Investment return Interest income on financial assets is determined using the effective interest rate method. The effective interest rate method is a way of calculating the amortised cost of a financial asset (or group of financial assets) and of allocating the interest income over the expected life of the asset.
Any gains or losses arising from a change in fair value are recognised in the income statement.
Revenue from vehicle recovery and repair services Fees in respect of services for vehicle recovery are recognised at a point in time on satisfaction of performance obligations. The cost of providing the service is incurred as the service is rendered.
Outstanding claims provisions are not discounted for the time value of money except for claims to be settled by PPOs established under the Courts Act 2003.
A court can award damages for future pecuniary loss in respect of personal injury or for other damages in respect of personal injury and may order that the damages are wholly or partly to take the form of PPOs. These are covered in more detail in note 2.3. Costs for both direct and indirect claims handling expenses are also included.
A liability adequacy provision is made for unexpired risks arising where the expected value of claims and expenses attributable to the unexpired periods of policies in force at the balance sheet date exceeds the unearned premium reserve in relation to such policies after the deduction of any acquisition costs deferred and other prepaid amounts. The expected value is determined by reference to recent experience and allowing for changes to the premium rates. The provision for unexpired risks is calculated separately by reference to classes of business that are managed together after taking account of relevant investment returns.
1.9 Property, plant and equipment Items of property, plant and equipment (except investment property – note 1.12) are stated at cost less accumulated depreciation and impairment losses. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for separately.
Depreciation is charged to the income statement on a straight-line basis so as to write-off the depreciable amount of property, plant and equipment over their estimated useful lives. The depreciable amount is the cost of an asset less its residual value. Land is not depreciated. The estimated useful lives are as follows: Freehold and leasehold buildings 50 years or the period of the lease if shorter
1.10 Impairment of intangible assets, goodwill and property, plant and equipment At each reporting date, the Group assesses whether there is any indication that its intangible assets, goodwill or property, plant and equipment are impaired. If any such indication exists, the Group estimates the recoverable amount of the asset and the impairment loss, if any. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. If an asset does not generate cash flows that are independent of those of other assets or groups of assets, the recoverable amount is determined for the cash-generating unit (“CGU”) to which the asset belongs. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use.
Where the Group is a lessee At inception, the Group assesses whether a contract contains a lease arrangement which involves assessing whether it obtains substantially all the economic benefits from the use of a specific asset, and it has the right to direct the use of that asset. The Group recognises a rightof -use asset and a lease liability at the commencement of the lease (when the underlying asset is available for use), except for short-term leases of 12 months or less and low value leases which are expensed on a straight-line basis in the income statement. The right-of-use asset is initially measured based on the present value of the lease payments, plus initial direct costs less any incentives received. Lease payments include fixed payments and variable payments. Variable payments relate to contractual rent increases linked to inflation indices. The right-of-use asset is depreciated over the lease term and is subject to impairment testing if there is an indicator of impairment. When leases contain an extension or purchase option which is reasonably expected to be exercised this is included in the measurement of the lease.
Where the Group is a lessor Leases where a significant proportion of the risks and rewards of ownership is retained by the lessor, are classified as operating leases. Lease income from operating leases is recognised in the income statement on a straight-line basis over the lease term.
Where assets are subject to finance leases, the present value of the lease payments, together with any unguaranteed residual value, is recognised as a receivable.
1.13 Financial assets Financial assets are classified as AFS, HTM, designated at fair value through profit or loss, or loans and receivables.
Available-for-sale Financial assets can be designated as AFS on initial recognition. AFS financial assets are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at fair value. Impairment losses and exchange differences resulting from translating the amortised cost of foreign currency monetary AFS financial assets are recognised in the income statement, together with interest calculated using the effective interest rate method. Other changes in the fair value of AFS financial assets are reported in a separate component of shareholders’ equity until disposal, when the cumulative gain or loss is recognised in the income statement.
A financial asset is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The appropriate quoted market price for an asset held is usually the current bid price. When current bid prices are unavailable, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. If conditions have changed since the time of the transaction (for example, a change in the risk-free interest rate following the most recent price quote for a corporate bond), the fair value reflects the change in conditions by reference to current prices or rates for similar financial instruments, as appropriate. The valuation methodology described above uses observable market data.
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 and 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.
Loans and receivables Non-derivative financial assets with fixed or determinable repayments that are not quoted in an active market are classified as loans and receivables, except those that are classified as AFS or HTM. Loans and receivables are initially recognised at fair value plus directly related transaction costs and are subsequently measured at amortised cost using the effective interest rate method less any impairment losses.
In a fair value hedge, the gain or loss on the hedging instrument is recognised in the income statement. The gain or loss on the hedged item attributable to the hedged risk is recognised in the income statement and, where the hedged item is measured at amortised cost, adjusts the carrying amount of the hedged item.
164 DIRECT LINE GROUP aNNUAL REPORT & ACCOUNTS 2019 1.14 Cash and cash equivalents and borrowings 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, are measured at amortised cost using the effective interest rate method and are part of the Group’s cash management approach and are repayable on demand.
A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires.
Contributions to the Group’s defined contribution pension scheme are recognised in the income statement when payable.
1.19 Taxation The tax charge or credit represents the proportion of the tax payable and receivable arising in the current year only.
The cancellation of an award through failure to meet nonvesting conditions triggers an immediate expense for any unrecognised element of the cost of an award.
In September 2016, the IASB issued ‘Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts’ to address issues arising from the different effective dates of IFRS 9 and IFRS 17 ‘Insurance Contracts’. Amendments to IFRS 4 was endorsed by the EU in November 2017. These amendments permitted insurers who satisfied certain criteria to defer the effective date of IFRS 9, to coincide with the expected effective date of IFRS 17. The Group conducted a high-level assessment of the three aspects of IFRS 9 and based on current information, the impact of applying the expected loss model for the first time is currently immaterial. The Group does not expect any other significant impact on its financial statements.
As a result, the Group has decided to defer the application of IFRS 9 and continues to do so.
166 DIRECT LINE GROUP aNNUAL REPORT & ACCOUNTS 2019 1.23 Accounting developments continued Derivative assets do not have contractual terms that give rise on specified dates to cash flows that are solely payment of principal and interest on the principal amount outstanding. The fair value of these financial assets is disclosed in note 42 and the amount of change in the fair value during the period was an increase of £111.8 million (2018: £26.7 million increase).
In note 3.3.3 the Group has disclosed the carrying amount of financial assets at the end of the reporting period by credit risk rating grade, as defined in IFRS 7 ‘Financial Instruments: Disclosures’. The fair value and the carrying amount of financial assets that meet the solely payments of principal and interest criteria and, at the end of the reporting period do not have a low credit risk, was of £390.8 million (2018: 393.9 million).
IFRS 9 information that relates to entities within the Group that is not provided in the Group’s consolidated financial statements can be obtained from their individual financial statements, which are filed at Companies House.
IFRS 17 is a comprehensive new accounting standard for all insurance contracts covering recognition and measurement, presentation and disclosure. The overall objective of IFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers and to replace the requirements of IFRS 4 that allowed insurers to apply grandfathering of previous local accounting policies.
In October 2018 the IASB issued ‘Amendments to IAS 1 and IAS 8 Definition of Material.’ This clarifies and aligns the definition of ‘material’ and provides guidance to help improve consistency in the application of that concept whenever it is used in IFRS Standards. This is effective from 1 January 2020 and is endorsed by the EU.
Also, in October 2018 the IASB issued ‘Amendments to IFRS 3 Business Combinations’ which narrowed and clarified the definition of a business. They also permit a simplified assessment of whether an acquired set of activities and assets is a group of assets rather than a business. This is effective from 1 January 2020 but is yet to be endorsed by the EU.
WWW.DIRECTLINEGROUP.CO.UK 167 2. Critical accounting judgements and key sources of estimation uncertainty The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underline the preparation of its financial information. The Group’s principal accounting policies are set out on pages 158 to 166. Company law and IFRSs require the Directors, in preparing the Group’s financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable.
168 DIRECT LINE GROUP aNNUAL REPORT & ACCOUNTS 2019 2. Critical accounting judgements and key sources of estimation uncertainty continued 2.3 General insurance: outstanding claims provisions and related reinsurance recoveries
Claims reserves are assessed separately for large and attritional claims, typically using standard actuarial methods of projection. Key sources of estimation uncertainty include those arising from the selection of specific methods as well as assumptions for claims frequency and severity through the review of historical claims and emerging trends. The Group seeks to adopt a conservative approach to assessing claims liabilities, as evidenced by the favourable development of historical claims reserves. Reserves are based on management’s best estimate, which includes a prudence margin that exceeds the internal actuarial best estimate. This margin is set by reference to various actuarial scenario assessments and reserve distribution percentiles. It also considers other long and short-term risks not reflected in the actuarial inputs, as well as management’s view of the uncertainties in relation to the actuarial best estimate.
The most common method of settling bodily injury claims is by a lump sum. When this includes an element of indemnity for recurring costs, such as loss of earnings or ongoing medical care, the settlement calculations apply the statutory discount rate (known as the Ogden discount rate) to reflect the fact that payment is made on a one-off basis rather than periodically over time. The Ogden discount rate changed from 2.5% to minus 0.75% in 2017 in England, Wales and Scotland, reflecting the low interest rate environment, and case law holding that claimants were entitled to invest purely in zero risk investments, such as index-linked gilts. The Civil Liability Act 2018 changed the law in two ways: firstly, by requiring the Government to review the Ogden discount rate at least every five years, and secondly to do so by reference to low risk rather than very low or zero risk investments.
At 31 December 2018, the Group decided that it was likely that the Ogden discount rate would change in 2019 and selected an estimate of 0% to value its lump sum bodily injury reserves. When the Ogden discount rate review process subsequently concluded in July 2019, the discount rate increased from minus 0.75% to minus 0.25% for England and Wales. As the Ogden discount rate is a devolved matter in Scotland and Northern Ireland, it has remained at minus 0.75% in Scotland by choice, and at 2.5% in Northern Ireland.
The Group settles some large bodily injury claims as PPOs rather than lump sum payments. The Group has estimated the likelihood of large bodily injury claims settling as PPOs. In line with the Group’s experience, and the negative Ogden discount rate, the assumed PPO propensity has reduced in 2019. Anticipated PPOs consist of both existing large loss case reserves including allowances for development and claims yet to be reported to the Group. Reinsurance is applied at claim level and the net cash flows are discounted for the time value of money. The discount rate is consistent with the long duration of the claims payments and the assumed future indexation of the claims payments.
There is considerable uncertainty as to the effect of Brexit on the Group and the Group has proactively considered a variety of possible implications of a disruptive end to the Brexit implementation period on 31 December 2020, including of a financial and operational nature; these are referred to in the Risk management section of the Strategic report.
The Group’s reserves are subject to the risk of retrospective changes in judicial conditions such as the recent changes in the Ogden discount rate. Detailed information on the Ogden discount rate is provided in note 2.3.
Notes: 1. These sensitivities are net of reinsurance and exclude the impact of taxation. 2. These sensitivities reflect one-off impacts at 31 December and should not be interpreted as predictions. 3. The sensitivities relating to an increase or decrease in the real discount rate used for PPOs illustrate a movement in the time value of money from the assumed level of 0% for reserving. The PPO sensitivity has been calculated on the direct impact on the change in the internal discount rate with all other factors remaining unchanged.
When underwriting policies, the Group is subject to concentration risk in a variety of forms, including: – geographic concentration risk – the Group purchases a catastrophe reinsurance programme to protect against a modelled 1 in 200-years catastrophe loss. The programme is structured with the retention and limits expressed as percentages of gross earned premium. At 31 December 2019 this was the equivalent of £1,000.0 million (118% of gross earned premium of the previous 12 months) in excess of a retained deductible of £132.5 million (15.64% of gross earned premium); – product concentration risk – the Group’s business is heavily concentrated in the UK general insurance market. However, the Group offers a diversified portfolio of products and a variety of brands sold through a range of distribution channels to its customers; and
Distribution risk The risk of a material reduction in profit compared to plan due to the Group not writing its planned policy volumes in each segment.
The Group monitors its market risk exposure on a monthly basis and, in addition, has established an aggregate exposure limit consistent with its risk objective to maintain capital adequacy. Interdependencies across risk types have also been considered within the aggregate exposure limit. The allocation of the Group’s investments across asset classes has been approved by the Investment Committee.
The Group has a property portfolio and an infrastructure debt portfolio to generate a real return which, from an asset liability matching perspective, is used to offset the liability arising from longer duration PPOs.
Net interest rate risk This is the risk of loss from changes in the term structure of interest rates or interest rate volatility which impact assets and liabilities. The Group’s interest rate risk arises mainly from its debt, floating interest rate investments and assets and liabilities exposed to fixed interest rates.
The Group has subordinated guaranteed dated notes with fixed coupon rates which were issued on 27 April 2012 at a fixed rate of 9.25% and have a redemption date of 27 April 2042; at the same time the Group entered into a 10-year designated hedging instrument, to exchange the fixed rate of interest on these notes to a floating rate, to hedge exposure to interest rate.
The Group is exposed to the following interest rate benchmarks within its hedge accounting relationships, which are subject to interest rate benchmark reform: GBP LIBOR, USD LIBOR and EURIBOR (collectively ‘IBORs’). As listed in note 1, the hedged items include issued sterling fixed rate subordinated debt and holdings of US dollar and Euro denominated fixed rate debt securities.
As well as the benchmark interest rate exposures described in note 1, the Group has material non‑derivative financial instruments in its investment portfolio that are not included in hedge accounting relationships. Given hedge accounting is not applied, there is no accounting relief. The fair values of these financial assets reflect the uncertainties arising from the interest rate benchmark reforms.
Some of the Group’s current GBP LIBOR linked loan contracts do contain fall back provisions for the cessation of the referenced benchmark interest rate. Different working groups in the industry are working on fall back language for different instruments and different IBORs, which the Group is monitoring closely and will look to implement when appropriate.
Pay 3-month GBP LIBOR, receive sterling fixed interest rate swap 2022 £250 million Sterling fixed rate issued subordinated debt of the same maturity and nominal as the swap
Pay USD fixed, receive 3-month USD LIBOR interest rate swaps 2022 - 2050 US$151 million Portfolio fair value hedge of the 3-month USD LIBOR component of US dollar denominated fixed rate debt securities
Pay Euro fixed, receive 6-month EURIBOR interest rate swaps 2022 - 2040 €102 million Portfolio fair value hedge of the 6-month EURIBOR component of Euro denominated fixed rate debt securities
The Group will continue to apply the amendments to IFRS 9/IAS 39 until the uncertainty arising from the interest rate benchmark reforms with respect to the timing and the amount of the underlying cash flows that the Group is exposed ends. The Group has assumed that this uncertainty will not end until the Group’s contracts that reference IBORs are amended to specify the date the interest rate benchmark will be replaced and the cash flows of the alternative benchmark rate and the relevant spread adjustment. This will, in part, be dependent on the introduction of fall-back clauses which have yet to be added to some of the Group’s contracts and the negotiation with borrowers.
Exposure to currency risk is generated by the Group’s investments in US dollar and Euro denominated corporate bonds.
The Group maintains exposure to US dollar securities through £1,366.1 million (2018: £1,699.3 million) of investments in US dollar corporate bonds and Euro securities through £359.1 million (2018: £79.4 million) of Euro corporate bonds. The foreign currency exposure of these investments is hedged by foreign currency forward contracts, maintaining a minimal unhedged currency exposure on these portfolios, as well as a low basis risk on the hedging contracts.
Use of derivatives As mentioned above, the Group uses derivatives to hedge against interest rate and currency risk.
Derivative assets At fair value through the income statement: Foreign exchange contracts (forwards) 2,310.3 112.1 – – 112.1 Designated as hedging instruments: Foreign exchange contracts (forwards) 7.8 0.4 – – 0.4
Derivative liabilities At fair value through the income statement: Foreign exchange contracts (forwards) 1,716.2 20.6 – – 20.6 Designated as hedging instruments: Interest rate swaps 341.2 0.4 0.4 4.5 5.3 176 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
Sensitivity analysis The table below provides a sensitivity analysis of the potential impact on financial investments and derivatives 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.
Spread Impact of a 100 basis points increase in spreads on financial investments2,3 – – (146.4) (171.1) Interest rate Impact of a 100 basis points increase in interest rates on financial investments and derivatives2,3,4 12.0 15.6 (103.7) (101.1) Investment property Impact of a 15% decrease in property markets (43.8) (48.3) (43.8) (48.3)
5. The sensitivities set out above have not considered the impact of the general market changes on the value of the Group’s insurance liabilities or retirement benefit obligations. They reflect one-off impacts at 31 December and should not be interpreted as predictions.
178 DIRECT LINE GROUP aNNUAL REPORT & ACCOUNTS 2019 3. Risk management continued 3.3.3 Credit risk continued The Group cedes insurance risk to reinsurers but, in return, assumes counterparty default risk against which a reinsurance bad debt provision is assessed. The financial security of the Group’s panel of reinsurers is therefore important and both the quality and amount of the assumed counterparty default risk are subject to an approval process whereby reinsurance is only purchased from reinsurers that hold a credit rating of at least A– at the time cover is purchased. The Group’s leading counterparty exposures are reviewed on a quarterly basis by the Head of Reinsurance and Corporate Insurance. 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.
Within the analysis of debt securities above are bank debt securities at 31 December 2019 of £ 1,292.2 million (2018: £1,125.2 million) that can be further analysed as: secured £20.9 million (2018: £63.0 million); unsecured £1,105.5 million (2018: £949.8 million); and subordinated £165.8 million (2018: £112.4 million).
Outsourcing risk This is the risk of failing to implement a robust framework for the sourcing, appointment and ongoing contract management of third-party suppliers, outsourced service providers and intragroup relationships. This includes both domestic and offshore outsourcing activities.
Commercial real estate loans 45.8 122.9 37.0 – – 205.7 Cash and cash equivalents1 948.6 – – – – 948.6
Commercial real estate loans 18.2 74.6 108.8 – – 201.6 Cash and cash equivalents1 1,154.4 – – – – 1,154.4
The following table analyses the undiscounted cash flows of insurance and financial liabilities by contractual repricing or maturity dates, whichever is earlier.
Trade and other payables, including insurance payables 474.8 5.2 0.7 0.6 – 481.3 481.3
Notes: 1. Insurance liabilities exclude unearned premium reserves as there are no liquidity risks inherent in them. 2. Results for the year ended 31 December 2018 have been restated to reflect the fully retrospective adoption of IFRS 16 ‘Leases’, see note 44.
4. Segmental analysis The Directors manage the Group primarily by product type and present the segmental analysis on that basis. The segments, which are all UK based, reflect the management structure whereby a member of the Executive Committee is accountable to the Chief Executive Officer for each of the operating segments: Motor This segment consists of personal motor insurance together with the associated legal protection cover. The Group sells motor insurance direct to customers through its own brands Direct Line, Churchill, Privilege and Darwin, and through partnership brands such as vehicle manufacturers and through PCWs.
Restructuring and one-off costs Restructuring costs are costs incurred in respect of the business activities which have a material effect on the nature and focus of the Group’s operations. One-off costs are costs that are non-recurring in nature.
The table below analyses the Group’s revenue and results by reportable segment for the year ended 31 December 2019.
Restructuring and one-off costs (11.2) Operating profit after restructuring and one-off costs 535.7 Finance costs (26.0) Profit before tax 509.7
Restructuring and one-off costs – Operating profit after restructuring and one-off costs 606.4 Finance costs (25.9) Profit before tax 580.5
The segmental analysis of assets and liabilities is prepared using a combination of asset and liability balances directly attributable to each operating segment and an apportionment of assets and liabilities managed at a Group-wide level. This does not represent the Group’s view of the capital requirements for its operating segments.
184 DIRECT LINE GROUP aNNUAL REPORT & ACCOUNTS 2019 5. Net earned premium £m
Investment income: Interest income from debt securities 108.4 124.0 Interest income from cash and cash equivalents 7.9 6.2 Interest income from infrastructure debt 7.0 6.9 Interest income from commercial real estate loans 6.9 6.2 Interest income 130.2 143.3 Rental income from investment property 16.2 15.9
Net unrealised (losses) / gains: Impairment of loans and receivables – (6.0)
Derivative (losses) / gains: Foreign exchange forward contracts1 (56.8) 103.4 (102.6) (41.3) Associated foreign exchange risk 53.4 (123.8) 72.6 41.3 Net losses on foreign exchange forward contracts (3.4) (20.4) (30.0) –
Associated interest rate risk on hedged items 10.7 41.4 (24.3) 3.2 Net (losses) / gains on interest rate derivatives (6.1) 7.8 (2.2) 1.4
Current accident year claims paid 1,232.9 (0.2) 1,232.7 1,307.8 (0.2) 1,307.6 Prior accident year claims paid 870.7 (25.1) 845.6 878.2 (30.9) 847.3
Claims handling expenses2 for the year ended 31 December 2019 of £202.9 million (20181: £192.2 million) have been included in the claims figures above.
Notes: 1. Results for the year ended 31 December 2018 have been restated to reflect the fully retrospective adoption of IFRS 16 ‘Leases’, see note 44. 2. Includes costs in respect of low value leases of £0.3 million (31 December 2018 £0.3 million).
Commission expenses 171.2 188.5 Expenses incurred under profit participations 40.3 11.9 10. Operating expenses £m restated
Staff costs2,3 267.3 269.9 IT and other operating expenses2,3,4 163.4 167.6
Insurance levies5 81.5 67.6 Depreciation and amortisation6,7 78.8 91.9 Total operating expenses (including restructuring and one-off costs) 704.9 718.2
186 DIRECT LINE GROUP aNNUAL REPORT & ACCOUNTS 2019 10. Operating expenses continued The table below analyses the number of people employed by the Group’s operations.
The aggregate remuneration of those employed by the Group’s operations comprised: £m
Note: 1. For the year ended 31 December 2018, an amount of £6.0 million has been reclassified from pension costs to wages and salaries.
Aggregate Directors’ emoluments The table below analyses the total amount of Directors’ remuneration in accordance with Schedule 5 to the Accounting Regulations.
Salaries, fees, bonuses and benefits in kind 4.4 5.9 Gains on exercise of share options 5.3 4.2
Notes: 1. Results for the year ended 31 December 2018 have been restated to reflect the fully retrospective adoption of IFRS 16 ‘Leases’, see note 44. 2. As described in note 33, on 27 April 2012 the Group issued subordinated guaranteed dated notes with a nominal value of £500 million at a fixed rate of 9.25%. On the same date, the Group also entered into a 10-year designated hedging instrument to exchange the fixed rate of interest on the notes for a floating rate of 3-month LIBOR plus a spread of 706 basis points, which increased to 707 basis points with effect from 29 July 2013. On 8 December 2017, the Group redeemed £250 million nominal value of the notes.
Current taxation: Charge for the year 101.9 114.4 Over provision in respect of prior year (1.1) (4.8)
Current taxation 100.8 109.6 Deferred taxation (note 13) (11.0) (1.1) Tax charge for the year 89.8 108.5
The following table analyses the difference between the actual income tax charge and the expected income tax charge computed by applying the standard rate of corporation tax of 19.0%1 (2018: 19.0%).
Expected tax charge 96.8 110.3 Effects of: Disallowable expenses 2.9 5.4 Non-taxable items – (2.5) Effect of change in corporation taxation rate – (0.2) Over provision in respect of prior year (6.7) (1.3) Deductible Tier 1 notes coupon payment in equity (3.2) (3.2)
Per balance sheet: Current tax liabilities 50.3 46.0 Deferred tax liabilities 9.6 4.5
(Charge) / credit to the income statement (1.1) (0.1) 7.4 4.9 (0.1) – 11.0 Credit / (charge) to other comprehensive income – 1.3 – – – (17.4) (16.1)
Notes: 1. The non-distributable reserve was a statutory claims equalisation reserve calculated in accordance with the rules of the PRA. With the introduction of Solvency II on 1 January 2016, the requirement to maintain the claims equalisation reserve ceased and the balance at 31 December 2015 was released to retained earnings. The taxation of this release is spread over six years from the change in regulation. It is provided for in deferred tax above as it represents the future unwind of previously claimed tax deductions for transfers into the reserve.
In addition, the Group has an unrecognised deferred tax asset at 31 December 2019 of £4.5 million (2018: £4.7 million) in relation to capital losses of which £4.5 million (2018: £4.7 million) relates to realised losses and £nil (2018: £nil) relates to unrealised losses.
Proposed dividends: 2019 final dividend of 14.4 pence per share 198.0 – 2018 final dividend of 14.0 pence per share – 192.5 2018 special dividend of 8.3 pence per share – 114.1
15. Earnings per share Earnings per share is calculated by dividing earnings attributable to the owners of the Company less coupon payments in respect of Tier 1 notes by the weighted average number of Ordinary Shares during the year.
Basic Basic earnings per share is calculated by dividing the earnings attributable to the owners of the Company less coupon payments in respect of Tier 1 notes by the weighted average number of Ordinary Shares during the period, excluding Ordinary Shares held as employee trust shares.
Earnings attributable to owners of the Company 419.9 472.0 Coupon payments in respect of Tier 1 notes (16.6) (16.6) Profit for the calculation of earnings per share 403.3 455.4 Weighted average number of Ordinary Shares (millions) 1,367.2 1,366.5 Effect of dilutive potential of share options and contingently issuable shares (millions) 15.3 15.8 Weighted average number of Ordinary Shares for the purpose of diluted earnings per share (millions) 1,382.5 1,382.3
190 DIRECT LINE GROUP aNNUAL REPORT & ACCOUNTS 2019 16. Net assets per share and return on equity Net asset value per share is calculated as total shareholders’ equity (which excludes Tier 1 notes) divided by the number of Ordinary Shares at the end of the period excluding shares held by employee share trusts.
Net assets 2,643.6 2,558.2 Goodwill and other intangible assets2 (702.5) (566.8) Tangible net assets 1,941.1 1,991.4
Number of Ordinary Shares (millions) 1,375.0 1,375.0 Shares held by employee share trusts (millions) (8.4) (10.4) Closing number of Ordinary Shares (millions) 1,366.6 1,364.6 Net asset value per share (pence) 193.4 187.5 Tangible net asset value per share (pence) 142.0 145.9
Notes: 1. Results for the year ended 31 December 2018 have been restated to reflect the fully retrospective adoption of IFRS 16 ‘Leases’, see note 44. 2. Goodwill has arisen on acquisition by the Group of subsidiary companies and on acquisition of new accident repair centres. Intangible assets are primarily comprised of software development costs.
Earnings attributable to owners of the Company 419.9 472.0 Coupon payments in respect of Tier 1 notes (16.6) (16.6) Profit for the calculation of return on equity 403.3 455.4
Opening shareholders’ equity 2,558.2 2,701.9 Closing shareholders’ equity 2,643.6 2,558.2 Average shareholders’ equity 2,600.9 2,630.1
Acquisitions and additions 1.5 174.2 175.7 Disposals and write-off1 – (8.8) (8.8)
Charge for the year – 38.7 38.7 Disposals and write-off1 – (8.8) (8.8) Impairment losses2 – 1.3 1.3
Notes: 1. Disposals and write-off include fully amortised intangible assets no longer utilised by the Group in its operating activities. 2. The impairment losses relate to capitalised software development costs for ongoing IT projects primarily relating to development of new systems.
Included within other intangible assets, are assets still in development of £343.5 million (2018: £269.9 million). These assets are tested for impairment during the Group’s annual impairment review at each reporting date.
Goodwill arose on the acquisition of U K Insurance Limited (£141.0 million), Churchill Insurance Company Limited (£70.0 million) and accident repair networks (£3.2 million) and is allocated to reportable segments. The addition to goodwill in the year ended 31 December 2019 of £1.5 million arose on acquisition of a new accident repair centre.
The table below analyses the carrying amount of goodwill allocated to each CGU.
There is no goodwill impairment for the year ended 31 December 2019 (2018: £nil).
192 DIRECT LINE GROUP aNNUAL REPORT & ACCOUNTS 2019 17. Goodwill and other intangible assets continued The table below details the recoverable amounts in excess of carrying value for the CGUs where goodwill and other intangible assets are held. Sensitivity information is included to enhance user understanding of the influence of key assumptions. Following the annual impairment review, no reasonable possible change in these key assumptions would have resulted in an impairment of goodwill and other intangible assets.
Rescue and other personal lines 3.0 11.4 606.9 (59.6) (80.9) (7.2)
The Group is satisfied that the aggregate fair value of property, plant and equipment is not less than its carrying value.
The valuation conforms to international valuation standards. The fair value was determined using a methodology based on recent market transactions for similar properties, which have been adjusted for the specific characteristics of each property within the portfolio. This approach to valuation is consistent with the methodology used in the year ended 31 December 2018.
Reinsurers’ share of general insurance liabilities 1,190.1 1,159.9 Impairment provision1 (40.5) (54.7) Total excluding reinsurers’ unearned premium reserves 34 1,149.6 1,105.2 Reinsurers’ unearned premium reserve 35 101.7 103.5
Note: 1. Impairment provision relates to reinsurance debtors, allowing for the risk that reinsurance assets may not be collected, or where the reinsurer’s credit rating has been significantly downgraded and may have difficulty in meeting its obligations.
Additional provision (4.2) (7.5) Release to income statement 18.4 12.7 23. Deferred acquisition costs £m restated
Derivative assets At fair value through the income statement: Foreign exchange contracts (forwards) 112.1 19.2 Designated as hedging instruments: Foreign exchange contracts (forwards)1 0.4 1.4 Interest rate swaps 9.0 27.6
27. Retirement benefit obligations Defined contribution scheme The pension charge in respect of the defined contribution scheme for the year ended 31 December 2019 was £25.5 million (20181: £22.7 million).
The trustee invests in the scheme’s assets in an appropriate mix of return seeking assets and liability matching assets to better match the assets to future pension obligations. The main risks impacting funding levels are interest rates, changes in inflation expectations and the performance of the absolute return bond fund. The split of scheme assets is shown below. The matching assets are invested in liability-driven investment strategies, primarily UK gilts and indexlinked gilt funds, but also including some leveraged gilt funds and interest rate and inflation swap funds. These are used to reducing the scheme’s inflation and duration risks against its liabilities.
The weighted average duration of the defined benefit obligations at 31 December 2019 is 20 years (2018: 20 years) using accounting assumptions.
Index-linked bonds 28.1 30.4 Government bonds 29.1 24.9 Liquidity fund1 2.5 0.8 Absolute return bond fund2 40.2 39.4
Gains from change in demographic assumptions – 0.4 0.4 Gains from change in financial assumptions – 5.8 5.8
Return on plan assets excluding amounts included in the net interest on the defined benefit asset 4.4 – 4.4 Actuarial gains of defined benefit scheme
Notes: 1. The net interest income / (cost) in the income statement has been included under other operating expenses. 2. This resulted from the outcome of a court case ruling in October 2018 involving the Lloyds Bank pension schemes, which led to a one-off increase in liabilities for UK pension schemes more widely. 3. A number of historical annuity policies held by the scheme were transferred to individual members during 2018.
HTM debt securities Corporate 104.0 101.0 Total debt securities 4,189.6 4,246.6 Total debt securities Fixed interest rate1 4,166.5 4,211.1 Floating interest rate 23.1 35.5
Cash at bank and in hand 223.1 157.4 Short-term deposits with credit institutions1 725.5 997.0 Cash and cash equivalents 948.6 1,154.4 Bank overdrafts2 (52.3) (62.0) Cash and bank overdrafts3 896.3 1,092.4
The Group has the option to cancel the coupon payment; this becomes mandatory if the Solvency condition1 is not met at the time of or following coupon payment, non-compliance with the SCR, non-compliance with the minimum capital requirement, where the Group has insufficient distributable reserves or where the relevant regulator requires the coupon payment to be cancelled.
Note: 1. All payments shall be conditional upon the Group being solvent at the time of payment and immediately after payment. The Issuer will be solvent if (i) it is able to pay its debts owed to senior creditors as they fall due and (ii) its assets exceed its liabilities.
The remaining notes, with a nominal value of £250 million, have a redemption date of 27 April 2042 with the option to repay the notes on 27 April 2022. If the notes are not repaid on that date, the rate of interest will be reset at a rate of the 6-month LIBOR plus 7.91%.
Estimate of ultimate gross claims costs: At end of accident year 3,941.7 2,698.1 2,372.7 2,184.0 2,094.5 2,118.1 2,157.7 2,217.3 2,300.1 2,110.4 One year later (117.1) (99.3) (163.3) (117.6) 20.7 (30.0) (86.7) (116.2) (62.3) Two years later (99.1) (94.6) (118.9) (153.0) (38.4) (143.5) (53.3) (103.1) Three years later (50.3) (89.3) (49.3) (21.0) (144.9) (62.4) (82.8) Four years later (105.5) (60.9) (9.9) (102.1) (50.2) (22.9) Five years later (57.7) (21.2) (79.2) (50.8) (51.6) Six years later (25.9) (60.3) (36.2) (27.4) Seven years later (50.0) (25.1) (23.8) Eight years later (17.6) (27.9) Nine years later (17.8)
Gross liability recognised in balance sheet 73.1 40.0 21.3 37.2 182.0 249.2 313.6 420.2 606.7 1,023.8 2,967.1 2009 and prior 774.3 Claims handling provision 78.2 Total 3,819.6
Net liability recognised in balance sheet 51.1 32.0 17.7 30.9 74.9 127.8 201.9 299.9 454.3 854.8 2,145.3 2009 and prior 446.5 Claims handling provision 78.2 Total 2,670.0
202 DIRECT LINE GROUP aNNUAL REPORT & ACCOUNTS 2019 34. Insurance liabilities continued Movements in gross and net insurance liabilities
Incurred but not reported 825.4 (320.3) 505.1 Claims handling provision 78.2 – 78.2
The table below analyses the outstanding PPO claims provisions on a discounted and an undiscounted basis at 31 December 2019 and 31 December 2018. These represent the total cost of PPOs rather than any costs in excess of purely Ogden-based settlements.
Net of reinsurance Approved PPO claims provisions 252.5 638.6 247.6 640.0
In the majority of cases, the inflation agreed in the settlement is the Annual Survey of Hours and Earnings SOC 6115 inflation published by the Office for National Statistics, for which the long-term rate is assumed to be 4% (2018: 4%). The Group has estimated a rate of interest used for the calculation of present values as 4% (2018: 4%), which results in a real discount rate of 0% (2018: 0%). The Group will continue to review the inflation and discount rates used to calculate these insurance reserves.
Written in the period 3,211.9 (223.4) 2,988.5 Earned in the period (3,306.7) 217.2 (3,089.5)
Written in the period 3,203.1 (215.9) 2,987.2 Earned in the period (3,202.6) 217.7 (2,984.9)
Long-Term Incentive Plan Executive Directors and certain members of senior management are eligible to participate in the LTIP with awards granted in the form of nil-cost options. Under the plan, the shares vest at the end of a three-year period dependent upon the continued employment by the Group and also the Group achieving predefined performance conditions associated with TSR and RoTE. For awards since August 2017, the Directors are subject to an additional two-year holding period following the three-year vesting period.
Awards were made in the year ended 31 December 2019 over 4.5 million Ordinary Shares with an estimated fair value of £14.4 million at the 2019 grant dates (2018: 3.9 million Ordinary Shares with an estimated fair value of £10.5 million).
Expected volatility was determined by considering the actual volatility of the Group’s share price since its initial public offering and that of a group of listed UK insurance companies.
Deferred Annual Incentive Plan To incentivise delivery of performance over a one-year operating cycle, Executive Directors and certain members of senior management are eligible for awards under the AIP, of which at least 40% is granted in the form of a nil-cost option under the DAIP with the remainder being settled in cash following year-end. During the year awards were made over 1.3 million Ordinary Shares (2018: 1.3 million Ordinary Shares) under this plan with an estimated fair value of £4.5 million (2018: £4.9 million) using the market value at the date of grant.
In the year ended 31 December 2019, matching share awards were granted over 0.5 million Ordinary Shares (2018: 0.4 million Ordinary Shares) with an estimated fair value of £1.6 million (2018: £1.5 million). The fair value of each matching share award is estimated using the market value at the date of grant.
Under the plan, the shares vest at the end of a three-year period dependent upon the continued employment with the Group together with continued ownership of the associated purchased shares up to the point of vesting.
Granted during the year1 8.0 9.2 Forfeited during the year (3.0) (2.7) Exercised during the year (4.7) (5.4)
Note: 1. In accordance with the rules of the LTIP and DAIP award plans, additional awards of 1.5 million shares were granted during the year ended 31 December 2019 (2018: 1.7 million) in respect of the equivalent dividend.
Further information on share-based payments, in respect of Executive Directors, is provided in the Directors’ remuneration report.
Of the above, £nil (2018: £nil) is due to be settled outside of 12 months.
Regulatory levies provisions include undiscounted balances held for MIB, FSCS and other insurance levies where the Group is charged in the following year.
Restructuring provisions include balances held in respect of various property dilapidations and a number of small restructuring programmes within the Group, none of which are individually significant.
Other provisions primarily include balances held in respect of staff bonuses and reward.
Trade creditors and accruals 224.2 227.7 Other taxes 101.3 100.0 Other creditors 95.3 89.1 Due to reinsurers 43.7 47.4 Due to agents, brokers and intermediaries 9.7 11.9 Deferred income 2.9 4.7 Due to insurance companies 1.0 0.5 39. Notes to the consolidated cash flow statement £m restated
Operating cash flows before movements in working capital 370.3 440.9 Movements in working capital: Net decrease in net insurance liabilities including reinsurance assets, unearned premium reserves and deferred acquisition costs (220.1) (325.0) Net decrease in insurance and other receivables 29.4 105.3 Net decrease in accrued income and other assets 4.5 7.9 Net decrease in trade and other payables, including insurance payables and provisions (1.7) (103.9)
Net accrued interest on interest rate swap – – – – – (0.2) Fair value movement in interest rate swap – – – – 3.4 (1.3)
Note: 1. The interest rate swaps relate to the Group’s 10-year designated hedging instrument which exchanges the fixed rate of interest for a floating rate of 3-month LIBOR plus a spread of 706 basis points which was credit value adjusted to 707 basis points with effect from 29 July 2013.
Other leases disclosures Sublease income in respect of property right-of-use assets was £0.3 million during the year (2018: £0.3 million). Expenses relating to short-term and variable lease payments were not included in the measurement of lease liabilities as they were not significant. Total cash outflow in respect of leases for year ended 31 December 2019 was £20.1 million (2018: £19.5 million).
– level 3 fair value measurements used for investment properties, HTM debt securities, infrastructure debt and commercial real estate loans are those derived from a valuation technique that includes inputs for the asset that are unobservable.
At 31 December 2019 Carrying value £m Level 1 £m £m Fair value £m
Assets held at fair value: Investment property (note 20) 291.7 – – 291.7 291.7
Other financial assets: HTM debt securities (note 28) 104.0 – 14.1 94.0 108.1
Liabilities held at fair value: Derivative liabilities (note 26) 30.5 – 30.5 – 30.5 Other financial liabilities: Subordinated liabilities (note 33) 259.0 – 297.8 – 297.8
Other financial assets: HTM debt securities (note 28) 101.0 – 13.9 87.4 101.3
Liabilities held at fair value: Derivative liabilities (note 26) 25.9 – 25.9 – 25.9 Other financial liabilities: Subordinated liabilities (note 33) 259.5 – 297.8 – 297.8 208 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
The movements in assets held at fair value and classified as level 3 in the fair value hierarchy are within investment property and are analysed in note 20 along with further details on the Group’s valuation approach. A summary of realised and unrealised gains or losses in relation to investment property at fair value are presented in note 6. Sensitivity analysis in respect of investment property has been provided in note 3. No other level 3 assets are measured at fair value. There were no changes in the categorisation of assets between levels 1, 2 and 3 for assets and liabilities held by the Group since 31 December 2018.
210 DIRECT LINE GROUP aNNUAL REPORT & ACCOUNTS 2019 44. First-time adoption of IFRS 16 The Group adopted IFRS 16 for the first time on 1 January 2019 as explained in note 1 to the consolidated financial statements. As a result, leased liabilities in respect of property, motor vehicles and IT equipment are now recognised on the balance sheet, along with corresponding right-of-use assets. The impact of the adoption of the new standard on the income statement has been to replace rental expenses with a depreciation charge and a finance cost in respect of the leased assets. An element of the depreciation charge is attributed to claims handling expenses, which are included in claims costs.
The following tables reconcile the restated comparative financial statements to amounts previously presented under under IAS 17: Impact on the consolidated income statement for the year ended 31 December 2018
Insurance claims recoverable from reinsurers 55.1 – 55.1 Net insurance claims (1,911.8) 0.7 (1,911.1) Commission expenses (200.4) – (200.4)
2. Net operating expense impact of replacing rental expenses with a depreciation charge on right-of-use assets. 3. Interest expense recognised on unwinding of discounted lease liabilities.
Profit for the period 473.7 (1.7) 472.0 Other comprehensive loss net of tax (114.2) – (114.2) Total comprehensive income for the period attributable to owners of the Company 359.5 (1.7) 357.8
Assets Right-of-use assets – 153.4 153.4 Deferred acquisition costs 171.0 (0.6) 170.4 Prepayments, accrued income and other assets 128.0 (3.5) 124.5 Equity Shareholders’ equity 2,573.1 (14.9) 2,558.2 Liabilities Deferred tax 7.6 (3.1) 4.5 Lease liabilities – 167.3 167.3
Impact on the consolidated cash flow statement year ended 31 December 2018
Derivative financial instruments 5 0.6 1.4 Trade and other payables 12 1.0 1.7 Deferred tax liabilities 4 0.6 0.6 Current tax liabilities 4 – 0.2 Total liabilities 371.9 357.6 Total equity and liabilities 3,649.8 3,909.9
The profit for the year net of tax was £143.3 million (2018: £449.6 million).
Registration No. 02280426 212 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2019
The attached notes on pages 214 to 219 form an integral part of these separate financial statements.
Total comprehensive income for the year – – – – 143.3 143.3 – 143.3 Dividends and appropriations paid (note 13) – – – – (420.7) (420.7) – (420.7) Credit to equity for equity-settled share-based payments – – 18.4 – – 18.4 – 18.4 Shares distributed by employee trusts – – (15.4) – – (15.4) – (15.4)
The Company’s financial statements are prepared in accordance with Financial Reporting Standard FRS 101 ‘Reduced Disclosure Framework’.
The Company has taken advantage of the following FRS 101 disclosure exemptions: – FRS 101.8 (d): the requirements of IFRS 7 ‘Financial Instruments: Disclosures’ to make disclosures about financial instruments; – FRS 101.8 (e): the disclosure requirements of IFRS13 ‘Fair Value Measurement’; – FRS 101.8 (g): the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B, 38C, 111 and 134 – 136 of IAS 1 ‘Presentation of
Financial Statements’ to produce a cash flow statement and to make an explicit and unreserved statement of compliance with IFRSs; – FRS 101.8 (h): the requirements of IAS 7 ‘Statements of Cash Flows’ to produce a cash flow statement and related notes; – FRS 101.8 (i): the requirements of paragraphs 30 and 31 of IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ to include a list of new IFRSs that have been issued but that have yet to be applied; and
– FRS 101.8 (k): the requirements of IAS 24 ‘Related Party Disclosures’ to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary which is party to a transaction is wholly owned by such a member.
1.4 Financial assets Financial assets are classified at initial recognition and subsequently measured at amortised cost or fair value through other comprehensive income. The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Company’s business model for managing them. The Company initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs.
Amortised cost Assets which are held to collect contractual cash flows, and with contractual terms which give rise to cash flows which are solely payments of principal and interest on the principal amount outstanding, are subsequently measured at amortised cost, unless designated as fair value through profit or loss. The Company’s financial assets at amortised cost include loans to subsidiary undertakings and cash and cash equivalents. Financial assets at amortised cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognised in the income statement when the asset is derecognised, modified or impaired.
At each balance sheet date, the Company assesses on a forward-looking basis, whether there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as held at amortised cost or fair value through other comprehensive income, is expected. This assessment depends on whether there has been a deterioration in the instrument’s credit quality since initial recognition. The Company measures the expected loss as the difference between the carrying amount of the asset or group of assets including the allowance for expected losses, and the present value of estimated future cash flows from the asset or group of assets, discounted at the effective interest rate of the instrument. The expected loss allowance is based on assumptions about risk of default and expected loss rates.
The Company uses judgement in making these assumptions and selecting the inputs to the impairment calculation based on the credit quality and history of the financial asset or group of financial assets, as well as existing market conditions and forward-looking expectations.
Impairment losses, including the expected credit allowance, are recognised in the income statement and the carrying amount of the financial asset or group of financial assets is reduced by establishing an allowance for the impairment losses. If in a subsequent period the amount of the expected impairment allowance reduces, and this can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. A financial asset is written off when there is no reasonable expectation of recovery.
216 DIRECT LINE GROUP aNNUAL REPORT & ACCOUNTS 2019 2. Investment in subsidiary undertakings £m
Directly held by the Company: Direct Line Group Limited1 02811437 United Kingdom Intermediate holding company DL Insurance Services Limited1 03001989 United Kingdom Management services Finsure Premium Finance Limited1 01670887 United Kingdom Non-trading company Inter Group Insurance Services Limited1 02762848 United Kingdom Dormant7 UK Assistance Accident Repair Centres Limited1 02568507 United Kingdom Motor vehicle repair services UK Assistance Limited1 02857232 United Kingdom Dormant7
Churchill Insurance Company Limited1 02258947 United Kingdom General insurance Direct Line Insurance Limited1 01810801 United Kingdom Dormant7
DLG Legal Services Limited6 08302561 United Kingdom Legal services DLG Pension Trustee Limited1 08911044 United Kingdom Dormant7
The National Insurance and Guarantee Corporation Limited1 00042133 United Kingdom Dormant7
Loans to subsidiary undertakings1 298.6 531.9 Trade receivables due from subsidiary undertakings – 15.1 Other debtors 0.5 1.3
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. On 28 February 2019, the Board of U K Insurance Limited passed a resolution to repay £250 million of subordinated loan and the repayment date was 7 March 2019. All loans are neither past due nor impaired.
Per balance sheet: Current tax assets 3.5 – Current tax liabilities – (0.2) Deferred tax liabilities (0.6) (0.6)
Derivative assets Designated as hedging instruments: Derivative liabilities Designated as hedging instruments: Notes: 1. The derivative assets and liabilities are both classified as level 2 within the Group’s fair value hierarchy set out in note 42 of the consolidated financial statements. 2. The foreign exchange cash flow hedges have been entered into on behalf of the Group’s subsidiary companies.
218 DIRECT LINE GROUP aNNUAL REPORT & ACCOUNTS 2019 6. Financial investments £m
Cash at bank and in hand (0.2) 0.1 Short-term deposits with credit institutions1 124.4 236.0
9. Tier 1 notes Full details of the Tier 1 notes of the Company are set out in note 32 to the consolidated financial statements.
The subordinated guaranteed dated notes with a nominal value of £500 million were issued on 27 April 2012 at a fixed rate of 9.25% and have a redemption date of 27 April 2042. The Company has the option to repay the notes on specific dates from 27 April 2022. If the notes are not repaid on 27 April 2022, the rate of interest will be reset at a rate of sixmonth LIBOR plus 7.91%.
Note: 1. Included in the above is a loan of £84.4 million (2018: £73.0 million) from UK Assistance Accident Repair Centres Limited. All loans from fellow Group subsidiaries are repayable by 31 December 2024 and are subject to interest on outstanding balances based on the average three-month LIBOR rate.
Shareholders can arrange to receive their cash dividend payments in a bank or building society account by completing a dividend mandate form. This is available from the Company’s registrar, Computershare Investor Services Plc (“Registrar”), in the UK. You can find the Registrar’s contact details on page 230. Alternatively, shareholders can access their shareholdings online and download a dividend mandate form from the Investor Centre. You can find details of this below.
Shareholders can access their current shareholding details online at www.investorcentre.co.uk/directline. Investor Centre is a free-to-use, secure, self-service website that enables shareholders to manage their holdings online. The website allows 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 – register to receive electronic shareholder communications.
Shareholder warning Fraudsters use persuasive and high-pressure tactics to lure investors into scams. They may offer to sell shares that prove to be worthless or non-existent. Or they can offer to buy shares at an inflated price in return for you paying upfront. They promise high profits. However, if you buy or sell shares in this way, you will probably lose your money.
How to avoid share fraud – Remember that FCA-authorised firms are unlikely to contact you unexpectedly offering to buy or sell shares. – Do not converse with them. Note the name of the person and firm contacting you, then end the call. – To see if the person and firm contacting you are authorised by the FCA, check the Financial Services Register at www.fca.org.uk/register.
If you have already paid money to share fraudsters, call Action Fraud on 0300 123 2040.
Shareholders, who register their email address with our Registrar, or at the Investor Centre, can receive emails with news on events, such as the AGM. They can also receive shareholder communications electronically, like the Annual Report & Accounts and Notice of Meeting.
Financial calendar 2020 Date Event 03 March Preliminary Results 2019 announcement 09 April ‘Ex-dividend’ date for 2019 final dividend 14 April Record date for 2019 final dividend 29 April Final date for election under the
Annual General Meeting The 2020 AGM will be held on 14 May 2020 at 11.00 am. All shareholders will receive a separate notice convening the AGM. This will explain the resolutions to be put to the meeting and include details regarding the venue and how to get there.
This represents all assets management or administered by or on behalf of the Group, including those assets managed by third parties.
The total written premium at inception divided by the number of policies.
Capital The funds invested in the Group, including funds invested by shareholders and Tier 1 notes. In addition, subordinated liability in the Group’s balance sheet is classified as Tier 2 capital for Solvency II purposes.
The sum of the loss, commission and expense ratios. The ratio measures the amount of claims costs, commission and operating expenses, compared to net earned premium generated. A ratio of less than 100% indicates profitable underwriting. Normalised combined operating ratio adjusts loss and commission ratios for weather and changes to the Ogden discount rate. (See page 225 alternative performance measures.)
This is calculated using the combined operating ratio less movement in prior year reserves. (See page 225 alternative performance measures.)
This is calculated using the normalised operating profit adjusted for prior-year reserve movements. (See page 225 alternative performance measures.)
The forum that represents all employees, including when there is a legal requirement to consult employees.
Expense ratio The ratio of operating expenses divided by net earned premium. (See page 225 alternative performance measures.)
Finance costs The cost of servicing the Group’s external borrowings and including the interest on ROU assets.
The independent body responsible for regulating the UK's financial services industry.
Financial leverage ratio Tier 1 notes and financial debt (subordinated guaranteed dated notes) as a percentage of total capital employed.
The rate of interest that a lessee would have to pay to borrow over a similar term and security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.
A not-for-profit public interest organisation that is overseen by a monitoring board of public authorities. It develops IFRS standards that aim to make worldwide markets transparent, accountable and efficient.
Investment return The investment return earned from the investment portfolio, including unrealised and realised gains and losses, impairments and fair value adjustments.
Loss ratio Net insurance claims divided by net earned premium. (See page 225 alternative performance measures.)
Malus An arrangement that permits unvested remuneration awards to be forfeited, when the Company considers it appropriate.
A forward-looking assessment of the Group’s risks and associated capital requirements, over the business planning period.
These are claims payments as awarded under the Courts Act 2003. PPOs are used to settle some large personal injury claims. They generally provide a lump-sum award plus inflationlinked annual payments to claimants who require long-term care.
Reserves Funds that have been set aside to meet outstanding insurance claims and IBNR. Restructuring costs These are costs incurred in respect of the business activities where the Group has a constructive obligation to restructure its activities. Return on equity This is calculated by dividing the profit attributable to the owners of the Company after deduction of the Tier 1 coupon payments by average shareholders’ equity for the period. Return on tangible equity (“RoTE”)
A lessee's right to use an asset over the life of a lease, calculated as the initial amount of the lease liability, plus any lease payments made to the lessor before the lease commencement date, plus any initial direct costs incurred, minus any lease incentives received.
Solvency II The capital adequacy regime for the European insurance industry, which became effective on 1 January 2016. It establishes capital requirements and risk management standards. It comprises three pillars: Pillar I, which sets out capital requirements for an insurer; Pillar II, which focuses on systems of governance; and Pillar III, which deals with disclosure requirements.
Solvency capital ratio The ratio of Solvency II own funds to the solvency capital requirement. Tangible equity This shows the equity excluding Tier 1 notes and intangible assets for comparability with companies who have not acquired businesses or capitalised intangible assets. (See page 226 alternative performance measures).
This shows the equity excluding Tier 1 notes and intangible assets per share for comparability with companies who have not acquired businesses or capitalised intangible assets. (See page 226 alternative performance measures).
The profit or loss from operational activities, excluding investment return and other operating income. It is calculated as net earned premium less net insurance claims and total expenses, excluding restructuring and one-off costs.
Combined operating ratio is defined in the glossary on page 222 and reconciled in note 4 on page 182.
This is a measure of underwriting profitability and excludes non-insurance income, whereby a ratio of less than 100% represents an underwriting profit and a ratio of more than 100% represents an underwriting loss.
Current-year combined operating ratio is defined in the glossary on page 222 and is reconciled on page 32.
Current-year normalised operating profit ratio is defined in the glossary on page 222 and reconciled on page 227.
Expresses a relationship between current-year normalised operating profit and normalised operating profit.
Expense ratio is defined in the glossary on page 222 and is reconciled in note 4 on page 182.
Investment return yield is defined in the glossary on page 223 and is reconciled on page 226.
Net investment income yield is defined in the glossary on page 223 and is reconciled on page 226.
Combined operating ratio is defined in the glossary on page 222 and reconciled on page 227.
Operating expenses are defined in the glossary on page 223 and reconciled in note 4 on page 182.
This shows the expenses relating to business activities excluding restructuring and one-off costs.
Closest equivalent IFRS measure Definition and / or reconciliation Rationale for APM
Operating profit is defined in the glossary on page 223 and reconciled in note 4 on page 182.
This shows the underlying performance (before tax and excludes finance costs and restructuring and one-off costs) of the business activities.
This shows performance against a measure of equity that is more easily comparable to that of other companies.
Equity Tangible equity is defined in the glossary on page 224 and is reconciled in note 16 on page 190.
Tangible net assets per share is defined in the glossary on page 224 and reconciled in note 16 on page 190.
Underwriting profit is defined in the glossary on page 224 and is reconciled in note 4 on page 182.
Hedging to a sterling floating rate basis3 6 (22.1) (30.8) Net investment income 124.3 128.4 Net realised and unrealised gains excluding hedging 10.3 26.2
Operating profit 546.9 606.4 Effect of: Ogden discount rate 16.9 (54.8) Normalised weather – claims (59.0) 3.3 Normalised weather – profit share 3.7 (1.2)
Prior-year normalised operating profit 311.4 353.0 Current-year normalised operating profit 197.1 200.7 Current-year normalised operating profit ratio 39% 36%
Notes: 1. See glossary on page 223 for definition. 2. Results for the year ended 31 December 2018 have been restated to reflect the fully retrospective adoption of IFRS 16 ‘Leases’, see note
Operating expenses (including restructuring and one-off costs) 10 704.9 718.2 Less restructuring and one-off costs 10 (11.2) – Operating expenses 693.7 718.2
Profit before tax 509.7 580.5 Add back: restructuring and one-off costs 11.2 – Coupon payments in respect of Tier 1 notes (16.6) (16.6) Adjusted profit before tax 504.3 563.9 Tax charge – (108.5) Tax charge (using the 2019 UK standard tax rate of 19%) (95.8) – Adjusted profit after tax 408.5 455.4 Opening shareholders’ equity 2,558.2 2,701.9 Opening goodwill and other intangible assets (566.8) (471.1) Opening shareholders’ tangible equity 1,991.4 2,230.8 Closing shareholders’ equity 2,643.6 2,558.2 Closing goodwill and other intangible assets (702.5) (566.8) Closing shareholders’ tangible equity 1,941.1 1,991.4 Average shareholders’ tangible equity3 1,966.3 2,111.1 Return on tangible equity 20.8% 21.6%
Forward-looking statements are not guaranteeing 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: – United Kingdom (“UK”) domestic and global economic business conditions; – the outcome of discussions between the UK and the European Union (“EU”) regarding the terms, following Brexit, of any future trading and other relationships between the UK and the EU; – the terms of future trading and other relationships between the UK and other countries following Brexit; – 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 or rates); – the impact of competition, currency changes, inflation and deflation; – the timing impact and other uncertainties of future acquisitions, disposals, partnership arrangements, joint ventures or combinations within relevant industries; and
– the impact of tax and other legislation and other regulation in the jurisdictions in which the Group and its affiliates operate.
Registrars Computershare Investor Services Plc The Pavilions Bridgwater Road Bristol BS99 6ZZ
D ire ct L in e In su ra n ce