ tangible equity3 2,125.2 2,128.3 Return on tangible equity 21.5% 23.0%
Closing derivatives asset6 11.8 55.1 Closing investment holdings 6,164.1 6,709.3 Average investment holdings 6,436.7 6,645.2 Investment income yield 2.5% 2.5% Net investment income yield 2.0% 2.1% Investment return yield 2.4% 2.6%
Certain information contained in this document, including any information as to the Group’s strategy, plans or future financial or operating performance, constitutes “forwardlooking statements”. These forward-looking statements may be identified by the use of forward-looking terminology, including the terms “aims”, “ambition”, “anticipates”, “aspire”, “believes”, “continue”, “could”, “estimates”, “expects”, “guidance”, “intends”, “may”, “mission”, “outlook”, “over the medium term”, “plans”, “predicts”, “projects”, “propositions”, “seeks”, “should”, “strategy”, “targets” or “will” or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this document and include statements regarding the intentions, beliefs or current expectations of the Directors concerning, among other things: the Group’s results of operations, financial condition, prospects, growth, strategies and the industry in which the Group operates. Examples of forward-looking statements include financial targets and guidance which are contained in this document specifically with respect to the return on tangible equity, solvency capital ratio, the Group’s combined operating ratio, prior-year reserve releases, cost reduction, reductions in expense and commission ratios, investment income yield, net realised and unrealised gains and risk appetite range. By their nature, all forward-looking statements involve risk and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future or are beyond the Group’s control.
The forward-looking statements contained in this document reflect knowledge and information available as of the date of preparation of this document. The Group and the Directors expressly disclaim any obligations or undertaking to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by applicable law or regulation. Nothing in this document should be construed as a profit forecast
Registered in England and Wales No. 02280426 Company Secretary: Roger C Clifton
Investor Centre To find out more about Investor Centre, go to www.investorcentre.co.uk/directline
RBC Europe Ltd (trading as ‘RBC Capital Markets’) Riverbank House 2 Swan Lane London EC4R 3BF
Registered in England & Wales No. 02280426 Registered Office: Churchill Court, Westmoreland Road, Bromley, BR1 1DP