Our purpose is to help people carry on with their lives, giving them peace of mind now and in the future.
Notes: 1. See glossary on pages 222 to 224 for definitions and Appendix A
3. A reduction in the ratio represents an improvement as a proportion of net earned premium, while an increase in the ratio represents a deterioration. See glossary on page 222 for definitions.
Motor We are Britain’s leading personal motor insurer measured by in-force policies1, mainly represented through our well-known brands Direct Line, Churchill, Privilege, and our new Darwin brand, and also through our partners.
Home We are one of Britain’s leading personal home insurers measured by in-force policies1. We reach our customers by selling home insurance products through our brands Direct Line, Churchill and Privilege, and our partners RBS and NatWest.
Commercial We protect commercial businesses through our brands, NIG, Direct Line for Business and Churchill. NIG sell products exclusively through brokers operating across the UK, whilst Direct Line for Business sell insurance policies direct via phone and online and Churchill sell insurance policies direct via phone, online and through price comparison websites (“PCWs”).
We operate across four market segments, providing peace of mind to our customers through a range of products, supported by a caring team.
Research Survey (FRS) six months ended January 2020, 13,999 adults interviewed for motor insurance and 12,749 for home insurance.
2. Mintel Vehicle Recovery – UK, September 2019. 3. Mintel Pet Insurance August 2019 & Mintel Travel Insurance February 2020.
Darwin, our first new personal lines brand in 25 years, uses innovative pricing technology to provide great value insurance for customers.
Green Flag offers an award-winning service at a lower cost, using local garages across the UK to provide a smarter alternative solution for breakdown. Available direct, via our insurance brands and through PCWs.
DLG Auto Services is our network of bodyshops across the UK, repairing more than 90,000 cars every year for our customers.
NIG are experts at commercial insurance. We sell via brokers across a number of specialisms including small and medium-sized enterprise, real estate and agriculture.
Darwin is an evolution in motor insurance, smart and simple, the way it should be. Our motor insurance is available through PCWs.
Privilege offers quick and efficient insurance at the best price. Our insurance products are available direct and through PCWs.
Our strong brands, each with their own personality, enable our customers to choose the right cover to protect their cars, homes, holidays, businesses and pets.
Consumers’ buying behaviours are changing and we want to be everywhere our customers shop. That’s why our insurance is offered through the four main routes to market.
Price comparison websites Strong brands and propositions are important but so are great prices. Our IT investment aims to improve our speed to market and enhance our pricing capabilities for customers.
We have a track record of delivering strong returns to shareholders, having distributed £2.2 billion in dividends over the past five years. This together with our share price performance has delivered an attractive total shareholder return.
Alternative performance measures on pages 225 to 228 for reconciliation to financial statement line items.
2. Applies to operating expenses excluding restructuring and one-off costs. 3. Excludes restructuring and one-off costs. 4. Normalised for weather and changes to the Ogden discount rate.
Return on tangible equity (“RoTE”)1: At least 15% per annum over the long term
Transforming our business for the long term 2019 was a year of delivering good results in a competitive environment and of building the capability to underpin the long-term sustainability of our business.
2019 was an exciting year for Direct Line Group as we launched three major new IT platforms aimed at improving the service we provide to our customers, announced the next stage of our strategy at the Capital Markets Day in November 2019, redefined our vision and purpose, and continued to develop our five-pillar sustainability strategy.
Despite challenging trading conditions in the motor insurance market, our model of disciplined underwriting and cost reduction underpinned a combined operating ratio of 92.2% (93.5% adjusted for normal weather and Ogden discount rate changes) and enabled us to grow our final dividend 2.9% to 14.4 pence. Profit before tax was down 12.2% to £509.7 million (2018 restated1: £580.5 million). The effect of benign weather in 2019 was more than offset by lower reserve releases, in part due to the change in the Ogden discount rate, and restructuring and one-off costs in 2019. In addition, realised gains and property revaluations which benefited our investment result in 2018 were not repeated. As we announced on 3 March 2020, in line with our capital management approach of growing the regular dividend in line with business growth and distributing surplus capital, we are also returning up to £150 million of surplus capital by way of a share buyback programme. More information on the intended share buyback is provided on page 36.
New leadership and Board changes 2019 was also a significant year for leadership changes. After a decade leading the business, Paul Geddes stepped down as Chief Executive Officer (“CEO”) and we welcomed Penny James as CEO following the Annual General Meeting (“AGM”) in May 2019. Clare Thompson, former Independent Non-Executive Director (“NED”), also stepped down from the Board after the 2019 AGM.
Following a rigorous search process, the Group was also delighted to announce the appointment of Tim Harris as Chief Financial Officer (“CFO”) and Board member in October 2019. I was delighted to welcome Tim as I believe we will benefit from his many years of experience as a leading director in the insurance industry.
Strategy Direct Line Group’s vision is to create a world where insurance is personal, inclusive and a force for good. Our purpose is to help people carry on with their lives, giving them peace of mind now and in the future. Our strategy recognises our strengths as a UK insurance expert with diversification of distribution and product and is defined by six strategic objectives. These are: being the best at direct; winning on price comparison websites; extending our reach; using our technical edge; being nimble and cost efficient; and empowering great people.
The Board continues to oversee the ambitious programme of investment in major IT systems, aimed at improving the Group’s digital offering, pricing and underwriting capability, customer experience and operational efficiency. Whilst this new technology is beginning to be implemented, there is still much to do to transform our business. The Board continues to support our senior executives realising the potential of our business, by introducing more agile working practices, particularly in the areas of our business that are at the forefront of delivering change.
Although we are predominantly a UK business, we do, for example, have exposure to financial markets and import goods and services to fulfil insurance claims. We have been monitoring events carefully and have proactively taken steps to mitigate the likely impact on the Group to the extent we consider it to be appropriate and proportionate to do so, given the considerable uncertainties; however, in the event of a disruptive end to the implementation period the Group would not be immune.
Linking remuneration to performance We remain focused on ensuring that executive pay is aligned with the Group’s strategy of targeting sustainable shareholder and customer value. This is primarily achieved by the Annual Incentive Plan (“AIP”) and Long-Term Incentive Plan (“LTIP”) being aligned to performance measures shareholders consider important. This is underpinned by the delivery of a significant proportion of remuneration through shares and shareholding requirements.
The Company’s share price on 31 December 2019 was 312.5 pence (2018: 318.7 pence). Total shareholder return (“TSR”), which includes dividend payments, was 7.0% for the year (2018: minus 7.7%). Since the Group’s Capital Markets Day in November, the share price has responded positively. It has continued to perform strongly at the beginning of 2020 and has significantly outperformed the wider non-life insurance sector. Over the past five years, shareholders have received a TSR of 56% compared to the FTSE 350 (excluding investment trusts) of 43%. Since the 2012 Initial Public Offering (“IPO”), the Board has declared cumulative dividends, including special dividends, equivalent to approximately 118% of the IPO share price. More information on the Group’s remuneration policy and share awards are disclosed in the Directors’ remuneration report on pages 106 to 138.
Effectiveness The effectiveness of your Board’s and its Committees’ performance is considered annually in an effectiveness review.
Shareholder and stakeholder relations Your Board maintains strong relationships and regular interaction with shareholders. Their continued support for the Group’s strategic aims is important. Your Board also has regard to the interests of other stakeholders.
Through our five-pillar sustainability strategy, we aim to deliver long-term sustainability for customers, our people and shareholders and other stakeholders and ensure that we have a positive impact on society and protect the environment. During the year, we sought views from a range of stakeholders including customers, suppliers, investors, commercial partners, non-governmental organisations and policymakers on what really matters to them. Further details of this exercise as well as progress on each of our sustainability pillars are shown on pages 59 to 71.
Our People We encourage a culture that celebrates difference and empowers people so that they can thrive. The Group’s people are fundamental to the Group’s success and sustainability and I would like to thank each of them for their hard work, initiative and commitment. Their positive energy, high levels of engagement, embodiment of the Group’s values and dedication to serving our customers have helped our businesses progress and have put us in a strong position for the future.
Core strengths that are hard to replicate As a UK-focused company, we have the ability to be a deep specialist in a market unlike any other in the world, while the range of channels and products gives us real diversification and scale that many of our peers do not have. This lets us pivot as dynamics shift in the market and this flexibility has supported our track record of delivering good returns.
Across the business, we have a number of real strengths. First and foremost, we are a people business, which means we really care and have a passion to serve our customers. Secondly, we have a strong balance sheet with further opportunities to improve its effectiveness. And thirdly, we successfully combine strong brands and rich data because we are a direct player and have leading claims skills supported, for example, by our own accident repair centres. This combination is hard to replicate and we believe this provides a platform for real long-term value.
Our new platform makes it easier for us to onboard new books of business. We plan to use this to explore inorganic growth opportunities through partnerships and acquisitions.
We aim to create a great experience for our customers and embed sustainable competitive advantage by leveraging our strengths in repair, data and claims insight and management.
– Strong brand power – Outstanding customer service – Valuable and differentiated propositions – Unique data insights
– Increasing demand for more simple, easy to use and flexible products
Strategy to transform our business The Group aims to create a world where insurance is personal, inclusive and a force for good. We’ll do this by helping people carry on with their lives, giving them peace of mind, now and in the future. Because that’s how we believe we will secure long-term sustainability in the changing world ahead.
Our six strategic objectives set out a clear path for us to realise our potential and are set out in the table below. The first three aim to ensure that our products are easy to use and available everywhere. The second three are underlying skills which are designed to help us deliver great value and an excellent customer experience.
Whilst landing technology change and improving efficiency are key objectives in 2020, we are also continuing to drive our brand health with exciting plans for Direct Line and continuing to position Churchill as a PCW-first brand. These plans are all designed with fantastic customer experience and propositions at their heart.
Supporting our activities and central to the long-term sustainability of the business, we have deeply embedded and fundamental principles: – Our values sit at the very heart of our everyday behaviours. They were created ground up and represent in full technicolour our identity.
Like many data driven consumer markets, ours is digitising fast and our success will be predicated on combining great customer-focused brands with a strong technology foundation. Our journey has three overlapping phases, with each of our different parts of the business moving through these phases at a different pace.
Regulation A main FCA focus has continued to be on pricing practices generally, including its Market Study on General insurance pricing practices. For some time we have been actively taking steps regarding pricing, as well as working with the ABI and holding proactive discussions with the FCA on potential remedies. We are supportive of the FCA Market Study, the outcomes of which are due for publication in June 2020. The FCA has also been focused on firms’ culture and governance, operational resilience, management of regulatory change, the general insurance distribution chain, vulnerable customers, affordability as it relates to consumer credit, complaint handling and the appropriate establishment of customers’ demands and needs as per the requirements under the Insurance Distribution Directive.
Climate change We are committed to playing our part in helping the UK become a sustainable, low carbon economy. We intend to set a challenging target to be carbon neutral as a business and aim to be compliant with the Taskforce on Climate-related Financial Disclosures (“TCFD”) by the end of 2020. This year, our objective was to ensure that our investments in investment-grade bonds were tilted more towards companies with better environmental, social and governance (“ESG”) credentials and we were delighted that relevant portfolios had an average ESG rating of ‘A’. This represents 87% of the credit investments in the portfolio and 62% of our total investment portfolio. We also recycled 98% of our total waste and since 2014 have sourced 100% of our electricity from renewable sources. In order to achieve our goal of long-term sustainability it is important that we give back more to the planet than we take out.
Gross written premium was 0.3% lower than in 2018 (2019: £3,203.1 million, 2018: £3,211.9 million). The impact of lower average premiums in Motor and Home and lower partnership volumes were almost fully offset by strong growth in Green Flag and Commercial direct own brands. The second half of 2019 saw gross written premium increase by 3.4% compared to the first half of 2019 (H1 2019: £1,575.1 million; H2 2019: £1,628.0 million) as performance across Motor and Home direct own brands improved.
Claims related to large weather events totalled £6 million in 2019 compared with £75 million in 2018 and expectations of £65 million for both years. The results also include a £16.9 million charge arising from the change in the Ogden discount rate to minus 0.25%, from the assumed rate of 0% in the first half of 2019 (2018: release of £54.8 million).
Our business transformation We are on an ambitious transformation journey to increase the competitiveness of our business.
Find out more on page 61 operating expenses, excluding amortisation and depreciation charges, by £50 million from 2018 to 2021, and in 2019 we achieved £11 million of this target and aim to achieve the remaining £39m over the next two years. Lower operating expenses helped to maintain the expense ratio at 23.2% (2018 restated: 23.2%). Of the estimated £60 million restructuring and one-off costs announced at our Capital Markets Day, that we expect over 2019 and 2020, we incurred £11.2 million in 2019 (2018: £nil).
Overall, the combined operating ratio was 92.2%. When normalised for weather and Ogden discount rate changes the ratio was 93.5% (2018 restated: 93.3%), towards the lower end of our 93% to 95% medium term target range.
We made further progress to improve the quality of our earnings; the current-year contribution to operating profit, normalised for weather and Ogden discount rate changes, increased by three percentage points to 39%1, as the Group was more than able to offset lower investment gains and the £9.6 million one-off gain from the sale of our Bristol office in 2018. We continue to target the proportion from current-year to be more than 50% by the end of 2021.
UK storms and Coronavirus The recent storms, Ciara and Dennis, in February have shown how important it is to be with the right insurer and we are proud with how we supported our customers during these difficult times. We estimate that the claims costs of these storms will be in the region of £35 million, net of Flood Re recoveries, across our Home and Commercial businesses compared to an expected annual weather cost of around £64 million. It is too early to assess any additional claims from storm Jorge. In addition, the Coronavirus outbreak (specifically the disease COVID-19) has the potential to impact the 2020 result of our Travel business. We have Travel reinsurance protection to mitigate the cost of an event over a 28-day period to £1 million up to a limit of £10 million. The full coverage, if utilised, can be reinstated once on the same terms. Currently, incurred claims are around £1 million. Like all businesses, we are subject to the consequences of disruption to financial markets and global supply chains which, over time, could impact the performance of our investments and the cost and speed of fulfilling customers’ claims.
The targeted improvement in current-year underwriting profitability is supported by the significant investment the Group is making in building future capability. This investment aims to improve the current-year loss ratio by delivering additional pricing sophistication and supporting multiple initiatives to combat fraud. In addition, the Group is targeting improved efficiency through self-service and digitalisation and a reduction in operating expenses1 by £50 million between 2018 and 2021 and we aim to improve our operating expense ratio to 20% by 2023. We reiterate our ongoing target of achieving at least a 15% return on tangible equity per annum.
Looking ahead to 2020 and beyond, we are aiming for a triple win: – a win for the Group and those invested in its success – our shareholders and our people; – a win for the customer in the creation of true value; and – a win for society and the planet as we know our longterm success is intrinsically linked with the success of the community and environment around us.
Our fundamental strengths as a business continue to bring benefits and I’m proud that our transformation programme gives us the opportunity to further enhance the ability of the Group to offer value for customers and shareholders.
To utilise the potential of our investments and capabilities to win more customers through acquisitions and brand partnerships.
To be the UK’s leading direct insurer because we anticipate our customers’ needs and develop services and products they want to buy.
To deliver a step change in our pricing and trading capability so that our leading PCW brands win customers from our competitors.
To transform into an agile, cost effective business to drive efficiency and simplicity for us and our customers.
Churchill has had a makeover! Our customers have always loved Churchie, the leading1 PCW brand, but we know that our customers’ expectations are changing. The original ‘nodding dog’ has been replaced by a CGI Churchie. The new ad aims to make life feel that little bit more effortless – as we believe it should do for all our customers allowing them to just... chill.
Building Darwin We wanted to use our experience and expertise to shake things up by bringing in a team of data scientists and engineers to build Darwin from scratch as a ‘start-up’ within the business. The fusion created by having great people within the business and bringing in great people with different skills helped us to develop Darwin’s machine learning algorithms on cloud-based technology. As a result, not only does Darwin have the capability to price individual risk much more efficiently, it also offers a full digital customer experience.
Digitising our processes Technology is overhauling the way we deliver greater efficiency. This year we’ve digitalised claims processes to create a more nimble journey for our customers and drive cost savings for us. Our robotics function processes 50,000 transactions a week, with capacity to expand and automate more processes.
Starling Bank partnership launched With more and more people managing their lives digitally, this year we partnered with Starling Bank, using their in-app Marketplace to offer banking customers Churchill home insurance. Using API (Application Programming Interface) technology customers are directed straight to the Churchill brand quote and buy system and can choose to have some of their details pre-populated.
People We are a business that really cares, with people who have a passion to serve our customers.
Brands We know how to build brand value and have some of the most loved brands in the UK.
We have a number of incredible strengths, from strong brands to rich data to leading claims skills, that are hard to replicate and provide real long-term value.
– Over the past five years we have consistently delivered strong shareholder returns having distributed £2.2 billion in dividends
– Cost reduction targets are important to the sustainable success of the Group providing opportunities for greater business agility
– We invest in a diversified investment portfolio which aims to provide for current and future claims payments
We are aiming for a triple win: A win for the Group A win for the Group and those invested in its success – our shareholders and our people.
A win for the customer A win for the customer in the creation of true value.
– Our investment in technology aims to increase our competitiveness allowing digitalisation where customers can enjoy self-serve
– We pride ourselves on strong ESG credentials because we know sustainability and commercial success go hand in hand
– Investing in the business has enabled us to keep pace with changing customer needs, improve operational performance and create cutting-edge products and services
– As a major contributor of taxes we are proactive in working with HMRC to ensure that new tax legislation is appropriate and tax anomalies are identified
We have not set a target. However, growing earnings per share is considered an indicator of a healthy business.
Strong performance These key performance indicators assess our performance against our strategy.
Notes: 1. Results for the year ended 31 December 2018 have been restated to reflect the fully retrospective adoption of IFRS 16 ‘Leases’, see note 44. 2. See glossary on pages 222 to 224 and Appendix A – Alternative performance measures on pages 225 to 228 for reconciliation to financial statement line items.
Changes to our KPIs in 2019 Our metrics are reviewed annually and updated as appropriate to ensure they remain an effective measure of delivery against our objectives. For 2019, the review of these metrics resulted in the following changes: – Dividend per share has been replaced by capital returns which includes ordinary and special dividends and share buybacks.
Combined operating ratio was 92.2%. Adjusting for normal weather and changes to the Ogden discount rate, the combined operating ratio of 93.5% (2018 restated: 93.3%) was towards the lower end of the Group’s medium-term target range of 93% to 95%. The current-year Motor loss ratio was broadly stable.
Proposed final ordinary dividend of 14.4 pence, an increase of 2.9% on 2018. Announcing a £150 million share buyback and awarding our people £500 of free shares each.
Strong capital position with a solvency capital ratio of 165% after proposed capital distributions (2018: 170%).
We delivered a good result in 2019, trading well through a difficult market, while staying on track with our transformation and maintaining our balance sheet strength.
In-force policies (thousands) 14,789 15,073 Of which: direct own brands (thousands) 7,290 7,188
Of which: direct own brands 2,227.8 2,228.9 Net earned premium 2,984.9 3,089.5
Profit after tax 419.9 472.0 Key metrics Current-year attritional loss ratio3,4 71.6% 72.6% Loss ratio3,4 61.9% 61.9% Commission ratio3,4 7.1% 6.5% Expense ratio3,4 23.2% 23.2% Combined operating ratio3,4 92.2% 91.6% Return on tangible equity4 20.8% 21.6% Investment income yield4 2.4% 2.5%
Net asset value per share (pence) 193.4 187.5 Tangible net asset value per share (pence) 142.0 145.9 Solvency capital ratio post-
Notes: 1. Results for the year ended 31 December 2018 have been restated to reflect the fully retrospective adoption of IFRS 16 ‘Leases’. See note 44 to the consolidated financial statements.
4. See glossary on pages 222 to 224 for definitions and appendix A – Alternative performance measures on pages 225 to 228 for reconciliation to financial statement line items.
5. See note 4 on page 1, reported after proposed dividends.
Underwriting profit 232.1 259.8 Instalment and other operating income 180.2 192.0 Investment return 134.6 154.6 Total operating profit 546.9 606.4
The combined operating ratio was 92.2% (2018 restated: 91.6%). The current-year attritional loss ratio improved by 1.0 percentage point to 71.6% (2018 restated: 72.6%). Home, Rescue and other personal lines and Commercial all improved, and Motor remained broadly steady. The loss ratio relating to major weather events improved by 2.2 percentage points to 0.2%, partially offset by a 0.6 percentage point increase in the commission ratio. The expense ratio was stable as lower expenses were offset by a reduction in earned premium. Overall, the current-year combined operating ratio improved by 2.6 percentage points to 102.1%.
Instalment and other operating income decreased to £180.2 million (2018: £192.0 million), due primarily to the non-repeat of a £9.6 million property gain in 2018. Other income, including from our in-house accident repair network, remained broadly stable.
Investment return decreased to £134.6 million (2018: £154.6 million) as a result of a reduction in assets under management reducing investment income, the nonrepeat of £13 million of fair value adjustments in 2018 and a reduction in realised gains.
Effect of Ogden discount rate changes on claims reserves net of reinsurance
The Civil Liability Act 2018 introduced a new framework for setting the personal injury Ogden discount rate, requiring the Government to reset the Ogden discount rate by reference to low risk rather than very low or zero risk investments. Following a Government review, as dictated by the terms of the Civil Liability Act 2018, on 15 July 2019 the Lord Chancellor announced a new Ogden discount rate of minus 0.25% to take effect from 5 August 2019. Compared to an assumed Ogden discount rate of 0% this resulted in a £16.9 million increase in reserves split across the Motor and Commercial segments. In 2018, following the granting of royal assent for the Act in December 2018, the Group reviewed the Ogden discount rate for reserves for large bodily injury claims and selected an assumed rate of 0% for reserving purposes as at 31 December 2018. This resulted in a reserves release of £54.8 million in 2018.
Other personal lines 122 126 Rescue and other personal lines 7,377 7,573
Business and commercial products sold under the Churchill brand that we previously reported within NIG and other. Prior periods have been re-presented accordingly.
Gross written premium of £3,203.1 million (2018: £3,211.9 million) reduced slightly by 0.3% as modest declines in Motor and Home were partially offset by increases in Commercial and Rescue and other personal lines. Direct own brands gross written premium of £2,227.8 million (2018: £2,228.9 million) was broadly steady.
Underwriting profit (£ million) 232.1 259.8 Loss ratio 61.9% 61.9% Commission ratio 7.1% 6.5% Expense ratio 23.2% 23.2% Combined operating ratio 92.2% 91.6%
The Group’s combined operating ratio of 92.2% (2018 restated: 91.6%) increased by 0.6 percentage points, primarily due to an increase in the commission ratio. Weather-related claims reduced in 2019 and there was no repeat of the weather-event related claims experienced in the first half of 2018. The resulting improvements to the Home loss ratio were largely offset by increases in the Motor loss ratio as the contribution from prior-year reserve releases reduced. Normalised for weather and the Ogden discount rate change, the combined operating ratio was approximately 93.5%1, towards the lower end of the Group’s medium-term target range of 93% to 95%. This includes a 0.6 percentage point impact from the Ogden discount rate change in July 2019.
The commission ratio has increased primarily as a result of increased profit-share payments and volume related payments to PCWs.
The expense ratio has remained steady at 23.2% as lower costs were fully offset by lower earned premium. Operating expenses excluding restructuring and one-off costs fell by £24.5 million to £693.7 million in 2019, with reductions across all major cost categories except for insurance levies. Note: 1. See glossary on pages 222 to 224 for definitions and appendix A
Notes: 1. Home and Commercial claims for major weather events, including inland and coastal flooding and storms. 2. Results for the period ended 31 December 2018 have been restated to reflect the fully retrospective adoption of IFRS 16 ‘Leases’.
Loss ratio Commission ratio Expense ratio Current-year combined operating ratio 32 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
Operating expenses before restructuring and one-off costs reduced by £24.5 million to £693.7 million (2018 restated: £718.2 million), meeting the Group’s 2019 target of reducing operating expenses to under £700 million. This resulted in an unchanged expense ratio of 23.2% (2018 restated: 23.2%). The Group saw reductions in all major cost categories with the exception of insurance levies, where there have been increases in both the Motor Insurers’ Bureau and the Financial Services Compensation Scheme levies.
2. Staff costs and other operating expenses attributable to claims handling activities are allocated to the cost of insurance claims.
4. Insurance levies were previously reported in IT and other operating expenses. Comparative data for the year 31 December 2018 has been re-presented accordingly.
6. Includes depreciation on right-of-use assets of £14.2 million (31 December 2018: £14.1 million).
Investment income yield1 2.4% 2.5% Net investment income yield1 2.1% 2.0% Investment return yield1 2.2% 2.4%
Note: 1. See glossary on pages 222 to 224 for definitions and appendix A
Total investment return decreased by £20.0 million to £134.6 million (2018: £154.6 million). This was due to a reduction in investment income, primarily as a result of lower assets under management, and a reduction in realised and unrealised gains excluding hedging, which was predominantly driven by investment property revaluations (2019: (£6.2) million, 2018: £12.7 million).
Operating profit by segment All divisions contributed to profit in 2019, demonstrating the diversity of the Group’s multi-product, multi-brand and multi-channel portfolio. Motor operating profit reduced, primarily due to the effects on prior-year reserve releases of Ogden discount rate changes in both 2018 and 2019. Home operating profit improved, primarily due to underwriting actions, claims indemnity initiatives and benign weather. Rescue operating profit of £45.1 million (2018 restated: £40.2 million) is included in the Rescue and other personal lines result.
Restructuring and one-off costs In order to support its cost reduction targets, the Group announced approximately £60 million of restructuring and one-off costs across 2019 and 2020 at its Capital Markets Day in November. The Group incurred £11.2 million of restructuring and one-off costs in 2019 with the remainder expected to be incurred in 2020.
Finance costs Finance costs were broadly steady at £26.0 million (2018 restated: £25.9 million) and include finance costs which were incurred on the Group’s leased assets following the fully retrospective adoption of IFRS 16 ‘Leases’ on 1 January 2019.
Profit for the year was £419.9 million (2018 restated: £472.0 million) in line with the reduction in operating profit.
The Group generated operating cash flows before movements in working capital of £370.3 million (2018: £440.9 million), a reduction of £70.6 million due to the reduction in profit for the year adjusted for non-cash movements. After taking into account movements in working capital, the Group generated £182.4 million (2018: £125.2 million), an increase of £57.2 million. The Group has considerable assets under management, the cash generated from these reduced by £94.2 million to £373.9 million following reductions in the Group’s assets under management, as a result of dividend payments, and proceeds from the maturity of AFS debt securities. Net cash generated from operating activities was £462.1 million (2018: 491.6 million).
The Group continued to invest significantly in its major IT programmes (2019: £175.7 million, 2018: £142.4 million). The Group paid out £420.7 million (2018: 503.8 million) in dividends in the year, comprising the 14.0 pence 2018 final dividend, the 8.3 pence 2018 special dividend and the 7.2 pence first interim dividend annual in the half-year results in 2019.
Net cash used in investing activities of £187.6 million and net cash used in financing activities of £470.6 million offset the £462.1 million generated from operating activities and resulted in a net decrease in cash and cash equivalents of £196.1 million (2018: £212.1 million decrease) to £896.3 million (2018: £1,092.4 million). The levels of cash and other highly liquid sources of funding that the Group holds to cover its claims obligations is continually monitored to ensure that the levels remain within the Group’s risk appetite.
Capital management and dividend policy The Group aims to manage its capital efficiently and generate long-term sustainable value for shareholders, while balancing operational, regulatory, rating agency and policyholder requirements.
The final dividend will be paid on 21 May 2020 to shareholders on the register on 14 April 2020. The exdividend date will be 9 April 2020.
Capital analysis The Group is regulated under Solvency II requirements by the PRA on both a Group basis and for the Group’s principal underwriter, U K Insurance Limited. In its results, the Group has estimated its Solvency II own funds, SCR and solvency capital ratio as at 31 December 2019.
Note: 1. Foreseeable dividends included above are adjusted to exclude the expected dividend waivers in relation to shares held by the employee share trusts, which are held to meet obligations arising on the various share option awards.
Surplus generation 36 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
Tier 2 capital – subordinated debt 0.26 0.26 Tier 3 capital – deferred tax 0.09 0.09 Total own funds 2.17 2.15
During 2019, the Group’s own funds increased from £2.15 billion to £2.17 billion. Tier 1 capital after foreseeable capital distributions represents 84% of own funds and 138% of the estimated SCR. Tier 2 capital relates solely to the Group’s £0.26 billion subordinated debt. The amount of Tier 2 and Tier 3 capital permitted under the Solvency II regulations is 50% of the Group’s SCR and of Tier 3 alone is less than 15%. Therefore, the Group currently has no ineligible capital. The maximum amount of Restricted Tier 1 capital permitted as a proportion of total Tier 1 capital under the Solvency II regulations is 20%. Restricted Tier 1 capital relates solely to the Tier 1 notes issued in 2017.
Change in valuation of technical provisions (0.06) (0.15) Other asset and liability adjustments (0.08) (0.09) Foreseeable capital distributions (0.35) (0.31) Tier 1 capital – unrestricted 1.45 1.45 Tier 1 capital – restricted 0.37 0.35
Note: 1. No adjustment has been made for IFRS 16 ‘Leases’ in 2018 on a
Solvency capital requirement at 1 January 1.26 Model and parameter changes (0.07) Exposure changes 0.13 Solvency capital requirement at 31 December 1.32
The Group’s SCR has increased by £0.06 billion in the year. Model and parameter changes reduced the SCR by £0.07 billion. Exposure changes, as a result of restructuring costs, Solvency II technical provisions movements and volume and mix changes of assets under management, led to an increase in the SCR of £0.13 billion.
Scenario and sensitivity analysis The following table shows the impact on the Group’s estimated solvency capital ratio in the event of the following scenarios as at 31 December 2019. The impact on the Group’s solvency capital ratio arises from movements in both the Group’s solvency capital requirement and own funds.
Motor small bodily injury deterioration equivalent to accident years 2008 and 2009 (7pts) (7pts) One-off catastrophe loss equivalent to the 1990 storm (9pts) (8pts) One-off catastrophe loss based on extensive flooding of the River Thames (9pts) (8pts) Change in reserving basis for PPOs to use a real discount rate of minus 1%1 (8pts) (10pts) 100bps increase in credit spreads2 (9pts) (11pts) 100bps decrease in interest rates with no change in the PPO real discount rate 1pt (1pt)
Notes: 1. The PPO real discount rate used is an actuarial judgement which is reviewed annually based on the economic outlook for wage inflation relative to the EIOPA discount rate curve.
2. Total IFRS financial debt and Tier 1 notes as a percentage of total IFRS capital employed.
The Group seeks to adopt a conservative approach to assessing liabilities, as evidenced by the favourable development of historical claims reserves. Reserves are based on management’s best estimate, which includes a prudence margin that exceeds the internal actuarial best estimate. This margin is set by reference to various actuarial scenario assessments and reserve distribution percentiles. It also considers other short and long-term risks not reflected in the actuarial inputs, as well as management’s view on the uncertainties in relation to the actuarial best estimate.
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 Ogden discount rate changed from 2.5% to minus 0.75% in 2017 in England, Wales and Scotland, reflecting the low interest rate environment, and case law holding that claimants were entitled to invest purely in zero risk investments, i.e. index-linked gilts. The Civil Liability Act 2018 changed the law in two ways: firstly, by requiring the Government to review the Ogden discount rate at least every five years, and secondly to do so by reference to low risk rather than very low or zero risk investments.
At year-end 2018, the Group decided that it was likely that the Ogden discount rate would change in 2019 and selected an estimate of 0% to value its lump sum bodily injury reserves. When the Ogden discount rate review process subsequently concluded in July 2019, the discount rate increased from minus 0.75% to minus 0.25% for England and Wales. The Ogden discount rate is a devolved matter in Scotland and Northern Ireland and it has remained at minus 0.75% in Scotland, and at 2.5% in Northern Ireland.
Tier 2 capital 38 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
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. There has been an 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’s prior-year reserve releases were £294.5 million (2018: £404.4 million) with good experience in large and small bodily injury claims being a key contributor.
Sensitivity analysis – the discount rate used in relation to PPOs and changes in the assumed Ogden discount rate 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 and separately the Ogden discount rate) with all other assumptions left unchanged. Other potential risks beyond the ones described could have additional financial impacts on the Group.
Impact of an increase in the discount rate used in the calculation of present values of 100 basis points 48.5 50.7 Impact of a decrease in the discount rate used in the calculation of present values of 100 basis points (66.5) (70.1) Ogden discount rate4
Impact of the Group reserving at a discount rate of 0.75% compared to minus 0.25% (2018: 1% compared to 0%) 53.3 56.2 Impact of the Group reserving at a discount rate of minus 1.25% compared to minus 0.25% (2018: minus 1% compared to 0%) (75.0) (76.3)
Reinsurance The objectives of the Group’s reinsurance strategy are to reduce the volatility of earnings, facilitate effective capital management, and transfer risk outside the Group’s risk appetite. This is achieved by transferring risk exposure through various reinsurance programmes: – Catastrophe reinsurance to protect against an accumulation of claims arising from a natural perils event. The retained deductible is 15.6% of gross earned premium (£132.5 million at 31 December 2019) and cover is placed annually on 1 July up to a modelled 1-in-200 year loss event of 133.6% of gross earned premium (£1,132.5 million at 31 December 2019). At the last renewal, 1 July 2019, approximately 60% of the reinsurance programme was placed on a fixed price basis (reinsurers’ rate on line) as the final year of a three-year contract.
Asset and liability management The following table summarises the Group’s high-level approach to asset and liability management.
Asset allocation and benchmarks – U K Insurance Limited The current strategic asset benchmarks for U K Insurance Limited are detailed in the following table: At 31 December
Commercial real estate loans 4% 3.7% 4% 3.4% Cash and cash equivalents 7% 13.4% 7% 13.9%
2. Net of bank overdrafts: includes cash at bank and in hand and money market funds.
The Group’s direct and indirect tax contribution to the UK Exchequer is significantly higher than the UK corporation tax that the Group pays on its profits. The Group collects taxes relating to employees and customers on behalf of the UK Exchequer and other national governments. It also incurs a significant amount of irrecoverable value added tax relating to overheads and claims. Taxes borne and collected in other tax jurisdictions have not been included in this note as the amounts are minimal in the context of the wider UK Group.
During 2019 the sum of taxes either paid or collected across the Group was £956.6 million. The composition of this between the various taxes borne and collected by the Group is shown below.
Non-traditional competitors and intermediaries may change how products are accessed by customers.
Our aim is for customers to value the protection, service and security our products offer, being clear about pricing and ultimately giving people numerous reasons to stay with our brands.
New products, new routes to market and technology may emerge offering tailored products due to changing consumer expectations on ease, flexibility, sustainability and transparency.
Improving car technology may change the risk pool and increase the importance of data and analytics.
– We are preparing for the future by investing in specialist equipment to repair cars with ADAS technology, supported FiveAI’s trial of autonomous vehicles and partnered with Europe’s largest car-subscription service Drover.
Our response to the individual markets we operate in can be found on pages 44 to 51.
In-force policies (thousands) 4,043 4,094 Of which direct own brands 3,921 3,950
Gross written premium £1,651.6m £1,671.2m Loss ratio 69.3% 63.5% Commission ratio 2.6% 2.0% Expense ratio 22.9% 23.1% Combined operating ratio 94.8% 88.6% Operating profit £302.6m £418.1m
Own brand in-force policies reduced by 0.7%, with an overall reduction in in-force policies of 1.2% to 4.0 million.
Operating profit of £302.6 million was £115.5 million lower than prior year, primarily due to lower prior-year reserve releases of Ogden discount rate changes in 2018 and 2019.
The Group’s Motor in-force policy count stabilised during the second half of the year as some signs of premium inflation returned to the market, with new business sales on price comparison websites strengthening during the last quarter. The Group began to expand its underwriting footprint with the introduction of its Darwin brand in 2019, and the deployment of the Group’s next generation underwriting platform was completed for new business in its Privilege brand.
The Group continued to invest in its in-house vehicle repair network and other initiatives designed to help manage claims inflation. In 2019 the Group opened its twenty first site, in Weybridge, and completed more than 90,000 in-house repairs across the network during the year.
Own brands in-force policies reduced slightly by 0.7%. Strong new business growth was achieved in Churchill following the brand’s re-launch in October and a strengthened proposition for the price comparison website channel. Retention reduced slightly, but remained strong across direct own brands and partnerships.
By 2025 40% of all vehicles are forecast to be fitted with some form of ADAS in the near future, changing the skills our people will need to fix the cars of the future. ADAS features, such as Autonomous Emergency Braking, rely on sensors to operate presenting challenges for our network of accident repair centres because the technology sits in some of the most collision intensive aspects of cars.
In-force policies (thousands) 2,594 2,651 Of which direct own brands 1,765 1,789
Gross written premium £586.6m £606.9m Loss ratio 46.8% 61.8% Commission ratio 9.7% 9.4% Expense ratio 23.8% 22.3% Combined operating ratio 80.3% 93.5% Operating profit £150.6m £83.9m
Home’s current-year attritional loss ratio was 3.5 percentage points lower as pricing, underwriting and claims handling actions initiated in 2018 restored escape of water claims inflation to a level near the bottom end of historic long-term averages after a number of years of elevated inflation.
2. See glossary on pages 222 to 224 for definitions and appendix
Performance In-force policies for Home’s own brands reduced by 1.3% in 2019 to 1.8 million policies due to a reduction in new business volumes. Partnership volumes reduced by 3.8%, Prudential and Sainsbury’s partnerships are closed to new business and continued to run off in line with expectations.
Gross written premium was 3.3% lower than 2018, predominantly due to a reduction in partnership volume, as Prudential and Sainsburys continued to run off. Own brands gross written premium reduced by 1.2% primarily due to lower renewal premiums. Retention continued to be strong.
Our team were stationed in the local community centre and at Wainfleet market place to assist everyone in need and provide some peace of mind. Our emergency response vehicle was mobilised in the area to provide customers with a physical location where they could come and speak with us directly, have their queries answered and be reassured that we would take care of repairing the damage caused to their homes.
Gross written premium grew 3.1% to £436.0 million supported by increases across all product lines.
Green Flag celebrated its 25th birthday as a brand this year by hitting the target of reaching one million direct customers after another year of double-digit growth. In another major milestone in its transformation it also provided customers with a more seamless experience by bringing best practice from its claims and sales & service teams to create “Centres of Excellence” in Leeds and Glasgow.
Not content with challenging to be the number one breakdown brand, Green Flag wants to be famous for being a brand for motorists too. By building its online presence, it aims to attract new customers and further grow its business – all while providing an awesome experience for customers.
Overview Rescue and other personal lines consists of Rescue products, including those sold through the Green Flag brand, and other personal lines insurance, including Travel, Pet and Creditor, which are sold through own brands and partnership arrangements.
Green Flag’s ongoing transformation strategy, positioning itself as the market disrupter, gathered pace in 2019. Green Flag’s direct in-force policy count passed 1 million in September and the Group has commenced building its next generation of underwriting and claims management platforms.
This new digital capability complements our multilingual call centres and effective repatriation service, which is available for customers who have encountered more serious incidents while away.
Travel claims inflation remained in line with medium to long-term expectations during 2019. The Group did not see any adverse claims experience resulting from the collapse of Thomas Cook in September 2019. Brexit uncertainty remains a risk until the UK’s implementation period ends, however, the possible withdrawal of the European Health Insurance Card (“EHIC”) scheme may lead to customers relying more on travel insurance.
Green Flag Rescue continued to grow its higher average premium direct business during 2019, increasing in-force policies by 13.7% to 1.1 million. Gross written premium increased by 13.5% to £79.0 million.
Total Other personal lines (comprising Travel, Pet and other) in-force policies reduced by 2.8% to 3.9 million primarily due to lower packaged bank account volumes in Travel. Pet in-force policies grew in 2019, reversing a period of lower volumes, and insurance packages tailored for UK Select Home and Motor customers saw strong growth in the year.
The combined operating ratio for Rescue and other personal lines increased slightly by 0.4 percentage points to 95.4% (2018 restated: 95.0%) as a 1.5 percentage point improvement to the expense ratio was more than offset by an increase to the commission ratio. The loss ratio was broadly stable year-on-year.
NIG exited less profitable relationships and targeted increased margins at the expense of policy count growth. The focus continued to be on profitability and delivering on its service proposition to be ‘Effortless to Trade With’.
Commercial’s broking and partnerships division signed six new partnerships including a referral agreement with American Express and two innovative partnerships with car-share start-up “YouMeCar” and flexible car leasing service, Drover.
In-force policies (thousands) 775 755 Of which: Commercial direct own brands 541 514
Gross written premium £528.9m £511.0m Of which: Commercial direct own brands £149.4m £137.9m NIG and other £379.5m £373.1m
Loss ratio 52.7% 51.8% Commission ratio 18.5% 18.9% Expense ratio 24.5% 24.7% Combined operating ratio 95.7% 95.4% Operating profit £54.6m £60.4m
Performance Commercial in-force policies increased by 2.6% compared with 2018 to 775,000, reflecting strong growth in Commercial direct own brands with NIG and other broadly stable.
Overarching risk objective The Group recognises that its long-term sustainability is dependent on having sufficient economic capital to meet its liabilities as they fall due, thus protecting its reputation and the integrity of its relationship with policyholders and other stakeholders. As part of this, its appetite is for general insurance risk, focusing on personal lines retail and small and medium-sized enterprise insurance in the United Kingdom. The Group has appetite for non-insurance risks, as appropriate, to enable and assist it to undertake its primary activity of insurance.
Three strategic risk objectives 1. Maintain capital adequacy The Group seeks to hold capital resources in the range of 140%-180% of the internal model solvency capital requirement.
3. Maintain stakeholder confidence The Group has no appetite for material risks resulting in reputational damage, regulatory or legal censure, poor customer outcomes, fines or prosecutions and other types of nonbudgeted operational risk losses associated with the Group’s conduct and activities. The Group will maintain a robust and proportionate internal control environment.
Managing risk in line with our strategy Our management team, with oversight from the Board, and the Board Risk Committee, are responsible for developing our strategy. Our Strategic Planning Process aims to ensure we have developed clear objectives and targets, and identified the actions needed to deliver them, including the management of risk.
To begin with, the focus was on establishing standards and governance, articulating the Group’s risk appetite and ensuring we had appropriate capability across its three lines of defence. We now have an embedded Enterprise Risk Management Framework (“Risk Management Framework”) with clear accountabilities and risk ownership designed to ensure that we identify, manage, mitigate and report on all key risks and controls through the three lines of defence model: – First line: Management is responsible for embedding risk management into business as usual and change processes whilst creating transparent reporting of risks and management actions.
– Second line: The Risk Function is responsible for the design and recommendation to the Board Risk Committee of the risk management framework, its implementation across the Group and the provision of proportionate oversight of risks, events and management actions throughout the Group.
– Third line: Group Audit is responsible and accountable for providing an independent and objective view of the adequacy and effectiveness of the Group’s risk management, governance and internal control framework.
Risk appetite Our risk appetite statements are an expression of the level of risk the Group is prepared to accept to achieve its business objectives. The statements are used to drive risk-aware decision-making by key business stakeholders.
– we review our risk appetite statements and key risk indicators annually.
Aligned to the three lines of defence model, not only does the risk management framework articulate the high-level principles and practices needed to achieve appropriate risk management standards, but it also demonstrates the inter-relationships between components of the risk management framework.
Our risk culture underpins our business and decision-making, and helps us embed a robust approach to managing risk. Our Risk Function drives ownership of risks in the business and ensures that risk consideration is integral to all decision-making. It also provides expert advice and guidance to business areas, whilst also challenging the effectiveness of controls to manage risk and compliance.
The ‘Risk Heroes’ campaign generated over 3,600 click-throughs and online interactions during the campaign period. The amount of interest in the campaign, as measured by click-throughs and online interactions, suggests that, as a result of the Risk Communications Plan, as well as business as usual activity, the Risk Function was able to raise its visibility, and increase staff understanding of risk across the Group.
Key drivers of the outlook for insurance risk across our business plan include reserving, underwriting, distribution, pricing and reinsurance risks.
This year, motor market premium inflation has not matched expectations of claims inflation, which has led to a slowdown in customer shopping behaviour and a reduction in new business. Increases in vehicle technology are also beginning to cause an increase in claims inflation. In response we are developing our ability to distinguish this trend between vehicles to more accurately price risk. We’ve also launched Darwin (see page 22) using machine learning rating models with the aim of growing market share in areas where we have lower penetration.
The continued political uncertainty (including post-Brexit) could also have an impact on claims inflation and market behaviour (for example, recession affects customer behaviour) and we continue to monitor this closely.
Finally, climate change presents a risk of more frequent extreme events and key risk indicators are in place to monitor related risks across Home and Motor. (See Planet pillar on pages 68 to 71.)
Concerns about the impacts of Brexit remain, and continuing US-China tensions could impact equity and credit markets within the global economy and lead to credit spread increases.
The principal risks within this category are Cyber, Operational Resilience, Partnership Contractual Obligations, Change, Outsourcing and Technology and Infrastructure risks.
Operational risks can arise within all areas of the business and can become manifest through inadequate or failed internal processes or systems, human error or from external events. The key drivers for us include people, data, cyber, technology and infrastructure, resilience, partnership contractual obligations, change, and outsourcing and suppliers.
We are continuing to work to improve performance of our IT systems while focusing on developing future systems capability. With significant strategic investment in train we are actively strengthening our change implementation controls to further mitigate potential impacts related to data management, IT systems stability, cyber security, and the wider internal control environment during transition.
Our risk management framework is designed to enable us to capture risk information in a complete and consistent way, including proactive trend analysis, root cause analysis and read across to enable early warnings and a ‘learning’ risk environment.
Finally, we carry out planned risk-based monitoring of customer processes as well as more targeted thematic reviews to help us manage the risk of unfair customer outcomes.
To manage credit risk, we set credit limits for each counterparty and actively monitor credit exposures. In addition, we only purchase reinsurance from reinsurers with at least A- rating and, for liabilities with a relatively long period of time to settlement, this rating is at least A+. Finally, we also have well defined criteria to determine which customers are offered and granted credit.
Potential effects of Brexit The UK left the EU (“Brexit”) on 31 January 2020. At the date of this report there remains uncertainty as to when the implementation period will end (it is due to end on 31 December 2020 but could yet be extended, albeit requiring a change to the law) and as to what, if any, trading agreement may or may not be agreed between the UK and EU to take effect subsequent to the implementation period. There is also uncertainty as to what trading agreements may or may not be agreed with key non-EU countries to supersede such arrangements previously subject to EU trade agreements. Accordingly, there remains uncertainty as to the effect of Brexit on the Group.
Internal review Following the EU referendum result in 2016, which saw the UK vote to leave the EU, the Group established a Brexit Working Group comprising representatives from across the Group. It was identified that there was a risk that the UK could enter a prolonged period of reduced growth due to Brexit, potentially reducing insurance sales and the value of our investment portfolio. Whilst our operations are based mainly in the UK, Brexit-related issues which could impact adversely on the Group could include: changes to the value of sterling which impact claims and non-claims supplier costs; inflation; impacts on credit spreads which in turn could impact on the Group’s investments and capital; recession; recruitment and retention of people; impacts on the speed of delivery and cost of goods and services required by the business including for fulfilling insurance claims made by customers, for example because of delays at borders caused by increased border regulations and by additional costs caused by increased tariffs and devaluation of sterling; availability of reinsurers authorised to write business in the UK; data transfers; the removal of the EHIC leading to greater reliance on travel insurance; travel disruption; increased use of Green Cards (internationally recognised certificates that act as proof of insurance, including in the EU); potential changes to direct and indirect tax; and the regulatory impact on our capital position.
Possible implications 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; for example: The Group’s investment portfolio The impact on the Group’s investment portfolio and in particular credit spreads related to its debt securities and therefore Group solvency: A sensitivity analysis relating to credit spreads is provided on page 37 and on page 177. The Group has also considered Brexit impacts in its Investment Committee, and further information is provided on the work of the Investment Committee on pages 104 to 105. A disruptive end to previous arrangements between the UK and EU could impact adversely on the Group’s investments and therefore capital and the solvency capital coverage ratio and the appropriateness of paying dividends.
Procurement and supply chain In particular as part of the Group’s ability to deal with claims made under insurance policies, the Group needs to acquire a wide range of goods and services. A significant amount and spread of goods, for example such as car parts, are sourced from within the EU. The Group has been in discussion with principal suppliers who took steps to increase stocks within the UK in the event of a potential ‘hard’ Brexit leading to disruption at borders. However, in the event of a lack of appropriate trading arrangements with the EU (and other countries) following the implementation period and for example in the event of the imposition of tariffs and quotas, the Group’s ability to deal with claims in its normal ordinary course of business manner could be adversely impacted and there could be delays and extra costs.
The Republic of Ireland The Group has a small amount of business in the Republic of Ireland, servicing a small Irish part of a UK partner’s wider business. The Group had obtained approval in principle from the Central Bank of Ireland for the establishment of a formal third country branch in the Republic of Ireland, in order to be able to continue with this business post a ‘hard’ no-deal Brexit, should that have become necessary. It remains to be seen whether similar arrangements will be needed at the end of the implementation period.
During 2019, the Risk Function has worked with subject matter experts from the business to enhance the quality and detail of emerging risk updates. Each risk is owned by a member of the Executive with subject matter experts in the Risk Function providing challenge and oversight; and emerging risks are monitored by the Risk Management Committee, Board Risk Committee and Board.
The emerging risk process is supplemented by deep dives on selected emerging risks which are reported to the Board Risk Committee for review and challenge.
Climate change We recognise that climate change potentially poses material long-term financial risks to the business and is receiving increased scrutiny from regulators and investors. Climate change can be divided into three categories: physical, transition and liability risks, all of which can manifest themselves through a range of existing risks within the material risk register, including insurance, market, operational, strategic and reputational risks.
Physical risks Physical risks are the direct risks which arise from weather-related events, including the potential to affect both the frequency and severity of natural catastrophes and other weather-related events in the UK. These are not only financial risks but also risks arising from the operational impacts of weather events; for example, vacating an office due to flooding, as happened to the Group in 2015.
Transitional risks Transitional risks arise because efforts to mitigate climate change are driving a transition towards a lower-carbon economy, which creates risks and opportunities.
For example: – Whilst insuring electric vehicles does not fundamentally change the business model, electric vehicles have their own unique risk profile, and pose different challenges to motor underwriters, accident repair centres, and to rescue products.
Liability risks Liability risks arise when parties, who have suffered losses from climate change, seek to recover from those they believe may have been responsible. There is some potential exposure to liability risk through commercial liability insurance. There are two types of coverage that may have an elevated exposure to climate liability risk: insurance against the risks due to pollution on agricultural insurance policies, and professional indemnity covers. We have reinsured both of these risks.
The risks and impacts of climate change are wide ranging. The Group is focusing increasingly on climate change, with related risk management activity including the monitoring of climate change through the Emerging Risk process, the formation of a Climate Change working group, and commencing the implementation of the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures. (see Planet pillar page 68).
While the extent and timing of these changes are uncertain, our new strategy (pages 15 and 20 to 21) has been designed to help us respond to these and other market changes so that we can win in our chosen markets.
Viability Statement In accordance with provision 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Group for a period longer than the minimum 12 months required by the going concern statement.
Based on the results of these reviews, the Board has a reasonable expectation that the Company and the Group can continue in operation, and provide the appropriate degree of protection to those who are, or may become, policyholders or claimants in the period to 31 December 2023.
Understanding what matters most to our stakeholders The Group’s proud history gives it an established position in the UK general insurance market.
We’ve always been innovators from the moment we disrupted the market in the 1980s by giving people the opportunity to buy their insurance direct.
By using our five pillar ESG framework we asked stakeholders to prioritise a range of sustainability issues and then matched this against the priorities of the business.
The prioritisation exercise has highlighted the following priority areas: 1. Delivering great service to all customers 2. Communicating clearly and openly with customers 3. Investing in training and developing our people 4. Supporting employee wellbeing 5. Harnessing data and technology 6. Protecting customers’ data 7. Upholding good labour standards
We will now use this insight, alongside the other feedback we have received, to shape our five pillar ESG strategy and further inform those initiatives. Through this lens we can identify new opportunities helping to ensure future decision making of the running of our business reflects stakeholder views.
The scale of our influence means it touches on a vast range of interests – everything from the service we offer customers, the support we provide our people, how we treat suppliers, how we deliver shareholder returns and our wider impact on society and the environment.
People Encourage a culture that celebrates difference and empowers people so that they can thrive.
Society Use our expertise to improve outcomes for society and the communities we serve.
Section 172(1) Statement Direct Line Group is a leading motor, home and commercial insurer which depends on the trust and confidence of its stakeholders to operate sustainably in the long term. The Group seeks to put its customers’ best interests first, invests in its employees, supports the communities in which it operates and strives to generate sustainable profits for shareholders.
Our vision, purpose, sustainability pillars and values are set out in the Strategic report, as are the risks facing our organisation and the mitigating action we take, our environmental, social and governance practices, examples of stakeholder engagement and information about our engagement with employees, shareholders and suppliers. The Group’s ESG activity, overseen by the Board, is described in the Strategic report on pages 59 to 73.
L o w e r Im p o rt a n ce t o s ta k e h o ld e rs
While many customers shop around for insurance, we recognise that more needs to be done to promote competition in the market, particularly for longstanding customers. Prices should not keep rising for no reason. We want our customers to value the protection, service and security our products offer giving them reason to want to come back to us every year. The FCA Market Study on General insurance pricing practices Interim Report has proposed a number of remedies. Since establishing our own pricing review process in 2014 we have taken action to ensure we continue to earn our customers’ trust: Our people and their instinctive customer care drive real long-term value and is seriously difficult to replicate. We believe this gives us competitive advantage.
– We’ve reviewed the premiums of customers who have been with us for five years or more resulting in inflation only, frozen or discounted prices.
– While auto-renewal is an important customer safeguard we believe that people should be able to opt-out easily.
Personalisation Treat me like a real person and not like a process
Giving customers choice and flexibility Like many data-driven consumer markets, ours is digitising fast and we believe our success will be predicated on combining customer focus and brand with a strong technology foundation.
Our women’s network Thrive has continued to expand, giving more of our people the opportunity to benefit from the advice of external speakers to develop their skills. Covering issues such as imposter syndrome and securing your financial future, the network epitomises our ‘say it like it is’ value, encouraging people to be open about their career hopes and fears and what they can do to succeed. As a result, networking and mentoring has increased across the business.
We have nearly 11,000 people with a multitude of different skills, bringing their own diverse experiences and backgrounds into all that they do. We celebrate diversity from dress code to neurodiversity networks, from living our value of ‘saying it like it is’ to taking pride in our activity around mental health. We want all of our people to ‘bring all of themselves to work’ because that’s how we’ll continue to be a great place to work and attract and retain the best talent. That’s why we continue to promote internal initiatives that recognise, support and applaud difference as well as support the things that matter to our people.
Promoting diversity and inclusion Our values sit at the very heart of our business. They were created ground up and represent in full technicolour our identity. Our people always want to ‘aim higher’ which is why we set up the Diversity and Network Alliance (“DNA”) run by volunteers with action strands including gender, disability, working families, BAME, LGBT+ and social mobility. Led by our people, each strand represents the thoughts and needs of our people, helping to guide what we support externally and our people policies and strategy.
Encourage a culture that celebrates difference and empowers people so that they can thrive.
Neuro-diversity Neuro-diversity focuses on unleashing the potential of teams, as well as individuals, in the knowledge that our differences can stimulate bigger and better ideas, leveraging an untapped source of competitive advantage. Through our work with Auticon, who provide IT and data consultants on the autistic spectrum, we’ve been able to hire consultants into our pricing development team and ensure the right support network is in place for them to thrive.
Women in Finance Charter The Group set a target of 30% females in senior leadership positions by 2019 and we are proud to have achieved this through implementing measures including investment in female leadership programmes, utilising gender balanced shortlists and using gender decoders on our job advertisements to ensure the language is unbiased and attractive to all potential candidates .
Hampton Alexander Review The Hampton Alexander Review set targets for FTSE 350 companies to have at least 33% women on their Board and in leadership positions by 2020. The Group is ranked 32nd in the FTSE 250 for female Board representation, with 40% of the Board being female. In senior management positions 31% are women.
Financial health Money can often be at the heart of many people’s worries, but too often people are not comfortable talking about it or seeking help. This year we have launched a financial wellbeing initiative to assist our colleagues in gaining financial confidence through learning about savings accounts and wider financial education.
Pay In April we increased the Group’s company-wide minimum salary to £19,000 for full-time colleagues on 37.5 hours. This was 8% above the Living Wage Foundation rate outside London at the time, and 18% higher than the Government’s national minimum wage.
Human Rights We have a range of policies and procedures that support our commitment to human rights. These include our : – diversity policy (see page 63) – wellbeing strategy (see page 64) – Code of Business Conduct (see page 75) – compliance with the Modern Slavery Act 2015 (see page 103) – Ethical Code for Suppliers (see page 67)
The page references above identify where more detail is provided on each of these important elements.
We support our LGBT+ community through attendance at Pride events all over the UK. Through the LGBT+ strand, our people have worked together to organise events throughout the UK under the ‘Proud to be here’ Group banner. One of our values is ‘bring all of yourself to work’ and we welcome the opportunity to celebrate diversity amongst our people as well as supporting inclusion in business and society.
Through our #ThisIsMe campaign we created a platform to enable our people to share their stories about what makes them who they are using an enterprise social networking service and in a video shared internally and externally. By celebrating the diversity of all our people and encouraging conversation about what matters to them both within and outside of work, the campaign embodied our value of ‘Bring All of Yourself to Work’.
We have always instinctively been there for society and the communities we serve but we are now consciously making this central to our strategic thinking.
Mind Our people have raised over £170,000 for our corporate charity partner Mind, since starting our relationship. The effort and enthusiasm of our employees in raising money is making a profound contribution towards running Mind’s Infoline which supports people to access the help they need. Our fundraising will enable around 33,000 more calls or four new Infoline advisers, a significant opportunity to help more people.
Colleagues faced the challenge of raising as much money as possible by setting up an innovative small business venture. In a short period of time they turned £1,500 seed funding into an impressive £20,468.
Giving back to society As a large UK company, we want to play our part in driving positive outcomes for society as a whole and we know that if we do business in the right way we can achieve this. Whether that’s managing tax obligations responsibly, working with our local communities to support the things that matter to them, investing in training or treating our suppliers fairly.
Tax We recognise the importance of managing our tax obligations responsibly and the Group’s total tax contribution is £956.6 million which includes the Group’s direct and indirect tax contribution. The diagram below reflects the Group’s tax contribution. See the full tax contribution note and tax strategy on page 42.
Social Mobility Pledge We have taken time to consider how we could enhance our Diversity and inclusion strategy with a particular focus on promoting social mobility. We are proud to have signed the pledge and look forward to further embedding employee-led initiatives.
Our Ethical Code for Suppliers requires that all our suppliers adhere to the core International Labour Organisation standards. The Modern Slavery Act 2015 is incorporated into our risk profiling and specific requirements are incorporated in our due diligence and assurance processes that align with the legislative requirements. We are committed to ensuring that modern slavery is not present in our supply chain.
We have fitted new paint spray booths in three of our accident repair centres which is leading to operational energy efficiencies. Digital controls are allowing for more accuracy when painters are managing paint and bake cycles. We also have better capability in controlling how much power is driving air into the booths meaning we can reduce how much gas is used when jobs are not taking place. And because we now use automatic air recirculation we are using less power to draw in outside air. These actions could lead to savings in energy of up to 40%.
Governance The CEO has overall responsibility for climate change and environmental matters. The Chief Risk Officer who leads the Risk Function is responsible for overseeing the management of climate change-related financial risk to the Group and sponsors the ‘Planet’ pillar of the Group’s sustainability framework. This includes the Risk Function’s work in analysing and stress testing the potential future impact of climate change on the business.
Our Board Committees oversee the Group’s environmental initiatives, climate-related disclosures and investment performance and are responsible for both assessing and managing climate-related risks and opportunities.
Strategy The UK is committed to the vision of a sustainable, low carbon economy which promotes green growth where individuals, businesses and wider society take advantage of new opportunities.
– Full digital experience: By providing customers with a full digital experience this will reduce the need to post and print policy documents.
– Agile working: Moving towards an agile working model is expected to reduce the footprint of the estate, require less energy and change the travel patterns for employees.
As a major UK employer, we believe it is important to support and encourage behavioural change outside and within our business. That’s why we set up a network of Environmental Champions who have received accredited sustainability training to promote local awareness campaigns.
– Plastic free catering solutions: Through our partnership with Vegware, which provides fully compostable plant-based food containers, cutlery and cups, we have decreased waste from our onsite catering.
– Our investment policy is to encourage asset managers to invest in green bonds and at the end of 2019 1.5% of our bond portfolio was invested in green bonds, which is above the broad market weight.
– We invest £278 million in infrastructure loans which focus heavily on social infrastructure. At the end of 2019 89% of the portfolio was invested in hospitals, schools and other public service buildings.
We currently target: – A 57% reduction in Group-wide emissions and a 30% reduction in energy consumption by the end of 2020 against a 2013 like-for-like baseline. To date, the Group has achieved 53% and 29% respectively.
– A slow more orderly transition that keeps global temperatures well within the Paris target of 2°C of warming
Risk Management The Enterprise Risk Management strategy and framework sets out our approach to setting risk strategy and for managing risks to the strategic objectives and day-to-day operations of the business.
The effects of climate change are wide-ranging, and the Group reflects the effects of climate change through the drivers of those risks which are defined in the Group Risk Taxonomy.
As physical impacts from climate change and associated transition to a low carbon economy are likely to be gradual, there are limited impacts from physical risks directly attributable to climate change included in the financial plan. However, we are taking a number of steps to manage risks and take advantage of opportunities presented by climate change and the transition to a low carbon economy. Please see page 57 for further information.
Each year, business areas assess and identify all current and developing climate change-related risks and their likelihood of materialising either on an inherent or residual basis. These are rated using the Impact Classification Matrix allowing us to determine the relative significance of climate-related risks.
Weather-related events are modelled using the Group’s Internal Economic Capital Model. These catastrophe models are regularly reviewed, using the latest scientific thinking, to ensure they align to our risk profile and to help ensure appropriate pricing. Large weather events are mitigated by our use of catastrophe reinsurance.
CO2 Emissions We take pride in challenging ourselves to reduce emissions and energy consumption across the business. Being transparent about our energy use is a fundamental part of that challenge.
– In 2019 our Scope 1 & 2 GHG emissions total were 13,932 tonnes meaning that over the last seven years we have achieved a 53% reduction in GHG emissions.
Emissions table Tonnes of CO2e 20132 2018 (restated)3 2019 % change (2013 to 2019)5Location-based Location-based Market-based4,5 Location-based Market-based
7. Intensity metric is calculated using tonnes CO2e divided by £m net earned premium. 8. Scope 3 total has been expanded for 2018 and 2019 to include a small amount of emissions associated with plug-in hybrid vehicles.
Non-financial information statement The cross references below set out where stakeholders can find information in our Strategic report that relates to non-financial matters, as required under the new regulations1 on reporting non-financial information.
In September 2019 the Group was rated as an ESG leader within property and casualty insurance ranking first out of 81 companies.
The Board believes that a business model that is sustainable in the long term is key for discharging the responsibility to promote the success of the Group. We pride ourselves on a proactive sustainability strategy and the table below shows where information can be found in this Annual Report & Accounts containing our ESG disclosures, our external ratings, as well as information on how we govern and how we think about the future.
Car sharing is an emerging trend that could have wide-ranging implications for insurers. In the future people may want to use products and services periodically, rather than making a big outlay in spending. It is part of a broader desire for products that are easy to use, easy to access and ultimately personal to individual needs. That’s why this year we signed up to two new partnerships because we recognise that subscription-based services could alter the way insurance models work: – Drover has created a new way to “own” a car by providing individuals and private hire drivers with flexible vehicle subscriptions where users pay a recurring fee for the right to use a car with insurance, maintenance, tax, MOT and breakdown cover.
The Corporate Responsibility Committee focuses on the Group’s responsibility for the environment, the community and the wellbeing and engagement of its people.
The Investment Committee considers the strategy for incorporating ESG factors into the Group’s investment management.
The Audit Committee focuses on sustainability in the Group’s financial disclosures.
Dear shareholders and other stakeholders, On behalf of the Board, I am pleased to present the Corporate Governance report for the year ended 31 December 2019.
Your Board is committed to underpinning all of the Group’s activities with the highest standards of corporate governance. This section of our Annual Report explains how your Board seeks to ensure that we have effective corporate governance in place to help support the creation of long-term sustainable value for our shareholders and other stakeholders.
There is a duty, enshrined in the Companies Act 2006, for your Directors to act in the way each of us considers, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, having regard to various matters identified in the legislation. In this Annual Report we have detailed the stakeholder and other issues which the Directors considered when discharging this duty throughout the year. Our formal statement in relation to section 172 of the Companies Act 2006 appears on page 60.
Purpose, culture and values The Board believes that the Group’s purpose-based culture is the foundation for delivering long-term sustainability.
The Board recognises the importance of its role in setting the tone of the Group’s culture and embedding it throughout the Group. The Board aims to foster an open and collaborative culture based on the vision and purpose adopted during the year, supporting decisions that are best for our shareholders, whilst having regard to the interests of our other stakeholders. Our vision, purpose, values and Code of Business Conduct are central to the Group’s culture. We encourage our people to be curious, to be aligned on outcomes, to build trust, encourage simplicity, empower their teams and continually test, learn and adapt.
Board changes Penny James, who was serving as our CFO, replaced Paul Geddes as CEO at the conclusion of the 2019 AGM, at which point Paul stepped down from the Board. Clare Thompson, who served as a NED for more than six years, also stepped down from the Board at the conclusion of
Direct Line’s purpose-based culture is the foundation for delivering long-term sustainability.
As part of the annual evaluation process, all NEDs were assessed as being independent and able to provide a valuable and effective contribution to the Board. Suggestions for further improving effectiveness that were raised during the review process have been taken into consideration by the Board. Further details can be found on page 86.
Remuneration The Board has delegated to the Remuneration Committee responsibility for the remuneration arrangements for the Chairman, Executive Directors and senior management. The Remuneration Committee also reviews workforce remuneration and related policies and the alignment of incentives and rewards with the Group’s culture.
The Group’s remuneration policy was last approved at the 2017 AGM and the current policy has remained in place for three years. In accordance with legislation, we will submit a new policy for shareholder approval at the upcoming AGM on 14 May 2020. The Chair of the Remuneration Committee has consulted our major shareholders on our proposed Directors’ Remuneration Policy on which shareholders will be given the opportunity to vote at the 2020 AGM.
Annual General Meeting Direct Line Insurance Group plc’s 2020 AGM will be held on Thursday 14 May 2020 at 11am. Full details of the venue and the resolutions to be proposed to our shareholders can be found in the Notice of AGM which will be made available on our corporate website.
Aim higher Be ambitious to achieve even better results. Have confidence, innovate and try new things. Embrace change to deliver for each other, our customers and our shareholders.
Challenge drives progress. Your input matters so have the courage to say what you think and the patience to listen to others. Keep it simple and customer focused.
Nobody has all the answers. Collaborate and draw upon the diverse skills across our business. Trust each other and focus on customer outcomes to beat our competitors.
The Board recognises the benefit of recruiting leaders who live the Group’s culture and values and represent a diversity of gender, ethnicity, cognitive strengths and socio-economic, educational and professional backgrounds.
The Nomination and Governance Committee continues to review succession plans both for the Board and at executive level each year. Further information on our diversity policy, our approach to succession planning and Board appointments can be found in its report.
Effectiveness and evaluation As Chairman, one of my principal objectives is to guide and develop an effective Board which is able to support our executives in executing an ambitious strategy for the benefit of our shareholders and other stakeholders. In accordance with the Code, we conduct external evaluations of the effectiveness of the Board and its
Mike’s previous positions include Chairman of Resolution Limited, then a FTSE 100 UK life assurance business, Group Finance Director and then CEO of Resolution plc. He was also previously Group Finance Director of Aviva plc. Mike is an Associate of the Institute of Chartered Accountants in England and Wales and has a Masters degree in History from the University of Oxford.
Biography Penny was CFO of Direct Line Group until her appointment as CEO in May 2019. The Board benefits from Penny’s deep understanding of our sector as well as her leadership skills, financial and risk expertise, strategic thinking and cultural alignment. As CEO, Penny is leading both the delivery of the Group’s short-term strategic imperatives, including technological and business transformation, and the development of the next stage of our strategy of targeting long-term sustainability.
Penny was previously Group Chief Risk Officer and Executive Director at Prudential plc, where she was responsible for leading risk oversight globally. Before this, she was Director of Group Finance at Prudential. Penny was previously Group CFO at Omega Insurance Holdings Limited and CFO, UK General Insurance, at Zurich Financial Services. She was a NED of Admiral Group plc from 2015 to 2017. She is an Associate of the Institute of Chartered Accountants in England and Wales.
Biography Danuta is Chair of the Remuneration Committee. The Board benefits from her previous experience as a Chief Executive and NED (including two positions as Chairs of Remuneration Committees), significant experience in sales, marketing, customer services and technology and in leading and changing large businesses.
Danuta was Chairman of Telefónica in Ireland until 2012, having previously been its Chief Executive from 2001 to 2010. During her nine-year tenure as Chief Executive, she increased the customer base from just under 1 million to over 1.7 million. Before working at Telefónica, Danuta held various senior positions within BT Group from 1984 to 2001. Until 2018, Danuta was a NED and Chairman of the Remuneration Committee at both PageGroup plc and Old Mutual plc.
Current external appointments Danuta is Non-Executive Chair of St. Modwen Properties plc. She is also SID of Aldermore Group plc and a Non-Executive Member of the Defence Board of the UK Ministry of Defence.
Mark previously held the role of Group CFO and Executive Director at Legal & General Group plc (“Legal & General”) until 2017. During his 19-year career at Legal & General, he held a variety of senior roles including CEO of the Savings business, Managing Director of the With-Profits business, and Resources and International Director. Before joining Legal & General, Mark held senior financial and business development roles at ASDA and Kingfisher. Mark is an Associate of the Institute of Chartered Accountants in England and Wales.
Biography Jane is Chair of the Board Risk Committee. The Board benefits from Jane’s significant experience of risk management, corporate governance, internal control and developing and monitoring customer and conduct risk frameworks. This experience, as well as extensive experience in overseeing IT and transformation programmes, makes her well suited to the role of Independent NED and Chair of the Board Risk Committee.
Biography Tim joined Direct Line Group as CFO on 1 October 2019. The Board benefits from Tim’s many years of experience as a finance director in the insurance industry, his detailed knowledge of capital markets and his track record of successfully leading finance transformation programmes.
Current external appointments Tim is a member of the Association of British Insurers Board and is Chair of their Prudential Financial and Taxation Committee. He is also a member of the PRA’s Practitioner Panel.
Biography Sebastian is Chair of the Corporate Responsibility Committee. The Board benefits from Sebastian’s extensive experience in retail and consumer practice at large groups, his detailed understanding of the UK consumer markets, products and brands as well has his strategic and operational experience running Dixons Carphone plc and Boots.
Current external appointments Sebastian is President and Managing Director of Boots, and Senior Vice President of Walgreen Boots Alliance, Inc. He is also a Trustee of the Museum of Modern Art Limited.
Fiona has over 30 years’ experience in retail financial services, in the industry and as an auditor, in the UK and the USA. She is an Associate Member of the Institute of Chartered Accountants in England and Wales, qualifying as an accountant early on in her career at Arthur Young (now EY). Until January 2019 she was Vice-Chairman of Save the Children UK and a Trustee Director of the Humanitarian Leadership Academy. Previously, Fiona served as CEO of Scottish Friendly Group for 11 years, before which she was Scottish Friendly Group’s Finance Director.
Richard was Chief Executive of Lloyd’s of London from 2006 to 2013. He was Non-Executive Chairman of Brit Syndicates Limited and Executive Chairman of Cunningham Lindsey from 2014 to 2018. He was a NED of Partnership Assurance Group plc, now part of Just Group plc, between 2013 and 2016. Before being Chief Executive of Lloyd’s of London he was previously Chief Executive, later Vice Chairman, of the International Petroleum Exchange, rebranded ICE Futures. Before this, he held a range of senior positions at British Petroleum and was a research scientist for the Science and Engineering Council. Richard was also a NED of London Clearing House, a member of the PwC Advisory Board and a Board member of the Geneva Association.
Current external appointments Gregor is Chairman of Alliance Trust plc and Chairman of Quilter Financial Planning Limited. He is a NED of FNZ Group and Chairman of FNZ UK Limited. Gregor is also Honorary Treasurer of the charity International Alert.
Penny James chairs the Executive Committee. In addition to Penny James and Tim Harris, the Committee comprises the following: MARK EVANS MANAGING DIRECTOR, MARKETING AND DIGITAL
Steve’s previous roles include Director of Strategic and Technical Claims at RSA, Director of Claims and Customer Service at Capita, and Director of Operations at AMP. Steve is also Chairman of the Motor Insurers’ Bureau.
Experience and qualifications Jonathan has over 30 years’ experience of the insurance industry. He is responsible for delivering the Commercial strategy, developing customer propositions, enhancing the Commercial brands and delivering efficiencies within the Commercial businesses.
Experience and qualifications Simon is responsible for leading the Group’s HR function, Internal and External Communications and Public Affairs. He is also responsible for delivering the Group’s People and Corporate Responsibility strategies. Simon is a Fellow of the Chartered Institute of Personnel and Development. Simon is retiring from the Group in March 2020.
Simon has spent the majority of his career as a leader in customer-centric businesses. Before moving into HR, Simon held several commercial business roles in the fastmoving consumer goods and financial services sectors.
Simon is a NED of Nottingham Building Society and is also a trustee of the KidsOut UK charity.
Previously, Kate was Commercial and Marketing Director for Privilege and launched Direct Line for Business in 2007. Before joining the Group, Kate held roles in Calvin Klein Cosmetics, Moore Stephens and qualified as a Chartered Accountant with the National Audit Office. She is also an Associate of the Royal College of Science.
Experience and qualifications Humphrey has over 30 years’ experience as a solicitor. He is responsible for the Group Legal function and oversees a range of areas of legal advice and services.
Humphrey’s experience includes advising on corporate and commercial matters, steering corporate transactions in the UK and internationally, managing legal risk and dealing with corporate governance issues. Before joining the Group, Humphrey was Group Legal Director at RSA and prior to that he was a corporate lawyer with the City law firm Ashurst Morris Crisp.
Gus joined Direct Line Group as Strategy Director before becoming Commercial Director for the Group’s motor insurance business. Following this he was Managing Director of Motor Insurance and Business Development.
The UK Corporate Governance Code The Code set by the Financial Reporting Council (“FRC”) applied to the financial year ended 31 December 2019. Direct Line Insurance Group plc (the “Company”) complied with all of the provisions of the Code throughout the financial year and up to the date of this report.
Further details of how the Company applied the Code’s principles and complied with its provisions are set out in the Strategic report on pages 10 to 13 and 20 to 21, in the Corporate Governance report on pages 74 to 92 and in the Directors’ remuneration report on pages 106 to 138. For more information about the Code, visit the FRC’s website at www.frc.org.uk.
There is a Schedule of Matters Reserved for the Board, which contains items reserved to the Board to consider and approve, relating to strategy and management, material contracts, financial reporting and controls, internal controls and risk management, Board membership and succession planning, corporate governance, structure and capital, and delegation of authority.
In addition to the Schedule of Matters Reserved to the Board, each Board Committee has written terms of reference defining its role and responsibilities. The terms of reference of the Board Committees can be found on our corporate website. Further details regarding the role and activities of the Board and its Committees can be found on pages 83 to 105 and the Directors’ remuneration report which begins on page 106.
Board composition As at the date of this report, the Board comprised the Chairman, who was independent when appointed to the Board; two Executive Directors; and seven independent NEDs, including the SID. The current Directors served throughout all of 2019, except for Tim Harris who was appointed to the Board on 1 October 2019. Paul Geddes, our previous CEO and Clare Thompson, NED, stepped down from the Board at the conclusion of the 2019 AGM. Mike Holliday-Williams who also served during the year as Managing Director, Personal Lines stepped down as a Director on 30 June 2019.
NED Independence On behalf of the Board, the Nomination and Governance Committee assesses the NEDs’ independence, skills, knowledge and experience annually. The Nomination and Governance Committee concluded that every current NED was independent, continued to contribute effectively, and demonstrated they were committed to the role. Each current Director will submit themselves for election or re-election at the 2020 AGM.
You can find out more about the activities of the Nomination and Governance Committee’s work during the year on pages 100 and 101.
The Board has authorised certain potential conflicts of interest in this way including in relation to Directors’ external directorships and their interests in securities of other financial service institutions. Accordingly, the Board deals with any actual conflict of interest or duty that might arise. This usually would involve making sure a Director does not participate in a relevant Board or Committee discussion or decision. To do this, the Company Secretary maintains a register of conflicts and any conflicts that the Board has authorised. The Board reviews this register at each scheduled Board meeting to ensure that each Director applies independent judgement.
Meetings The Board and Board Committees held a number of scheduled meetings in 2019 at which senior executives, external advisers and independent advisers were invited to attend and present on business developments and governance matters. The Company Secretary attended all Board meetings and he, or his nominated deputy, attended all Board Committee meetings. The table below sets out attendance at the scheduled meetings in 20191. Additional Board and Committee meetings were convened during the year to discuss ad hoc business development, governance and regulatory matters.
Notes: 1. Attendance is expressed as the number of scheduled meetings attended out of the number of such meetings possible or applicable for the Director to attend.
Shareholder and stakeholder benefit The Board organises and directs the Group’s affairs in a way that it believes will help the Group succeed for the benefit of its members as a whole, whilst having regard to its stakeholders generally.
More information on how the Board has regard for the Group’s wider stakeholders and other relevant matters can be found on pages 88 to 89.
Strategy The Board oversees the development of the Group’s strategy and monitors management’s performance and progress against the strategic aims and objectives.
The Remuneration Committee: – Sets and oversees how the Group implements its remuneration policy – Oversees the level and structure of remuneration arrangements for senior executives, approves share incentive plans, and recommends them to the Board and shareholders
– Monitors the progress of the Group’s environmental initiatives and agrees the targets for reducing energy consumption and greenhouse gas emissions
Board’s business – Ensures the Directors receive accurate, timely and clear information
– Has an individual role profile agreed by the Board, as does the CEO. These profiles clearly define their respective roles and responsibilities and ensure that no one person has unlimited powers of decision-making
The NEDs – Challenge management in an objective and constructive manner
The Executive Committee The Executive Committee is the principal management committee that helps the CEO manage the Group’s operations. It helps the CEO: – Set performance targets – Implement Group strategy – Monitor key objectives and commercial plans to help achieve the Group’s targets – Evaluate new business initiatives and opportunities
Biographical details of the Directors and Executive Committee members are shown on pages 76 to 80
The co-ordination of the Board meeting content is managed by the Chairman and supported by the CEO and Company Secretary.
In 2019, NED visits to operational business units in London, Glasgow, Bromley and Doncaster were arranged to meet a number of functions to better understand how the business operates. Members of the Board also visited operational teams in Hyderabad, New Delhi and Mumbai in India.
The CEO and CFO spend a considerable amount of time with the different business areas ensuring that the Board’s aims are being correctly disseminated throughout the Group. The NEDs meet with key management outside the Board and Committee meetings to obtain a wider view of the Group’s activities. On a rotational basis, the NEDs attend meetings of the Group’s Employee Representative Body (“ERB”) to engage with staff and report views of our people back to the Board. Further information on the Board’s interaction with the ERB can be found on page 89.
The effectiveness review was based on the completion of a questionnaire which covered a range of topics including: the composition and diversity of the Board, leadership and culture and how effectively the Board works together to achieve objectives of the Group. In addition to the members of the Board, regular attendees of the Board and/or committee meetings were invited to complete the questionnaire.
experience to support management in its substantial transformational execution agenda. It was proposed to renew a programme of visits by the Board as a whole, and by smaller groups of NEDs, to the Group’s various operational sites to foster interaction between the Board and employees; and to create further opportunities for NEDs to engage with the newer members of the Executive Committee and the wider management team.
– Reviewing means for the workforce to raise concerns in confidence and, if they wish, anonymously (“whistleblowing”). Further details on the Group’s whistleblowing arrangements can be found on page 99.
– Seeking feedback from our people through the annual ‘DiaLoGue Survey’, a tool to measure engagement, which this year included questions on inclusivity and culture. We believe that promoting an open and collaborative culture helped result in Direct Line Group being named as the 3rd Best Big Company to work for by The Sunday Times in February 2019.
– Enabling our employees to benefit from the Group’s success. All eligible employees can participate in the Group’s Buy As You Earn (“BAYE”) Plan which provides a cost-effective way for all employees to acquire shares in the Company.
– Supporting management’s emphasis on employee wellbeing, including mental health awareness and financial wellbeing.
The principles and practices set by the Board and the progress made with the diversity of the Board include: 1. Maintaining at least 30% female representation on the Board The Board aims to maintain female representation of at least 30% and remains committed to seeking to improve further its position on gender diversity when appropriate opportunities arise. The Board will continue to appoint the most appropriate candidates based on knowledge, skills, experience and, where necessary, independence. As at the date of this report, female representation on the Board was 40% which exceeds the target set in Lord Davies’ Women on Boards Review Five Year Summary to be achieved by 2020 and achieves the HamptonAlexander Review’s recommendation for a minimum of 33% of women’s representation on boards by 2020.
During the year, the Nomination and Governance Committee worked closely with Egon Zehnder which culminated in the appointment of Tim Harris as CFO with effect from 1 October 2019. Egon Zehnder is a signatory to the Voluntary Code of Conduct for Executive Search Firms and has no other connection to the Company or any Director.
The Board continues to support Group-wide diversity initiatives, including succession planning programmes, to broaden and strengthen female talent at middle management level. Other key 2019 gender diversity initiatives included: the promotion of flexible working; a partnership with the EveryWoman network which helps organisations enhance the potential of female talent; and mentoring schemes and associated development programmes for high-potential female candidates.
Further information regarding the Group’s approach to diversity including the process for Board appointments and reappointments can be found in the Nomination and Governance Committee report.
Shareholder and Stakeholder relations The Group’s five-pillar sustainability strategy, endorsed by the Board, aims to foster the highest standards of ESG practice and to deliver long-term sustainability for all of our stakeholders. In taking decisions, the Directors carefully consider the balance of interests of the stakeholders who might be affected and any impact on the environment and the Group’s reputation.
– In November 2019, the Group held its first Capital Markets Day at our contact centre in Doncaster. The Executive Directors and members of the Executive Committee communicated the Group’s purpose, strategy and medium-term targets to our shareholders and stakeholders. More information about our 2019 Capital Markets Day can be found on the Group’s corporate website.
– As announced on 3 March 2020 and, in line with our capital management approach of growing the regular dividend in line with business growth and distributing surplus capital, we will be returning up to £150 million of surplus capital through a share buyback programme. Further details on the buyback programme, which aims to improve shareholder value, can be found on page 36.
Our Customers We put our customers at the heart of everything we do. The Board believes that the Company’s long-term sustainability is driven by understanding customers’ needs and acting in their best interests.
– The Board monitors customer engagement by receiving a customer and conduct report at each of its scheduled meetings and focused, during 2019, on improvements in pricing transparency and customer purchasing and claims experiences.
– Metrics relating to customer experience remain an important element of the targets for the Annual Incentive Plan for Executive Directors and other senior managers.
Our People The Board encourages a culture that celebrates difference and seeks to empower people so that they can thrive.
– The Group relies on the engagement and enthusiasm of its talented people. The Board and senior management focus regularly on diversity and inclusion and the wellbeing, including mental health and financial wellbeing, of employees. The Group encourages employees to become shareholders by participating in the BAYE Plan and has launched a new employee benefit to assist staff with managing their finances effectively.
Our People (continued) – We welcome the 2018 Code which places a greater emphasis on areas such as the
– The Board, through the Corporate Responsibility Committee, receives regular updates on the Group’s support for the charity, Mind, and the activities of the Group’s Community and Social Committees, which enable our people to contribute to, and engage with, the communities in which we operate by organising independent events. The Corporate Responsibility Committee supports the Board in these areas by helping the Group to conduct its business in a responsible manner which includes environmental, social and ethical manners.
Our Suppliers We aim to maintain the highest possible standards of integrity in business relationships with suppliers and partners.
– The Group relies on certain key strategic suppliers and a large number of other suppliers to conduct its business. During the year, the Board carried out a deep dive into the management of the Group’s supply chain, focusing on issues including modern slavery, sustainability and prompt payment. The Board received in-depth updates on the relationship with strategic suppliers in the context of reports on the Group’s technology transformation programmes.
– The Group is committed to the highest standards of integrity in its relationships with suppliers and partners and is a long-standing signatory of the Prompt Payment Code. During the financial year, the Group remained committed to prompt payment terms to ensure fair payment practices.
The Group’s governance framework is detailed in the Group’s High Level Control and System of Governance Framework document. This document details how the Group meets Solvency II and the Prudential Regulation Authority (“PRA”) requirements to identify Key Functions and to have and maintain a Responsibilities Map in respect of the PRA and Financial Conduct Authority’s (“FCA”) Senior Managers and Certification Regime requirements. The Board reviews this document annually.
Policy owner approves Minimum Standards subject to non-objection from the Risk Management Committee.
Audit, Risk and Internal Control An explanation of how the Board complies with the Code in relation to audit, risk and internal control is set out below, except for the following matter, which is covered elsewhere in the Annual Report & Accounts: – how the Board has assessed the Group’s longer-term viability and the adoption of the going concern basis in the financial statements is on pages 58 and 145.
You can find an explanation from the Directors about their responsibility for preparing the financial statements in the Statement of Directors’ responsibilities on pages 141 and 142. The Group’s External Auditor explains its responsibilities on page 150.
Assessing emerging and principal risks The Board determines the nature and extent of the risks that it is willing to take to achieve its strategic objectives. The Directors robustly assessed the emerging and principal risks facing the Company, including risks that would threaten its business model, future performance, solvency or liquidity. You can find a description of these risks, and their management or mitigation, on pages 54 to 55 and 57 to 58.
Risk management and internal control systems The Board oversees the Group’s risk management and internal control systems. It has complied with the Code by establishing a continuous process for identifying, evaluating and managing emerging and principal risks the Group faces.
The Board was also supported in its review of the annual Internal Risk and Control Assessment. This process involved each function completing a self-assessment of its risks and key controls and an Executive Sponsor, responsible for the function, attesting to the status of the effectiveness of the risk management and internal control systems. The Risk function reviewed and challenged these findings and the Audit function provided an independent assessment of the overall effectiveness of the governance and risk and control framework of the Group. The Group then combined the overall findings into a Group-level assessment, which the CEO approved. The process included reporting on the nature and effectiveness of the controls, and other management processes that manage these risks.
During the year, the Committee oversaw the change programme initiated for the transition to International Financial Reporting Standard (“IFRS”) 17 ‘Insurance Contracts’. As part of the programme, the Group’s ledger system is being upgraded. The Committee received updates on the implementation of, and benefits expected from this programme and reviewed the conclusions of the assurance reviews conducted by EY.
Committee skills and experience In line with the Code, all members of the Audit Committee are independent and the Committee as a whole is deemed to have competence relevant to the insurance and financial services sectors in which the Group operates.
The Committee also considered the going concern assumptions and viability statement in the Annual Report & Accounts, valuation of assets and impairment reviews, reserving provisions, non-recurring period-specific transactions and clarity of disclosures. The Committee reviewed and concluded that the Annual Report & Accounts taken as a whole were fair, balanced and understandable and provided sufficient information to enable the reader to assess the Group’s position and performance, business model and strategy.
Internal control and Group Audit During the year, the Committee reviewed the adequacy and effectiveness of the Group’s internal control systems. The Group’s financial reporting control framework is part of the wider internal controls system and addresses financial reporting risks. The Board delegates supervision of the framework to the Committee while the CFO is responsible for the framework’s operation on a day-to-day basis. During 2019, the Committee received regular reports on any control deficiencies, compensating controls and the mitigating actions taken by management.
The Committee oversees Group Audit’s work and seeks to ensure industry best practice is adopted appropriately. The Group Head of Audit’s primary reporting line is to the Chair of the Committee. The secondary reporting line, for day-to-day administration, was to the CFO until 2019 and will be to the CEO from 2020. Group Audit provides the Committee with independent and objective reports on the adequacy and effectiveness of the Group’s governance, risk management and internal controls. The Committee approves Group Audit’s annual plan and
The Committee considered the valuation of goodwill and intangible assets. A report was presented to the Committee which set out the basis for undertaking an impairment test on goodwill and the result of that test. Reports were also presented to the Committee covering the assumptions and judgements made in arriving at a valuation of intangible assets. These assets mainly related to investment in the Group’s IT systems and capabilities in respect of projects which are aimed at improving the digital offering, customer experience and operational efficiency.
The Committee considered reports on the estimates and judgements applied to the carrying value of the Group’s investments that are not held at fair value and the basis for the valuation. These assets are principally comprised of infrastructure loans, commercial real estate loans and private placement bonds held within the investment portfolio. Information was provided to the Committee on a regular basis to support the value recognised in the accounts.
receives quarterly reports detailing internal audit activity, key findings, management responses, and proposed action plans. Group Audit also monitors that the most significant actions are completed. There were no significant failings or weaknesses reported to the Committee in the year.
Kevin Patience, Group Head of Internal Audit, announced during 2019 that he would be retiring at the end of the year, leading to the search for his successor. Executive recruitment specialist Spencer Stuart, which is a signatory to the Voluntary Code of Conduct for Executive Search Firms and which has no other connection to the Company, was asked to lead the search. The Committee and CEO considered a list of replacements prepared by Spencer Stuart and, having agreed a shortlist, interviewed a number of candidates. After careful and detailed consideration, the Committee and CEO identified Mark Stock as the strongest candidate due to his extensive professional services and senior corporate experience, coupled with his broad and relevant understanding of technology and change. Mark was appointed as Group Head of Internal Audit on 10 February 2020.
The Chair of the Committee also reported on matters dealt with at each Committee meeting to the subsequent Board meeting.
The current audit partner is Mr Colin Rawlings, FCA, who was first appointed for the 2016 audit.
When considering the timing of the external audit tender, the Committee took into account the Group’s ongoing change programmes including the implementation of a new general ledger, the use of consultants employed by auditing firms in connection with those programmes, audit partner rotation, the impact of IFRS 17 and the best interests of all stakeholders including potential investors and shareholders. Following an assessment of all the factors, the Committee decided that it was not appropriate to tender the external audit contract at this time. The Committee will review the position on an annual basis, but currently anticipates tendering the audit contract after the implementation of IFRS 17 for the 2023 year-end to ensure the broadest choice of firms.
Audit fees 2.0 88% Audit-related assurance services 0.1 4% Other assurance services 0.1 4% Non-audit services 0.1 4% Total fees for audit and other services 2.3 100%
Auditor, the quality controls put in place to deliver the audit and whether the agreed audit plan was fulfilled; and v. private meetings with the External Auditor in the absence of management.
After taking into account all of the information available, the Committee concluded that Deloitte had performed its obligations effectively and appropriately as External Auditor to the Group.
The Committee recommended to the Board that the Group re-appoint Deloitte as External Auditor, to which the Board agreed. A resolution regarding the reappointment of Deloitte as auditor of the Group will be put to shareholders at the 2020 AGM.
During the period, the oversight of change risk was a central focus for the Committee as the Group continued on its transformation journey to deliver technology and organisational change. The Committee received reports on the progress of the Group’s multi-year transformation programmes, considering the relevant risks and interdependencies in detail, and commissioning assurance reports from external specialists, as well as from the Group’s Risk and Audit functions. The Committee received regular updates from the Group’s Enterprise Change team which provides a framework for managing change risk, facilitates the prioritisation of strategic investment and monitors the interdependencies of change programmes.
Driving fair outcomes for customers is a principal focus of the Committee. During the period, it received updates on the FCA’s pricing practices market study and the related discussions with the regulator and considered the potential impact on the Group of certain possible outcomes of the study. The Committee challenged management’s proposals to improve the Group’s arrangements for seeking to ensure fairness in pricing and monitored the progress of the Group’s implementation of the Insurance Distribution Directive, including arrangements required to improve transparency and communication in customers’ best interests.
The Group has developed a proactive operational resilience programme, aligned to the expectations set out in the discussion paper: Building the UK Financial Sector’s Operational Resilience published jointly by the Bank of England, PRA and FCA. The Committee challenged and supported the development of the programme, which aggregates business process, organisational, third-party and technological resilience, taking a proactive approach with the aim of prioritising the prevention of, and recovery from, financial and other shocks to the business. The Committee received reports on the programme’s development, implementation timelines and the key indicators which would be used for monitoring the
Membership, attendance and responsibilities of the Committee, including the outcome of the annual effectiveness review can be found on pages 76 to 79, 82, 83 and 86
Group’s operational resilience. The Committee challenged arrangements for ensuring that the risk of dependency on third-party suppliers was mitigated by planned assurance programmes, including by way of contractual rights of audit.
The Committee received regular reports regarding the three strategic risk appetite statements: maintain capital adequacy; stable and efficient access to funding and liquidity; and maintain stakeholder confidence. The Committee monitored the Group’s exposure against these risk appetite statements and the lower level risk appetite statements, considered key risk indicators and assessed the key drivers that affected status against risk appetite. The Committee reviewed and questioned the justification of the assessment of certain risks and the robustness of management action plans to address areas close to or outside tolerance.
Additionally, the Committee considered other subjects in more detail at each scheduled meeting. These included: compliance and regulatory risk including oversight of the Group’s regulatory relationships; operational risk; financial risk, Solvency II and capital model; and risk governance.
Customer and conduct The Group’s purpose is to help people carry on with their lives, giving them peace of mind now and in the future. The Group has a management-level Customer Conduct Committee, which reviews, challenges and oversees customer and conduct matters for all of the Group’s brands and channels with the aim of promoting customers’ best interests and ensuring that the Group’s business activities are consistent with the best interests of its customers. The Customer Conduct Committee’s findings and any recommendations for improvement are regularly reported both to the Board and the Committee.
The Committee reviewed and challenged reports, with the objective of ensuring that the Group was operating within its defined conduct risk appetite and to obtain assurance that customer outcomes remained fair and appropriate. The Committee focused, in particular, on Home insurance pricing practices, considered arrangements being made by the Group to improve transparency in pricing and to ensure that increases in renewal prices were not unreasonable over time. The Committee received reports on management’s interaction with the FCA in the context of the regulator’s pricing practices market study and considered the potential impact on the Group of a range of possible outcomes of the study.
The Committee monitored the progress of the Group’s implementation of the Insurance Distribution Directive, which regulates the way in which insurance products are designed and the information that must be provided to customers to assist them in buying cover appropriate to their needs. The Committee received updates from senior managers on the FCA’s expectations with regard to Insurance Distribution Directive implementation and scrutinised the changes to the Group’s quote and buy arrangements required to improve transparency and communication in customers’ best interests.
The Committee received data privacy updates and reports on the progress of the EU General Data Protection Regulation programme, including arrangements to respond to data information requests and to comply with the Regulation and with the Information Commissioner’s Office guidelines. The Committee received assurance that the programme had transitioned to ‘business as usual’ following completion of a Group Audit review.
The Committee reviewed regular updates on regulatory developments and interactions, particularly in relation to the FCA and PRA. The Committee also reviewed the actions being undertaken to ensure compliance with the regulators’ Senior Managers and Certification Regime, which included a comprehensive review of the Group’s High Level Control and System of Governance Framework document and updating the detailed management responsibilities map. The Committee considered regular reports on the Group’s actions to prevent financial crime, including reviewing the annual Financial Crime Report.
Financial risk At each meeting, the Committee monitored the Group’s performance against its capital risk appetite through the CRO’s report. Committee members considered financial risks in the strategic plan against risk appetite. Committee members also reviewed and challenged the ORSA process and key content before the report was submitted for approval to the Board. Committee challenges on elements of the ORSA during the year included those in relation to stress testing of the strategic plan, pricing and underwriting risk, internal model validation activity and the appropriateness of contingent management actions.
Material Risk Register The Committee assessed the principal risks facing the Group, which are listed on pages 54 and 55. The Committee undertook this by reviewing and challenging the matters listed in the Group’s Material Risk Register in the context of the Group’s risk appetite and through consideration of the risk assessment contained in the CRO’s report that was discussed at each scheduled meeting.
Risk strategy During the year, the Committee held a Risk strategy day focusing on three main areas: management’s considerations in respect of fairness in the pricing of the Group’s products and in its engagement with customers; the potential impacts and risks relating to Brexit; and the role and the operation of the Committee in the future. The Committee discussed its role in the oversight of change and the interdependencies between different change programmes and the dependencies and risks involved in the delivery of the Strategic Plan.
The Committee also considered the results of the annual Group assessment of the effectiveness of the internal controls environment undertaken by each business division, as well as monitoring controls on an ongoing basis. The Committee considered, challenged and approved the Annual Risk operational plan and the adequacy and objectivity of the Risk function’s resources.
Whistleblowing As delegated by the Board, the Committee routinely reviewed the arrangements by which employees may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters (“whistleblowing”) during the year. The Committee also reviewed reports relating to whistleblowing including individual cases, anonymised to ensure arrangements are in place for the proportionate and independent investigation of such matters and for appropriate followup action.
Additional information The Committee has unrestricted access to management and external advisers to help discharge its duties. It is satisfied that in 2019 it received sufficient, reliable and timely information to perform its responsibilities effectively.
Succession planning below Board level continues to be a priority of the Committee. During the search for a new CFO, Neil Manser, now the Group’s Chief Strategy Officer, carried out the CFO role on an interim basis and was appointed to the Group’s Executive Committee. Kate Syred, Managing Director of Household, Partnerships and Data; Gus Park, Managing Director of Motor, Pricing and Underwriting; and Mark Evans, Managing Director of Marketing and Digital also joined the Group’s Executive Committee on 1 July 2019.
The Committee will continue to oversee the Group’s executive succession planning with the objective of building a diverse and inclusive talent pipeline and identifying potential in the senior leadership population.
The Committee considered a broad list of diverse candidates prepared by Egon Zehnder and, having agreed a shortlist, interviewed internal and external candidates. Following a thorough interview and assessment programme and having obtained regulatory approval, the Committee recommended Tim Harris as its preferred candidate. The Board accepted the Committee’s recommendation and agreed to appoint Tim as CFO with effect from 1 October 2019. The decision was announced on 16 September 2019.
Board and senior management succession planning Following the conclusion of the AGM in May 2019, Penny James, who had been serving as the Group’s CFO, was appointed as CEO and Paul Geddes and Clare Thompson stepped down from the Board. Later in the year, Mike Holliday-Williams stepped down as a Director of the Company and Tim Harris joined the Board as CFO. The Board currently comprises two Executive Directors and eight NEDs, including the Chairman.
During the year the Committee, which led the process of selecting a new CEO, recommended the appointment of Penny James, who took over as CEO on 9 May 2019.
The Committee continued to focus on Board and executive succession planning with the objective of refreshing the diversity and experience of the Board and developing a diverse senior management talent pipeline.
Electing and re-electing Directors Before recommending the proposed election or reelection of Directors at the 2019 AGM, the Committee reviewed the independence of NEDs and concluded that all NEDs remained independent in judgement and character and met the criteria for independence set out in the Code. Mike Biggs was independent when he was appointed as Chairman and was not involved in his own review.
Special attention was paid to the NEDs’ external responsibilities and it was concluded that all Directors had sufficient time to dedicate to their respective roles. The Committee recommended to the Board and shareholders that all serving Directors be submitted for election or re-election at the Company’s 2019 AGM, with the exception of Paul Geddes and Clare Thompson, who had decided to step down at the conclusion of the AGM.
Diversity The Board believes that an effective board with a broad strategic perspective embraces a diversity of gender, race, skills and experience, as well as of regional, socioeconomic, educational and professional backgrounds, among other differences. In its search for candidates, the Board aims only to engage with executive search firms which are signatories to the Voluntary Code of Conduct for Executive Search Firms.
In March 2018, the Board adopted a diversity policy which sets out the Board’s approach to diversity and is available on the Company’s website. This policy, which is annually reviewed and monitored by the Committee, is presented to any executive search firm engaged to assist with the selection and appointment process for Board positions.
The objective of the diversity policy is to seek to ensure that individual differences, which contribute to the success of the Company and represent the diversity of our customers and the UK, are reflected at Board level.
Further information on the Board diversity policy and the Group’s diversity initiatives can be found in the Corporate Governance report on page 87.
The Board supports the targets set in the HamptonAlexander Review. As at 31 December 2019, female representation on the Board was 40% (2018: 42%). The Board remains committed to progressing women into senior roles and aims to increase female representation at executive level through associated development programmes for high-potential females. As at 31 December 2019, female representation at Executive Committee level and their direct reports was 18% and 43% respectively.
The Board also supports the recommendations set out in the Parker Review. It continues to be the Board’s ambition to increase cultural and ethnic diversity on the Board by 2021.
Corporate governance In January 2019, the Committee changed its name and agreed to expand its remit to include responsibility for monitoring emerging governance matters, compliance with the Code and the Group’s approach to subsidiary governance. During the year, special attention was paid to the new Code, corporate governance reforms and to the new corporate governance disclosure requirements for large private companies, which apply to certain entities in the Group. The Committee monitors developments in governance and ESG standards and will continue to monitor consultations, developments and reforms which affect the Group’s corporate governance obligations.
Our Planet As part of the Group’s ‘Reduce, Reuse, Recycle’ strategy, the Committee, together with the Board, oversees how the Group protects the business from the impact of climate change and how it fares in its aim of giving back more to the planet than it takes out. During the year, the Committee monitored the progress of the Group’s environmental initiatives and endorsed the targets for reducing energy consumption and greenhouse gas emissions. It also monitored the Group’s recycling, waste management and other environmental initiatives. The Committee challenged and monitored management in meeting its Planet-related targets and received the following results: – Management targeted a 30% like-for-like reduction in the Group’s energy use by 2020 against a 2013 baseline, and at the end of 2019 our overall reduction had reached 29% (2018: 20%).Three key areas which helped to contribute to this result included: (i) the improvement of the Group’s building energy management system; (ii) the optimisation of floor occupancy and energy used across the Group’s office locations; and (iii) the investment in energy efficient equipment.
– Management targeted a 57% reduction in Group-wide emissions on a like-for-like basis by 2020 against a 2013 baseline, and at the end of 2019 our overall reduction had reached 53% (2018 restated1: 44%).
During the period, the Committee focused on the Group’s corporate responsibility strategy to ensure that it was both authentic and impactful, and that management continued to focus on initiatives with real potential to improve lives. It monitored the progress of the Group’s corporate responsibility strategy through regular updates on the different focus areas and challenged the robustness of, and progress against, targets relating to the strategy. It also reviewed ethical matters including the Group’s Code of Business Conduct for employees and the Group’s modern slavery statement.
In addition, the Committee reviewed its responsibilities to ensure alignment with the Group’s sustainability strategy, its response to climate change and to market practice. It also monitored and scrutinised the extent and effectiveness of the Group’s external reporting of corporate responsibility performance, including through preparation for corporate responsibility-related questions at the 2019 AGM and engagement with proxy voting advisers regarding corporate responsibility-related feedback.
Note: 1. Historical Scope 1 direct emissions have been restated to include emissions from leased vehicle mileage previously excluded.
The Committee regards the mental health and wellbeing of the Group’s colleagues as an integral part of its diversity and inclusion strategy. During the year, the Committee received updates on a range of mental health and wellbeing initiatives including the introduction of mental health first aiders across the business and mental health resilience training for people managers, as well as the implementation of a number of financial wellbeing initiatives such as salary-linked loans, advances and savings products.
The Committee received updates on the Group’s partnership with the corporate charity, Mind. It was satisfied that the collaboration had been firmly embedded across the organisation, as was evident through colleagues’ fundraising of £170,000 for Mind since the launch of the partnership in July 2018. The funds had enabled Mind to extend its community reach and its helpline to answer a further 33,000 calls during the year. The Committee was supportive of management’s endeavours to continue to drive engagement and motivate colleagues through the Group’s Community and Social Committees, responsible for organising independent volunteering and fundraising events for Mind and other significant causes such as the charity, Stand Up To Cancer.
The Committee received an update on the collaboration of the External Affairs and Brand teams with the Parliamentary Advisory Council on Transport Safety who produced a comprehensive report on seat belt-wearing rates in the UK. The Committee was delighted to hear that the Department for Transport had been considering taking forward recommendations from the report including the introduction of three penalty points for not wearing a seat belt, heightened police activity, education campaigns and improved technical solutions (e.g. camera technology) and data collection surveys.
In December 2019, the Committee reviewed the Group’s policy on compliance with the Modern Slavery Act 2015 and how third-party suppliers complied with the Act’s requirements.
The Committee challenged the Procurement function and concluded that modern slavery processes and policies were robust and sufficient and that the Group’s modern slavery statement reflected best practice and was effective in embedding supply chain processes.
Sustainable investing At the end of 2019 the Group’s investing framework for investment grade corporate bonds reflected the ESG framework approved by the Committee. Under the framework: – negative screening has been applied to selected issuers; – the guidelines for all investment managers in scope have been amended to encourage managers to invest into suitable “green” bonds where available; and
Market developments At each scheduled meeting, the Committee received a market update from the Director of Investment Management and Treasury. The updates covered: economic conditions in the UK, the US and the Eurozone; market levels for key asset classes (notably credit); the outlook for interest rates and inflation; and developing issues viewed as appropriate to be brought to the attention of the Committee. The impact on assets from the continuing tensions surrounding international trading relations and the weakness of the retail sector were of particular note during 2019. The Committee also monitored the development of interest rate policies set by the Bank of England, the US Federal Reserve and the European Bank and the impact on hedged yields from non-sterling assets held.
Throughout the year the Committee continued to keep under review the economic and financial implications of the UK leaving the EU and the consequent positioning of liquid asset classes within the investment portfolio in anticipation of a Brexit “deal” being or not being agreed and ratified.
An investment framework including an ESG lens for the Group’s investment grade credit portfolios was implemented.
The Committee reviewed the Group’s exposure and plans to mitigate any risks associated with the planned discontinuation of the London Inter-Bank Offered Rate (“LIBOR”) after 2021.
The Committee requested and examined a gap analysis determining how the Group met the PRA’s expectations under the Prudent Person Principle in response to a draft supervisory statement issued in September 2019.
Suitability of investment strategy The annual studies examining stressed liquidity requirements and asset and liability matching were presented to the Committee during the year. Such work informs strategic benchmark allocations and provides part of the context for the addition of new asset classes or exiting a holding. In 2019, estimated aggregate liquidity requirements across a three month period remained unchanged. No asset classes were introduced or exited (albeit the benchmark allocations for certain portfolios were changed to reflect better small changes in liability durations) and the first investments were made into the Euro credit portfolio (which had been approved by the Committee in H2 2018 with investment held over until the “core” manager initiative had been implemented).
Monitoring investment activity and performance The Committee received a comprehensive report at each scheduled meeting covering: the financial results from investment activity; aggregate portfolio positioning against strategic benchmarks; performance of each individual portfolio against benchmark; adherence to operational controls; performance of suppliers; and compliance with an agreed framework of risk limits. During the year the Committee invited the internal investment team and the managers responsible for the investment property portfolio, global credit portfolio and the high yield portfolio to present updates on their respective portfolios.
Dear Shareholders, On behalf of the Remuneration Committee (“The Committee”), I am pleased to introduce this year’s report, including our updated Directors’ Remuneration Policy.
This has been a busy year for the Group with the progression of our change agenda. In the context of remuneration, the Committee considered the following items: – In line with the changes to the UK Corporate Governance Code 2018 (the “Code”), the Committee received more information and regular updates on all-employee reward and engaged directly with the wider employee population. This put the Committee in a good position to take all-employee reward into account when considering the Directors’ Remuneration Policy (the “Policy”).
– This year we are proposing a new Remuneration Policy. Following a review which included considering all-employee remuneration and other stakeholder interests, the Committee was satisfied that the Policy remains ‘fit for purpose’, therefore only relatively small changes are proposed to refine the Policy. We have also refreshed the incentive scheme rules.
– Penny James was appointed CEO on 9 May 2019 and the process for the recruitment of a new CFO was completed with Tim Harris taking up the position on 1 October 2019. For both appointments the Committee considered the appropriate remuneration that would motivate and retain the candidates. In addition, the Committee considered their remuneration in the context of wider workforce remuneration and I am pleased to report that their pension contribution level is in line with the workforce. This means that we are fully compliant with the new Code in this regard.
– The Committee considered the Annual Incentive Plan (“AIP”) outturn noting the change agenda and the establishment of Penny’s leadership team and was satisfied that good progress has been made. The Committee considered the overall outcomes of both the AIP and the Long-Term Incentive Plan (“LTIP”) schemes and was satisfied that those outturns were appropriate and so did not apply discretion to adjust the outturns.
I see the Committee’s objectives as: – Rewarding Directors for results that are generated within the risk appetite set by the Board.
– Setting an appropriate framework for remuneration for the Executive Directors, Executive Committee and other senior management with enough flexibility so that the Group can attract and retain the best people for the organisation.
– Having oversight of remuneration policies throughout the Group and ensuring all our employees are paid fairly.
Chair’s statement 106 to 109 Remuneration at a glance – summarising the remuneration arrangements for Executive Directors 110 to 111 Annual report on remuneration – detailing pay outcomes for 2019 and covering how the Group will implement remuneration in 2020 112 to 127 Directors’ Remuneration Policy 128 to 138
The key features of the new policy are: – For all current and future Executive Directors, the pension contribution will be set in line with the pension contribution rate for all Group employees in the UK (currently 9% of salary). Any new Executive Committee members will also have their pension contributions aligned with the Executive Directors and the wider workforce.
– Consistent malus and clawback trigger events to reflect the guidance set out by the FRC.
– To enable the Committee (in line with the new Code requirements) to apply discretion and override formulaic outcomes where those outcomes do not reflect overall Group performance.
Details on how the Policy will be implemented for 2020 are set out on page 111
We have consulted with our largest shareholders, Institutional Shareholder Services, the Investment Association and Glass Lewis as part of reviewing our Policy and its implementation for 2020. In light of the positive feedback received, we did not make any changes to our initial proposals. I would like to take this opportunity to thank them for their time and valuable input.
Performance and incentive outcomes for the year During 2019, I believe our management team has worked extremely hard to deliver and be prepared to launch a new strategy and can take pride in the growth the Group has experienced in the past year.
The Group delivered good results in a challenging market, growing our capital return and we consider our successful customer-focused strategy and our investment in future capabilities to have helped sustain this robust performance. The results are reflected in the incentive outcomes for our Executive Directors.
The requirements of the revised Code have provided the Committee with an opportunity to consider whether our existing Policy on executive pay remains appropriate for our business and in line with regulatory requirements and key stakeholder expectations. The current policy was well supported by shareholders on adoption (receiving over 98% of votes in favour when it was approved at the AGM in May 2017) and, we believe, continues to support the delivery of our long-term strategy.
The TSR performance for the 2016 LTIP awards run from the date of award to the third anniversary of award (as opposed to across the three financial years commencing with the year in which the award was granted as for the RoTE measure). TSR performance for both the March and August awards did not achieve threshold performance reflecting the challenging external environment, therefore no shares vested under this measure. Subsequently the overall vesting outcome for the 2016 LTIP awards was 60%.
The RoTE performance period for these awards ended on 31 December 2019. The three-year average RoTE performance for 2017, 2018 and 2019 was 20.4% against a maximum target of 18.0%. Awards under the RoTE element are therefore due to vest at 100% of the maximum potential.
Wider workforce engagement and pay considerations for 2019 The Committee has consistently considered wider employee pay as context for the decisions it makes. Every year, we review and act upon the outcome of our DiaLoGue People Survey. As Chair of the Committee, I have attended meetings of the Group’s Employee Representative Body (“ERB”) since 2018 at appropriate times during the year. These meetings are an opportunity to discuss any concerns raised in relation to employee pay and that of our Executive Directors and senior leadership. Our existing workforce engagement is strengthened through internal social networking, “town halls” and other forums. To supplement this, the Committee receives papers setting out details of all-employee pay and workforce policies across the Group at each meeting. We found that this standing agenda item gave us further valuable insight for framing executive pay and policies.
Early adoption of the CEO pay ratio disclosure in 2018 emphasised the Committee’s intention to do so. The employee pay ratio has been refined further for 2019 by adopting Option A to better reflect the diverse range of job roles across the business see page 120.
Approach to pay in 2020 No change to the overall approach to pay is anticipated for 2020. The CEO will be awarded a salary increase of 2.13%. This is in line with the average increase for the wider workforce (2.25%) but calculated based on the weighted average salary before and after her promotion to CEO. The CFO’s salary remains appropriate given his joining date in the latter quarter of the year.
No change will be made to the weightings of the metrics under the AIP. The approach to assessment will focus on performance measures agreed at the start of the year.
We are not proposing any changes to the performance conditions for the 2020 awards under the LTIP. Likewise, the target RoTE scale of 17.5% to 20.5% will remain at the same level as in 2019 and reflects an appropriate performance range in the context of the Group’s planned underlying RoTE performance.
Note: 1. From 2020 AGM this will increase to 250% for the CEO, she currently exceeds the increased level.
– 2.13% increase for the CEO to £817,000 – The CFO’s salary remains appropriate (at £535,000)
– At least 50% of the AIP is based on financial measures. The Committee considers various non-financial performance measures such as strategic measures
– It bases its judgement for the payment outcome at the end of the performance period on its assessment of the level of performance achieved with reference to performance targets agreed at the start of the year
Shared – The performance targets are commercially sensitive and will be disclosed in next year’s report
– 40% of the AIP is deferred into shares – Typically vesting after three years subject to continued employment – Malus and clawback provisions apply
– Awards typically granted as nil-cost options – Awards typically granted twice a year – The Plan allows for awards with a maximum value of 200% of base salary per financial year – Performance is measured over three years – Awards vest subject to financial underpin and payment gateway – Malus and clawback provisions apply – Awards are subject to an additional two-year holding period following the end of the three-year performance period
– No change to the maximum annual award levels – Nil-cost options will continue to be used for the grants – The current 60% RoTE and 40% TSR mix will continue to apply for 2020 – A RoTE target range of 17.5% (threshold) to 20.5%
(maximum) is required for the 2020 awards to vest – Vesting at threshold is 20% and maximum is 100%
with straight-line vesting in between – Relative TSR will be measured against the FTSE 350
Remuneration Committee members and governance The following list details members of the Committee during 2019. You can find information about each member’s attendance at meetings on page 82. You can find their biographies on pages 76 to 78.
The Committee appointed PricewaterhouseCoopers LLP(“PwC”) as its independent adviser from 1 January 2019 following a competitive tender process. PwC is a signatory to the Remuneration Consultants Group’s Code of Conduct.
During the year, PwC advised on market practice, corporate governance and regulations, incentive plan design and target-setting, recruitment, investor engagement and other matters that the Committee was considering. PwC supported the Group in several ways, including the provision of IFRS 17, tax, technology consulting and immigration services during 2019. The Committee is satisfied that the advice PwC provided was objective and independent.
PwC’s total fees for remuneration-related advice in 2019 were £151,700 exclusive of VAT. PwC charged its fees based on its standard hourly rates for providing advice.
Notes: 1. Salary – the Company operates a flexible benefits policy, and salary is reported before any personal elections are made. 2. Benefits – includes a company car or allowance, private medical insurance, life assurance, income protection, health screening and discounted insurance. The CEO uses a car service for travelling on journeys from home to office, the Group also pays for any associated tax liability that arises on this benefit.
3. Annual bonus – includes amounts earned for performance during the year but deferred for three years under the DAIP. For more information, see page 126. These deferred awards are subject to continuous employment only. However, awards remain subject to malus and clawback.
5. The 2018 long-term incentive buyout for Penny James – the expected vesting outcome figure reported in 2018 has been updated. The figure relates to the amount in respect of the second and final tranche of her buy-out awards, which vested in April 2019. These updates are based on the actual vesting of 97.335% (unchanged) and a share price of £3.559 on 1 April 2019. The award was subject to the achievement of performance targets, ending in the 2018 performance year, that relate partly to the performance of the Company and partly to the performance of her previous employer.
6. The 2019 “Other” figure for Tim Harris relates to the amount in respect of his buyout awards, disclosed on page 127. The award is not subject to any performance conditions, and the value of this award is based on a share price at the date of grant (1 October 2019) of £2.9997.
7. Penny James was appointed to CEO on 1 May 2019. Her remuneration for 2019 covers both her time spent in the role as CFO and as CEO during 2019. As disclosed last year, Penny’s pension contribution was reduced from 25% to 9% of salary on her appointment to CEO in May 2019 to align with the wider workforce.
10. Mike Holliday-Williams stepped down from the Board on 30 June 2019 when the role of Managing Director, Personal Lines was made redundant. His remuneration for the purposes of this table has been pro-rated with LTIPs vesting by reference to performance conditions met while he was on the Board in 2019. Details of Mike’s salary, pension and benefits paid following his cessation as an Executive Director on 30 June 2019 until the date of his exit on 30 September 2019 can be found on pages 123-124.
The approach taken to assessing financial performance against this measure was based on a straight-line outcome between 10% for threshold performance and 60% for on-target performance, and a straight-line outcome between on target performance and 100% for achievement of maximum performance.
Measure Threshold 10% Target 60% Maximum 100% 2019 Actual 2019 Achievement
Annual Incentive Plan outcomes for 2019 (Audited) The chart illustrates the final assessment of the level of achievement under the AIP and total outcome approved by the Remuneration Committee.
Overall, we worked hard to offer great customer service, and this is reflected in our top quartile NPS scores measuring the likelihood of our customers to recommend one of our brands. – The Group’s NPS showed strong year-on-year performance, exceeding target and achieving top quartile performance in a range of independent benchmarking studies. – Churchill NPS was just ahead of the target set for 2019; and we worked hard to boost customers’ loyalty by making dealing with insurance easier; launching a new brand driving the Churchill strap line.
– We continued to enhance digital capabilities for customers amending and renewing polices to meet more customer needs.
– The volume of claims complaints reduced significantly in 2019, as we focused on constantly working to improve and taking learnings from dissatisfaction in order to help ensure that our customer outcomes continue to be high.
– Long-term reducing trends on Household, Motor, Commercial and Rescue continued into 2019, so that stretch targets were exceeded in all lines of business.
– Claims NPS performance was well ahead of target with various customer focused initiatives making a difference (i.e. speeding up total loss payments significantly).
– The Group’s work in delivering the highest level of customer service has been recognised at the UK Customer Experience Awards where the Group won Gold or Silver across five different categories.
– A new platform was launched in Q4 2018 to further improve insight capabilities and this improved capability has been embedded during 2019 to drive even more focused coaching conversations and performance recognition.
– In Household, Motor and Claims MyCustomer consultant performance was significantly ahead of target with several best-ever months in both areas.
People element (10% weighting) For the People element of the AIP, the Board set a range of people measures specifically around succession strength, diversity and employee engagement, reflecting the importance of this agenda to the success of the Group. The Committee considered that performance across these measures was very strong and had exceeded expectations against a background of high employee engagement alongside significant change and transition this year. The Committee therefore agreed a near maximum outturn for the People measures, giving a total of 9% out of 10% attributable to this element. A detailed assessment of the People measures is set out below. Measure Assessment
– We successfully and smoothly navigated changes to our senior leaders and Executive Committee in 2019, quickly filling roles with either internal or external capable longterm leaders and provided continuity of leadership, mindfully increasing our female representation at this level.
– We continued to focus on building an inclusive organisation, valuing diversity and uniqueness. 91% of our people responded positively that they feel they can ‘bring all of themselves to work’ in our 2019 employee survey.
– We continued to achieve high participation levels (88%) in our employee survey, DiaLoGue, and maintained high overall engagement levels at 78% in 2019, which places us in the upper quintile of high performing companies.
– Tradesperson on the Direct Line for Business digital platform. – Alongside launching new systems, we have made good progress on setting the foundations for changes to come in 2020, for example: – We have delivered the first release of a major finance transformation which will move core finance systems to the cloud and; – We have also made significant steps in updating our underlying technology platform.
– We deferred certain elements of programmes, primarily to mitigate potential risks arising from system stability and programme complexity. These actions have been well managed and controlled by the Group.
Costs Development and execution of activities to deliver a sustainably lower cost base to support future quality of earnings
– We have also launched several programmes to reduce cost across multiple spend lines including senior management, technology infrastructure, print and mail, and travel and entertainment.
LTIP outcomes for 2019 (Audited) LTIP awards are granted in March and August of each year. Each grant is subject to the following performance conditions: – RoTE (60% weighting) – performance is measured over three financial years starting from the 1 January preceding the March grant; and
2016 LTIP awards (vesting in 2019) Awards under the LTIP granted in March and August 2016 vested during 2019. They are subject to relative TSR performance over the three-year period from the date of grant, and RoTE performance in 2016, 2017 and 2018.
Consistent with the regulations, the expected RoTE vesting outcomes for the year ended 31 December 2018 (together with the TSR elements from the 2015 awards) were included in the 2018 single remuneration figure in the 2018 report. The 2018 single remuneration figure has been updated in the 2019 report to reflect the known share price at the actual vesting date (and updated for dividends) for the RoTE portion of the awards. You can find details of this on page 113. The performance outcomes of these elements are included in the table below.
2017 LTIP awards (vesting in 2020) Awards under the LTIP granted in March and August 2017 will vest during 2020. They are subject to relative TSR performance over the three-year vesting period, and RoTE performance in 2017, 2018 and 2019. The RoTE performance period for these awards ended on 31 December 2019 and performance in respect of this element is set out in the table below. Performance under the relative TSR measure will be assessed at the end of the vesting periods in March 2020 and August 2020 respectively and will be disclosed in the 2020 Directors’ Remuneration Report. This is subject to the Committee’s satisfaction that the financial and risk underpins have been met at the end of the vesting period.
Summary of the 2019 LTIP single remuneration figure outcomes1 Number of shares awarded (inc. dividends) subject to this performance condition
Paul Geddes 99,387 0% – – Mike Holliday-Williams 50,482 0% – –
Notes: 1. The August 2016 and both the 2017 LTIP awards for Paul and Mike are pro-rated accordingly (to 9 May 2019, and to 30 June 2019 respectively) and will be disclosed as a payment to past directors in the 2020 and 2021 annual report on remuneration. Paul’s and Mike’s 2019 single figure disclosure only refers to the March 2016 component of their LTIP, which did not vest.
Interests at end of employments Share plan interests exercised during the year until end of employments
Share plan interests vested but unexercised1 Shares held outright Number of options exercised1 Share price on date of exercise
Notes: 1. These awards take the form of nil-cost options over the Company’s shares. Awards accrue dividend entitlement from the grant date to the date on which an award vests. Dividends added post-vesting are shown to 31 December 2019 (or end of employment if applicable), but are not realised until exercise.
on relative TSR performance. The exact targets for each award were disclosed in the relevant Annual Report on Remuneration. 4. Paul’s employment ended on 31 July 2019. 5. Mike’s employment ended on 30 September 2019. Mike exercised shares twice during the year, at a share price of £3.626 and £2.847.
Non-Executive Directors (Audited) Fees were the only remuneration paid to Non-Executive Directors in 2018 and 2019. Non-Executive Directors may also claim for reasonable travel and subsistence expenses, in accordance with the Group’s travel and expenses policy, and, where these are classified as taxable by HMRC, they are shown under ‘Taxable Benefits’ below. The Non-Executive Directors receive no other benefits.
Company (including any gross-up for tax and National Insurance Contributions due).
As required by the regulations, the CEO single figure used to determine the 2019 pay ratios is based on the sum of the total single figures of remuneration for Paul Geddes and Penny James, but with remuneration in respect of Penny’s service as CFO excluded. This gives a total of £2,042,000. Each employee’s pay and benefits were calculated using each element of the employee remuneration, on a full-time equivalent basis. No adjustments (other than to achieve a full-time equivalent rate) were made and no components of pay have been omitted.
Base salaries of all employees, including our Executive Directors, are set with reference to a range of factors including market practice, experience and performance in role. For reference, the CEO base salary median pay ratio is 32:1. In reviewing the ratios the Committee also noted that the CEO’s remuneration package is weighted more heavily towards variable pay (including the AIP and LTIP) than the wider workforce due to the nature of the role, and this means the ratio is likely to fluctuate depending on the performance of the business and associated outcomes of incentive plans in each year.
Percentage change in Chief Executive Officer’s pay for 2018 to 2019 The table below shows Penny James’ year-on-year percentage change in salary, taxable benefits and bonus, compared to the average pay for all other employees. This represents the increase in salary received on promotion from CFO to CEO in May 2019.
Chief Executive Officer 11.9% 142.3% 25.1% All employees (average) 3.6% 11.0% 17.4%
Annual bonus payment (% of maximum) 65% 63% 75% 83% 63% 88% 68% 76%
Paul Geddes As disclosed in last year’s report, Paul stepped down from the Board on 9 May 2019 and left the Company on 31 July 2019. Following his cessation as a Director of the Company, Paul’s salary, pension and benefits were paid in monthly instalments until the end of his employment as follows: Salary (£’000) Benefits (£’000) Pension (£’000) Total (£’000)
At the time of exit, the Committee exercised its discretion to treat Paul as a ‘good’ leaver under the Company’s incentive schemes. The treatment of his awards was therefore as follows: AIP The 2019 AIP was subject to the satisfaction of the gateway criteria and the relevant performance criteria. The award was also pro-rated to reflect the period worked until the end of his employment. 40% of the award will be deferred into shares. Further detail is set out on page 126.
The single figure table on page 113 includes only the value of the AIP based on the period up to 9 May 2019 when Paul stepped down from the Board. As his total 2019 AIP award was pro-rated to the end of his employment (31 July 2019), the additional value of his AIP for 2019 was £249,494 (based on the period from 9 May 2019 to 31 July 2019).
DAIP The 2017, 2018 and 2019 DAIP awards will continue to vest on their third anniversaries of award and remain subject to all scheme rules, including malus and clawback provisions. Awards will be exercisable for 12 months after they vest.
LTIP The August 2016, March and August 2017 and March 2018 LTIP awards will be time pro-rated to reflect the period from their date of grant to the end of his employment. The awards will vest on the third anniversary of their grant, subject to their original performance conditions and to all scheme rules, including malus and clawback provisions.
Furthermore, if Paul secures a new role which the Committee consider is comparable with his role with the Group, and which it considers should reasonably compensate him for the loss of any unvested awards, then such unvested awards will be forfeited.
Paul was granted 215,730 awards under the August 2016 LTIP. As disclosed in last year’s report, the RoTE outcome was 100% of maximum. As outlined on page 118, the relative TSR outcome was 0% of maximum. Based on this performance, and pro-rating the original number of shares from the date of grant to the end of employment, a total of 158,967 shares vested on 30 August 2019 with a value of £450,036 based on the share price of £2.831 on that date.
Mike Holliday-Williams An assessment of senior roles determined that the Managing Director, Personal Lines role was no longer required at the Board level, and that this role would therefore be made redundant. As a result, Mike Holliday-Williams stepped down as an Executive Director on 30 June 2019. He then worked with the Group to ensure a smooth handover until 30 September 2019. It was originally intended that he would then commence a period of garden leave, ending on 30 June 2020, during which time his contractual salary, benefits and pension would be paid. Unvested LTIP awards would continue to accrue during garden leave in line with the Plan rules given his redundancy circumstances. However, the Committee mutually agreed to an earlier employment cessation date of 30 September 2019 following discussions on his potential appointment as CEO of Aegon UK – a Dutch life insurance company that is primarily known as a pensions and life insurance provider. The Committee carefully considered Mike’s continued ‘good’ leaver status in the context of his then anticipated CEO appointment at Aegon and determined that it was appropriate that Mike continues to be treated as a ‘good’ leaver for the following reasons: – A life insurance company, Aegon UK is not a competitor of the Group; and – Mike confirmed that Aegon does not operate a long-term incentive plan and (as such) will not buy out unvested
Mike’s appointment as CEO of Aegon UK was announced on 10 September 2019 and the Committee will continue to monitor his good leaver status and will seek further attestation before the vesting of each future award to ensure this remains appropriate. For example, if the nature of Aegon UK’s business operations were to change such that the company would be considered a competitor to the Group, the Committee would again review his leaver status. Like Paul, this is facilitated by the LTIP mitigation clause included in his settlement agreement in line with the ISS guidelines on this. All awards will continue to be subject to malus and clawback provisions.
Given Mike’s earlier employment cessation date, Mike’s salary, pension and benefits were paid in monthly instalments for a significantly shorter period until the end of his employment on 30 September 2019 as follows: Salary (£’000) Benefits (£’000) Pension (£’000) Total (£’000)
Furthermore, if Mike secures a new role which compensates him for the loss of any unvested awards, the Committee has discretion to withhold unvested LTIPs.
No LTIP awards have been made to Mike since March 2019.
March and August 2016 LTIP The table below sets out the awards which vested during the year: Award Number of share options awarded (inc. dividends)
March and August 2017 LTIP The performance period in respect of the RoTE elements of these awards ended on 31 December 2019 however the performance period in respect of the TSR elements of these awards ends on 26 March 2020 and 28 August 2020. The value of the 2017 LTIP awards vesting for John will therefore be disclosed in the 2020 report.
New Executive Director On 1 October 2019, Tim Harris joined the Board as an Executive Director and was appointed CFO. Tim’s annual salary is £535,000 with a pension allowance of 9% of salary. He also participates in the Group’s Annual Incentive Plan up to a maximum of 175% of salary and the Long-Term Incentive Plan up to 200% of salary.
In addition, and as disclosed on page 113, he received a one-off award pursuant to listing Rule 9.4.2 to compensate for the loss of LTIP awards made by his former employer. See page 127 for details.
Notes: 1. During 2019 the Company paid special dividends of £113.7million in addition to the regular dividends. Under the dividend policy the Board considers whether to make additional distributions each year alongside the full-year results. 2. There have been no share buybacks since the IPO. The dividends paid information has been taken from note 14 to the consolidated financial statements. The overall expenditure on pay has been taken from note 10 and therefore, consistent with market practice, it has not been calculated in a manner consistent with the single figure in this report.
AGM voting outcomes The table shows the percentage of shareholders voting for or against, and the percentage of votes withheld, relating to the resolutions to approve the 2018 Directors’ Remuneration Report which was put to shareholders at the 2019 AGM on 9 May 2019.
The resolution approving the Directors’ Remuneration Report was passed by 93.88% of the votes cast in favour of the resolution.
Notes: 1. Executive Directors are expected to retain all the ‘after tax’ Ordinary Shares they obtain from any of the Company’s share incentive plans until they achieve a shareholding level that is equal to 200% of base salary. From the 2020 AGM, the shareholding level required from the CEO will be equal to 250% of base salary.
Distribution statement This chart shows the overall pay expenditure across all Group employees compared with the total dividend value paid to shareholders in 2018 and 2019.
LTIP awards granted during 2019 (Audited) The table below shows awards granted under the LTIP to Executive Directors in 2019 in the form of nil-cost options.
Note: 1. The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £3.5227 in
The performance conditions that apply to the LTIP awards granted in 2019 are set out below Performance conditions for awards granted in 2019 under the LTIP
Performance Measure Proportion of award Performance for threshold vesting (20%) Performance for maximum vesting
The RoTE targets for awards granted in 2019, applying to 60% of the award, were an average annual RoTE of 17.5% for 20% vesting, 18.5% for 40% vesting and 20.5% for full vesting. A straight-line interpolation occurs from threshold to target, and then from target to maximum performance.
Penny James Chief Executive Officer 321,300 91,208 – – Tim Harris Chief Financial Officer – – – – Paul Geddes Former Chief
Buyout awards (Audited) On joining Tim Harris received an LTIP award over 200% of salary on the same terms as the August 2019 grant (except that the vesting dates will run from the date of grant.) This was granted at the annual award level as no separate buy-out was made to compensate him for the loss of his 2019 award at his previous employer. Full details of this award is set out in the relevant section on the prior page.
Notes: 1. 50% of the award vests on 30 June 2020, 25% of the award vests on 30 June 2021 and the remaining 25% vests on 30 June 2022. 2. 50% of the award vests on 30 June 2021, 25% of the award vests on 30 June 2022 and the remaining 25% vests on 30 June 2023.
No additional fees are paid for membership of the Investment Committee.
You can find further details regarding the policy’s operation for 2020 on page 111.
– Staying competitive in the market allows us to attract, retain and motivate highcalibre executives with the skills to achieve our key aims while managing costs
Pension – To remain competitive within the market place – To encourage retirement planning and retain flexibility for individuals
– The maximum pension percentage contributions are set at a level that is consistent with that applied to the majority of employees
– Where an Executive Director is required to relocate to perform their role, they may be offered appropriate relocation benefits. The level of such benefits would be determined based on the circumstances of the individual and typical market practice and be consistent with the relocation arrangements available to the workforce generally. In normal circumstances, relocation benefits will only be paid for a period of 12 months
– Base salaries are typically reviewed annually and set in April of each year, although the Committee may undertake an out-of-cycle review if it determines this to be appropriate
– The Committee will monitor the costs in practice and ensure the overall costs do not increase by more than the Committee considers to be appropriate in all the circumstances
– Threshold and maximum bonus levels for Executive Directors are set by considering annual bonus practice throughout the organisation and referring to practice at other insurance and general market comparators
– However, the Committee retains flexibility to amend the pay-out level at different levels of performance for future bonus cycles. This is based on its assessment of the level of stretch inherent in the set targets, and the Committee will disclose any such determinations appropriately
– Dividends will accrue during the deferral period – Malus and clawback provisions apply to the cash and deferred elements. These are explained in the notes to the policy table
– Performance measures may be financial and non-financial (Group, divisional, business line or individual)
– The Committee sets targets at the beginning of each financial year
– For Executive Directors, at least 40% of the AIP is deferred into shares under the DAIP – This typically vests three years after grant (with deferred awards also capable of being settled in cash at the discretion of the Committee, for example, when it gives rise to legal difficulties to settle in shares). The remainder of the award is paid in cash following the year-end
interests with those of shareholders to motivate and incentivise delivering sustained business performance over the long term
– The maximum LTIP award in normal circumstances is 200% of salary
– In line with the Code requirements, the Committee maintains discretion to override formulaic outcomes where those outcomes are not reflective of the overall Group performance
– 250% of salary for the CEO and 200% for the CFO. – The Committee reserves the discretion to amend these levels in future years
Changes from 2017 Policy The main changes from the 2017 Policy are summarised below and are primarily driven by the new Code requirements on remuneration and good governance practice: – Alignment of all Executive Directors’ pension percentage with that of the majority of the employee population, in line with the requirements of the new Code.
– Determination of bonus outcomes on a straight-line basis between threshold and maximum to further simplify the remuneration structure and achieve consistency with the LTIP.
– Increasing the level of share ownership guidelines from 200% to 250% of salary for the CEO to further strengthen the alignment with shareholders.
The terms of incentive plan awards may be adjusted in the event of a variation of the Company’s share capital, demerger or a similar event that materially affects the price of the shares, or otherwise in accordance with the plan rules.
The relevant performance targets are set at or following the start of each year to ensure the Executive Directors focus appropriately on the key objectives for the next 12 months.
The Group has one consistent reward policy for all levels of employees. Therefore, the same reward principles guide reward decisions for all Group employees, including Executive Directors. However, remuneration packages differ to account for appropriate factors in different areas of the business: – AIP – approximately 3,550 employees participate in the AIP. The corporate performance measures for all employees are consistent with those used for Executive Directors, although the weighting. Attributable to those factors may differ. The Group’s strategic leaders (approximately 60 employees) also receive part of their bonus in Company shares deferred for three years.
– Incentive awards – approximately 3,800 employees, excluding Executive Directors, participate in a function or team specific incentive plan which assesses personal performance over a monthly period. These incentive awards may pay out monthly or quarterly.
– All employee share plans – the Committee considers it important for all employees to have the opportunity to become shareholders in the Group. The HMRC-approved SIP has operated since 2013, and, in addition, the Group has made periodic awards of free shares. These awards have no performance criteria attached and vest on the third anniversary of the award grant date, subject to the completion of three years continuing employment. At year-end, approximately 3,900 employees throughout the Group had signed up to these schemes with 8,400 holding free shares in the Company.
– Pension and benefits – the Company contributes on average 9% to the defined contribution pension scheme without any requirement for an employee contribution. Employees may also opt for a proportion or all of this to be paid as cash rather than into the pension scheme.
– Non-Executive Directors are paid a basic annual fee Additional fees may be paid to Non-Executive Directors who chair a Board Committee, sit on a Board Committee, and for the SID to reflect additional responsibilities, as appropriate. The level of fees for 2020 is shown in the Report on Remuneration
– The fees paid to the Chairman include all Board and Committee membership fees, and are determined by the Remuneration Committee
– Non-Executive Directors may receive certain expenses, including the reimbursement of travel expenses and accommodation or similar which, consistent with general market practice, will be grossed-up for any tax arising on such expenses (where the tax on those expenses is paid by the Company). It is the Committee’s view that expenses (which are deemed to be benefits) are covered under the aggregate cap set by the Articles of Association and that this cap is not restricted to fees only
– Similarly, while not benefits in the normal usage of that term, certain other items such as hospitality or retirement gifts may also be provided
– The Non-Executive Directors are not entitled to receive any compensation for loss of office, other than fees for their notice period
Recruitment remuneration policy To strengthen the management team and secure the skills to deliver the Group’s strategic aims, the recruitment remuneration policy aims to give the Committee enough flexibility to secure the appointment and promotion of high-calibre executives.
Principles for recruitment remuneration 1. In terms of the principles for setting a package for a new Executive Director, the starting point for the Committee will be to look to the policy for Executive Directors as set out in the policy table and structure a package in accordance with that policy.
The elements of any package for a recruit, including the maximum level of variable pay, but excluding buy-outs, will be consistent with the Executive Directors’ remuneration policy described in this report, as modified by the above statement of principles where appropriate. The Committee reserves the right to avail itself of the current Listing Rule 9.4.2 (being the rule which permits exceptional recruitment awards on terms different from any shareholder approved ongoing plans) if needed to facilitate, in exceptional circumstances, recruiting an Executive Director. Awards granted under this provision will only be used for buy-out awards.
Service contracts Subject to the discretion noted above for new recruits, it is the Group’s policy to set notice periods for Executive Directors of no more than 12 months (by the Director or by the Company). The Executive Directors’ service agreements summary is as follows: Director Effective date of contract
Penny James 1 November 2017 12 months Base salary, benefits & pension only for unexpired portion of notice period to be paid in a lump sum or monthly instalments, in which case, instalments are subject to mitigation if an alternative role is found.
Tim Harris 1 October 2019 12 months Base salary, benefits & pension only for unexpired portion of notice period to be paid in a lump sum or monthly instalments, in which case, instalments are subject to mitigation if an alternative role is found.
Awards will vest in full. In the event of a demerger or similar event, the Committee may determine that awards vest on the same basis
All unvested awards will lapse During the holding period, awards cease to be contingent on employment and, therefore, will not lapse (except on dismissal for cause) but may be subject to malus
Depending on the circumstances of departure, an Executive Director may have additional claims under relevant employment protection laws, and the Company may contribute to any legal fees involved in agreeing a termination. It may also agree to incur certain other expenses such as providing outplacement services. Any such fees would be disclosed as part of the detail of any termination arrangements. The Committee reserves the right to make any other payments connected with a Director’s cessation of office or employment, where the payments are made in good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation) or by way of a compromise or settlement of any claim arising in connection with the cessation of a Director’s office or employment.
The Chairman and Non-Executive Directors have notice periods of three months from either party which do not apply in the case of a Director not being re-elected by shareholders or retiring from office under the Articles of Association. Other than fees for this notice period, the Chairman and Non-Executive Directors are not entitled to any compensation on exit.
Considering employment conditions elsewhere in the Group As explained elsewhere in this report, the Committee reviews the overall pay and bonus decisions in aggregate for the wider Group, and, therefore, considers pay and conditions in the wider Group in determining the Directors’ Remuneration Policy and the remuneration payable to Directors. Through the CEO and other senior management, the Committee may receive input from employee groups in the Group, such as the Employee Representative Body, as required.
The Committee also seeks to build an active and productive dialogue with investors on developments in the remuneration aspects of corporate governance generally and, particularly, relating to any changes to the Company’s executive pay arrangements.
The elements of remuneration included in each scenario are as follows: Minimum Consists of fixed remuneration only (that is, base salary, benefits and pension): – Base salary is the salary to be paid from 1 April 2020 – Benefits measured as benefits paid in 2019 as set out in the single figure table on page 113 – Pension measured as the defined contribution or cash allowance in lieu of Company contributions, as a percentage of salary
Based on the above plus a 50% share price growth assumption
Strategic report The Company’s Strategic report is on pages 1 to 73. It includes the following information that would otherwise need to be disclosed in this Directors’ report: Subject Pages
Use of financial instruments 34, 35 and 41 Important events since the financial year-end 10 to 19 Likely future developments in the business 19 Employee involvement 63 to 65 Research and development 22, 23 and 43 Greenhouse gas emissions 71
Disclosure of information under Listing Rule 9.8.4R In accordance with Listing Rule 9.8.4C, the table below sets out the location of the information required to be disclosed, where applicable. Subject Page
Interest capitalised by the Group None Unaudited financial information None Long-term incentive plan involving one Director only Not applicable Directors’ waivers of emoluments Not applicable Directors’ waivers of future emoluments Not applicable Non pro-rata allotments for cash (issuer) Not applicable Non pro-rata allotments for cash (major subsidiaries) None Listed company is a subsidiary of another company Not applicable Contracts of significance involving a Director Not applicable Contracts of significance involving a controlling shareholder Not applicable Details of shareholder dividend waivers 140 Controlling shareholder agreements Not applicable
Dividends The Board recommends a final dividend of 14.4 pence per share to shareholders. Subject to shareholder approval at the Company’s 2020 AGM, this will become payable on 21 May 2020 to all holders of Ordinary Shares on the Register of members at close of business on 14 April 2020.
Secretary Roger Clifton is the Company Secretary of Direct Line Insurance Group plc. He can be contacted at the Company’s Registered Office, details of which are on page 230.
– allot shares (with the disapplication of pre-emption rights) up to an aggregate nominal amount of £23,250,000 in relation to the issue of Solvency II Restricted Tier Instruments.
Employees of the Company and Directors must conform with the EU Market Abuse Regulation and the Company’s share dealing rules. These rules restrict particular employees’ and Directors’ ability to deal in the Company’s shares at certain times, and require the employee or Director to obtain permission to deal before doing so. Some of the Company’s employee share plans also include restrictions on transferring shares while the shares are held within the plans.
Business Relationships The Group is a leading motor, home and commercial insurer which depends on the trust and confidence of its stakeholders to operate sustainably in the long term. Direct Line seeks to put its customers’ best interests first, invests in its employees, supports the communities in which it operates and strives to generate sustainable profits for shareholders. Examples of how the Group has had regard to the need to foster the Company’s business relationships with suppliers, customers and others, and the effect of that regard, including on the principal decisions taken by the Company during the financial year is detailed in the Corporate Governance report on pages 88 and 89.
Employees with disabilities The Group is committed to promoting diversity and inclusion across every area of the business through initiatives such as the Diversity Network Alliance (“DNA”). At recruitment, we adjust and enhance our application and selection process, and guide and provide additional training for interviewers, where necessary.
Going concern The Group has sufficient financial resources to meet its financial needs, including managing a mature portfolio of insurance risk. The Directors believe the Group is well positioned to manage its business risks successfully in the current economic environment.
The Finance review on pages 28 to 42 describes the Group’s capital management strategy, which covers how it measures its regulatory and economic capital needs and deploys capital.
The Group’s financial position is also covered in that section, including a commentary on cash and investment levels, reserves, currency management, insurance liability management, liquidity and borrowings. Additionally, note 3 to the consolidated financial statements describes capital management needs and policies. The note also covers insurance, market, liquidity and credit risks which may affect the Group’s financial position.
Auditor Deloitte has expressed its willingness to continue in office as the External Auditor. A resolution to reappoint Deloitte will be proposed at the forthcoming AGM. You can find an assessment of the effectiveness and recommendation for reappointing Deloitte in the Audit Committee report on page 96.
Company law requires the Directors to prepare such financial statements for each financial year in accordance with IFRS, as adopted by the EU and Article 4 of the International Accounting Standard (“IAS”) regulation. 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.
In preparing these financial statements, IAS 1 requires that Directors: properly select and apply accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and assess the Company’s ability to continue as a going concern.
Notes to the Parent Company financial statements 1. Accounting policies 214 2. Investment in subsidiary undertakings 216 3. Other receivables 217 4. Current and deferred tax 217 5. Derivative financial instruments 217 6. Financial investments 218 7. Cash and cash equivalents 218 8. Share capital and capital reserves 218 10. Subordinated liabilities 218 12. Trade and other payables 219 14. Share-based payments 219 15. Risk management 219 16. Directors and key management remuneration 219
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. 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 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ (United Kingdom Generally Accepted Accounting Practice).
We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (“FRC”) Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that no non-audit services prohibited by the FRC’s Ethical Standard were provided to the Group or the Parent Company.
– valuation of intangible assets; and – valuation of investments not held at fair value.
Materiality The materiality that we used for the Group financial statements was £28 million which approximates 5.3% of three-year average profit before tax.
We have reviewed the Directors’ statement on page 141 of the annual report about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group’s and Parent Company’s ability to continue to do so over a period of at least 12 months from the date of approval of the financial statements.
Based solely on reading the Directors’ statements and considering whether they were consistent with the knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the Directors’ assessment of the Group’s and the Parent Company’s ability to continue as a going concern, we are required to state whether we have anything material to add or draw attention to in relation to: – the disclosures on pages 54 and 55 that describe the principal risks and explain how they are being managed or mitigated; – the Directors' confirmation on page 91 that they have carried out a robust assessment of the principal and emerging risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; or
Viability means the ability of the Group to continue over the time horizon considered appropriate by the Directors which for Direct Line Group is four years.
5.1 Valuation of insurance reserves Refer to page 94 (Audit Committee Report), page 160 (Accounting policies) and page 201 (Financial statements).
Key audit matter description The frequency and severity of large bodily injury claims have a significant impact on the valuation of the insurance liabilities and the setting of these assumptions is driven by a variety of factors. These factors include the completeness and accuracy of source data, the transparency of any changes in the reporting of large bodily injury claims, and actuarial assumptions being consistent with emerging data, market factors and the Group’s reserving policy. As a result of these factors, there is a significant level of estimation uncertainty in the valuation of these claims, which increases the susceptibility of the balance to material misstatement due to error and fraud.
A key market factor that significantly impacts the valuation of large bodily injury claims is the Ogden discount rate. Following the Civil Liability Act passing Royal Assent in 2018, the Government announced a change in the discount rate from minus 0.75% to minus 0.25% in July 2019 in England and Wales. At 31 December 2018 the Group selected an estimate of 0% for valuing lump sum bodily injury claims, however following the announcement the Group has elected to reserve for these claims using a rate of minus 0.25% in 2019. This change in rate impacted the valuation of the insurance liabilities adversely by £16.9 million.
Key audit matter description The Group is required to settle a proportion of large bodily injury claims as PPOs rather than lump sum payments. The valuation of PPOs has a material impact on the financial statements, with liabilities totalling £800.1 million (2018: £874.3 million) on a discounted gross basis as detailed in note 34. The PPOs are sensitive to economic assumptions selected and as at 31 December 2019 the Group valued PPOs using an inflation rate of 4% (2018: 4%) and a discount rate of 4% (2018: 4%). These assumptions represent a key source of estimation uncertainty for the Group which increases the susceptibility of the balance to material misstatement due to error and fraud.