Notes to the consolidated financial statements continued 17. Goodwill and other intangible assets continued Goodwill arose on the acquisition of U K Insurance Limited (£141.0 million) and Churchill Insurance Company Limited (£70.0 million), which is allocated across Motor, Home, Rescue and other personal lines and Commercial. The addition to goodwill in the year ended 31 December 2017 of £1.0 million arose as a result of a business combination to expand the Group’s accident repair centre network.
Rescue and other personal lines 3.0 11.5 556.6 (53.3) (72.4) (6.5)
Accumulated depreciation and impairment At 1 January 2016 2.4 78.1 80.5 Depreciation charge for the year 1.0 29.1 30.1
The valuation conforms to international valuation standards. The fair value was determined using a methodology based on recent market transactions for similar properties, which have been adjusted for the specific characteristics of each property within the portfolio. This approach to valuation is consistent with the methodology used in the year ended 31 December 2016.
The Group did not dispose of any subsidiaries in the years ended 31 December 2017 and 31 December 2016.
Note: 1. Impairment provision relates to reinsurance debtors allowing for the risk that reinsurance assets may not be collected or where the reinsurer’s credit rating has been significantly downgraded and it may have difficulty in meeting its obligations.
Additional provision (9.6) (4.2) Release to income statement 0.4 7.4 22. Deferred acquisition costs 2017 £m 2016 £m
Defined benefit scheme The Group’s defined benefit pension scheme was closed in 2003 although the Group remains the sponsoring employer for obligations to current and deferred pensioners based on qualifying years’ service and final salaries. The defined benefit scheme is legally separated from the Group with trustees who are required by law to act in the interests of the scheme and of all the relevant stakeholders. The trustees of the pension scheme are responsible for the investment policy with regard to the assets of the scheme.
No assumption has been made for salary growth as there are no obligations in the scheme that are linked to future increases in salaries.
Notes to the consolidated financial statements continued 25. Retirement benefit obligations continued The table below analyses the fair value of the scheme assets by type of asset.
Note: 1. The liquidity fund is an investment in an open-ended fund incorporated in the Republic of Ireland which targets capital stability and income in the UK. It is invested in short-term fixed income and variable rate securities (such as Treasury Bills) listed or traded on one or more recognised exchange.
The majority of debt instruments held directly or through the liquidity fund have quoted prices in active markets.
Present value of defined benefit scheme obligations (87.3) (90.5) (72.0) (79.6) (68.0) Fair value of defined benefit scheme assets 101.7 102.5 85.1 83.1 66.0
Impact on present value of defined benefit scheme obligations £m £m 2016 £m
Discount rate 0.25% increase in discount rate (0.2) (0.2) (4.4) (4.7)
The most recent funding valuation of the Group’s defined benefit scheme was carried out as at 1 October 2014. The Group agreed with the trustees to make a contribution of £2.8 million in 2016 with further contributions of up to £1.5 million per annum in 2017 and 2018 to meet the scheme’s funding requirements. As a result of a funding update, no contributions are expected to be payable in 2018 (2017: £nil). The Group is currently undertaking a funding valuation of the defined benefit scheme as at 1 October 2017, the results of which are due to be agreed with the trustees in 2018.
HTM debt securities Corporate 103.6 85.1 Total debt securities 4,555.0 4,730.3 Total debt securities Fixed interest rate1 4,540.1 4,709.6 Floating interest rate 14.9 20.7
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 2017 was £1,591.5 million (2016: £1,593.6 million).
Notes to the consolidated financial statements continued 27. Cash and cash equivalents and borrowings £m 2016 £m
Cash at bank and in hand 258.0 166.6 Short-term deposits with credit institutions1 1,100.6 999.5 Cash and cash equivalents 1,358.6 1,166.1 Bank overdrafts2 (54.1) (55.3) Cash and bank overdrafts3 1,304.5 1,110.8
Note: 1. The freehold property held for sale at 31 December 2017 relates to Bristol Broad Street which was transferred from property, plant and equipment to assets held for sale in 2016. The fair value change in 2017 relates to estimated costs to sell.
At 31 December 2017, 9,945,473 Ordinary Shares (2016: 9,946,340 Ordinary Shares) were owned by the employee share trusts with a cost of £34.1 million (2016: £34.3 million). These Ordinary Shares are carried at cost and have a market value of £38.0 million (2016: £36.7 million).
30. Other reserves Movements in the revaluation reserve for AFS investments £m 2016 £m
Revaluation during the year – gross 8.8 119.6 Revaluation during the year – tax (1.5) (20.2) Realised gains – gross (23.2) (15.3) Realised gains – tax 4.0 2.6
On 7 December 2017, the Group issued £350 million of fixed rate perpetual Tier 1 notes with a coupon rate of 4.75% per annum.
On 8 December 2017, the Group repurchased £250 million nominal value of the subordinated guaranteed dated notes for a purchase price of £330.1 million including accrued interest of £2.7 million and associated transaction costs of £0.6 million.
Notes to the consolidated financial statements continued 33. Insurance liabilities £m 2016 £m
Current estimate of cumulative claims 3,270.9 3,631.5 3,436.1 2,272.5 1,952.1 1,790.3 1,931.9 1,944.6 2,071.0 2,217.3
Estimate of ultimate net claims costs: At end of accident year 3,334.7 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 One year later 52.0 70.0 (125.2) (131.5) (146.7) (123.6) (29.7) (67.0) (18.9) Two years later 15.9 (17.4) (120.4) (82.1) (107.8) (134.4) (42.0) (77.8) Three years later (22.8) (54.1) (44.0) (76.5) (35.6) (27.8) (100.7) Four years later (45.8) (67.0) (93.6) (48.7) (11.6) (64.3) Five years later (48.7) (29.6) (52.3) (37.3) (54.2) Six years later (30.9) (74.6) (43.9) (37.0) Seven years later (24.5) (38.2) (24.8) Eight years later (16.2) (0.4) Nine years later (13.0)
Net liability recognised in balance sheet 59.3 143.0 109.1 100.8 85.0 150.5 274.4 314.2 461.5 966.5 2,664.3 2007 and prior 400.9 Claims handling provision 79.3 Total 3,144.5
Cash paid for claims settled in the year (2,036.9) 18.8 (2,018.1) Increase / (decrease) in liabilities: Arising from current-year claims 2,329.3 (235.4) 2,093.9 Arising from prior-year claims (150.3) (139.8) (290.1)
Incurred but not reported 1,142.7 (338.7) 804.0 Claims handling provision 79.3 – 79.3
Weighted average assumptions during the year: Share price (pence) 359 368 Exercise price (pence) 0 0 Volatility of share price 20% 18% Average comparator volatility 30% 29% Expected life 3 years 3 years Risk-free rate 0.2% 0.3%
Restricted Shares Plan The purpose of the Restricted Shares Plan is to facilitate the wider participation in Group share-based awards to eligible employees. These awards can be granted at any time during the year, generally have no performance criteria, and vest over periods ranging between one and three years from the date of the grant, subject to continued employment. During the year awards were made over 1.1 million Ordinary Shares (2016: 0.3 million Ordinary Shares) with an estimated fair value of £3.9 million (2016: £0.9 million) using the market value at the date of grant.
The awards outstanding at 31 December 2017 have no performance criteria attached, other than the requirement that the employee remains in employment with the Group for three years from the date of grant.
Direct Line Group Share Incentive Plans: Free Share awards In 2016, the Group offered all eligible UK employees a Free Share award granting 71 Ordinary Shares free of charge. These awards have no performance criteria attached and vest on the third anniversary of the award grant date, subject to completion of three years, continuing employment. The Group initially granted 0.8 million Ordinary Shares with an estimated fair value of £2.8 million using the market value at the date of grant.
In the year ended 31 December 2017, matching share awards were granted over 0.4 million Ordinary Shares (2016: 0.4 million Ordinary Shares) with an estimated fair value of £1.3 million (2016: £1.3 million). The fair value of each matching share award is estimated using the market value at the date of grant.
In respect of the outstanding options at 31 December 2017, the weighted average remaining contractual life is 1.39 years (2016: 1.39 years). No share awards expired during the year (2016: nil).
Notes to the consolidated financial statements continued 37. Notes to the consolidated cash flow statement £m 2016 £m
Profit for the year 434.0 278.8 Adjustments for: Investment return (175.4) (171.5) Instalment income (116.4) (107.1) Finance costs 103.8 37.2 Defined benefit pension scheme – net interest income (0.3) (0.5) Equity-settled share-based payment charge 14.8 16.8 Tax charge 105.0 74.2 Depreciation and amortisation charges 82.0 87.5 Impairment of property, plant and equipment, goodwill and intangible assets 56.9 39.3 Impairment provision movements on reinsurance contracts 9.2 (3.2) (Fair value adjustment) / impairment charge on assets held for sale – freehold property (0.4) 19.7 Loss on sale of property, plant and equipment 0.7 1.7
Operating cash flows before movements in working capital 513.9 272.9 Movements in working capital: Net decrease in net insurance liabilities including reinsurance assets, unearned premium reserves and deferred acquisition costs (186.7) (143.1) Net increase in prepayments and accrued income and other assets (15.2) (20.1) Net decrease / (increase) in insurance and other receivables 7.1 (32.5) Net (decrease) / increase in trade and other payables, including insurance payables (41.2) 42.7 Contribution to defined benefit pension scheme – (2.8)
Cash generated from operations 277.9 117.1 Taxes paid (76.5) (83.3) Cash flow hedges 2.6 1.2 Net cash generated from operating activities before investment of insurance assets 204.0 35.0 Interest received 316.6 294.6 Rental income received from investment property 16.2 18.4 Purchases of investment property – (1.4) Proceeds on disposal of investment property 41.3 25.2 Proceeds on disposal / maturity of AFS debt securities 1,948.4 2,489.9 Net decrease in financial investments: loans and receivables to credit institutions – 44.9 Advances made for Infrastructure debt and commercial real estate loans (108.5) (97.7) Repayments of infrastructure debt 31.8 11.0 Purchases of AFS debt securities (1,885.4) (1,886.5) Purchases of HTM debt securities (18.5) (71.0) Cash generated from investment of insurance assets 341.9 827.4
Notes: 1. The interest rate swaps relate to Group’s 10- year designated hedging instrument to exchange the fixed rate of interest for a floating rate of three-month LIBOR
plus a spread of 706 basis points which was credit value adjusted to 707 basis points with effect from 29 July 2013. 2. This includes £2.7 million of accrued interest settled in relation to the £250 million of repayment of subordinated guaranteed notes.
39. Commitments Operating lease commitments where the Group is the lessee The Group has entered into non-cancellable operating lease agreements for properties, vehicles and other assets.
Lease payments under operating leases recognised as an expense in the year 18.8 18.3
Within one year 15.3 16.3 In the second to fifth years inclusive 46.1 53.0 After five years 73.1 78.9
Other financial assets: HTM debt securities (note 26) 103.6 – 14.4 92.8 107.2
Liabilities held at fair value: Derivative liabilities (note 24) 12.0 – 12.0 – 12.0 Other financial liabilities: Subordinated liabilities (note 32) 264.7 – 328.7 – 328.7
Assets held at fair value: Investment property (note 19) 329.0 – – 329.0 329.0
The movements in assets held at fair value and classified as level 3 in the fair value hierarchy are within investment property, HTM debt securities, commercial real estate loans and infrastructure debt. There were no changes in the categorisation of assets between levels 1, 2 and 3 for assets and liabilities held by the Group since 31 December 2016.
Year end balances arising from sales of products and services to related parties £m 2016 £m
Short-term employee benefits 10.6 8.4 Termination benefits – 0.1 Share-based payments 5.5 7.6
Cash and cash equivalents 7 209.3 157.5 Total assets 3,944.2 3,950.5
Profit for the year 50.6 764.9 Other comprehensive (loss) / income Items that may be reclassified subsequently to income statement: Fair value (loss) / gain on AFS investments (0.4) 0.5 Tax relating to items that may be reclassified 0.1 (0.1)
Other comprehensive (loss) / income for the year net of tax (0.3) 0.4 Total comprehensive income for the year attributable to owners of the Company 50.3 765.3
Parent Company statement of changes in equity For the year ended 31 December 2017
Total comprehensive income for the year – – – 0.4 764.9 765.3 – 765.3
Total comprehensive income for the year – – – (0.3) 50.6 50.3 – 50.3
Parent Company cash flow statement For the year ended 31 December 2017 £m 2016 £m
Net cash used in operating activities 14 (7.9) (5.1) Cash flows from investing activities Interest received on loans to subsidiary undertakings 47.5 47.6 Interest received on AFS debt securities 10.5 4.7 Dividends received from subsidiary undertakings 114.0 780.6 Net increase in loans advanced to subsidiary undertakings (59.4) (28.8) Capital contribution to subsidiary undertakings – (16.9) Proceeds on disposal / maturity of AFS debt securities 119.8 5.0 Purchase of AFS debt securities – (136.9) Net cash generated from investing activities 232.4 655.3 Cash flows from financing activities Net proceeds from issue of Tier 1 notes 346.5 –
Notes to the Parent Company financial statements 1. Accounting policies 1.1 Basis of preparation Direct Line Insurance Group plc, registered in England and Wales (company number 02280426), is the ultimate Parent Company of the Group. The principal activity of the Company is managing its investments in subsidiaries, providing loans to those subsidiaries, raising funds for the Group and the receipt and payment of dividends.
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 Dormant U K Insurance Business Solutions Limited1 United Kingdom Insurance broking services U K Insurance Limited2,3 United Kingdom General insurance
Notes to the Parent Company financial statements continued 2. Investment in subsidiary undertakings continued
Per balance sheet: Current tax assets 16.1 0.8 Deferred tax liabilities (0.6) (0.4)
The table below analyses the major deferred tax liabilities recognised by the Company and movements thereon.
Note: 1. This represents money market funds with no notice period for withdrawal.
The notes are unsecured, subordinated obligations of the Company, and rank pari passu without any preference among themselves. In the event of a winding up or insolvency, they are to be repaid only after the claims of all other senior creditors have been met.
The aggregate fair value of subordinated guaranteed dated notes at 31 December 2017 was £328.7 million (2016: £625.0 million).
Note: 1. Included in the above is a loan of £61.5 million (2016: £nil) from UK Assistance Accident Repair Centres Limited. Other loans of £23.0 million from fellow
Profit for the year 50.6 764.9 Adjustments for: Investment return (182.5) (829.4) Finance costs 124.6 46.9 Impairment of loans to share trusts 16.8 16.8 Tax credit (15.9) (0.5)
Operating cash flows before movements in working capital (6.4) (1.3) Movements in working capital: Net decrease / (increase) in other debtors 0.5 (1.8) Net decrease in trade and other payables (5.0) (0.2)
The table below details the changes in liabilities arising from financing activities.
Note: 1. This includes £2.7 million of accrued interest settled in relation to the £250 million of repayment of subordinated guaranteed notes.
The following transactions were carried out with related parties: Sales of services £m 2016 £m
Interest receivable from subsidiary undertakings 48.0 47.9 Dividend income from subsidiary undertakings 133.8 780.6
16. Share-based payments Full details of share-based compensation plans are provided in note 35 to the consolidated financial statements.
17. 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.
18. Directors and key management remuneration The Directors and key management of the Group and the Company are the same. The aggregate emoluments of the Directors are set out in note 10 to the consolidated financial statements, the compensation for key management is set out in note 41 to the consolidated financial statements and the remuneration and pension benefits payable in respect of the highest paid Director are included in the Directors’ remuneration report in the Governance section of the Annual Report & Accounts.
Share ownership Share capital You can find details of the Company’s share capital in note 29 to the consolidated financial statements.
Dividends The Company pays its dividends in Sterling to shareholders registered on its register of members at the relevant record date.
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
Shareholder warning Almost five thousand people contact the FCA about share fraud each year – and victims lose an average of £20,000.
• 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
• 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
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
• 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.
Financial calendar 2018 Date Event 27 February Preliminary Results 2017 05 April ‘Ex-dividend’ date for 2017 final dividend 06 April Record date for 2017 final dividend 02 May1 Trading update for the first quarter of 2018 10 May Annual General Meeting 17 May Payment date for 2017 final dividend 01 August1 Half Year Report 2018 09 August1 ‘Ex-dividend’ date for 2018 interim dividend 10 August1 Record date for 2018 interim dividend 07 September1 Payment date for 2018 interim dividend 06 November1 Trading update for the third quarter of
Annual General Meeting The 2018 AGM will be held on 10 May 2018 at the offices of Allen & Overy LLP, One Bishops Square, London E1 6AD, starting at 11.00 am. All shareholders will receive a separate notice convening the AGM. This will explain the resolutions to be put to the meeting.
Adjusted profit after tax Profit after tax is adjusted to exclude the Run-off segment and restructuring costs, and is stated after charging tax using the UK standard tax rate of 19.25%; (2016: 20.00%). (See Appendix A – APM from page 177).
Financial assets that are classified as available-for-sale. Please refer to the accounting policy note 1.12 on page 120.
The loss ratio for the current accident year, excluding the movement of claims reserves relating to previous accident years, and claims relating to major weather events in the Home segment.
The UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment.
A not-for-profit public interest organisation that is overseen by a monitoring board of public authorities. It develops IFRS: standards that aim to make worldwide markets transparent, accountable and efficient.
Funds set aside to meet the cost of claims for accidents that have occurred, but have not yet been reported to the Group. This includes an element of uplift on the value of claims reported. Where the Group has determined that the value currently held in reserves is not sufficient to meet the estimated ultimate costs if the claim is referred to as incurred but not enough reported (“IBNER”).
Investment return yield The return earned from the investment portfolio, recognised through the income statement during the period divided by the average AUM. This includes unrealised and realised gains and losses, impairments, and fair value adjustments. The average AUM derives from the period’s opening and closing balances. (See Appendix A – APM from page 177).
Leverage Tier 1 notes and financial debt (subordinated guaranteed dated notes) as a percentage of total capital employed.
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 177).
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 by average Shareholders’ equity for the period. Return on Tangible Equity (“RoTE”)
The profit or loss from operational activities, excluding investment return and other operating income. It is calculated as net earned premium less net insurance claims and total expenses.
Further information is presented below, defined in the glossary on pages from 174 to 176 and reconciled to the most directly reconcilable line items in the financial statements and notes. Note 4 on page 139 of the consolidated financial statements presents a reconciliation of the Group’s business activities on a segmental basis to the consolidated income statement including Ongoing operations of the Group. All note references in the table below are to the notes to the consolidated financial statements on pages 112 to 171.
Loss ratio Current-year attritional loss ratio is defined in the glossary on page 174 and is reconciled to loss ratio (discussed below) on page 36.
Investment return yield is defined in the glossary on page 175 and is reconciled on page 179.
Loss ratio is defined in the glossary on page 175 and is reconciled in note 4.
Operating profit from Ongoing operations is defined as operating profit (see glossary on page 175) less operating profit from Run-off segment plus restructuring costs (note 4) and is reconciled on page 178.
This measure shows the underlying performance (before tax and finance costs) of the business activities without the impact of business that is in Run-off and restructuring costs.
RoTE is defined in the glossary on page 175 and is reconciled on page 178.
Tangible equity Equity Tangible equity is defined as equity less intangible assets within the balance sheet and is reconciled on page 178.
This shows the equity excluding intangible assets per share for comparability with companies who have not acquired businesses or capitalised intangible assets.
Add back: restructuring costs 4 11.9 39.9 Exclude: operating profit from Run-off 4 (43.8) (26.6) Operating profit from Ongoing operations 4 610.9 403.5
Opening shareholders’ equity 2,521.5 2,630.0 Opening goodwill and other intangible assets (508.9) (524.8) Opening shareholders’ tangible equity 2,012.6 2,105.2 Closing shareholders’ equity 2,715.1 2,521.5 Closing goodwill and other intangible assets (471.1) (508.9) Closing shareholders’ tangible equity 2,244.0 2,012.6 Average shareholders’ tangible equity3 2,128.3 2,058.9 Return on tangible equity 21.7% 14.2%
Adjusted profit after tax from Ongoing operations 462.9 293.0 Weighted average number of Ordinary Shares for the purpose of diluted earnings per share (millions) 15 1,379.0 1,381.8 Adjusted diluted earnings per share (pence) 33.6 21.2
Opening investment property 329.0 347.4 Opening financial investments 5,147.0 5,614.6 Opening cash and cash equivalents 1,166.1 963.7 Opening borrowings (55.3) (61.3) Opening derivatives liability4 (5.8) (45.7) Opening investment holdings 6,581.0 6,818.7 Closing investment property 19 309.3 329.0 Closing financial investments 26 5,040.4 5,147.0 Closing cash and cash equivalents 27 1,358.6 1,166.1
Notes: 1. See glossary on page 175 for definitions 2. See notes to the consolidated financial statements 3. Includes net realised and unrealised gains / (losses) of derivatives in relation to AUM
Forward-looking statements are not guarantees of future performance. The Group’s actual results of operations, financial condition and the development of the business sector in which the Group operates may differ materially from those suggested by the forward-looking statements contained in this document, for example directly or indirectly as a result of, but not limited to, UK domestic and global economic business conditions, the outcome of the negotiations relating to the UK’s withdrawal from the European Union, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements or the Ogden discount rate), the impact of competition, currency changes, inflation and deflation, the timing impact and other uncertainties of future acquisitions, disposals, joint ventures or combinations within relevant industries, as well as the impact of tax and other legislation and other regulation in the jurisdictions in which the Group and its affiliates operate. In addition, even if the Group’s actual results of operations, financial condition and the development of the business sector in which the Group operates are consistent with the forwardlooking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods.