The Board uses various technological methods of communication, including Chief Executive Officer and Chief Financial Officer all-employee phone conferences, emails and intranet messages, acknowledging that circumstances in 2020 created challenges for interaction.
Our DNA focuses on a number of strands including employees with disabilities. It identifies areas where we can improve and help people to continue working for us. We reasonably adjust employees’ working environments and equipment, and roles and role requirements. We also seek to ensure that everyone can access the same opportunities. You can find more information regarding employee involvement in the Strategic report on pages 1 to 75.
The Directors have elected to prepare the Parent Company financial statements in accordance with FRS 101 “Reduced Disclosure Framework”. Under company law, the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the Company’s state of affairs and profit or loss for that period.
The Directors are responsible for keeping adequate accounting records that: are sufficient to show and explain the Company’s transactions and disclose, with reasonable accuracy, the Company’s financial position at any time; and enable them to ensure the financial statements comply with the Companies Act 2006. Additionally, the Directors are responsible for safeguarding the Company’s assets and, hence, taking reasonable steps to prevent and detect fraud and other irregularities. The Directors are responsible for maintaining and ensuring the integrity of the corporate and financial information included on the Company’s website at www.directlinegroup.co.uk.
This report was approved by the Board on 5 March 2021 and signed on its behalf by: Roger C. Clifton Company Secretary
Directors’ report continued 144 Direct Line Group Annual Report and Accounts 2020
Notes to the Parent Company Financial Statements 1. Accounting policies 217 2. Investment in subsidiary undertakings 218 3. Other receivables 219 4. Current and deferred tax 219 5. Derivative financial instruments 219 6. Financial investments 219 7. Cash and cash equivalents 220 8. Share capital, capital reserves and distributable reserves 10. Subordinated liabilities 220 12. Trade and other payables 221 14. Share-based payments 221 15. Contingent liabilities 221 16. Risk management 221 17. Directors and key management remuneration
– the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law, international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRSs as adopted by the European Union and as issued by the IASB. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards, including FRS 101 'Reduced Disclosure Framework' (United Kingdom Generally Accepted Accounting Practice).
INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DIRECT LINE INSURANCE GROUP PLC Independent Auditor’s Report to the shareholders of Direct Line Insurance Group plc 146 Direct Line Group Annual Report and Accounts 2020
Within this report, key audit matters are identified as follows: Newly identified; Increased level of risk; Similar level of risk; and
Scoping Our Group audit scoping included two entities being subject to a full scope audit and a further two entities being subject to an audit of specified account balances. These four entities represent the principal business units and account for 99% of the Group’s net assets, 100% of the Group’s gross earned premium and 95% of the Group’s profit before tax. We performed analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to a full scope audit or an audit of specified balances.
During the year we have identified one new key audit matter relating to the migration of the general ledger, given the potential wide-reaching impact this one-off event has on the financial statements.
Lastly, we have no longer identified the valuation of intangible assets as a key audit matter due to the progress made in 2020 towards rolling out the new motor trading platform.
4. Conclusions relating to going concern In auditing the financial statements, we have concluded that the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Our evaluation of the Directors’ assessment of the Group’s and Parent Company’s ability to continue to adopt the going concern basis of accounting included: – assessing the Group’s process around the going concern assessment performed by management; – evaluating the historical accuracy of forecasts prepared by management; – challenging the reasonableness of the profit forecasts used by management; and – evaluating the Group’s current-year performance and year end liquidity and solvency capital position.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group and Parent Company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
In relation to the reporting on how the Group has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the Directors’ statement in the financial statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report.
5.1 Valuation of insurance liabilities Refer to page 99 (Audit Committee Report), page 163 (Accounting policies) and page 205 (Financial statements).
In addition, the impact of the UK government’s various lockdown measures introduced first in March 2020, in response to Covid-19, has resulted in significantly reduced mobility and traffic volumes in March and April 2020 and reduced volumes for the rest of the year after further lockdown measures were introduced. The Group and the wider market have experienced reduced motor vehicle accident frequencies as a result. This further adds to the inherent uncertainty underlying the estimation of the ultimate number of bodily injury claims for the 2020 accident year.
In order to gain assurance over the completeness and accuracy of source data used in the Group’s actuarial calculations and by our in-house actuarial specialists in performing our work, we have tested the data reconciliation controls and performed reconciliations on the actuarial data back to the financial ledger.
– analysing the consistency in reserving strength and reserve releases in comparison with prior years.
Key observations In the prior financial year we considered the frequency and severity assumptions for large bodily injury claims to be reasonable and prudent however less prudent than previous financial periods given that the Group’s actuaries had given credit for favourable experience noted that year. In the current financial year we have concluded that the assumptions continue to be reasonable, albeit we have seen a continuation in the trend of reduced prudence compared to previous periods.
Independent Auditor’s Report to the shareholders of Direct Line Insurance Group plc continued 148 Direct Line Group Annual Report and Accounts 2020
We have worked with our actuarial specialists to challenge: – The PPO inflation assumption through inquiries with the Actuarial Director, reviewing relevant supporting documentation and benchmarking against market economic data with particular reference to Covid-19 uncertainty, and other market participants; – The Group’s sensitivity testing on the PPO inflation assumption; – The selected discount rate with reference to current and future performance of the assets backing the PPO liabilities; and – The methodology and rationale for deriving the discount rate.
5.1.3 Judgement applied in setting the margin above the actuarial best estimate
The appropriate margin to recognise is an area of significant management judgement based on the perceived uncertainty and potential for volatility in the underlying claims. In light of the heightened uncertainties created by the Covid-19 pandemic, we have identified the margin as an area of key audit focus given its susceptibility to management bias.
5.2 Valuation of illiquid investments Refer to page 99 (Audit Committee Report), pages 166 and 167 (Accounting policies) and pages 196 and 202 (Financial statements).
In the current year, we continue to identify the valuation of illiquid investments, specifically the commercial real estate, infrastructure and private placements investments as a key audit matter as described below. Additionally, we have identified the valuation of investment property as a key audit matter due to the greater level of estimation uncertainty in determining a fair value as a result of Covid-19.
How the scope of our audit responded to the key audit matter We have obtained an understanding and tested the relevant controls that mitigate the risk over the valuation of illiquid investments. Our work included attendance at the year-end impairment review meeting in order to observe the operation of a key management review control.
In addition, we performed the following procedures: – Tested a sample of interest payments to bank during the year to test for default or delinquency in interest payments; – Utilised market indices to identify commercial real estate loans at risk and inspected the tenancy breakdowns for potential risks of store closure given the current economic issues facing the UK high street; – Challenged management on loans of interest where indicators could point to issuer financial difficulty and obtained evidence to help assess whether the conclusion reached by management is reasonable; and – Engaged our complex pricing specialists to determine an independent fair value of these assets to identify any significant decreases in value below book cost.
Key audit matter description The investment properties held by the Group comprise retail, supermarkets and food stores, office, industrial and alternative properties. As noted in disclosure note 20, the total value as at 31 December 2020 is £292.1 million (2019: £291.7 million). Given the impact of Covid-19 and its potential to accelerate long-term trends in the use of various types of property, we have identified the methodology and assumptions used for valuing certain parts of the investment property portfolio as a key audit matter in the current year. The investment properties we have identified relate to the retail, office and alternative sector properties held, where tenants possessed an increased exposure to Government imposed Covid-19 lockdown restrictions which may accelerate the long-term downwards trend of property valuation in these sectors. These properties total £142.0 million (2019: £150.0 million).
In addition, we performed the following procedures: – We have worked with our real estate specialists who challenged the estimated rental value, yield and capitalisation rate assumptions and methodologies used in the valuation of the properties; – We have tested the completeness and accuracy of the data inputs used in the valuation process performed by management and their external valuer; and
Key audit matter description During May 2020, as part of the Group’s ongoing Finance Transformation programme, the Group migrated their general ledger system. We have focused on this migration due to the inherent risk of error and the impact such an error may have on the control environment of the Group. The incomplete and inaccurate transfer of data to the new general ledger system could result in the incorrect presentation of balances in the Group’s consolidated accounts and would affect the quality of management information that supports the decision-making for those charged with governance.
How the scope of our audit responded to the key audit matter We have performed the following procedures in order to respond to this risk: – Obtained an understanding of and tested the relevant controls in the data migration; – Re-performed key reconciliations to verify the completeness and accuracy of the data transfer and substantively test material differences; and – Worked with IT specialists to test the design and implementation of general IT controls around the governance of the data migration and system controls post-implementation.
Key observations Based on the work performed, we did not identify any significant issues from our testing of the general ledger migration.
Materiality £28.0 million (2019: £28.0 million) £25.2 million (2019: £25.2 million)
Materiality equates to less than 1% of (2019: 1%) of shareholders’ equity and is capped at 90% (2019: 90%) of Group materiality.
We determined that the critical benchmark for the Group was average profit before tax. This measure uses a three-year average of profit before tax, which we deemed appropriate due to the inherent volatility of profits in the insurance industry. We also elected to exclude the impact of the Ogden discount rate change to 0% in the 2018 results and minus 0.25% in the 2019 results due to the non-recurring nature of these events.
We also considered this measure to be suitable having compared to other benchmarks: our materiality equates to 6.2% (2019: 5.5%) of statutory profit before tax, 0.9% (2019: 0.9%) of gross earned premium and 0.9% (2019: 0.9%) of total equity.
We determined that the critical benchmark for the Parent Company was shareholder’s equity. This is because the Parent Company is not a trading entity but rather received dividend income from its subsidiaries.
Performance materiality 67.5% (2019: 70%) of Group materiality 67.5% (2019: 70%) of Parent Company materiality
In determining performance materiality, we considered the following factors: – We have audited the Group for a number of years and so have knowledge of both the Group and the environment it operates in; – Our ability to rely on controls over a number of significant business processes; – Our past experience of the audit, which has indicated a low number of corrected and uncorrected misstatements identified in prior periods; – Misstatements noted in prior periods have not been indicative of deficiencies in internal control and so there is a low likelihood they will occur in the current period; and
For consistency within the Group, the same percentage of 67.5% of materiality has been applied to the Parent Company.
6.3 Error reporting threshold We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £1.4 million (2019: £1.4 million), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
Independent Auditor’s Report to the shareholders of Direct Line Insurance Group plc continued 152 Direct Line Group Annual Report and Accounts 2020
Business process and financial reporting controls In planning our 2020 audit, we identified 20 business cycles that were material to the Group’s financial reporting processes. These cycles spanned the Group’s material transactions and account balances including the premiums, claims, reinsurance, expenses, payroll, investments and intangibles cycles and part of the reserving cycle relating to reconciliation of data, and we intended to rely on the business controls associated with all of these cycles. Having completed our testing over the operating effectiveness of business controls associated with these cycles, through a combination of current period testing and reliance on prior period testing, we concluded that we were able to rely upon the business controls associated with all 20 cycles.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
9. Responsibilities of Directors As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.
11.1 Identifying and assessing potential risks related to irregularities In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we considered the following: – the nature of the industry and sector, control environment and business performance including the design of the Group’s remuneration policies, key drivers for Directors’ remuneration, bonus levels and performance targets; – the Group’s own assessment of the risks that irregularities may occur either as a result of fraud or error that was approved by the Board Risk Committee on 11 February 2021; – results of our enquiries of management, internal audit, and the Audit Committee about their own identification and assessment of the risks of irregularities; – any matters we identified having obtained and reviewed the Group’s documentation of their policies and procedures relating to: – identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance; – detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud; – the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations; and – the matters discussed among the audit engagement team and involving relevant internal specialists, including tax, valuations, pensions, IT and industry specialists regarding how and where fraud might occur in the financial statements and any potential indicators of fraud.
We also obtained an understanding of the legal and regulatory framework that the Group operates in, focusing on provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and regulations we considered in this context included the UK Companies Act, Listing Rules and tax legislation.
In addition to the above, our procedures to respond to risks identified included the following: – reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the financial statements; – enquiring of management, the Audit Committee and in-house legal counsel concerning actual and potential litigation and claims; – performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud; – reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with HMRC, PRA and FCA; and
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.
INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DIRECT LINE INSURANCE GROUP PLC - CONTINUED
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the financial statements and our knowledge obtained during the audit: – the Directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out on page 143; – the Directors’ explanation as to its assessment of the Group’s prospects, the period this assessment covers and why the period is appropriate set out on page 75; – the Directors' statement on fair, balanced and understandable set out on page 95; – the Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 95; – the section of the Annual Report and Accounts that describes the review of effectiveness of risk management and internal control systems set out on page 172; and – the section describing the work of the Audit Committee set out on page 97.
15. Other matters which we are required to address 15.1 Auditor tenure Following the recommendation of the Audit Committee of Royal Bank of Scotland Group plc, (“RBSG”), which at the time owned Direct Line, we were appointed by the Board of Directors of RBSG on 21 March 2000 to audit the financial statements for the year ending 31 December 2000 and subsequent financial periods. When the Group became independent of RBSG the Group’s Board reappointed us to audit the newly demerged Group. Taking into account our service to predecessor organisations, the period of total uninterrupted engagement including previous renewals and reappointments of the firm is 21 years, covering the years ending 31 December 2000 to 31 December 2020. Under the Companies Act 2006, the last financial year of our maximum engagement period is the year ending 31 December 2023.
Independent Auditor’s Report to the shareholders of Direct Line Insurance Group plc continued 156 Direct Line Group Annual Report and Accounts 2020
Earnings per share: The attached notes on pages 162 to 214 form an integral part of these consolidated financial statements.
Items that will not be reclassified subsequently to the income statement: Actuarial loss on defined benefit pension scheme 27 (0.4) (7.3)
Items that may be reclassified subsequently to the income statement: Cash flow hedges (0.1) (0.7)
Total comprehensive income for the year attributable to the owners of the Company 403.4 497.5
Consolidated Statement of Comprehensive Income For the year ended 31 December 2020 158 Direct Line Group Annual Report and Accounts 2020
Profit for the year — — — — — 419.9 419.9 — 419.9
Dividends and appropriations paid (note 14) — — — — — (420.7) (420.7) — (420.7)
Shares acquired by employee trusts — (10.4) — — — — (10.4) — (10.4)
Shares distributed by employee trusts — 15.4 — — — (15.4) — — —
Tax on share-based payments — — — — — 0.6 0.6 — 0.6
Profit for the year — — — — — 367.2 367.2 — 367.2 Other comprehensive income — — — 36.4 (0.1) (0.1) 36.2 — 36.2 Dividends and appropriations paid (note 14) — — — — — (312.5) (312.5) — (312.5) Shares acquired by employee trusts — (23.8) — — — — (23.8) — (23.8) Shares cancelled following buyback (note 30) (1.1) — 1.1 — — (30.0) (30.0) — (30.0) Credit to equity for equitysettled share-based payments (note 36) — — — — — 18.5 18.5 — 18.5 Shares distributed by employee trusts — 13.7 — — — (13.7) — — — Tax on share-based payments — — — — — 0.5 0.5 — 0.5
Net cash generated from operating activities before investment of insurance assets 39 268.8 88.2
Cash and cash equivalents at the beginning of the year 29 896.3 1,092.4
The attached notes on pages 162 to 214 form an integral part of these consolidated financial statements.
CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2020
The consolidated financial statements are prepared on the historical cost basis except for available-for-sale (“AFS”) financial assets, investment property and derivative financial instruments, which are measured at fair value (fair value is defined in note 42).
Where necessary, adjustments have been made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. The policies set out below have been applied consistently throughout the years ended 31 December 2020 and 31 December 2019 to items considered material to the consolidated financial statements.
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 all scenarios, it was concluded that the Group’s solvency capital requirement would not be breached following the implementation of management actions.
Amendment to IFRS 16 ‘Leases Covid-19-related Rent Concessions’ permits lessees, as a practical expedient, not to assess whether particular rent concessions occurring as a direct consequence of the Covid-19 pandemic are lease modifications and instead to account for those rent concessions as if they are not lease modifications.
Amendments to IFRS 3 ‘Business Combinations’, narrow and clarify the definition of a business. They also permit a simplified assessment of whether an acquired set of activities and assets is a group of assets rather than a business.
Group entities record transactions in the currency of the primary economic environment in which they operate (their functional currency), translated at the foreign exchange rate ruling at the date of the transaction.
Non-monetary items denominated in foreign currencies that are stated at fair value are translated into the relevant functional currency at the foreign exchange rates ruling at the dates the values are determined. Translation differences arising on non-monetary items measured at fair value are recognised in the income statement except for differences arising on AFS non-monetary financial assets, which are recognised in other comprehensive income.
Premiums earned Insurance and reinsurance premiums comprise the total premiums receivable for the whole period of cover provided by contracts incepted during the financial year, adjusted by an unearned premium reserve, which represents the proportion of the premiums incepted in the year or prior periods that relate to periods of insurance cover after the balance sheet date. Unearned premiums are calculated over the period of exposure under the policy, on a daily basis, 24ths basis or allowing for the estimated incidence of exposure under policies.
Income is recognised when the customer or claimant has been provided with a vehicle by the supplier.
Other income Commission fee income in respect of services is recognised at a point in time on satisfaction of related performance obligations. Where variable consideration is identified in a contract, this revenue is estimated and constrained to the extent that it is highly improbable that revenue recognised will be reversed. Income is stated excluding applicable sales taxes.
A liability adequacy provision is made for unexpired risks arising where the expected value of claims and expenses attributable to the unexpired periods of policies in force at the balance sheet date exceeds the unearned premium reserve in relation to such policies after the deduction of any acquisition costs deferred and other prepaid amounts. The expected value is determined by reference to recent experience and allowing for changes to the premium rates.
The Group cedes insurance risk by reinsurance in the normal course of business, with the arrangement and retention limits varying by product line. Outward reinsurance premiums are generally accounted for in the same accounting period as the premiums for the related direct business being reinsured. Outward reinsurance recoveries are accounted for in the same accounting period as the direct claims to which they relate.
Reinsurance assets include balances due from reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a consistent manner, with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract. Recoveries in respect of PPOs are discounted for the time value of money.
1.7 Deferred acquisition costs Acquisition costs relating to new and renewing insurance policies are matched with the earning of the premiums to which they relate. A proportion of acquisition costs incurred during the year is therefore deferred to the subsequent accounting period to match the extent to which premiums written during the year are unearned at the balance sheet date.
During and after development, accumulated costs are reviewed for impairment against the projected benefits that the software is expected to generate. Costs incurred prior to the establishment of technical feasibility and economic viability are expensed as incurred, as are all training costs and general overheads.
Notes to the Consolidated Financial Statements continued 164 Direct Line Group Annual Report and Accounts 2020
1.9 Property, plant and equipment Items of property, plant and equipment (except investment property – see note 1.12) are stated at cost less accumulated depreciation and impairment losses. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for separately.
Where the Group is a lessee At inception, the Group assesses whether a contract contains a lease arrangement, which involves assessing whether it obtains substantially all the economic benefits from the use of a specific asset, and it has the right to direct the use of that asset. The Group recognises a right-of-use asset and a lease liability at the commencement of the lease (when the underlying asset is available for use), except for short-term leases of 12 months or less and low value leases which are expensed on a straight-line basis in the income statement. The right-of-use asset is initially measured based on the present value of the lease payments, plus initial direct costs less any incentives received. Lease payments include fixed payments and variable payments. Variable payments relate to contractual rent increases linked to inflation indices. The right-of-use asset is depreciated over the lease term and is subject to impairment testing if there is an indicator of impairment. When leases contain an extension or purchase option which is reasonably expected to be exercised this is included in the measurement of the lease.
In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date unless the interest rate implicit in the lease is readily determinable. The incremental borrowing rate is determined based on available risk-free market yieldto -maturity pricing linked to the lease amount and term, and includes a credit spread. The lease liability is subsequently measured at amortised cost using the effective interest rate method and remeasured, with a corresponding adjustment to the right-of-use asset, when there is a change in future lease payments, terms or reassessment of options.
The Group’s leasehold property mainly relates to office space and vehicle repair centres. Leases in respect of motor vehicles relate to recovery and replacement vehicles, and management cars. The Group also leases certain IT equipment which is not a significant portion of the total leased asset portfolio.
Investment property is derecognised when it has been either disposed of or permanently withdrawn from use and no future economic benefit is expected from disposal. Any gains or losses on the retirement or disposal of investment property are recognised in the income statement in the year of retirement or disposal.
Available-for-sale ("AFS") Financial assets can be designated as AFS on initial recognition. AFS financial assets are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at fair value. Impairment losses and exchange differences, resulting from translating the amortised cost of foreign currency monetary AFS financial assets, are recognised in the income statement, together with interest calculated using the effective interest rate method. Other changes in the fair value of AFS financial assets are reported in a separate component of shareholders’ equity until disposal, when the cumulative gain or loss is recognised in the income statement.
A financial asset is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s-length basis. The appropriate quoted market price for an asset held is usually the current bid price. When current bid prices are unavailable, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. If conditions have changed since the time of the transaction (for example, a change in the risk-free interest rate following the most recent price quote for a corporate bond), the fair value reflects the change in conditions by reference to current prices or rates for similar financial instruments, as appropriate. The valuation methodology described above uses observable market data.
Held-to-maturity ("HTM") Non-derivative financial assets not designated as AFS, or loans and receivables with fixed or determinable payments and fixed maturity, where the intention and ability to hold them to maturity exists, are classified as HTM.
Impairment of financial assets At each balance sheet date, the Group assesses whether there is any objective evidence that a financial asset or group of financial assets classified as AFS, HTM or loans and receivables is impaired. A financial asset or portfolio of financial assets is impaired and an impairment loss incurred if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash flows from the asset.
Impairment losses are recognised in the income statement and the carrying amount of the financial asset or group of financial assets is reduced by establishing an allowance for the impairment losses. If in a subsequent period the amount of the impairment loss reduces, and the reduction can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance.
Derivatives and hedging Derivative financial instruments are recognised initially, and subsequently measured, at fair value. Derivative fair values are determined from quoted prices in active markets where available. Where there is no active market for an instrument, fair value is derived from prices for the derivative’s components using appropriate pricing or valuation models.
In a cash flow hedge, the effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income. Any ineffective portion is recognised in the income statement.
When the Group has an onerous contract, it recognises the present obligation under the contract as a provision. A contract is onerous when the unavoidable costs of meeting the contractual obligations exceed the expected future economic benefit.
Scheme assets are measured at their fair value. Any surplus or deficit of scheme assets over liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). The current service cost and any past service costs, together with the net interest on the net pension liability or asset, is charged or credited to operating expenses. Actuarial gains and losses are recognised in full in the period in which they occur outside the income statement and presented in other comprehensive income under "Items that will not be reclassified subsequently to the income statement".
The consideration for any Ordinary Share of the Company purchased by the Group for the benefit of the employee trusts is deducted from equity.
1.23 Accounting developments New IFRS standards and amendments that are issued, but not yet effective for the 31 December 2020 reporting period and have not been early adopted by the Group, are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective, except for amendments to IFRS 9 ‘Financial Instruments’, as explained below.
In July 2014, the IASB issued the final version of IFRS 9 ‘Financial Instruments’ which replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’ and all previous versions of IFRS 9; it was endorsed by the EU in 2016. IFRS 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. It was effective for annual periods beginning on or after 1 January 2018, however adoption by the Group has been deferred as described below.
In September 2016, the IASB issued Amendments to IFRS 4: ‘Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts’ to address issues arising from the different effective dates of IFRS 9 and IFRS 17 ‘Insurance Contracts’. These amendments to IFRS 4 were endorsed by the EU in November 2017.
These amendments permitted insurers who satisfied certain criteria to defer the effective date of IFRS 9, to coincide with the expected effective date of IFRS 17. The Group conducted a high-level assessment of the three aspects of IFRS 9 and based on current information, the impact of applying the expected loss model for the first time is currently immaterial. The Group does not expect any other significant impact on its financial statements.
The amendments required insurance entities to evaluate whether their activities were predominantly connected to insurance as at their annual reporting date immediately preceding 1 April 2016, providing an option to defer adoption of IFRS 9 if liabilities connected to insurance comprised a predominant proportion of their total liabilities as at that date. The Group concluded that it satisfied the criteria and there have been no significant changes in the Group’s activities since this assessment to require a reassessment of the criteria.
The fair value at the end of the reporting period for financial assets with contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount are disclosed in note 42. The amount of change in the fair value during the period for these financial assets was: – AFS debt securities £96.7 million increase (2019: £118.6 million increase); – HTM debt securities £0.2 million decrease (2019: £3.8 million increase); – infrastructure debt £1.1 million increase (2019: £10.6 million increase); and
Notes to the Consolidated Financial Statements continued 168 Direct Line Group Annual Report and Accounts 2020
'Amendments to IFRS 9: Prepayment Features with Negative Compensation’ was issued in October 2017 and is endorsed by the EU to allow instruments with symmetric prepayment options to qualify for amortised cost or fair value through other comprehensive income measurement because they would otherwise fail the ‘solely payments of principal and interest' test on the principal amount condition. The amendments are effective from the same period as IFRS 9.
An initial assessment of the impact of IFRS 17 on the Group’s financial statements has been completed and work has now started on the design and build of the systems that will provide the foundation for reporting under IFRS 17 from 1 January 2023. The Group expects to be able to apply the simplified premium allocation approach to all material insurance and reinsurance contract groups. As the standard was not endorsed by the EU before 31 December 2020, it will instead require endorsement by the UKEB.
In September 2019, the IASB issued ‘Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39 and IFRS 7’ which the Group adopted in 2019. These Phase 1 amendments modify some specific hedge accounting requirements to provide relief from the potential effects of the uncertainty caused by the IBOR reform. In addition, it requires companies to disclose additional information about their hedging relationships which are directly affected by these uncertainties. The amendments allow the Group to continue applying hedge accounting to some of its benchmark interest rate exposure, as the amendments permit the continuation of hedge accounting where in future the hedged benchmark interest rate may no longer be separately available. The amendments do not alter the requirement for the designated interest rate risk component to be measurable. If the risk component is no longer reliably measurable, the hedging relationship is discontinued. The relief provided by the amendments ceases to apply prospectively when the uncertainties arising from the interest rate benchmark reform are no longer present.
The Group holds investments in US dollar and Euro fixed rate debt securities which it includes in a macro fair value hedge of the USD LIBOR and EURIBOR risk component of these investments respectively.
The Phase 2 amendments provide additional temporary reliefs from applying specific IFRS 9 and IAS 39 hedge accounting requirements to hedging relationships directly affected by IBOR reform. They also require disclosure of: (i) how the entity is managing the transition to alternative benchmark rates, its progress and the risks arising from the transition; (ii) quantitative information about derivatives and non-derivatives that have yet to transition, disaggregated by significant interest rate benchmark; and (iii) a description of any changes to the risk management strategy as a result of IBOR reform.
In May 2020 the IASB issued narrow-scope amendments to three Standards: – Amendments to IFRS 3 ‘Business Combinations’ update a reference in IFRS 3 to the Conceptual Framework for Financial Reporting without changing the accounting requirements for business combinations.
– Amendments to IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ specify which costs a company includes when assessing whether a contract will be lossmaking.
These three amendments have an IASB effective date of 1 January 2022 and will require endorsement by the UKEB.
Also, in May 2020 the IASB issued ‘Annual Improvements to IFRS Standards 2018-2020’ which makes minor amendments to: – IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ which simplifies the application of IFRS 1 for a subsidiary that becomes a first-time adopter of IFRS Standards later than its parent; – IFRS 9 ‘Financial Instruments’ – this amendment clarifies that – for the purpose of performing the ‘10 per cent test’ for derecognition of financial liabilities – in determining those fees paid net of fees received, a borrower includes only fees paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf; and
All amendments are effective 1 January 2022 and will require endorsement by the UKEB.
2. Critical accounting judgements and key sources of estimation uncertainty The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial information. The Group’s principal accounting policies are set out on pages 162 to 170. Company law and IFRSs require the Directors, in preparing the Group’s financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable.
– whether an event has occurred that could be reliably estimated and which had an impact on the financial asset or its future cash flows.
Sources of estimation uncertainty Sources of estimation uncertainty can arise where there are indicators of impairment of an intangible asset and an impairment provision is deemed appropriate. Factors, such as whether the carrying amount of the asset is expected to be greater than the recoverable amount are assessed, and in 2020 the Group recognised an impairment provision of £6.6 million (2019: £1.3 million) in relation to ongoing IT projects primarily relating to the development of new systems.
The sensitivities to the assumptions made by the Group in respect of the testing for impairment of goodwill and other intangible assets are shown in note 17.
The most common method of settling bodily injury claims is by a lump sum. When this includes an element of indemnity for recurring costs, such as loss of earnings or ongoing medical care, the settlement calculations apply the statutory discount rate (known as the Ogden discount rate) to reflect the fact that payment is made on a one-off basis rather than periodically over time. The current Ogden discount rate is minus 0.25% for England and Wales, minus 0.75% in Scotland, and 2.5% in Northern Ireland.
The Group reserves its large bodily injury claims at the relevant discount rate for each jurisdiction, with the overwhelming majority now reserved at minus 0.25% as most will be settled under the law in England and Wales. The Ogden discount rate will be reviewed again at the latest in 2024 but, following the most recent change in 2019, only small movements are expected in future. These will have a low impact on the Group’s reserves. This is also a function of the ongoing reduction in large bodily injury exposures as a result of continued positive prior-year development of claims reserves, and a higher proportion of reserves being covered by reinsurance as a result of the decision to opt for a lower reinsurance attachment point from 2014 onwards.
The Group settles some large bodily injury claims as PPOs rather than lump sum payments. The Group has estimated the likelihood of large bodily injury claims settling as PPOs. Anticipated PPOs consist of both existing large loss case reserves including allowances for development and claims yet to be reported to the Group. Reinsurance is applied at claim level and the net cash flows are discounted for the time value of money. The discount rate is consistent with the long duration and the assumed future indexation of the claims payments.
3. Risk management 3.1 Enterprise Risk Management Strategy and Framework The Enterprise Risk Management Strategy and Framework sets out, at a high level, the Group’s approach and processes for managing risks. Further information can be found in the Risk management section of the Strategic report on page 69.
3.3 Principal risks from insurance activities and use of financial instruments The Risk management section of the Strategic report also sets out all the risks assessed by the Group as principal risks. Detailed below is the Group’s risk exposure arising from its insurance activities and use of financial instruments specifically in respect of insurance risk, market risk, credit risk, operational risk and liquidity risk.
Following the end of the transition period on 31 December 2020 and the trade and co-operation agreement between the UK and the EU, there still remains considerable uncertainty as to the effect of Brexit on the Group. The Group has proactively considered a variety of possible implications of a disruptive end to existing trading and other arrangements between the UK and the EU, including of a financial and operational nature. Additionally, the risk of a UK-wide recession and global financial instability as a result of the Covid-19 pandemic remains high and the Group continues to monitor the worst-case impact. The implications of both these risks are referred to in the Risk management section of the Strategic report.
The Group’s reserves are subject to the risk of retrospective changes in judicial conditions such as the recent changes in the Ogden discount rate. Detailed information on the Ogden discount rate is provided in note 2.4.
Uncertainty in claims reserves estimation is larger for claims such as PPOs for which annually indexed payments are made, typically over the lifetime of the injured party. Claims reserves for PPOs are held on a discounted basis and are sensitive to a change in the discount rate.
Notes to the Consolidated Financial Statements continued 172 Direct Line Group Annual Report and Accounts 2020
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, 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 a decrease in the discount rate used in the calculation of present values of 100 basis points (62.7) (66.5)
Impact of the Group reserving at a discount rate of 0.75% compared to minus 0.25% (2019: 0.75% compared to minus 0.25%) 43.7 53.3
The PPO sensitivity above is calculated on the basis of a change in the internal discount rate used for the actuarial best estimate reserves as at 31 December 2020. It does not take into account any second order impacts such as changes in PPO propensity or reinsurance bad debt assumptions.
The Group recognises that climate change may impact its business over the longer term. In particular, there is a risk that climate change affects the frequency and severity of extreme weather events (physical risk), which will change the Group’s view of underwriting risk, reinsurance and pricing. The Group will be developing its risk management systems and monitoring tools over 2021 for physical risk alongside participating in the Climate Biennial Exploratory Scenario ("CBES"). Low-frequency, high-severity weather losses are mitigated to a significant degree by the catastrophe reinsurance programme, the ceding of home high flood risks to Flood Re, and the commercial underwriting strategy which reduces high flood risk exposure. Furthermore, there is a risk that the Group’s insurance products will not meet its customers’ needs as a result of changes in market dynamics and customer behaviour in relation to climate change, for example a rapid shift towards electric vehicle usage. The Group expects these specific risks to materialise in the medium to longer-term (see page 63 for definition) and anticipates that its continued strategic and operational response to the transition to a lowercarbon economy will support mitigation of these risks and the associated impacts in the long term.
The Group monitors its market risk exposure on a daily basis and, in addition, has established an aggregate exposure limit consistent with its risk objective to maintain capital adequacy. Interdependencies across risk types have also been considered within the aggregate exposure limit. The allocation of the Group’s investments across asset classes has been approved by the Investment Committee. The strategic asset allocation within the investment portfolio is reviewed by the Investment Committee, which makes recommendations to the Board for its investment strategy approval. The Investment Committee determines policy and controls, covering such areas as risk, liquidity and performance. The Investment Committee meets at least three times a year to evaluate risk exposure, the current strategy, associated policies and investment guidelines and to consider investment recommendations submitted to it. Oversight of the implementation of decisions taken by the Investment Committee is via the first and second lines of defence.
During the year, the Investment Committee agreed long-term targets for the investment portfolio in relation to supporting the Group's objectives on climate change. These are: ensuring the Group's entire investment portfolio is net carbon neutral by 2050 in line with the aims of the Paris Agreement; and an interim target of a 50% reduction in weighted average greenhouse gas emissions intensity by 2030 within the Group's corporate bonds portfolio, the largest part of its investment portfolio.
When setting the strategic asset allocation, the Group is subject to concentration risk in a variety of forms including: – large exposures to individual assets (either bond issuers or deposit-taking institutions); and – large exposures to different assets where movements in values and ratings are closely correlated.
Australia 205.7 — — — 205.7 Austria 17.1 — — — 17.1 Belgium 38.0 — — — 38.0 Canada 127.6 — — — 127.6 Cayman Islands 1.8 — — — 1.8 Czech Republic 1.1 — — — 1.1 Denmark 11.9 — — — 11.9 Finland 27.7 12.3 — — 40.0 France 311.0 13.1 — — 324.1 Germany 199.6 — 1.3 — 200.9 Ireland 7.1 — — — 7.1 Italy 27.1 — — — 27.1 Japan 48.2 — — — 48.2 Luxembourg 4.4 — — — 4.4 Mexico 14.0 — — — 14.0 Netherlands 155.3 — — — 155.3 New Zealand 8.1 — — — 8.1 Norway 15.0 10.2 — — 25.2 Peru 1.9 — — — 1.9 South Africa 10.0 — — — 10.0 South Korea 3.1 — — — 3.1 Spain 75.8 — — — 75.8 Sweden 61.4 — — — 61.4 Switzerland 33.1 — — — 33.1 UAE 3.6 — — — 3.6 UK 1,201.1 — 15.1 — 1,216.2 USA 1,514.2 — 8.8 — 1,523.0 Supranational — — — 21.3 21.3 Total 4,124.9 35.6 25.2 21.3 4,207.0
Pricing risk The risk of economic loss arising from business being incorrectly priced or underwritten.
174 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020176 Direct Line Group Annual Report and Accounts 2020
Notes to the Consolidated Financial Statements continued 3. Risk management continued 3.3.1 Insurance risk continued The key risks relating to climate change today are UK floods and major UK windstorms.
– these fall-back clauses will be added to any new agreements.
Portfolio fair value hedge of the 1-month USD LIBOR component of US dollar denominated fixed rate debt securities
The Group maintains exposure to US dollar securities through £1,331.9 million (2019: £1,366.1 million) of investments in US dollar bonds and Euro securities through £231.1 million (2019: £359.1 million) of Euro bonds. The foreign currency exposure of these investments is hedged by foreign currency forward contracts, maintaining a minimal unhedged currency exposure on these portfolios, as well as a low basis risk on the hedging contracts.
Use of derivatives The Group uses derivatives to hedge against interest rate and currency risk.
Derivative assets At fair value through the income statement: Foreign exchange contracts (forwards) 2,310.3 112.1 — — 112.1
Spread Impact of a 100 basis points increase in spreads on financial investments2,3 — — (151.2) (146.4)
Interest rate Impact of a 100 basis points increase in interest rates on financial investments and derivatives2,3,4 12.5 12.0 (114.1) (103.7)
Investment property Impact of a 15% decrease in property markets (43.8) (43.8) (43.8) (43.8)
Notes: 1. These sensitivities exclude the impact of taxation and have not considered the impact of the general market changes on the value of the Group’s insurance liabilities or retirement benefit obligations. They reflect one-off impacts at 31 December and should not be interpreted as predictions.
4. The sensitivities set out above reflect one-off impacts at 31 December, with the exception of the income statement interest rate sensitivity on financial investments and derivatives, which projects a movement in a full year’s interest charge as a result of the increase in the interest rate applied to these assets or liabilities on those positions held at 31 December.
The terms and conditions of collateral pledged for both assets and liabilities are market-standard. When securities are pledged they are required to be readily convertible to cash, and as such no policy has been established for the disposal of assets not readily convertible into cash.
3.3.3 Credit risk This is the risk of loss resulting from defaults in obligations due and/or changes in credit standing of either issuers of securities, counterparties or any debtors to which the Group is exposed. The Group is mainly exposed to counterparty default risk.
Counterparty default risk This is the risk of loss from unexpected default or deterioration in the credit standing of the counterparties and debtors of Group undertakings. This risk is monitored by three forums: the Investment Risk Forum monitors credit spreads as indicators of potential losses on investments incurred but not yet realised; the Credit Risk Forum monitors reinsurance and corporate insurance counterparty default risk; and the NIG Credit Committee is responsible for monitoring broker credit risk. The main responsibility of these forums is to ensure that all material aspects of counterparty default risk within the Group are identified, monitored and measured.
Corporate 68.1 400.9 1,842.3 1,447.1 366.5 4,124.9 Supranational 21.3 — — — — 21.3 Local government 10.2 25.4 — — — 35.6 Sovereign 10.1 15.1 — — — 25.2 Total 109.7 441.4 1,842.3 1,447.1 366.5 4,207.0
Notes to the Consolidated Financial Statements continued 182 Direct Line Group Annual Report and Accounts 2020
The tables below analyse the credit quality of financial and insurance assets that are neither past due nor impaired (excluding debt securities analysed above). The tables include reinsurance exposure, after provision. The Group’s approach to reinsurance counterparty default risk is detailed on page 181.
Outsourcing risk This is the risk of failing to implement a robust framework for the sourcing, appointment and ongoing contract management of third-party suppliers, outsourced service providers and intra-group relationships. This includes both domestic and offshore outsourcing activities.
At 31 December 2020 £m £m £m £m £m £m £m
Carrying value £m 3.4 Capital management At 31 December 2020, the Group's capital position was comprised of shareholders' equity of £2,699.7 million (31 December 2019: £2,643.6 million) and Tier 1 notes of £346.5 million (31 December 2019: £346.5 million). In addition, the Group's balance sheet also included £516.6 million of subordinated loan capital (31 December 2019: £259.0 million) which is classified as Tier 2 for Solvency II purposes.
4. Segmental analysis The Directors manage the Group primarily by product type and present the segmental analysis on that basis. The segments, which are all UK based, reflect the management structure whereby a member of the Executive Committee is accountable to the Chief Executive Officer for each of the operating segments: Motor This segment consists of personal motor insurance together with the associated legal protection cover. The Group sells motor insurance direct to customers through its own brands Direct Line, Churchill, Privilege and Darwin, and through partnership brands such as vehicle manufacturers and through price comparison websites ("PCWs").
Home This segment consists of home insurance together with associated legal protection cover. The Group sells home insurance products through its brands Direct Line, Churchill and Privilege, and its partnership brands (Royal Bank of Scotland and NatWest), as well as through PCWs.
Restructuring and one-off costs Restructuring costs are costs incurred in respect of those business activities which have a material effect on the nature and focus of the Group’s operations. One-off costs are costs that are non-recurring in nature.
The table below analyses the Group’s revenue and results by reportable segment for the year ended 31 December 2020.
Underwriting profit / (loss) 182.2 71.7 (8.5) 22.4 267.8 Loss ratio 59.8% 55.6% 61.7% 51.4% 57.9% Commission ratio 3.2% 8.1% 16.4% 18.7% 8.6% Expense ratio 24.7% 23.4% 23.9% 25.4% 24.5% Combined operating ratio 87.7% 87.1% 102.0% 95.5% 91.0%
The table below analyses the Group’s assets and liabilities by reportable segment at 31 December 2020.
Rescue and other personal lines Commercial Total £m £m £m £m £m
Goodwill 129.6 45.8 28.7 10.1 214.2 Other segment assets 6,874.0 765.5 304.2 1,464.4 9,408.1 Segment liabilities (4,771.6) (558.7) (196.2) (1,049.6) (6,576.1) Segment net assets 2,232.0 252.6 136.7 424.9 3,046.2
Associated interest rate risk on hedged items 10.6 29.3 10.7 41.4
Net (losses) / gains on interest rate derivatives (15.6) 6.3 (6.1) 7.8
Note: 1. Other income mainly includes fee income from insurance intermediary services.
Gross Reinsurance Net Gross Reinsurance Net £m £m £m £m £m £m
Current accident year claims paid 1,056.4 (18.1) 1,038.3 1,232.9 (0.2) 1,232.7
Prior accident year claims paid 876.6 (123.0) 753.6 870.7 (25.1) 845.6
Notes: 1. Restructuring and one-off costs of £39.4 million (2019: £11.2 million) are included as follows: staff costs of £14.7 million (2019: £5.8 million), other operating expenses of £24.2 million (2019: £5.4 million) and depreciation of £0.5 million (2019: £nil).
Fees payable for the audit of: The Company’s annual accounts 0.2 0.2
Further information about the remuneration of individual Directors is provided in the Directors’ Remuneration Report.
Amortisation of arrangement costs, discount on issue and fair value hedging adjustment of subordinated liabilities (1.3) 0.3
Notes: 1. On 5 June 2020, the Group issued subordinated Tier 2 notes at a fixed rate of 4.0%. See note 33. 2. As described in note 33, on 27 April 2012 the Group issued subordinated guaranteed dated Tier 2 notes with a nominal value of £500 million at a fixed rate of 9.25%. On the same date, the Group also entered into a 10-year interest rate swap to exchange the fixed rate of interest on the notes for a floating rate. This was treated as a hedging instrument. On 8 December 2017, the Group redeemed £250 million nominal value of the notes and the hedging agreement was redesignated accordingly. On 31 July 2020, the Group identified that the hedge no longer met the criteria of hedge effectiveness under IAS 39 and, under the rules of the standard, the accumulated hedging adjustment has begun to be amortised to the income statement from the date of the last successful hedge effectiveness test over the remaining life of the subordinated debt using an effective interest rate calculation.
Notes to the Consolidated Financial Statements continued 190 Direct Line Group Annual Report and Accounts 2020
Under / (over) provision in respect of prior year 0.6 (5.6)
Effects of: Effect of change in corporation taxation rate1 0.1 —
Note: 1. In the Finance Act 2020 the UK Government cancelled the previously enacted reduction in the UK corporation tax rate from 19% to 17% which had been due to take effect from 1 April 2020. The impact of this change on the tax charge for the year is set out in the table above.
AFS revaluation reserve Total £m £m £m £m £m £m £m
(Charge) / credit to the income statement (1.1) (0.1) 7.4 4.9 (0.1) — 11.0
Credit / (charge) to other comprehensive income — 1.3 — — — (17.4) (16.1)
Credit / (charge) to the income statement 5.9 (0.3) 0.2 3.9 0.8 — 10.5 Credit / (charge) to other comprehensive income — 0.3 — — — (10.1) (9.8) Credit direct to equity — — — — 0.2 — 0.2 At 31 December 2020 10.2 (1.8) 4.2 (4.9) 3.1 (19.5) (8.7)
Note: 1. The non-distributable reserve was a statutory claims equalisation reserve calculated in accordance with the rules of the PRA. With the introduction of Solvency II on 1 January 2016, the requirement to maintain the claims equalisation reserve ceased and the balance at 31 December 2015 was released to retained earnings. The taxation of this release is spread over six years from the change in regulation. It is provided for in deferred tax above as it represents the future unwind of previously claimed tax deductions for transfers into the reserve.
In addition, the Group has an unrecognised deferred tax asset at 31 December 2020 of £5.0 million (2019: £4.5 million) in relation to capital losses of which £5.0 million (2019: £4.5 million) relates to realised losses and £nil (2019: £nil) relates to unrealised losses.
Amounts recognised as distributions to equity holders in the period: 2020 interim dividend of 7.4 pence per share paid on 4 September 2020 100.4 —
2020 special interim dividend of 14.4 pence per share paid on 4 September 2020 195.5 —
On 3 March 2020, the Group announced that the Board had approved a share buyback of up to £150 million. On 19 March 2020, the Board cancelled that share buyback programme given the uncertainty in the capital markets at the time, driven by the rapidly emerging Covid-19 pandemic.
Notes to the Consolidated Financial Statements continued 192 Direct Line Group Annual Report and Accounts 2020
Effect of dilutive potential of share options and contingently issuable shares (millions) 18.6 15.3
Weighted average number of Ordinary Shares for the purpose of diluted earnings per share (millions) 1,375.1 1,382.5
Tangible net asset value per share is calculated as total shareholders’ equity less goodwill and other intangible assets divided by the number of Ordinary Shares at the end of the period, excluding shares held by employee share trusts.
Acquisitions and additions — 140.7 140.7 At 31 December 2020 214.2 1,085.5 1,299.7 Accumulated amortisation and impairment
Goodwill arose on the acquisition of U K Insurance Limited (£141.0 million), Churchill Insurance Company Limited (£70.0 million) and accident repair networks (£3.2 million) and is allocated to reportable segments.
The Group’s testing for impairment of goodwill and intangible assets includes the comparison of the recoverable amount of each CGU to which goodwill and other intangible assets have been allocated with its carrying value and is updated at each reporting date and whenever there are indications of impairment.
There is no goodwill impairment for the year ended 31 December 2020 (2019: £nil).
The recoverable amount is the higher of the CGU fair value less the costs to sell and its value-in-use. Value-in-use is the present value of expected future cash flows from the CGU. Fair value is the estimated amount that could be obtained from the sale of the CGU in an arm’s-length transaction between knowledgeable and willing parties.
Rescue and other personal lines 1.5 10.7 640.1 (56.9) (79.1) (74.2)
Additions — 20.1 20.1 Disposals — (13.4) (13.4) At 31 December 2020 79.8 195.9 275.7 Accumulated depreciation and impairment
Depreciation charge for the year 11.0 3.6 0.2 14.8 Disposals (16.1) (3.2) — (19.3) At 31 December 2020 63.6 7.1 0.7 71.4
Note: 1. The cost included in the carrying value at 31 December 2020 is £233.4 million (2019: £222.9 million).
Release to income statement 7.9 18.4 23. Deferred acquisition costs £m £m
At 1 January 2020 1.0 0.2 1.2 Additional provision 25.2 0.3 25.5 Released to income statement (24.0) (0.2) (24.2) At 31 December 2020 2.2 0.3 2.5 25. Prepayments, accrued income and other assets £m £m
Defined benefit scheme The Group’s defined benefit pension scheme was closed in 2003, although the Group remains the sponsoring employer for obligations to current and deferred pensioners based on qualifying years’ service and final salaries. The defined benefit scheme is legally separated from the Group with trustees who are required by law to act in the interests of the scheme and of all the relevant stakeholders. The trustees of the pension scheme are responsible for the investment policy with regard to the assets of the scheme.
198 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020198 Direct Line Group Annual Report and Accounts 2020
Life expectancy at age 60 now: Life expectancy at age 60 in 20 years’ time: The table below analyses the fair value of the scheme assets by type of asset.
3. In the third quarter of 2020, the scheme transferred the absolute return bond mandate to a new dynamic bond fund which targets positive returns over a threeyear rolling basis. It is invested to maximise the total return from a globally diversified portfolio, predominantly comprising high-yield corporate and government bonds.
All UK debt instruments have quoted prices in active markets. The dynamic bond fund holds bonds that, rather than being traded on an exchange, are traded through agents, brokers or investment banks matching buyers and sellers.
Return on plan assets excluding amounts included in the net interest on the defined benefit asset 9.0 — 9.0 Actuarial gains of defined benefit scheme
Notes to the Consolidated Financial Statements continued 200 Direct Line Group Annual Report and Accounts 2020
Return on plan assets excluding amounts included in the net interest on the defined benefit asset 9.0 4.4 (3.5) 1.0 13.7
Life expectancy 1-year increase in life expectancy 0.1 0.1 3.6 3.2 1-year decrease in life expectancy (0.1) (0.1) (3.6) (3.2)
The most recent funding valuation of the Group’s defined benefit scheme was carried out as at 1 October 2017. This showed an excess of assets over liabilities. The Group agreed with the trustees to make contributions of up to £1.5 million per annum in 2019, 2020 and 2021, in the event that a deficit subsequently emerges, on the anniversary of the funding valuation date.
At the date of signing these financial statements, no contributions are expected to be payable in 2021 (2020: £nil). The Group is currently undertaking a funding valuation of the defined benefit scheme at 1 October 2020, the results of which are due to be agreed with the trustees in 2021.
Notes: 1. The Group swaps a fixed interest rate for a floating rate of interest on its US dollar and Euro corporate debt securities by entering into interest rate derivatives. The hedged amount at 31 December 2020 was £971.1 million (2019: £955.8 million).
2. Bank overdrafts represent short-term timing differences between transactions posted in the records of the Group and transactions flowing through the accounts at the bank.
3. Cash and bank overdrafts total is included for the purposes of the consolidated cash flow statement.
The effective interest rate on short-term deposits with credit institutions for the year ended 31 December 2020 was 0.25% (2019: 0.79%) and average maturity was 10 days (2019: 10 days).
At 31 December 2020, 12,753,755 Ordinary Shares (2019: 8,445,670 Ordinary Shares) were owned by the employee share trusts at a cost of £40.3 million (2019: £30.2 million). These Ordinary Shares are carried at cost and at 31 December 2020 had a market value of £40.7 million (2019: £26.4 million).
On 8 December 2017, the Group repurchased £250 million nominal value of the subordinated guaranteed dated notes for a purchase price of £330.1 million including accrued interest of £2.7 million and associated transaction costs of £0.6 million. The designated hedging agreement was adjusted accordingly.
Notes to the Consolidated Financial Statements continued 204 Direct Line Group Annual Report and Accounts 2020
Estimate of ultimate gross claims costs: At end of accident year 2,698.1 2,372.7 2,184.0 2,094.5 2,118.1 2,157.7 2,217.3 2,300.1 2,110.4 1,847.3
Estimate of ultimate net claims costs: At end of accident year 2,644.4 2,271.8 2,093.9 1,971.0 1,926.7 1,922.2 2,016.9 2,125.9 1,941.2 1,674.5
Current estimate of cumulative claims 2,181.3 1,869.7 1,676.6 1,696.5 1,706.7 1,804.5 1,857.9 2,057.4 1,906.7 1,674.5
At 31 December 2020 3,617.0 (1,025.3) 2,591.7 Claims reported 2,762.0 (842.8) 1,919.2 Incurred but not reported 777.0 (182.5) 594.5 Claims handling provision 78.0 — 78.0 At 31 December 2020 3,617.0 (1,025.3) 2,591.7
The table below analyses the outstanding PPO claims provisions on a discounted and an undiscounted basis at 31 December 2020 and 31 December 2019. These represent the total cost of PPOs rather than any costs in excess of purely Ogden-based settlements.
In the majority of cases, the inflation agreed in the settlement is the Annual Survey of Hours and Earnings SOC 6115 inflation published by the Office for National Statistics, for which the long-term rate is assumed to be 3.5% (2019: 4%). The Group has estimated a rate of interest used for the calculation of present values as 3.5% (2019: 4%), which results in a real discount rate of 0% (2019: 0%). The Group will continue to review the inflation and discount rates used to calculate these insurance reserves.
At 1 January 2019 1,505.5 (103.5) 1,402.0 Written in the period 3,203.1 (215.9) 2,987.2 Earned in the period (3,202.6) 217.7 (2,984.9)
Deferred Annual Incentive Plan To incentivise delivery of performance over a one-year operating cycle, Executive Directors and certain members of senior management are eligible for awards under the Annual Incentive Plan ("AIP"), of which at least 40% is granted in the form of a nil-cost option under the DAIP with the remainder being settled in cash following year end. During the year awards were made over 1.8 million Ordinary Shares (2019: 1.3 million Ordinary Shares) under this plan with an estimated fair value of £4.6 million (2019: £4.5 million) using the market value at the date of grant.
The awards outstanding at 31 December 2020 have no performance criteria attached; there is a requirement that the employee remains in employment with the Group for three years from the date of grant.
In the year ended 31 December 2020, matching share awards were granted over 0.6 million Ordinary Shares (2019: 0.5 million Ordinary Shares) with an estimated fair value of £1.6 million (2019: £1.6 million). The fair value of each matching share award is estimated using the market value at the date of grant.
Under the plan, the shares vest at the end of a three-year period dependent upon continued employment with the Group together with continued ownership of the associated purchased shares up to the point of vesting.
Note: 1. In accordance with the rules of the LTIP, Restricted Shares Plan and DAIP, additional awards of 1.3 million shares were granted during the year ended 31 December 2020 (2019: 1.5 million) in respect of the equivalent dividend.
Of the above, £6.0 million (2019: £nil) is due to be settled outside of 12 months.
Notes to the Consolidated Financial Statements continued 210 Direct Line Group Annual Report and Accounts 2020
Impairment of property, plant and equipment, goodwill and intangible assets 6.6 1.3
Loss on sale of property, plant and equipment and right of use assets 4.9 0.3
Movements in working capital: Net decrease in net insurance liabilities including reinsurance assets, unearned premium reserves and deferred acquisition costs (91.3) (220.1)
Net (increase) / decrease in insurance and other receivables (1.6) 29.4
Proceeds on disposal / maturity of AFS debt securities 1,614.0 1,886.4
39. Notes to the consolidated cash flow statement continued The table below details changes in liabilities arising from the Group’s financing activities.
Leases Subordinated liabilities Interest rate swap associated with subordinated debt1 £m £m £m £m £m £m
Interest paid on subordinated liabilities — — 28.3 23.1 — — Interest rate swap cash settlement — — — — (4.1) (3.4) Lease cash flows (18.5) (19.8) — — — — Interest on lease payments 6.0 6.7 — — — — Financing cash flows (12.5) (13.1) (228.9) 23.1 (4.1) (3.4)
Net lease additions 0.5 10.2 — — — — Amortisation of arrangement costs and discount on issue of subordinated liabilities
Amortisation of fair value hedging — — 1.8 — — — Accrued interest expense on subordinated liabilities
Net accrued interest on interest rate swap — — — — 0.3 — Fair value movement in interest rate swap — — — — 3.0 3.4 Non-cash changes 0.5 10.2 (28.7) (22.6) 3.3 3.4 At 31 December 152.4 164.4 (516.6) (259.0) 8.2 9.0
41. Leases Operating lease commitments where the Group is the lessor The following table analyses future aggregate minimum lease payments receivable under non-cancellable operating leases in respect of property leased to third-party tenants.
For disclosure purposes, fair value measurements are classified as level 1, 2 or 3 based on the degree to which fair value is observable: – Level 1 financial assets are measured in whole or in part by reference to published quotes in an active market. In an active market quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’slength basis.
– Level 2 financial assets and liabilities are measured using a valuation technique based on assumptions that are supported by prices from observable current market transactions. These include AFS debt security assets for which pricing is obtained via pricing services, but where prices have not been determined in an active market, or financial assets with fair values based on broker quotes or assets that are valued using the Group’s own models whereby the majority of assumptions are market-observable. Derivatives are valued using broker quotes or appropriate valuation models. Model inputs include a range of factors which are deemed to be observable, including current market and contractual prices for underlying instruments, period to maturity, correlations, yield curves and volatility of underlying instruments.
– Level 3 fair value measurements used for investment properties, HTM debt securities, infrastructure debt, commercial real estate loans and equity investments are those derived from a valuation technique that includes inputs for the asset that are unobservable.
Comparison of carrying value to fair value of financial instruments and assets where fair value is disclosed
The movements in assets held at fair value and classified as level 3 in the fair value hierarchy relate to investment property and equity investments. Investment property is analysed in note 20 along with further details on the Group’s valuation approach. A summary of realised and unrealised gains or losses in relation to investment property at fair value are presented in note 6. Sensitivity analysis in respect of investment property has been provided in note 3. There were no changes in the categorisation of assets between levels 1, 2 and 3 for assets and liabilities held by the Group since 31 December 2019.
The table below analyses the movement in assets carried at fair value classified as level 3 in the fair value hierarchy. Investment property (note 20)
At 1 January 2020 291.7 — Additions at cost 10.5 3.2 Decrease in fair value in the period through profit or loss (note 6) (10.1) — At 31 December 2020 292.1 3.2 43. Related parties Transactions between the Group’s subsidiary undertakings, which are related parties, have been eliminated on consolidation and accordingly are not disclosed.
Dividends and appropriations paid (note 13) — — — — (420.7) (420.7) — (420.7)
The attached notes on pages 217 to 221 form an integral part of these separate financial statements.
Parent Company Statement of Changes in Equity For the year ended 31 December 2020 £m £m
Profit for the year attributable to the owners of the Company 343.0 143.3
Total comprehensive income for the year attributable to the owners of the Company 342.9 143.3
Credit to equity for equitysettled share-based payments — — 18.4 — — 18.4 — 18.4
PARENT COMPANY STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2020 216 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020 216 Direct Line Group Annual Report and Accounts 2020
The Company’s financial statements are prepared in accordance with FRS 101 ‘Reduced Disclosure Framework’.
Financial Statements’ to produce a cash flow statement and to make an explicit and unreserved statement of compliance with IFRSs; – FRS 101.8 (h): the requirements of IAS 7 ‘Statements of Cash Flows’ to produce a cash flow statement and related notes; – FRS 101.8 (i): the requirements of paragraphs 30 and 31 of IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ to include a list of new IFRSs that have been issued but that have yet to be applied; and – FRS 101.8 (k): the requirements of IAS 24 ‘Related Party Disclosures’ to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary which is party to a transaction is wholly owned by such a member.
Adoption of new and revised standards Full details of the new and revised standards adopted by the Company are set out in note 1 to the consolidated financial statements.
Impairment At initial recognition of a financial asset measured at amortised cost or fair value through other comprehensive income an expected credit loss assessment is conducted with an impairment loss booked if material. The Company uses judgement in making these assumptions and selecting the inputs to the impairment calculation based on the credit quality and history of the financial asset or group of financial assets, as well as existing market conditions and forward-looking expectations.
Notes to the Parent Company Financial Statements losses. If in a subsequent period the amount of the expected impairment allowance reduces, and this can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. A financial asset is written off when there is no reasonable expectation of recovery.
U K Insurance Business Solutions Limited1 05196274 United Kingdom Insurance intermediary services
6. Registered office at: ESC House, 155, 1st & 2nd Floor, Okhla Industrial Area Phase-3, New Delhi, 110020, India. Company registration number: U74140DL2014FTC265567.
losses. If in a subsequent period the amount of the expected impairment allowance reduces, and this can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. A financial asset is written off when there is no reasonable expectation of recovery.
On 27 March 2020, the Company provided additional funding to its subsidiary, U K Insurance Limited. It purchased one Ordinary Share of £1 nominal value for a consideration of £150 million.
Indirectly held by the Company: 10-15 Livery Street, Birmingham UK Limited4 JE109119 Jersey Dormant9
December 2020, it is expected that Brolly UK Technology Limited will be exempt from the requirements of the Companies Act 2006 relating to the audit of individual accounts by virtue of section 479 A.
218 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020 7. Registered office at: 42 The Headrow, Leeds, LS1 8HZ. 8. These entities have not been audited, in accordance with the exemptions available for dormant entities under section 480 of the Companies Act 2006. 9. Under the Companies (Jersey) Law 1991, there is no requirement to file individual accounts and audit a private limited company.
The deferred tax liability is in respect of provisions and other temporary differences.
Notes: 1. The derivative assets and liabilities are both classified as level 2 within the Group’s fair value hierarchy set out in note 42 of the consolidated financial statements. 2. The foreign exchange cash flow hedges have been entered into on behalf of the Group’s subsidiary companies.
WWW.DIRECTLINEGROUP.CO.UK 219 218 Direct Line Group Annual Report and Accounts 2020
7. Registered office at: 42 The Headrow, Leeds, LS1 8HZ. 8. These entities have not been audited, in accordance with the exemptions available for dormant entities under section 480 of the Companies Act 2006. 9. Under the Companies (Jersey) Law 1991, there is no requirement to file individual accounts and audit a private limited company.
Note: 1. Included in loans to subsidiary undertakings is a £250 million unsecured subordinated loan to U K Insurance Limited. A loan of £500 million was advanced on 27 April 2012 at a fixed rate of 9.5% with a repayment date of 27 April 2042. On 7 March 2019, £250 million was repaid. All loans are neither past due nor impaired.
Total payables to third parties 1.1 1.0 13. Dividends Full details of the dividends paid and proposed by the Company are set out in note 14 to the consolidated financial statements.
15. Contingent liabilities The Company will guarantee the debts and liabilities of its UK subsidiary, Brolly UK Technology Limited, at the balance sheet date in accordance with section 479C of the Companies Act 2006. The Company has assessed the probability of loss under this guarantee as remote.
10. Subordinated liabilities £m £m £250 million 9.25% subordinated Tier 2 notes due 2042 The subordinated guaranteed dated notes with a nominal value of £500 million were issued on 27 April 2012 at a fixed rate of 9.25% and have a redemption date of 27 April 2042. On 8 December 2017, the Company repurchased £250 million nominal value of subordinated guaranteed dated notes for a purchase price of £330.1 million including accrued interest of £2.7 million and associated transaction costs of £0.6 million.
The Articles of Association of the Company and the letters of appointment of the Executive Directors, the Chair and the Non-Executive Directors are available for inspection at the Company’s registered office and at the offices of Allen & Overy LLP.
Shareholders can arrange to receive their cash dividend payments in a bank or building society account by completing a dividend mandate form. This is available from the Company’s registrar, Computershare Investor Services Plc (“Registrar”), in the UK. You can find the Registrar’s contact details on page 232. Alternatively, shareholders can access their shareholdings online and download a dividend mandate form from the Investor Centre. You can find details of this below.
Shareholder warning Fraudsters use persuasive and high-pressure tactics to lure investors into scams. They may offer to sell shares that prove to be worthless or non-existent, or they can offer to buy shares at an inflated price in return for you paying upfront. They promise high profits. However, 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.
– Remember that if you buy or sell shares from an unauthorised firm, you cannot access the Financial Ombudsman Service or Financial Services Compensation Scheme.
Report a scam If fraudsters approach you, tell the FCA using the share fraud reporting form at www.fca.org.uk/consumers/ report-scam-unauthorised-firm. You can also find out more about investment scams on the same web page.
Electronic communications and voting The Group produces various communications. Shareholders can view these online, download them, or receive paper copies by contacting the Registrar.
You can call or email the Registrar regarding its sharedealing facility using this contact information: – For telephone sales, call +44 (0)370 703 0084 between 8.00 am and 6.00 pm, Monday to Friday, excluding public holidays, and
This incentivises the performance of Executive Directors and employees over a one-year operating cycle. It focuses on the short to medium-term elements of the Group’s strategic aims.
This represents all assets managed or administered by or on behalf of the Group, including those assets managed by third parties.
Carbon emissions Scope 1 – covers direct emissions from owned or controlled sources, including fuels used in office buildings, accident repair centres and owned vehicles. Scope 2 – covers indirect emissions from the generation of purchased electricity, steam, heating and cooling for office buildings and accident repair centres. Scope 3 under our direct control – includes indirect emissions that occur in the Group’s value chain, under its direct control, such as waste disposal and business travel. Total Scope 3 – includes all other indirect emissions that occur in the Group’s value chain and purchased goods and services, excluding investments.
Funds set aside by the Group to meet the estimated cost of settling claims and related expenses that the Group considers it will ultimately need to pay.
Clawback The Group's ability to claim repayment of paid amounts both cash and equity settled sharebased payments.
The sum of the loss, commission and expense ratios. The ratio measures the amount of claims costs, commission and operating expenses, compared to net earned premium generated. A ratio of less than 100% indicates profitable underwriting. Normalised combined operating ratio adjusts loss and commission ratios for weather and changes to the Ogden discount rate. (See page 227 alternative performance measures.)
Commission expenses Payments to brokers, partners and price comparison websites for generating business.
This is calculated using the combined operating ratio less movement in prior-year reserves. (See page 227 alternative performance measures.)
224 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020224 Direct Line Group Annual Report and Accounts 2020
Earnings per share The amount of the Group’s profit after deduction of the Tier 1 coupon payments allocated to each Ordinary Share of the Company.
Expense ratio The ratio of operating expenses divided by net earned premium. (See page 227 alternative performance measures.)
Finance costs The cost of servicing the Group’s external borrowings and including the interest on right-ofuse assets.
Financial leverage ratio Tier 1 notes and financial debt (subordinated Tier 2 notes) as a percentage of total capital employed.
In-force policies The number of policies on a given date that are active and against which the Group will pay, following a valid insurance claim.
A not-for-profit public interest organisation that is overseen by a monitoring board of public authorities. It develops International Financial Reporting Standards ("IFRSs") that aim to make worldwide markets transparent, accountable and efficient.
Awards made as nil-cost options or conditional share awards, which vest to the extent that performance conditions are satisfied after a period of at least three years.
Loss ratio Net insurance claims divided by net earned premium. (See page 227 alternative performance measures.)
Operating expenses These are the expenses relating to business activities excluding restructuring and one-off costs. (See page 227 alternative performance measures.)
Scope 1, Scope 2, Scope 3 under our direct control and total Scope 3
Please refer to the glossary definition for carbon emissions on page 224.
Solvency capital ratio The ratio of Solvency II own funds to the solvency capital requirement.
Tangible equity This shows the equity excluding Tier 1 notes and intangible assets (for comparability with companies which have not acquired businesses or capitalised intangible assets). (See page 228 alternative performance measures).
This shows the amount of tangible equity allocated to each ordinary share (for comparability with companies which have not acquired businesses or capitalised intangible assets). (See page 228 alternative performance measures).
Compares share price movement with reinvested dividends as a percentage of the share price.
226 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020226 Direct Line Group Annual Report and Accounts 2020
Appendix A – Alternative performance measures The Group has identified Alternative Performance Measures (“APMs”) in accordance with the European Securities and Markets Authority’s published Guidelines. The Group uses APMs to improve comparability of information between reporting periods and reporting segments, by adjusting for either uncontrollable or one-off costs which impact the IFRS measures, to aid the user of the annual report and accounts in understanding the activity taking place across the Group. These APMs are contained within the main narrative sections of this document, outside the financial statements and notes, and may not necessarily have standardised meanings for ease of comparability across peer organisations.
Further information is presented below, defined in the glossary on pages 224 to 226 and reconciled to the most directly reconcilable line items in the financial statements and notes. Note 4 on page 185 of the consolidated financial statements presents a reconciliation of the Group’s business activities on a segmental basis to the consolidated income statement. All note references in the table below are to the notes to the consolidated financial statements on pages 162 to 214.
Combined operating ratio is defined in the glossary on page 224 and reconciled in note 4 on page 185.
Commission ratio is defined in the glossary on page 224 and is reconciled in note 4 on page 185.
Current-year attritional loss ratio is defined in the glossary on page 224 and is reconciled to the loss ratio (discussed below) on page 24.
Current-year combined operating ratio is defined in the glossary on page 224 and is reconciled on page 24.
Current-year normalised operating profit ratio is defined in the glossary on page 224 and reconciled on page 229.
Expense ratio is defined in the glossary on page 225 and is reconciled in note 4 on page 185.
Investment income yield is defined in the glossary on page 225 and is reconciled on page 228.
Investment return yield is defined in the glossary on page 225 and is reconciled on page 228.
Expresses a relationship between the investment return and the associated opening and closing assets adjusted for portfolio hedging instruments.
Combined operating ratio and normalised combined operating ratio are defined in the glossary on page 224 and reconciled on page 229.
Operating profit is defined in the glossary on page 226 and reconciled in note 4 on page 185.
Return on tangible equity is defined in the glossary on page 226 and is reconciled on page 230.
This shows the equity excluding Tier 1 notes and intangible assets for comparability with companies which have not acquired businesses or capitalised intangible assets.
Tangible net asset value per share is defined in the glossary on page 226 and reconciled in note 16 on page 193.
Underwriting profit is defined in the glossary on page 226 and is reconciled in note 4 on page 185.
Notes: 1. See glossary on page 225 for definitions. 2. See notes to the consolidated financial statements. 3. Includes net realised and unrealised gains / (losses) on derivatives in relation to AUM. 4. See footnote 1 on page 34 (Investment holdings). 5. Mean average of opening and closing balances.
Combined operating ratio normalised for weather 90.3% 86.9% 95.9% 99.4% 91.7% 94.1%
Combined operating ratio normalised for weather and Ogden discount rate 90.3% 86.9% 95.9% 99.2% 91.7% 93.5%
Tax charge (2019 and 2020 UK standard tax rate of 19%) (90.1) (95.8)
Notes: 1. See glossary on page 226 for definition. 2. Mean average of opening and closing balances.
Certain information contained in this document, including any information as to the Group’s strategy, plans or future financial or operating performance, constitutes “forwardlooking statements”. These forward-looking statements may be identified by the use of forward-looking terminology, including the terms “aims”, “ambition”, “anticipates”, “aspire”, “believes”, “continue”, “could”, “estimates”, “expects”, “guidance”, “intends”, “may”, “mission”, “outlook”, “over the medium term”, “plans”, “predicts”, “projects”, “propositions”, “seeks”, “should”, “strategy”, “targets” or “will” or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in several places throughout this document and include statements regarding the intentions, beliefs or current expectations of the Directors concerning, among other things: the Group’s results of operations, financial condition, prospects, growth, strategies and the industry in which the Group operates. Examples of forward-looking statements include financial targets and guidance which are contained in this document specifically with respect to the return on tangible equity, solvency capital ratio, the Group’s combined operating ratio, percentage targets for currentyear contribution to operating profit, prior-year reserve releases, cost reductions, reductions in expense and commission ratios, investment income yield, net realised and unrealised gains, capital expenditure and risk appetite range. By their nature, all forward-looking statements involve risk and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and/or are beyond the Group’s control. Forward-looking statements are not guaranteeing future performance.
In addition, even if the Group’s actual results of operations, financial condition and the development of the business sector in which the Group operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods.