The effective interest rate on short-term deposits with credit institutions for the year ended 31 December 2013 was 0.41% (2012: 0.35%) and average maturity was 14 days (2012: 11 days).
The Group intends to dispose of freehold property it no longer utilises at Lumbry Park, Alton. At 31 December 2013, the property is being actively marketed, with no impairment losses recognised in the year ended 31 December 2013 (2012: £nil).
The Group satisfies share-based payments under the Group’s share plans primarily through shares purchased in the market and held by employee share trusts.
28. Other reserves Movements in the revaluation reserve for AFS investments
The subordinated dated notes were issued on 27 April 2012 at a fixed rate of 9.25%. On the same date, the Group also entered into a 10-year hedge to exchange the fixed rate of interest for a floating rate of three-month LIBOR plus a spread of 706 bps.
30. Insurance liabilities, unearned premium reserve and reinsurance assets £m 2012 £m
Reinsurers’ share of general insurance (including reinsurance unearned premium reserve) Claims reported (467.5) (397.8) Claims incurred but not reported (449.8) (511.6)
Net general insurance (including unearned premium reserve) Claims reported 3,168.9 3,571.5 Claims incurred but not reported 1,542.9 1,642.3 Claims handling provision 128.3 163.8 Liability adequacy provision – 4.3
Estimate of ultimate claims costs: At end of accident year 3,679.1 4,007.5 4,091.6 4,390.5 3,878.1 4,148.0 4,261.9 3,080.5 2,797.3 2,652.5 36,987.0
Eight years later 22.0 (34.4) – – – – – – – – (12.4) Nine years later (29.1) – – – – – – – – – (29.1)
Liability recognised in balance sheet 173.3 119.1 211.9 303.0 298.7 534.8 667.1 699.4 785.9 1,532.9 5,326.1 2003 and prior 303.0 Claims handling provision 128.3 Total gross liability 5,757.4
Estimate of ultimate claims costs: At end of accident year 3,486.1 3,869.6 4,030.8 4,341.3 3,816.0 4,113.0 4,219.3 2,946.1 2,570.1 2,401.5 35,793.8
Incurred but not reported 2,217.5 (281.8) 1,935.7 Claims handling provision 153.2 – 153.2 Liability adequacy provision 3.6 – 3.6
Effect of foreign currency exchange adjustment (13.2) 2.1 (11.1) Increase in liability adequacy provision 0.7 – 0.7
Cash paid for claims settled in the year (2,852.1) 149.1 (2,703.0) Increase / (decrease) in liabilities: Arising from current-year claims 2,894.2 (250.9) 2,643.3 Arising from prior-year claims (583.9) 96.7 (487.2)
Incurred but not reported 1,992.7 (449.8) 1,542.9 Claims handling provision 128.3 – 128.3 Liability adequacy provision – – –
Net decrease in the year (47.1) (38.9) (86.0) Effect of foreign currency exchange adjustment (11.6) – (11.6)
Net (decrease) / increase in the year (61.8) 5.0 (56.8) Effect of foreign currency exchange adjustment 7.6 (0.8) 6.8 31. Life insurance liabilities and reinsurance assets £m 2012 £m
Net life insurance Long-term insurance contracts: With fixed and guaranteed terms – 11.8 Benefits outstanding – 0.7
Provisions in respect of new and existing business 34.5 (21.4) 13.1 Expected change in existing business provisions (19.8) 17.3 (2.5) Variance between actual and expected experience (3.0) (5.0) (8.0) Other movements (3.7) – (3.7)
The weighted average duration of the defined benefit obligations at 31 December 2013 is 20 years (2012: 20 years) using accounting assumptions.
The table below analyses the market value of the scheme assets by type of asset.
Index-linked bonds 13.1 10.2 Government bonds 5.7 6.5 Corporate bonds 42.9 32.5
Virtually all debt and equity instruments have quoted prices on active markets.
Direct Line Group Annual Report & Accounts 2013 158 32. Retirement benefit obligations continued Movement in net pension (deficit) / surplus
Contributions by employer 2.5 – 2.5 Benefits paid (1.2) 1.2 –
Income statement: Net interest income / (cost)1,2 2.3 (2.7) (0.4) Statement of comprehensive income: Actuarial losses arising from experience adjustments (1.3) (0.2) (1.5) Actuarial losses arising from changes in financial assumptions – (4.4) (4.4) Actuarial losses arising from changes in demographic assumptions – (1.0) (1.0)
Notes: 1. The income / (cost) in the income statement has been included under other operating expenses.
Long-Term Incentive Plan Senior management are eligible to participate in the LTIP and awards are granted in the form of nil-cost options. Under the plan, the shares vest at the end of a three-year period dependent upon the following: continued employment by the Group and achieving predefined performance conditions associated with TSR and RoTE.
Conditional awards were made in the year ended 31 December 2013 over 3.0 million Ordinary Shares with an estimated fair value at grant of £4.9 million in March and 2.5 million Ordinary Shares with an estimated fair value at grant of £4.3 million in August (2012: 3.2 million Ordinary Shares with an estimated fair value at grant of £5.0 million in November) under the Group’s LTIP.
RBS Group LTIP awards Prior to October 2012, certain employees benefited from share-based awards originally granted by RBS Group. The expense incurred in respect of awards granted by RBS Group to Direct Line Group employees is not material and has been included within operating expenses.
The RBS Group Remuneration Committee has agreed that RBS Group will be responsible for the settlement of the following outstanding LTIP awards, with no charge to be made to Direct Line Group: • LTIP awards in the year ended 31 December 2011 – expected to vest in March 2014
• LTIP awards in the year ended 31 December 2012 – expected to vest in March 2015
The 2011 and 2012 LTIP awards will be settled with Company Ordinary Shares currently held by RBS Group. Details of the RBS Group legacy share based payments are set out in the Directors’ remuneration report on page 98.
Direct Line Share Incentive Plans The HMRC approved Buy-As-You-Earn Plan in the UK and an International plan, mirroring the UK plan for Italy, were both launched during the year ended 31 December 2013. The International plan is being further rolled out to employees in Germany and it is expected that this process will be completed in 2014.
Under the Share Incentive Plans, the shares vest at the end of a three-year period dependent upon the following: continued employment by the Group (or on leaving employment in certain circumstances) and continued ownership of the associated purchased shares up to the point of vesting.
In respect of the outstanding options at 31 December 2013, the weighted average remaining contractual life is 2.20 years (2012: 2.85 years). No share options expired during the year (2012: nil).
The weighted average share price during the period of exercise was £2.17 in the year ended 31 December 2013 (2012: not applicable).
Due to agents, brokers and intermediaries 6.2 6.9 Due to reinsurers 81.0 81.9 Due to insurance companies 13.6 13.8 Due to related parties 58.7 34.7 Trade creditors and accruals 255.8 201.0 Other creditors 174.3 107.8 Other taxes 80.6 81.7
Operating cash flows before movements in working capital 173.9 (39.1) Movements in working capital: Net decrease in net insurance liabilities including reinsurance assets and deferred acquisition costs (594.8) (532.5) Net (increase) / decrease in prepayments and accrued income and other assets (13.1) 9.6 Net decrease in insurance and other receivables 34.3 86.5 Net increase / (decrease) in trade and other payables including insurance payables 175.9 (253.4) Contribution to retirement benefit obligations (2.8) (2.5)
Cash used by operations (226.6) (731.4) Taxes paid (80.2) (232.4) Finance costs – (2.0) Cash flow hedges (0.2) (0.2) Net cash flow used by operating activities before investment of insurance assets (307.0) (966.0)
Interest received 574.2 327.7 Rental income received from investment property 11.4 4.4 Purchases of investment property (87.0) (133.7) Proceeds on disposal of investment property – 69.5 Distributions received from other investment funds – 3.1 Proceeds on disposal / maturity of AFS financial investments 3,147.8 4,021.6 Net decrease in investment balances held with credit institutions 209.3 844.6 Purchases of AFS financial investments (3,422.7) (3,132.4) Cash generated from investment of insurance assets 433.0 2,004.8 36. Contingent liabilities The Group did not have any contingent liabilities at 31 December 2013 (2012: none).
37. Commitments Operating lease commitments The Group has entered cancellable and non-cancellable operating lease agreements for vehicles and other assets.
The following table analyses the outstanding commitments under cancellable and non-cancellable operating leases by the period in which they fall due.
Within one year 29.8 33.0 In the second to fifth years inclusive 85.0 92.3 After five years 248.9 250.5
Operating lease commitments where the Group is the lessor The following table analyses future aggregate minimum lease payments receivable under non-cancellable operating leases.
Direct Line Group Annual Report & Accounts 2013 164 38. Classification of financial instruments The following tables analyse the Group’s financial assets and financial liabilities in accordance with the categories of financial instruments in IAS 39. Non-financial assets and liabilities outside the scope of IAS 39 are shown separately. Other than those financial assets and liabilities stated at fair value below, the carrying value of all other financial assets and liabilities, with the exception of subordinated liabilities, equals their fair value.
Assets Goodwill and other intangible assets – – – – 421.5 421.5 Property, plant and equipment – – – – 92.4 92.4 Investment property – – – – 128.9 128.9 Reinsurance assets – – – – 1,102.0 1,102.0 Deferred tax assets – – – – 22.5 22.5 Current tax assets – – – – 5.5 5.5 Deferred acquisition costs – – – – 327.6 327.6 Insurance and other receivables – – 1,164.0 – – 1,164.0 Prepayments, accrued income and other assets – – – – 82.6 82.6 Derivative financial instruments 37.5 – – – – 37.5 Retirement benefit asset – – – – 2.5 2.5
Cash and cash equivalents – – 1,508.4 – – 1,508.4 Assets held for sale – – – – 1.0 1.0
Sale of insurance contracts and other services 3.2 6.9 Purchase of services 145.8 270.7
Purchase of services, in the year ended 31 December 2012 above, include share-based payment costs for key managers and other staff.
Year end balances arising from sales and purchases of products and services to and from RBS Group Amounts owed by related parties Amounts owed to related parties £m £m 2012 £m
Movement in amounts owed by / to RBS Group Amounts owed by related parties Amounts owed to related parties £m £m 2012 £m
Transactions in the year 0.2 68.0 147.1 294.6 Settled in the year (4.4) (70.6) (123.1) (418.6)
Included in transactions within amounts owed by related parties in the year ended 31 December 2012 is £69.5 million, invoiced to and paid by RBS Group for the purchase of investment properties.
During the first quarter of 2014 the UK has seen adverse weather conditions resulting from storm damage and severe flooding. The Group’s preliminary estimate of the costs of Home claims, until the 22 February 2014, is in the range of £70 million to £90 million. The Group has also experienced weather-related claims of approximately £20 million in its Commercial division.
Equity Share capital 6 150.0 150.0 Capital redemption reserve 1,450.0 1,450.0 Share based payment reserve 3.9 0.3 Retained earnings 1,611.9 1,661.5 Total equity 3,215.8 3,261.8
Trade and other payables 10 0.5 – Total liabilities 502.9 758.8 Total equity and liabilities 3,718.7 4,020.6
The financial statements were approved by the Board of Directors and authorised for issue on 25 February 2014. They were signed on its behalf by: John Reizenstein Chief Financial Officer
Direct Line Group Annual Report & Accounts 2013 169 £m 2012 £m
Profit for the year 193.1 1,240.4 Total comprehensive income for the year attributable to owners of the Company 193.1 1,240.4
Total comprehensive income for the year – – – 1,240.4 1,240.4 Share redemption (1,350.0) 1,350.0 – – – Dividends paid – – – (1,000.0) (1,000.0) Credit to equity for equity-settled share based payments – – 0.3 – 0.3
Total comprehensive income for the year – – – 193.1 193.1 Dividends paid – – – (242.7) (242.7) Credit to equity for equity-settled share based payments – – 4.1 – 4.1 Shares distributed by employee trusts – – (0.5) – (0.5)
The attached notes on pages 171 to 174 form an integral part of these separate financial statements.
Direct Line Group Annual Report & Accounts 2013 170 £m 2012 £m
Net cash (used by) /generated from operating activities 12 (3.0) 7.4 Cash flows from investing activities Interest received on loans to subsidiary undertakings 47.5 23.8 Dividends received from subsidiary undertakings 220.8 1,545.0 Acquisition of investments in subsidiary undertakings (9.1) (105.2) Disposal of investments in subsidiary undertakings 2 39.3 – Cash flows from net investment hedges (5.3) – Net cash generated from investing activities 293.2 1,463.6 Cash flows from financing activities Dividends paid (242.7) (1,000.0) Proceeds on issue of subordinated liabilities – 493.0 Finance costs (46.3) (23.1) Repayment of borrowings from related parties (255.0) (322.5) Proceeds of borrowings from related parties – 120.9 Net increase in loans advanced to subsidiary undertakings (7.7) (503.1) Net cash used by financing activities (551.7) (1,234.8) Net (decrease) / increase in cash and cash equivalents (261.5) 236.2 Cash and cash equivalents at the beginning of the year 5 268.3 32.1 Cash and cash equivalents at the end of the year 5 6.8 268.3
The attached notes on pages 171 to 174 form an integral part of these separate financial statements
Direct Line Group Annual Report & Accounts 2013 171 1. Accounting policies Basis of preparation Direct Line Insurance Group plc, incorporated in the UK, is the ultimate parent undertaking of the Direct Line Group. The principal activity of the Company is managing its investments in subsidiaries, raising funds for the Group, providing loans to subsidiaries and the receipt and payment of dividends.
The Company’s financial statements are prepared in accordance with IFRSs as issued by the IASB and are presented in accordance with the Companies Act 2006. In accordance with the exemption permitted under section 408 of Companies Act 2006, the Company’s income statement and related notes have not been presented in these separate financial statements.
The Company sold 100% of the share capital of its subsidiary Direct Line Life Insurance Company Limited on 28 November 2013. The carrying value of the investment in the Life business was £50.7 million at the date of sale. The total cash consideration received was £39.3 million generating a loss on disposal of £11.4 million.
Full details of investments in principal subsidiaries are set out in note 19 to the consolidated financial statements.
Short-term deposits with credit institutions: Third parties 6.7 263.6 Related parties – RBS Group – 4.7 6. Share capital Full details of the share capital of the Company are set out in note 27 to the consolidated financial statements.
There have been no defaults on any of the notes during the year. The Company has the option to defer interest payments on the notes but to date has not exercised this right.
Current – 255.4 10. Trade and other payables £m 2012 £m
Profit for the period 193.1 1,240.4 Adjustments for: Impairment in subsidiary undertakings 10.8 291.8 Investment income (268.4) (1,578.1) Other operating (gain) / loss (0.2) 1.3 Finance costs 47.1 41.6 Loss on disposal of subsidiary undertaking 11.4 – Tax credit (1.3) (5.5)
Operating cash flows before movements in working capital (7.5) (8.5) Net decrease in related party balances 0.8 23.4 Tax received 4.2 2.3 Finance costs (0.5) (9.8) Cash (used by) / generated from operations (3.0) 7.4
14. Share-based payments Full details of share-based compensation plans are provided in note 33 to the consolidated financial statements.
15. Risk management The risks faced by the Company are considered to be from its investment in subsidiaries. Its risks are considered to be the same as those in the operations of the Group itself and details of the key risks to the Group and the steps taken to manage them are disclosed in the Risk management section of the consolidated financial statements (note 3).
16. Directors and key management remuneration The Directors and key management of the Group and the Company are the same. The aggregate emoluments of the Directors are set out in note 10 of the consolidated financial statements, the compensation for key management is set out in note 39 of the consolidated financial statements and the remuneration and pension benefits payable in respect of the highest paid Director, are included in the Directors’ remuneration report in the Governance section of the Annual Report & Accounts.
Market The Company has a primary listing on the UK Listing Authority’s Official List and its Ordinary Shares are admitted to trading on the London Stock Exchange.
Share ownership Share capital The details of the Company’s share capital are presented in note 27 to the consolidated financial statements.
Dividends The Group aims to generate long-term sustainable value for shareholders, while balancing operational, regulatory, rating agency and policyholder requirements. The Board has adopted a progressive dividend policy for the Company, which will aim to increase the dividend annually in real terms to reflect its cash flow generation and long-term earnings potential.
The Company pays its dividends in Pounds Sterling to shareholders registered on its principal register in the UK.
Shareholders may have their cash dividends paid directly into a bank or building society by completing a dividend mandate form, which is available from the Company’s share registrar (“Registrar”) Computershare Investor Services PLC in the UK. Contact details for the Registrar are set out on page 180. Alternatively, shareholders may access their shareholdings online and download a dividend mandate from the Investor Centre, please see page 180 for details.
Shareholder warning 5,000 people contact the FCA about share fraud each year, with victims losing an average of £20,000.
Fraudsters use persuasive and high-pressure tactics to lure investors into scams. They may offer to sell shares that turn out to be worthless or non-existent, or to buy shares at an inflated price in return for an upfront payment. While high profits are promised, if you buy or sell shares in this way you will probably lose your money.
• Beware of fraudsters claiming to be from an authorised firm, copying its website or giving you false contact details
• Consider that if you buy or sell shares from an unauthorised firm you will not have access to the Financial Ombudsman Service or Financial Services Compensation Scheme
• Remember: if it sounds too good to be true, it probably is
• Be aware of when the dividends are paid and contact the Registrar if you do not receive your dividend
• Consider having your dividends paid directly into your bank account (you will need to fill out a dividend mandate form and send it to the Registrar); this reduces the risk of the cheque being intercepted or lost in the post
• If you are buying or selling shares, deal only with brokers registered in the UK or in your country of residence
• Be aware that the Company will never contact you by telephone concerning investment matters. If you receive such a call from a person purporting to represent the Group please contact the Company Secretary immediately
Dealing facilities Shareholders can buy, sell or transfer Direct Line Group shares through a stockbroker or a high street bank, or through the Registrar’s share-dealing facility.
The Registrar may be contacted regarding its share-dealing facility by telephone or by email as follows: • for telephone sales call +44 (0)870 703 0084 between 8.30 am and 5.30 pm, Monday to Friday excluding public holidays; and
Financial calendar 26 February Announcement of results 2013 12 March ‘Ex-dividend’ date for second special interim and 2013 final dividend 14 March Record date for second special interim and 2013 final dividends 2 May1 First quarter 2014 Interim Management Statement 15 May Annual General Meeting 20 May Payment date for second special interim and 2013 final dividends 1 August1 Half year 2014 Interim Report 13 August1 ‘Ex-dividend’ date for 2014 interim dividend 15 August1 Record date for 2014 interim dividend 12 September1 Payment date for 2014 interim dividend 31 October1 Third quarter 2014 Interim Management Statement
Clawback The ability of the Company to claim repayment of paid amounts as a debt.
Commission Amounts paid to brokers, partners and price comparison websites for generating business.
Expense ratio The ratio of operating expenses divided by net earned premium.
Funds set aside to meet the cost of claims for accidents that have taken place, but have not yet been reported to us.
Investment income yield The annualised investment return earned through the income statement during the period, divided by the average assets under management (“AUM”) for each asset class during the same period. The investment return excludes realised gains, impairments and fair vale adjustments, while the average AUM for the period is derived by taking the opening and closing balances for the period.
Malus An arrangement that permits the forfeiture of unvested remuneration awards, in circumstances considered appropriate by the Company.
Ogden discount rate The discount rate set by the relevant government bodies, the Lord Chancellor and Scottish Ministers, and used to calculate lump sum awards in bodily injury cases.
Ongoing operations Includes the Group’s ongoing segments: Motor, Home, Rescue and other personal lines, Commercial and International. It excludes the Run-off segment and restructuring and other one-off costs.
The Prudential Regulation Authority is a part of the Bank of England and responsible for the prudential regulation and supervision of insurers and financial institutions in the UK.
Return on equity Return on equity is calculated by dividing the profit attributable to the owners of the Company by average ordinary shareholders’ equity for the period.
Run-off Where the Group no longer underwrites new business but continues to meet its claims liabilities under existing contracts.
Compares the movements in the share price and dividends paid over a period of time, as a percentage of the share price at the beginning of the period.
The profit or loss from operational activities, excluding investment performance. It is calculated as: Net earned premium less Net insurance claims less Total expenses
Investor Centre: To find out more about Investor Centre, go to www.investorcentre.co.uk/directline
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Our corporate website houses the most up-to-date information about the Group as well as detailed investor and media sections with the following information: • Results and presentations • Share price information • Financial calendar • Company and regulatory news www.directlinegroup.com
In conjunction with this report, we have produced a separate online version of key sections.
Our Annual Report & Accounts is supplemented by a range of other information about the Group that can be found on our corporate website.