Direct Line for Business (“DL4B”) DL4B, an extension of the Direct Line brand, is our direct commercial insurance brand for small and medium-sized enterprises (“SMEs”) in the UK that have straightforward commercial insurance requirements.
Direct Line in Italy and Germany In Italy and Germany, we distribute to customers through the phone and internet, including price comparison websites (“PCWs”). The brand is known for its excellent customer service and value.
Direct Line Group (the “Group”) is the largest retail general insurer in the UK, the number one direct motor insurer in Italy and the number three direct motor insurer in Germany. We operate a multi-brand, multi-product and multi-channel business that covers the majority of customer segments in the UK for personal lines general insurance and small and medium-sized enterprise commercial insurance. Our brands offer the following products: motor, home, rescue, pet, travel and commercial.
Green Flag is our roadside rescue and recovery product, which is sold both as a stand-alone service and as an optional add-on to motor insurance.
Overview This has been a year of transformation for Direct Line Group. Learn more about us, our performance, our brands, how we conduct our business, and the future direction for the Group.
Corporate governance report Our long-term performance as a Group is strengthened by responsible corporate governance. Learn more about our Board and the framework of our corporate governance.
Pages 10 to 95 of this Annual Report & Accounts 2012 constitutes the Directors’ report for the purposes of section 415 Companies Act 2006. The Directors’ report incorporates the Business review, on pages 10 to 51.
Delivering our strategy We have made good progress in our financial performance in 2012, increasing ongoing operating profit by 9.3% over the prior year. We continued to implement our transformation plan, as demonstrated by our return to underwriting profit. We successfully completed an Initial Public Offering on the London Stock Exchange in partial fulfilment of RBS Group’s European Commission divestment obligation
• Extended the presence of Churchill and Privilege Motor and Home products to the four major UK PCWs
• Balance sheet efficiency augmented through the issue of £500 million of subordinated debt following U K Insurance Limited, the Group’s main underwriter, being assigned credit ratings of ‘A’ by Standard and Poor’s and ‘A2’ by Moody’s
• Successful separation from RBS Group and subsequent Initial Public Offering of 35% of Direct Line Group’s Ordinary Shares in October 2012
• Announced targets of 98% combined operating ratio in 2013, £100 million of gross annual cost savings in 2014, and an overall target of a 15% return on tangible equity
Quality products to meet customer needs We have continued to invest in our leading brands, refreshing our brand advertising campaigns and sharpening the alignment of our brand portfolio to our target customer segments.
Ease of purchase Our multi-brand, multi-channel distribution approach continues to be the central focus for us. Customers can choose from a variety of channels when purchasing our products.
Good value and quality service Our direct activity enables us to focus on providing high quality service to customers who value a direct relationship with their insurer.
2. Ongoing operations. The profit before tax for the year to 31 December 2012 was £249.1 million (2011: £342.9 million).
3. Earnings adjusted to exclude restructuring and other one-off costs and the result of our Run-off operation.
Gross written premium2 3Direct Line Group Annual Report & Accounts 2012
Motor We are the UK’s leading personal motor insurer with a 16% share of the market’s in-force policies. Mainly represented through our highly recognised brands, Direct Line and Churchill, we insure one in six cars on the road, representing 4.1 million in-force policies. We also sell motor insurance through partners such as Sainsbury’s Bank.
Home We are one of the UK’s largest home insurers with an 18% market share of in-force policies. In addition to selling home insurance products through our own brands, we also distribute home policies through partners such as Sainsbury’s Bank, RBS, NatWest, Nationwide Building Society and Prudential.
Delivering value We use a multi-brand, multi-product and multi-distribution channel business model, positioning each of our brands to offer different propositions to distinct customer segments. When combined effectively with our significant scale, we believe this allows us to achieve high performance in distribution, pricing, claims and cost, which in turn should position us to deliver value to customers and sustainable returns to our shareholders
Pricing and underwriting The scale of our business, which we have built over the last 25 years, enables deeper pricing insight, creating the potential for greater pricing accuracy. It also allows us to invest more heavily in data and achieve economies of scale, which means we are able to set the appropriate price for the risks we underwrite.
Managing risk Risk manifests itself in many ways and at each point of our business model it needs to be managed. We ensure that our products meet all of the regulatory standards and that customers fully understand what they are purchasing from us. We also make sure that we price our policies prudently and appropriately invest our assets to minimise the risk of creating a potential loss to the Group. We mitigate risks by agreeing policies and minimum standards that are regularly reviewed and updated to ensure we are in line with the risk appetite set by the Board. This internal control framework is supplemented with regular reviews by external experts.
Setting our direction The Board is encouraged by the good progress made by the Group during 2012
This was a very important year for Direct Line Group. We made significant progress in delivering the objectives set out in our transformation plan, whilst also substantially separating operations from RBS Group. In October, we successfully listed on the London Stock Exchange in the UK’s largest Initial Public Offering (“IPO”) in 2012.
Strategy overview and results The strategic plan to transform Direct Line Group into ‘Britain’s best retail general insurer’ was launched in 2010 by our Chief Executive Officer, Paul Geddes and is now well established. We have made progress in many areas of our business including transforming our pricing and claims functions and improving our capital efficiency.
IPO On 16 October 2012, Direct Line Group listed on the London Stock Exchange following the IPO by RBS Group of 35% of the Group’s shares. The IPO was met with significant investor demand and the shares have subsequently performed well, rising by 24% from the IPO price of 175 pence per share to close the year at 216.4 pence per share.
“I believe the Company has a high quality Board that has the expertise and experience to provide excellent support and challenge to the business.” Mike Biggs, Chairman 8 Direct Line Group Annual Report & Accounts 2012
I joined the Board as Chairman in April and began by recruiting further Directors to build a Board suitable for the Group’s ambitions and to join the existing independent Non-Executive Directors, Andrew Palmer and Jane Hanson. I am delighted that during the course of the year a further three independent Non-Executive Directors joined the Board – Glyn Jones, Clare Thompson and Priscilla Vacassin. Glyn also holds the position of Senior Independent Director. Glyn, Clare and Priscilla bring a variety of strengths and skills from their previous experience and these are discussed in the corporate governance section.
Summary 2012 has been a year of very significant progress for Direct Line Group and the Board would like to acknowledge the effort and commitment of every member of staff in what has been an extremely busy and demanding year.
For information on our corporate governance see p.52 9Direct Line Group Annual Report & Accounts 2012
Listing on the London Stock Exchange In October, we successfully completed our IPO on the London Stock Exchange. RBS Group sold 520.8 million Ordinary Shares in Direct Line Group, representing 35% of our issued share capital, generating gross proceeds of £911 million for RBS Group. In December, Direct Line Group became a constituent of the FTSE 250 Index.
The journey so far In the midst of tough economic and competitive conditions, we have delivered a clear turnaround in performance, most visibly a £667 million improvement in operating profit from ongoing operations since 2010. We have maintained a focus on underwriting for profit by methodically reducing our level of risk, taking stringent steps to improve our pricing capability, and exiting lines of business that have proven unprofitable.
As a result of these actions, we have strengthened and improved our business, making good progress towards achieving our strategic targets.
The strategic plan With the first part of our transformation plan – to return to profit – complete, we have redefined our strategic plan through five key pillars: distribution, pricing, claims, costs, and Commercial and International.
“ The flotation of Direct Line Group on the London Stock Exchange marked an important milestone in our history. Our strong business model and transformation plan proved attractive to the market despite considerable economic and market headwinds.” Paul Geddes, Chief Executive Officer
The right team to deliver the evolving customer agenda We now have the right structure in place to help us specifically address our customers’ needs and to protect their interests. In light of the new structure of the Financial Services Authority (“FSA”) and the creation of the Financial Conduct Authority we are well placed to respond to the changing landscape of how businesses interact with their customers.
For more information see p.58 11Direct Line Group Annual Report & Accounts 2012
Costs The first phase of our cost reduction programme focused on our operational cost base. We reduced the number of our sites from 32 locations to 16 and delivered 15% efficiency savings across our UK sales operations. In August 2012, we announced the target of gross annual cost savings of £100 million in 2014.
Commercial and International We are working towards reducing our costs and improving operational efficiency in Commercial, targeting a COR below 100% in 2014. In International, we are leveraging our UK expertise in pricing and claims as well as driving through operational efficiencies to produce returns consistent with our strong market position as a leading direct insurer in both Italy and Germany.
Priorities for 2013 During 2013 we aim to make progress towards delivering the strategic financial targets we set out at the time of the IPO. In particular we aim to deliver a 98% COR in 2013 and to make progress towards our £100 million gross annual cost savings target.
To enhance our distribution, we are already fine-tuning our propositions with the implementation of new offers and pricing structures adapted to the evolving needs of our customers. We will continually monitor the business to ensure we are addressing the needs of our customers, the competitiveness of the markets in which we operate, the engagement of our staff and the returns expected by our shareholders.
Regulatory environment We are operating in an industry that is preparing for substantial regulatory change. With the ongoing debates in the motor market surrounding referral and legal fees, the increase in whiplash claims and the implementation of the gender directive, we aim to be leaders through this period of change and lobby for reform to provide the best outcome for our customers and shareholders.
Investment markets remain tough with continued low reinvestment yields and therefore, within our risk appetite, we are planning various actions intended to mitigate pressures on investment returns. We will continue to invest in the business with the objective of both sustaining our leadership position and meeting our 15% RoTE.
Paul Geddes, Chief Executive Officer 12 Direct Line Group Annual Report & Accounts 2012
Maintain risk-based capital coverage consistent with credit rating in the ‘A’ range
For more information on our key performance indicators see p.24 13Direct Line Group Annual Report & Accounts 2012
Our strategy in action Our launch on comparethemarket.com is one way that we reinforced our multi-brand, multi-channel model. We have given customers even more choice about how they access our Churchill and Privilege brands, as well as our partners, such as Sainsbury’s Bank. Giving customers a variety of access points means they can buy in the way that best suits the level of interaction they need.
We aim to improve our distribution efficiency and effectiveness through a focus on digital capability and customer value
Pricing We aim to leverage our substantial data scale and the investments we have made to deliver leading technical and market pricing
Geospatial toolPricing Our strategy in action We understand the importance of price in consumer buying decisions. We therefore use our extensive data resources, such as the Geospatial tool, so that we can offer customers products at prices which accurately reflect their individual circumstances and risks, match their specific needs and offer good value for money.
Claims We aim to capitalise on our hard work and the strategic transformation to maintain top quartile claims performance
In the next few years, we will aim to maintain momentum in our claims transformation programme. This will be extended to other business divisions in the UK, as well as applying lessons learnt to our International division. We expect to see further regulatory change in the coming years; we’ve been lobbying for it and we believe we are well placed to adapt to the changes when they come into effect.
We aim to deliver on our cost saving target and continue to manage our expense base closely
We recognise the ongoing imperative to improve our expense position in this competitive market. In August 2012, we announced a target of £100 million gross annual cost savings in 2014. We have already taken steps to deliver the majority of the programme, including announcing the closure of our Teesside office as well as a reorganisation of the Executive team and the reduction of 70 senior leadership roles across the organisation.
The priority for 2013 and beyond is to deliver our cost saving programme while continuing to review the way we do business. We believe that making changes to our systems represents an important way of enhancing efficiency, while helping our people control the way services are provided to customers. We have signed a five-year contract with Capgemini to design, deliver and run our new IT infrastructure.
Our strategy in action Having reviewed our cost base, we have made some fundamental changes to our organisation. We aim to continually operate at the most efficient levels, while maintaining excellent customer service. This means not just looking at the number of people and offices we need, but also challenging ourselves to reduce complexity and deliver better value to our customers and shareholders.
Commercial We have refocused our Commercial business to target the growing SME and micro segments, and are increasingly set to benefit as these customers move towards direct and e-trading distribution channels
Having returned the business to operating profit in 2012, we are targeting a COR below 100% for the Commercial division in 2014. We aim to improve our loss ratio by managing our top-line growth and by enhancing our pricing sophistication through leveraging the Group’s proprietary data. We have put in place robust plans to cut costs and deliver a better model for brokers, customers and shareholders.
Measuring our performance We have defined seven key performance indicators that allow us to monitor our performance against our strategic priorities. These KPIs are supported by further more detailed performance indicators
Aim We aim to maximise investment income subject to the risk appetite set by the Board. Our investment policy is conservative with assets currently invested in bonds, cash and property.
Aim We aim to operate an efficient and effective organisation and are targeting £100 million gross annual cost savings in 2014 from the 2011 cost base.
2. Earnings adjusted to exclude restructuring and other one-off costs and the result of our Run-off operation.
4. Pro forma RoTE assumes that the capital actions taken by Direct Line Group (£1 billion dividend payment and £500 million long-term subordinated debt issue) occurred on 1 January 2012.
Definition The amount of cash paid to shareholders out of the profits of Direct Line Group. The amount shown relates solely to dividends proposed post the IPO in October 2012.
Adjusted earnings per share2 (pence) Definition We adjust earnings to exclude restructuring and other one-off costs and the result of our Run-off operation. These adjusted earnings, which reflect the ongoing operations, are divided by the average number of shares in issue.
Aim We have not set a target for adjusted earnings per share given the cyclical nature of the insurance industry. Growing earnings per share is considered one indicator of a healthy business.
Risk strategy and risk appetite The Board has set clear strategic risk objectives: • To maintain capital adequacy
• To ensure stable and efficient access to funding and liquidity
Managing risk We have a robust and integrated risk management framework. This framework sets out the responsibilities and accountabilities for risk management for the whole business
These objectives have been developed to recognise that, for long-term sustainability, we need to have sufficient economic capital and we need to protect our reputation and integrity in our relationships with customers and stakeholders.
Within the Group, a well-articulated risk appetite lies at the heart of effective enterprise risk management (“ERM”) to support: • Our strategic risk objectives, as outlined above
“The risk and compliance strategy is focused on fully supporting the Group’s goal to become Britain’s best retail general insurer, delivering sustainable returns.” José Vazquez, Chief Risk Officer
Board Risk Committee1 26 Direct Line Group Annual Report & Accounts 2012
Risk appetite should not be static and the Group is committed to performing an annual review of the risk appetite framework to ensure its continued suitability to support a well-managed company.
The strategic risk objectives link to a set of risk appetite statements and key metrics.
Maintain capital adequacy Maintain sufficient economic capital to a defined target
• Quantitative approach to risk analysis, for example, development of a robust economic capital model. Leveraging off our market leading position in home and motor provides access to a significant volume of data
Ex ec ut iv e m an ag em en t r ep or tin g, fo r e xa m pl e Ri sk
Strategic risk The economic climate could put at risk our ability to meet our strategic objectives in the areas of distribution, pricing, claims, costs, Commercial and International.
We may fail to execute our ongoing strategic transformation plan, and the expected benefits of that plan may not be achieved at the time or to the extent expected, or at all.
The value of the Group decreases, resulting in a lack of shareholder confidence.
• Investment in brand awareness, and improved pricing and claims models
Adverse loss experience impacting current year and future year business performance.
• Underwriting guidelines for all business transacted, restricting the types and classes of business that may be accepted
Reserving risk Due to the uncertain nature and timing of the risks to which we are exposed, we cannot precisely determine the amounts that we will ultimately pay to meet the liabilities covered by the insurance policies written.
Adverse development in prior year reserves resulting in a financial loss.
• We have upgraded and enhanced many of our operational processes and systems, including the claims system and fraud detection system. This includes enhancing our ERM framework to integrate risk, business and capital strategies
• Our investment portfolio is managed and controlled through: – Investment strategy and guidelines proposed to the Board by the Investment Committee and monitored by the Asset and Liability Committee
– Diverse holding of types of assets including geographies, sectors and credit ratings
Counterparty risk We partner with many suppliers and the failure of any of these to perform their financial obligations or perform them in a timely manner could result in a financial loss. The principal area of counterparty risk is our use of reinsurance against catastrophe risk.
Loss due to default of banks, reinsurers, brokers or other third parties.
• We have a constructive and open relationship with our regulators and other official bodies (for example the Ministry of Justice and the Office of Fair Trading), in addition to specific risk management tools and resources to minimise our exposure to regulatory risk
• A key focus for us is to build our brands business through marketing, whilst regularly monitoring performance using a range of brand metrics
Operating profit for ongoing business improved by 9.3% to £461.2 million (2011: £421.9 million). This followed substantial management action to improve risk selection and claims management. Combined with the successful implementation of our 2012 capital plan, including returning £1 billion in dividends (2011: nil) to RBS Group and raising £500 million (2011: nil) of long-term subordinated debt, the Group has achieved, on a pro forma basis, a RoTE for ongoing business of 13.4%.
The Group’s COR for ongoing business was 99.2% (2011: 101.8%), leading to a profitable underwriting result despite above average claims arising from major weather events and the impact of parallel running costs prior to the separation from RBS Group.
On the following pages 31 to 35, the contribution of each division to the Group’s operating performance is discussed in more detail.
In addition, consultations regarding increasing the bodily injury small claims limit from £1,000 to £5,000 and reforming medical evidence for whiplash claims have begun.
Performance We have continued to invest in our customer offerings, and have focused in particular on sharpening our multi-car proposition and pricing. We completed the roll-out of our new claims system to all brands, and are delivering improved claims performance, particularly in bodily injury cases. In July, we launched on comparethemarket.com, with the Churchill, Privilege and Sainsbury’s Bank brands.
Gross written premium of £1,623.5 million fell 6.4% compared with 2011, due to the full-year effect of de-risking the portfolio in 2011 and a continued focus on disciplined underwriting. The in-force policy count stabilised at 4.1 million.
The underwriting loss in 2012 of £26.3 million improved by £72.3 million compared with 2011, and the COR fell from 105.6% to 101.6%. This was the result of continued improvements to claims performance arising from improved pricing, the ongoing effect of de-risking and the benefits arising from the transformation of the claims operation. These trends were reflected in both an improved current-year loss ratio and increased releases from prior years. Operating profit of £261.8 million in 2012 increased from £254.8 million in 2011.
• Operating profit up 2.7% despite significant reduction in other operating income
Highlights • Operating profit of £93.3 million, 16.6% lower than 2011 primarily due to adverse weather in 2012
Performance We continue to focus on improving our product options to meet customer needs and increase customer value. New product ranges were launched in 2012 for our Sainsbury’s Bank and Nationwide Building Society partnerships.
In addition, our new claims system and operating model, launched for Churchill in 2011, has been extended to our remaining own brands, with the roll-out plan for our partner brands continuing into 2013. In December 2012, we launched home insurance on comparethemarket.com, with our Churchill, Privilege and selected partner brands.
Total gross written premium was £989.0 million, 4.1% lower than 2011, with a COR of 96.6% and an operating profit of £93.3 million. Rainfall figures for 2012 were among the highest on record, with claims from weather events totalling £105 million, £25 million above the expected level for a normal year.
Outlook The Home division continues to enhance its pricing and claims capabilities with a focus on deploying these in key customer segments. With a balanced distribution footprint, we believe the Home division is well positioned to maintain its position in a competitive market.
• Increase in in-force policies relating to growth in packaged bank accounts
Performance The division has delivered gross written premium of £389.8 million which is 11.3% higher than 2011. This was driven by the growth in travel partnership accounts and premium inflation in the pet market. In-force policies increased by 3.1% during 2012. Gross written premium for the rescue business reduced by 3.6% compared with 2011, with growth in the Green Flag direct business offset by lower linked sales as the Motor business de-risked.
Underwriting profit of £66.2 million was 23.1% higher than 2011, the increase being largely attributable to one-off releases and adjustments relating to the run-off of our creditor business. Overall operating profit increased by 33.3% compared with 2011.
Outlook In 2013 we expect to enhance our customer propositions through refreshed marketing initiatives and improved distribution capabilities. The positive results in 2012 from the run-off of our creditor business are not expected to be repeated in 2013.
Rescue and other personal lines 33Direct Line Group Annual Report & Accounts 2012
Performance Gross written premium of £435.6 million was broadly unchanged as growth in DL4B was offset by the exit of unprofitable business. The loss ratio improved by 2.3 percentage points reflecting improvements in underlying business, particularly from the motor account, and continued releases from prior year reserves. This was despite a number of larger than normal fire claims in the first half of 2012, as well as weather events. The expense ratio improved by 2.4 percentage points reflecting improved cost management.
Outlook We have set a target to deliver a COR below 100% in 2014 and expect to make progress towards this target in 2013. Through 2013 we aim to rationalise our regional and head office operating model, to complete the roll-out of the new Commercial eTrading platform in the broker channel and to continue the development of our brands.
Commercial “ Thanks to a strong focus on pricing and disciplined underwriting we are back in profit. We have established a momentum over the last two years which gives us confidence in delivering our targets.” Jonathan Greenwood, Managing Director of Commercial 34 Direct Line Group Annual Report & Accounts 2012
Market In Italy the economic environment deteriorated further in 2012 with depressed GDP growth. The downturn put pressure on the insurance market which contracted by 1%. The pricing cycle remained positive with market rates increasing by 2.5%. However, there was a decrease in the number of insured vehicles of 1.5% year on year. Despite adverse conditions the direct market increased by 10% in comparison with 2011.
In Germany, economic growth slowed in the second half of the year but remains largely positive compared with the rest of Europe. The motor insurance industry reached €22 billion gross written premium with growth of 5.1% above 2011 levels mainly driven by a positive pricing cycle.
Performance Despite a challenging year within the Eurozone, our International business performed strongly in 2012.
Both the Italian and German businesses have generated strong profits in 2012, making operating profits of £14.0 million and £5.5 million respectively.
In-force policies increased by 5.4% to around 1.5 million and gross written premium increased 3.9% in local currency terms. Due to adverse exchange rates, reported gross written premium reduced by 3.0% to £552.7 million compared with 2011.
Outlook The outlook for Direct Line Italy is mixed. The Italian economy continues to experience lower new car sales and the volume of cars in Italy is expected to shrink in 2013. Offsetting this, fewer miles driven is resulting in lower claims frequency. The Italian government has announced a number of initiatives to liberalise the market and although these have yet to be finalised we consider this may provide an opportunity for Direct Line Italy.
Highlights • Operating profit from ongoing operations of £461.2 million up 9.3%
• Final dividend proposed of 8 pence per share 36 Direct Line Group Annual Report & Accounts 2012
Gross written premiums of £3,990.6 million fell 3.3% compared with the prior year (2011: £4,124.9 million). This was predominantly driven by Motor, due to the full-year effect of de-risking the portfolio in 2011 and a continued focus on disciplined underwriting. Home gross written premium fell 4.1% compared with 2011, due primarily to increased competition for new business volumes.
International gross written premium of £552.7 million was 3.0% lower than the previous year (2011: £570.0 million) as a result of adverse exchange rate movements during 2012. Gross written premium in local currency terms increased by 3.9%, broadly in line with the increase in in-force policies.
In-force policies for ongoing operations increased by 1.4% during 2012 to 19.6 million. The increase related primarily to Rescue and other personal lines and arose mainly from travel policies from packaged bank accounts. Motor and Home in-force policies were broadly stable during the period.
Commercial continued to grow in-force policies through DL4B which focuses on SME and micro businesses. After a period of strong growth in 2011, International’s growth rate slowed to 5.4% with growth coming from both the Italian and German operations.
Overall, the current-year attritional loss ratio improved by 1.6 percentage points in 2012 reflecting progress made in improving the underlying performance of the Group.
On a segmental basis, the COR improved in all divisions compared with 2011, with the exception of Home, which was impacted by worse than average claims from weather events.
In Motor, the 4.0 percentage points improvement in COR reflects management actions to improve the risk profile of the book as well as higher releases of reserves from prior years. These releases were driven by favourable bodily injury experience for recent accident years partly attributable to improved pricing, better risk selection and benefits arising from the Group’s claims transformation programme. Following these actions, inflation rates for small bodily injury claims continue to be favourable relative to actuarial expectations.
International’s COR improved by 4.3 percentage points compared with 2011 as a result of an improved loss ratio reflecting reserve releases from prior years, particularly in respect of large bodily injury claims in Italy. An improved expense ratio, partly reflecting higher reinsurance commissions received in 2012, was offset by a higher commission ratio attributable to a change in mix towards PCW and partnership business.
Operating expenses including claims handling costs increased by 1.0% to £1,145.1 million. The Group is targeting gross annual savings of £100 million in costs and claims handling expenses in 2014 relative to the level in 2011 (2011: £1,134.0 million). Plans relating to 70% of the target have been announced, with advanced plans in place for the remainder of the savings. Savings associated with this plan are expected to begin to be recognised in 2013.
Instalment and other operating income from ongoing operations reduced by 22.4% primarily as a result of the cessation of fee income in Motor relating to managing certain elements of the run-off of Tesco Personal Finance (“TPF”) business. All policies relating to TPF have now expired and this income will not be repeated. On an underlying basis instalment and other operating income fell 15.1%.
Staff costs and other operating expenses increased in 2012 as a direct result of separation from RBS Group, whereas RBS Group management fees fell by 46.2%, all of which were incurred in the first half of 2012.
Investment return Total investment return was £281.8 million, in line with 2011 as an increase in realised gains and reduction in impairments offset lower investment income. For ongoing operations, investment return was £234.7 million, 1.7% lower than 2011.
During 2012, total funds under management decreased by 13.8% to £9.4 billion. Key reasons for the reduction include the payment of dividends and repayment of intra-group loans totalling £1,235.2 million to RBS Group and the acquisition of Direct Line Germany from RBS Deutschland for £120 million. This was partially offset by the issuance of £500 million of long-term subordinated debt.
Investment income was £199.3 million, an 18.2% decrease on 2011, mainly as a result of the decrease in assets under management, low reinvestment yields in the UK and higher cash holdings during the year. Elevated cash holdings during the year arose from extensive portfolio restructuring and the need to hold cash in advance of the capital management activities.
Net realised and unrealised gains recognised in 2012 were £82.5 million compared with £38.3 million in 2011.
The investment income yield on the total portfolio for 2012 was 2.0%, a decrease from the 2.3% earned in 2011. The investment return was 2.8% compared with 2.6% in 2011.
Reinvestment rates on corporate bonds remain low with current reinvestment yields of 1.6%. Taken with current yields on cash and government bonds and expected yields on property, the blended reinvestment rate at the target asset mix is 1.6%. This does not take into account the effect of forward yields or a number of management actions which are expected to augment returns.
Taxation The effective tax rate for 2012 was 26.0% (2011: 27.4%) and benefited from lower UK corporate tax rates. The effective tax rate was 1.5 percentage points higher than the UK standard tax rate due to higher earnings from the International operations, which have a higher corporation tax rate, and higher levels of disallowable expense, in part relating to separation and divestment. This was partially offset by a credit in International for prior periods.
Adjusted basic and diluted earnings per share, which excludes Run-off and restructuring and other one-off costs, increased by 6.3% to 21.8 pence.
Dividends Prior to the IPO in October 2012, £1 billion of dividends were paid to RBS Group. These dividends formed part of the actions taken to improve the capital efficiency of the Group.
A final dividend of 8 pence per share (2011: nil) has been proposed. On the basis that the final dividend represents two thirds of the total annual distribution, the full-year pro forma dividend of 12 pence per share would represent a payout ratio of 55% of earnings from ongoing operations, in line with the policy set out at the time of the IPO. From 2013, the Group aims to raise the dividend annually in real terms.
Balance sheet and financial management Net asset value The net asset value at 31 December 2012 was £2,831.6 million (31 December 2011: £3,612.8 million) with tangible net asset value of £2,410.1 million (31 December 2011: £3,247.0 million). This equates to 189.1 pence and 161.0 pence per share respectively as at 31 December 2012 (31 December 2011: 240.9 pence and 216.5 pence, respectively).
Given this uncertainty, the Group adopts a prudent approach to the assessment of liabilities. This prudent approach is supported by historical claims reserve releases. These can be observed in the gross and net ultimate claims cost development triangles shown on pages 147 and 148. The triangles demonstrate that, for all accident years, the estimated ultimate claims cost has reduced over time. Reductions in ultimate claims cost have fluctuated over the period with the years from 2003 to 2006 and 2010 showing the largest decreases. The 2009 accident year has shown the lowest reduction following a significant increase in claims relating to motor over the 2009 and 2010 financial years in response to the market-wide adverse development in bodily injury claims. This resulted in part from the rise of claims management companies, an increase in no-win no-fee litigation, and an increase in PPOs.
• Claims reserves are based on internal estimates, supported by independent external review
Investment portfolio Our investment strategy is conservative and primarily comprises investments in sovereign bonds, investment grade fixed income securities and cash. The strategy is to ensure adequate liquidity, to appropriately match asset and liability durations (with specific focus on PPOs) and to diversify risk and maximise return relative to the Group’s risk appetite.
During 2012, the key achievements included: • Establishing an in-house investment capability to enable the Group to manage and oversee its investment holdings. The in-house team’s responsibilities include managing cash, government bonds and ‘AAA’ credit portfolios for the UK business, with specialist external asset managers employed to manage other asset holdings
• Investing in US Dollar investment grade credit (hedged back to Pounds Sterling) to enable wider debt issuer diversification
Corporate 48% Sovereign 20% Cash, cash equivalents, loans and receivables 22% Investment property 1% Supranationals 6% Local government 3%
Derivatives are permitted for risk management purposes within the investment portfolio including interest rate swaps to align asset and liability durations and forward currency contracts to manage currency risk.
The total value of the investment portfolio at 31 December 2012 was £9.4 billion, 13.8% lower than at 31 December 2011. Assets under management remain liquid with 22.0% of the funds held in cash and cash equivalents at year end. This is a transitory position and it is planned that cash holdings will reduce significantly during it 2013.
The average duration of total investment assets was 1.8 years, with the breakdown being UK 1.7 years, Italy 2.8 years and Germany 2.5 years (2011: average on total assets 2.2 years, UK 2.1 years, Italy 2.3 years and Germany 2.6 years).
Exposure to European economies such as Spain, Italy and Ireland is minimal, with these countries accounting for only 1.0% of the aggregate bond portfolio. There are no investment holdings in Portugal or Greece.
4. Government bonds include sovereign, supranational and local government bonds. Sovereign bonds account for 19.7% of the total investment holdings as at 31 December 2012 as per the following: – sovereign £1,843 million, supranational £521 million and local government £271 million as at 31 December 2012; and
– sovereign £2,795 million, supranational £489 million and local government £198 million as at 31 December 2011.
Capital management Capital management policy The Group seeks to manage its capital efficiently and maintain an appropriate level of capitalisation and solvency in line with its risk appetite. The Group determines the appropriate level of capital on the basis of a number of criteria, including a risk-based capital requirement, holding a prudent capital buffer above regulatory requirements, and the objective of maintaining a credit rating in the ‘A’ range. The Group manages its subsidiaries to ensure that capital resources exceed regulatory minima.
The UK regulated entities carry out an assessment of the adequacy of their overall financial resources in accordance with the FSA’s ICA methodology. This is based on an internal capital model, which is calibrated, as required by the FSA, to a 99.5% confidence interval over a one-year time horizon.
On 27 April 2012 the Group issued £500 million of long-term Tier 2 subordinated debt. The increase in debt and financial leverage was partially offset by the repayment of long-term borrowings of £246.4 million to RBS Group in 2012. Undated loan capital of £258.5 million provided by TPF was repaid in January 2013.
Notes: 1. Includes the undated subordinated loan from TPF of £255 million and £3.5 million of solvency capital provided by TPF in relation to the TPF life insurance business, both of which the Group repaid in January 2013. As such, it has been excluded from Tier 2 capital as at 31 December 2012.
3. Based on the IGD for the Group and adjusted to include the capital requirement for Direct Line Versicherung AG acquired on 2 April 2012.
The above regulatory numbers are estimated, based on preliminary regulatory returns for 31 December 2012.
2. Total financial debt as a percentage of total capital employed.
Following the repayment of the undated subordinated loan, the financial leverage ratio on a pro forma basis, excluding the undated subordinated loan, as at 31 December 2012 would have been 15.7%.
Standard & Poor’s and Moody’s currently link the financial strength ratings of U K Insurance Limited to the overall rating of RBS Group. As a consequence, Standard & Poor’s has indicated that, while RBS Group has a majority shareholding in Direct Line Group, its rating for U K Insurance Limited could be affected by future rating actions on RBS Group. Moody’s has indicated that its rating for U K Insurance Limited could be negatively impacted by a material weakening of RBS Group’s credit profile as reflected in any further downgrade in RBS Group’s ratings or any delay to the completion of the divestment of Direct Line Group from RBS Group.
Acting responsibly One of the most exciting elements of building a new corporate brand is being able to take a fresh look at everything we do
Four core elements We have worked closely with Business in The Community (“BITC”) and identified four core Corporate Social Responsibility (“CSR”) elements: Employee Experience; Business Practices; Community; and Energy and Environment. Each has its own distinct strategy, developed with the help of our employees – volunteers from across the business who are passionate about doing the right thing.
We must recognise how far we have come and what we still need to change in order to be the best. Our focus is on evolving our strategy to provide a better employee and customer experience. We are using all information channels available, linking the analysis and interpreting the results to develop our people, their talents, create the right culture and build sustainable engagement.
We seek to understand how best to enable a company culture that is collaborative, empowering, and innovative, so that our people are able to influence the customer experience positively and achieve superior customer and shareholder value.
The Group’s diversity network aims to represent the multiple minority groups within our business and aspires to have a workforce reflective of the outside world and our customer base. The network has just been established and we hope to encourage up to 10% of our workforce to become members by the end of 2014.
“I feel passionately about Direct Line Group playing an important role in contributing to UK growth, jobs and taxes. Building a strong, successful and sustainable business is integral to achieving this. “As a leading retail general insurer, our responsibility is not only to our customers, shareholders and staff, but also to the wider society. “Our values are a first step in reflecting that responsibility and embedding sustainability into our business.” Jane Hanson, Chair of the Corporate Social Responsibility Committee 47Direct Line Group Annual Report & Accounts 2012
We exceed in the following key areas: • 7% higher for people leadership
In areas where we do not outperform, such as personal development, we are taking a number of initiatives. These include our new Leadership Framework, People Managers Transformation Programme and the new people development and succession planning processes.
3) Maintain people’s engagement Recognising the importance of people’s engagement through organisational transformation, we have worked on proactively identifying where there are employee engagement issues across the organisation and put in place supporting activities to mitigate these, such as outplacement support, redeployment and career fairs. Benchmarking against the Towers Watson 2012 surveys, our engagement index shows that we have maintained employee engagement throughout our transformation journey to date at 73%, which is in line with industry norms.
Ideas from employees helped to arrive at a set of values to govern the way the Group operates.
Our aim is to create a culture of volunteering, giving all our employees one paid day off a year.
Challenges and opportunities Making our communities safer, through reducing vehicle collisions and crime, aligns both insurance risk and our CSR thinking, helping us maintain operational effectiveness in the long term. Reducing the number of claims our customers experience not only provides us with commercial benefit, but more importantly reduces the distress and inconvenience our customers face when they are involved in a road traffic accident, or household incident, or when they are the victims of crime.
Through our supplier network, we have a clear opportunity to develop best practice further. For example, through our ‘Repair not Replace’ programme, we are reducing our environmental impact.
Drivers in the Right Direction’, which brought together the Government, the insurance industry and researchers to discuss how to reduce the number of collisions involving young drivers who have recently passed their test.
• The reduction of crime and anti-social behaviour in our communities
RoadSafe has also been chosen as one of our national charity partners. Its mission is to reduce road deaths and injuries through a variety of road safety initiatives. In collaboration with local police and road safety managers, our employees have the opportunity to become involved in local Community Speedwatch campaigns, monitoring the speed of vehicles in areas of concern to the public. This is the first of a number of RoadSafe initiatives we are planning.
Achievements in 2012 • Through our Community Cashback scheme our employees were able to donate an additional £48,000 to the charities in which they are involved or are close to their heart.
• Through our payroll giving scheme, by matching employee donations we were able to contribute £112,000 to the charities that matter to our people.
• Through utilising our call centre network we were able to support Children in Need and Comic Relief, with over 900 employees taking pledge telephone calls.
Helping out in a crisis We are there to help people in their time of need, whether that be when their home has been flooded or when they are involved in a car crash. Our customer service teams are trained to deal with the worst cases and our technical teams and loss adjustors are deployed all over the country to help our customers recover. Our aim is to get people’s lives back on track as easily as possible. When major events affect our communities, we aim to deploy our people to help and advise in these communities, not just our insured customers. We have also built a specialist mobile office that helps us base ourselves right in the heart of communities that are in crisis.
We have chosen to partner with: The Prince’s Trust – this charity specialises in helping disadvantaged young people. In collaboration with The Prince’s Trust, we ran a ‘Get into car repairs’ pilot at our Wakefield accident repair centre. Over a four-week period, 15 disadvantaged young people received technical car repair training, work readiness skills – including CV writing and interview experience – and soft skills such as communication and team building. A number of people from our Leeds sites volunteered as mentors, offering ongoing support to the participants. Following its success, we aim to assess the feasibility of how we develop the programme further.
Energy and environment Strategy We intend that our operations will be managed sustainably and with environmental considerations at the heart of the way we run the business. We will manage our operational impact and aim to reduce our carbon footprint.
• Business – we aim to reduce the impact of our travel, both to the office and to business meetings; to promote flexible working arrangements; to consume less energy and paper; and to use existing assets more efficiently.
• Introducing a range of agile working practices and technological improvements to enhance flexibility, minimise travel, and reduce printing, accommodation and resource impacts.
We aim to monitor performance metrics across the business and by site, and track our progress in each of these areas. We also aim to submit to external regulation as required, and expect to operate in compliance with Energy, Environmental and Pollution Prevention Regulations.
Challenges and opportunities Climate change is a very real commercial risk to our business. The landmark climate change risk assessment study by the Department for Environment, Food and Rural Affairs in January 2012 cited flooding as one of the key risks faced by Britain and estimated that flood risks to buildings and infrastructure were anticipated to rise to between £2 billion and £12 billion by the 2080s. As a leading home insurer, we are in discussion with the Government on how to address these future risks, as well as sharing our data and insight.
A key challenge for our environment strategy is to obtain all relevant information to gain a clearer view of our current impacts and position, and enable us to monitor our CSR KPIs, as a business and by site.
Achievements in 2012 • 100% renewable rate on contracted electricity sourced for our UK offices and our default office paper has 100% recycled content.
• We recycled 76% of the waste generated by our Accident Repair Centres, saving 1,517 tonnes of CO2.
A year of transformation Significant changes and events affecting the Group during 2012 and until the date of this report.
25 April: £500m Fixed/Floating Rate Guaranteed Subordinated Notes due 2042 issued by the Company with the Notes being guaranteed by U K Insurance Limited.
27 March: The Company declared and paid an interim dividend of £300m to RBS Group.
14 Feb: The new Direct Line Group corporate identity was launched.
3 August: The Group announced a cost reduction plan targeting gross annual cost savings of £100m in 2014.
Mike Biggs, Chairman 52 Direct Line Group Annual Report & Accounts 2012
The scale of organisational change in the business during 2012 was also significant. In addition to the separation from RBS Group, Direct Line Group continued a process of business transformation at the same time as executing the IPO which has allowed us to become a listed company.
13 December: The Company won ‘IPO of the Year’ at the 2012
24 December: The Company became a constituent of the FTSE 250.
24 September: The Company announced that Glyn Jones had been appointed as Senior Independent Director and Mark Catton, CEO of RBS Corporate and Institutional Banking in the UK, as a Non-Executive Director.
“ As Chairman of Direct Line Group, I am responsible for the leadership of the Board.” Mike Biggs, Chairman
I am pleased to report that we reached compliance with the UK Corporate Governance Code in relation to key Board structure and processes by the time of the IPO.
Before and after the IPO the Board was instrumental in initiating projects to assure an integrated approach to governance. Further details of our approach are set out on pages 60 to 68.
Our pursuit of strong governance is based on the conviction that it is good for our business. By adopting structures and systems designed to help us operate with maximum effectiveness and efficiency, we aim to optimise our competitive positioning and instil trust and confidence in our stakeholders that we intend to deliver against our objectives and create long-term sustainable value.
We intend to continue to build on these inductions by arranging site visits and training during 2013. We will review the effectiveness of the Board as a whole and of individual Directors by annual evaluations.
Accountability An overriding focus in 2012 was to ensure our policies, processes and systems are fit for Direct Line Group to operate as a listed company, meeting all relevant statutory, regulatory and compliance obligations.
One of the first challenges we met during 2012 was to revisit the existing governance infrastructure and devise a framework appropriate for a stand-alone listed insurance group. It was particularly important, during a time of significant organisational change, to ensure that the outputs of various work streams were subjected to robust systems of challenge and independent oversight, with material decisions being escalated to the Board.
What has the Board achieved? Highlights of 2012 • Refreshed the membership of the Board to meet the requirements of best practice relating to a majority of Non-Executive Directors on the Board (excluding the Chairman).
• Substantially completed separation from RBS Group with independent corporate functions and governance from 1 July 2012.
We have designed our remuneration strategy to attract, retain and motivate executives of the highest quality, incentivising them to deliver exceptional performance aligned with the interests of shareholders and the delivery of our business plan.
We have determined a policy of setting pay by reference to median market pay in the context of FTSE 31 to FTSE 100 listed companies and insurance peers. We determined the remuneration levels and structures for Executive Directors in line with that policy. Further information is available in the Directors’ remuneration report on page 78.
Relations with shareholders and other stakeholders We value open, constructive and effective communication with our shareholders. We had regular dialogue with our major shareholder, RBS Group, throughout the year. In the run-up to and following listing, we held numerous meetings with actual and potential shareholders. I am available to meet our major shareholders to discuss Directors’ remuneration and other matters going forward.
What will the Board focus on? Our objectives for 2013 The Board’s main priorities are to embed the significant changes made to the governance of the Group, with specific actions focused on key areas of activity: • Supporting the vision of becoming Britain’s best retail general insurer.
• Setting the tone and culture of the Group focusing on behaviours to help achieve the strategic objectives and to deliver fair outcomes to our customers.
External appointments Chairman of Resolution Limited (but will step down later in the year).
Key strengths and contribution Mike is a respected figure in the insurance industry and is well regarded by City investors. He brings the Group extensive insurance industry experience and a successful track record of flotations in this sector.
External appointments Paul is a member of the ABI Board, a member of the Financial Ombudsman Service’s insurance industry steering group, and a member of the FSA Practitioner Panel.
Experience and qualifications John was previously Managing Director, Corporate and Markets at Co-operative Banking Group (CBG, the group that brings together The Co-operative Bank, Co-operative Insurance Society and CIS General Insurance). He was Chief Financial Officer at CBG from 2003 to 2007. Prior to joining CBG, John spent more than 20 years in investment banking with UBS and Goldman Sachs. John is an Economics graduate of the University of Cambridge. He is 56.
Key strengths and contribution John is an experienced Chief Financial Officer and former banker with extensive City and financial services experience. He is accordingly well placed to provide strong support to Paul Geddes in leading the Group.
Senior Independent Non-Executive Director Appointment Glyn joined the Board in September 2012.
External appointments Glyn is Chairman of Aspen Insurance Holding Limited, a New York listed specialty lines insurer, and also Chairman of Aspen Insurance UK Limited, a principal operating subsidiary of the Aspen Group.
5 Mark Catton Non-Executive Director Appointment Mark joined the Board in September 2012.
Experience and qualifications Mark rejoined RBS Group in August 2007 as a Managing Director in corporate banking, having previously worked for NatWest. Prior to joining RBS Group, Mark was a senior executive at Barclays from 2001 to 2007, responsible for a number of its client and product businesses. He was latterly Managing Director in European investment banking and debt capital markets at Barclays Capital. He is an associate of the Chartered Institute of Bankers and the Association of Corporate Treasurers. Mark is 46.
External appointments Clare is currently a Non-Executive member of the Partnership Board of Miller Insurance Services LLP and is Treasurer of the Disasters Emergency Committee.
Experience and qualifications Priscilla was most recently Group Human Resources Director at Prudential plc and a Non-Executive Director and member of the Audit Committee at the Ministry of Defence. Priscilla has previously held senior human resources positions across a number of financial services and customer facing industries including roles at Abbey National plc, where she was Executive Director, Human Resources; BAA plc, where she was Group Human Resources Director and Kingfisher plc. She graduated in Law (with Honours) from the University of North East London. Priscilla is 55.
Key strengths and contribution Jane has undertaken a number of senior roles in financial services, including in the UK life insurance sector and has extensive experience of risk management, corporate governance and internal control. She also has extensive experience of developing and monitoring customer frameworks. This experience led to Jane’s appointment as Chair of the Board Risk and Corporate Social Responsibility committees. She also provides a customer focus on the Board.
External appointments Andrew is currently the Senior Independent Director at Segro plc, the British and European Industrial Real Estate Investment Trust Company (he will step down in April 2013), a trustee of the Royal School of Needlework, a NonExecutive Director of RSN Enterprises Limited and Royal London Mutual Insurance Society Limited and a member of the Financial Reporting Review Panel of the Financial Reporting Council.
Key strengths and contribution Andrew has undertaken a number of senior roles within the financial services and insurance industries. In addition, he
Key strengths and contribution Priscilla has great knowledge and experience of developing organisational values, and creating the leadership, succession, development and remuneration structures required to support corporate strategy. She has worked both as a practitioner and as an adviser and therefore understands the complexity around remuneration in both technical and market terms.
10 Bruce Van Saun Non-Executive Director Appointment Bruce joined the Board in April 2012.
Experience and qualifications Bruce has over 25 years of financial services experience. From 1997 to 2008 he held a number of senior positions with Bank of New York and later Bank of New York Mellon, most recently as Vice-Chairman and Chief Financial Officer, before which he was responsible for Asset Management and Market-Related businesses. He has held senior positions with Deutsche Bank, Wasserstein Perella Group and Kidder Peabody and Company. He has served on several corporate boards as a Non-Executive Director and has been active in numerous community organisations. He graduated summa cum laude (with the highest distinction) from Bucknell University in Lewisburg, Pennsylvania, with a Bachelor of Science in Business Administration. He also gained an MBA at the University of North Carolina. Bruce is 55.
Key strengths and contribution Bruce is one of two Non-Executive Directors nominated by The Royal Bank of Scotland Group plc as the majority shareholder. As Group Finance Director at The Royal Bank of Scotland Group plc, Bruce has extensive experience of the activities and markets in which the Group operates. Key
Experience and qualifications Rob has 19 years’ experience in international capital markets as a communications specialist and financial journalist. Rob was previously a Managing Director and Head of Group Press Office at HSBC Holdings. Prior to this he was Managing Director, Financial Services and a Partner of Financial Dynamics, a subsidiary of FTI Consulting Inc. Rob began his career in business media where he held senior journalist roles in the UK and Asia. Rob is a graduate of the University of Nottingham where he gained a Bachelor of Arts (Honours) in Politics and the University of London where he gained a Master of Arts in South Asia Studies. He holds a Certificate in Investor Relations awarded by The Investor Relations Society.
3 Darrell Evans Chief Customer Officer Appointment Darrell joined the Group in October 2009.
Experience and qualifications Previously, Jonathan held various senior Group positions in Personal Lines and Partnership divisions including Managing Director Home and Product and pricing Director Partnerships. Immediately prior to joining the Group, Jonathan was Vice President of Insurance for MBNA Europe and prior to that General Manager for a joint venture between Commercial Union and BNP Paribas. Jonathan started his career at Halifax, later HBOS, where he held a variety of senior product and operational roles in the general insurance division.
5 Steve Maddock Managing Director of Claims Appointment Steve joined as Managing Director of Claims in February 2010.
Experience and qualifications Humphrey has had more than 20 years’ experience since qualifying as a solicitor in 1989, and has advised on corporate and commercial matters, a wide range of corporate transactions across many countries, legal risk management and corporate governance issues, with RSA Insurance Group, where he was Group Legal Director, and City law firm Ashurst Morris Crisp. He is a graduate of the University of Oxford.
6 Mark Martin Human Resources Director Appointment Mark joined as Human Resources Director in February 2010.
Experience and qualifications Prior to her current role, Angela was CIO at J Sainsbury’s and a member of their Operating Board. She previously worked for ASDA/ Wal-Mart where she held a number of roles including European Strategy Director, CIO through the ASDA/Wal-Mart integration and e-Commerce Director which included establishing ASDA’s home grocery business. Angela started her career as a consultant and holds a degree in Electrical and Electronic Engineering from the University of Bristol.
10 Thomas Woolgrove Managing Director of Personal Lines Appointment Tom joined as Managing Director, Personal Lines in April 2010.
Experience and qualifications Tom previously held various Managing Director roles with HBOS and Lloyds Banking Group, including UK Private Banking, General Insurance and Motor Finance. Before that, he was a strategy consultant with Gemini Consulting, part of the Capgemini Group, and a graduate engineer with Rolls-Royce Aerospace. He is a member of the Association of British Insurers General Insurance Committee and the Chartered Insurance Institute Professionalism Taskforce. He was elected Deputy President of the Chartered Insurance Institute in July 2012. Tom holds a Masters Degree in Engineering and Management from the University of Oxford, and an MBA from the University of Chicago, Booth School of Business.
Contents 60 The UK Corporate Governance Code 60 Leadership 64 Board effectiveness 67 Accountability 68 Remuneration 68 Committee reports 68 Audit Committee 71 Board Risk Committee 73 Corporate Social Responsibility Committee 74 Investment Committee 75 Nomination Committee 76 Remuneration Committee 77 Relations with shareholders 78 Directors’ remuneration report 91 Other disclosures
The Group’s integrated approach to governance is demonstrated by the way in which the various projects undertaken during the year were managed, chief among which was the Fit for Listing project. Each project involved consultation and regular meetings with stakeholders, and accountability for delivery was cascaded throughout the business.
Transformation plan The Transformation plan launched in 2010 consisted of three phases: Phase 1: Recover profitability
Following the return to profit in 2011, the Group redefined its strategic plan through five pillars: distribution, pricing, claims, costs and Commercial and International businesses. The Group is making good progress as it targets a 15% RoTE.
Customer conduct A working group was set up to assess our conduct towards our customers during transactions, to highlight potential failures of delivering appropriate customer outcomes. This includes how our entire business thinks about interactions with our customers.
The working group manages customer conduct across Direct Line Group. It assesses and reports our performance, while consulting on improvements and emerging conduct themes.
Culture and behaviours The organisational and governance changes made in 2012 were accompanied by a corresponding programme to reinforce the culture and behaviours we require to enable Direct Line Group to achieve its strategic objectives. See page 47 for more information on this initiative.
Fit for Listing Given the scale of organisational change which was to take place during 2012, a Fit for Listing work stream was created that brought together the interests of relevant stakeholders. The purpose was to establish a framework for delivering the transition of Direct Line Group from ‘limited’ to ‘listed’ status, as well as to establish and confirm management and operational focus, given the other work streams also underway.
Relationship Agreement An element of achieving independence and substantial operational separation from RBS Group was to enter into a Relationship Agreement setting out the terms of the relationship between Direct Line Group and RBS Group following the listing.
The Relationship Agreement makes explicit the independence of Direct Line Group from its major shareholder, RBS Group, whilst making express provision for RBS Group to be entitled to the information it needs from Direct Line Group in order to meet its legal, regulatory and accounting obligations. It also sets out RBS Group’s rights to nominate Directors depending on the proportion of its shareholding in the Company. This is an important piece of governance architecture.
• the provision of independent assurance by our internal audit function over the adequacy and effectiveness of our governance, risk and control framework.
How are we structured to ensure good, strong governance? The Group started 2012 with a structure appropriate to the needs of a wholly-owned subsidiary of our parent, RBS Group. The appointment of new Directors helped enable the restructuring of our Board Committee architecture, leading to the creation of a Remuneration Committee (in April), a Corporate Social Responsibility Committee and a Nomination Committee (when we listed). Under the provisions of RBS Group’s governance framework, Direct Line Group’s risk and audit functions were overseen at Board level by a combined Risk and Audit Committee. Following the principles set out in the Walker Report, this Committee was separated on listing into a Board Risk Committee and an Audit Committee. We also have an Investment Committee.
The governance structure illustrating the relationship between the Board and its Committees is set out on page 61.
The Board has established its Board Committees to assist it in delivering its responsibilities. Each Committee plays a vital role in ensuring that the Board operates efficiently and gives appropriate consideration to matters. The composition, attendance, role and focus of each Committee are set out on pages 68 to 76.
What is the role of the Board and what are its members’ key responsibilities? The specific duties of the Board are clearly set out in its terms of reference. These address a wide range of corporate governance issues and list those items that are specifically reserved for consideration and decision by the Board.
The Board is the main decision-making forum for the Group. It has overall responsibility for managing the business and affairs of the Group, the establishment of the Group’s strategy and the raising and allocation of capital. The main responsibilities of the Board include: • Ensuring that the necessary financial and human resources are in place for the Group to meet its objectives.
• Managing risk effectively through setting, approving and monitoring the Group’s strategic aims with regard to risk appetite, stress scenarios, mitigating actions and longer-term strategic threats.
• Scrutinising the performance of management in meeting agreed goals and objectives.
• Satisfying itself as to the integrity of financial information and that financial controls and systems of risk management and internal control are robust and defensible.
• Taking a prime role in succession planning and appointing and, where necessary, removing Executive Directors.
Chairman • To provide leadership of the Board and ensure its effectiveness in all aspects of its role.
Non-Executive Director • To provide constructive challenge and to help to develop proposals on strategy.
• To be available to shareholders if they have concerns which contact through the normal channels of Chairman, Chief Executive or other Executive Directors has failed to resolve or for which such contact is inappropriate.
How often does the Board meet? The Board met regularly during 2012; in addition to the 11 scheduled meetings a further 11 ad hoc meetings were held. Not all the Directors were available to attend the ad hoc meetings. Details at attendance of Board and Board Committee meetings by Directors during the year are set out below and on pages 68 to 77.
Andrew Palmer2 8 of 8 9 of 10 2 of 3 0 of 1
Mark Catton4 1 of 1 – 2 of 3 0 of 1
Bruce Van Saun3 1 of 4 5 of 5 3 of 3 0 of 1
3. Mike Biggs joined the Board as Chairman and Bruce Van Saun was appointed to the Board on 27 April 2012.
8. Although half the Board attended this meeting, all Directors were provided with papers and given the opportunity to comment ahead of the meeting.
The names of the Directors who served as at the end of the year, together with their biographical details and other information, are shown on pages 56 to 57.
Mike Biggs, Glyn Jones, Mark Catton, Clare Thompson, Priscilla Vacassin and Bruce Van Saun all joined the Board during the year, and Chris Sullivan, Ian Falconer and Sheree Howard left the Board. The respective dates are shown in the notes to the table.
What is the role of the Executive Committee? The Executive Committee is the principal management committee that assists the Chief Executive Officer in the day-to-day management of the business as a whole. It supports him in setting performance targets and in implementing the Group’s strategy and direction as determined by the Board. The Committee assists him to monitor key objectives and commercial plans to deliver the Group’s targets. It also helps him to evaluate new business initiatives and opportunities, and receives and considers reports on operational matters, where these are material to the Group or have cross-company implications.
“At Direct Line Group we have worked hard to ensure that the Board has the appropriate mix of skills, experience, independence and knowledge to help deliver our long-term strategy. It is vitally important to us that we have the right combination of people to support our ambitions for the future and we spent considerable time building a Board which we believe has the capabilities to do this.” Mike Biggs, Chairman
How do you ensure the Board of Directors is balanced and the majority of Directors are independent? As part of the process of creating a Code-compliant Board, the Company focused on obtaining the elements considered necessary to maximise the Board’s effectiveness (see the process for appointing new people to the Board overleaf). Consequently, the Board and its committees have been constructed in a way that ensures that an appropriate balance of skills, experience, independence, knowledge of the sector and diversity exists to enable the Directors to discharge their duties and responsibilities effectively.
The individuals’ attributes were established as part of the selection procedure. (Please see the section “What is the process for appointing new people to the Board?” for the desired attributes of our Directors and a description of the selection process.)
In addition, the Company employs a continuous process of reviewing independence from management and invites the declaration of any conflict of interest that could interfere with each Director’s ability to act in the best interests of the Group. UK company law allows the Board to authorise a situation in which there is, or may be, a conflict between the interests of the Group and the direct or indirect interests of a Director or between the Director’s duties to the Group and to another person. The Board has adopted procedures for ensuring that its powers to authorise conflicts operate effectively. For this purpose a register of conflicts, and of any authorisation of a conflict granted by the Board, is maintained by the Company Secretary and regularly reviewed by the Board.
• Experience and appreciation of businesses with customer service at their core (perceived as advantageous).
Attributes • Widely recognised as an individual of high repute and integrity who can rapidly gain Executive and Non-Executive colleagues’ respect and trust.
• A team player and a good listener with the style and ability to be a highly constructive member of the Board.
• Strong communication and presentation skills, with the ability to get under the skin of the business and a strong desire to gain a deep understanding of what is going on in and around the Group.
The Nomination Committee will adopt an approach modelled on this selection procedure for future appointments.
In line with these arrangements, all 10 Directors will be subject to re-election by shareholders at our Annual General Meeting (“AGM”) on 6 June 2013.
Further training and updates are provided to the Board and its Committees as appropriate.
How do we ensure we have an effective Board? The Board significantly changed over 2012. It was not at full complement until September, prior to the listing of the Company in October.
For these reasons, the Board did not undertake a formal evaluation of its performance in 2012. We intend to conduct a comprehensive review in 2013, when individual Directors will be subject to a performance evaluation, and the Chairman will meet with each Director and provide feedback on a one-to-one basis. Committee chairmen will also receive feedback on the performance of their committees. Feedback on the Chairman’s performance will be provided directly to the Senior Independent Director, who will discuss this with the other Non-Executive Directors before their one-to-one meetings with the Chairman.
What is the Direct Line Group’s approach to diversity? The Board considered carefully the diversity of its Board members from a variety of perspectives and sought to ensure that Directors had the relevant range of knowledge, skills, experience and, where necessary, independence to help the Company deliver its strategy.
Our induction process1 The Group provides Directors with formal induction sessions, including the following matters: • Overview of business
the selection of Directors to the Board. Also, the Corporate Social Responsibility Committee intends to consider the issue in the context of ensuring the diversity of the Group talent pipeline for future requirements, with mentoring schemes for high-potential candidates and associated training and development programmes.
Building a working environment where all our employees can develop to their full potential is important to us and we work hard to broaden the range of approaches available to our people, ensure our policies and processes support them and encourage divergent thinking.
• Improved ability to respond and change through creativity and innovation; innovative approaches to products.
• Increasing employee engagement, which helps attract new staff and retain those already here, reduces recruitment costs and can increase productivity.
In a competitive and challenging business environment, diversity is a necessity and an advantage. It helps us retain business, identify new markets and attract new customers. Our customers collectively represent a variety of backgrounds and nationalities and we need to understand their particular needs. When our workforce mirrors the diversity of our customers we are better placed to understand, anticipate and meet those needs through innovative products and services.
“At Direct Line Group we are determined to present a fair, balanced and understandable insight into our business for our stakeholders. We endeavour to make this assessment as clear as possible.” Mike Biggs, Chairman
We meet specific responsibilities placed on the Board under the provisions of the Code as follows: • An explanation of how the Company generates value over the long term within the business model and the strategy for delivering Company objectives is on pages 6 to 23.
• The arrangements established by the Board for the application of risk management and internal control principles are detailed on pages 67 to 68.
The Group’s risk assessment process includes output from a system for reporting on all the significant risks that stand in the way of achieving Group objectives. The system also reports on the nature and effectiveness of the controls and other management processes that manage these risks. The system also sets risk appetites for key categories of quantifiable risk. It additionally encompasses self-assessment of controls by risk owners throughout the business, whose assertions are independently challenged by the Risk Management Committee.
How does the Board ensure that internal systems of control are effective? The Board has put in place a management structure with defined lines of responsibility and clear delegation of authority. This control framework cascades down through the business units and central functions, showing clear responsibilities for ensuring that appropriate controls are in place at an operational level, including those that relate to the financial reporting process.
The Board regularly reviews the effectiveness of the Group’s risk management and internal control systems. Its monitoring covers all material controls and is based principally on reviewing reports from management and the Internal Audit function so that the Board may consider whether significant weaknesses are promptly remedied and if they indicate a need for more extensive monitoring. During the course of the reviews, the Board has not identified or been advised of any failings or weaknesses which it has determined to be significant.
Role and focus The Committee is responsible for the oversight and challenge of the effectiveness of the Group’s systems of financial control, financial regulatory reporting and other internal controls. It monitors the work of internal and external auditors and actuaries.
The Audit Committee’s terms of reference are available on our website at: www.directlinegroup.com.
Other attendees include • Chief Executive Officer • Chief Financial Officer • Chief Risk Officer
Minimum number of meetings per annum The Committee is to meet at least four times a year at appropriate times in the financial and regulatory reporting and audit cycle and otherwise as required.
Notes: 1. The attendance shown above includes attendance of the Audit and Risk Committee until it was split into distinct Audit and Board Risk Committees with effect from 16 October 2012.
2. Attendance is expressed as the number of meetings attended out of the number of meetings possible or applicable for the Director to attend.
5. A member throughout the year and appointed Chair on 16 October 2012.
What did the Committee do in 2012? • Reviewed the constitution, membership and terms of reference of the Committee.
• Agreed the scope of the audit work to be undertaken by the external auditors and the Internal Audit function.
• Monitored Internal Audit’s independent and objective reports regarding the appropriateness, effectiveness and sustainability of the Group’s system of internal controls.
• Reviewed regular reports of the work conducted by the auditors and noted mitigating actions proposed by management where required.
• Reviewed: the interim results for the half year ended 30 June 2012 issued in September; the interim management statement issued in November; and the Annual Report & Accounts for the year ended 31 December 2012, with particular focus on accounting policies and critical estimates and judgements.
• Key control issues reported by Internal Audit were monitored on a quarterly basis until the Group’s risk exposure had been properly mitigated.
• Monitored the Group’s compliance with statutory and regulatory requirements and recommendations within the scope of the Committee’s terms of reference.
• Effected the creation of separate Audit and Board Risk Committees, wholly constituted of independent NonExecutive Directors and with distinct terms of reference.
• Reviewed documentation relating to the listing of £500 million of Tier 2 subordinated debt, issued in April 2012 and the IPO documentation.
• Established the parameters of the services provided by the external auditors in line with the requirements of the relevant minimum standard.
• Approved an internal controls manual as a guide to the businesses and to the auditors.
What will we be focusing on? • Providing oversight of the actuarial reporting process; a review of the Group’s control environment and processes.
Frequency of meetings During 2012, the Committee (and its predecessor, the Risk and Audit Committee) met on seven occasions, five of which were scheduled and two were additional ad hoc meetings. The members’ attendance record is set out above. In addition to the formal meetings, the Committee held: • Separate meetings to discuss relevant issues with members of senior management and the Head of Internal Audit.
The Internal Audit function provides the Committee with independent and objective reports on the appropriateness, effectiveness and sustainability of the Group’s risk management, systems of internal control, governance frameworks and processes. The Group’s statement of internal controls can be found on page 68.
At least half-yearly, the Committee reviews and challenges the key assumptions and judgements, the emerging trends, movements and analysis of uncertainties underlying the assessment of the actuarial best estimate reviews where appropriate.
Following their review of actuarial best estimate and management best estimate reserves, the Committee proposes the respective reserves to the Board for booking.
External audit The Committee plays a key role in managing the relationship with the Group’s external auditor, Deloitte LLP. The Group’s Audit/Non-Audit Services Minimum Standard ensures that the independence and objectivity of the external auditor are not impaired.
• At each meeting, the Audit Committee reviews and, if approved, ratifies all services approved since its previous meeting.
The Audit Committee will regularly review and where appropriate update the Minimum Standard to ensure alignment with the latest standards and practice in establishing, maintaining and monitoring the independence and objectivity of auditors.
Fees payable to the auditor During the year ended 31 December 2012, Deloitte LLP’s fees for audit services and other services supplied were £6.1 million.
The Committee is recommending to the Board that Deloitte LLP be re-appointed as auditor of the Company. A resolution for the re-appointment of Deloitte LLP as auditor of the Company will be put to a shareholder vote at the AGM on 6 June 2013.
Role and focus The Board Risk Committee provides oversight and advice to the Board in relation to current and potential future risk exposures of the Group and future risk strategy. It determines risk appetite and tolerance and promotes a risk awareness culture within the Group.
Notes: 1. The Board Risk Committee was constituted on 16 October 2012. The attendance shown above includes attendance of the Risk and Audit Committee until it was split into distinct Audit and Board Risk committees with effect from 16 October 2012.
2 Attendance is expressed as the number of meetings attended out of the number of meetings possible or applicable for the Director to attend.
Jane Hanson, Chair of the Board Risk Committee 71Direct Line Group Annual Report & Accounts 2012
The activities of the Risk and Audit Committees were combined and managed by a joint Risk and Audit Committee until 16 October 2012. References to the activities of the Board Risk Committee below include those activities carried out by the Risk and Audit Committee.
What did the Committee do in 2012? The Committee (and its predecessor, the Risk and Audit Committee) considered and monitored the following matters during 2012: • The Group’s key risks and risk appetite, including regulatory and conduct risks.
• The high level risk-based policies throughout the Group, including the risk appetite framework, policy framework, and associated tools and processes. These included, but were not limited to, the business change risk process, material risk assessment and business continuity planning.
• The detailed planning for the Group’s internal Solvency II model. The Committee also received regular progress reports on the development of the models used to calculate economic capital requirements and the stress and scenario-testing techniques used to validate the results.
• Risks identified as outside appetite resulting from Internal Audit and other assurance reviews of the Group’s system of internal control and the action taken by management to mitigate them.
Role and focus The remit of the Corporate Social Responsibility Committee is to ensure Direct Line Group conducts its business in a responsible manner (including in relation to health and safety, environmental, corporate social responsibility, social and ethical matters). The Committee also oversees the allocation of donations and community involvement.
Other attendees include • Human Resources Director • General Counsel and
• Health and safety policies and procedures and compliance with them.
• Considering and recommending the Group’s positioning on relevant emerging Corporate Social Responsibility issues.
Jane Hanson, Chair of the Corporate Social Responsibility Committee 73Direct Line Group Annual Report & Accounts 2012
• Considered plans and monitored progress in delivering a stand-alone Investment and Treasury function prior to operational separation from RBS Group.
• Reviewed and monitored exposures of concern, in particular sovereign and bank exposure to Eurozone countries, and legacy positions outside the tolerance limits set in the risk exposure framework.
• Received updates on collateral management plans, the closure of legacy investment portfolios, changes to the asset manager for the International portfolios and recommendations to adjust credit durations for the Group’s investment portfolios.
• Reported as appropriate to the boards of the regulated companies within the Group on our investment management performance.
What have we achieved? • Monitored the successful creation of a stand-alone Investment and Treasury function.
• Reviewed the significant progress made by the Investment and Treasury function in reshaping the investment portfolios.
• Using the internal capital model to support asset strategy decisions by understanding the capital and solvency implications.
Andrew Palmer, Chair of the Investment Committee 74 Direct Line Group Annual Report & Accounts 2012
Role and focus The Nomination Committee is responsible for considering and making recommendations to the Board regarding the appointment of Directors. It will make recommendations regarding the membership and chairmanship of the Board Committees.
The Nomination Committee’s terms of reference are available on our website at: www.directlinegroup.com.
Nomination Committee report Frequency of meetings As the Board was up to full complement prior to listing on 16 October 2012, the Committee did not need to meet between listing and the year end. It has subsequently met to determine Directors’ independence or non-independence for the purpose of recommending to the Board the re-appointment of Directors at the AGM.
The Committee is to meet at least once a year to consider the Board composition and membership of the principal Committees and to consider the suitability of all Directors standing for re-election at the AGM. The Committee will also meet as required to consider candidates for appointment to the Board. The Chief Executive Officer is closely involved in the work of the Committee and is invited to attend and contribute to meetings.
Appointments During 2012, Mike Biggs, Mark Catton, Glyn Jones, Clare Thompson, Priscilla Vacassin and Bruce Van Saun were appointed to the Board. The appointment of Mike Biggs was managed by RBS Group as it wholly owned Direct Line Group at that time. Messrs Van Saun and Catton were nominated by the Company’s majority shareholder, RBS Group. We recruited the remaining Non-Executive Directors appointed in 2012 with the help of external search consultants JCA Group, who have no other connection with the Company. As part of the process, those newly-appointed Directors met the Chairman, the Chief Executive Officer and a number of other Directors before being appointed.
Mike Biggs, Chair of the Nomination Committee 75Direct Line Group Annual Report & Accounts 2012
What did the Committee do in 2012? • Reviewed the constitution of the Committee, its membership and terms of reference.
• Granted awards to eligible employees under the Long-Term Incentive Plan (“LTIP”).
• Considered post-IPO pay arrangements for the Executive Directors and members of the Executive Committee.
• Established an Employee Share Ownership Trust, and considered the proposed approach to funding it and its relationship with the trustees.
• Developed the remuneration and incentive arrangements for Executive Directors and senior executives of the Group and considered the treatment of legacy entitlements under RBS Group share schemes.
What will we be focusing on? • The 2013 remuneration and incentive plan arrangements in tandem with reviews of the pay review budget for 2013 and the outcomes from the annual performance review.
• The share ownership guidelines for members of the Executive Committee.
• The possible outcomes of the 2013 Annual Incentive Plan (“AIP”) and the structure of the 2014 plan in light of the experience in 2013.
3. Acted as Chair for meetings held on 18 July, 13 August, 3 September and 21 September 2012. Continues as a member.
What did we do in 2012? During the year, Directors spent a considerable amount of time understanding the views of potential investors and other market participants, to ensure they were aware of market sentiment in the run-up to, and following, the IPO. In October, the Chief Executive Officer, the Chief Financial Officer and members of the executive between them met and presented to 292 institutions, seeing over 700 individuals across eight cities (with calls to six more).
• Attending key conferences to enable communication with a large number of existing and target investors in a time-efficient manner.
• Dinners with UK fund managers at the end of 2013.
We will announce the result of the poll as soon as practical after the meeting and also post the result on our website after that date. The proxy form and announcement of the results explicitly state that a vote withheld is not a vote in law and will therefore not be counted in the calculation when deciding whether the resolution has been passed.
What is the procedure at the AGM? Following presentations by members of the Board, voting on the resolutions at the AGM will be conducted on a poll. Shareholders’ proxy votes can be submitted electronically through the Company Registrar’s website. Further details can be found in the Notice of AGM.
Dear shareholder I welcome you to this, the first remuneration report of Direct Line Insurance Group plc. In such a competitive market, we believe that our employees are critical to the success of our business, both now and into the future. As a result, the Group’s remuneration policy seeks to provide, in the context of the Group’s business strategy, a reward proposition at the right cost to attract, retain, motivate and reward high-calibre employees, so that they are engaged to deliver superior long-term business performance within acceptable risk parameters.
Our remuneration policy supports this strategy. Executive Directors will only receive their full remuneration opportunity if material value is created for our shareholders.
• We intend to continue the practice of making LTIP grants at regular six-month intervals at the levels indicated at the IPO and applying stretching performance conditions over each award’s performance period.
• The implementation of the Group’s Reward Policy in 2012 and what was paid, vested or awarded (conditional upon the application of performance tests) to Executive Directors in respect of the financial year ended 31 December 2012.
The Remuneration Committee independent review Governance The remuneration report has been prepared in accordance with the requirements of the Companies Act 2006 and Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.
This report also provides a number of the requirements of the prospective new regulations recommended by the Department for Business, Innovation & Skills (“BIS”) (albeit these are still in draft format) which will take effect in respect of financial years ending on or after October 2013.
The Group also complies with the Code in relation to remuneration. The Group is an active member of the Association of British Insurers (the “ABI”). The Committee, consistent with its approach of operating within the highest standards of corporate governance, takes significant account of guidelines issued by the ABI and shareholder bodies (such as the National Association of Pension Funds) when setting the remuneration strategy for the Group. The Committee will also seek to build an active and productive dialogue with investors generally and on changes to the Group’s executive pay arrangements in particular.
Under its terms of reference the remit of the Committee, which is a committee of the Board, is to set and oversee the remuneration policy and contract terms of the Executive Directors, the Chairman of the Board and members of the Executive Committee. It also reviews the overall pay and bonus decisions in aggregate for the wider Group and therefore takes account of pay and conditions in the wider Group. The remuneration of the Non-Executive Directors is determined by the Board as a whole, without the individuals concerned being present.
Deloitte LLP has audited the following items, as stipulated by law: • the table of Directors’ emoluments and associated footnotes on page 86 and the disclosure of the items comprising benefits in kind; • the tables of pensions benefits on page 90; and
• the table of disclosure of Executive Directors’ share options and share awards on pages 88 to 90 and associated footnotes.
Base salary • This is the core element of pay that reflects the individual’s role and position within the Group and is payable for doing the expected day-to-day job.
• Salaries are reviewed against: – level of skill, experience and scope of responsibilities, individual and business performance, economic climate and market conditions; – the median market pay in the context of insurance peers (Aviva, Hiscox, L&G, Old Mutual, Prudential, RSA, Resolution and Standard Life ) and FTSE 31 to 100 listed companies; and
• The maximum bonus level potential under the AIP for the CEO is 175% of base salary, and for the CFO is 150% of base salary.
2013 AIP targets are set as per detail on pages 84 and 85.
• Awards under the LTIP will be made twice in each financial year of the Company (at approximately six-month intervals following the announcement of the Company’s annual and half-yearly results). For the Executive Directors, bi-annual awards will be made over shares with a face value equal to 100% of their then salary on each occasion.
• The use of RoTE and TSR in combination provides a balanced approach to the measurement of the Group’s performance over the longer term by using both a stated financial KPI and a measure based on shareholder return.
• To encourage retirement planning by our employees and retain flexibility for individuals.
• This is in line with the approach taken for all Group employees.
Benefits • A comprehensive flexible benefits package is offered, with the emphasis on employees being able to choose the combination of cash and benefits that suits them.
• This element supports many of our values, but particularly that in return for our employees ‘bringing all of themselves to work’, we will consider them as whole individuals with needs in and outside of the workplace.
• Executive Directors receive a benefits package in line with market practice. This includes a company car allowance, private medical insurance, life assurance and income protection insurance.
• To encourage share ownership by employees, thereby allowing them to share in the long-term success of the Group and align their interests with those of the shareholders.
• For external appointments the Committee may offer additional cash and share-based elements when they consider it in the best interests of the Company and therefore of shareholders.
Future remuneration policy Policy table Remuneration for Executive Directors for the financial year commencing 1 January 2013 consists of the following elements: Element Purpose and link to strategy Operation Changes for 2013
• Bonus levels and the appropriateness of measures and weightings are reviewed annually to ensure they continue to support our strategy.
• Awards are made in the form of nil-cost options which vest to the extent performance conditions are satisfied, three years from the date of grant. An additional share payment in lieu of dividends is also paid at vesting.
• The Committee will determine the performance condition for each award made under the LTIP, with performance measured over a single period of three years with no provision to retest.
• Performance is measured against stretching targets set at the beginning of the performance period. For awards granted in 2012 vesting is determined based on two measures: – 60% will be based on RoTE performance; and
– 40% will be based on relative total shareholder return (“TSR”) performance against the FTSE 350 (excluding Investment Trusts).
• Awards will be subject to a payment gateway such that the Committee must be satisfied that there are no material risk failings, reputational concerns or regulatory issues.
• In addition, there will be an underpin relating to the Committee’s view of the underlying financial performance of the Company.
• The vesting of all awards is subject to clawback at the discretion of the Committee.
• Pension contributions are paid only in respect of base salary.
• Executive Directors are able to participate in the all-employee share plans on the same terms as other Group employees.
• The Executive Directors and Executive Committee members are subject to Share Ownership Guidelines and, until they comply with these, are required to retain all of the Ordinary Shares that they obtain from any of the Company’s employee share plans after any disposals necessary for the payment of personal taxes on the acquisition of such Ordinary Shares.
• For external and internal appointments, the Committee may agree that the Group will meet certain relocation expenses as appropriate.
There have been no changes (nor are there any planned in 2013) to remuneration for Executive or Non-Executive Directors since the Group listed on the London Stock Exchange.
Service agreements The Executive Directors’ service agreements summary is as follows: Director Effective date of contract Notice period Exit payment policy
Paul Geddes 1 September 2012 12 months Base salary only for unexpired portion of notice period and to be paid in a lump sum or monthly instalments, in which case instalments are subject to mitigation if an alternative role is found.
If a leaver is deemed to be a ‘good leaver’, for example leaving through redundancy, ill health or death or otherwise at the discretion of the Committee
The Directors may appoint additional members to join the Board during the year. Directors appointed in this way will be subject to election by shareholders at the first AGM after their appointment. In subsequent years the Directors are expected to submit themselves for re-election at the AGM.
The Chairman and Non-Executive Directors have notice periods of three months from either party.
• Superior – maximum bonus and maximum vesting under the LTIP.
Note: Share price growth and the value of dividend roll-up are ignored in this analysis.
There will be no increase to Executive Directors’ salaries in 2013.
Annual Incentive Plan For the 2012 AIP, the Committee determined the level of award for Paul Geddes, taking into account the views of RBS Group on his performance. The award for John Reizenstein was agreed by the Committee, making an assessment against the targets set by RBS Group at the beginning of 2012. Overall, the Committee felt the bonus outcome was marginally below ‘On-target’. The Committee acknowledged that the commitments set out at IPO have been met, and that the share price has increased significantly since listing. However, taking into account wider factors and internal stretch targets, overall performance was slightly below ‘On-target’.
Resulting from the performance described above, the annual incentive awards payable to the Executive Directors in respect of the financial year ended 31 December 2012 are: Director Position
Note: 1. Paul Geddes’s bonus outcome for 2012 will be deferred on terms comparable to those applying to all members of the RBS Group Executive Committee, due to his having been a member of the RBS Group Executive Committee for nine months of the year, with the exception that any deferral is into the Company’s shares. John Reizenstein’s bonus will be paid 60% in cash and 40% in deferred shares under the DAIP as per the plan for all other senior employees.
Directors’ remuneration report continued 84 Direct Line Group Annual Report & Accounts 2012
Long-Term Incentive Plan The Company’s policy is to make awards twice a year following the announcement of the Company’s full and half-year results. The first awards were made on 7 November 2012, following IPO. These awards were treated by the Committee as an ordinary award, consistent with awards that will usually be made in the second half of the Company’s financial year. The value of these awards was, therefore, equal to 50% of the normal annual policy level, that is, the awards granted to Paul Geddes and John Reizenstein were over Ordinary Shares with a face value of 100% of their salary. Awards were also granted to SLT members for lower amounts than those applicable to the Executive Directors.
Performance conditions for awards made in 2012 The initial awards granted on 7 November are subject to the achievement of the following performance conditions: • 60% is based on RoTE over a two-year performance period (2013 and 2014); and
Relative TSR 20% of portion of award vests for median performance Full vesting for upper quintile performance
In addition, the LTIP awards will only vest to the extent that the Committee is satisfied that the outcome of the TSR and RoTE performance conditions reflects the underlying financial performance of the Group over the period from the awards date until vesting. In making these considerations, the Committee will take into account whether there have been any material risk failings.
Free share awards Following the IPO in October, an offer of 143 shares (worth approximately £250 at the time of offer) was made to all employees in the Group under the all-employee, HMRC-approved, Share Incentive Plan (“SIP”). The SIP is not subject to performance conditions and the shares vest after three years. Both Executive Directors accepted this offer.
Pension provision Paul Geddes elected to become a member of the Group’s defined contribution pension plan with effect from 1 September 2012. Prior to this, he was a participant in an RBS Group defined benefit plan. Going forward, he receives a combination of Company contributions and a taxable cash allowance together worth 25% of annual gross salary. Information on the transfer value of his RBS Group legacy defined benefit pension can be found on page 90.
John Reizenstein elected not to join the Group’s defined contribution pension plan and receives a taxable cash allowance in lieu of Company contributions. The cash payment is equal to 25% of annual gross salary.
Chairman and Non-Executive Directors’ fees The fees paid to the Chairman are inclusive of all Board and Committee membership fees and are determined by the Committee. The Chairman’s fees have been set at £400,000 per annum.
The fees of the other Non-Executive Directors are determined by the Board, with affected persons absenting themselves from the deliberations, and aim to be competitive with other fully listed companies of equivalent size and complexity.
Additional fees are paid to Non-Executive Directors who chair a Board Committee or sit on a Board Committee and to the Senior Independent Director.
The Non-Executive Directors are not entitled to receive any compensation for loss of office and are not entitled to participate in the Company’s bonus, employee share plan or pension arrangements. Fee levels for Non-Executive Directors are reviewed annually and set in April of each year.
Total remuneration for the 2012 financial year Remuneration for the Executive Directors for the year ended 31 December 2012 was as follows: salary1 £’000 and benefits2 £’000 contributions and cash allowance in lieu of pension3 £’000 2012 Bonuses awarded for performance during the year4 £’000 emoluments £’000 emoluments7 £’000 in RBS Group defined benefit plan5 £’000 2012 LTI awards vesting6 £’000 figure of remuneration £’000
4. Annual bonus includes both the cash element received and the deferred element awarded in relation to the financial year ending 31 December 2012.
5. This is the change in accrued benefits in RBS Group defined benefit plans for Paul Geddes.
6. This figure represents the vesting of the Medium Term Performance Plan award during the financial year ending 31 December 2012, with performance conditions and appropriate vesting amounts assessed by the RBS Group Remuneration Committee.
2. Chris Sullivan and Ian Falconer resigned as Directors in 2012.
Notes: 1. There are no changes between the year-end and a date not more than one month prior to the date of the notice for the AGM.
2. These awards take the form of nil-cost options over the Group’s shares and are subject to performance conditions to be assessed by the Committee and as described on page 85.
Direct Line Group free share awards The table below details the unvested awards held by Paul Geddes and John Reizenstein made under the all-employee free share awards over 143 shares per employee referred to earlier in this report.
Paul Geddes Free Share Award – 143 – – 143 27 November 2012 2.02 27 November 2015
For the Medium Term Performance Plan award vesting to Paul Geddes in 2012, RBS Group determined the level which would vest based on the original performance targets as set at grant.
The table below details the awards made to Paul Geddes and John Reizenstein under RBS Group plans which will vest in Direct Line Insurance Group plc shares.
Paul Geddes RBS Group LTIP 2011 337,139 – – 501,394 501,394 7 March 2011 4.45 7 March 20142
John Reizenstein RBS Group LTIP 2011 69,226 – – 102,953 102,953 7 March 2011 4.45 7 March 20142
RBS Group LTIP 2012 – 120,578 – 179,324 179,324 7 March 2012 2.80 7 March 20152
Notes: 1. The Direct Line Insurance Group plc share price at 31 December 2012 was £2.164 and the range of prices in year (11 October 2012 to 31 December 2012) was £1.865 to £2.164.
RBS Group LTIP 2010 229,779 – – – 229,779 14 May 2010 4.90 14 May 20132
RBS Group deferred awards Awards which were originally awarded under the RBS Group Deferral Plan will continue to be delivered in RBS Group shares. The awards detailed below under the RBS Group Deferral Plan give a conditional right to acquire Ordinary Shares under the RBS Group 2010 Deferral Plan.
Legacy RBS Group pension benefits For the first part of the year, Paul Geddes participated in the RBS Group defined benefit pension plan. Mr. Geddes left this plan to join the Direct Line Group defined contribution plan on 1 September 2012 but kept his accrued pension in the RBS Group defined benefits pension plan. His deferred benefits and accrual in 2012 under the legacy RBS Group plan are shown below: Change in accrued pension in year £
Transfer value of total accrued pension at 31 December 2012 £
Activities, directors’ report and business review Direct Line Group is the largest retail general insurer in the UK. The number one direct motor insurer in Italy and the number three direct motor insurer in Germany. We operate a multi-brand, multi-product and multi-channel business that covers the majority of customer segments in the UK for personal lines general insurance and SME commercial lines.
Information about the use of financial instruments by the Company and its subsidiaries and its risk management policies is disclosed in the business review on pages 26 to 29.
The cautionary statement about forward-looking statements is set out on page 175.
Post-balance sheet events Details of events after the statement of financial position dates are contained in note 41 to the financial statements.
Dividends The final dividend for 2012 of 8 pence per ordinary share will, subject to shareholder approval, be paid on 11 June 2013 to all holders of Ordinary Shares on the Register of Members at close of business on 8 March 2013. Full details of dividends paid and of the dividend policy may be found on pages 135 and 171 respectively.
Details of the Company’s rules on the appointment and term of appointment of Directors are given on pages 65 to 66 of this report.
Remuneration of Directors The Remuneration report starting on page 78 forms part of the Directors’ report and includes details of the nature and amount of each element of the remuneration (including share options) of each of the Directors.
Secretary Details of the Company Secretary of Direct Line Insurance Group plc, including his qualifications and experience, are set out on page 59.
Authorisation of conflicts of interest The Company’s Articles of Association permit the authorisation of a Director’s potential conflict of interest or duty. Such authorisations may be given by the remaining Directors who are independent of the potential conflict.
Share capital and control The issued and fully paid share capital of the Company immediately following Admission to the Official List of the London Stock Exchange (the Official List) was 1,500,000,000 Ordinary Shares of 10 pence each.
Prior to listing, the Directors were authorised on 31 August 2012, conditional on admission to the Official List, to subdivide each of the 1,500,000,000 Ordinary Shares of £1 each in the Company into: (a) 1,500,000,000 Ordinary Shares of 10 pence; and
Accordingly, the Directors were authorised on 21 September 2012, conditional on admission to the Official List of the London Stock Exchange, to: • allot shares in the Company up to an aggregate nominal amount of £50,000,000, or grant rights to subscribe for or to convert any security into shares; • allot shares up to an aggregate nominal amount of £100,000,000, for the purpose of a rights issue; and
The rights and obligations attaching to the Company’s Ordinary Shares, together with the powers of the Company’s Directors, are set out in the Company’s Articles of Association, which can be obtained from the Company’s website, www.directlinegroup.com. Unless expressly specified to the contrary in the Articles of Association, they may only be amended by a special resolution of the Company’s shareholders at a general meeting.
Material contracts A number of agreements may take effect, alter or terminate upon a change of control of the Company including following a takeover bid, for example commercial contracts and distribution agreements. None is considered to be significant in terms of its impact on the business of the Group as a whole.
• The Relationship Agreement between the Company and RBS Group remains in force until such time as the RBS Group’s shareholding reduces below 20% of the issued share capital of the Company. There are also provisions which provide the RBS Group with the right automatically to terminate the Relationship Agreement if the Company ceases to be listed, or if it passes a resolution to wind up, or if an administration order is made or it makes an arrangement with creditors. There are no provisions in the Relationship Agreement which allows RBS Group to terminate the agreement in the event of a change of control of Direct Line Group.
• All of the Company’s employee share incentive plans contain provisions relating to a change of control. Outstanding awards would typically vest and become exercisable on a change of control, subject usually to the satisfaction of performance conditions and pro-rata reduction.
Employee consultation The Group’s statement on our employees is set out in the Corporate Social Responsibility report. In summary, we encourage open, honest and transparent communication and dialogue with employees. ERBs are in place to advise the Executive Committee regarding employee matters, including concerns and reports on morale, and to support communications. Throughout 2012, ERBs have championed the BEST programme, helping all employees contribute to improving the Group’s business. The BEST programme focuses on how we can achieve our ambition to become Britain’s best retail general insurer. A key achievement of the programme was the distillation of the ideas received from employees to arrive at a set of values to govern the way the Group operates. In addition, we held workshops as part of the transformation plan focusing on what constitutes the BEST for People, BEST for Customers and BEST for Shareholders.
Supplier payment policy The Group’s policy is to pay suppliers in accordance with agreed terms of business. Whenever possible, purchase orders are placed on the basis of the Group’s standard terms and conditions. These include provision for the payment of suppliers within 30 days of the end of the month in which the Group receives the goods or in which services are provided.
Charitable and political contributions Through our Community Cashback scheme our employees were able to donate £48,000 to the charities they are involved in. Through our payroll giving scheme, the Group matched employee donations and contributed a total of £112,000. The Group was also able to support Children in Need and Comic Relief with over 900 employees taking pledge telephone calls in 2012.
Financial instruments The Group’s companies use financial instruments to manage certain types of risk, including those relating to credit, foreign-currency exchange, cash flow, liquidity, interest rates and equity and property prices. Details of the objectives and management of these instruments are contained in the Risk management and Capital management sections on pages 26 to 29 and 45. An indication of the exposure of Group companies to such risks is also contained in note 3 to the consolidated financial statements.
In addition, note 27 to the consolidated financial statements describes capital management needs and policies and note 3 covers underwriting, market, liquidity and credit risks which may affect the Group’s financial position.
After making due enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they have adopted the going concern basis in preparing this Annual Report & Accounts.
• The Director has taken all the steps that he or she ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that Deloitte LLP is aware of that information.
Auditors Deloitte LLP has expressed its willingness to continue in office as external auditors. A resolution to reappoint them will be proposed at the forthcoming AGM.
We have audited the financial statements of Direct Line Insurance Group plc (the “Company”) and its subsidiaries (together the “Group”) for the year ended 31 December 2012 which comprise the accounting policies, the consolidated and Company balance sheets as at 31 December 2012, the consolidated income statement, the consolidated and Company statements of changes in equity and the consolidated and Company cash flow statements for the year ended 31 December 2012 and the related notes 1 to 41 on the consolidated financial statements, and the related notes 1 to 16 on the Company financial statements. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (“IFRSs”) as adopted by the European Union.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditor As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Separate opinion in relation to IFRSs as issued by the IASB As explained in the accounting policies to the Group financial statements, the Group in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (“IASB”).
• the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or
Gross earned premium 4,048.5 4,522.9 Reinsurance premium ceded (326.5) (269.9) Net earned premium 5 3,722.0 4,253.0 Investment return 6 281.8 281.9 Instalment income 7 125.4 145.0 Other operating income 7 73.3 95.1 Total income 4,202.5 4,775.0 Insurance claims 8 (2,875.3) (3,160.6) Insurance claims recoverable from reinsurers 8 451.0 193.1 Net insurance claims (2,424.3) (2,967.5)
Gain on disposal of subsidiary – 1.6 Profit before tax 249.1 342.9 Tax charge 12 (64.8) (93.9) Profit for the year 184.3 249.0 Profit attributable to: Owners of the Company 184.3 249.0 Non-controlling interests – – 184.3 249.0
Earnings per share: Basic (pence) 15 12.3 16.6 Diluted (pence) 15 12.3 16.6
Profit for the year 184.3 249.0 Other comprehensive income Actuarial loss on defined benefit plan 33 (3.4) (0.6) Exchange differences on translation of foreign operations (2.4) (3.5) Fair value gain on available-for-sale investments 28 109.9 183.8 Less: realised net gains on available-for-sale investments 28 (89.5) (52.3)
Tax credit / (charge) on other comprehensive income 1.9 (36.8) Other comprehensive income for the year 16.5 90.6 Total comprehensive income for the year 200.8 339.6
Total comprehensive income attributable to: Owners of the Company 200.8 339.6 Non-controlling interests – – 200.8 339.6
Direct Line Group Annual Report & Accounts 2012 100 £m 2011 £m
Assets Goodwill and other intangible assets 16 421.5 365.8 Property, plant and equipment 17 92.4 46.9
Deferred tax assets 13 22.5 26.9 Current tax assets 12 5.5 – Deferred acquisition costs 21 327.6 310.5 Insurance and other receivables 22 1,164.0 1,252.9 Prepayments, accrued income and other assets 82.6 92.2 Derivative financial instruments 23 37.5 0.1 Retirement benefit asset 33 2.5 2.6
Liabilities Subordinated liabilities 29 787.5 – Insurance liabilities 30 6,398.5 6,509.0 Unearned premium reserve 30 1,872.9 1,931.6
Derivative financial instruments 23 6.5 – Trade and other payables including insurance payables 35 654.6 910.2 Deferred tax liabilities 13 20.9 12.1 Current tax liabilities 12 34.5 218.0 Total liabilities 9,866.3 9,898.8 Total equity and liabilities 12,697.9 13,770.1
Profit for the year – – – – – – 249.0 249.0
Balance at 1 January 2011 and 31 December 2011 258.5 Transfer to subordinated liabilities (258.5) Balance at 31 December 2012 –
Direct Line Group Annual Report & Accounts 2012 102 £m 2011 £m
Net cash used by operating activities before investment of insurance assets 36 (966.0) (359.8) Cash generated from investment of insurance assets 36 2,004.8 38.8 Net cash generated from / (used by) operating activities 1,038.8 (321.0) Cash flows from investing activities Proceeds on disposal of property, plant and equipment – 1.2 Purchases of property, plant and equipment 17 (63.7) (7.5) Purchases of intangible assets 16 (96.6) (119.8) Net cash flows from disposal of subsidiary – (0.1) Cash flows from net investment hedges 6.1 – Net cash used by investing activities (154.2) (126.2) Cash flows from financing activities Dividends paid (1,000.0) – Repayments of borrowings (246.4) (205.5) Proceeds on issue of subordinated debt 493.0 – Finance costs (16.1) – Purchase of employee trust shares (5.0) – Proceeds from borrowings – 205.0 Net cash used by financing activities (774.5) (0.5) Net increase / (decrease) in cash and cash equivalents 110.1 (447.7) Cash and cash equivalents at the beginning of the year 25 1,309.6 1,763.5 Effect of foreign exchange rate changes (2.2) (6.2) Cash and cash equivalents at the end of the year 25 1,417.5 1,309.6
Direct Line Insurance Group plc is a public limited company incorporated in the United Kingdom. The address of the registered office is Churchill Court, Westmoreland Road, Bromley, BR1 1DP, England.
The consolidated financial statements are prepared on the historical cost basis except for available-for-sale financial assets, investment property and derivative financial instruments, which are measured at fair value.
Adoption of new and revised standards There have been no new or revised standards adopted in the year.
Where necessary, adjustments have been made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. The policies set out below have been applied consistently throughout the years ended 2012 and 2011 to items considered material to the consolidated financial information.
All intercompany transactions, balances, income and expenses between Group entities are eliminated on consolidation. The consolidated financial statements are prepared using consistent accounting policies.
1.3 Contract classification Insurance contracts are those contracts where the Group (the insurer) has accepted significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
1.4 Revenue recognition Premiums earned Insurance and reinsurance premiums comprise the total premiums receivable for the whole period of cover provided by contracts incepted during the financial year, adjusted by an unearned premium provision, which represents the proportion of the premiums incepted in prior periods and that relate to periods of insurance after the balance sheet date. Unearned premiums are calculated over the period of exposure under the policy, on a daily basis, 24ths basis or allowing for the estimated incidence of exposure under policies. Insurance premiums are shown gross of any commission payable to intermediaries or other parties.
Vehicle replacement referral income Vehicle replacement referral fee income comprises fees in respect of referral income received when a customer or a non-fault policy holder (claimant) of another insurer has been provided with a hire vehicle from a preferred supplier.
Revenue from vehicle recovery and repairs services Fees in respect of services for vehicle recovery are recognised as the right to consideration, and accrue through the provision of the service to the customer. The arrangements are generally contractual and the cost of providing the service is incurred as the service is rendered. The price is usually fixed and always determinable.
A reinsurance bad debt provision is assessed in respect of reinsurance debtors, to allow for the risk that the reinsurance asset may not be collected or where the reinsurer’s credit rating has been downgraded significantly. This also includes an assessment in respect of the ceded part of claims provisions to reflect the credit risk exposure to long-term reinsurance assets particularly in relation to periodical payments. This is affected by the Group reducing the carrying value of the asset accordingly and the impairment loss is recognised in the income statement.
Available-for-sale – Financial assets that are not classified as loans and receivables, are classified as available-for-sale. Financial assets can be designated as available-for-sale on initial recognition. Available-for-sale financial assets are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at fair value. Impairment losses and exchange differences resulting from retranslating the amortised cost of foreign currency monetary available-for-sale financial assets are recognised in the income statement, together with interest calculated using the effective interest rate method. Other changes in the fair value of available-for-sale financial assets are reported in a separate component of shareholders’ equity until disposal, when the cumulative gain or loss is recognised in the income statement.
A financial asset is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The appropriate quoted market price for an asset held is usually the current bid price. When current bid prices are unavailable, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. If conditions have changed since the time of the transaction (for example, a change in the riskfree interest rate following the most recent price quote for a corporate bond), the fair value reflects the change in conditions by reference to current prices or rates for similar financial instruments, as appropriate.
If the market for a financial asset is not active, the Group establishes the fair value by using a valuation technique. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties (if available), reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the Group uses that technique.
(b) the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value.
Other loans and receivables principally comprise loans to related parties and other debtors.
Impairment of financial assets At each balance sheet date the Group assesses whether there is any objective evidence that a financial asset or group of financial assets classified as available-for-sale or loans and receivables is impaired. A financial asset or portfolio of financial assets is impaired and an impairment loss incurred if there is objective evidence that an event or events since initial recognition of the asset has adversely affected the amount or timing of future cash flows from the asset.
Available-for-sale – When a decline in the fair value of a financial asset classified as available-for-sale has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss is removed from equity and recognised in the income statement. The loss is measured as the difference between the amortised cost of the financial asset and its current fair value. Impairment losses on available-for-sale equity instruments are not reversed through profit or loss, but those on available-for-sale debt instruments are reversed, if there is an increase in fair value that is objectively related to a subsequent event. Subsequent increases in the fair value of available-for-sale other investment funds are all recognised in equity.
Direct Line Group Annual Report & Accounts 2012 108 1. Accounting policies continued
For amounts due from policyholders, the bad debt provision is calculated based upon prior loss experience. For all balances outstanding in excess of three months, a bad debt provision is made. Where a policy is subsequently cancelled, the outstanding debt that is overdue is written off to the income statement and the bad debt provision is written back to the income statement.
Gains and losses arising from changes in the fair value of a derivative are recognised as they arise in the income statement unless the derivative is the hedging instrument in a qualifying hedge. The Group currently enters into a number of hedge relationships, including net investment, cash flow and fair value hedges.
1.13 Cash and cash equivalents Cash and cash equivalents comprise cash in hand and demand deposits with banks together with short-term highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of change in value.
Borrowings, comprising bank overdrafts and group loans, are measured at amortised cost using the effective interest rate method.
1.14 Financial liabilities Financial liabilities are initially recognised at fair value net of transaction costs incurred. Other than derivatives which are recognised and measured at fair value, all other financial liabilities are subsequently measured at amortised cost using the effective interest rate method.
contractual obligations exceed the expected economic benefit. A provision is recognised when the Group vacates a leasehold property for the costs under the lease which exceed expected economic benefits.
Contributions to the Group’s defined contribution pension scheme are recognised in the income statement when payable. As described in note 33, the Group’s defined benefit pension scheme was closed in 2003. Scheme liabilities are measured on an actuarial basis, using the projected unit credit method and discounted at a rate that reflects the current rate of return on a high quality corporate bond of equivalent term and currency to the scheme liabilities.
1.20 Share-based payments The Group operates a number of share-based compensation schemes under which it awards Company shares and share options to its employees. Such awards are generally subject to vesting conditions: conditions that vary the amount of cash or shares to which an employee is entitled.
IFRS 10 ‘Consolidated Financial Statements’, which replaces SIC 12 ‘Consolidation – Special Purpose Entities’ and the consolidation elements of the existing IAS 27 ‘Consolidated and Separate Financial Statements’, was issued by the IASB in May 2011. The new standard adopts a single definition of control: a reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity to generate returns for the reporting entity. Effective for annual periods beginning on or after 1 January 2013, the new standard is not expected to have any effect on the Group.
In May 2011 the IASB issued amendments to IAS 27 ‘Separate Financial Statements’ which comprises those parts of the existing IAS 27 that dealt with separate financial statements, effective for annual periods beginning on or after 1 January 2013. The amendment to this standard is not expected to have any effect on the Group.
IFRS 11 ‘Joint Arrangements’, which supersedes IAS 31 ‘Interests in Joint Ventures’, was issued by the IASB in May 2011. Joint operations are accounted for by the investor recognising its assets and liabilities including its share of any assets held and liabilities incurred jointly and its share of revenues and costs. Joint ventures are accounted for in the investor’s consolidated accounts using the equity method. This standard is effective for annual periods beginning on or after 1 January 2013 but as the Group does not have any joint arrangements at this time, it is not expected to have any effect on the Group.
In May 2011 the IASB issued amendments to IAS 28 ‘Investments in Associates and Joint Ventures’ to cover joint ventures as well as associates; both must be accounted for using the equity method. The mechanics of the equity method are unchanged. Effective for annual periods beginning on or after 1 January 2013, the amendments to this standard are not expected to have any effect on the Group.
IFRS 12 ‘Disclosure of Interests in Other Entities’ covers disclosures for entities reporting under IFRS 10 and IFRS 11, replacing requirements in IAS 28 and IAS 27, and was issued by the IASB in May 2011. Entities are required to disclose information that helps financial statement readers evaluate the nature, risks and financial effects associated with an entity’s interests in subsidiaries, in associates and joint arrangements and in unconsolidated structured entities. The new standard is effective for annual periods beginning on or after 1 January 2013, and is not expected to have any effect on the Group.
In December 2011 the IASB issued amendments to IFRS 7 ‘Financial Instruments: Disclosure – Offsetting Financial Assets and Financial Liabilities’. The amended disclosure requirements are intended to enable the evaluation of the effect or potential effect of netting arrangements as permitted by IAS 32 (paragraph 42), on the financial statements. The amendments are effective for annual periods beginning on or after 1 January 2013 and are not expected to have any effect on the Group.
2.1 General insurance: outstanding claims provisions and related reinsurance recoveries The Group makes provision for the full cost of outstanding claims from its general insurance business at the balance sheet date, including claims estimated to have been incurred but not yet reported at that date and loss adjustment expenses. Outstanding claims provisions net of related reinsurance recoveries and liability adequacy provision at 31 December 2012 amounted to £5,377.6 million (2011: £5,807.7 million).
In August 2012, the Ministry of Justice announced a review of the approach to setting the Ogden discount rate within the existing legal framework in light of the current economic climate. The consultation has now taken place and the results are pending. In addition, in February 2013, a further consultation has been initiated on the legal framework within which the rate is set as well as consideration of the usage of PPOs as a form of settlement.
Direct Line Group Annual Report & Accounts 2012 112 2. Critical accounting estimates and judgements continued
Net of reinsurance Approved PPO claims provisions 125.0 345.0 80.3 245.1
2.2 Impairment provisions – financial assets Available-for-sale – the Group determines that available-for-sale financial assets are impaired when there is objective evidence that an event or events since initial recognition of the assets have adversely affected the amount or timing of future cash flows from the asset. The determination of which events could have adversely affected the amount or timing of future cash flows from the asset requires judgement. In making this judgement, the Group evaluates, among other factors, the normal price volatility of the financial asset, the financial health of the investee, industry and sector performance, changes in technology and operational and financing cash flow or where there has been a significant or prolonged decline in the fair value of the asset below its cost. Impairment may be appropriate when there is evidence of deterioration in these factors.
On a quarterly basis, the Group reviews whether there is any objective evidence that the direct investments in debt securities are impaired based on the following criteria: • price performance of a particular debt security, or group of debt securities, demonstrating an adverse trend compared to the market as a whole; • adverse movements in the credit rating for corporate debt; • actual, or imminent, default on coupon interest or nominal; or
Had all the declines in available-for-sale asset values met the criteria above at 31 December 2012, the Group would suffer a further £21.5 million loss (2011: £37.3 million loss), being the transfer of the total available-for-sale reserve for unrealised losses to the income statement. These movements represent mark to market movements and where there is no objective evidence of any loss events that could affect future cash flows, no impairments are recorded for these movements.
The fair value of all available-for-sale financial assets was determined using observable market input and at 31 December 2012 amounted to £7,156.5 million (2011: £7,990.7 million). The judgements and assumptions adopted by the directors in the valuation of available-for-sale financial assets when a market is not active require the use of valuation techniques. These valuation techniques involve a degree of estimation and are shown in note 1.12. Details of sensitivity analysis are shown in note 3.4.1.
2.4 Deferred acquisition costs The Group defers a proportion of acquisition costs incurred during the year to subsequent accounting periods. Management use estimation techniques to determine the level of costs to be deferred, by category of business. Judgement is used to determine the types of cost that can be deferred and these are referred to in note 1.7. The total deferred acquisition costs at 31 December 2012 amounted to £327.6 million (2011: £310.5 million). During 2012, the Group reviewed the costs included in the calculation of deferred acquisition costs and considers them to be appropriate, and has determined that they are recoverable.
For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the Group’s cashgenerating units or groups of cash-generating units expected to benefit from the combination. Goodwill impairment testing involves the comparison of the carrying value of a cash-generating unit or group of cash-generating units with its recoverable amount. The recoverable amount is the higher of the unit’s fair value and its value in use. Value in use is the present value of expected future cash flows from the cash-generating unit or group of cash-generating units. Fair value is the amount obtainable from the sale of the cash-generating unit in an arm’s length transaction between knowledgeable, willing parties.
Impairment testing inherently involves a number of judgemental areas: the preparation of cash flow forecasts for periods that are beyond the normal requirements of management reporting; the assessment of the discount rate appropriate to the business; estimation of the fair value of cash-generating units; and the valuation of the separable assets of each business whose goodwill is being reviewed. Details of sensitivity analysis are shown in note 16.
3.3 Insurance risk Insurance risk can arise from: • fluctuations in the timing, frequency and severity of insured events and their ultimate settlement, relative to the expectations of the Group at the time of underwriting, including those driven by inaccurate pricing, inappropriate underwriting guidelines and terms and conditions, and holding inadequate reserves; • inadequate reinsurance protection; and
The Group predominantly underwrites personal lines insurance including residential property, motor, assistance, creditor, travel and pet business. The Group also underwrites commercial risks primarily for low-to-medium risk trades within the SME market. Contracts are typically issued on an annual basis, which means that the Group’s liability usually extends for a 12-month period, after which the Group is entitled to decline to renew or can impose renewal terms by amending the premium or other policy terms and conditions such as the excess as appropriate.
The Group underwrites long-term insurance falling within the business classes of life and annuity and permanent health. However, from 6 July 2011 the Group ceased accepting new business. The products provided include mortgage life cover, fixed term life cover with critical illness, over 50s life cover and the life cover associated with the creditor business underwritten by the Group’s general insurance business. Contracts were issued typically on a long-term basis, which means that the Group’s liability can extend for a period ranging from five years up to 52 years.
Reserving risk is controlled through a range of processes: • regular periodic reviews of the claims and premium / liability adequacy reserves for the main classes of business by the internal actuarial team; • the use of external actuaries to review periodically the actuarial best estimate reserves produced internally, either through peer review or through provision of independent reserve estimates; • accompanying all reserve reviews with actuarial assessment of the uncertainties through a variety of techniques including bootstrapping and scenario analysis; • oversight of the reserving process by relevant senior management and the Board; 114 Direct Line Group Annual Report & Accounts 2012
• regular reconciliation of the data used in the actuarial reviews against general ledger data and reconciliation of the claims data history against the equivalent data from prior reviews; and
As referred to on page 28, uncertainty in claims reserve estimation is larger for claims such as PPOs for which annually indexed payments are made periodically over several years or even the lifetime of the injured party. Claims reserves for PPOs are held on a discounted basis and the table below indicates the sensitivity of discounted reserves to changes in the discount rate.
PPOs1 Impact of an increase in the discount rate used in the calculation of present values of 100bps 104.7 106.5 104.7 106.5 Impact of a decrease in the discount rate used in the calculation of present values of 100bps (150.4) (152.1) (150.4) (152.1)
3.3.2 Claims management risk Claims management risk is the risk that claims are paid or handled inappropriately.
Loss adjustors are used in certain circumstances to handle claims to conclusion. This involves liaison with the policyholder, third parties, suppliers and the claims function.
Specialist bodily injury claims teams in the UK are responsible for handling these types of losses with the nature of handling dependent on the level and type of claim. Where applicable they are referred to the technical and large loss teams who also deal with all other claim types above defined limits or within specific criteria.
Direct Line Group Annual Report & Accounts 2012 116 3. Risk management continued 3.3.3 Reinsurance risk The Group uses reinsurance to: • protect the insurance results against low-frequency, high-severity losses through the transfer of catastrophe claims volatility to reinsurers; • protect the insurance results against unforeseen volumes of, or adverse trends in, large individual claims, in order to reduce volatility and to improve stability of earnings; • reduce the Group’s capital requirements; and/or
Using reinsurance the Group cedes away insurance risk to reinsurers but in return assumes back credit risk against which a reinsurance bad debt provision is assessed. The financial security of the Group’s panel of reinsurers is therefore extremely important and both the quality and quantum of the assumed credit risk are subject to a credit risk approval process. The Group’s leading counterparty exposures are analysed on a monthly basis where utilisation is monitored against agreed individual reinsurer limits. These limits represent the accumulated credit risk for all Group underwriting entities. The Group aims to contract with a diverse range of reinsurers on its contracts to mitigate the credit and/or non-payment risks associated with its reinsurance exposures.
• reinsurance concentration risk – reinsurance is purchased from a number of providers to ensure that a diverse range of counterparties is contracted with, within the desired credit rating range.
The Group is mainly exposed to the following market risk factors: • interest rate risk; • credit spread risk; • foreign currency risk; and
The Group has the ability to monitor market risk exposure on a daily basis and has established limits per interest rate and credit spread exposures. The limits per asset class have been approved at the investment strategy level.
The Group uses its internal capital model to determine its capital requirements and market risk limits, and monitors its market risk exposure based on a 98% one-year value at risk measure. The Group also applies market risk stressed scenarios testing for analysing the economic impact of specific severe market conditions. The results of this analysis are used to enhance the understanding of market risk spots not captured by the value-at-risk metric and for implementing mitigating actions as appropriate.
The market value of the Group’s investments in fixed coupon securities is affected by the movement of the interest rates. For the investments in US Dollar corporate bonds of £984.8 million, the Group hedges the exposure of this portfolio to the US Dollar interest rate risk using swaps. The derivatives reduce the duration of the portfolio to close to zero, eliminating its sensitivity to the US Dollar interest rate fluctuation.
At 31 December 2012, the Group maintained two investment portfolios in US Dollar corporate bonds. The foreign currency exposure of these investments is hedged by foreign currency forward contracts. The currency risk exposure is monitored on a daily basis and minimal exposure has been identified since its inception in May 2012.
The Group is also exposed to currency risk through its subsidiaries in Italy and Germany. The Group’s currency risk arises from its investments in the subsidiaries’ capital; this risk is hedged by foreign currency forward contracts from the date of acquisition.
Direct Line Group Annual Report & Accounts 2012 118 3. Risk management continued
The table below provides the sensitivity analysis of the potential impact of a change in a single factor with all other assumptions left unchanged. Other potential risks beyond the ones described in the table could have an additional financial impact on the Group.
Notes: 1. The income statement impacts on AFS debt securities is limited to floating rate bonds and interest rate derivatives used to hedge a portion of the portfolio. The income statement is not impacted in relation to fixed rate bonds, where the coupon return is not changed through an alteration in prevailing market rates, as the accounting treatment for AFS debt securities means that only the coupon received is processed through this statement with fair value movements being recognised through total equity.
3. The impact in 2011 results is a reduction in total equity only as a result of the accounting policy.
7. The sensitivities set out above exclude the impact of taxation.
The tables below analyse the maturity of the Group’s derivative assets and liabilities at 31 December 2012. In the prior period, the Group conducted a small amount of derivative activity, primarily in relation to hedging its investment in its foreign subsidiary in Italy. All these contracts had a maturity of three months or less.
Derivative assets At fair value through the income statement: Foreign exchange contracts (forwards) 1,339.7 11.9 – – 11.9
Designated as hedging instruments: Foreign exchange contracts (forwards) 1.2 – – – – Total 1,967.9 13.6 0.1 23.8 37.5 118 Direct Line Group Annual Report & Accounts 2012
3.4.2 Credit risk Credit risk arises from the potential that losses are incurred from the failure of counterparties to meet their credit obligations, due either to their failure and/or their inability to pay, or their unwillingness to pay amounts due.
The objective of the credit risk policy and supporting minimum standards is to document the control processes by which the Group is able to identify, monitor, measure, manage, control and mitigate the level of credit risk to which it is exposed effectively. The credit risk control environment is primarily managed through the Credit Risk and Investment Forum. The main responsibility of this forum is to ensure that all material aspects of credit risk within the Group are identified, monitored and measured.
The tables below provide information regarding the carrying value of financial and insurance assets that bear credit risk, and that have been impaired, and the ageing of financial assets that are past due but not impaired.
Total available-forsale debt securities £m of which: Mortgage backed securities £m
Bank debt securities, at 31 December 2012, can be further analysed as: secured £211.1 million (2011: £418.8 million); unsecured £1,153.4 million (2011: £1,357.1 million); subordinated £146.3 million (2011: £193.9 million) and certificates of deposit £nil (2011: £72.3 million).
The tables below analyse, by type of asset, the credit quality of financial and insurance assets that are neither past due nor impaired excluding debt securities. The table includes reinsurance exposure, after provision. Note 3.3.3 details the Group’s approach to reinsurance credit risk management.
Other loans and receivables due from policyholders, agents, brokers and intermediaries generally do not have a credit rating.
3.4.3 Liquidity risk Liquidity risk is the potential that obligations cannot be met as they fall due as a consequence of having a timing mismatch and/or an inability to raise sufficient liquid assets or cash without suffering a substantial loss on realisation.
The measurement and management of liquidity risk within the Group is undertaken within the limits and other policy parameters of the Group’s liquidity risk appetite. Compliance is monitored in respect of both the internal policy and the regulatory requirements of local regulators.
Direct Line Group Annual Report & Accounts 2012 122 3. Risk management continued
Trade and other payables including insurance payables 910.2 910.2 – – – – Total 7,737.1 3,036.5 2,049.4 864.6 861.6 925.0
3.4.4 Investment concentration risk Investment concentration risk arises through excessive exposure to particular industry sectors, groups of business undertakings or similar activities. The Group may suffer significant losses in its investment portfolio as a result of over-exposure to particular sectors engaged in similar activities or similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions.
The table below analyses the distribution of available-for-sale debt securities held by geographical area at 31 December 2012 as follows: Sovereign, supranational and local government debt securities £m
The table below analyses the distribution of available-for-sale debt securities held by geographical area at 31 December 2011 as follows: Sovereign, supranational and local government debt securities £m
Total availablefor -sale debt securities £m of which: Mortgage backed securities £m
3.5 Operational risk Effective operational risk management requires the Group to identify, assess, manage, monitor, report and mitigate all areas of exposure. Operational risk is inherent in all of the Group’s processes, systems and products, and from external events, with the Group’s ERM framework detailing the minimum standards, tools, techniques and other processes used to ensure that operational risks are identified, managed and mitigated to an acceptable level and that contingency plans are in place.
Effective operational risk management helps the Group to achieve its objectives, including: • focus on doing things the right way, leading to fewer surprises; • reducing operational errors and losses, leading to increased customer satisfaction and higher-quality earnings; • informed analytical risk taking; • increased management attention to the risks and issues that really matter; and
3.6 Regulatory risk The risk is managed by a dedicated team responsible for providing expert advice and guidance to all parts of the business on regulatory, political and legislative change, including Solvency II. Through proactive and early engagement the team raises awareness of regulatory changes, enabling management to plan for potential threats and opportunities. The team also supports the business in identifying, analysing and coordinating responses to relevant UK and European regulatory developments through to facilitating the initiation of implementation programmes.
The Group determines the appropriate level of capital on the basis of a number of criteria including its risk-based requirement, the maintenance of a prudent excess versus regulatory capital requirements, and its capital risk appetite statement of ensuring consistency with a credit rating in the ’A’ range. The Group seeks to hold capital coverage in the range of 125% to 150% of the risk-based capital requirement. The Group also manages its subsidiaries on an ongoing basis to ensure that capital resources exceed regulatory minima in accordance with its risk appetite.
The UK regulated insurance entities of the Group carry out an assessment of the adequacy of their overall financial resources in accordance with the FSA’s ICA methodology. For the UK, this is based on an internal capital model which is calibrated, as required by the FSA, to a 99.5% confidence interval over a one-year time horizon. As stated above, the Group’s capital risk appetite is to hold capital consistent with the Group maintaining a credit rating in the ’A’ range and as such its capital resources are in excess of the ICA requirement. The capital for European entities is maintained in accordance with the local regulatory solvency requirements.
The Directors manage the Group primarily by product type and present the segmental analysis on that basis. The segments reflect the management structure whereby a member of the Executive Committee is accountable to the Chief Executive Officer for each of the following operating segments: Motor This segment consists of personal car insurance cover together with the associated legal expenses business. The Group sells motor insurance through its own brands – Direct Line, Churchill and Privilege – and through partnership brands directly to customers or through PCWs. As a result, the Group has a brand and product offering that covers most major retail customer segments for motor insurance in the UK.
Restructuring and other one-off costs Costs included within restructuring and other one-off costs include items that are exceptional in nature, including additional expenses as a result of separation and divestment from RBS Group and impairment of goodwill.
No inter-segment transactions occurred in the periods ending 2012 and 2011. If any transaction were to occur, transfer prices between operating segments are set on an arm’s length basis in a manner similar to transactions with third parties. Segment income, expenses and results will include those transfers between business segments which will then be eliminated on consolidation.
Direct Line Group Annual Report & Accounts 2012 128 4. Segmental analysis continued
The table below is an analysis of the Group’s revenue and results by reportable segment for the year ended 31 December 2012: Motor £m Home £m
Gross earned premium 1,677.8 1,005.2 402.5 433.2 510.3 4,029.0 19.5 – 4,048.5 Reinsurance premium ceded (48.6) (54.4) (19.7) (30.4) (167.2) (320.3) (6.2) – (326.5) Net earned premium 1,629.2 950.8 382.8 402.8 343.1 3,708.7 13.3 – 3,722.0 Investment return 140.0 34.1 7.5 29.4 23.7 234.7 47.1 – 281.8 Instalment and other operating income 148.1 26.5 10.7 5.9 7.1 198.3 0.4 – 198.7 Total income 1,917.3 1,011.4 401.0 438.1 373.9 4,141.7 60.8 – 4,202.5 Insurance claims (1,364.8) (560.7) (218.1) (278.2) (401.9) (2,823.7) (51.6) – (2,875.3) Insurance claims recoverable from reinsurers 148.3 6.0 23.2 24.1 133.9 335.5 115.5 – 451.0 Net insurance claims (1,216.5) (554.7) (194.9) (254.1) (268.0) (2,488.2) 63.9 – (2,424.3)
Gross earned premium 1,797.4 1,031.1 410.3 420.5 482.8 4,142.1 380.8 – 4,522.9 Reinsurance premium ceded (25.8) (57.0) (19.5) (27.8) (121.1) (251.2) (18.7) – (269.9) Net earned premium 1,771.6 974.1 390.8 392.7 361.7 3,890.9 362.1 – 4,253.0 Investment return 145.2 28.5 9.5 30.5 25.0 238.7 43.2 – 281.9 Instalment and other operating income 208.2 35.1 – 5.0 7.2 255.5 (15.4) – 240.1 Total income 2,125.0 1,037.7 400.3 428.2 393.9 4,385.1 389.9 – 4,775.0 Insurance claims (1,501.6) (579.2) (195.7) (268.6) (391.4) (2,936.5) (224.1) – (3,160.6) Insurance claims recoverable from reinsurers 54.8 19.9 22.1 11.9 96.8 205.5 (12.4) – 193.1 Net insurance claims (1,446.8) (559.3) (173.6) (256.7) (294.6) (2,731.0) (236.5) – (2,967.5)
The table below is an analysis of the Group’s segment assets and liabilities at 31 December 2012: Motor £m Home £m
Direct Line Group Annual Report & Accounts 2012 130 4. Segmental analysis continued
All operations are in the UK except for International which operates in Germany and Italy. The reportable segment net assets do not represent the Group’s view of the capital requirements for its operating segments.
Premium revenue ceded to reinsurers on insurance contracts issued: Premium payables (365.4) (257.1) Change in reinsurance unearned premium reserve 38.9 (12.8)
Notes: 1. Derivative net realised gains includes a £3.8 million loss on interest rate derivatives, with a £0.2 million gain on associated hedged risk and a £24.3 million gain on foreign exchange derivatives with a £2.9 million loss on the associated hedged risk.
Current accident year claims paid 1,360.0 (71.3) 1,288.7 Prior accident years claims paid 1,612.1 (55.6) 1,556.5 Movement in claims provision (96.8) (324.1) (420.9)
Current accident year claims paid 1,646.5 (113.2) 1,533.3 Prior accident years claims paid 1,976.4 (37.4) 1,939.0 Movement in claims provision (462.3) (42.5) (504.8)
An increase in the liability adequacy provision for the year ended 31 December 2012 of £0.7 million (2011: £21.8 million reduction) has been included in the movement in claims provision.
Direct Line Group Annual Report & Accounts 2012 132 10. Operating expenses £m 2011 £m
Staff costs attributable to claims handling activities are allocated to claims and loss adjustment expenses.
Included in operating expenses are run-off, restructuring and other one-off costs as follows: £m 2011 £m
Wages and salaries 444.5 425.3 Social security costs 50.0 47.6 Pension costs 62.3 41.6 Share-based payments 0.3 – Total 557.1 514.5 132 Direct Line Group Annual Report & Accounts 2012
Aggregate Directors’ emoluments The remuneration and pension benefits of the Directors, including those of the highest paid Director, are included in the Directors’ remuneration report in the corporate governance section of the Annual Report & Accounts.
At 31 December 2012, one Director (2011: three) had retirement benefits accruing under money purchase pension schemes in respect of qualifying service.
Interest expense on subordinated dated notes1 26.7 – Other interest expense 2.0 2.7
Current taxation: Charge for the year 61.7 157.2 (Over) / under-provision in respect of prior year (1.0) 10.8
The actual income tax charge differs from the expected income tax charge computed by applying the standard rate of UK corporation tax of 24.5%1 (2011: 26.5%) as follows: £m 2011 £m
Note: 1. The UK Government enacted a reduction in the UK corporation tax rate from 26% to 24% effective from 1 April 2012 in the Finance Act 2012, which also enacted a further reduction to 23% to be effective from 1 April 2013. As a consequence the closing deferred tax assets and liabilities have been recognised at an effective rate of 23%. The impact of these changes on the tax charge for the year is set out in the table above.
Per balance sheet: Current tax assets 5.5 – Current tax liabilities 34.5 218.0 134 Direct Line Group Annual Report & Accounts 2012
A deferred tax asset of £1.2 million has not been recognised in respect of capital losses arising on the revaluation of investment property as there are currently no eligible gains against which these unrealised losses can be utilised.
Ordinary dividend: Interim dividend paid in respect of current year on 27 March 2012 20.0 – 300.0 – Interim dividend paid in respect of current year on 6 June 2012 33.3 – 500.0 – Interim dividend paid in respect of current year on 3 September 2012 13.3 – 200.0 – Total 1,000.0 –
Basic Basic earnings per share is calculated by dividing the earnings attributable to the owners of the Company and the weighted average of Ordinary Shares in issue during the period, excluding Ordinary Shares held as employee trust shares.
Weighted average number of Ordinary Shares in issue (millions) 1,499.4 1,500.0 Basic earnings per share (pence) 12.3 16.6
Net asset value and tangible net asset value per share Net asset value per share is calculated as total shareholders’ equity (excluding non-controlling interest) divided by the number of Ordinary Shares in issue at the end of the period. Ordinary Shares in issue exclude shares held by employee share trusts at 31 December 2012 of 2,848,991 (2011: nil).
Number of Ordinary Shares in issue (millions) 1,500.0 1,500.0 Shares held by employee share trusts (millions) (2.8) – Closing number of Ordinary Shares in issue (millions) 1,497.2 1,500.0
Goodwill arose on the acquisition of U K Insurance Limited (£141 million) and Churchill Insurance Company Limited (£70 million), which is allocated across Motor, Home, Rescue and other personal lines and Commercial.
Direct Line Group Annual Report & Accounts 2012 138 16. Goodwill and other intangible assets continued
The goodwill of the CGUs of the Group is as follows: Motor £m Home £m
Recoverable amount in excess of carrying value £m 1% change in pre-tax discount rate £m 1% change in terminal growth rate £m 1% change in forecast pre-tax profit2 £m
2. Reflects a 1% change to each year of the five-year forecast and terminal profit forecast.
Tracker Network UK Limited provides stolen vehicle recovery systems and vehicle asset management systems. Goodwill was fully impaired by 31 December 2011 (impairment charge 2011: £10.2 million) as performance was not in line with that anticipated at the date of purchase. The recoverable amount was calculated in 2011 using a value in use methodology, with the key assumptions underlying the calculation being a terminal growth rate of 3% and a pre-tax discount rate of 12.1%.
Cost At 1 January 2011 91.6 Additions 7.5 Disposals (7.9) Reclassified as held-for-sale (1.5) Effect of foreign currency exchange adjustment (0.6)
Additions 63.7 Disposals (9.2) Effect of foreign currency exchange adjustment (1.2)
Depreciation At 1 January 2011 39.0 Depreciation charge for the year 10.4 Disposals (6.4) Reclassified as held-for-sale (0.5) Effect of foreign currency exchange adjustment (0.3)
Depreciation charge for the year 13.1 Disposals (4.4) Effect of foreign currency exchange adjustment (0.9)
Direct Line Group Annual Report & Accounts 2012 140 18. Investment property £m
At 1 January 69.5 83.5 Additions 133.7 – Disposals (69.5) – Decrease in fair value (4.8) (14.0)
In 2011 Devitt Insurance Services Limited was sold to CKH Limited for a consideration of £2.3 million. Cash and cash equivalents included in the disposal were £2.4 million along with other assets of £7.3 million and other liabilities of £9.0 million.
Reinsurers’ share of general insurance 1,068.0 712.8 Impairment provision (60.7) (53.9)
Other loans and receivables: Accrued interest 2.0 3.3 Receivables from related parties 5.1 7.7 Other debtors 60.2 39.3 141Direct Line Group Annual Report & Accounts 2012
Derivative financial instruments as shown above are all classified as level 2 under the fair value hierarchy as described in note 24. These are measured at fair value, which equates to carrying value.
Included in the above are related party transactions with RBS Group at 31 December 2012 £23.0 million (2011: £0.1 million).
Note: 1. Other investment funds comprised a single fund which included Euro and US Dollar-denominated bonds, hedged back to Pounds Sterling.
Included within the debt securities balance at 31 December 2012 is £75.0 million (2011: £304.6 million) relating to securities issued by members of RBS Group.
The following table shows an analysis of financial instruments recorded at fair value, which equates to their carrying value, by level of the fair value hierarchy: At 31 December
Notes: 1. Level 1 financial assets are measured in whole or in part by reference to published quotes in an active market. In an active market quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
2. Included in the Level 2 category are financial assets measured using a valuation technique based on assumptions that are supported by prices from observable current market transactions. These are assets for which pricing is obtained via pricing services, but where prices have not been determined in an active market, or financial assets with fair values based on broker quotes, investments in private equity funds with fair values obtained via fund managers or assets that are valued using the Group’s own models whereby the majority of assumptions are market-observable.
Note: 1. Included in the above are investments of £492.5 million (2011: £612.0 million) held by the Group in Global Treasury Funds PLC (an open ended umbrella investment company with variable capital incorporated with limited liability in Ireland). RBS Asset Management (Dublin) Limited is the appointed manager to the fund.
The Group intends to dispose of freehold property it no longer utilises at Lumbry Park, Alton. At 31 December 2012, the property is being actively marketed, with no impairment losses recognised in the year ended 31 December 2012.
Direct Line Group Annual Report & Accounts 2012 144 27. Share capital million
The Company’s issued share capital now comprises 1.5 billion Ordinary Shares of 10 pence each. For the year ended 31 December 2012, this has not altered the earnings per share calculation.
At 31 December 2012, 2,848,991 Ordinary Shares (2011: nil) were owned by the employee share trusts with a cost of £5.0 million, with an undertaking to satisfy the awards of shares in the Company under the Company’s share plans and schemes.
These shares were purchased by the employee share trusts and are carried at cost. At 31 December 2012, they had an aggregate nominal value of £0.3 million (2011: £nil) and a market value of £6.2 million (2011: £nil).
Movements in the revaluation reserve for available-for-sale investments were as follows: Other investment funds £m
The non-distributable reserve relates to a UK statutory claims equalisation reserve that is calculated in accordance with the rules of the FSA. The transfer to retained earnings in 2011 was a consequence of the Group’s consolidation of its four UK general insurance underwriting entities by way of a UK Financial Services and Markets Act 2000 Part VII transfer, which is a mechanism used to transfer all the insurance business, rights, benefits, obligations and interests into one insurance underwriter.
The undated subordinated loans of £258.5 million were provided by TPF in 2006 and were reclassified from non-controlling interest in total equity following FSA approval to repay the loans. There is no interest payable on this instrument. The loans were fully repaid on 8 January 2013 (see note 41).
Insurance liabilities Life insurance (note 31) 107.2 97.8 General insurance 6,291.3 6,411.2
Gross general insurance Claims reported 3,969.3 4,036.9 Claims incurred but not reported 2,153.9 2,217.5 Loss adjustment expenses 163.8 153.2 Liability adequacy provision 4.3 3.6
Accident year 2003 £m 2006 £m £m £m £m £m 2012 £m Total £m
Estimate of ultimate claims costs: At end of accident year 3,648.5 3,679.1 4,007.5 4,091.6 4,390.5 3,878.1 4,148.0 4,261.9 3,080.5 2,797.3 37,983.0
Current estimate of cumulative claims 3,272.5 3,389.0 3,601.1 3,745.3 4,352.0 3,884.9 4,201.3 4,048.5 3,000.2 2,797.3 36,292.1
Direct Line Group Annual Report & Accounts 2012 148 30. Insurance liabilities, unearned premium reserve and reinsurance assets continued
Current estimate of cumulative claims 2,840.7 3,138.9 3,421.9 3,645.6 4,221.2 3,772.6 4,095.8 3,973.2 2,826.8 2,570.1 34,506.8
Liability recognised in balance sheet 62.3 118.0 118.5 206.2 325.3 381.0 729.6 850.4 897.6 1,428.2 5,117.1 2002 and prior 96.7 Loss adjustment expenses 163.8 Total net liability1 5,377.6
Incurred but not reported 2,217.5 (281.8) 1,935.7 Liability adequacy provision 3.6 – 3.6
Net exchange differences (13.2) 2.1 (11.1) Increase in liability adequacy provision 0.7 – 0.7
Net decrease in the year (47.1) (38.9) (86.0) Exchange movement (11.6) – (11.6)
Gross life insurance Long-term insurance contracts: With fixed and guaranteed terms 102.9 93.0 Benefits outstanding 4.3 4.8
Net life insurance Long-term insurance contracts: With fixed and guaranteed terms 11.8 14.4 Benefits outstanding 0.7 0.7
The pension charge in respect of the defined contribution scheme at 31 December 2012 was £26.0 million (2011: £28.0 million).
In addition, certain employees of the Group who were previously members of the RBS Group defined benefit pension scheme transferred to the Group’s defined contribution scheme in the year. As a result of standardising employment terms for all Group employees, which included changes to the employment terms of a small number of Group employees who were members of the RBS Group defined benefit pension scheme, the Group crystallised a debt under section 75 of the UK Pensions Act 1995. Consequently the Group was required to pay into the RBS Group’s defined benefit pension scheme (in which those employees ceased to participate) as a result of a deficit in that scheme. The debt was calculated based on the amount needed to secure Direct Line Group’s share of the pension liabilities in the pension scheme with an insurance company. An amount of £31.3 million was paid to the RBS Group pension scheme on 29 June 2012 in full and final settlement.
Defined benefit scheme The Group’s defined benefit pension scheme was closed in 2003 although DLISL remains the sponsoring employer for obligations to current and deferred pensioners.
Rate of increase in pension payment 2.1 2.1 Rate of increase of deferred pensions 2.1 2.1 Discount rate 4.5 5.0 Inflation rate 2.8 3.0
The expected return on the scheme assets at 31 December is based upon the assumed returns in the table below together with the present value of the obligations and deficit in the scheme.
Total market value of assets 63.7 56.7 Present value of fund obligations 61.2 54.1 Surplus in the scheme 2.5 2.6 Deferred tax asset at 23% (2011: 25%) 0.6 0.6
The deferred tax asset has been netted off against the net pension liability and has been accounted for as a liability (note 13).
Interest on obligation (2.7) (3.0) Expected return on plan assets 3.5 3.7
The credit to the income statement has been included under other operating expenses.
Opening fair value of plan assets 56.7 54.4 Expected return 3.5 3.7 Actuarial gains / (loss) 2.2 (2.6)
Net pension surplus / (deficit) before deferred tax: At 1 January 2.6 (0.1)
Direct Line Group Annual Report & Accounts 2012 154 33. Retirement benefits obligations continued
Impact on profit before tax (£m) – – – – Impact before tax on total equity (£m) (3.0) 3.2 3.1 (3.0)
Under the scheme, the shares vest at the end of a three-year period dependent upon the following: continued employment by the Group and achieving predefined performance conditions associated with TSR and RoTE.
The awards are subject to both non-market and market-based performance conditions.
The RBS Group Remuneration Committee has agreed that RBS Group will be responsible for the settlement of the following outstanding LTIP Awards, with no charge to be made to Direct Line Group: • LTIP awards in 2010 – expected to vest in March 2013
• LTIP awards in 2011 – expected to vest in March 2014
It was agreed that the 2010 LTIP award scheme will continue to be settled in RBS Group shares; however, the 2011 and 2012 LTIP award schemes will be settled with Company shares currently held by RBS Group.
Due to agents, brokers and intermediaries 6.9 4.8 Due to reinsurers 81.9 66.1 Due to insurance companies 13.8 5.4 Due to related parties 34.7 158.7 Trade creditors and accruals 201.0 184.6 Other creditors 107.8 287.6 Other taxes 81.7 86.5
On 2 April 2012, the Group acquired Direct Line Versicherung AG. In the preparation of the consolidated financial statements for the year ended 31 December 2011, a liability for the payment to RBS Group for the transfer of ownership and control was recognised. This liability was settled in April 2012. Included within other creditors is an amount of £nil (2011: £110.9 million) in respect of an inter-company creditor with RBS Group.
Taxes (paid) / received (232.4) 20.7 Finance costs (2.0) (2.5) Cash flow hedges (0.2) – Net cash flow used by operating activities before investment of insurance assets (966.0) (359.8)
Interest received 327.7 440.8 Rental income received from investment property 4.4 7.1 Purchase of investment property (133.7) – Proceeds on disposal of investment property 69.5 – Distributions received from other investment funds 3.1 8.5 Proceeds on disposal / maturity of available-for-sale financial assets 4,021.6 6,403.4 Net decrease / (increase) in investment balances held with credit institutions 844.6 (422.9) Purchases of available-for-sale investments (3,132.4) (6,398.1) Cash generated from investment of insurance assets 2,004.8 38.8 157Direct Line Group Annual Report & Accounts 2012
Direct Line Group Annual Report & Accounts 2012 158 37. Contingencies and guarantees
Companies within the Group have guaranteed the performance of certain contracts with insurance partners. There was a guarantee in place from 1 June 2011 until 31 January 2012 of £70 million for events occurring up to 31 January 2012, although liability under this guarantee was reduced at 31 January 2012 to £58.5 million for events occurring after that date. There are further guarantees in place which also relate to contracts with insurance partners for £90.3 million at 31 December 2012.
Operating lease commitments The Group leases vehicles under non-cancellable operating lease agreements.
At the balance sheet date, the Group had outstanding commitments under non-cancellable operating leases, which fall due as follows: £m 2011 £m
Within one year 33.0 8.7 In the second to fifth years inclusive 92.3 19.0 After five years 250.5 9.3
The following table analyses the Group’s financial assets and financial liabilities in accordance with the categories of financial instruments in IAS 39. Non-financial assets and liabilities outside the scope of IAS 39 are shown separately. Other than those financial assets and liabilities stated at fair value below, the carrying value of all other financial assets and liabilities equals their fair value.
Liabilities Subordinated liabilities – – – 787.5 – 787.5 Insurance liabilities – – – – 6,398.5 6,398.5 Unearned premium reserve – – – – 1,872.9 1,872.9
Total equity 2,831.6 159Direct Line Group Annual Report & Accounts 2012
Assets Goodwill and other intangible assets – – – – 365.8 365.8 Property, plant and equipment – – – – 46.9 46.9 Investment property – – – – 69.5 69.5 Reinsurance assets – – – – 741.6 741.6 Deferred tax assets – – – – 26.9 26.9 Deferred acquisition costs – – – – 310.5 310.5 Insurance and other receivables – – 1,252.9 – – 1,252.9 Prepayments, accrued income and other assets – – – – 92.2 92.2 Derivative financial instruments 0.1 – – – – 0.1 Retirement benefit asset – – – – 2.6 2.6
Liabilities Insurance liabilities – – – – 6,509.0 6,509.0 Unearned premium reserve – – – – 1,931.6 1,931.6
Total equity 3,871.3 160 Direct Line Group Annual Report & Accounts 2012
Direct Line Group’s immediate holding company is The Royal Bank of Scotland Group plc which is incorporated in the United Kingdom and registered in Scotland.
The following transactions were carried out with related parties, who are all members of RBS Group.
i. Sales of insurance contracts and other services £m 2011 £m
Short-term employee benefits 5.6 4.2 Post-employment benefits 0.6 0.4 Other long-term benefits 1.5 2.1 Termination benefits 2.2 0.1 Share-based payments 0.5 0.1
For the purposes of IAS24 ‘Related party disclosures’, key management personnel comprise the Directors of the Company, Non-Executive Directors and members of the Executive Committee.
Cash at bank held with related parties 25 69.1 48.4 Short-term bank deposits held with related parties 25 28.8 148.4 Bank overdrafts held with related parties 32 (90.9) (64.2) Derivative financial assets and liabilities 23 23.0 0.1 Term deposits held with related parties 24 50.0 147.0
RBS Group issuers 75.0 304.6 v. Year end balances arising from sales and purchases of products and services Receivables from related parties (note 22)
Included in the above is an amount of £69.5 million in the year ended 31 December 2012, invoiced to and paid by RBS Group for the purchase of investment properties.
Fellow subsidiaries 29.3 83.6 162 Direct Line Group Annual Report & Accounts 2012
Movements in loans to related parties were as follows: £m 2011 £m
Loans received during the year – 205.0 Loan repayments made (246.4) (205.5) Interest charged 2.7 2.3 Interest settled (2.7) (2.3) Exchange movement (1.3) (1.0) At 31 December – 247.7
On 8 January 2013, the Group repaid undated subordinated loans of £258.5 million to TPF.
The attached notes on pages 167 to 170 form an integral part of these separate financial statements.
The financial statements were approved by the Board of Directors and authorised for issue on 27 February 2013. They were signed on its behalf by: John Reizenstein Chief Financial Officer
Total comprehensive income for the year – – – 515.9 515.9
Total comprehensive income for the year – – – 1,240.4 1,240.4 Share redemption (1,350.0) 1,350.0 – – – Dividends paid – – – (1,000.0) (1,000.0) Share-based payments – – 0.3 – 0.3
The Company’s financial statements are prepared in accordance with IFRS as issued by the IASB and are presented in accordance with the Companies Act 2006. In accordance with the exemption permitted under section 408 of Companies Act 2006, the Company’s income statement and related notes have not been presented in these separate financial statements.
Investment in subsidiaries Investments in subsidiaries are stated at cost less any impairment.
The Company acquired 100% of the share capital of Direct Line Versicherung AG on 2 April 2012. The fair value of identifiable assets acquired was £368.7 million (including cash and cash equivalents of £39.7 million), and the fair value of identifiable liabilities assumed was £263.5 million. The total cash consideration paid was £105.2 million.
Loans to subsidiary undertakings 521.4 9.1 Receivables from subsidiary undertakings 0.3 25.0 167Direct Line Group Annual Report & Accounts 2012
Corporation tax recoverable 4.5 1.3 5. Cash and cash equivalents £m 2011 £m
Short-term deposits with credit institutions: Third parties 263.6 – Fellow subsidiaries 4.7 32.1 6. Share capital
Full details of the share capital of the Company are set out in note 27 to the consolidated financial statements.
The notes are unsecured, subordinated obligations of the Company, and rank pari passu without any preference among themselves. In the event of a winding up or of bankruptcy, they are to be repaid only after the claims of all other creditors have been met.
The aggregate fair value of subordinated dated notes is £597.6 million (2011: £nil).
Full details of the dividends paid by the Company are set out in note 14 to the consolidated financial statements.
Operating cash flows before movements in working capital (8.5) (9.6) Net decrease / (increase) in related party balances 23.4 (24.6) Tax received 2.3 0.6 Finance costs (9.8) (5.9) Cash generated from / (used by) operations 7.4 (39.5)
Direct Line Group Annual Report & Accounts 2012 170 13. Related parties
During the year The Royal Bank of Scotland Group plc sold 520.8 million of the Company’s Ordinary Shares, representing 34.7% of the total share capital of the Company.
Management fees payable to subsidiary undertakings 8.7 6.7 Interest payable to subsidiary undertakings 7.1 3.8 Interest payable to fellow subsidiary 2.7 2.5
Interest charged on borrowings from related parties were at rates ranging from 0.51% to 1.92% (2011: 0.71% to 1.92%).
Full details of share-based compensation plans are provided in note 34 to the consolidated financial statements.
The risks faced by the Company are considered to be the same as those in the operations of the Group itself and details of the key risks to the Group and the steps taken to manage them are disclosed in the Risk management section of the consolidated financial statements (note 3).
The Directors and key management of the Group and the Company are the same. The remuneration and pension benefits of the Directors, including those of the highest paid Director, are included in the Directors’ remuneration report in the corporate governance section of the Annual Report & Accounts.
Share ownership Share capital The details of the Company’s share capital is presented in note 27 to the consolidated financial statements.
Shareholders may have their cash dividends paid directly into a bank or building society by completing a dividend mandate form, which is available from the Company’s Share Registrar (“Registrar”) Computershare Investor Services PLC in the UK. Contact details for the Registrar are set out on the inside back cover of this report. Alternatively, shareholders may access their shareholdings online and download a dividend mandate from the Investor Centre. Please see the inside back cover for details.
Shareholders should notify the Registrar of any change in shareholding details in a timely manner.
Shareholders can also access their current shareholding details online at www.investorcentre.co.uk/directline. Investor Centre is a free-to-use, secure, self-service website where shareholders can manage their holdings online. The website enables shareholders to: • check their holdings; • update their records (including address and direct credit details); • access all their securities in one portfolio by setting up a personal account; • vote online; and
If you receive an unsolicited call: • make sure you get the correct name of the person and organisation; • check that they are properly authorised by the FSA by visiting www.fsa.gov.uk/register/; and
• Inform the Registrar as soon as you change your address.
• Be aware of when the dividends are paid and contact the Registrar if you do not receive your dividend.
• Consider having your dividends paid directly into your bank account (you will need to fill out a dividend mandate form and send it to the Registrar); this reduces the risk of the cheque being intercepted or lost in the post.
• Be aware that the Company will never contact you by telephone concerning investment matters. If you receive such a call from a person purporting to represent the Group please contact the Company Secretary immediately.
Corporate website The Group’s corporate website is www.directlinegroup.com. It contains more useful information for the Company’s investors and shareholders, including press releases, forthcoming events, essential shareholder information, a financial calendar and details of the Company’s AGM. You may also subscribe for email news alerts.
Shareholders who register their email address with our Registrar or on the Investor Centre can be kept informed of events such as the AGM and receive shareholder communications like the Annual Report & Accounts and Notice of Meeting electronically.
Dealing facilities Shareholders can buy, sell or transfer DLG shares through a stockbroker or a high street bank, or through the Registrar’s share-dealing facility.
Financial calendar1 28 February Announcement of results for 2012 6 March ‘Ex-dividend’ date for 2012 final dividend 8 March Record date for 2012 final dividend 3 May First quarter 2013 Interim Management Statement 6 June Annual General Meeting 11 June Payment date for 2012 final dividend 2 August Announcement of half year results for 2013 14 August ‘Ex-dividend’ date for 2013 interim dividend 16 August Record date for 2013 interim dividend 26 September Payment date for 2013 interim dividend 1 November Third quarter 2013 Interim Management Statement
Annual General Meeting The 2013 AGM will be held on 6 June 2013 at The Auditorium, Allen & Overy LLP, One Bishops Square, London E1 6AD, starting at 10.00 am. All shareholders will receive a separate notice convening the AGM, which will explain the resolutions to be put to the meeting.
Additional information continued 172 Direct Line Group Annual Report & Accounts 2012
Claims frequency The number of claims divided by the number of policies per annum.
The loss ratio for the current accident year excluding the impact of movement of reserves relating to previous accident years and claims relating to weather events in the Home division.
Earnings per share The amount of the Group’s profit allocated to each Ordinary Share of the Group.
Commission Amounts paid to brokers, partners and PCWs for generating business.
The independent body that regulates the financial services industry in the UK.
Initial Public Offering (“IPO”) The first sale of shares by a previously unlisted company to investors on a securities exchange.
Investment return yield The total annualised investment return earned through the income statement during the period, including all one-off items such as realised gains, fair value adjustments and impairments, divided by the average AUM for each asset class during the same period.
Net claims The cost of claims incurred in the period less any claims costs recovered under reinsurance contracts. It includes both claims payments and movements in claims reserves.
Net earned premium The element of gross written premium less reinsurance premium ceded for the period that insurance cover has already been provided.
Ogden discount rate The discount rate set by the relevant government bodies and used to calculate lump sum awards in bodily injury cases.
Operating profit The pre-tax profit generated by the activities of the Group, including insurance and investment activity, but excluding finance costs.
Return on equity Return on equity is calculated by dividing the profit attributable to the owners of the company by average ordinary shareholders’ equity for the period.
Pro forma RoTE is based on RoTE, but assumes that the capital actions taken by the Group (£1 billion dividend payment and £500 million long-term subordinated debt issue) occurred on 1 January 2012.
Total shareholder return Compares the movements in the share price and dividends paid over a period of time, as a percentage of the share price at the beginning of the period.
The UK Corporate Governance Code, dated June 2010 and issued by the Financial Reporting Council.
Glossary continued 174 Direct Line Group Annual Report & Accounts 2012
This Annual Report & Accounts has been prepared for, and only for, the members of the Company as a body, and no other persons. The Company, its Directors, employees, agents or advisers do not accept responsibility to any other person to whom this document is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed.
Certain information contained in this document including any information as to the Group’s strategy, plans or future financial or operating performance constitute “forward-looking statements”. These forward-looking statements may be identified by the use of forward-looking terminology, including the terms “aims”, “anticipates”, “believes”, “estimates”, “expects”, “intends”, “may”, “plans”, “predicts”, “projects”, “seeks”, “should”, “targets” or “will” or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this document and include statements regarding the intentions, beliefs or current expectations of the Directors concerning, amongst other things: the Company’s results of operations, financial condition, prospects, growth, strategies and the industry in which the Group operates. Examples of forward-looking statements include financial targets which are contained in this document specifically with respect to RoTE, the Group’s COR, the COR for the Group’s commercial business, and cost savings. By their nature, all forward-looking statements involve risk and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future or are beyond the Group’s control. Forward-looking statements are not guarantees of future performance. The Company’s actual results of operations, financial condition and the development of the business sector in which the Group operates may differ materially from those suggested by the forward-looking statements contained in this document including, but not limited to, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements or the Ogden discount rate), the impact of competition, currency changes, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulation in the jurisdictions in which the Group and its affiliates operate. In addition, even if the Company’s actual results of operations, financial condition, and the development of the business sector in which the Group operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods.
The forward-looking statements contained in this document reflect knowledge and information available as of the date of preparation of this document. The Company and the Directors expressly disclaim any obligations or undertaking to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by applicable law or regulation. Nothing in this Annual Report & Accounts should be construed as a profit forecast.
Principal banker The Royal Bank of Scotland Group plc 280 Bishopsgate London EC2M 4RB Telephone: +44 (0)131 556 8555 Website: www.rbs.com
Morgan Stanley & Co International plc 25 Cabot Square Canary Wharf London E14 4QA Telephone: +44 (0)20 7425 8000 Website: www.morganstanley.com
RBC Europe Ltd Riverbank House 2 Swan Lane London EC4R 3BF Telephone: +44 (0)20 7653 4000 Website: www.rbc.com 176 Direct Line Group Annual Report & Accounts 2012
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