Governance Chair’s introduction 76 Board of Directors 78 Executive Committee 81 Corporate governance report 83 Committee reports 97 Directors’ Remuneration Report 113 Directors’ report 140
Financial Statements Contents 145 Independent Auditor’s report 146 Consolidated Financial Statements 157 Notes to the Consolidated Financial Statements 162 Parent Company Financial Statements 215 Notes to the Parent Company Financial Statements 217
Notes: 1. See glossary on pages 224 to 226 for definitions and Appendix A – Alternative performance measures on pages 227 to 230 for reconciliation to financial statement line items.
2. A reduction in the ratio represents an improvement as a proportion of net earned premium, while an increase in the ratio represents a deterioration. See glossary on page 224 for definitions.
Claims teams take over 6,500 calls from customers helping to support them following Storm Ciara
Our Travel team continues to settle claims for over 26,000 customers and repatriate over 900 customers stranded abroad
Privilege offers full end-toend motor insurance service on new platform, for both new business and renewal customers
Direct Line for Business rolls out new Van and Tradesperson products on its digital platform
Strong Churchill new business growth, increased share of new business on PCWs across Motor and Home
Group announces new diversity and inclusion targets for improving Black, Asian and Minority Ethnic representation in senior leadership roles
New “Mileage MoneyBack” proposition offers Direct Line Motor customers a flexible approach to manage their car insurance
2. Payment deferrals, mileage refunds for motor customers, waiving cancellation fees and reducing cover.
Find out more about our plans for 2021 in the Chief Executive Officer’s Review on pages 11 to 17
Migrates to a new mainframe platform as part of the Group’s technology transformation
Motor Home Rescue and other personal lines Commercial 31 Dec 31 Dec 31 Dec 1 Jan
Win on price comparison websites (PCWs) To deliver a step change in our pricing and trading capability so that our leading PCW brands win customers from our competitors.
Extend our reach To utilise the potential of our investments and capabilities to win more customers through acquisitions and brand partnerships.
Technical edge To use our data, scale, skill and insight across claims, pricing and underwriting to deliver value to customers.
Nimble and cost efficient To transform into an agile, cost effective business to drive efficiency and simplicity for us and our customers.
In 2020 we made good progress against our targets to improve the sustainability of our earnings, growing current-year contribution to operating profit and delivering a strong combined operating ratio. Our focus on supporting our customers, our people and wider society led to an increase in costs in 2020.
Target: At least 50% contribution to total operating profit by 2021 2020: Following an elevated contribution in 2020 due to lower claims frequency associated with Covid-19 disruption
Target: At least 15% per annum over the long term 2020: Notes: 1. See glossary on pages 224 to 226 for definitions and Appendix A – Alternative performance measures on pages 227 to 230 for reconciliation to financial statement line items.
We know how to build brand value and have some of the most loved brands in the UK which are available direct, through PCWs, or via specialist brokers. We also partner with some of the UK’s leading banks.
We are one of the leading providers of rescue, travel and pet insurance in the UK. Green Flag is the third largest roadside recovery provider2. We are also the second largest travel and the fourth largest pet insurer3
Our customers We earn our customers’ trust by demonstrating how we are acting in their best interests.
Premiums Our diversified model enables us to offer a range of products across a range of distribution channels.
Claims management We have deep specialism in claims handling, including market-leading counter-fraud capability.
Tax We manage our tax obligations responsibly contributing either directly or indirectly £888 million in tax to the Exchequer this year. See more on page 35.
We have a number of strengths, from strong brands to rich data, to leading claims skills, that are hard to replicate and provide real long-term value.
Our people We encourage a culture that celebrates difference and empowers people so that they can thrive.
Shareholders We have a track record of delivering strong returns to shareholders. This, together with our share price performance, has delivered an attractive total shareholder return.
I would like to start my first statement as Chair by recognising the efforts of all my Direct Line Group (the “Group”) colleagues in navigating the turbulent conditions that we experienced in 2020.
The resilience and adaptability demonstrated by our people has been commendable. The Covid-19 pandemic has affected all our stakeholders and I am proud of the senior leadership team for responding swiftly and effectively and for addressing the rapidly changing needs of the Group’s stakeholders, including our customers, our workforce and the communities we serve.
In the extraordinary market conditions caused by lockdowns and market uncertainty related to Brexit and other global economic factors, our disciplined underwriting model produced a combined operating ratio of 91.0% (2019: 92.2%). Profit before tax was down 11.4% to £451.4 million (2019: £509.7 million) but our strong capital position has enabled us to increase our final dividend to 14.7 pence and commence a share buyback of up to £100 million. This is on top of the £30 million share buyback we made in March 2020 before we prudently cancelled the programme against a background of market volatility.
New leadership and Board changes I am delighted to have been chosen by my fellow Directors to succeed Mike Biggs as Chair following his retirement from office in August 2020. It was a pleasure to have served with him as an independent Non-Executive Director and, on behalf of the Board, I extend our thanks to Mike for his exemplary stewardship of the Board as Chair since before the Company separated from the Royal Bank of Scotland and listed on the London Stock Exchange in 2012. Mike formed the Board, led it through the IPO and was instrumental in defining the Group’s enviable culture and ambition. We are indebted to him for his wisdom, for the contribution of his deep experience, honed over four decades in the financial services sector, and for his legacy of inclusivity and solidarity in the Board’s culture. The selection process which led to my appointment as Chair is summarised in the Governance report on page 91.
In 2020, our resilience and agility enabled us to support our customers and communities, distribute surplus capital and progress building the capability designed to deliver our sustainable strategy.
“The resilience and adaptability demonstrated by our people has been commendable.”
We are committed to our diversity and inclusion agenda, including our target of increasing female representation in our senior leadership team. Details about the progress we are making on Board diversity appear in our Nomination and Governance Committee report on pages 106 to 108 and further information about changes to the Board and its Committees is set out on page 91.
Our strategic objectives aim to ensure that we build technological and organisational capability to continue providing products which meet our customers’ changing needs and are available through multiple channels, to continue providing outstanding customer service and value for money, to create value for our investors, to support our communities and to protect the environment.
Reflecting the strength of the Group’s capital position, and in line with our dividend policy to return capital to shareholders which is expected to be surplus to the Group’s requirements for a prolonged period, the Group intends to commence a share buyback programme. The Board has approved a share buyback programme of up to £100 million, with an initial tranche of up to £50 million expected to be completed by the time of the half-year results.
In April 2020, the Group took the difficult decision to cancel the 2019 final dividend of 14.4 pence and the £150 million share buyback programme, in recognition of heightened uncertainty in the macroeconomic environment due to Covid-19, although its solvency position was strong. At the time of the interim results in August 2020, the Group’s financial resilience in the face of Covid-19 enabled it to declare a regular interim dividend and catch-up on the cancelled 2019 final dividend. We are grateful to our shareholders for their understanding during this challenging period.
Over the past three years, the Group has delivered a TSR of 7.9% compared to the FTSE 350 (excluding investment trusts) reduction of 5.0%, having returned £1.2 billion to shareholders during the period.
Sustainability and culture In December 2020, we published our first Task Force on Climate-related Financial Disclosures Report and our first Sustainability Report. These set out the progress the Group has made against its Environment, Social and Governance agenda, including the Group’s intention to set Science Based Targets which will strengthen our disclosures across Scope 1, Scope 2 and Scope 3 emissions, as well as the actions we took in response to the Covid-19 pandemic to support our people, customers and communities. For definitions of terms used, please see the glossary on pages 224 to 226.
Climate-related risks and opportunities have grown in importance for us as a business. As an insurance company, understanding and managing risk is of fundamental importance, and we recognise that climate change poses material long-term risks to the business.
We are embracing the sustainable practices that we believe underpin a better corporate culture, offering products that meet our customers’ needs and providing greater long-term sustainability for investors.
The Board believes that working for all our stakeholders is the foundation needed for delivering long-term sustainability. The Board recognises the importance of setting the tone of the Group’s culture and embedding it throughout the organisation. More information about this can be found in the Governance introduction on page 76.
In November 2019, we set out our vision for building a world where insurance is personal, inclusive and a force for good. At that time, we could not have anticipated the extraordinary events of 2020 and now more than ever, it is essential that we live up to that ambition and play our part in supporting the communities we serve. The DLG Community Fund of £3.5 million is being used to support the communities where our largest sites are based as well as several national charities.
Our People We pride ourselves in having an empowering culture that celebrates difference and authenticity, and encourages each colleague to bring their whole self to work. The Group’s success and resilience is due in no small part to the contribution of its people. In a year which could have produced very different outcomes, the Board and I are grateful for the hard work, initiative and commitment of our people, who have continued to live the Group’s values and to demonstrate dedication to serving our customers.
The Directors of Direct Line Insurance Group plc (the “Company”) have been subject to the duties codified in law, which include the duty to act in the way in which they consider, in good faith, would be most likely to promote the success of the Group for the benefit of its members as a whole, having regard to the stakeholders and matters set out in Section 172(1) of the Companies Act 2006 (“Section 172(1)”).
The underlying principles of promoting the success of the Company for the benefit of its members as a whole, and of considering stakeholders when making decisions that could affect them, is understood by the senior leadership team and consideration and respect for stakeholders is demonstrated throughout the Group.
We are committed to ensuring that the Group takes action both to protect the business and to reduce its direct and indirect impact on the environment.
Business performance and the impact of Covid-19 In 2020, we delivered another year of strong profitability at the same time as growing our direct own brand policy count. The investments we have made in systems and capability over the last few years are showing through in this growth and are contributing to underlying improvements in current-year underwriting profitability. Overall Covid-19 led to a modest net benefit to the result. Despite the impact of the pandemic, we made further progress in delivering the change required to implement the Group’s transformation plans.
“In 2020, we delivered another year of strong profitability at the same time as growing our direct own brand policy count.”
We help people carry on with their lives, giving them peace of mind now and in the future
We want to create a world where insurance is personal, inclusive and a force for good
– Launched a free on-line risk management portal for every NIG policyholder
– Increase in Travel claims, relating to both claims volumes and claims handling costs as well as additional commission payments
– An estimated £6 million in Covid-19 related business interruption claims
Prior to the pandemic we had set out to achieve improvements in our current-year loss ratio and therefore to improve the profitability of the business we write. Offsetting this we had expected to see the level of releases from prior year business reduce, reflecting changes in the level of Motor excess of loss reinsurance some years ago. During 2020, prior-year reserve releases reduced to £173.8 million (2019: £294.5 million). Although the improvements in our loss ratio undoubtedly benefited from the impact of the Covid-19 pandemic, we are confident we have made progress in increasing the current-year contribution to operating profit.
Overall we have sought to do the right thing by all our stakeholders throughout 2020, and believe the underlying performance and quality of change delivery in the year indicate we are on track to deliver on our targets.
Strategic update 2020 was always a critical change delivery year on our path to building the insurance company of the future – technology and data led but with the customer at its heart. I have been very pleased by our ability to continue delivering major transformational change, even from our homes. The table opposite outlines some of our key achievements.
“As we transform the business both in terms of the technology we use and our agility, we are changing the way the organisation works.”
A further effect was felt in our investment portfolio where we saw investment return fall from £134.6 million in 2019 to £95.1 million in 2020, reflecting the dual impact of lower reinvestment rates and a small number of writedowns in the investment portfolio. When we look at some of the volatility in the market over the period we are pleased with the overall performance of the portfolio.
That said, capital generation has been strong and our perception is that the level of risk in the system, with vaccines rolling out and a Brexit deal in place, is beginning to reduce. As a result we are declaring a final dividend of 14.7 pence per share and announcing a share buyback programme, as we reiterate our target of operating around the middle of our risk appetite range of 140% to 180% in normal circumstances. The share buyback will be for up to £100 million, with an initial tranche of up to £50 million expected to be completed by the time of the half-year results.
– Continuing the journey towards greater digitalisation, applying advanced analytical techniques to enhance the customer experience.
‘Bring all of yourself to work’ is a value lived vibrantly across the Group but after extensive discussions with our people, we launched a new diversity and inclusion strategy and set ourselves stretching targets around ethnicity and gender in our leadership so that we are truly inclusive and reflect the customers we serve.
Supporting a greener future 450k+ Over 450,000 customers supported through payment deferrals, waiving cancellation fees and mileage refunds 26k+ More than 26,000 customer travel claims settled and over 900 customers repatriated
Free Free Rescue cover, fast-track claims and free home emergencies cover for NHS staff
Moved 9,000 people to home working and supported our motor accident repair centres to open safely and keep Britain moving
Reduce Committed to setting Science-Based Targets1 for Scope1 1, 2 and 3 to help the Group reduce its carbon footprint
Consumer trends In 2020 we saw a number of trends emerging through the year. Ultimately these tell us that our strategy is the right one. Those trends are: – Consumers’ willingness to interact digitally has been transformed. Digitalisation is at the heart of our technology transformation so this trend is entirely aligned with our plans.
– The working model has changed. Knowing our people can deliver from home has provided an opportunity to change how we use our offices in a way that supports what our people tell us they want and offers opportunities to recruit people irrespective of geography.
This is an area where we have already been proactive for several years by implementing a range of measures to reduce the differential in pricing between our new business and renewal customers. We are supportive of the aims of the FCA and believe that, in a world where prices become less of a differentiator, our strong brands, diversified business model and the capabilities we are building will enable us to win in the future market. On the way there is uncertainty around the detailed application of the rules, the timelines for implementation and the nature of short-term volatility as the market rebalances. We have prepared for a range of outcomes and we continue to work with the FCA to assist it in navigating some of the issues and are seeking to help shape the right outcome for our customers and shareholders.
Climate The impact of climate change has far reaching implications for economies around the world. Our Planet pillar, which aims to protect our business from the impact of climate change and give back to the planet more than we take out, drives our approach. We recognise that our actions as a business can contribute to climate risk mitigation and help accelerate the transition to a low carbon and sustainable future. We take this seriously and have continued to challenge ourselves to reduce emissions and energy consumption through greater transparency.
Outlook The capability delivered as the Group looks to transition from technology transformation into business transformation underpins the improvement in the current-year profitability and provides a platform for growth, underwriting improvements and cost efficiency. Through increased digitalisation and self-serve, enabled by new ways of working, we aim to deliver significant customer and efficiency improvements and underpin our target of an operating expense ratio of 20% by 2023. The new ways of working during 2020 have enabled us to think more ambitiously about how we use our office space and we have therefore launched a property strategy which aims to help deliver incremental savings to this target. In addition, greater pricing sophistication and counter-fraud initiatives aim to continue the improvement in the current-year loss ratio. The Group remains on track to maintain the contribution from current-year operating profit at more than half of the Group’s total operating profit and we reiterate our ongoing target of achieving at least a 15% return on tangible equity per annum.
2020 has been a testing year for everyone and I am proud of how we have responded as a Group, demonstrating throughout the resilience of our business model. We had strong momentum coming into the Covid-19 crisis and have delivered a good financial result whilst simultaneously navigating the Covid-19 pandemic, supporting our various stakeholders and staying true to our vision and purpose throughout. Given the progress we are making on our transformation, we enter 2021 with real momentum and are confident in delivering our vision of being a technology and data led insurance company of the future with our customers at its heart.
Penny James Chief Executive Officer to reduce emissions, to submit to the Science Based Target Initiative (“SBTi”) for approval. Finally, we know that we are on a journey and cannot reduce our emissions overnight, therefore we became carbon neutral through offsetting, as we work to reduce our emissions over time. Note: 1. See glossary on pages 224 to 226 for definitions.
The disruption to global trade and supply chains caused by the pandemic could increase the risk of inflation in the long term. The Group’s investment portfolio is positioned defensively and additional steps could be taken, such as further shifting the portfolio towards ‘defensive’ sectors or increasing more allocation to cash. The portfolio also contains a proportion of short-maturity bonds which could be sold relatively quickly if necessary.
3. The 2019 solvency capital ratio has been adjusted to remove the cancelled 14.4p final dividend and £120 million of the share buyback as announced in March/April 2020. (The reported number was a solvency capital ratio of 165%.)
The amount of cash paid in dividends to shareholders and amount of share buybacks funded from the Group’s retained profits. (See page 192 for dividend breakdown).
We aim to achieve at least a 15% RoTE per annum over the long term.
We base Long-Term Incentive Plan (“LTIP”) awards partly on relative total shareholder return performance, which includes dividends. Directors also receive dividends on their beneficial shareholdings and accrue these on unvested LTIP awards.
We base part of the Annual Incentive Plan (“AIP”) awards on profit before tax. The COR is closely linked to this.
ep ort 4. Estimates based on the Group’s Solvency II partial internal model. 5. On an aggregated 12-month rolling basis, with 2013 rebased to 100. 6. For the Group’s principal underwriter, U K Insurance Limited. 7. FCA complaints reporting requirements have changed for periods after 29 June 2016. Before 29 June 2016, only complaints resolved after two business days were classed as FCA reportable. From July 2016 all complaints resolved are classed as FCA reportable.
Engagement is about being proud to work for the Group and helping us to succeed. It means that employees are not just happy or satisfied, but doing something to help us achieve our Company goals.
Net promoter score (“NPS”) is an index that measures the willingness of customers to recommend products or services to others. It is used to gauge customers’ overall experience with a product or service, and customers’ loyalty to a brand.
Direct own brands in-force policies grew by 2.2% driven by strong segments of growth across the business including Home, Commercial and Green Flag Rescue, whilst Motor was broadly stable. Total in-force policies reduced due to lower partnerships and Travel volumes.
Increased major weather costs of £43.0 million (2019: £6.0 million) contributed to lower operating profit of £522.1 million, £24.8 million (4.5%) lower than 2019 (£546.9 million). Covid-19 restrictions reduced claims frequency in Motor and Commercial, although this was partially offset by investment in initiatives to protect our customers, people and society, lower investment asset returns and the impact of the Covid-19 pandemic on Travel. Overall, the impact of the pandemic was a modest net benefit to the result.
Progress on the Group’s transformation continued to drive improved current-year profitability via increased pricing and underwriting sophistication in Commercial and improved counter-fraud capability in Motor.
Profit before tax of £451.4 million was £58.3 million lower than 2019, following the reduction in operating profit alongside £39.4 million of restructuring and one-off costs as the Group invested in cost-saving initiatives.
Proposed final ordinary dividend of 14.7 pence per share, increased 2.1%2 and announcing a share buyback programme of up to £100 million. Intention to move back towards the middle of the Group’s capital risk appetite range assuming more normal circumstances.
2. The 2019 final dividend of 14.4 pence was subsequently cancelled and paid as a special interim dividend in 2020.
Strong capital position, good results 20 Direct Line Group Annual Report and Accounts 2020
Share buyback actioned (10.4 million shares) 30.0 – Share buyback proposed3 100.0 150.0 31 Dec
Notes: 1. A reduction in the ratio represents an improvement as a proportion of net earned premium, while an increase in the ratio represents a deterioration.
Investment return decreased to £95.1 million (2019: £134.6 million), reflecting the dual impact of lower reinvestment rates and lower valuations on property in the investment portfolio.
Taking all of this together, operating profit decreased by £24.8 million to £522.1 million (2019: £546.9 million) and current-year operating profit, as a proportion of total operating profit, improved to 66.7% (65.4% on a normalised basis). Whilst current-year profitability has benefited from the impact of Covid-19 related factors in 2020, the Group remains on track for its target of achieving more than half of the Group’s annual operating profit from current-year earnings by the end of 2021.
Direct own brands 3,943 3,921 Partnerships 118 122 Motor 4,061 4,043
Rescue 3,400 3,450 Travel 3,499 3,648 Pet 145 157 Other personal lines 61 122 Rescue and other personal lines 7,105 7,377
Underwriting profit 267.8 232.1 Instalment and other operating income 159.2 180.2 Investment return 95.1 134.6 Operating profit 522.1 546.9
First, the Group experienced major weather event claims of £43.0 million in 2020, below our expectations of £64 million but higher than the very benign weather experienced in 2019 (£6.0 million).
Overall the Group incurred £93 million in supporting customers, our people and society as part of our “Force for Good” initiatives. This support included customer refunds, job protection, charity donations and supplier support measures. Over this period the Group has not taken any Government support. The cost of these initiatives are all recognised in the underwriting result.
Furthermore, within the underwriting result there are four additional factors: a net reduction in motor claims from significantly reduced driving, partly offset by higher claims severity; a reduction in motor premiums as a result of fewer new drivers and market-wide
Direct own brands 1,567.6 1,591.7 Partnerships 49.3 59.9 Motor 1,616.9 1,651.6
Direct own brands 411.6 407.7 Partnerships 166.3 178.9 Home 577.9 586.6
Underwriting profit (£ million) 267.8 232.1 Loss ratio 57.9% 61.9% Commission ratio 8.6 % 7.1% Expense ratio 24.5% 23.2% Combined operating ratio 91.0% 92.2%
Overall underwriting profit increased to £267.8 million (2019: £232.1 million) with an improvement in the combined operating ratio to 91.0% (2019: 92.2%). The loss ratio improved significantly to 57.9% (2019: 61.9%) as higher major weather-related claims and lower prior-year reserve releases were more than offset by the net positive effect of Covid-19 related factors. These included reduced claims frequency in Motor, only partially offset by premium deflation in Motor, higher claims handling costs in Travel and a cautious estimate of Travel claims. The improvement in the loss ratio was partially offset by a higher commission ratio and higher expense ratio. The commission ratio increased primarily as a result of increased profit share payments, particularly on packaged bank accounts, and volume related commission payments to PCWs, while the expense ratio increased due to investment in initiatives to protect our customers, people and society. Excluding costs related to the protection of our customers and people against the Covid-19 pandemic, the Group made progress in reducing its underlying expense base.
Note: 1. Home and Commercial claims for major weather events, including inland and coastal flooding and storms.
The current-year attritional loss ratio excludes prior-year reserve releases and claims costs from major weather events, although in 2020 it was impacted by Covid-19 disruption. The Group’s current-year attritional loss ratio of 62.3% improved by 9.3 percentage points compared to 2019, due to reduced Motor claims frequency alongside improved underlying current-year performance across all lines. Home and Commercial experienced increased major weather costs, up £24.0 million and £13.0 million respectively compared to 2019.
The Group’s current-year combined operating ratio improved by 5.2 percentage points to 96.9% (2019: 102.1%) as a 9.3 percentage point improvement to the currentyear attritional loss ratio was partly offset by a 1.3 percentage point increase in claims due to major weather events, a 1.5 percentage point increase in the commission ratio and a 1.3 percentage point increase in the expense ratio.
Staff costs1 255.6 261.5 IT and other operating expenses1,2 196.0 158.0 Marketing 10 106.6 113.9 Insurance levies 10 80.4 81.5 Depreciation and amortisation3,4 10 85.8 78.8 Total operating expenses before restructuring and one-off costs 724.4 693.7
Operating expenses before restructuring and one-off costs increased by £30.7 million to £724.4 million (2019: £693.7 million). This resulted in an increase in the expense ratio of 1.3 percentage points to 24.5% (2019: 23.2%). The increase in costs was entirely due to investment in initiatives for our customers, people, suppliers and the wider society in the context of the Covid-19 pandemic. In total these initiatives are estimated to have increased operating expenses by £34 million and in some cases had the effect of delaying cost saving programmes which were planned for 2020. Adjusting for these initiatives, operating expenses were broadly flat year on year and we reiterate our 20% expense ratio ambition for 2023.
Instalment income 109.3 114.0 Other operating income: Revenue from vehicle recovery and repair services 7 24.0 28.3 Vehicle replacement referral income 7 12.2 19.1 Legal services income 7 8.8 11.3 Other income1 7 4.9 7.5 Other operating income 49.9 66.2 Total instalment and other operating income 159.2 180.2
Total investment return decreased by £39.5 million to £95.1 million (2019: £134.6 million) with a reduction in investment income and write downs on investment property. Lower reinvestment rates, following interest rate cuts made by both the US Federal Reserve and the Bank of England during Q1 2020, led to a lower net investment income yield of 1.8% (2019: 2.1%).
Restructuring and one-off costs In order to support its cost reduction targets, the Group announced approximately £60 million of restructuring and one-off costs across 2019 and 2020 at its Capital Markets Day in November 2019. The Group incurred £39.4 million of restructuring and one-off costs in 2020 bringing the total cost to date to £50.6 million. As part of the Group’s response to the Covid-19 pandemic to support its people it paused some elements of its restructuring programme. The Group expects the remaining £9 million in relation to this cost reduction programme to be incurred during 2021.
Finance costs Finance costs increased to £31.3 million (2019: £26.0 million) primarily due to interest on the £260 million Tier 2 subordinated debt issued in June 2020.
Earnings per share Basic earnings per share decreased by 12.5% to 25.8 pence (2019: 29.5 pence). Diluted earnings per share decreased by 12.7% to 25.5 pence (2019: 29.2 pence) mainly reflecting the reduction in profit after tax.
The Group generated operating cash flows before movements in working capital of £398.6 million (2019: £370.3 million), an increase of £28.3 million due to the increase in profit for the year adjusted for non-cash movements. After taking into account movements in working capital, the Group generated £402.6 million (2019: £182.4 million), an increase of £220.2 million. The Group has considerable assets under management; the cash generated from these reduced by £58.0 million to £315.9 million following reductions in the Group’s assets under management, as a result of dividend payments. Net cash generated from operating activities was £584.7 million (2019: £462.1 million).
Net cash used in investing activities of £161.0 million reflected the Group’s continuing investment in its major IT programmes (2020: £140.7 million, 2019: £175.7 million).
Net cash used in financing activities of £151.8 million comprised £312.5 million (2019: £420.7 million) in dividends and Tier 1 capital coupon payments in the year, partly offset by net proceeds of £257.2 million on the Tier 2 subordinated debt issued in June. Dividends paid in the year comprised the 7.4 pence first interim dividend and 14.4 pence special dividend announced in the half-year results in 2020.
Net cash used in financing and investing activities partly offset the £584.7 million generated from operating activities and resulted in a net increase in cash and cash equivalents of £271.9 million (2019: £196.1 million decrease) to £1,168.2 million (2019: £896.3 million).
The levels of cash and other highly liquid sources of funding that the Group holds to cover its claims obligations is continually monitored to ensure that the levels remain within the Group’s risk appetite.
The Board has recommended a final dividend of 14.7 pence per share (2019: 14.4 pence), an increase of 2.1% on the special interim dividend of 14.4 pence per share announced at the time of the interim results which reflected a full catch up of the cancelled 2019 final dividend. The Board has also approved a share buyback of up to £100 million, with an initial tranche of up to £50 million expected to be completed by the time of the half-year results. This reflects the Board’s continued confidence in the Group’s capital position and the sustainability of its earnings. In normal circumstances, the Board expects the Group to operate around the middle of its solvency capital ratio risk appetite range of 140% to 180%.
After the dividend and share buyback, the estimated solvency capital ratio was 191% as at 31 December 2020. The Group has outstanding Tier 2 debt issued in 2012 with nominal value of £250 million and a first call date during the first half of 2022. Excluding this debt, the Group’s solvency ratio after the dividend and share buyback would be 172%. In February 2021, the Group acquired the head lease of its Bromley office site, which reduced the Group’s coverage ratio by an additional 6 percentage points.
The final dividend will be paid on 20 May 2021 to shareholders on the register on 9 April 2021. The exdividend date will be 8 April 2021.
Capital analysis The Group is regulated under Solvency II requirements by the PRA on both a Group basis and for the Group’s principal underwriter, U K Insurance Limited. In its results, the Group has estimated its Solvency II own funds, SCR and solvency capital ratio as at 31 December 2020.
Capital position At 31 December 2020, the Group held a Solvency II capital surplus of £1.22 billion above its regulatory capital requirements, which was equivalent to an estimated solvency capital ratio of 191%, after the proposed final dividend and share buyback.
The Group’s SCR and solvency capital ratio are as follows: Solvency capital requirement (£ billion) 1.34 1.32 Capital surplus above solvency capital requirement (£ billion) 1.22 0.85 Solvency capital ratio after proposed final dividend and share buyback 191% 165%
Capital surplus at 1 January 0.85 0.89 Capital generation excluding market movements 0.59 0.60 Market movements (0.02) 0.06 Capital generation 0.57 0.66 Change in solvency capital requirement (0.02) (0.06) Surplus generation 0.55 0.60 Capital expenditure (0.16) (0.19) Tier 2 debt issue 0.26 – Cancellation of 2019 year-end distribution and reinstatement for 2020 half year1 0.12 – Interim dividend (0.10) (0.10) Final dividend2 (0.20) (0.20) Share buyback (0.10) (0.15) Net surplus movement 0.37 (0.04) Capital surplus at 31 December 1.22 0.85
Solvency capital requirement at 1 January 1.32 Model and parameter changes – Exposure changes 0.02 Solvency capital requirement at 31 December 1.34
Scenario and sensitivity analysis The following table shows the impact on the Group’s estimated solvency capital ratio in the event of the following scenarios as at 31 December 2020. The impact on the Group’s solvency capital ratio arises from movements in both the Group’s solvency capital requirement and own funds.
During 2020, the Group’s own funds increased from £2.17 billion to £2.56 billion. Tier 1 capital after foreseeable distributions represents 75% of own funds and 143% of the estimated SCR. Tier 2 capital relates solely to the Group’s £0.53 billion subordinated debt. The amount of Tier 2 and Tier 3 capital permitted under the Solvency II regulations is 50% of the Group’s SCR and of Tier 3 alone is less than 15%. Therefore, the Group currently has no ineligible capital. The maximum amount of Restricted Tier 1 capital permitted as a proportion of total Tier 1 capital under the Solvency II regulations is 20%. Restricted Tier 1 capital relates solely to the Tier 1 notes issued in 2017.
Reconciliation of IFRS shareholders’ equity to Solvency II own funds (£bn)
Leverage The Group’s financial leverage increased by 5.6 percentage points to 24.2% (2019: 18.6%). The increase was primarily due to the issue of £260 million of Tier 2 subordinated debt in June 2020.
Shareholders’ equity 2,699.7 2,643.6 Tier 1 notes 346.5 346.5 Financial debt – subordinated debt 516.6 259.0 Total capital employed 3,562.8 3,249.1 Financial-leverage ratio1 24.2% 18.6%
Note: 1. Total IFRS financial debt and Tier 1 notes as a percentage of total IFRS capital employed.
Credit ratings Moody’s Investors Service provide insurance financialstrength ratings for U K Insurance Limited, the Group’s principal underwriter. Moody’s rate U K Insurance Limited as “A1” for insurance financial strength (strong) with a stable outlook.
Reserving The Group makes provision for the full cost of outstanding claims from its general insurance business at the balance sheet date, including claims estimated to have been incurred but not yet reported at that date and associated claims handling costs. The Group considers the class of business, the length of time to notify a claim, the validity of the claim against a policy, and the claim value. Claims reserves could settle across a range of outcomes, and settlement certainty increases over time. However, for bodily injury claims the uncertainty is greater due to the length of time taken to settle these claims. The possibility of annuity payments for injured parties also increases this uncertainty.
If the claimant prefers, large bodily injury claims can be settled using a PPO. This is an alternative way to provide an indemnity for recurring costs, making regular payments, usually for the rest of the claimant’s life. These claims are reserved for using an internal discount rate, which is progressively unwound over time. As it is likely to take time to establish whether a claimant will prefer a PPO or a lump sum, until a settlement method is agreed the Group makes assumptions about the likelihood that claimants will opt for a PPO. This is known as the PPO propensity.
Looking forward, the Group expects to continue setting its initial management best estimate with an appropriate degree of conservatism. Assuming current claims trends continue, the contribution from prior-year reserve releases is expected to remain significant.
Sensitivity analysis – the discount rate used in relation to PPOs, changes in the assumed Ogden discount rate and claims inflation The table below provides a sensitivity analysis of the potential net impact of a change in a single factor (the internal discount rate used for PPOs , the Ogden discount rate or claims inflation) with all other assumptions left unchanged. Other potential risks beyond the ones described could have additional financial impacts on the Group.
Impact of an increase in the discount rate used in the calculation of present values of 100 basis points 45.9 48.5 Impact of a decrease in the discount rate used in the calculation of present values of 100 basis points (62.7) (66.5) Ogden discount rate4
4. Ogden discount rate sensitivity has been calculated on the direct impact of a permanent change in the discount rate in England and Wales with all other factors remaining unchanged. The Group will consider the statutory discount rate when setting its reserves but not necessarily provide on this basis. This is intended to ensure that reserves are appropriate for current and potential future developments.
– Motor reinsurance to protect against a single claim or an accumulation of large claims which renews on 1 January. The retained deductible is set at an indexed level of £1 million per claim but the reinsurance is only 75% placed up to a level of £10 million and the protection above £10 million is subject to an additional aggregate retention of £37.5 million. This programme was renewed on 1 January 2021.
– Commercial property risk reinsurance to protect against large individual claims with a retained deductible of £4.0 million which renews annually on 1 July.
Finance review continued 32 Direct Line Group Annual Report and Accounts 2020
More than 10 years, for example PPOs Property and infrastructure debt Inflation-linked or floating
Surplus − tangible equity Investment-grade credit, short-term high yield, cash and government debt securities
2. Net of bank overdrafts: includes cash at bank and in hand and money market funds. 3. Equity investments consist of an equity fund which is valued based on external valuation reports received from a third-party fund manager.
These arrangements are intended to ensure that the Group: complies with applicable laws and regulations; meets its obligations as a contributor and a collector of taxes on behalf of the tax authorities; and manages its tax affairs efficiently, claiming reliefs and other incentives where appropriate.
For more information please see our published Group Tax policy on the Group’s website at co.uk/en/who-we-are/governance/other-policies.html.
Total tax contribution The Group’s direct and indirect tax contribution to the UK Exchequer is significantly higher than the UK corporation tax that the Group pays on its profits. The Group collects taxes relating to employees and customers on behalf of the UK Exchequer and other national governments. It also incurs a significant amount of irrecoverable value added tax relating to overheads and claims. Taxes borne and collected in other tax jurisdictions have not been included in this note as the amounts are minimal in the context of the wider UK Group.
Insurance premium tax 397.0 Value added tax 11.3 Employee’s pay as you earn and national insurance contributions 97.9 Total taxes collected 506.2
Own brand in-force policies increased by 0.6%, with an overall increase in in-force policies of 0.4% to 4.1 million.
Gross written premium £1,616.9m £1,651.6m Loss ratio 59.8% 69.3% Commission ratio 3.2% 2.6% Expense ratio 24.7% 22.9% Combined operating ratio 87.7% 94.8% Operating profit £363.5m £302.6m
Against this backdrop, the Group focused on providing financial support to its customers experiencing financial difficulties while maintaining a focus on underwriting discipline and indemnity management in a highly competitive market.
The combination of market dynamics and strategic progress resulted in a current-year attritional loss ratio of 66.6% (2019: 81.2%).
Performance Motor in-force policies grew by 0.4% to 4.1 million with own brand in-force policies up by 0.6% at 3.9 million. Strong retention was partially offset by a slow down in the new business market as new car sales fell and fewer new drivers entered the market. The Group saw good growth in the PCW channel as both Churchill and Darwin strengthened their propositions.
The Motor result has been significantly affected by the factors surrounding Covid-19, with the current-year attritional loss ratio improving by 14.6 percentage points to 66.6% (2019: 81.2%). The majority of this reduction reflects lower levels of claims frequency as driving patterns evolved through the year. A relatively normal first quarter was followed by a halving of claims frequency during the second quarter with less significant but still lower levels of claims frequency through the rest of the year. While claims frequency was down as fewer miles were driven, claims severity was higher than the Group’s medium-term expectation of 3% to 5% inflation per annum. Claims severity has been impacted by longer repair times and consequent greater credit hire costs and additional cleaning and by extending the scope of vehicle replacement as part of the customer initiatives.
In total, prior-year reserve releases were £79.9 million lower year on year at £100.6 million. The 2019 prior-year reserve releases included a strengthening of £15.9 million as a result of the change in the Ogden discount rate to minus 0.25% from an assumed rate of 0%.
Overall Motor’s reported combined operating ratio improved by 7.1 percentage points to 87.7% (2019: 94.8%). The improvements in the current-year attritional loss ratio were offset by a 0.6 percentage point increase in the commission ratio, primarily due to increased volume related commission payments to PCWs, a 1.8 percentage point increase in the expense ratio and a 5.1 percentage point reduction in prior-year reserve releases. Note: 1. Average incepted written premium excluding IPT for Motor own brands (covering 96.5% of Motor) for year end 31 December 2020.
Total in-force policies 1.7% higher at 2.6 million. Own brand policies were 4.1% higher at 1.8 million principally due to strong growth in the PCW channel where new business sales increased by over 30%.
Total gross written premium was 1.5% lower at £577.9 million. Own brand gross written premium was 1.0% higher.
Direct Price comparison websites Partnerships 38 Direct Line Group Annual Report and Accounts 2020
Gross written premium £577.9m £586.6m Loss ratio 55.6% 46.8% Commission ratio 8.1% 9.7% Expense ratio 23.4% 23.8% Combined operating ratio 87.1% 80.3% Operating profit £101.4m £150.6m
Overview In 2020 the home market continued to shift towards the PCW channel and Covid-19 led to changes in claims mix with fewer claims for escape of water and theft as more people were at home.
Performance In-force policies for Home’s own brands increased by 4.1% in 2020 to 1.8 million policies. Retention and new business were strong with particular strength in PCW new business which grew over 30%. This reflected the Group’s increased focus on, and capability in, the PCW channel. Partnership volumes reduced by 3.4%; Prudential and Sainsbury’s partnerships are closed to new business and continued to run off in line with expectations.
Home own brand average premium1 reduced by 3.8% primarily reflecting a change in mix towards lower risk and consequently lower average premium policies in the PCW channel. Risk-adjusted prices reduced by 1.2% reflecting initiatives taken to reduce claims inflation and actions taken to reduce the differential between new business and renewal prices.
The commission ratio of 8.1% was 1.6 percentage points lower than 2019 due to lower profit share payments to partners.
Green Flag’s ongoing transformation, positioning itself as the challenger brand in the rescue market, continued in 2020 with the launch of a new claims system. Throughout the pandemic in 2020 Green Flag offered free breakdown cover to NHS workers and offered free vehicle health checks to all its customers.
Green Flag’s in-force policy count continued to grow, and in August it recorded its biggest sales month since 2012. Policy count growth was slower overall as there were fewer cars on the road and fewer miles driven due to lockdown restrictions. The restrictions and changes to customer behaviours also led to lower claims in the year which contributed to an increase in Rescue operating profit to £51.2 million.
Travel experienced elevated claims being registered in 2020, particularly during the first lockdown and operational capacity was strengthened to support customers. In addition, the Group has taken a cautious stance in its approach to Travel claims reserving.
Part of the app’s success is based on the ability to introduce enhancements quickly, giving the Green Flag team greater agility to meet customer needs and service more claims digitally.
Performance The combined operating ratio for Rescue and other personal lines increased by 6.6 percentage points to 102.0% (2019: 95.4%) due predominantly to Travel which incurred increased claims handling costs supporting customers throughout 2020 and higher commissions to partners. The Group has taken a cautious stance in its reserving for travel claims.
Rescue in-force policies reduced by 1.4% to 3.4 million and gross written premium reduced by 0.5% to £166.7 million. Green Flag Rescue continued to grow its higher average premium direct business during 2020, increasing in-force policies by 4.8% to 1.1 million and gross written premium by 5.2% to £83.1 million. Other Rescue lines, which include the linked channel, where cover can be purchased with a Group Motor policy, and Rescue partnerships, saw in-force policies and gross written premium reduce by 4.2% and 5.5% respectively.
Other personal lines (comprising Travel, Pet, Creditor and policies tailored to mid- to high-net worth customers) in-force policies reduced by 5.7% to 3.7 million primarily due to lower Travel, following the Group’s suspension of sales in Q2 and Q3, as a result of the Covid-19 lockdown, and continued reductions in packaged bank volumes. Gross written premium for Other personal lines decreased by 6.5% with reductions across all lines except Pet, where premium levels were maintained.
Strong performance in Direct Line for Business as it continued to focus on micro business tailored propositions.
NIG and other gross written premium grew by 6.6%, benefiting from improvements arising from the re-platforming of the products on its award-winning electronic trading platform and improvements in Van insurance pricing.
In-force policies (thousands) 811 775 Of which direct own brands 560 541
Direct Line for Business continued to grow policy count through its ongoing focus on offering micro business tailored propositions, with the launch of its Van insurance product at the start of the year.
Commercial’s current-year attritional loss ratio continued to improve. Higher weather event costs were offset by fewer claims associated with the Covid-19 pandemic and UK lockdowns and underlying claims benefits from Commercial’s ongoing investment in pricing and underwriting.
NIG self-help online portal The NIG Risk Assist tool was launched to help business owners manage and respond to a broad range of risks through a comprehensive range of easy-to-use online tools.
The online portal offers a wide range of services, such as: unlimited online access to health & safety and HR professionals for support and guidance on specific issues facing their businesses; unlimited phone counselling and medical advice; a suite of online eLearning courses to help train and develop staff; assessments, guides and templates to keep up with changing rules and regulations; business continuity planning to keep our customers in business when disaster strikes; and much more. The proposition was launched during the Covid-19 pandemic and has since been a valuable support for our customers.
Commercial direct own brands grew in-force policies by 3.5% supported by the growth in Van for Direct Line, where the product was added to the new Commercial direct platform, and for Churchill where Van is sold through the PCW channel. Gross written premium increased by 9.3% to £163.3 million with increases across all Commercial direct product lines.
The current-year attritional loss ratio in Commercial improved by 6.0 percentage points to 59.6%. This was driven by improvements to underwriting through pricing and risk selection as well as frequency benefits in motor lines since the end of Q1. This was partially offset by Covid-19 related business interruption claims at £6 million.
The combined operating ratio for Commercial improved slightly by 0.2 percentage points to 95.5% (2019: 95.7%) as an improvement in the current-year attritional loss ratio of 6.0 percentage points was largely offset by an increase in claims related to severe weather, a reduction in prior-year reserve releases and an increase of 0.9 percentage points on the expense ratio.
Building a sustainable future Our approach to sustainability is based on a simple premise: the role we play as a business to support the stakeholders we interact with on a daily basis – customers, shareholders, suppliers, our people, communities and the planet – makes the Group stronger and can bring future rewards.
Our established five pillar sustainability strategy, underpinned by our vision and purpose, has given the Group confidence when responding to the unforeseen circumstances of 2020. By aiming to be a force for good and giving people peace of mind we have tried at all times to deliver on our ambition of doing the right thing for all of our stakeholders.
This year we published our first Sustainability Report which you can view online at: www.directlinegroup.co.uk/2020_Sustainability_Report 44 Direct Line Group Annual Report and Accounts 2020
We asked a range of business and external stakeholders to prioritise a range of sustainability issues against our business priorities through a series of in-depth interviews and surveys to create a business impact assessment of risks, impacts and opportunities for the Group.
It means everything from delivering great service to all customers, investing in our people so they are supported, harnessing the latest data and technology and ensuring we manage our suppliers responsibly, including prompt payment.
Priorities 1 Meeting customer needs each and every day 2 Investing in and supporting our great people 3 Realising the potential of data and technology 4 Understanding and managing the impact of climate change
Lo w er Im p or ta n ce t o st ak eh ol d er s
– Financial wellbeing – Mental health first aider network – Supporting Mind – Bereavement team
Quality Education Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all.
– Carbon offsetting projects: clean water in Kenya, clean cookstoves in Bangladesh, rainforest protection in Brazil
Ensure access to affordable, reliable, sustainable and modern energy for all.
Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.
– Carbon offsetting projects: clean water in Kenya, rainforest protection in Brazil
External memberships and benchmarks CDP: The Carbon Disclosure Project is a globally recognised platform measuring reporting performance and this year the Group maintained its ‘B’ rating based on 2019 activity.
RE100: We are in the process of applying for membership of RE100, a global initiative dedicated to accelerating a global shift in clean energy. Under this initiative, we will continue our objective of sourcing 100% renewable electricity.
PRI: The UN Principles for Responsible Investment, launched in 2006, is a major collective initiative that seeks to promote responsible investment among investors and asset managers. We expect all of our external portfolio managers to be signatories.
SBTi: The Science Based Targets Initiative helps companies to determine emission reduction targets in line with climate science. In 2020 we began the process of setting new science-based reduction targets for our Scope 1 and Scope 2 emissions and Scope 3 emissions under our direct control. These targets will be submitted for approval within the two-years’ time frame set by the SBTi (August 2022).
We know that communicating clearly and openly with customers is important to our stakeholders and business. This is why our Customer Experience Pillars continue to guide the Group by using a clear framework with the aim of delivering great customer service. These principles have been invaluable this year when responding to the Covid-19 pandemic where we adapted to customer needs and changing circumstances across the business.
Making claims easy When customers make a claim they want peace of mind that it is being treated with due care, but we also know that speed matters. Whether it is fixing cars in our accident repair centres or assisting people who have suffered flooding or had their homes hit by storm damage, we want to help our customers get back to normal. This year our Travel customers’ plans were turned upside down so we created a new claims prioritisation process that has handled claims up to five times faster for thousands of our travel customers.
Digital developments have also enabled us to make the claims process easier for customers who wish to claim online. As a result: – our new online travel platform gives our customers the ability to settle small value claims in four minutes or less, without any human interaction at all; and
Caring for customers in need Losing a loved one is always difficult and taking care of financial matters is the last thing on people’s minds. This is why we created a dedicated team with specialist skills to help customers who want everything to be made as simple as possible when they experience a bereavement.
All queries are dealt with in one place by experienced consultants trained to handle the sensitive nature of these conversations. This helps to make a difficult task, that nobody wants to face alone, just that little bit easier.
This year we completed a comprehensive diversity and inclusion survey – to which nearly 6,500 of our people responded. It’s shown us what we do well and where we need to improve, highlighting a gap between the experiences of different communities.
Supporting race equality Alongside our survey, we completed an in-depth analysis of our ethnicity data.
Our response: We have signed Business in the Community’s Race at Work charter and introduced new targets to hold ourselves to account for improving Black, Asian and Minority Ethnic representation in leadership roles by the end of 2022.
We have introduced new principles for senior-level recruitment to help protect from bias – including anonymised CVs and diverse shortlisting, as well as enhancing the mandatory training completed by recruiting managers.
Diversity Network Alliance (DNA) We have a vibrant DNA community that works together to promote and champion diversity and inclusion within our business.
Our strands – BAME (Black, Asian & Minority Ethnic) – Belief – Generations, families & carers – LGBT+ – Neurodiversity & disability – Social mobility – Thrive (representing gender)
Enabling gender equality We are proud to be one of only a few companies in the FTSE 250 with a female Chief Executive Officer and Chair. We recognise that to enable women to fulfil their potential, we need to offer them support throughout their different career stages. Women have a different set of barriers to men and these need to be navigated in a different way.
Excludes an estimated 0.5% colleagues who identify as non-binary, gender-fluid or other gender due to data reporting constraints
We are determined to raise the profile of mental health, supporting everyone to be open about how they feel in and out of work. Over the course of the pandemic the Group ran frequent pulse surveys to assess the sentiment and wellbeing of employees whilst many were working remotely.
Hampton Alexander Review The Hampton Alexander Review set a target for FTSE 350 companies to have at least 33% representation of women on their Board and in their Executive Committee and direct reports by the end of 2020. We are pleased to have exceeded this with 40% and 39.1% representation1, respectively.
Gender pay gap Our gender pay gap continues to be low compared to the broader financial services sector; we know there is more to do. After three years of reporting we feel we understand our gender pay gap well, with a large portion of this being from the under-representation of women at more senior levels across the Group.
This is why we have continued to invest in development programmes for high-potential females to support them in progressing into senior leadership roles. This helps our women to think differently and start taking risks, put themselves forward and make a plan to advance more quickly through the organisation.
New ways of working Earlier this year we took the decision to radically change the way we worked and transform our trading and change areas into an agile business. Agile is a way of working that began in the tech sector to improve the speed that a product went from conception to market. We decided that adopting agile values, principles, tools and most importantly mindset would allow us to deliver customer value faster. We chose to press ahead with the transformation as the sudden change to our work and home lives only served to emphasise why our people needed to be empowered to self-organise and create new ways of doing things providing solutions for customers as quickly as possible. An immense amount of work went into consultation with our Employee Representative Body (“ERB”) and our people so that we could create an agile model that’s true to the Group and can take advantage of the investment we have already made in our technology.
Employee Representative Body We are proud to have an active and engaged ERB. They help us share and discuss proposals and initiatives that may affect our future and are consulted as part of any future change programme. During the agile transformation the ERB helped individuals understand what the changes were, helped communicate the views of colleagues and provided alternative proposals and approaches.
Human rights Happy people deliver better outcomes for our customers and the business overall so we strive to ensure that our employment practices and policies exceed those in the Universal Declaration of Human Rights. Whether that’s our wellbeing strategy which supports mental, physical and financial health, or our My Life policies which help our people balance work and life priorities or our policy to pay more than the Living Wage to all our people. We want to help our people thrive in and outside of work.
How we choose to give back to our communities and what to campaign on all have a bearing on society and in turn how we remain a force for good. The actions we take are all focused on making a tangible impact which leads to lasting change.
We pride ourselves on a culture that celebrates difference and authenticity, where colleagues can bring their whole self to work.
Celebrating difference, however, is more than simply catering for a multitude of voices. A person’s background should never act as a barrier, but like other companies we know that people still feel held back from making progress.
Our Covid-19 response for society The Group wants to support communities throughout the UK which is why we prioritised social mobility in 2020 and established our Group Community Fund in response to the Covid-19 pandemic, working to deliver £3.5 million to 250 charities, helping over 200,000 people.
Use our expertise to improve outcomes for society and the communities we serve 54 Direct Line Group Annual Report and Accounts 2020
– We have surveyed colleagues to understand what our social mobility make-up is across the business because we know that with meaningful data our interventions will have more impact.
Achievement for All Our Social Mobility DNA strand this year used the Group’s Community Fund to partner with Achievement for All which provide wellbeing and education support for disadvantaged young people to thrive emotionally, socially and academically. Our partnership will focus on schools in Walsall, Barnsley and Doncaster where our commitment to social mobility is matched with tangible impact in communities located near to some of our main office sites, also offering the opportunity for colleagues to become mentors.
Our tax contribution A key part of being a responsible corporate citizen is ensuring that we comply with all applicable tax laws and regulations and meet our responsibilities both as a contributor of corporate taxes and as a collector of taxes on behalf of HMRC. In 2020 the Group’s total tax contribution was £888.0 million which includes the Group’s direct and indirect taxation. More information can be found in the tax contribution section on page 35.
Road safety campaigners As one of the UK’s leading motor insurers we have a long tradition of campaigning for improved road safety. This year we worked with the Parliamentary Advisory Council on Transport Safety (“PACTS”) to highlight increased numbers of road deaths and serious injury where people do not wear a seat belt. Our research discovered that almost a third (31 per cent) of those who died in vehicles on Britain’s roads in 2018 were not wearing a seat belt and that 72 per cent of the British public wanted the introduction of penalty points for those caught not wearing a seat belt. We will continue to campaign with PACTS to increase the penalty for failing to wear a seat belt because it saves lives.
Computers for kids Following our immediate crisis support to refuges, we funded 700 laptops for KidsOut to distribute to children in support of their education. Since then the first donation from our 2021 Community Fund has seen £125,000 go towards the Daily Mail’s Computers for Kids campaign.
Phase 1: £2 million of immediate support to the most vulnerable, directly assisting children and families in refuges, parents needing baby packs, food banks and community groups
Phase 2: £500,000 for colleagues to nominate 180 local causes they cared passionately about with micro-donations
Phase 3: £1 million directed towards recovery efforts focused on four pressing challenges: social mobility, marginalised groups, food poverty and public health
Step one: Disclose to track progress We have always challenged ourselves to reduce emissions and energy consumption across the business through greater transparency. We exceeded our 2020 targets set in 2017 against a 2013 baseline and now intend to hold ourselves to account against a new 2019 baseline.
We comply with the applicable greenhouse gas reporting requirements of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and apply the GHG Protocol Corporate Accounting and Reporting Standard (revised edition) to calculate our emissions, which includes emissions associated with electricity consumption using both the Location-based Scope 2 and Market-based Scope 2 calculation methodologies. We monitor the intensity metric of emissions per £ million of net earned premium as a measure of how efficiently we provide our insurance products (see page 61). We also engage with the Carbon Disclosure Project (“CDP”) and recently maintained a ‘B’ rating based on 2019 activity.
,1 reduction in energy consumption compared to 20131 reduction in CO2 emissions (Scope 1 and 2) compared to 20131
Aiming to be the most energy efficient repair network in the UK
Notes: 1. See page 66 for more information on reduction targets. All emission and energy use data reported are related to UK operations.
4. By offsetting Scope 1 and 2 emissions as well as the elements of our Scope 3 emissions under our direct control.
We have also continued to invest in our auto services sites catering for their individual energy efficiency needs: – Installing a new air conditioning system in our Peterborough site allowing for more accurate temperature control, alongside a reduction in electricity usage compared to conventional units
– Training technicians in new repair techniques which reduce the need for repair materials and reliance on paint spray booths
– New LED lighting in our Weybridge site enabling energy savings of up to 60%, a reduction in maintenance costs over a projected lifespan of 10 to 20 years
Our journey to net zero Each year we will become less reliant on carbon offsetting to achieve net zero. Through our “Greener, Cleaner Action Plan” we aim to mitigate our impact on climate change: – Offices: Reimagining the way we work by investing in energy-efficient features, encouraging flexible working, improving recycling rates, continuing to use 100% renewable electricity and ensuring 100% of office waste is diverted from landfill.
– Our supply chain: Extending our reach by calculating and disclosing our Scope 3 purchased goods and services emissions and exploring how we can work with individual suppliers to drive lower emissions.
– Our customers: Supporting green choices by conducting customer market research to explore attitudes to insurance.
– Water filters, Kenya: Our funding will support the distribution of safe water filters for families. As well as delivering health impacts, the project also reduces the need for people to boil water to make it safe to drink, which requires the burning of unsustainable energy sources such as wood or charcoal. This reduced reliance on fuel reduces family expenditure and reduces pressure on forests, as well as cutting carbon emissions.
Scope 3 emissions under our direct control 2020 2019 baseline Fuel and energy related activities 2,332 2,465 Waste generated in operations 413 1,245 Business travel – air travel 198 928 Business travel – hotel night stays 75 469 Business travel – rail 63 410 Employee commuting5 1,450 4,599 Upstream leased assets1,6 63 193 Upstream transportation and distribution of auctioned vehicles 625 912 Total (tCO2e)1 5,219 11,221
Direct Line Group carbon footprint (operational control) 2020 2019 baseline Office sites (Scope 1&2 tCO2e) 3,608 6,397 Auto services (Scope 1&2 tCO2e) 8,529 9,931 Total Scope 1&2 (tCO2e) 12,137 16,328 Total Scope 3 under our direct control (tCO2e) 5,219 11,221 Total (tCO2e) 17,356 27,549
6. Upstream leased assets refer to leased office space locations where Direct Line Group does not directly control the energy provision as it is included in the service agreement.
7. Prior to 2019, the emissions used in the calculation of the intensity metric excluded emissions from additional vehicles used during repairs, courtesy car fuel usage and vehicles that are Company funded, as these were not previously tracked. The 2019 result has been re-presented accordingly (reported as 4.7 in the 2019 Annual Report and Accounts). The 2020 result includes these emissions.
The Board sets and monitors the Group’s performance against its risk strategy, risk appetite and risk framework and has also established a risk management model that separates responsibilities into ‘Three Lines of Defence’.
– The First Line of Defence is the Group’s management roles with responsibility for owning and managing risks to achieve business objectives on a day-to-day basis.
– The Third Line of Defence is Group Audit, providing an independent and objective view of the adequacy and effectiveness of the Group’s risk management, governance and internal control framework. The Group Audit Plan includes sustainability and climate changespecific reviews.
The Sustainability Steering Group, led by our CEO, drives the sustainability agenda through our sustainability pillars, each of which is sponsored by a member of our senior management team. Our five-pillar sustainability strategy, endorsed by the Board, aims to foster the highest standard of ESG practice and deliver long-term sustainability for all of our stakeholders. The Planet pillar takes the lead on climate-related issues and is sponsored by our Chief Risk Officer (“CRO”).
The Board has oversight on two key aspects of the Group’s approach: – the Board considers and approves the Group’s strategic and financial plan (“the Plan”) annually and monitors progress at each of its meetings during the year. In approving the Plan, the Board reviews and approves the Group’s Own Risk and Solvency Assessment (“ORSA”), which includes an analysis of the climate change-related risks to the business; and
– the Board oversees the Group’s sustainability activity through its Committees which scrutinise and provide appropriate challenge on the Group’s five pillar sustainability strategy. The Chair of each Committee reports to the Board after each Committee meeting, including on sustainability activities when relevant.
Sustainability continued 62 Direct Line Group Annual Report and Accounts 2020
– Liability risks arising when parties who have suffered losses from climate change seek to recover them from those they believe may have been responsible. This is important to our business, because this includes exposure to liability risk through commercial liability insurance.
Stress test We participated in the PRA’s 2019 insurance stress test which considered the impact of climate change on our business, based on three hypothetical climate change scenarios.
– Scenario C, a scenario with failed future improvements in climate policy, reaching a temperature increase in excess of 4°C (relative to pre-industrial levels) by 2100 assuming no transition and a continuation of current policy trends.
Further disclosure on the outputs from the scenario analysis can be found in our full TCFD 2020 report, pages 11 to 13 www.directlinegroup.co.uk 63
Developing further insight into electric-powered vehicles for pricing considerations, the nature of the risks involved, developing efficient repair practices and strengthening technical expertise in our accident repair centres are therefore commercial opportunities. Failing to do this could have an adverse impact on market share if the Group fails to grasp the scale of the transition in the medium term.
Operations Our operations are exposed to physical and transition risks. Climate change could disrupt our direct operations as it has the potential to affect both the frequency and severity of natural catastrophes and other weather-related events in the UK. We could also face increased operating costs due to potential carbon cost increases and regulatory requirements designed to limit carbon emissions. In seeking to mitigate such potential challenges the Group is setting reduction targets, improving the way individual business areas operate and the way we leverage our relationship with suppliers.
We continue to invest in energy-efficient features and equipment across our office estate and accident repair centres providing the opportunity to reduce energy costs, which could otherwise increase. The Group is also improving operational efficiencies in order to save energy costs and mitigate environmental impact, for example, in our roadside rescue and recovery business where we are focused on lessening our impacts by reducing our mileage through attendance efficiency. More information can be found on page 20 of the Group’s 2020 TCFD Report.
Our responsibilities extend far beyond our direct operations. Therefore, another key area of focus for us is to continually enhance our understanding of the risks and impacts in our supply chain and continue to drive improvements that are designed to minimise carbon and waste.
We will use our established relationships and purchasing power through procurement to mitigate our risks by seeking to reduce the emissions in our supply chain, while we support our supply chain partners to adapt to a low-carbon world. Once approved, our new Science-Based Targets will enable us to monitor our progress and the effectiveness of this approach.
Strategic approach Our strategy focuses on the Group’s underwriting activity, our operations and our investments where we assess the inbound and outbound risks and opportunities.
Note: 1. For access to the full report please go online at: www.directlinegroup.co.uk/2020_TCFD_Report 64 Direct Line Group Annual Report and Accounts 2020
Our first steps on this path relate to our corporate bonds portfolio, the largest part of our investment portfolio. Across these portfolios we have committed to a 50% reduction in weighted-average GHG emissions intensity by 2030, benchmarked against 2020 levels.
Risk management The predominant direct physical drivers of risk to the Group’s capital position are UK floods and major UK windstorms. Whilst additional risks such as freezing weather and subsidence are less material to capital requirements, these are modelled within the Group’s Internal Economic Capital Model and reviewed at least biennially.
– a 30% reduction in energy consumption on a like-for-like basis by the end of 2020 against a 2013 baseline. This year we again exceeded our target with a 45% reduction in energy consumption, which takes into account the impact of Covid-19 where the move to home working reduced energy use across our estate. Excluding the impact of Covid-19 we estimate that energy consumption in 2020 would have been approximately 34% lower than 2013.
Sustainability continued 66 Direct Line Group Annual Report and Accounts 2020
TCFD recommendation Future Group activity Governance Describe the Board’s oversight of climate-related risks and opportunities.
Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning.
Quantifying the impact of climate-related scenarios, including a 2°C or lower scenario, will strengthen the Group’s ability to describe how resilient its strategy is, particularly placing monetary values on climate-related impacts.
The Group will continue its robust approach towards the management of physical risk and intends examining in more depth inbound and outbound impacts in order to be able to better describe transition and liability risks. The ambition is for risk management processes to support the Group in conducting detailed analysis on each risk and applying monetary values to support the Group’s overall strategy.
Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management.
Metrics and targets Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process.
The Group plans to work towards establishing Science-Based Targets within the business to be approved by the SBTi which will strengthen our disclosures across Scope 1, Scope 2 and total Scope 3 GHG emissions.Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 GHG emissions, and the related risks.
Having met and exceeded these targets we will now benchmark the Group’s environmental performance against a 2019 baseline and will set Science-Based Targets within the two-year timeframe set out by the SBTi.
We also have the following long-term goal for our investments: – ensuring our entire investment portfolio is net carbon neutral by 2050 in line with the aims of the Paris Agreement.
Streamlined Energy and Carbon Reporting (SECR) regulations The following table highlights where information can be found that supports the requirement to disclose how the Group manages its energy consumption and carbon emissions.
– from buying electricity, heat, steam or cooling by the Group for its own use 61
– energy consumed resulting from buying electricity, heat, steam or cooling by the Group for its own use
Note: 1. The offshore area is broadly defined as the sea adjacent to the UK, including the territorial sea, plus the sea in any designated area under section 1(7) of the Continental Shelf Act 1964 and section 41 (3) of the Marine and Coastal Access Act 2009.
Where possible, the following table states where additional information can be found that supports the requirements of sections 414CA and 414CB of the Companies Act 2006.
Reporting requirement Information necessary to understand our business and its impact within the Annual Report & Accounts Pages
Environmental – Our sustainability pillars – Sustainable Development Goals – Greenhouse gas emissions – Climate-related risks – TCFD Report
Employees – Covid-19 response and people – Diversity and inclusion – Hampton-Alexander Review – Gender pay gap – Performance and pay
Human rights – Well-being strategy – My Life policies – Living wage – Ethical Code for Suppliers – Modern Slavery Statement
– Ethical matters – Sustainability Committee report – Code of Business Conduct
– Managing our risk – Risk management – Audit, risk and internal control – Board Risk Committee report
Non-financial KPIs – Change delivery – Workforce engagement – Net promoter score – Customer complaints
Sustainability continuedSustainability continued 68 Direct Line Group Annual Report and Accounts 2020
A key aspect of any effective strategic planning process is to understand and manage those risks appropriately. To achieve this, the Risk Function works closely with the business to help it to identify and assess risks, which is done through setting and achieving targets as well as through its review and challenge of business plans in the strategic planning process.
Our risk governance framework The Risk Function continues to lead transformation and cultural change to drive ownership of risks in the business, recognising the Group’s changing risk profile and the maturing control and governance environment.
Second line: The Risk Function is responsible for the design and recommendation to the Board Risk Committee of the Risk Management Framework, its implementation across the Group and the provision of proportionate oversight of risks, events and management actions throughout the Group.
Our Risk Management Framework The Risk Management Framework document sets out, at a high level, the Group’s approach to setting risk strategy and managing risks to the strategic objectives and day-to-day operations of the business.
Aligned to the three lines of defence model, not only does the Risk Management Framework articulate the high-level principles and practices needed to achieve appropriate risk management standards, but it also demonstrates the inter-relationships between components of the Risk Management Framework.
Within this, the risk management process is a key element in the development and on-going maintenance of an accurate risk profile. The objective of the risk management process is to identify, assess, manage, monitor and report on the risks that the Group is exposed to. See page 66 for specific information on how the business identifies and assesses the risks associated with climate change.
Within the Risk Management Framework, policies address specific risk areas and are aligned to the Group’s risk appetite. Policies, where appropriate, are supported by underlying minimum standards which interpret policies into a set of risk and control requirements to be implemented across the Group.
Proactive risk management through Covid-19: The Covid-19 pandemic created an unprecedented set of circumstances in the UK, as the country moved to national lockdowns. To minimise transmission of the Covid-19 virus, people across the UK were asked to remain at home, including working from home where possible and restricting any travel.
Within the Group, Covid-19 presented a series of challenges in seeking to protect its people, maintain customer operations, and safeguard the business.
In responding to the pandemic, management demonstrated strong proactive leadership, took accountability and showed a clear understanding of risk as they transitioned the business to a home working model. We transitioned our people to working from home prior to the national lockdown being called, while maintaining service continuity for our customers.
Throughout the pandemic, the Risk Function worked closely with business areas to perform key risk and control assessments to inform this decision making; including assessments of risks introduced through mass homeworking, which enabled us to take mitigating action where necessary. The results of this exercise informed management of our critical supply chain.
Throughout this challenging period, business functions have continued to work together proactively to ensure that our customers receive appropriate levels of service and support, whilst still delivering business performance.
The Group recognises that its long-term sustainability is dependent on having sufficient economic capital to meet its liabilities as they fall due, thus protecting its reputation and the integrity of its relationship with policyholders and other stakeholders. As part of this, its appetite is for general insurance risk, focusing on personal lines retail and small and medium-sized enterprise insurance in the United Kingdom. The Group has appetite for non-insurance risks, as appropriate, to enable and assist it to undertake its primary activity of insurance.
The risk of loss due to fluctuations in the timings, amount, frequency and severity of an insured event relative to the expectations at the time of underwriting.
Key drivers of the outlook for insurance risk across our business plan include reserve, underwriting, distribution, pricing and reinsurance risks. Issues relating to Covid-19 have been a key area of focus for the Group in 2020 and the main driver of the increasing trend in Insurance risk. Claims trends have been significantly impacted particularly during the lockdown period. This has led to uncertainty in claims reserving and pricing.
In 2021 and beyond, Covid-19, Brexit and potential recession may have an impact on claims inflation together with market and customer behaviour.
Key drivers of market risk are the sensitivity of the values of our assets and investments to changes in credit spreads, and our exposure to losses as a result of changes in interest rate term structure or volatility.
Concerns about the Covid-19 pandemic and Brexit fallout could impact equity and credit markets within the global economy leading to credit spread increases, foreign exchange rate volatility, interest rate changes and devaluation of UK property assets.
To address this, we have an investment strategy which is approved by the Board and includes limiting exposure to individual asset classes and the number of illiquid investments we hold. We also use risk reduction techniques such as hedging foreign currency exposures with forward contracts.
The key risks within this category are Cyber, Technology & Infrastructure, Operational Resilience, Change, People, Information Management, Outsourcing, Partnerships and Fraud.
We operate a strong control environment through the delivery of the Procurement & Supply Chain target operating model, which is focused on delivering active monitoring and management of key suppliers.
Our Risk Management Framework is designed to enable us to capture risk information in a complete and consistent way, enabling proactive trend analysis, root cause analysis and read across to facilitate early warnings and a ‘learning’ risk environment.
Principal risks and uncertainties We carefully assess the principal risks facing us. Principal risks are defined as having a residual risk impact of £40 million or more on a 1-in-200 years basis, taking into account customer, financial and reputational impacts.
The risks leading to reputational damage, regulatory or legal censure, fines or prosecutions and other types of non-budgeted operational risk losses associated with the Group’s conduct and activities.
Pricing practices within the general insurance market is a key area of focus for the FCA and for the Group. We continue to devote a lot of attention to this area as we prepare for the implementation of the FCA’s pricing practices remedies, expected in Q2 2021. Our existing conduct Risk Management Framework is designed to deliver fair outcomes to customers and minimise our risk exposure. The framework is supported by a set of conduct pricing principles designed to enable the fair pricing of business across our book. We continue to develop our approach to anticipate regulatory developments and to ensure that we can continue to provide good outcomes for our customers. We carry out planned risk-based monitoring of customer processes as well as more targeted thematic reviews to help us manage the risk of unfair customer outcomes.
We have maintained regular and open dialogue with both the FCA and PRA on our responses to Covid-19, outlining actions taken with the aim of ensuring that good customer outcomes are achieved and that the Group remains financially and operationally resilient.
The risk of loss resulting from default in obligations due from and/or changes in the credit standing of issuers of securities, counterparties or any debtors to which the Group is exposed.
Finally, we also have well defined criteria to determine which customers are offered and granted credit.
Empower Great people 72 Direct Line Group Annual Report and Accounts 2020
The disruption to global trade and supply-chains caused by the pandemic could increase the risk of inflation in the long-term.
For the Group, the investment portfolio is positioned relatively defensively; however, if the UK recession were to worsen significantly, additional steps could be taken such as further shifting the portfolio towards ‘defensive’ sectors or increasing more allocation to cash.
Globally, the economic shock caused by the Covid-19 pandemic initially resulted in credit spreads in Europe and the US moving to levels last seen in the 2008/09 credit crisis, and equity markets posted extremely steep percentage falls. Whilst markets have recovered to a degree, there still remains uncertainty over the duration and continued impact of the pandemic.
The Group has a small amount of business in the Republic of Ireland, servicing a small Irish part of a UK partner’s wider business. Accordingly, following approval from the Central Bank of Ireland the Group established an Irish branch in the Republic of Ireland with effect from the end of the transition period.
Emerging risks Emerging risks are defined in the Group as newly developing risks that are often difficult to quantify but may materially affect the Group. Emerging risks are usually highly uncertain risks which are external to the Group. The Group has in place an emerging risks process which enables it to: – have a proactive approach to emerging risk management; – identify, manage and monitor a broad range of potential emerging risks; and
The Covid-19 pandemic continues to challenge the way the industry operates, both now and in the future. Second line of defence and first line of defence subject matter experts continue to monitor potential threats and opportunities which may impact the Group and the wider industry, as the ‘new normal’ becomes clearer.
Following the issue of the PRA’s Supervisory Statement SS3/19, the Group has appointed the CRO as the Senior Management Function holder for Climate Change and put an initial plan in place to address the expectations set out in the supervisory statement.
The Group has updated risk policies and minimum standards explicitly to reference the risks from climate change, and we reviewed climate-related key performance indicators for energy usage and emissions across the business throughout H2 2020, to help inform future climate-related financial disclosures.
The risks and impacts of climate change are wide ranging; the Group is focusing increasingly on climate change, with related risk management activity which includes monitoring climate change through the emerging risk process, forming a Climate Change Working Group and continuing its journey to implement the recommendations of the Financial Stability Board’s Taskforce on Climaterelated Financial Disclosures (“TCFD”).
As part of embedding the management of these climaterelated financial risks in 2021, the Group will take part in the Bank of England’s Climate Biennial Exploratory Scenarios exercise. This stress testing exercise aims to understand the impact on the Group of future climate scenarios incorporating physical and transition risks.
Ethical use of data The Group identified the ‘failure to establish an ethical way to use data’ as an emerging risk in H2 2019, with activity underway to mitigate against associated risks. The industry and policymakers’ view of this risk is still emerging, as legislation and regulation in this area is yet to mature; however, it is a growing area of focus for the Group’s regulators and for the Group itself.
The Strategic report, on pages 1 to 75, sets out the Group’s financial performance, business environment, outlook and financial management strategies. It covers how the Group measures its regulatory and economic capital needs and deploys capital. You can find discussion about the Group’s principal risks and risk management on pages 69 to 74. Note 3 to the consolidated financial statements starts on page 172 and sets out financial disclosures relating to the Group’s principal risks. This covers insurance, market and credit risk; and the Group’s approach to monitoring, managing and mitigating exposures to these risks.
The Board has assessed the principal risks of the Group over the duration of the planning cycle. The assessment included considering the possible challenging market conditions due to the impact of Covid-19 on the economy and customer behaviour, the possible adverse implications of Brexit, the implementation of the FCA’s Pricing Practices Review and change risk. The 2020 Plan modelled a number of different scenarios which were directly and indirectly influenced by the Covid-19 pandemic. These included delay to improvements in technological capability, the impact of Covid-19 on claims frequency levels and the impact of Brexit on the investment return. The key judgements applied were in relation to the likely time period of Covid-19 related restrictions, and the subsequent impact on customer behaviour and the economic recovery.
FCA General Insurance Pricing Practices Review (“PPR”) – The FCA’s consultation period ended in January 2021 and the final report has not yet been published. The Group’s Plan includes a scenario for the impact of the PPR from 2022 onwards based upon the differential between new business and renewal prices. The Group considered a spectrum between two potential outcomes. A series of management actions have been identified to mitigate the impact of this scenario.
In addition, the Group’s Risk Function has carried out an assessment of the risks to the plan and the dependencies for the success of the Strategic Plan. This included running stress tests on the Plan to consider the 1-in-8-years and 1-in-25-years loss simulations based on the internal economic capital model. In both cases, the Group remained within its risk appetite range for its solvency capital ratio and did not breach the Group’s solvency capital requirement after contingent management actions in any of the years covered by the plan (2020 to 2024).
Statement of the Directors in respect of the Strategic report The Board reviewed and approved the Strategic report on pages 1 to 75 on 5 March 2021.
The Board endorses the UK Corporate Governance Code 2018 (the “Code”), which applied to our 2020 financial year, and the related FRC Guidance on Board Effectiveness. We seek to ensure that our governance framework remains aligned with best practice, consistent with the Code. Throughout the year ended 31 December 2020, the Company complied with the Principles and Provisions set out in the Code.
I would like to thank you for your support and look forward to hearing your views as we prepare for our forthcoming AGM on Thursday, 13 May 2021.
Our Governance Danuta Gray Chair of the Board 76 Direct Line Group Annual Report and Accounts 2020
Succession planning and Board changes There have been changes to our Board since last year’s AGM. I succeeded Mike Biggs as Chair in August 2020 and Adrian Joseph OBE joined as an independent Non-Executive Director in January 2021.
The Nomination and Governance Committee continues to review succession plans both for the Board and at executive level each year.
In early 2021, three levels of the emergency succession plan were invoked to provide cover for Tim Harris’s leave of absence while he cared for a member of his family receiving medical treatment: Neil Manser stepped up as Acting Chief Financial Officer; Jasvinder Gakhal as Acting Chief Strategy Officer and Rebecca Clapham as Interim Managing Director of Direct Line for Business.
Further information on our diversity policy, our approach to succession planning and Board appointments can be found in the Nomination and Governance Committee report on pages 106 to 108.
Effectiveness and evaluation As Chair, one of my principal objectives is to ensure that the Board includes a body of Non-Executive Directors with the skills and experience to be able to support and challenge our Senior Management in developing and executing an ambitious strategy for the benefit of our shareholders and other stakeholders. In accordance with the Code, we conduct evaluations of the effectiveness of the Board and its Committees annually, including an externally facilitated review every third year. The 2019 review was facilitated by Robert Goffee, Professor of Organisational Behaviour at the London Business School, who had no other connection with the Company or any individual Director.
In 2020, having recently been appointed as Chair, I chose to conduct the effectiveness review myself. Building on themes identified by Professor Goffee, this year’s review focused on the value capable of being added by Non-Executive Directors from their experience, the emphasis on strategic issues on the Board’s agenda, the Board’s ability to challenge executive performance based on the quality of information provided, and the external sources of insight available.
The outcome of the resolutions put to the AGM, including poll results detailing votes for, against and withheld, will be published on the London Stock Exchange’s and the Company’s websites once the AGM has concluded.
“The Board recognises the importance of its role in setting the tone of the Group’s culture and embedding it throughout the Group.”
Danuta was Chair of Telefónica in Ireland until 2012, having previously been its Chief Executive from 2001 to 2010. During her nine-year tenure as Chief Executive, she increased the customer base from just under 1 million to over 1.7 million. Before working at Telefónica, Danuta held various senior positions within BT Group from 1984 to 2001. Until 2018, Danuta was a NED and Chair of the Remuneration Committee at both PageGroup plc and Old Mutual plc.
Biography Penny was CFO of Direct Line Group until her appointment as CEO in May 2019. The Board benefits from Penny’s deep understanding of our sector as well as her leadership skills, financial and risk expertise, strategic thinking and cultural alignment.
Jane has her own financial sector consulting business and is also a magistrate.
The Board benefits from Sebastian’s extensive experience in retail and consumer practice at large groups, his detailed understanding of the UK’s consumer markets, products and brands as well as his strategic and operational experience running Dixons Carphone plc and Boots.
Until 2018, Sebastian was Group Chief Executive of Dixons Carphone plc, having previously held the role of Group Chief Executive of Dixons Retail plc from 2012. Before this, he was CEO of Synergy Insurance Services Limited, a private equity backed insurance company, and was previously Strategy Director at Mothercare plc. Sebastian has a degree in law from the University of Oxford and an MBA from INSEAD. He began his career at The Boston Consulting Group.
Current external appointments – Managing Director of Boots UK, subsidiary of Walgreens Boots Alliance, Inc – Senior Vice President of Walgreen Boots
The Board benefits from his previous extensive experience and knowledge of the financial services sector, particularly in life and general insurance, gained through his roles at Legal & General. Additionally, he has a detailed understanding of the retail sector and customer service.
Biography The Board benefits from Fiona’s profound knowledge of the financial services industry and her previous extensive experience as both a business leader and an auditor makes her well suited to her role as a member of the Audit, Board Risk and Investment Committees.
– Chair and Non-Executive Director of the Scottish Mortgage Investment Trust plc
Current external appointments – Member of the Executive Committee of the Ardonagh Group
The Board benefits from his wide-ranging experience of the financial services sector, and in particular, significant experience gained in the insurance and investment management sectors. His career and experiences at Ernst & Young and Lloyds, in particular, make him suitable to chair the Audit Committee.
Biography Adrian Joseph joined BT Group in February 2020 as Managing Director, Group Data and Artificial Intelligence. Prior to this he was a senior Partner at Ernst & Young for three years and the Head of the UK Data and Analytics practice for Financial Services. He joined Ernst & Young with over ten years’ cloud, digital, platform, data science and analytics experience gained in senior leadership roles at Google, and a further 15 years in industry and consultancy. This included two years as the main Board member responsible for Sales and Marketing at Trafficmaster Plc.
Current external appointments – Member of HM Government’s AI Council 80 Direct Line Group Annual Report and Accounts 2020
Steve’s previous roles include Director of Strategic and Technical Claims at RSA, Director of Claims and Customer Service at Capita, and Director of Operations at AMP. Steve is also Chair of the Motor Insurers’ Bureau and a member of the Association of British Insurers’ General Insurance Committee.
Experience and qualifications Jonathan joined the Group in 2000 and is Managing Director, Commercial.
Jonathan has over 30 years’ experience of the insurance industry. He is responsible for delivering the Commercial strategy, developing customer propositions, enhancing the Commercial brands and delivering efficiencies within the Commercial businesses.
Experience and qualifications Kate joined Direct Line Group in 2000 and is Managing Director of Household, Partnerships & Data. Kate has over 20 years’ experience of the insurance industry. Kate is responsible for delivering the strategy and developing products for the Group’s Home, Pet, Travel, Life and Private Businesses as well as leading the Partnerships division. She is Chair of the Group’s Diversity Network Alliance.
Previously, Kate was Commercial & Marketing Director for Privilege and launched Direct Line for Business in 2007. Before joining the Group, Kate held roles in Calvin Klein Cosmetics, Moore Stephens – Vladivostok and qualified as a Chartered Accountant with the National Audit Office. She is also an Associate of the Royal College of Science.
Experience and qualifications Neil joined Direct Line Group in 2011 as Director of Investor Relations and was instrumental in the Group’s successful IPO in 2012. He has worked in a number of roles within the Group, in Finance including Strategy and within the business, as Managing Director of NIG. Neil was appointed Deputy CFO in August 2018 before becoming Chief Strategy Officer in March 2020. He is now responsible for leading the Group’s corporate strategy.
Experience and qualifications Gus joined Direct Line Group in 2011 and is Managing Director of Motor, Pricing & Underwriting. He is responsible for leading the Group’s Personal Motor business across all brands, as well as the Pricing and Underwriting function across all consumer products.
Gus has over 25 years’ experience in a wide range of sectors and roles, having started his career as a civil servant for the Home Office. After this he moved into strategy consulting for the Boston Consulting Group, and then into retail banking for Bradford & Bingley.
Experience and qualifications Vicky is Chief People Officer at Direct Line Group and has a wealth of experience in building HR functions, developing cultural frameworks and enhancing people capabilities.
Vicky joined the Group having worked previously at Santander where she was the HR Director for five years. Having operated in international organisations with global roles and projects in India, Romania, EMEA and the US, Vicky has experience in finance, retail and mobile telecommunications.
Vicky is accredited by the Chartered Institute of Personnel Development and holds a Master’s degree in Organisational Leadership.
Humphrey’s experience includes advising on corporate and commercial matters, steering corporate transactions in the UK and internationally, managing legal risk and dealing with corporate governance issues. Before joining the Group, Humphrey was Group Legal Director at RSA and prior to that he was a corporate lawyer with the City law firm, Ashurst Morris Crisp.
Experience and qualifications José joined the Group in 2012 and is Chief Risk Officer.
José has over 25 years’ experience of the insurance industry. He is responsible for the Group’s Risk function and Compliance function and is a Fellow of the Institute of Actuaries.
José was previously Global Chief Risk Officer and Group Chief Actuary at HSBC Insurance. Before joining HSBC, José worked for Zurich Insurance, first in its London Market Operations, then as Chief Actuary International Business Division (Asia, Latin America and Africa) and lastly as Chief Actuary in the UK.
Jasvinder attends the Executive Committee meetings in her capacity as Acting Chief Strategy Officer, and as such she is leading the Group Strategy and Group Communications and Sustainability functions.
– The Board – Board activities – The Board and culture
– The structure of the Board, Board Committees and executive management
Further details of how the Company applied the Code’s principles and complied with its provisions can be found in the following sections of the Annual Report & Accounts.
The Board The Board receives regular updates on the views of the Company’s shareholders from the Group’s brokers and directly from institutional shareholder meetings with senior executives and the Chair. The Board has regard to the interests of a range of stakeholders including customers, employees and suppliers when agreeing the Group’s strategic and financial plans and in all other decision-making. Illustrations of the breadth and depth of the Board’s regard to stakeholders’ interests are contained in the Sustainability section of the Annual Report & Accounts on pages 44 to 68.
In addition to the Schedule of Matters Reserved for the Board, each Board Committee has written terms of reference defining its role and responsibilities. The terms of reference of the Board Committees can be found on our corporate website. Further details regarding the role and activities of the Board and its Committees can be found below and in the Directors’ remuneration report which begins on page 113.
The role of the Board Pages 89 and 90 summarise the role of the Board, its Committees and the responsibilities of the Chair, the Senior Independent Director, the Non-Executive Directors, the Executive Directors and the Executive Committee. Whilst some of the key areas of the Board responsibility are summarised in the following paragraphs, these are not intended to be an exhaustive list.
Leadership The Board is the main decision-making body of the Company. It provides leadership within a framework of prudent and effective controls. The Board has clear divisions of responsibility and seeks the long-term sustainable success of the Group. Information on how opportunities and risks to the future success of the business have been considered and addressed, and about the sustainability of the Company’s business model, is set out in the Strategic report which begins on page 1.
For more information on how shareholders will be able to participate in the 2021 AGM see page 223 and for further information on communication with major investors see page 88. Additional information on how the Board has regard for the Group’s wider stakeholders and other relevant matters can be found on pages 86 to 87.
Financial performance The Board sets the financial plans, annual budgets and key performance indicators and monitors the Group’s results against them. The Board is accountable to investors for financial and operational performance.
Vision and purpose Our vision is to create a world where insurance is personal, inclusive and a force for good. Our purpose is to help people carry on with their lives, giving them peace of mind now and in the future.
– Receiving reports from the Board’s Committees; – Updating the Schedule of Matters Reserved for the Board; – Updating terms of reference for the Board Committees; – Receiving corporate governance updates; – Overseeing Board and executive succession planning; – Conducting the annual review of the Board and Board Committees’ effectiveness; – Approving the Company’s Code of Business Conduct and conducting an annual review of the Group’s governance framework; and – In addition to routine business, the Board sets aside time each year outside the annual
The Group’s Section 172(1) statement is part of the Chair’s statement in the Strategic report on page 10 and is supported by the Group’s five-pillar sustainability strategy on pages 44 to 45 and the TCFD statement on pages 62 to 63.
The table below provides an insight into decisions taken by the Board during 2020 which directly affect its stakeholders. In all cases, the Board considers the likely consequences of any decision in the long term.
The Board approved the following: – Code of Business Conduct; – Group pricing approach and associated governance and control framework; – Prompt Payment Practice Report; and – Covid-19 support measures for customers and suppliers.
People metrics form part of Annual Incentive Plan targets and a people update is presented at each Board meeting.
– ESG factors – Climate change – Emissions targets – Environmental practices
The Board considers feedback from investors communicated directly and through its brokers. The Board approved the following: – The methods by which surplus capital should be returned to shareholders; – Termination of 2020 buyback programme and cancellation of 2019 final dividend; – Subsequent approval of the interim and special interim dividend; and – Annual Report & Accounts.
Chairs Mike Biggs3 6 of 6 – – – – 3 of 3 2 of 2 Danuta Gray 9 of 9 – – – – 4 of 4 3 of 3 Senior Independent Director Richard Ward 9 of 9 – 5 of 5 – – 4 of 4 – Non-Executive Directors Mark Gregory 9 of 9 5 of 5 – – 4 of 4 – 3 of 3 Jane Hanson 9 of 9 5 of 5 5 of 5 4 of 4 4 of 4 – – Sebastian James 9 of 9 – – 4 of 4 – – 3 of 3 Fiona McBain 9 of 9 5 of 5 5 of 5 – – – – Gregor Stewart 9 of 9 5 of 5 5 of 5 – – – – Executive Directors Penny James 9 of 9 – – 4 of 4 – – – Tim Harris 9 of 9 – – – 4 of 4 – – Executive Committee Member Simon Linares4 1 of 1
2. Formerly the Corporate Responsibility Committee. 3. Mike Biggs stepped down from the Board on 4 August 2020. 4. Simon Linares stepped down from the Sustainability Committee on 21 April 2020.
The Board and culture The Board is responsible for establishing the Company’s purpose, values and strategy, promoting its culture, overseeing its conduct and affairs, and for promoting the success of the Company for the benefit of the members and all the stakeholders.
– Supporting management’s emphasis on employee wellbeing, including mental health awareness and financial wellbeing. For more information please see the People section of the Sustainability Pillars on page 50.
Each Director has a duty to avoid conflicts of interest. They must declare any conflict of interest that could interfere with their ability to act in the Group’s best interests. The Board has authorised certain potential conflicts of interest in this way including in relation to Directors’ external directorships and their interests in securities of other financial service institutions. Accordingly, the Board deals with any actual conflict of interest or duty that might arise. This usually would involve making sure a Director does not participate in a relevant Board or Committee discussion or decision. To do this, the Company Secretary maintains a register of conflicts and any conflicts that the Board has authorised. The Board reviews this register at each scheduled Board meeting to ensure that each Director applies independent judgement.
Governance framework and structure The Board oversees the system of governance in operation throughout the Group. This includes a robust system of internal controls and a sound Risk Management Framework. The Board has established a risk management model that separates the Group’s risk management responsibilities into three lines of defence. An explanation of these responsibilities can be found on page 69.
The Board approves the High Level Control and System of Governance Framework, overarching risk appetite statements and Group policies following review by the Board Risk Committee.
Non-Executive Directors – Challenge management in an objective and constructive manner – Use their wider business experience to help develop the Group’s strategy
Executive Directors – The CEO and CFO are members of the Board with delegated responsibility for the day-to-day operation of the Group and delivering its strategy
– The CEO delegates certain elements of her authority to the Executive Committee members to help ensure that senior executives are accountable and responsible for managing their business and functions
Board Committees Full details of membership, responsibilities and activity of each Committee throughout the year can be found on pages 97 to 139.
Biographies of the Executive Committee can be found on pages 81 to 82.
Structure of the Board, Board Committees and executive management The following chart sets out the structure of the Board and its Committees and highlights the responsibilities of the Chair, the Senior Independent Director, the Non-Executive Directors, the Executive Directors, the Company Secretary and the Executive Committee. The role descriptions for CEO and Chair are set out in writing and the profiles clearly define their respective roles and responsibilities and ensure that no one person has unlimited powers of decision making.
The Board and Board Committees have unrestricted access to management and external advisers to help discharge their responsibilities. Each Committee plays a vital role in helping the Board to operate efficiently and consider matters appropriately.
Biographical details of the Directors of the Company as at the date of this report are set out on pages 78 to 80.
Board succession The Nomination and Governance Committee continues to review succession plans both for the Board and at executive level each year. Further information on our diversity policy, our approach to succession planning and Board appointments can be found in the Nomination and Governance Committee’s report on pages 106 to 108.
In a series of interviews with Richard Ward and Russell Reynolds, each member of the Selection Board indicated the skills, experience and characteristics that they thought would be important in a new Chair. Based on the criteria defined as a result of consultation with Selection Board members, Russell Reynolds proposed a list of eligible external candidates, which the Selection Board refined into a shortlist of candidates to be approached.
The Company Secretary maintained the training agenda for the Board and its Committees during the year. Training topics during the year included the Senior Managers and Certification Regime, the IT transformation programme, data privacy, cyber and operational resilience and the Internal Economic Capital Model.
In addition, a series of deep dives into the Group’s business areas took place during the year to deepen each Director’s knowledge of the business and provide oversight at Board and Committee level.
NED Independence On behalf of the Board, the Nomination and Governance Committee assesses the NEDs’ independence, skills, knowledge and experience annually. The Nomination and Governance Committee concluded that every current NED was independent, continued to contribute effectively, and demonstrated they were committed to the role. Each current Director will submit themselves for election or re-election at the 2021 AGM, except for Jane Hanson, who is retiring from the Board.
Information and support The Board accesses assistance and advice from the Company Secretary. The Board may seek external independent professional advice at the Company’s expense, if required, to discharge its duties.
Supporting equality of opportunity and building a culture that values difference has a strong correlation with our values, both at Board level and within the wider workforce.
The Code encourages diversity of gender, social and ethnic backgrounds, cognitive and personal strengths. The Board understands that diversity includes but is not limited to gender and aims to increase demographic and philosophical differences at Board level and throughout the Group. The Group has a Board-approved diversity policy which is reviewed annually.
Whilst all appointments are based on merit and objective criteria, we are proud to be able to demonstrate a Board that not only boasts a female Chair and Chief Executive Officer but also a broader range of diversity characteristics.
The Board advocates the importance of cultural and ethnic diversity and aims to increase it at Board and Executive Committee level, as well as across the Group.
Board composition 92 Direct Line Group Annual Report and Accounts 2020
The Board is pleased to have appointed Adrian Joseph as a Non-Executive Director from 1 January 2021. Adrian has deep experience of data strategy and artificial intelligence and is a respected thought leader in diversity and inclusion.
The Board and Executive Committee continue to support the Diversity Network Alliance which champions diversity and inclusion within our organisation through strands relating to gender, ethnicity, social mobility, disability and neurodiversity, sexual orientation, generations, families and carers and belief.
2. Engaging executive search firms who have signed up to the Voluntary Code of Conduct for Executive Search Firms on gender diversity and best practice In its search for candidates, when using executive search firms, the Board will only engage those who are signatories to the Voluntary Code of Conduct for Executive Search Firms as recommended by Lord Davies.
The Group is a signatory to the Women in Finance Charter which aspires to see gender balance at all levels across financial services firms. As at 31 December 2020, the Group exceeded its target set the previous year of achieving at least 33% female representation at senior leadership team level, with 45.7% of Executive Committee and direct report positions held by women. For a breakdown of the Executive Committee, please see biographical details on pages 81 to 82.
The Board continues to support Group-wide diversity initiatives, including succession planning programmes, to broaden and strengthen female talent at middle management level. For more information on the Group’s diversity and inclusion strategy please see the People section on page 50.
The Board recognises that a continuous and constructive review of its performance is an important factor in achieving its objectives and realising its full potential.
Evaluation process Step 1: with the assistance of the Company Secretary, the Chair identified the effectiveness priorities for discussion.
Step 3: Reports were prepared for the Board and for each Committee for discussion.
Step 4: An action plan was defined following discussion of the reports.
Evaluation outcome The Chair prepared a report for discussion by the Board and each of the Board Committees.
The review concluded that, during the year, the Board, its Committees and individual members of the Board had performed effectively. Progress was found to have been made on the actions suggested in the 2019 review, as summarised in the table below. Suggestions for finetuning the effectiveness of Committees, including strengthening the membership of the Remuneration Committee and clarifying the role and authority of the Sustainability (formerly the Corporate Responsibility) Committee, were addressed during the year.
The Board has built on its cohesion by creating opportunities for NEDs to add value based on their experience and by focusing on strategy in post-Covid-19 markets, the impact of the FCA pricing practices review, the pace of organisational and technological change, the cost base, capital strategy and growth.
Make space for strategy The number and length of Board meetings have been increased to allow time for deeper discussion of strategic topics including costs, capital structure, growth, technology, digitalisation, the Agile operating model, data strategy, ethics and governance, investment in, and realising the benefits of, talent management, and succession planning.
The table below illustrates the areas of focus that resulted from the 2020 review and the actions that are proposed for 2021.
An explanation of how the Board complies with the Code in relation to audit, risk and internal control is set out below, except for the following matters, which are covered elsewhere in the Annual Report & Accounts: – how the Board has assessed the Group’s longer-term viability and the adoption of the Going Concern basis in the financial statements is on page 74 and page 143; – The Board has delegated responsibility to the Audit Committee to oversee the management of the relationship with the Company’s External Auditor. You can find details of the Audit Committee’s role, activities and relationship with the External Auditor in the Committee report which starts on page 97.
Responsibility for preparing the Annual Report & Accounts The Board’s objective is to give shareholders a fair, balanced and understandable assessment of the Group’s position and prospects and business model and strategy. The Board is also responsible for maintaining adequate accounting records and seeks to ensure compliance with statutory and regulatory obligations.
You can find an explanation from the Directors about their responsibility for preparing the financial statements in the Statement of Directors’ responsibilities on page 143. The Group’s External Auditor explains its responsibilities on page 153.
This confirmation is based on the Board Risk Committee’s review and challenge of the Group’s Material Risk Assessment and the Board’s review and approval of the Group’s risk appetite statements. The Risk Assessment identifies risks quantified as having a residual risk impact of £40 million or more based on a 1-in-200 years likelihood. The quantifications are produced through stress and scenario analysis, and the capital model. Each directorate’s bottom-up risk identification and assessment supplements the Material Risk Assessment. The Material Risk Assessment also plays a key role in developing the ORSA and assessing the Group’s strategic plan.
The Board has established a management structure with defined lines of responsibility and clear delegation of authority. This control framework cascades through the divisions and central functions, detailing clear responsibilities to ensure the Group’s operations have appropriate controls. This includes controls relating to the financial reporting process.
The Board Risk Committee regularly reviews: significant risks and how they might affect the Group’s financial position; comparisons to agreed risk appetites; and what the Group does to manage risks outside its appetite.
The Group Audit function supports the Board by providing an independent and objective assurance of the adequacy and effectiveness of the Group’s controls. It brings a systematic and disciplined approach to evaluating and improving the effectiveness of the Group’s risk management, control and governance frameworks and processes.
On behalf of the Board, the Audit Committee regularly reviews the effectiveness of the Group’s internal control systems. Its monitoring covers all material controls. Principally, it reviews and challenges reports from management, the Group Audit function and the External Auditor. This enables it to consider how to manage or mitigate risk in line with the Group’s risk strategy.
Key responsibilities – Oversee the integrity of the Group’s financial statements – Oversee and challenge the effectiveness of the
Group’s systems of financial and other internal controls, and financial and regulatory reporting
– Oversee the actuarial reserving process – Oversee the work and effectiveness of the Group’s internal and external auditors – Oversee the Group’s financial and non-financial disclosures, including any climate-related financial disclosures
– Insurance reserves: reviewed the Group’s insurance reserves to obtain assurance that they remained appropriate for discharging expected liabilities. In doing so, the Committee challenged the actuarial best estimate of technical provisions and the prudential margin for IFRS 4 ‘Insurance Contracts’.
Committee skills and experience In line with the UK Corporate Governance Code 2018 (the “Code”), all members of the Audit Committee are independent and the Committee as a whole is deemed to have competence relevant to the insurance and financial services sectors in which the Group operates.
All Committee members are members of the Institute of Chartered Accountants in England and Wales, with the exception of the Chair, Gregor Stewart, who is a member of the Institute of Chartered Accountants of Scotland.
Each member has recent and relevant financial experience gained in a number of different financial services businesses including insurance, enabling them to contribute diverse expertise to the Committee’s proceedings.
Main activities during the year The agendas for the meetings taking place during the year are agreed by the Chair of the Committee and detail the matters to be discussed and considered at each meeting. An analysis of the activity of the Committee during the year identified that it had discussed all intended matters during the year.
At each scheduled Committee meeting, the Committee received reports on financial and non-financial reporting, insurance reserves, internal controls and Group Audit.
Having reviewed the Committee’s terms of reference during the year, the Committee has included the additional responsibility of reviewing the Group’s Task Force on Climate-related Financial Disclosures Report (“TCFD Report”) on behalf of the Board on an annual basis.
The Committee also considered: the Financial Reporting Council’s guidance on the Strategic Report; the UK Corporate Governance Code 2018; Section 172(1) of the Companies Act 2006 (as previously defined); the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018; the Financial Reporting Council’s 2020 year-end letter to Audit Committee Chairs; and guidance issued by the Financial Reporting Council during the year on Covid-19 disclosures.
Subordinated Tier 2 Notes In order to strengthen the Group’s long-term finances further, the Committee was asked to oversee certain matters regarding the issue of £260 million Subordinated Tier 2 Notes at a 4.0% coupon to be listed on the General Exchange Market (GEM) of Euronext Dublin. The Committee reviewed the approach to the production and verification of the Listing Particulars and agreed that the listing would improve the financial flexibility and liquidity of the Group during the heightened uncertainty in the macroeconomic environment.
When considering the 2020 Annual Report & Accounts, the Committee focused on the significant judgements and issues which could be material to the financial statements. These included the matters set out in the table on page 99 and also included a detailed review of the impact of Covid-19, ensuring that the disclosure on matters relevant to the financial statements was fair, balanced and understandable in the context of the Group’s operations.
The Committee considered reports on the estimates and judgements applied to the carrying value of the Group’s investments that are not held at fair value and the basis for the valuation. These assets are principally comprised of infrastructure loans, commercial real estate loans and private placement bonds held within the investment portfolio. In addition the Group also holds a portfolio of investment properties. Information was provided to the Committee on a regular basis to support the value recognised in the accounts.
In 2020, the Group migrated to a new general ledger system. This involved a process of key risk assessments and mitigation plans following a decision to go live whilst most staff were working remotely. Detailed plans covering areas such as testing, dry runs, data migration, reconciliation and business user training were managed and implemented remotely and the migration was successfully completed in May 2020.
The Committee is responsible for overseeing the work of Group Audit and for ensuring industry best practice is adopted appropriately.
As a direct response to Covid-19, the Committee was asked to approve the rescheduling of the internal audit plan. The Committee assessed the resources available and those required to complete the Group Audit Plan. Following assessment by the Committee during the year, it concluded that the Group Audit function was effective.
Additional information The Committee has unrestricted access to management and external advisers to help discharge its duties. It is satisfied that in 2020 it received sufficient, reliable and timely information to perform its responsibilities effectively.
During the reporting period, the Actuarial Director, external actuarial advisers, External Auditor and Group Head of Audit met privately with the Audit Committee, in the absence of management.
The audit partner is Colin Rawlings, FCA, who was first appointed for the 2016 audit. Following conclusion of the 2020 audit, Colin will have completed five years as lead audit partner and, in compliance with the Group’s minimum standard on independence of the External Auditor, will complete his engagement with the Group. During the year, the Committee confirmed the appointment of a new partner proposed by Deloitte and are satisfied that Adam Addis, ACA, can be appointed to the audit for 2021.
External Auditor tenure During the year, the Committee again 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. This took into account the reforms of the audit market by the Competition and Markets Authority and the EU, under which Deloitte can continue as the Company’s External Auditor until 31 December 2023. As Deloitte was appointed as Auditor to the Company in 2000 (when it was a subsidiary of The Royal Bank of Scotland Group plc), under the transitional provisions of the legislation, the firm may not re-engage for the audit after 17 June 2023. The Committee considered whether it was appropriate to tender the external audit contract for the year ending 31 December 2021 and concluded it was not appropriate.
During the year, the Committee reviewed the auditrelated services that could be provided by the External Auditor. It was agreed that, in order to protect the independence of the External Auditor, generally on an ongoing basis, services should not be provided unless there is a strong, clear and understandable business reason. The Committee is satisfied that the Group has adequate procedures to ensure that the External Auditor is independent and objective.
During the year, the Committee approved fees of £0.6 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 2020.
Audit fees 2.1 72 Audit-related assurance services 0.2 7 Non-audit services 0.6 21 Total fees for audit and other services 2.9 100
Audit-related assurance services were in respect of the Group’s Solvency II reporting and the review of the Half Year Report 2020 and non-audit services primarily related to assurance activities on IT projects in relation to the development of new systems where Deloitte was chosen to provide the non-audit services because of its expertise and insight in this area. The engagement with Deloitte for this activity was compliant with the transitional rules of the Financial Reporting Council’s revised Ethical Standard and this engagement is now coming to an end. To guard against any independence issues, appropriate safeguards were discussed and agreed by the Committee and Deloitte. In addition, Deloitte also undertook procedures to support the Group’s issue of £260 million of Tier 2 debt in May 2020. They were considered to be an appropriate choice of service provider as their understanding of the Group was deemed relevant for the service. The Committee determined that the services provided would not affect the independence of the External Auditor. Further information in respect of audit fees paid to Deloitte is disclosed in note 10 to the consolidated financial statements.
The Board reviewed and approved this report on 5 March 2021.
Further detail on these areas can be found in the body of the Committee report.
The Committee sought assurance and was satisfied with the Risk function’s review of the governance of the key Covid-19-related decisions made during the year and the management actions recommended by Group Audit following its consultative exercise of the lessons learnt from the crisis management response to the initial phases of Covid-19.
Customer and conduct Customer and conduct risk has continued to be a principal focus of the Committee in 2020. During the period, the Committee devoted significant time to considering, challenging and supporting management on its approach to managing these risks and sought assurance that fair pricing and outcomes were being achieved for customers across all Direct Line Group products. The Committee received reports and probed management on the Group’s pricing strategy and governance and control framework, the process taken to review and manage conduct thresholds and margins and pricing transparency, the methods used for pricing for vulnerable customers, protected characteristics and the approach to data ethics. In October 2020, the Committee held a risk strategy session and discussed in detail the Group’s use and governance of pricing factors, key customer judgements being applied in pricing, customer outcomes illustrating the effectiveness of the Group’s pricing approach as well as initial thoughts on the FCA’s General Insurance Pricing Practices Market Study and its impact on the Group.
The Group has a management-level Customer Conduct Committee, which reviews, challenges and oversees customer and conduct matters for all of the Group’s brands and channels with the aim of promoting customers’ best interests and ensuring that the Group’s business activities are consistent with the best interests of its customers. The Customer Conduct Committee’s findings and any recommendations for improvement are regularly reported both to the Board and the Committee.
The Committee reviewed updates during the year on the progress the Group had made to deliver stable desktop, telephony and mainframe platforms. The Committee challenged management on the lessons learned from other firms’ IT migration programmes and sought assurance that the Group had appropriate mitigating controls and actions in place to prevent occurrence of such issues which could have a detrimental impact on the Group and its customers.
At each meeting, the Committee monitored the Group’s performance against its capital risk appetite through the CRO’s report. Committee members considered financial risks and assessed these risks against risk appetite. Committee members also reviewed and challenged the Own Risk and Solvency Assessment (“ORSA”) process and key content before the report was submitted for approval to the Board. Committee challenges on elements of the ORSA during the year included those in relation to stress testing of the strategic plan, pricing and underwriting risk, internal model validation activity and the appropriateness of contingent management actions.
Throughout the year, the Committee received reports on the internal model, including independent validation results and the internal model owners’ report. This outlined the scope of the capital model, key outputs, risk drivers, significant parameters, expert judgements and key assumptions. As a result of reviewing the internal model owners’ report, the Committee challenged management on its approach to diversification risk.
The Committee received regular reports regarding the three strategic risk appetite statements: maintain capital adequacy; stable and efficient access to funding and liquidity; and maintain stakeholder confidence. The Committee monitored the Group’s exposure against these risk appetite statements and the lower level risk appetite statements, considered key risk indicators and assessed the key drivers that affected status against risk appetite. The Committee reviewed and questioned the justification of the assessment of certain risks and the robustness of management action plans to address areas close to or outside of tolerance.
Risk management and controls The Committee monitored the Group’s risk management and internal control systems, and reviewed their effectiveness. This covered all material risks, including financial, operational and compliance. The Committee reviewed the residual risk position and considered the effectiveness of any associated mitigating actions and compensating controls. The monitoring and review by the Committee involved examining an assessment of the control environment and material controls at Group level, based on divisional risk and control self-assessments. These assessments had been subject to challenge by the Risk and Group Audit functions.
Assessment of risk behaviours and attitudes The Committee reviewed the annual Assessment of Risk Behaviours and Attitudes undertaken jointly by the Risk and Group Audit functions, which covered areas including tone from the top, decision-making and the Risk Management Framework as well as the Group’s response to Covid-19 and the implementation of the Group’s new ways of working as part of the business transformation programme. The Committee discussed the outputs of the assessment, as well as areas for further improvement, seeking to ensure the appropriateness of the actions identified.
The Committee assessed the Group’s emerging risks. It challenged the assumption that management had identified all possible significant emerging risks during the year and the Risk function’s role in ensuring that such risks were being monitored and managed appropriately. The most notable emerging risks identified included those relating to climate change and ethical use of data. Further details regarding such risks can be found on pages 71 to 72.
The Committee considered the Group’s actions to prevent financial crime through its review of the annual Financial Crime Report. Annually, the Committee considers an anti-bribery and corruption report, which includes a risk assessment of the level of anti-bribery and corruption risk to the Group. The Group’s annual anti-bribery and corruption risk assessment was completed, noting that no allegations or suspicions of bribery or corruption had been identified or reported in 2020. Following review and challenge, the Committee was satisfied that the Group’s policies and procedures on anti-bribery and corruption were fit for purpose and that anti-bribery and corruption risks were managed appropriately.
The activity of the Committee was reviewed during the year against the Committee’s terms of reference. The Committee terms of reference can be found on the corporate website: www.directlinegroup.co.uk/en/ who-we-are/governance/board-committees.
– Monitored progress on executive succession planning, both for members of the Executive Committee and for new roles in the Agile operating model adopted by the Group during the year.
The process adopted by the Board which culminated in my selection as Mike Biggs’ successor as Chair of the Board is described in detail in the Corporate Governance report on page 91.
In October 2020, the Company announced my appointment as Chair of the Nomination and Governance Committee; Mark Gregory became Interim Chair of the Remuneration Committee; and Sebastian James was appointed as a member of the Nomination and Governance Committee.
New appointments We engaged Heidrick and Struggles, which is a signatory to the Voluntary Code of Conduct for executive search firms, to assist in the search for a new independent NED in 2020. Heidrick and Struggles has no other connection with the Company or any individual Director. Shortlisted candidates were interviewed by members of the Committee and the preferred candidate subsequently met all other members of the Board.
Following the Committee’s recommendation, the Board agreed, in December 2020, that Adrian Joseph OBE would be appointed as an independent Non-Executive Director with effect from 1 January 2021.
Diverse pipeline During the year, the Committee reviewed the Group’s management succession planning and talent development initiatives, with the objective of building a diverse and inclusive talent pipeline and identifying potential in the senior leadership population.
The Committee recognises the importance of thorough contingency planning and in January 2021, it reviewed both emergency cover and longer-term succession planning for all Executive Committee roles, along with plans for developing senior leaders in new roles in the Group’s Agile operating model.
Gender of Board and Senior Management The Board supports the targets set in the HamptonAlexander Review. As at 31 December 2020, female representation on the Board was 44.4%.
The Board remains committed to progressing women into senior roles and aims to increase female representation at executive level through associated development programmes for high-potential females. As at 31 December 2020, female representation at Executive Committee level and their direct reports was 45.7%.
Further information on the evaluation process, including the outcomes and actions proposed, can be found in the Corporate Governance report on page 93.
Nomination and Governance Committee report continued 108 Direct Line Group Annual Report and Accounts 2020
Key responsibilities – Provide oversight and advice on how the Group conducts its business in a responsible and sustainable manner that reflects the Group’s vision and purpose
– Monitor the progress of the Group’s initiatives under its sustainability pillars
Areas of focus in the reporting period – Oversaw the Group’s efforts to be a force for good in response to the Covid-19 pandemic. – Monitored the Group’s sustainability activity through regular updates on each of the five pillars of the sustainability strategy.
– Received updates on the development of the Group’s first Sustainability Report.
Main activities during the year Customers During 2020, the Committee monitored steps taken to earn customers’ trust by demonstrating how the Group acts in their best interests. The Committee reviewed management’s initiatives to support customers in the light of the challenges presented by the Covid-19 pandemic including supporting our customers with roles in the NHS by offering a fast track claims service, free personal possession, home emergency and rescue cover. The Committee was supportive of other initiatives to assist customers in financial difficulty as a result of Covid-19 such as providing “Mileage MoneyBack” refunds, offering to waive cancellation fees, payment deferrals, and adding flexibility to motor and rescue policies.
Additional ethical matters The Committee recognises that respecting human rights is self-evidently the right thing to do and is committed to ensuring that the Group conducts its business in a manner which is ethical and sustainable.
In December 2020, the Committee reviewed the Group’s policy on compliance with the Modern Slavery Act 2015 and how third-party suppliers complied with the Act’s requirements.
The Committee challenged the Procurement function and concluded that processes and policies in connection with the Modern Slavery Act were robust, effective in being embedded in supply chain processes, and had appropriately responded to unprecedented circumstances presented by Covid-19.
Committee effectiveness review During the year, an internal evaluation of the effectiveness of the Committee was conducted as part of the wider review of the Board and the Board Committees by the Chair of the Board. The review found that the Committee functioned effectively and that the refreshed scope of the Committee allowed sustainability issues to be addressed creatively and thoughtfully. The Committee’s terms of reference were reviewed during the year against the activity of the Committee. At the time of reviewing the Committee’s Terms of Reference, the Board agreed that its name should be changed from the Corporate Responsibility Committee to the Sustainability Committee.
– Fiona McBain – appointed 1 January 2021 Independent Non-Executive Director
– Ensured investment activities continued always to provide sufficient access to liquidity to meet a stress insurance or market event.
– Monitored market developments in response to the planned discontinuation of the London Inter-Bank Offered Rate (“LIBOR”) after 2021 and the progress made by the Group to ensure it is ready for the changes.
Main activities during the year Covid-19 The April meeting, which took place against a background of lockdowns around the world and fiscal and monetary responses by governments and central banks being implemented at pace, considered a comprehensive paper confirming the levels of diversification within the asset portfolios, the quality of assets held and exposures to sectors most adversely affected by lockdowns and social distancing. The paper detailed exposure to those assets at the lower end of the Company’s risk appetite and, therefore, more susceptible to being downgraded outside of risk appetite. At the same meeting the Committee reviewed waivers agreed by management with asset managers for fixed income holdings already outside risk appetite, the waivers allowing the asset managers a longer timeframe in which to consider when to dispose of such assets in view of improving market conditions. The Committee received regular updates on the waiver positions between scheduled meetings until all waivers were closed later in the year.
– The exclusion of any companies that are developing new thermal coal mines or coal burning power plants.
The Committee will continue to monitor the results of the responsible investing framework in place and seek updates on market developments and trends. The Committee expects management to recommend further adjustments to the framework over the next two to three years.
The Committee recognised that it was important for the Group to seek to comply with the recommendations made by the Task Force on Climate-related Financial Disclosures (“TCFD”) and to carry out climate change scenario stress testing.
Further information about the Group’s approach to TCFD can be found on pages 62 to 63.
Suitability of investment strategy The annual studies examining stressed liquidity requirements and asset and liability matching were presented to the Committee during the year. Such work informs strategic benchmark allocations and provides part of the context for the addition of new asset classes or disposing of a holding. During the year, the Committee agreed amendments to the existing strategic benchmark which entailed reductions in benchmark allocations to assets supporting liquidity and infrastructure debt and net increases in allocations to investment grade credit and Commercial Real Estate (“CRE”) loans.
Dear Shareholders, I am pleased to introduce my first Directors’ Remuneration Report (the “Report”) as Chair of the Remuneration Committee (the “Committee”), for the 2020 financial year. I would like to thank Danuta Gray for her stewardship of the Committee over the last few years and congratulate her on being appointed as Chair of the Board.
– Mark Gregory – appointed Chair on 26 October 2020 Chair
Through the year and into 2021, the health, safety and wellbeing of our people has never been more crucial. Despite the challenges the pandemic has presented, the Group provided stability and security of pay for our entire workforce. We did not seek or receive any government support and did not furlough any colleagues. Just before and as we moved into the initial lockdown in March 2020, we moved 9,000 people to work from home and continued to pay all of our employees their usual pay, including fixed-term contractors, regardless of whether they were fully or partially working, or temporarily not able to work. The Group also initially suspended the structural workforce changes, previously announced in February 2020, to provide further job security at this challenging time. A gradual implementation of the planned structural changes has now begun. There have been no redundancies as a result of the impact of the Covid-19 pandemic. Furthermore, through a combination of employee redeployments and alterations to the timing of planned changes, fewer than anticipated exits have occurred as part of the planned structural changes. Penny James also voluntarily donated the value of her salary increase from 1 April 2020 to FareShare, a charity that redistributes surplus food to other charities that turn it into meals for those in need. These measures demonstrate our understanding that these are challenging times for everyone and that we will continue to make the decisions needed to protect the long-term interests of the Group for the good of all of our stakeholders.
The Group has had a good year, in difficult circumstances, demonstrating financial resilience and making significant progress against our key strategic aims despite the challenges we faced in 2020. Our objective is to turn the Group’s potential into growth through combining our customer-focused philosophy, strong brands and technology transformation to become a simpler, leaner and more agile organisation. Therefore, we are committed to being a home for capable people who celebrate difference and challenge the status quo to deliver to our customers. We can only do this by empowering and developing the best people.
With this in mind I am pleased to provide an overview of our work in relation to the remuneration of both the Executive Directors and the wider workforce for the year ended 31 December 2020.
The Committee’s objectives include: – rewarding Directors for results that are generated within the risk appetite set by the Board; – setting an appropriate framework for remuneration for the Executive Directors, Executive Committee and other senior management with enough flexibility so that the Group can attract and retain the best people for the organisation; and
Covid-19 trigger factors The Committee proactively considered the impact of Covid-19 throughout the year, beginning in late March when the Committee established a set of principles to assess its decisions. These were developed with the key overarching aim of ensuring that pay decisions for 2020 were set at a reasonable level and appropriate with reference to all our stakeholders and the external economic backdrop. They were set, and continue to be referred to, as follows: Principle Description Committee end of year assessment
Following consultation with the PRA, the Group re-started dividends following the HY2020 results and also paid a catch-up dividend in respect of the cancelled 2019 final dividend. 2019 and 2020 pay outcomes are therefore aligned with the experience of our shareholders.
No staff redundancies were made as a result of Covid-19, and the Committee supported the Group’s decision to delay planned redundancies as a result of the restructuring programme to provide job security for colleagues. The Committee noted that the number of redundancies was reduced as a result of redeploying some employees.
Management outcomes are consistent with the wider workforce – the AIP outcome is the same across the Group and senior leadership salary increases are nil for 2021 (the wider workforce received increases of between 1.5% to 2%).
The Committee would consider any adverse impact in respect of customer experience, reputation or regulatory relationship during 2020.
The Group has provided exceptional service to customers during the year, as illustrated in the outturn of the Customer element of the AIP. The Committee is proud of the measures the Group took to support customers and local communities.
The Committee carefully considered the expectations of shareholders and proxy agencies in determining 2020 remuneration outcomes and is satisfied that the decisions are consistent with these expectations.
2019 bonus (AIP) To pay the bonus in the normal manner with no adjustment.
The 2019 bonus reflected the Company’s good performance in a challenging year of change, before the impact of Covid-19.
It was agreed in April 2020 that Executive Directors would not be considered for any further bonuses until dividends for ordinary shareholders resumed (which was announced in August).
The CEO voluntarily donated the increase to charity for the 2020 financial year.
The Company made its commitment to all eligible employees to receive a salary increase for the 2020 financial year, prior to the impact of Covid-19, and felt it was important to meet this commitment to our hard working colleagues.
However, in relation to the People metric, the set of indicators was refined to refocus on a few key indicators given the external circumstances and wider impact of Covid-19.
The Company committed publicly to the operation of a bonus plan for all eligible employees for 2020. The Company performance conditions are the same for employees and Executive Directors. A formulaic assessment of achievement against the financial and strategic elements was carried out. Profit before tax performance was above the maximum level set at the start of the financial year. However, the Committee recognises that the pandemic has had both positive and negative results on our financial performance. Examples include direct effects arising from reduced claims frequencies, refunds as a result of offering customers the opportunity to adjust their policy terms as well as the Group’s charitable donations and community actions. After rigorous debate, the Committee determined that it was appropriate to apply a discretionary downward adjustment of 10% to the financial outturn of the AIP to 90% of maximum. The overall AIP outturn is 82% of maximum.
2017 LTIP vesting The Committee approved the vesting of the March and August 2017 LTIP awards without adjustment during 2020.
The 2017 LTIP measured performance over three years (up to 31 December 2019 for RoTE, and up to the vesting date for TSR).
The value of the shares on vesting reflected the share price experience of shareholders.
The Company followed its normal practice of using the three-day average share price immediately before the date of grant to determine the number of shares awarded.
The LTIP performance conditions are based on the long-term RoTE and TSR and therefore remain appropriate.
‘Windfall gains’ were considered before granting the March and August 2020 LTIPs. The Committee also took the opportunity to agree and document certain circumstances that might trigger the Committee to commence a ‘windfall gains’ review at vesting, including reviewing share price analysis over time versus the sector and our peers.
Covid-19 impact on executive remuneration The following table summarises the key components of executive remuneration and the decisions made by the Committee: Committee decision Rationale 116 Direct Line Group Annual Report and Accounts 2020
The Committee considers it important to monitor and assess internal pay relativities and takes these into account when determining Executive Director remuneration. Early adoption of the CEO pay ratio disclosure in 2018 emphasised the Committee’s intention to do so. Option A was adopted to report the employee pay ratio last year to better reflect the diverse range of job roles across the business, (see page 129), and the Committee continues to review the annual CEO pay ratio disclosures.
The Group delivered good results in a challenging market with a strong capital position supported by our successful customer-focused strategy and our investment in future capabilities. This performance is reflected in the incentive outcomes for our Executive Directors. No adjustments to the performance targets set at the beginning of the year were made as a result of Covid-19. When assessing the formulaic outcome of the 2020 AIP, the Committee agreed that a discretionary downward adjustment to the financial metric was appropriate. Further details are set out in the following section. No discretion was exercised in respect of LTIP awards vesting during the year, which reflect the Group’s strong performance over the last three years.
AIP Financial resilience, whilst supporting our customers, people and local communities during this extraordinary period, has helped us to achieve strong underlying results in 2020, exceeding the financial plan for the year. This has led to a profit before tax of £451.4 million, which formulaically results in a maximum performance outturn for this element. However, the Committee recognises that the Covid-19 pandemic has acted both positively and negatively on our financial performance. Some of these influences relate to macro market trends, whereas others can be more directly linked to Covid-19 either as direct effects (for example, reduced motor claims frequencies, as a result of reduced travel during national lockdowns, and reduced motor premiums due to refunds offered to customers for reduced mileage expectations), or through choices the Group has made to manage through the pandemic (such as our charitable donations and supporting colleagues working from home). Therefore, after rigorous debate, the Committee determined that it was appropriate to apply a discretionary downward adjustment of 10% to the financial outturn of the AIP to 90% of maximum.
The Committee is pleased to report this year that performance across the Customer measures was extraordinary and awarded a maximum outturn for this element. The People measures were assessed as being between target and maximum. Although management has made significant progress on successfully landing much of the major technology transformation elements in 2020, there has been slower than expected progress on the cost reduction agenda on which the Shared objective was measured. Therefore the Committee awarded an outturn of 50% of maximum for this element. The overall AIP outcome for the Executive Directors for 2020 (after the application of downward discretion) was therefore 82% of maximum. In line with the Policy, 40% of any AIP award will be deferred for three years under the Deferred Annual Incentive Plan (“DAIP”). Full details on the outcomes for the year are included on pages 123 to 126.
– Relative TSR performance was above the threshold performance level for both the March and August 2017 LTIP awards (based on performance over the three-year period from the date of grant of each award), leading to vesting of 26.9% and 45.1% of maximum respectively for this element.
– Penny James joined the Group in November 2017 and was granted an LTIP award at that time in respect of 2017. The RoTE performance was assessed over the same three-year period as the March and August 2017 LTIP awards. Relative TSR performance was above threshold (based on performance over the three-year period from the date of grant), leading to vesting of 51.5% of maximum for this element. The overall outcome for this award was therefore 80.6%.
– As performance under the relative TSR element is based on the three-year period from the date of grant, the outcomes in respect of this element are not yet known. Consistent with the regulations, as the performance period for the TSR elements of the 2018 LTIP is not yet complete, the outcome will be reported separately next year. Accordingly, we have included an estimated value of the RoTE vesting outcomes for the 2018 LTIP awards, plus the TSR vestings from the 2017 LTIP awards, in the single figure remuneration table for 2020 for the Executive Directors.
Approach to pay in 2021 No change to the overall approach to pay is anticipated for 2021. Neither the CEO nor CFO will be awarded a salary increase, consistent with the approach we have taken across our senior leadership population given the challenging external economic climate. Salary increases will be awarded for the wider workforce population, in recognition of their hard work during this challenging period. The wider workforce will receive increases of between 1.5% and 2%.
As part of the wider Committee oversight on all-employee pay matters, the Committee can confirm that the Group will maintain the minimum salary level across the Group, that is 5% above the Living Wage Foundation rate outside London, and 15% higher than the Government’s current National Minimum Wage. We continue to want our employees to have direct interest in the ownership of the Group. As such, the Committee approved a grant of free shares (under the Company’s Share Incentive Plan) to all employees in 2021 to recognise their invaluable contribution to the business and the desire to strengthen shareholder alignment across the Group. In addition, a £400 one-off ‘thank you’ bonus will be awarded in April 2021 to everyone who is not usually eligible for a bonus as part of their contract.
Your AGM vote The Committee welcomes investor feedback on an ongoing basis and this Report seeks to describe and explain our remuneration decisions clearly. At this year’s AGM you are being asked to vote on a resolution for the Directors’ Remuneration Report. I hope that, having read the information in this Report, and considering the performance of the Group during 2020, you will vote in support of the Directors’ Remuneration Report at the AGM.
AIP achievement This chart illustrates the actual amounts earned from the AIP and reflecting performance in 2020. 60% of the amount is payable in March 2021 and 40% will be deferred into shares for three years.
LTIP Shareholding at 31 December 2020 This chart illustrates the number of shares held at the end of 2020 by the Executive Directors against the share ownership guidelines of 250% of salary for the CEO and 200% of salary for the CFO.
Clarity Remuneration arrangements should be transparent and promote effective engagement with shareholders and the workforce.
– The Committee is committed to transparent disclosure – full details of incentive targets and outcomes are published in detail in the Annual Report on Remuneration each year.
– Queries on remuneration practices from shareholders or the workforce are welcomed by the Committee throughout the year and encouraged at the AGM and at the Group’s regular Employee Representative Body (“ERB”) meetings.
– The Committee reviews the appropriateness of targets annually, being mindful of alignment with strategy and keeping them simple.
Risk Remuneration arrangements should ensure reputational and other risks from excessive rewards, and behavioural risks that can arise from target-based incentive plans, are identified and mitigated.
(for example, where not consistent with performance); – the inclusion of malus and clawback provisions under a wide range of potential scenarios; and – in-employment and post-employment shareholding requirements.
Predictability The range of possible values of rewards to individual directors should be identified and explained at the time of approving the Policy.
– An indication of the potential impact of a 50% share price appreciation on the value of LTIP awards is also included.
Proportionality The link between individual awards, the delivery of strategy and the long-term performance of the Company should be clear. Outcomes should not reward poor performance.
– Payments under variable incentive schemes require robust performance against challenging conditions over the short and longer term. The Committee considers the formulaic outcome, as well as other relevant factors, when making decisions on remuneration outcomes.
– The Committee oversees consistent workforce reward principles and is satisfied that these policies drive the right behaviours and reinforce the Group’s values, which in turn promote an appropriate culture.
– Work together – the Shared element of the AIP requires our Executive Directors and senior leadership to work together to deliver key results to our stakeholders.
Notes: 1. Salary – the Company operates a flexible benefits policy, and salary is reported before any personal elections are made. 2. Benefits – include a company car or allowance, private medical insurance, life assurance, income protection, health screening and discounted insurance. The CEO uses a car service for travelling on journeys between home and office; the Group also pays for any associated tax liability that arises on this benefit.
6. The 2019 “Other” figure for Tim Harris relates to the amount in respect of his buyout awards, disclosed in the 2019 Report. The award is not subject to any performance conditions, and the value of this award is based on a share price at the date of grant (1 October 2019) of £2.99.
Each Executive Director has confirmed they have not received any other form of remuneration, other than that already disclosed in the single figure table.
Directors’ Remuneration report continued 122 Direct Line Group Annual Report and Accounts 2020
40% of any AIP award is deferred into shares under the DAIP, vesting three years after grant.
The approach taken to assessing financial performance against this measure was based on a straight-line outcome between 10% for threshold performance and 100% for achievement of maximum performance.
A formulaic assessment of achievement against the financial and strategic elements was carried out. Whilst the financial plan for the year did not reflect any impact of the Covid-19 pandemic, the Committee sought quantitative data and qualitative information summarising losses and gains from the impacts of the pandemic. After a rigorous assessment, the Committee agreed to make a discretionary downward adjustment of 10% against the financial target component of the 2020 bonus. The outcome from 2020 performance against the financial measure was 90%, giving a total of 50% out of 55% attributable to this element. A summary of the assessment is provided in the following table.
Customer element (15% weighting) We put our customers at the heart of everything we do. Our long-term sustainability is driven by understanding customers’ needs and acting in their best interests. As part of our customer strategy, and to ensure that the business strives to achieve a sustained and competitive level of service, the Board sets challenging customer-centric KPIs. These are intended to ensure that remuneration is aligned with and supports continuous improvement.
Throughout the changing world around us in 2020 we adapted quickly so that we could deliver more for our customers at speed and help them navigate disruption in their lives. Our determination to deliver the best possible customer value and experience drove our response to Covid-19. This drove best-ever and long-term improving performance in 2020. Our brands performed well (mainly top quartile) across the majority of insurance customer experience benchmarking studies.
Having considered performance against targets and an assessment of the quality of performance achieved, the Committee determined that a maximum outturn for the Customer measures was appropriate, giving a total of 15% out of 15% attributable to this element. A detailed assessment of the Customer measures is set out below.
– We are proud that our NPS scores have yet again demonstrated the willingness of our customers to recommend our brands year on year, especially with Direct Line.
– Our NPS scores measure the likelihood of our customers to recommend one of our brands and showed strong year-on-year performance, exceeding target and achieving top-quartile performance in a range of independent benchmarking studies.
– A large spike of travel claims post ‘lockdown’ in Q2 led to significantly increased workloads and to mitigate this with the minimum impact to our customers, large numbers of staff were cross-trained to handle the increased volume of claims customer queries.
– Customers recognised the extraordinary levels of service provided and this was frequently acknowledged with many comments referring to our peoples excellence and the Group’s approach to adjusting products, processes and pricing in this period.
Directors’ Remuneration report continued 124 Direct Line Group Annual Report and Accounts 2020
People element (10% weighting) For the People element of the AIP, the Board set a range of people measures specifically around leadership, diversity and inclusion and employee engagement, reflecting the importance of these agendas to the success of the Group. Early into H2, the set of indicators was refined to refocus on a few key measures given that leadership effectiveness and engagement became most critical in our response to the Covid-19 pandemic. At year end, the Committee considered that performance across these measures had continued to improve on an already strong H1 performance against stretching targets. This was particularly laudable given the ongoing uncertainty caused by the pandemic, balanced with the re-initiation of a number of transformation activities in line with our strategic objectives. The Committee judged the performance against the People element to be above target, giving a total of 7.5% out of 10% attributable to this element. A detailed assessment of the People measures is set out below.
– To support our leadership community through the challenges of Covid-19, we invested in improving their ability to lead a more dispersed, digital and agile organisation through various leadership development initiatives including storytelling training, agile coaching and developing and launching a new Leadership Discovery programme. This is a six-month blended learning experience combining masterclasses, 360-degree insights and ongoing peer coaching to accelerate adoption of our behaviours.
– We have measured progress in leadership effectiveness by creating a leadership index that was measured regularly throughout 2020 indicating the extent to which colleagues felt positive about our leaders and the decisions they were making. This has shown that there is a high level of trust in our leaders with 84% positivity at the end of 2020.
– Since becoming a signatory to the Women in Finance Charter, we have recruited, developed and promoted more women into senior roles. Women now account for 30% of our senior leadership (2019: 31%, 2018: 28%, 2017: 25%, 2016: 22%) and we are looking forward to working towards our next milestone of 35% female representation in our senior leadership by the end of 2022. We have continued to invest in supporting the development of our female leaders through external programmes and coaching mentoring support.
– We established BAME and Black representation targets within the organisation for the first time and signed Business in the Community’s Race at Work charter to demonstrate our commitment to race inclusion.
– Our #WeCare campaign celebrated the diversity of our people by sharing stories to build a greater understanding of difference and reinforce a culture where our people can ‘bring all of themselves to work’.
Engagement Ensure we are fully engaged with our employees via the DiaLoGue programme, including throughout the business transformation process, with leaders setting the tone demonstrating the Group’s Values and Behaviours in all aspects of their role
– Throughout the year, we continued to achieve high participation levels (64% average), gathering a mix of quantitative and qualitative data across a range of topics including some key themes like sentiment, mental health, leadership, engagement and productivity.
– Our ability to check in and monitor engagement, sentiment and wellbeing in a more adaptive way was critical during 2020, allowing leaders to benefit from rapid access to results and to design for relevant, targeted actions to address themes, share ideas or build solutions.
– In addition, we re-designed many of our Group-wide high-profile engagement activities such as our coveted Chief Executive Awards programme to be delivered virtually. Our teams and leaders have creatively risen to the challenge of keeping motivation, support and engagement as high as possible through such a testing period.
Shared element (20% weighting) For the Shared element of the AIP, the Board set a range of strategic measures specifically around technology and business transformation and cost savings, with the aim of ensuring the Group has the capabilities and cost base to ensure its sustained success. The Committee considered the delivery of the major technology transformation programmes, for which specific measures and milestones were set; and for the cost objective the Committee focused on the progress to achieve a reduced cost base. The Committee therefore agreed an outturn of 50% for the Shared measures, giving a total of 10% out of 20% attributable to this element. A detailed assessment of the technology transformation and costs measures is set out below.
Technology transformation Progress and delivery of several technology investment programmes on time and on budget, to deliver new capability benefits
– Our major programmes successfully navigated the impacts of Covid-19 and mitigated delays to the extent possible, delivering a significant amount of change in a highly challenging environment.
– We launched a number of customer-facing systems, including: – a Green Flag claims engine delivering significant uplift in platform flexibility and customer service; – retooling of NIG ‘complex’ business including improving pricing sophistication; – the main product builds of the new Direct Line for Business platform, including
Tradesperson and Van and the full-cycle end-to-end delivery model established for ongoing change; – major Finance transformation which has moved core finance systems to the cloud; and
– Despite a strategic ambition to progress towards our target of reducing operating expenses, they increased during 2020 by £30.7 million to £724.4 million. The increase in costs was entirely due to investment in initiatives to protect our customers, people and society from the impact of Covid-19.
– In total these initiatives are estimated to have increased operating expenses by £34 million and in some cases had the effect of delaying cost-saving programmes which were planned for 2020. Adjusting for these initiatives, operating expenses were broadly flat year on year.
– Despite the impact of Covid-19, we have made good progress in building the capability to reduce our cost base in the future and have reiterated our 20% expense ratio target in 2023.
Directors’ Remuneration report continued 126 Direct Line Group Annual Report and Accounts 2020
– relative TSR (40% weighting) – performance is measured over a three-year period from the date of grant.
Consistent with the Regulations, the expected RoTE vesting outcomes for the year ended 31 December 2019 (together with the TSR elements from the 2016 awards) are included in the 2019 LTIP column of the single figure table. The performance outcomes of these elements are included in the table below.
The Committee was satisfied that the financial and risk underpins were met at the end of the vesting period and therefore the performance achieved against the targets and the vesting of the awards is as follows.
Summary of the 2020 LTIP single remuneration figure outcomes Number of shares awarded (inc. dividends) subject to this performance condition
Notes: 1. 2018 RoTE elements are based on the three-month average share price to 31 December 2020 of £2.91. 2. 2017 TSR element is based on share price on the date of vesting on 28 November 2020 of £2.97.
Share plan interests vested but unexercised1 Shares held outright Number of options exercised1 Share price on date of exercise4
Notes: 1. These awards take the form of nil-cost options over the Company’s shares. Awards accrue dividend entitlement from the grant date to the date on which an award vests. Dividends added post-vesting are shown to 31 December 2020 but are not realised until exercise.
2. LTIP awards include an additional two-year holding period before awards may be released. 3. Unvested awards subject to performance conditions represent LTIP awards for which 60% is based on RoTE performance and 40% on relative TSR performance. The exact targets for each award were disclosed in the relevant Annual Report on Remuneration. 4. Tim Harris exercised options on 4 August 2020.
Directors’ Remuneration report continued 128 Direct Line Group Annual Report and Accounts 2020
2. The values shown under ‘Taxable benefits’ above comprise the value of taxable travel and subsistence expenses reimbursed by the Company (including any gross-up for tax and national insurance contributions due).
3. Mike Biggs stepped down from the Board on 4 August 2020, on which date Danuta Gray became Chair.
CEO pay ratio In 2018, the Committee chose to adopt early the CEO pay ratio disclosure requirements. Since 2019, the Committee has determined that the appropriate methodology to be used in future years is Option A, as the Committee believes this is the most robust approach to use going forward.
The table below compares the 2020 single total figure of remuneration for the CEO with that of the Group employees who are paid at the 25th percentile (lower quartile), 50th percentile (median) and 75th percentile (upper quartile) of its employee population. The 2019 figures are also shown for comparison purposes.
Note: 1. As required by the regulations, the CEO single figure used to determine the 2019 pay ratios is based on the sum of the total single figures of remuneration for Paul Geddes and Penny James, but with remuneration in respect of Penny’s service as CFO excluded. The 2019 figures have been updated for Penny’s updated 2019 single figure value (see page 122 note 4).
The UK employees included are those employed on 31 December 2020 and remuneration figures are determined with reference to the financial year ending on 31 December 2020.
Each employee’s pay and benefits were calculated using each element of the employee remuneration, on a full-time equivalent basis. No adjustments (other than to achieve a full-time equivalent rate) were made and no components of pay have been omitted.
Base salaries of all employees, including our Executive Directors, are set with reference to a range of factors including market practice, experience and performance in role. For reference, the CEO base salary median pay ratio is 33:1 (2019: 32.1). In reviewing the ratios the Committee also noted that the CEO’s remuneration package is weighted more heavily towards variable pay (including the AIP and LTIP) than of the wider workforce due to the nature of the role, and this means the ratio is likely to fluctuate depending on the performance of the business and associated outcomes of incentive plans in each year.
The Group’s employees are fundamental to the Group’s strategy and to ensuring a high level of service to our customers. We are proud that the high number of consultants in our customer service centres are employed by the Group (rather than being outsourced) and note that the impact of these lower-paid roles is reflected in the ratios above. Further details on the differences between the remuneration of Executive Directors and the wider workforce are set out on page 117. The Committee is satisfied that these policies drive the right behaviours and reinforces the Group’s values which in turn drives the correct culture, and, for the reasons given above, it believes that the ratios are consistent with the Group’s reward policies.
Executive Directors Chief Executive Officer 7.6% (24.6)% 16.1% Chief Finance Officer4 0.0% 0.5% 7.9% Non-Executive Directors5
Notes: 1. Based on the change in average pay for employees employed in the year ended 31 December 2020 and the year ended 31 December 2019. The CEO’s salary in 2019 reflected part year as CFO before promotion to CEO, therefore the increase appears larger. Actual pay increase in 2020 was 2.1%. The increase to the CEO salary from 1 April 2020 was voluntarily paid to FareShare, a charity that redistributes surplus food to other charities that turn it into meals for those in need.
3. For employees other than the CEO, this includes average amounts earned under the AIP, and other variable incentive schemes, including monthly and quarterly incentive schemes operated in certain parts of the Group. Non-Executive Directors are not eligible to participate in any of the Group’s bonus or incentive schemes.
CEO single figure of remuneration (£'000s) 1,908 2,536 5,356 4,795 4,071 4,039 3,250 774 2,773 3,188 Annual bonus payment (% of maximum) 65% 63% 75% 83% 43% 88% 68% 76% 76% 82%
3. The 2019 single figure reflects part of the year for the outgoing CEO, Paul Geddes, and the entire year for the newly appointed CEO, Penny James.
4. The 2019 single figure has been revised to reflect the actual vesting of the 2017 awards under the LTIP. 5. The 2020 single figure reflects the estimated vesting of the RoTE portion of the LTIP granted in March and August 2018. Any shares under the LTIP granted in 2018 will not be delivered until the end of the applicable vesting periods in March and August 2021. However, they have been included in the single figure, as the performance period in respect of the RoTE portion has now been completed.
16 Oct 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec www.directlinegroup.co.uk 131
Vesting proportion (inc. performance and pro-rata) Number of share options vested
The March 2017 LTIP award vested overall at 70.8%, with the RoTE element achieving 100%, and TSR at 26.9%. The August 2017 LTIP award vested at 78.0%, with the RoTE element achieving 100% and TSR at 45.1%. All former Directors confirmed that they complied with the requirements of their individual exit agreements, which enabled the Committee to approve the vesting of these awards.
No payments were made to any Director for loss of office during 2020.
2. Following the cancellation of the dividend as announced on 8 April 2020, the final dividend for 2019 was not paid. However, a special interim dividend was subsequently paid in September 2020 reflecting a full catch-up of the cancelled 2019 final dividend.
3. The dividends paid information has been taken from note 14 to the consolidated financial statements. The overall expenditure on pay has been taken from note 10 and therefore, consistent with market practice, it has not been calculated in a manner consistent with the single figure in this report.
Approval of Directors’ Remuneration Report (2020 AGM) 1,023,165,733 94.88% 55,176,087 5.12% 63,462 – Approval of Directors’ Remuneration Policy (2020 AGM) 1,051,904,620 97.55% 26,440,027 2.45% 60,251 –
Shareholdings (Audited) This table sets out the Executive Directors’ share ownership guidelines and actual share ownership levels: Name Position Share ownership guideline1
3. Shareholding as a percentage of salary has been calculated based on the 31 December 2020 share price of £3.19.
Award as % of salary Number of shares granted Face value of Awards (£)
Note: 1. The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £2.62 in March 2020 and £2.96 in September 2020.
The performance conditions that apply to the LTIP awards granted in 2020 are set out below: Performance Measure
The RoTE targets for awards granted in 2020, applying to 60% of the award, were an average annual RoTE of 17.5% for 20% vesting and 20.5% for full vesting. A straight-line interpolation occurs from threshold to maximum performance.
The performance period for the awards granted on 27 March 2020 will end on 31 December 2022 for the RoTE element and 26 March 2023 for the TSR element. The performance period for the awards granted on 1 September 2020 will also end on 31 December 2022 for the RoTE element and 31 August 2023 for the TSR element.
Penny James Chief Executive Officer 401,899 153,397 Tim Harris Chief Financial Officer 71,155 27,158
Note: 1. The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £2.62. In accordance with the DAIP rules, dividends in respect of the deferred shares are reinvested in additional shares, which vest when the deferred shares vest.
Non-Executive Directors’ fees The fees for the Chair and Non-Executive Directors for 2021 are set out below and were reviewed in 2020.
Board Chair fee 350 Basic Non-Executive Director fee 75 Additional fees Senior Independent Director fee 30 Chair of Audit, Board Risk and Remuneration Committees 30 Chair of Sustainability and Investment Committees 10 Member of Board Committee (Audit, Board Risk or Remuneration) 10 Member of Board Committee (Sustainability or Nomination) 5
Penny James 01-Nov-17 12 months Base salary, benefits and pension only for unexpired portion of notice period to be paid in a lump sum or monthly instalments in which case, instalments are subject to mitigation if an alternative role is found.
Tim Harris 01-Oct-19 12 months Base salary, benefits and pension only for unexpired portion of notice period to be paid in a lump sum or monthly instalments, in which case, instalments are subject to mitigation if an alternative role is found.
Directors’ Remuneration report continued 134 Direct Line Group Annual Report and Accounts 2020
– The CEO’s salary remains appropriate (at £817,000) – The CFO’s salary remains appropriate (at £535,000)
– CEO and CFO pension contribution remains at 9% (in line with the workforce)
threshold and maximum performance – Financial measures (55%): Profit before tax – Non-financial measures (45%): People, Customer and Shared – The performance targets will be set following the usual process, considering internal and consensus forecasts and the key strategic priorities for the Group in 2021
– 40% of the AIP is deferred into shares – Typically vesting after three years, normally subject to continued employment – Malus and clawback provisions apply
(maximum) is required for the 2021 awards to vest – Vesting at threshold is 20% and maximum is 100% with straight-line vesting in between – Relative TSR will be measured against the FTSE 350
(excluding investment trusts) peer group. Vesting for median TSR performance (threshold) is 20% and for upper quintile TSR performance (maximum) is 100% with straight-line vesting in between these points www.directlinegroup.co.uk 135
Directors’ Remuneration Policy The following is a copy of the main table from the Policy approved by shareholders at the 2020 AGM. The full Policy is available in the Directors’ Remuneration Report of the 2019 Annual Report and Accounts, which is available on the Direct Line Group website under the ‘Results and reports’ heading in the Investors page. You can find further details regarding the Policy’s operation for 2021 on page 135.
– general base salary movements across the Group – The Committee does not follow market data strictly. However, it uses it as a reference point in considering, in its judgement, the appropriate salary level, while regarding other relevant factors, including corporate and individual performance, and any changes in an individual’s role and responsibilities
Pension – To remain competitive within the marketplace – To encourage retirement planning and retain flexibility for individuals
– In line with our approach to all employees, certain Group products are offered to Executive Directors at a discount
– The Executive Directors may be entitled to retain fees received for any directorships held outside the Group
– The principles for setting base salary are like those applied to other employees in the Group. However, the specific benchmarking groups used to review external market relativities may differ across employee groups
– Pension contributions are paid only in respect of base salary – Executive Directors are eligible to participate in the defined contribution pension arrangement or alternatively they may choose to receive a cash allowance in lieu of pension – The Executive Directors’ pension will be set in line with the pension level received by the majority of the employee population
– Executive Directors are eligible to participate in any of the employee share plans operated by the Company, in line with HMRC guidelines (where relevant) and on the same basis as other eligible employees. Currently, this includes our HMRC-approved SIP, which has been used to provide an award of free shares to all employees (including Executive Directors) and permits employees to purchase shares with a corresponding matching award
– Awards vest based on performance against financial and/or such other (including share return) measures, as set by the Committee, to be aligned with the Group’s long-term strategic objectives. The Committee may alter the precise targets used for future awards
Share ownership guidelines – To align the interests of Executive Directors with those of shareholders
AIP – To motivate executives and incentivise delivery of performance over a one-year operating cycle
– The maximum bonus opportunity under the AIP is 175% of base salary per year. The current maximum bonus opportunity applying for each individual Executive Director is shown in the statement of implementation of policy
– The AIP remains a discretionary arrangement. In line with the Code requirements, the Committee maintains discretion to override formulaic outcomes where those outcomes are not reflective of the overall Group performance
– Awards will typically be made in the form of nil-cost options or conditional share awards, which vest to the extent performance conditions are satisfied over a period of at least three years. Under the Plan rules, awards may also be settled in cash at the discretion of the Committee. This may be appropriate, for example, if legal difficulties arise with settling in shares
Disclosure of information under Listing Rule 9.8.4(C) In accordance with Listing Rule 9.8.4C, the table below sets out the location of the information required to be disclosed under LR 9.8.4(R), where applicable.
Interest capitalised by the Group None Unaudited financial information Note 3.5 Branches outside the UK 219 Long-term incentive plan involving one Director only
Directors’ waivers of emoluments Not applicable Directors’ waivers of future emoluments Not applicable Non pro-rata allotments for cash (issuer) Not applicable Non pro-rata allotments for cash (major subsidiaries)
Directors You can find the names of all current Directors and their biographies on pages 78 to 80. All Directors will retire and those wishing to continue to serve will be submitted for election or re-election at the 2021 AGM (with the exception of Jane Hanson who will be stepping down from the Board with effect from the end of the AGM, as previously announced.) This is in accordance with the Code and the Articles of Association of the Company, which govern appointing and replacing Directors.
The Directors listed on pages 78 to 80 were the Directors of the Company throughout the year under review, except for Adrian Joseph, who joined the Board on 1 January 2021. Mike Biggs also served during the year, stepping down as Chair of the Board and as a Director in August 2020. Mike was succeeded as Chair by Danuta Gray.
The Articles of Association of the Company permit it to indemnify the Company’s officers, and officers of any associated company, against liabilities arising from conducting Company business, to the extent permitted by law. As such, the Company has executed deeds of indemnity for each Director’s benefit, regarding liabilities that may attach to them in their capacity as Directors of the Company or associated companies.
Directors’ report 140 Direct Line Group Annual Report and Accounts 2020
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 232.
Share capital The Company has a premium listing on the London Stock Exchange. As at 31 December 2020, the Company’s share capital comprised 1,364,551,605 fully paid Ordinary Shares of 1010⁄11 pence each.
At the Company’s 2020 AGM, the Directors were authorised to: – allot shares in the Company or grant rights to subscribe for or convert any security into shares, up to an aggregate nominal amount of £49,620,058, and to allot further shares up to an aggregate nominal amount of £49,620,058 for the purpose of a rights issue; – allot shares having a nominal amount not exceeding in aggregate £7,443,009 for cash, without offering the shares first to existing shareholders in proportion to their holdings; – allot additional shares having a nominal amount not exceeding in aggregate £7,443,009 for the purposes of financing a transaction which the Board of the Company determines to be an acquisition or other capital investment, without offering the shares first to existing shareholders in proportion to their holdings; – make market purchases of up to 136,455,160 shares in the Company, representing 10% of the Company’s issued share capital at the time; and
– allot shares (with the disapplication of pre-emption rights) up to an aggregate nominal amount of £23,250,000 in relation to the issue of Restricted Tier 1 (“RT1”) Instruments.
To date, the Directors have not used these authorities granted in 2020 (although the authority to make market purchases of shares granted at the AGM in 2019 was used during the year, as described below.)
Under the Company’s Share Incentive Plan, Trustees hold shares on behalf of employee participants. The Trustees will only vote on those shares and receive dividends that a participant beneficially owns, in accordance with the participant’s wishes. An Employee Benefit Trust also operates. The Trustee of this has discretion to vote on any shares it holds as it sees fit, except any shares participants own beneficially, in which case the Trustee will only vote on such shares as per a participant’s instructions.
The Trustee of the Employee Benefit Trust has waived its right to dividends on all shares within the Trust. You can find out more about the number of shares held by the employee share plan trusts in note 36 on page 208. The Company is only aware of the dividend waivers and voting restrictions mentioned above.
On 3 March 2020, the Company announced the launch of a share buyback programme, which was then terminated on 19 March 2020 as a result of the volatile conditions arising from the Covid-19 pandemic. The share buyback programme had been designed to return surplus capital to shareholders and move the Group’s solvency capital coverage ratio towards the middle of its solvency risk appetite range. A total number of 10,448,395 ordinary shares of 1010⁄11 pence each were repurchased under the share buyback programme. The aggregate consideration paid was £28,783,407.42.
Each general meeting notice will specify a time, not more than 48 hours before the time fixed for the meeting (which may exclude non-working days), for determining a shareholder’s entitlement to attend and vote at the meeting. To be valid, all proxy appointments must be filed at least 48 hours before the time of the general meeting.
Standard Life Aberdeen plc 4.57% 4.57% Indirect APG Asset Management N.V 2.99% 2.99% Direct
Political donations The Group made no political donations during the year (2019: nil).
Business relationships The Board understands and has regard to the need to foster the Company’s business relationships with suppliers, customers, and others.
The Group relies on certain key strategic suppliers and a large number of other suppliers to conduct its business. The Board receives in-depth updates on its relationship with strategic suppliers in the context of reports on the Group’s technology programme. The Board has, in 2020, received updates on the generic approach to suppliers’ robustness in the context of Brexit preparations.
The Board reviews and approves the Code of Business Conduct, Ethical Code for Suppliers and Modern Slavery statement on an annual basis to ensure that these reflect the Group’s purpose and sustainability strategy.
For more on key decisions and considerations relating to stakeholders, see pages 86 to 87, and for more information on our key stakeholders, please refer to the sustainability pillars on pages 44 to 67.
The whole Board prides itself on its engagement with the workforce with frequent and consistent engagement by Executive Directors, which has only increased during Covid-19. The Board responded immediately to the Covid-19 crisis by calling additional Board meetings, including to discuss and consider the best way to protect its wider workforce.
Further to Provision 5 of the Code, the Non-Executive Directors see it as their joint responsibility to engage with the workforce and have, therefore, chosen not to designate one Non-Executive Director for this role. The Non-Executive Directors rotate attendance at meetings of the Group’s National Employee Representative Body, which are also attended by Executive Directors. The Board reviews the results of employee engagement surveys, and metrics relating to employee engagement remain an important element of the targets for the AIP for Executive Directors and other senior managers.
Having all Non-Executive Directors engaged with the workforce allows for greater accessibility for the workforce and a shared sense of responsibility. In December 2020 our Chair, Danuta Gray, attended the virtually hosted Employee Representative Body conference, at which she introduced herself to the members who were given the opportunity to ask her questions.