Annual Incentive Plan Executive Directors and certain members of senior management are eligible for awards under the AIP, of which at least 40% is granted in the form of a nil-cost option.
The awards outstanding at 31 December 2013 have no performance criteria attached, other than the requirement that the employee remains in employment with the Group for three years from the date of award (with the exception of the awards to the Chief Executive – specific terms in this case are set out in the Directors’ remuneration report).
The following table details the outstanding number of share awards in issue (all nil-cost).
The Group recognised total expenses of £4.1 million in the year ended 31 December 2013 (2012: £0.3 million) relating to equity settled share-based compensation plans.
Note: 1. Other provisions include £22.5 million (2012: £11.0 million) for costs associated with onerous contracts in respect of leasehold properties.
Direct Line Group Annual Report & Accounts 2013 162 35. Notes to the consolidated cash flow statement £m 2012 £m
Profit for the year 312.8 184.3 Adjustments for: Investment income (188.6) (199.3) Instalment income (117.8) (125.4) Other operating losses 0.7 2.1 Net fair value (gain) / loss on assets at fair value through income statement (7.5) 4.8 Finance costs 37.7 28.7 Equity-settled share-based payment transactions 4.1 0.3 Tax charge 111.1 64.8 Depreciation and amortisation expenses 58.2 43.1 Non-cash movement in demerger reserve – 24.6 Impairment of property, plant and equipment, goodwill and intangible assets 5.5 10.7 Impairment movements on reinsurance contracts (7.5) 6.8 Profit on sale of AFS financial investments (25.7) (89.4) Loss on sale of property, plant and equipment 2.9 4.8 Profit on disposal of subsidiary (12.0) –
Minimum lease payments under operating leases recognised as an expense in the year 35.0 7.5
Within one year 13.3 7.8 In the second to fifth years inclusive 45.3 26.6 After five years 85.9 41.2
Cash and cash equivalents – – 908.3 – – 908.3 Assets held for sale – – – – 1.0 1.0
Liabilities Subordinated liabilities – – – 486.6 – 486.6 Insurance liabilities – – – – 5,757.4 5,757.4 Unearned premium reserve – – – – 1,818.7 1,818.7 Retirement benefit obligations – – – – 2.0 2.0
Derivative financial instruments 19.3 – – – – 19.3 Trade and other payables including insurance payables – – – 683.4 134.9 818.3 Deferred tax liabilities – – – – 19.3 19.3 Current tax liabilities – – – – 21.1 21.1
Direct Line Group Annual Report & Accounts 2013 166 39. Related parties On 13 March 2013, RBS Group sold 16.8% of the Company’s Ordinary Shares and ceased to be the controlling shareholder of Direct Line Group. On 20 September 2013, RBS Group sold a further 20.0% of the Company’s Ordinary Shares, which is a further step towards complete disposal by the end of 2014. At 31 December 2013, RBS Group held 28.5% of the issued Ordinary Share capital and the Group is treated as an associated undertaking in the RBS Group results. The UK Government through HM Treasury is the ultimate controlling party of RBS Group and is as a consequence a related party of Direct Line Group. The UK Government’s shareholding is managed by UK Financial Investments Limited, a company wholly owned by the UK Government. This gives rise to related party transactions and balances, specifically in respect of tax with HMRC and debt security investments with the UK Government.
Year end balances arising from cash and investment transactions with members of the RBS Group £m 2012 £m
Included in transactions within amounts owed to related parties in the year ended 31 December 2012 is an amount of £39.3 million, invoiced by and paid to RBS Group for the acquisition of furniture, fittings and IT hardware. Furthermore, also included is an amount of £31.3 million paid to the RBS Group pension scheme (see note 32 for further details).
At 1 January – 247.7 Loan repayments made – (246.4) Interest charged – 2.7 Interest settled – (2.7) Effect of foreign currency exchange adjustment – (1.3) At 31 December – –
During the year ended 31 December 2012, the Group repaid its loans from RBS Group in preparation for operational separation.
Short-term employee benefits 9.1 7.1 Post-employment benefits 0.2 0.6 Termination benefits 0.2 2.2 Share-based payments 1.9 0.1
40. Post balance sheet events On 5 February 2014 the Group sold 100% of the share capital of Tracker Network (UK) Limited to Lysanda Limited.
Liabilities Subordinated liabilities 7 502.4 501.7 Derivative financial instruments 8 – 1.7
Parent Company statement of changes in equity For the year ended 31 December 2013
Loans to subsidiary undertakings1 528.8 521.4 Receivables from subsidiary undertakings – 0.3
Note: 1. Included in loans to subsidiary undertakings is a £500 million unsecured subordinated loan to U K Insurance Limited. The loan was advanced on 27 April 2012 at a fixed rate of 9.5% with a repayment date of 27 April 2042. There is an option to repay the loan on specific dates from 27 April 2022. If the loan is not repaid on that date, the rate of interest would be reset at a rate of the six-month LIBOR plus 8.16%.
Direct Line Group Annual Report & Accounts 2013 172 4. Current tax assets £m 2012 £m
Corporation tax recoverable 1.6 4.5 5. Cash and cash equivalents £m 2012 £m
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 insolvency, they are to be repaid only after the claims of all other creditors have been met.
11. Dividends Full details of the dividends paid by the Company are set out in note 14 to the consolidated financial statements.
Direct Line Group Annual Report & Accounts 2013 174 13. Related parties Direct Line Insurance Group plc, which is incorporated in England and Wales, is the ultimate parent undertaking of the Direct Line Group of companies.
During the year RBS Group sold 551.7 million of the Company’s Ordinary Shares, representing 36.8% of the total share capital of the Company. Following the sale, the RBS Group shareholding in Direct Line Group fell to 28.5%. Full details of related parties are set out in note 39 to the consolidated financial statements.
Interest income from loans to subsidiary undertakings was charged at rates ranging from 0.5% to 9.50% (2012: 0.51% to 9.50%).
Management fees payable to subsidiary undertakings 7.7 8.7 Interest payable to subsidiary undertakings 0.1 7.1 Interest payable to RBS Group – 2.7
Interest charged on borrowings from related parties were at rates ranging from 0.5% to 2.0% (2012: 0.51% to 1.92%).
In addition, if the Board believes that the Group has capital that is surplus to the Board’s view of its requirements, it is intended that it will be returned to shareholders. The Company may consider a special dividend and/or the repurchase of its own shares as a means of distributing surplus capital to shareholders.
Shareholder enquiries Shareholders with queries on any matter relating to their shares are invited to contact our Registrar using the contact details listed on page 180 of this Annual Report & Accounts.
The website requires shareholders to quote their Shareholder Reference Number in order to access this information.
How to avoid share fraud • Keep in mind that firms authorised by the FCA are unlikely to contact you out of the blue with an offer to buy or sell shares
• Do not get into a conversation; note the name of the person and firm contacting you and then end the call
• Check the Financial Services Register from www.fca.org.uk to see if the person and firm contacting you are authorised by the FCA
• Use the firm’s contact details listed on the Register if you want to call it back
• Think about getting independent financial and professional advice before you hand over any money
You can also call the FCA Consumer Helpline on 0800 111 6768.
If you have already paid money to share fraudsters you should contact Action Fraud on 0300 123 2040.
Tips on how you can protect your shares • Ensure all your certificates are kept in a safe place, or consider holding your shares in the UK’s electronic registration and settlement system for equity, CREST, or via a nominee
• Keep all correspondence from the Registrar that shows your shareholder reference number in a safe place and shred unwanted correspondence
• If you receive a letter from the Registrar regarding a change of address and you have not recently moved, please contact them immediately
• If you change your bank account, inform the Registrar of the details of your new account immediately
Electronic communications and voting The Group produces a range of communications which shareholders can receive in a range of formats. View online, download or receive a paper copy by contacting the Registrar. The contact details can be found on page 180.
Actuarial best estimate The probability-weighted average of all future claims and cost scenarios calculated using historical data, actuarial methods and judgement. A best estimate of reserves will therefore normally be designed to include no margin for optimism or conversely, caution.
Financial assets that are classified as available for sale. Please refer to the accounting policy note 1.12 on page 117.
The sum of the loss, expense and commission ratios. The ratio is a measure of the amount of claims costs and expenses compared to net earned premium generated. A ratio of less than 100% indicates a profitable business.
Commission ratio The ratio of commission expense divided by net earned premium.
DL4B Direct Line for Business, an extension of the Direct Line brand, is our direct commercial insurance brand for micro and small-sized businesses in the UK that have straightforward commercial insurance requirements.
The independent body that regulates firms and financial advisers to help put the interests of their customers and the integrity of the market at the core of what they do.
Gross written premium The total premiums from contracts that began during the period.
Incurred loss Claims that have been paid plus claims advised by a policyholder but not yet paid. Does not include IBNR (see above).
The first sale of shares by a previously unlisted company to investors on a securities exchange.
Insurance reserves This consists of insurance liabilities and liability adequacy reserve. Together these amount to the reserves an insurance company maintains to meet current and future claims.
Investment return yield The total annualised investment return earned through the income statement during the period, including items such as realised gains, fair value adjustments and impairments, divided by the average AUM for each asset class during the same period.
Net earned premium The element of gross earned premium less reinsurance premium ceded for the period that insurance cover has already been provided.
These are claims payments as awarded under the Courts Act 2003. PPOs are used to settle large personal injury claims and generally provide claimants who require long-term care with a lump sum award together with inflationlinked annual payments.
Return on tangible equity is adjusted profit after tax from ongoing operations divided by the Group’s average tangible shareholders’ equity. Profit after tax is adjusted to exclude the Run-off segment and restructuring and other one-off costs and is stated after charging tax (using the UK standard tax rate). Pro forma RoTE is based on RoTE, but assumes that the capital actions taken by the Group during 2012 (£1 billion dividend payment and £500 million long-term subordinated debt issue) occurred on 1 January 2012.
Risk mix This reflects the expected level of claims from the portfolio.
Three lines of defence The 1st line of defence is provided by line managers who are responsible for ownership and management of the risks to the achievement of business objectives on a day-to-day basis. The 2nd line of defence is provided by specialist control functions, including Risk and Compliance, which are responsible for the provision of proportionate oversight of the business and related or emerging risks. Group Audit delivers the 3rd line of defence through the provision of an independent view for the Board or the effectiveness of risk management.
The UK Corporate Governance Code, dated September 2012 and issued by the FRC.
Certain information contained in this document, including any information as to the Group’s strategy, plans or future financial or operating performance, constitutes “forward-looking statements”. These forward-looking statements may be identified by the use of forward-looking terminology, including the terms “aims”, “anticipates”, “believes”, “continue”, “could”, “estimates”, “expects”, “guidance”, “intends”, “may”, “outlook”, “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, among other things: the Group’s results of operations, financial condition, prospects, growth, strategies and the industry in which the Group operates. Examples of forward-looking statements include financial targets which are contained in this document specifically with respect to RoTE, the Group’s COR, the COR for the Group’s Commercial division, 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 Group’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, for example directly or indirectly as a result of, 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 and deflation, the timing impact and other uncertainties of future acquisitions, disposals, joint ventures 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 Group’s actual results of operations, financial condition and the development of the business sector in which the Group operates are consistent with the forwardlooking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods.
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