To make insurance much easier and better value for our customers
Governance 46 Chairman’s introduction 48 Board of Directors 50 Executive Committee 51 Corporate governance report 58 Committee reports 70 Directors’ remuneration report 96 Directors’ report
Financial statements 100 Contents 101 Independent Auditor’s report financial statements 111 Notes to the consolidated financial statements 164 Parent Company financial statements 167 Notes to the Parent Company financial statements
Delivering for our customers and shareholders We achieved good results in 2015 while making progress on implementing our strategy. We remained focused on operating efficiency and disciplined underwriting which helped us to improve operating profit from ongoing operations.
• Return on tangible equity1 of 18.5% for 2015 (2014: 16.8%). Profit before tax for continuing operations1 increased to £507.5 million (2014: £456.8 million)
• 4.5% increase in final dividend per share to 9.2 pence per share and additional special dividend of 8.8 pence per share. Total dividends for 2015, including special interim dividend of 27.5 pence per share following sale of International division, of 50.1 pence per share (2014: 27.2 pence per share)
• Investment in brand differentiation through further enhancements, a succession of initiatives to Direct Line proposition and improved trading capability across Churchill and Privilege, particularly on price comparison websites
Notes: 1. See glossary on pages 174 and 175 2. The Board is proposing a final dividend of 9.2 pence per share, making a total regular dividend for 2015 of 13.8 pence per share.
Protecting our customers We have multiple brands, products and distribution channels. Each allows our customers to choose the right cover to protect their cars, homes, holidays, businesses and pets.
Motor We are Britain’s leading personal motor insurer measured by in-force policies1, mainly represented through our highly recognised brands Direct Line, Churchill and Privilege, and also through our partners. We insure around one in seven cars on the road, representing 3.7 million in-force policies.
Home We are Britain’s leading personal home insurer measured by in-force policies1. We reach our customers by selling home insurance products through our brands, Direct Line, Churchill and Privilege, and our partners – Sainsbury’s Bank, RBS, NatWest and Prudential.
Notes: 1. Includes Direct Line, Churchill, Privilege and partner brands: RBS, Nationwide (home only), NatWest, Prudential and Sainsbury’s © GfK Financial
Churchill is a household name. We market our products by phone and internet, including PCWs. We target customers who have a high affinity to the brand, and who need an extra helping hand.
Notes: 1. Deloitte report – UK Insurance Disrupted 2. Department for Transport – Statistical Release published on 4 February 2016 for year ending September 2015
The digital economy creates new data sources. These are useful for marketing and underwriting, but come with new risks. Cyber risk affects insurers like any other online business. However, it also gives the industry new protection product opportunities.
Every customer is different Some see buying motor insurance as a way of staying on the right side of the law. Others see it as vital for protecting their livelihoods. People tend to view home and pet insurance as a more personal purchase, and the flooding in December has shown that home insurance can be invaluable. Whatever customers’ needs, it is essential we offer them the best products and services, at the right price.
Disruptive technologies emerging now and in the future This is an exciting time for the motor industry, creating opportunities and challenges for supporting companies. Telematics and diagnostics products are available through third-party and manufacturer-produced devices. The cost of these devices continues to drop as take-up increases. Advanced safety technologies, such as autonomous emergency braking, are here today and will advance in the next few years. Connected car technologies are still developing and are likely to become more common in future models. In time, the world may see fully autonomous cars. The insurance industry will need to be ready.
41% of new vehicles on sale have the available option of an autonomous emergency braking system3
The pace of change remains rapid The regulatory environment has changed significantly over the last few years. We expect this to continue. Solvency II’s arrival, changes to add-on selling practices and Flood Re’s expected introduction in 2016 are major developments for the industry. The Financial Conduct Authority (“FCA”) has indicated that consumer data will be an area of interest in the future. It remains important for us to continue communicating with regulatory bodies and to be ready to adapt in our changing world.
Creating value for our customers Our multi-brand, multi-product and multi-distribution channel business offers different propositions to distinct customers. We believe this approach should enable us to generate value for customers and sustainable returns for our shareholders.
Customers are at the centre of our business model. So our mission is clear: we want to make insurance much easier and better value for them. We aspire to give them products that best suit their needs, and exceptional service throughout their relationship with us. We also strive to adapt to their changing needs. From the moment customers choose our products, to the time they claim or need to resolve an event, we treat every step of the customer journey as an opportunity to provide excellent service and outcomes.
We hold assets that exceed our expected liabilities as capital. This is intended to absorb unexpected losses that might occur and is important to meet our regulatory capital requirements.
Customers can buy products online – including through PCWs – by phone, and indirectly through our partners. In our Commercial business, they also buy our products through brokers.
Strategy update Our mission is to make insurance much easier and better value for our customers. During 2015, our business progressed on delivering its strategic objectives and building future capability in line with this mission. We recognise that the changes we have planned are ambitious. They require substantial investment to deliver a step change in our digital capability together with an enhancement of core systems, which combined will be for our customers’ benefit.
Dividends Under our progressive dividend policy, see page 96, we aim to increase the dividend annually in real terms. This aim reflects the potential of the Company’s cash-flow generation and long-term earnings. We are recommending a final dividend of 9.2 pence per share. If approved, the total regular dividend of 13.8 pence per share would represent 4.5% growth on 2014’s regular dividend (13.2 pence per share), which is consistent with this policy.
Earlier in 2015, the Group completed the sale of its International division to Mapfre, S.A. and shareholders approved an 11-for-12 consolidation of the Company’s shares.
This consolidation was to maintain comparability of share price and earnings per share before and after the payment of a special interim dividend. A special interim dividend of 27.5 pence per share, being substantially all of the net proceeds from the sale, was then paid on 24 July 2015. In addition, the Board has resolved to pay a further special interim dividend of 8.8 pence per share. This takes the total special interim dividends for 2015 to 36.3 pence per share.
Accountability Your Board provides shareholders with an assessment of the Group’s position and prospects. We monitor and review the effectiveness of the Group’s risk management and internal control systems. See pages 26 and 56.
Engagement Your Board maintains strong relationships and regular interaction with our shareholders. Their continued support for our strategic aims is important. See page 57.
Board and Committee membership changes Glyn Jones, our former Senior Independent Director (“SID”), stood down as a Director after the Company’s 2015 Annual General Meeting (“AGM”), having decided to reduce the number of his non-executive directorships after becoming Chairman of a second listed company. I wish Glyn well and thank him for his dedicated commitment and excellent contribution to the Board.
On 18 January 2016, I was delighted to welcome Dr Richard Ward to the Board as our new SID. Your Board will benefit from his deep knowledge of the insurance industry and his experience as Chairman and NED of other firms in the sector. Further details about Richard are to be found on page 49.
As we announced on 16 February, Priscilla Vacassin has decided to step down from the Board with effect from 1 March 2016. Priscilla has made a crucial contribution to the Board, exercising effective stewardship of the Group’s executive remuneration arrangements, and I wish her every success for the future. Clare Thompson has agreed to act as interim Chair of the Remuneration Committee from 1 March. At the same time she will step down as Chair and member of the CSR Committee and the Investment Committee and as a member of the Board Risk Committee. Andrew Palmer will be appointed as Chair of the Investment Committee and Sebastian James as Chair of the CSR Committee with effect from the same date.
Overview of financial performance As we celebrate our third year as a listed company, I am pleased with our performance in 2015. A focus on operating efficiency and disciplined underwriting in competitive markets enabled us to deliver an improved performance. Operating profit from ongoing operations increased 2.9% to £520.7 million, despite higher than normal claims following the floods that hit northern parts of the UK towards the end of 2015. This result included prior-year reserve releases of £378.9 million (2014: £397.6 million) which were higher than expected.
Being a great retailer Throughout 2015 we have focused on differentiating our brands and improving our propositions. Customers have responded well to the Direct Line brand’s new positioning and propositions and helped strengthen our retention rates, which are over 80%.
We have also simplified and improved our claims services. For example, customers can now upload images of damage in their homes for assessors; track vehicle repairs on an online portal; and use Direct Line’s seven-day car repair service.
Within Commercial, we have been recognised for our leading capabilities in eTrade and direct. To meet our customers’ evolving needs, we have launched Professional Indemnity cover for Direct Line for Business and a cyber insurance product through NIG.
We believe we are making great progress, but know we have more to do to stay at the front of our markets.
We have also invested in training and developing our customer-facing employees, helping them interact with customers in a new and refreshing way. This is delivering good results and resonating well with our customers. Our satisfaction rating tool, MyCustomer, has shown an improvement of 23% and our Net Promoter Score for the Direct Line brand has increased by 7.5 points, a good reflection of this success.
Our people are working hard and providing benefits for our business and customers. We have continued recognising their outstanding achievements through our Chief Executive Awards.
We also introduced a new initiative which rewards employees for proposing ideas that reduce Group costs or make insurance easier for customers. This has generated excitement throughout the organisation and, to date, we have received over 4,000 entries.
Strategic priorities for 2016 Following the rearticulation of our strategy in 2015, many of our 2016 priorities build on initiatives begun in 2015. Improving customer experience remains key, with a focus on cross channel distribution, while reducing complaints and improving the customer renewal process. We will continue to strive to improve operating efficiency.
Outlook Our markets remained highly competitive during 2015 and in early 2016. While premium rates in the motor market have increased, this should be viewed in the context of rising claims costs and higher levels of insurance premium tax (”IPT”). The home market experienced premium deflation in 2015 overall, although underlying market pricing was broadly stable towards the end of 2015 as IPT increases were reflected. Overall, the increase in IPT has seen shopping in the market increase modestly. The rescue and commercial markets also experienced increased competitor activity during the year.
Against this backdrop, we continue to adopt a disciplined approach to managing the trade-off between margin and volumes, whilst continuing to seek opportunities to improve efficiency. We aim to reduce total costs in absolute terms in 2016 compared to 2015. The rate of reduction is expected to be lower in 2016 than in 2015 due in part to the cost of the Flood Re levy. Meanwhile, we are continuing to invest in building future capability.
For 2016, we expect to achieve a COR in the range of 93% to 95% for ongoing operations, assuming a normal annual level of claims from major weather events.
My thanks go to our people for their hard work and support throughout the year. I am excited by their passion and dedication, and by how everyone works tirelessly to make insurance much easier and better value for our customers.
We aim to make it easy for our customers to access our products and services at every stage. This includes increasing online servicing for customer policies and claims, and evolving telephone sales and servicing by investing in next-generation customer systems. We focus on training our contact centre employees to understand customer needs better.
Our investment in digital capability continued with the roll out of smartphone and tablet optimised websites, including new quote and buy journeys, for Home and Green Flag insurance products. These have built on last year’s successful implementation of a new quote and buy journey for Motor. Quote and buy journeys have continued to be optimised to take account of customer preferences depending on brand and distribution channel.
We aim to improve efficiency and effectiveness across the organisation. We intend doing this by delivering transformational initiatives, and making sure we provide quality and value for money every day. This goes beyond reducing costs. We always seek to design and deliver new capabilities in a cost-efficient way.
How we performed in 2015 We continued to improve efficiency in 2015 with a reduction in total costs of 4.6% while continuing to invest in capability. Reductions in underlying costs have been achieved in a number of areas including marketing, technology and property.
New pricing projects have been implemented which aim to broaden our competitive quote footprint for Motor and Home products. We continue to invest in and to evolve the sophistication of our telematics pricing.
Partnerships remain strategically important and we will look to build on our improving manufacturing capability to deliver what we aim to be market leading propositions to current partners, as well as to build relationships with future partners.
Compelling brands, propositions and customer experience to meet diverse and long-term customer needs
Our objectives for 2016 New car technology centred on improving safety is emerging at a fast pace and the Group aims to take a lead by becoming the insurer of choice for the owners of these cars. The Group is the insurance partner to the Move UK research consortium which is looking at analysing the development and deployment of automated driving systems, as well as investigating the motor liability legal framework in the future.
In Commercial, the Group is looking at ways to leverage its leading capabilities in eTrade and direct Commercial insurance as these markets adapt to evolving distribution trends.
Maximise existing growth opportunities while creating and driving future areas of value
How we performed in 2015 We have now essentially finished the migration of our IT systems from RBS. This has been a complex and challenging programme for the business.
Our investment in digital capability continued with the build, roll out and support of smartphone and tablet optimised websites for our Home and Green Flag insurance products. These have built on last year’s successful implementation and support of a new website for Motor.
We are continuing to invest in our employees’ skills. This will help us to improve effectiveness and customer experiences, and get the best from our new systems. We aim to create excellent Group-wide employee engagement by focusing on leadership and people management at all levels. This has helped improve our employee engagement metrics year on year.
How we performed in 2015 Our people engagement scores improved during 2015 and we made progress in preparing our staff for new systems and processes. We launched a number of people engagement events over the course of the year, including: • ‘Launch pad’ event, communicating our new strategy framework to our people managers
How we performed in 2015 Our hard work throughout 2015 meant we were well positioned for Solvency II’s introduction at the start of 2016. We submitted an application to the PRA for the Group’s principal underwriter, U K Insurance Limited (“UKI”), to use its internal economic capital model, validated by external experts, as part of a Group-wide partial internal model.
Our objectives for 2016 We aim to embed further and build on our risk management decision-making processes developed in 2015, and to continue to identify and mitigate risks. Additionally, and subject to PRA approval, we plan to operate from mid-2016 using our internal model for calculating solvency capital requirements.
In addition, we introduced or continued the following Direct Line propositions: the proposition to repair vehicles within seven days; replace stolen or damaged essential household items with cash or a brand new replacement within eight hours; and remove amendment fees.
Aside from introducing new propositions, we were also there for our customers at their time of need during the floods that hit homes in the northern parts of England and in parts of Scotland towards the end of 2015. The robust plans that we have in place for handling these types of events meant we were able to respond quickly to the needs of our customers.
Delivering efficiency in our claims methods and processes benefits us and our customers. This year, we introduced new propositions that helped us drive down claims inflation and improve efficiency.
We’re focused on delivering innovation to meet customer needs Direct Line for Business targets the UK’s growing number of small businesses. It appeals to customers who want to buy robust and clear cover quickly and easily.
Customers also receive support from a dedicated claims handler, who manages claims efficiently from start to finish.
Defining and measuring our performance These key performance indicators assess our performance against our strategy.
A measure of financial year underwriting profitability. It is the sum of the claims, commissions and expenses divided by net earned premium. This excludes instalment and other operating income, and investment return. A COR of less than 100% indicates profitable underwriting.
We aim to achieve at least a 15% RoTE. We achieved this in 2015.
We have a progressive dividend policy and aim to grow the dividend in real terms each year. Additionally, we look to return surplus capital to shareholders when appropriate.
We base part of the AIP awards on ongoing operating profit. COR is closely linked to this.
A measure to show the level of capital held compared to the level that is required, taking into account the risks we face.
Our aim for 2015 was to reduce the level of overall costs by improving efficiency, which we achieved. We will continue to strive to improve operating efficiency and aim to reduce total costs in absolute terms in 2016 compared to 2015. The rate of reduction will be lower than previous years, due in part to the cost of the Flood Re levy.
See Finance review page 40. See Finance review pages 44 and 45. Customer claims experience programmes and improved propositions have contributed to an increase in our overall brand score.
While the proportion of complaints received improved on 2014, we recognise that we have more to do to reduce these.
Risk management within risk appetite, which includes an assessment of capital strength, acts as a gateway for the AIP awards.
Notes: 1. Pro forma based on Solvency II standard formula estimated preliminary regulatory returns for 31 December 2015 and adjusted for final and second special interim dividends.
Managing risk in line with our strategy Management, and ultimately the Board, are responsible for developing our strategy. Our strategic planning process aims to ensure we have developed clear objectives and targets, and identified the actions needed to deliver them, including the management of risks. These clear objectives are consistent with our overall long-term ambition of sustainable growth and at least a 15% RoTE within our risk appetite. To find out more about our strategy, see page 14.
Group Audit are the Third Line of Defence and provides an independent view of the effectiveness of risk management and controls – see diagram below.
These KRIs are qualitative and quantitative, and both forward and backward looking. We review our risk appetite statements and KRIs annually, using outputs from the internal economic capital model.
Specialist functions with Second Line responsibilities for certain policies and minimum standards: Finance
Our Enterprise Risk Management Strategy and Framework This sets out, at a high level, our approach to setting risk strategy and the Enterprise Risk Management Framework (“ERMF”) for managing risks. It documents the high-level principles and practices to achieve appropriate risk management standards, and demonstrates the inter-relationships between components of the ERMF – see diagram.
Our risk culture Our risk culture underpins our business and decision-making, and helps us embed a robust approach to risk management. Our risk culture is demonstrated in the understanding and business-wide use of the risk management systems and processes, and through risk-aware decision making. The Board is committed to promoting a culture of high standards of corporate governance, business integrity, ethics and professionalism in all of our activities.
The Group has no appetite for material risks resulting in reputational damage, regulatory or legal censure, fines or prosecutions and other types of non-budgeted operational risk losses associated with Group conduct and activities. The Group will maintain a robust and proportionate internal control environment.
• We invest in enhanced external data to analyse and mitigate exposures
• We manage and control the risks in our investment portfolio through: − investment strategy approved by the Board
− risk-reduction techniques, such as hedging foreign currency exposures with forward contracts and hedging exposure to US interest rates with swap contracts
• We are working to improve the performance of our IT systems across the board, while focusing on the development of future systems capability. With significant change underway, we are monitoring risks associated with our IT systems’ stability, cyber security and the internal control environment
Principal risks and uncertainties We carry out a robust assessment of the principal risks facing us. Principal risks are defined as having a residual risk impact of £40 million or more on profit before tax or net asset value on a one-in-200 years basis, taking into account customer, financial and reputational impacts. We believe that the risk profile remains broadly unchanged over the last year.
• Robust customer conduct risk management is intended to minimise our exposures
• An annual strategy process is run which considers our performance, competitor positioning and strategic opportunities
New methods of gathering and using customer data Using ‘big data’ as part of our strategy could create new data management risks and issues; for example, complying with regulations relating to third-party access to telematics data.
Connecting with society We seek to serve our customers in a way which recognises our wider commitment to society. We do this both through providing insurance and other services and through an understanding of the different ways in which our business connects with society.
You can find more details of our approach, including our CSR Charter, policy framework, performance against last year’s targets, and targets for 2016, on the Group’s website at www.directlinegroup.com.
We recognise that our products, services and operations affect our many stakeholders, and we seek to make our society safer for everyone. We contribute to many aspects of the road safety agenda, and aim to inspire a generation of safer young drivers.
During 2015, we worked with various partners to address road safety.
Brake We have worked with Brake, the road safety charity, for 13 years. In this time, we have produced survey reports on driver behaviour, attitudes and understanding, and released the results to the media to raise awareness of safe driving. This year’s reports have covered ‘driving offences and deterrents’, ‘crash protection and vehicle selection’, ‘winter driving’ and ‘use of head restraints’. Brake uses this research for its wider campaigning, education, community and professional engagement activities. We held an event in Westminster with parliamentarians to showcase this research. We also sponsored Brake’s Parliamentarian of the Year Awards, which recognise Members of Parliament who have campaigned on road safety issues.
In the UK, 490,000 drivers pass their test each year. It is still a significant rite of passage for many young people. However, it is also often a time when young drivers are at their most vulnerable.
Our data shows that accident rates among young drivers spike during their first year of driving, with one in four young drivers crashing in this time. Young drivers are also hugely over-represented in the most serious accidents. The impact on them, their passengers, their families and other road users can last a lifetime and has a huge effect on society generally.
There are various reasons why young drivers crash. These include over-confidence, a natural human urge to test personal boundaries and take risks, and hidden hazards. Using road-safety data and our knowledge of driver behaviour collected through telematics, we’ve identified contextual speed as a significant cause of fatal crashes involving young drivers.
The biggest barrier to addressing this issue is that young drivers may feel immune to the risks. Our goal of inspiring a generation of safe careful drivers sits at odds with many of their motivations. They are pro-risk (although less than previous generations), competitive and relish the freedom of being a new driver. They may believe that most people drive faster than the speed limit and that good driving means travelling as fast as you can. To change behaviour, we have to change this perspective.
• A typical new driver becomes more dangerous in their first 1,000 miles of driving, even though they feel invincible
As Britain’s biggest motor insurer, we believe that every driver in Great Britain should have a safe first 1,000 miles. We are planning to: • Proactively use our brands, knowledge and expertise to find new ways to fix this problem
Energy use is the main cause of our emissions. In absolute terms, we have reduced our emissions following the exit of several office buildings. Furthermore, our Property Management team has developed an energy-saving plan. This seeks to optimise our buildings’ heating, ventilation and air-conditioning systems, and invest in energy-efficient devices, such as lighting. Throughout 2015, 100% of the Group’s UK electricity was purchased on a green tariff.
UK Accident Repair Centres. By the end of 2015, we were diverting 100% of waste away from landfill including recycling.
Suppliers Our Ethical Code for Suppliers sets out our approach to managing CSR-related matters across our supply chain. For example, we have developed our partnership with ‘Anyjunk’. Following a claim, Anyjunk provide a waste-collection service that seeks to recycle household waste and is currently recycling almost 90% of waste that it collects from our customers.
Engagement In 2015, we continued developing and championing our various volunteer groups, such as Employee Representative Bodies, Community and Social Committees (“CASCs”), Local Coordination Teams, Health and Safety Representatives, and the Diversity Network Alliance. This has helped increase our employees’ voice and enabled the Group to serve customers better.
Employee feedback remains an important gauge of how our many varied initiatives affect change. In 2014, we began using a new and more challenging methodology that is aligned to our ambition to be a top employer.
In 2015, our people managers created over 460 individual action plans to improve their teams’ experience. This has played a major part in significantly improving our engagement score from 45% in 2014 to 60%. The percentage of our employees who are proud to work for the Group also increased from 68% in 2014 to 80%, while 70% tell others that the Group is a great place to work (up from 55% in 2014).
Diversity, inclusion and human rights We continue to work towards an environment based on meritocracy and inclusion, where every employee can achieve their full potential, whatever their characteristics.
You can find the ratio of female-to-male employees at 31 December 2015 in the charts below.
• 50 employees from Manchester running 10 kilometres around the city centre to raise £5,000 for various local causes
Motor Highlights • Retained position as Britain’s leading personal motor insurer ranked by in-force policies
One of Motor’s partners, Sainsbury’s, has reviewed its insurance arrangements and Motor will no longer write new business from February 2017. Arrangements for the Sainsbury’s renewal book will follow contractual terms. In 2015, Sainsbury’s accounted for 3.5% of Motor’s gross written premium.
Regulatory During November, the Government announced plans designed to reduce the cost of soft tissue damage whiplash claims. These plans, which will be subject to consultation, include increasing the value of claims settled through the small claims track and removing general damages for certain claims. The Group has been calling for reform in this area for some time and is working with the Government and industry bodies on how these reforms should be implemented. The reforms are not expected to be in place before 2017.
Note: 1. Risk mix reflects the expected level of claims from the portfolio. It measures the estimated movement based on risk models used in that period and is revised when risk models are updated.
Home Highlights • Britain’s leading home insurer ranked by in-force policies
Performance In-force policies for Home own brands increased by 1.5% to 1.7 million over 2015, while partner in-force policies reduced by 7.3%. Gross written premium was 3.6% lower than for 2014 primarily due to partnerships which were 5.1% lower, while own brands experienced a smaller reduction of 1.9%.
Partnerships remain strategically important and Home will look to build on its improving manufacturing capability to deliver what it aims to be market leading propositions to current partners, as well as to build relationships with future partners. Consistent with this, Home is in discussion with RBS on a threeyear extension to its insurance partnership, which includes the RBS and NatWest brands.
Operating profit of £109.9 million was broadly stable in comparison to the prior year, despite a deflationary market and higher than normal claims from major weather events.
Flood Re From 1 April 2016, Flood Re, the Government and industrybacked scheme to provide affordable home insurance to households at high risk of flooding, is planned to become operational. The Group has supported Flood Re’s formation and is expected to be ready to cede chosen risks to Flood Re on its inception. Home’s share of the annual levy, based on its market share, is expected to be in the region of £24 million for 2016 and will be charged to operating expenses.
Rescue and other personal lines Highlights • Retained position as one of the UK’s leading providers of rescue and other personal lines insurance ranked by in-force policies
• COR for Rescue and other personal lines was stable at 91.2%
Gross written premium for Rescue and other personal lines experienced growth of 6.0% compared with 2014. Rescue gross written premium increased by 4.1% compared with 2014, mainly due to Green Flag direct sales. Refreshed web content, a new quote and buy journey and additional PCW distribution, together with take up of higher levels of cover and competitive propositions, supported this. Gross written premium for other personal lines rose 7.4% compared to 2014, driven primarily by pricing and upgraded levels of cover on travel partnerships.
The COR for Rescue and other personal lines was stable at 91.2% (2014: 92.0%). The Rescue COR was 82.3% (2014: 81.5%) with a higher loss ratio reflecting changes in the partner channel following favourable experience in the prior year being broadly offset by an improvement in the commission ratio.
Operating profit increased by 8.3% to £52.0 million. Within Rescue and other personal lines, Rescue operating profit improved to £42.2 million (2014: £41.5 million).
Note: 1. Rescue in-force policies have been revised to exclude partner post-accident vehicle recoveries.
Highlights • Commercial in-force policies grew by 7.2% and Direct Line for Business in-force policies now exceed 400,000
• Gross written premium was broadly stable reflecting competitive pressures. Direct Line for Business gross written premium surpassed £100 million
• Adjusting for a normal level of claims from weather and other large claims, COR was approximately 99%
Performance Commercial in-force policy growth across 2015 was achieved by increased sales through the Direct Line for Business and eTrade channels. Gross written premium was broadly stable at £485.3 million in comparison to 2014. In the first half of 2015, gross written premium decreased following competitive pressures in the regional broker market, while growth of 1.9% was achieved in the second half primarily through the eTrade and direct channels.
Regulatory The Insurance Act 2015 will come into effect on 12 August 2016, which represents a significant change to commercial insurance contract law. Commercial is working through the requirements of the Act and aims to deliver these appropriately for customers and brokers.
• Results benefited from disciplined underwriting, prior-year reserve releases from ongoing operations of £378.9 million (2014: £397.6 million) which were higher than expected, together with lower costs, partially offset by higher claims from major weather events and lower volumes
• 4.5% increase in final dividend per share of 9.2 pence per share and additional special dividend of 8.8 pence per share. Total dividends for 2015, including special interim dividend of 27.5 pence per share following sale of International division, of 50.1 pence per share (2014: 27.2 pence per share)
Key metrics Loss ratio1 59.5% 59.6% Commission ratio1 10.9% 11.8% Expense ratio1 23.6% 23.6%
– interim (pence) 4.6 4.4 – final (pence) 9.2 8.8 – regular (pence) 13.8 13.2 – first special (pence) 27.5 10.0 – second special (pence) 8.8 4.0 – total (pence) 50.1 27.2
In-force policies and gross written premium In-force policies – ongoing operations (thousands)
Other personal lines 230.8 214.9 Rescue and other personal lines 394.1 371.8
Underwriting profit (£ million) 175.2 148.1 Loss ratio 59.5% 59.6% Commission ratio 10.9% 11.8% Expense ratio 23.6% 23.6%
The COR for ongoing operations improved by 1.0 percentage point to 94.0% (2014: 95.0%). The loss and expense ratios were stable, whereas the commission ratio decreased by 0.9 percentage points.
At the start of the year, the Group set 2015 COR guidance for ongoing operations in the range of 94% to 96%. This assumed a normal level of claims from major weather events. The range reflected uncertainty surrounding claims inflation versus motor market pricing. This guidance, which assumed normal weather, was subsequently updated in the year to between 92% and 94%. Following higher than expected prior-year reserve releases, a COR of approximately 93%, normalised for weather, was achieved.
Within the stable headline loss ratio, the attritional loss ratio improved, but this was offset by a lower contribution from prior-year reserve releases and higher weather-related claims. The reduction in the commission ratio primarily reflected lower payments to partners, particularly in Home, following higher weather-related claims.
Reported loss ratio 59.5% 59.6% Prior-year reserve releases 13.0% 13.3% Major weather events – Home2 (3.1%) (2.1%) Current-year attritional loss ratio 69.4% 70.8%
For the year ended 31 December 2015 COR 92.4% 92.2% 91.2% 104.5% 94.0% Current-year attritional loss ratio 85.0% 45.8% 63.5% 75.5% 69.4% Prior-year reserve releases (£ million) 266.8 41.9 13.6 56.6 378.9 For the year ended 31 December 2014 COR 96.2% 92.7% 92.0% 98.8% 95.0% Current-year attritional loss ratio 88.5% 49.3% 61.7% 69.2% 70.8% Prior-year reserve releases (£ million) 278.4 49.8 15.7 53.7 397.6
By division, the COR improved in Motor, Home and Rescue and other personal lines compared with 2014, but deteriorated in Commercial, primarily due to the December 2015 storms.
Instalment and other operating income – ongoing operations £m 2014 £m
Instalment income 100.1 100.4 Other operating income: Vehicle replacement referral income 12.5 15.8 Revenue from vehicle recovery and repair services1 15.5 18.0 Other income 22.7 13.1 Other operating income 50.7 46.9 Total ongoing 150.8 147.3
The total investment return for ongoing operations decreased to £194.7 million compared to £210.6 million in 2014. This was driven by a decrease in net realised and unrealised gains and a small reduction in investment income. Investment income was £165.6 million, a 3.6% decrease from 2014, primarily as a result of lower average AUM (31 December 2015: £6,818.7 million; 31 December 2014: £7,051.3 million).
Net realised and unrealised gains for ongoing operations of £29.1 million were lower than the comparative period (2014: £38.9 million) due primarily to lower realised gains on disposals of fixed income debt securities and a small decrease in unrealised property gains, which were £24.2 million for the year (2014: £25.9 million).
All divisions were profitable in 2015, with Motor and Rescue and other personal lines improving operating profit on 2014. Home operating profit was broadly stable, while Commercial reduced compared to the previous year, primarily due to the storms in December.
Operating profit – ongoing operations 520.7 506.0 Run-off 73.1 55.3 Restructuring and other one-off costs (48.7) (69.6) Operating profit 545.1 491.7 Finance costs (37.6) (37.2) Gain on disposal of subsidiary − 2.3 Profit before tax 507.5 456.8
Profit from discontinued operations, net of tax 181.2 13.3 Profit after tax 580.4 372.6
Restructuring and other one-off costs Restructuring and other one-off costs for 2015 of £48.7 million (2014: £69.6 million) primarily reflected the costs associated with the exit of one location announced at the beginning of the year and IT migration. Over the three-year period 2015 to 2017, the Group expects cumulative restructuring and other one-off costs to continue to be substantially offset by the operating profit from the Run-off segment.
Gain on disposal of subsidiaries The gain on disposal of £2.3 million in 2014 relates to the sale of the Group’s stolen vehicle recovery business, Tracker.
Discontinued operations On 29 May 2015, the Group completed the sale of its International division, which comprised its Italian and German operations, to Mapfre, S.A. Accordingly, this division is treated as discontinued operations. The gain on disposal of £167.1 million is included in profit after tax from discontinued operations of £181.2 million. Operating profit includes £29.9 million of realised net gains on divisional available-forsale (“AFS”) investments reclassified through the income statement on disposal. Further details on discontinued operations are presented in note 5 to the consolidated financial statements, see page 136.
Profit for the year and return on tangible equity Profit for the year amounted to £580.4 million (2014: £372.6 million), a significant increase on the previous year following the gain on the disposal of the Group’s International division.
Notes: 1. Investment income yield excludes net gains and is calculated on income divided by the average AUM based on the opening and closing balance for Group – continuing operations.
In addition, the Board has resolved to pay a further special interim dividend of 8.8 pence per share. This takes the total special interim dividends for 2015 to 36.3 pence per share and includes the 27.5 pence per share dividend in relation to the sale of the International division.
Overall, cash and cash equivalents increased by £14.0 million (2014: £51.1 million increase) across the year to £902.4 million (31 December 2014: £898.2 million).
The net asset value at 31 December 2015 was £2,630.0 million (31 December 2014: £2,810.5 million) with a tangible net asset value of £2,105.2 million (31 December 2014: £2,287.4 million). The decrease since the beginning of the year reflected the payment of dividends and reduction of the AFS investments reserve, partially offset by profit in 2015.
Financial management Accessing sufficient funding as liabilities fall due is central to the Group’s long-term sustainability. The Group’s integrity and brand reputation for customers and other stakeholders relies on this sustainability. The Group’s key financial risks are reserving for insurance liabilities and market risk connected to the investment portfolio.
The Group seeks to adopt a conservative approach to assessing liabilities, as evidenced by the favourable development of historical claims reserves. Reserves are based on management’s best estimate which incorporates a prudent margin in excess of the internal actuarial best estimate. This margin is made in reference to a range of actuarial scenario assessments and percentiles and also considers other short and long-term risks not reflected in the actuarial inputs. For more information, see pages 152 to 154.
• Commercial risk reinsurance to protect against large individual claims with a retained deductible of £4 million
These arrangements are intended to ensure that the Group: complies with applicable laws and regulations, and meets its obligations as a contributor of taxes and a collector of taxes on behalf of the tax authorities; and manages its tax affairs efficiently, claiming reliefs and other incentives where appropriate.
• To deliver a suitable risk adjusted investment return commensurate with the Group’s risk appetite
Total debt securities 78.0% 76.2% Infrastructure debt 6.0% 4.8% Commercial real estate loans 3.0% − Cash and cash equivalents 7.0% 13.9% Investment property 6.0% 5.1%
At 31 December 2015, total investment holdings of £6,818.7 million were 3.3% lower, reflecting operating cash flows and dividends paid. Total debt securities were £5,194.4 million (31 December 2014: £5,802.5 million), of which 14.6% were rated as ‘AAA’ and a further 59.4% were rated as ‘AA’ or ‘A’. Corporate, supranational and local government debt securities account for 64.5% of the portfolio. The average duration at 31 December 2015 of total debt securities was 2.3 years (31 December 2014: 2.1 years).
The portfolio is weighted heavily towards social infrastructure with 88% of the year-end portfolio invested in projects across this sector (38% in healthcare, 45% in education and 5% in other). At year end, 88% of investments were underpinned by availability based payment schedules
• The securitised credit portfolio was restructured in 2015 in line with Solvency II risk retention requirements. At year end, 88% was invested in AAA tranches, 7% in AA tranches and 5% held in cash. The primary sectors the portfolio was invested in were mortgage backed securities (46%), collateralised loan obligations, where the underlying borrowers are rated subinvestment grade (30%), and asset backed securities secured on Federal Family Education Loan Program student loans (14%)
Investment holdings and yields – total Group 2015 2014 £m Allocation Income1 Allocation1 Income1
In determining the appropriate level of capitalisation and solvency, the Group considers capital across a number of metrics. These include economic capital, regulatory capital and rating agency capital. The Group targets holding capital sufficient to maintain a credit rating in the ‘A’ range.
3. Net of bank overdrafts and including term deposits with financial institutions with maturities exceeding three months.
www.directlinegroup.com 45 1 January 2016 and the Group is presenting pro forma information at 31 December 2015 for the first time on that basis.
The Group is regulated by the PRA on both a Group basis and, for the Group’s principal underwriter, UKI, on a solo basis.
Initially, the Group (including UKI) will assess its capital requirements using the standard formula. UKI has applied for its internal economic capital model to be approved as its internal model and approval is expected from the PRA in mid2016. From this point, UKI will calculate its capital requirement using the internal model which will form part of a Group-wide partial internal model.
Capital position At 31 December 2015, the Group held a capital surplus of £794.6 million above its pro forma1 regulatory capital requirements on a Solvency II standard formula basis. This was equivalent to a pro forma capital coverage ratio of 147.4%. Comparative figures are on a risk-based capital basis.
Pro forma1 solvency capital requirement (£ million) 1,676.2 n/a Capital surplus above pro forma solvency capital requirement (£ million) 794.6 n/a Pro forma capital coverage ratio 147.4% n/a Risk-based capital coverage ratio (adjusted for dividends3) n/a 148.2%
Leverage The Group’s financial leverage continues to be conservative. During 2015, the leverage increased from 15.8% to 16.5% due mainly to the sale of the Group’s International operations and subsequent special dividend which reduced shareholders’ equity.
Credit ratings Standard & Poor’s and Moody’s Investors Service provide insurance financial-strength ratings for UKI. UKI is currently rated ‘A’ (strong) with a stable outlook by Standard & Poor’s and ‘A2’ (good) with a stable outlook by Moody’s.
Dear shareholders and other stakeholders Our commitment to good corporate governance An important part of the Board’s role and mine as Chairman is to oversee the good governance of the Group. It is now more than three years since the Group was floated through an IPO. In that time, we have continued developing and refining our governance processes and procedures so that they remain fit for a FTSE 100 company.
Board and Committee structure and membership The Board has established Committees to focus on specific governance areas and to help it to meet its obligations and discharge its duties. The following Committees have been established with effect from the IPO: Audit, Board Risk, Remuneration, CSR, Nomination and Investment. You can find a report from each Committee in the Governance section of this Annual Report & Accounts. Other than the CSR Committee, all Committees only have Non-Executive Directors as members.
Change and IT migration The Board oversaw the Group’s major change programmes and associated risks and challenges relating to the migration of IT infrastructure from RBS Group and development of the next generation of customer systems, including focusing on risks relating to IT systems’ stability, cyber security and the internal control environment.
Succession planning The Nomination Committee focused on succession planning for the Board and Executives, and on recruiting Richard Ward as the SID.
Our Code of Business Conduct Business practices We shall engage in honest, professional and ethical conduct and maintain effective procedures to prevent confidential information being misused.
Dealing with employees We shall maintain a working environment that attracts, motivates and retains employees, and shall be intolerant of any type of discrimination, harassment or victimisation.
Final dividend 2014 As explained in last year’s Annual Report & Accounts, due to the uncertainty around the timing of the completion of the sale of the International division, the Board decided to pay an additional interim dividend for 2014 on 17 April 2015 in place of a final dividend. We will ask shareholders to approve a final dividend for 2015 at the Annual General Meeting in May 2016.
Share consolidation The Board proposed a share consolidation based on a consolidation ratio of 11 new shares for 12 existing shares due to the size of the special dividend relating to the sale of the International division, and to maintain comparability of share price and earnings per share before and after payment of the special dividend. Shareholders approved this on 29 June 2015.
Vesting of LTIPs The Remuneration Committee considered and approved the first vesting of the Direct Line Group LTIP on 9 November 2015, at 89.2% of the potential maximum award, which reflected good progress against the objectives set at the time of the IPO.
Dealing with communities and the environment We shall contribute to the social and economic wellbeing of those communities where we are an employer, and encourage employees to participate in projects and initiatives to strengthen those communities.
Dealing with competitors We shall compete with competitors honestly and in accordance with the relevant competition law.
External appointments None 2 Paul Geddes (46), Chief Executive Officer (appointed August 2009) (C)
After joining RBS Group in 2004 as Managing Director responsible for products and marketing, he became the Chief Executive Officer of RBS Group’s mainland UK retail banking business. Before joining RBS Group, Paul held various senior multi-channel retailing roles in the GUS and Kingfisher groups. Paul started his career in marketing, with UK and European roles at Procter & Gamble. He read Philosophy, Politics and Economics at the University of Oxford, and is a Fellow of the Chartered Institute of Bankers in Scotland.
External appointments Jane is Chair of Reclaim Fund Ltd and a Non-Executive Director and Chair of the Board Risk Committee of Old Mutual Wealth Management Limited. She is also an Independent Member of the Fairness Committee at ReAssure Ltd.
She has her own financial sector consulting business, which provides audit, enterprise risk management and corporate governance advisory and consulting services. Jane is also a magistrate.
5 Sebastian James (49), Non-Executive Director (appointed August 2014) (C, R and +)
Biography Sebastian has been Group Chief Executive of Dixons Carphone plc since 2014. He joined Dixons in April 2008 and held various roles, including Group Operations Director, before becoming Group Chief Executive in February 2012.
www.directlinegroup.com 49 6 Andrew Palmer (62), Non-Executive Director (appointed March 2011) (A, B, I, N, R and +)
External appointments Clare is a Non-Executive Director of British United Provident Association (Bupa) and Retail Charity Bonds plc. She is also a NonExecutive member of the partnership board of Miller Insurance Services LLP, and Treasurer of the Disasters Emergency Committee.
8 Priscilla Vacassin (58), Non-Executive Director (appointed September 2012) (B, N, R and +)
Priscilla was most recently Group Human Resources Director at Prudential plc, and a Non-Executive Director at the Ministry of Defence. Priscilla has previously held senior human resources positions in various financial services and customer-facing industries. These include 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 from the University of North East London.
Prior to this, Richard was Chief Executive of Lloyd’s of London, from 2006 to 2013.
Richard previously worked for over ten years at the London-based International Petroleum Exchange (“IPE”), the second largest energy trading exchange, re-branded ICE Futures, as both Chief Executive Officer and Vice-Chairman. Prior to the IPE, Richard held a range of senior positions at British Petroleum and was Head of Marketing & Business Development for energy derivatives worldwide at Tradition Financial Services.
External appointments Richard is Executive Chairman of Cunningham Lindsey and NonExecutive Chairman of Brit plc. He also serves as a Non-Executive Director of Partnership Assurance Group plc and is a member of the PRA Practitioner Panel, Bank of England.
Experience and qualifications Jonathan joined the Group in 2000 as Product and Pricing Director for UK partnerships. After the Group acquired Churchill, Jonathan became Commercial Director and then Managing Director of the Group’s household and life businesses. Jonathan was appointed Managing Director of Commercial in 2009.
4 Steve Maddock, Managing Director of Claims, Business Services and Technology Services (joined 2010)
Experience and qualifications In addition to leading our Claims and Business Services divisions, Steve is currently leading the management of our IT estate, while Angela Morrison dedicates herself to our next generation of customer systems programme. From 2004, Steve was Director of Strategic and Technical Claims at RSA. He has over 20 years’ insurance industry experience, including roles as Director of Claims and Customer Service at Capita, and as Director of Operations at AMP. Steve holds an MBA from the University of Reading, and is Chairman of the Motor Insurers’ Bureau and Insurance Database Services Limited.
Experience and qualifications Since completing the migration of systems from RBS Group, Angela has been focusing on our next generation of customer systems. She was previously Chief Information Officer at J Sainsbury and a member of its Operating Board. She previously worked for ASDA/Wal-Mart. Her roles included European Strategy Director; Chief Information Officer through the ASDA/Wal-Mart integration; and e-Commerce Director, which involved establishing ASDA’s home grocery business. Angela holds a degree in Electrical and Electronic Engineering from the University of Bristol.
The UK Corporate Governance Code Direct Line Insurance Group plc (the “Company”) has complied with the UK Corporate Governance Code 2014’s principles and provisions (the “Code”) throughout the financial year. The exception is the recommendation contained in Provision E.1.1 of the Code that the Senior Independent Director should attend sufficient meetings with major shareholders to listen to their views. During 2015, the Board received regular updates from the Company’s corporate brokers on the views of its institutional shareholders and, in addition, the Group’s Investor Relations team provided regular updates to the Board. It is open to major shareholders to raise any issues they wish with the Chairman, the SID and the Chair of the Remuneration Committee. On this basis the Board is satisfied that it understands the views of major shareholders and it was not necessary for the SID to meet them. The Board has therefore concluded that it has complied with the main and supporting principles under section E.1 of the Code regarding dialogue with shareholders.
You can find details of how the Company applied the Code’s principles and complied with its provisions in this report and the Directors’ remuneration report. For more information about the Code, visit the Financial Reporting Council’s website at www.frc.org.uk .
Leadership The Board The Board’s main role is to organise and direct the Group’s affairs in a way that is most likely to help it succeed in the long term for the benefit of shareholders as a whole. The Board supervises the Group’s operations, ensuring it is effectively managed, that prudent controls are in place, and that risks are assessed and managed appropriately. The Board sets the Group’s strategy, and monitors management’s performance and progress against the strategic aims and objectives.
• Major capital projects, major investments and contracts that are either materially strategic or above the Chief Executive Officer’s delegated authority
You can find the names of the Directors as at the date of this report, and their biographical information, on pages 48 and 49.
Glyn Jones, who was a NED and the SID, retired from the Board at the end of the Annual General Meeting on13 May 2015. Following Mr Jones’ stepping down, Andrew Palmer was appointed SID while the search for a new NED was undertaken. Richard Ward was appointed SID on his appointment to the Board.
NEDs are initially appointed for a term of three years. They will normally serve two fixed terms of three years. When appropriate, they may be invited to serve up to a further three years. The Nomination Committee nominates the Directors for appointment. The Board then approves the appointments. NEDs are subject to election or re-election annually at the Company’s AGM. You can find the standard terms and conditions of the NED appointments at www.directlinegroup.com .
The Board has authorised various conflicts in this way. However, the Board still ensures that it will appropriately deal with any actual conflict of interest or duty that might arise. This usually involves making sure a Director does not participate in a relevant Board or Committee discussion or decision.
During 2015, the Board’s areas of focus, challenge and supervision included: • Developing and challenging the Group’s strategic plan
• Overseeing the change programmes and associated risks relating to the IT migration from RBS Group. Furthermore, the Board monitored risks relating to IT systems’ stability, cyber security and the internal control environment
• Overseeing the management and reduction of the Group’s cost base
• Overseeing a review of the Group’s governance framework, including reviewing and approving risk-based policies
• Overseeing the sale of the International division, the effect on shareholders and the distribution of the proceeds to shareholders, and the share consolidation
The Company Secretary attended all Board meetings. At its discretion, the Board invited senior executives and external advisers to attend Board meetings, and present on business developments and governance issues.
This table sets out attendance at the scheduled meetings in 2015: Scheduled meetings1
Board induction, resources and training The Board is committed to training and developing all Directors and employees. The Company Secretary is responsible for helping the Chairman regularly review and organise appropriate training for the Directors. The Company Secretary also maintains an annual training agenda for the Board and its Committees.
• The Company Secretary updating the Board regularly on corporate governance
• The Group’s brokers and financial advisers presenting quarterly industry and market updates to the Board
• The Investor Relations team reporting regularly to the Board on the Group’s relationship with institutional investors and analysts
The Nomination Committee’s terms of reference state that it should duly regard the benefits of diversity, including gender diversity, when choosing Board candidates. You can find more information about the Board’s diversity policy in the Nomination Committee report on pages 66 and 67.
The CSR Committee considers diversity as part of its ‘Proud to be here’ work stream. This is to ensure the Group’s talent pipeline remains diverse to meet future requirements. The Group provides mentoring schemes and associated training and development programmes for high-potential candidates. You can find numerical data relating to the gender diversity of the Board, senior managers and employees in the CSR section on page 33.
Board effectiveness review In 2015, the Board chose to conduct its effectiveness review in-house. The Company Secretary designed and coordinated the process. This involved agreeing a structured questionnaire with the Chairman and Board members, distributing it to stakeholders, collating responses, and preparing reports. The Board and each of its Committees reviewed and discussed these reports.
• The behaviour of, and interaction between, the Board or Committee and management, including how much time they spent on strategic matters; how much NEDs challenged the Executive Directors; and the Board’s culture and composition
The questionnaire also asked respondents to comment on aspects they thought worked well in the 2014 review, and areas they thought needed to improve.
Note: 1. Attendance is expressed as the number of scheduled meetings attended out of the number of such meetings possible or applicable for the Director to attend.
Based on the questionnaire responses and resulting reports, the Directors are satisfied that the Board and its Committees operated effectively in 2015. The Directors are also satisfied that they made significant progress in areas identified in 2014 as needing to improve. The Board and its Committees agreed an action plan for improving further, which they will pursue in 2016.
The Board has agreed that external facilitators will conduct the 2016 effectiveness review.
• Enterprise Risk Management Strategy and Framework. This sets out the Group’s approach to managing risks robustly, and owning and overseeing risks
• Executive Governance Framework, which outlines how each business function is governed and details the authority delegated to Executive Committee members
Board approves Board High Level Governance framework, risk appetite and Group Policies are set by the Board, following review by the Board Risk Committee, for implementation by the Executive. Policies are drafted by Executive policy owners.
Board Risk Committee Enterprise Risk Management framework is approved by the Board Risk Committee, following review by the Risk Management Committee.
Risk Management Committee Developed by the Executives within the framework approved by the Board. Minimum Standards are reviewed by the Group’s Policy and Minimum Standard owners’ review forum. The Executive Governance Framework and Minimum Standards are approved by Executives within the Risk Management Committee.
Board Committees The Board has established various Committees to help meet its responsibilities. Each Committee plays a vital role in ensuring the Board operates efficiently and considers matters appropriately. The diagram above details the names of the Board Committees and Chairs, as at the date of this report.
Each Committee has separate terms of reference. The Board reviews these annually. You can find details of each Committee’s composition, attendance, role and focus on pages 58 to 69.
Accountability Financial and business reporting Responsibility for preparing the Annual Report & Accounts The Board is responsible for giving shareholders a fair, balanced and understandable assessment of the Company’s position and prospects. The Board is also responsible for maintaining adequate accounting records, and ensuring compliance with statutory and regulatory obligations.
You can find an explanation from the Directors about their responsibility for preparing the financial statements in the statement of Directors’ responsibilities on page 99. The Company’s external Auditor explains its responsibilities on page 105.
The Board meets its responsibilities under the Code as follows: • How the Company seeks to generate value over the long term is explained in the business model on pages 8 and 9, and the strategy for delivering Company objectives is on pages 14 to 17
• The Board’s arrangements for applying risk management and internal control principles follow
The Finance review on pages 44 and 45 describes the Group’s capital management strategy, which covers how it measures its regulatory and economic capital needs, and deploys capital.
After making due enquiries, the Directors reasonably expect that the Company and the Group have adequate resources to continue in operational existence for at least 12 months from the date of approval of the financial statements. Accordingly, they have adopted the going concern basis in preparing the financial statements.
Risk management and internal control Assessing principal risks The Directors confirm that they robustly assessed the principal risks facing the Company, including risks that would threaten its business model, future performance, solvency or liquidity. You can find a description of these risks, and their management or mitigation, on pages 28 and 29.
Viability statement The Strategic report, on pages 1 to 45, sets out the Group’s financial performance, business environment, outlook and financial management strategies. It covers how the Group measures its regulatory and economic capital needs, and deploys capital. You can find discussion about the Group’s principal risks and risk management on pages 26 to 29. Note 3 to the consolidated financial statements starts on page 121 and sets out financial disclosures relating to the Group’s principal risks. This covers insurance, market and credit; and the Group’s approach to monitoring, managing and mitigating exposures to these risks.
Every year and on a rolling basis, the Board considers a strategic plan for the Group. The plan makes certain assumptions in respect of the competitive markets in which the Group operates, and the delivery and implementation of the next generation of customer systems. Appropriate aspects of the strategic plan are stress-tested to understand and help set capital and other requirements.
When reviewing the strategic plan, the Board considered the Group’s prospects over the one and four-year periods that the plan covered. This review includes reviews of solvency, liquidity, assessment of principal risks and risk management. The one-year planning period has greater certainty, so it was used to set detailed budgets across the Group. Outcomes for the four-year period are less certain. However, the plan provides a robust planning tool for strategic decisions. The Board recognises that uncertainty increases over time and, therefore, future outcomes cannot be guaranteed or accurately predicted.
Risk management and internal control system The Board oversees the Group’s risk management and internal control system. It has complied with the Code by establishing a continuous process for identifying, evaluating and managing the principal risks the Group faces.
The Group operates a Three Lines of Defence model. You can find out more about this in the risk management section on pages 26 and 27.
Remuneration The Board has delegated responsibility to the Remuneration Committee for the remuneration arrangements of the Group’s Executive Directors and Chairman. It recommends and monitors the remuneration level and structure for senior executives. You can find out more about this in the Directors’ remuneration report starting on page 70.
The Executive Directors meet frequently with investors and inform the Board about shareholder concerns. This gives Directors the opportunity to discuss governance and strategy with shareholders. The Chairman, SID and NEDs are available to attend meetings with major shareholders at their request.
The Company’s Investor Relations team helps Directors continue communicating with institutional investors, fund managers and analysts. The Board receives regular updates on investor relations, including feedback from analysts. The Company’s corporate brokers also regularly attend Board meetings to inform the Board of shareholder views.
The Committee has unrestricted access to management and external advisers to help discharge its duties. It is satisfied that in 2015 it received sufficient, reliable and timely information to perform its responsibilities effectively.
Responsibilities The Committee’s main responsibilities are to: • Monitor the integrity of the Group’s financial statements and any other formal announcement relating to its financial performance
• Review and monitor the reserving process and recommend the quarterly reserves to the Board
• Continually review the adequacy and effectiveness of the Group’s internal financial controls and internal control systems, and the monitoring procedures
• Monitor and manage the relationship with the External Auditor, including agreeing the external audit fee, assessing effectiveness, and managing any tender process for the audit services contract
Committee composition, skills and experience The Committee comprises three independent NEDs: Andrew Palmer, Jane Hanson and Clare Thompson. You can find their biographies on pages 48 and 49.
On 13 May 2015, Glyn Jones stepped down as a NED and a member of the Committee.
All Committee members are members of the Institute of Chartered Accountants in England and Wales. They also have recent and relevant financial experience, enabling them to contribute diverse expertise to the Committee’s proceedings. To keep their skills current and relevant, in addition to Board training, members of the Committee have received training by Deloitte LLP focused on changes to the Code and in particular the new requirements for the longer term viability statement.
There were four additional meetings to consider outputs and approve reports from the Solvency II programme.
Main activities during the year At every scheduled Committee meeting, the Committee receives reports on financial reporting, reserves, internal controls, Group Audit and Solvency II. You can find out more about this in the following sections.
The review process focused on critical accounting policies and practices, emphasising those requiring a major element of judgement. The review also considered the going concern assumptions, impairment reviews, reserving provisions, unusual transactions, clarity of disclosures and significant audit adjustments.
Financial investments – The Committee considered reports on the judgements applied to the carrying value of the Group’s financial investments and the need for any impairment provision.
Internal control environment – The Committee considered reports on the internal control environment and associated mitigating actions/remedial action plans.
Reserves Every quarter, the Committee reviews and challenges the key assumptions and judgements, emerging trends, movements, and analysis of uncertainties underlying the actuarial best estimate of technical provisions. At the same time, the Committee considers and challenges the appropriateness of the Chief Financial Officer’s proposals for management’s best estimate of reserves. These are informed by actuarial analysis, wider commercial and risk management insights, and principles of consistency from period to period.
After reviewing the actuarial best estimate and management’s best estimate of reserves, the Committee recommends them to the Board.
During 2015, the Audit Committee received regular reports on the FRCF and the testing of it. Part of those reports focused on control deficiencies, and mitigating and remedial actions taken.
The Audit Committee oversees Group Audit’s work and seeks to ensure it adopts industry best practice appropriately. The Group Head of Audit’s primary reporting line is to the Chair of the Committee. The secondary reporting line – for day-to-day administration – is to the Chief Financial Officer. Group Audit gives the Committee independent and objective reports on the appropriateness and effectiveness of the Group’s internal controls and governance frameworks. The Committee approves Group Audit’s annual plan of reviews, and receives quarterly reports detailing internal audit activity, key findings, management responses, and proposed action plans. Group Audit also monitors that these actions are completed. The Committee also approves the Group Audit Charter.
During the year, the Committee assessed whether the Group Audit function was effective and concluded that it was. This included the Committee satisfying itself that the Group Audit function has the appropriate resources. The Committee also continued monitoring ongoing actions from 2014’s external quality assessment review.
• Reviews by the external auditor, mandated by the PRA for the Pillar III reports for 31 December 2014
Deloitte LLP must regularly rotate the partner it engages on the audit. The current partner is David Rush. He will be rotated after completing the 2015 year-end audit. This complies with the Group’s Minimum Standard on making sure the external audit remains independent.
There are no contractual obligations restricting the Company’s choice of external auditor and no auditor liability agreement has been entered into. Equally, any recommendation to reappoint Deloitte LLP as auditor of the Company depends on continued satisfactory performance.
Before each financial year, the Committee formally approves a list of audit and non-audit services that the External Auditor will provide. This is in accordance with the minimum standard.
The Committee reviewed how the Group applied its minimum standard on audit and non-audit services in 2015. It is satisfied that the Group has adequate procedures to make sure the External Auditors are independent and objective.
• Review and approve the design and implementation of the Enterprise Risk Management Framework, and the procedures for monitoring its adequacy and effectiveness
• Consider the Group’s risk profile relative to current and future Group strategy, and to risk appetite
• Review the governance of, and methodology and assumptions used in, the Group’s internal economic capital model and approval of changes to the model and associated policies and minimum standards
• Review and recommend the High Level Control and System of Governance Framework to the Board
You can find the Board Risk Committee’s terms of reference at www.directlinegroup.com .
Jane Hanson (Chair) 6 of 6 100% Andrew Palmer 6 of 6 100% Clare Thompson 6 of 6 100% Priscilla Vacassin 6 of 6 100%
The Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Group Head of Audit, General Counsel and a representative from the External Auditor are invited to attend meetings. In addition to regular one-to-one meetings with the Chair, the Chief Risk Officer also met privately with the Committee.
The Board Risk Committee also invites the Director of Compliance and Regulatory Risk, Director of Financial Risk and Enterprise Risk Director to appropriate sections of its meetings.
Main activities during the year Risk monitoring At each of its scheduled quarterly Committee meetings, the Committee receives a report from the Chief Risk Officer. This report highlights the outputs of regular risk monitoring and provides further detail of specific issues to the Committee.
The Committee robustly assessed the principal risks facing the Company, which you can find listed on pages 28 and 29. The Committee achieved this by reviewing and challenging the Group’s MRA in the context of the Group’s risk appetite.
Additionally, the Committee considered more detailed subjects at each scheduled meeting. These related to: compliance and regulatory risk including oversight of the Group’s regulatory relationships; operational risk; financial risk, Solvency II and IMAP; and risk governance. The Committee also requested specific reviews of areas of the risk and control environment.
Compliance and regulatory risk During the year, the Committee considered the Group’s compliance with regulatory requirements including conduct and financial crime. In particular, the Committee reviewed how the PRA’s Senior Insurance Managers Regime and the FCA’s Approved Persons regime would affect the Group. The Committee also reviewed the outputs from conduct and compliance assurance activity, including approving the Annual Assurance Plan.
Additionally, the Committee monitored the Group’s actions relating to a financial promotions assurance review; and the management of ongoing regulatory interactions, in particular with the FCA and the PRA.
The Committee received regular reports on the Group’s whistleblowing process; and the Group’s actions to prevent financial crime, including review of the Annual Financial Crime Report.
The Committee also received regular updates on the Group’s major change programmes, including the next generation of customer systems, and considered progress towards the planned significant change to the Group’s IT capabilities, including the development of new technology and new digital tools.
As part of this, the Committee considered the stress and scenario testing plan, and monitored and challenged the test results.
• Approval of the ORSA including its alignment to the business planning process
The Committee also received comprehensive training on the requirements of Solvency II.
Risk governance Every year, the Committee reviews and approves the Enterprise Risk Management Framework, which includes the Group risk policies and minimum standards. The Committee reviewed and challenged each Group policy and recommended the final versions for approval by the Board. The Committee also considered the results from the annual Group assessment of the effectiveness of the internal control environment undertaken by each business directorate, as well as monitoring controls on an ongoing basis.
Remuneration During the year, the Board Risk and Remuneration Committees held a joint meeting. This was to ensure the Group’s remuneration arrangements were still appropriate in the light of regulatory developments and did not encourage excessive risk-taking. As part of this review, the joint Committee also considered the Group’s preparedness for Solvency II. This followed published requirements, including how the Group would assess the performance of individuals in Control Functions. This Committee also monitored how incentive schemes operated for roles in the insurance sales and service contact centres, and for technicians and support staff in the UK Assistance Accident and Repair Centres.
The Board Risk Committee’s effectiveness The Company Secretary facilitated the Committee’s review of its effectiveness during the year. The Company Secretary also prepared a report based on responses from Committee members and other stakeholders to a pre-agreed questionnaire. After reviewing and discussing the report, the Committee concluded that it was operating effectively, and has access to sufficient resources to perform its duties.
The Corporate Social Responsibility Committee’s role The CSR Committee oversees and advises on how the Group conducts its business responsibly. This includes matters relating to environmental, employee engagement and wellbeing, community involvement, and ethics.
Responsibilities The Committee’s main responsibilities are: • Approving the Group’s CSR strategy
Committee composition The Committee comprised three independent NEDs: Clare Thompson, Jane Hanson and Sebastian James. Paul Geddes, Chief Executive Officer, and Angela Morrison, Chief Information Officer, are also Committee members. You can find their biographies on pages 48 to 50.
CSR strategy The Group’s CSR strategy focuses on four areas. A member of the Executive Committee sponsors each area. They are: • Helping to make our society safer – Mike Holliday-Williams
Main activities during the year The Committee monitors the implementation of the CSR strategy through regular updates on the different focus areas. It challenges the robustness of the targets in relation to each strand. It receives regular updates on each element of the CSR strategy and at each of its meetings the Committee receives a report on developments in CSR.
The CSR Committee‘s effectiveness The Company Secretary facilitated the Committee’s review of its effectiveness during the year. The Company Secretary also prepared a report based on responses from Committee members and other stakeholders to a pre-agreed questionnaire. After reviewing and discussing the report, the Committee concluded that it was operating effectively, and has access to sufficient resources to perform its duties.
The Board reviewed and approved this report on 29 February 2016.
Responsibilities The Committee’s main responsibilities are to: • Examine the rationale for, and the risks and financial implications of, any proposed changes to the Group’s investment strategy and, where agreed, recommend these changes to the Board
• Monitor the results from investment activities, namely adequacy of financial results delivered, compliance with agreed risk tolerances and external service provider performance. The Committee also ensures that any material breaches are reported to the Board Risk Committee
Committee composition, skills and experience The Committee comprised three independent NEDs: Clare Thompson, Jane Hanson and Andrew Palmer. You can find their biographies on pages 48 and 49.
The Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Director of Investment Management and Treasury, and Director of Financial Risk are invited to attend Investment Committee meetings. The Chair reports on matters dealt with at each Committee meeting to the subsequent scheduled Board meeting.
• A revised minimum requirement for access to liquidity in stressed business or economic conditions
• Changes to benchmark allocations for various existing asset classes including gilts, investment-grade credit, high-yield credit, securitised credit and investment property
Risk framework and operating model In October, the Committee agreed to proposals to move custody and middle-office services to a new provider. During the year, the Committee reviewed the credit exposure limits framework and agreed changes to issuer and concentration limits. It also agreed to limited changes to commercial property guidelines during the year. This gave the Group some flexibility to invest in property that needs development or major refurbishment before letting.
• Developing various asset and derivative reports to submit to the PRA and European Insurance and Occupational Pensions Authority
The Nomination Committee’s role The Committee is responsible for keeping the Board’s structure, size, composition, and balance of skills, experience, independence and expertise under review. It also provides guidance to management on executive succession planning.
• Succession planning for Directors and other senior executives, accounting for the skills and expertise the Group needs to deliver its strategy
• Considering and recommending to the Board Directors’ annual re-election and reappointment at the end of their term in office
Committee composition The Committee comprised the Chairman, Mike Biggs, and two independent NEDs, Andrew Palmer and Priscilla Vacassin. You can find their biographies on pages 48 to 49.
Richard Ward was appointed a member of the Committee on 25 February 2016.
The Chief Executive Officer is invited to attend Nomination Committee meetings. The Human Resources Director is also invited to attend appropriate sections of the Nomination Committee meetings. The Chair reports on matters dealt with at each Committee meeting to the subsequent scheduled Board meeting.
Main activities during the year Board composition During the year, the Committee: considered the Board’s skills and experience; reviewed the structure, size and composition of the Board; reviewed the membership and chairmanship of the Board’s Committees; and reviewed NEDs’ letters of appointment, terms of appointment and time commitment.
Succession planning The Committee acknowledges the importance of Board and executive succession planning, monitoring its progress as a standing agenda item at each of its scheduled meetings and providing guidance on executive succession planning to management.
Board appointment and reappointment process The Committee oversaw the process to appoint Richard Ward as a NED and SID. The Committee reviewed the Board members’ expertise and experience. It then produced a detailed brief and engaged external search consultants, JCA Group, to find suitable candidates.
As Richard Ward was appointed since the last AGM, he will submit himself for election at the Company’s 2016 AGM. He is considered independent within the Code’s meaning.
Note: 1. Attendance is expressed as the number of scheduled meetings attended out of the number of such meetings possible or applicable to attend.
Electing and re-electing Directors Before the proposed re-election of Directors at the 2015 AGM, the Committee reviewed the independence of NEDs. It concluded that Jane Hanson, Sebastian James, Andrew Palmer, Clare Thompson and Priscilla Vacassin were all independent within the Code’s meaning. Mike Biggs was independent when appointed as Chairman. The Committee recommended to the Board and shareholders to re-elect all serving Directors at the Company’s 2015 AGM.
You can find out more about the Group’s approach to diversity in the CSR section on page 33.
The Remuneration Committee’s role The Committee is responsible for setting and overseeing how the Group implements its remuneration policy. The Committee oversees the level and structure of remuneration arrangements for senior executives, approves share incentive plans, and recommends them to the Board and shareholders. Where applicable, it also oversees share plan changes that need shareholder approval.
Responsibilities The Committee’s main responsibilities are: • Setting the remuneration policy for the Executive Directors and Board Chairman and monitoring its operation
• Approving the Group’s remuneration governance framework. This includes approving the design and target of any performance-related pay arrangements, and liaising with the Board Risk and Audit Committees where appropriate
• Reviewing the design of all share incentive plans for the Board and shareholders to approve
You can find the Remuneration Committee’s terms of reference at www.directlinegroup.com .
Committee composition, skills and experience The Committee comprised three independent NEDs: Priscilla Vacassin, Sebastian James and Andrew Palmer, and the Chairman of the Board, Mike Biggs. You can find their biographies on pages 48 and 49.
In addition, the Committee actively interacts with the Audit Committee and Board Risk Committee when considering the setting of targets and payouts. As part of this, the Committee receives reports from the Chairs of those Committees at least twice a year. The Chair of the Audit Committee serves on the Committee. The Chair of the Board Risk Committee attended on three occasions.
Main activities during the year Annual Incentive Plan During the year, the Committee monitored the operation of the Annual Incentive Plan (“AIP”). For the 2014 financial year, this involved assessing the Group’s performance against the targets that the Committee set at the start of the year. It also received reports from the Chairs of the Audit Committee and Board Risk Committee about whether the Group had achieved the required performance within risk appetite. The Committee concluded that no clawback of awards was required in 2015.
For the 2015 financial year, the Committee approved the performance metrics and monitored performance against them. The Committee also discussed and challenged the AIP’s performance metrics for the 2016 financial year and, subsequent to the year end, approved the metrics.
It also considered how selling the Group’s International division would affect overseas participants in the Company’s share incentive plans.
The Remuneration Committee’s effectiveness The Company Secretary facilitated the Committee’s review of its effectiveness during the year. The Company Secretary also prepared a report based on responses from Committee members and other stakeholders to a pre-agreed questionnaire. After reviewing and discussing the report, the Committee concluded that it was operating effectively, and has access to sufficient resources to perform its duties.
November 2015 marked the vesting of the inaugural awards under the Direct Line Group LTIP. These LTIP awards were granted shortly following the IPO. They were subject to total shareholder return (“TSR”) performance over the three years since IPO and RoTE performance in 2013 and 2014. Since November 2012, grants under the LTIP have been made approximately every six months.
As disclosed last year, the Group achieved an average RoTE of 16.4% over the two-year performance period in 2013 and 2014 which resulted in 82% of the maximum potential vesting of the RoTE element, which comprises 60% of the total award. A strong share price performance in the three years from Admission, together with dividend payments during the period, resulted in a TSR of 135.1% for the three-year TSR performance period and positioned the Group above the upper quintile compared to companies in the FTSE 350 (excluding investment trusts). This resulted in 100% of the maximum potential vesting under the TSR element, which comprises 40% of the total award.
We have included these vesting outcomes in the single remuneration figure for both Executive Directors, details of which you can find on page 77.
Consistent with the regulations, the TSR element of the awards due to vest during 2016 will be reported separately next year.
Pay approach for 2016 Our remuneration policy has worked well since its approval by shareholders at the 2014 AGM and is still aligned with our key strategic priorities. As such, we will not change the approved policy this year. However, we intend to review this in 2016 and we will propose a policy for shareholders to approve at the 2017 AGM.
• We are not proposing to change the performance conditions for 2016 awards under the LTIP. The Committee has considered the current targets, and has determined that the levels of TSR performance (upper quintile) and RoTE performance required for full vesting, as increased in 2015, remain stretching
Voting on the annual remuneration report As we are not making any changes to our policy, the policy report will not be put to shareholders until the 2017 AGM. Therefore, the annual report on remuneration will be the only report that we put to an advisory shareholder vote at the AGM on 12 May 2016.
Base salary • Reviewed annually with any increases taking effect on 1 April
• 2.5% salary increase for the CEO to £794,600. 2.5% salary increase for the CFO to £480,900
• 40% of the award is deferred into shares, typically vesting after three years
• The weighting allocated to the basket of customer measures has been revised upwards from 20% to 25% in line with the Company’s strategic objectives and the number of measures has been broadened
• Plan allows for awards with a maximum value of 200% of base salary per financial year
• Awards typically granted every six months at half the annual level
• Performance is measured over three years and determined by RoTE and relative TSR measures
Executive Directors’ shareholding at year end The interests of shareholders and Executive Directors are closely aligned through the Chief Executive Officer and Chief Financial Officer holding Company shares at multiples of salary levels above the share ownership guidelines of 200% of salary. The Executives continue to build on these shareholdings as illustrated below. As at 31 December 2015, the number of shares beneficially held by the Chief Executive Officer and the Chief Financial Officer represented 249% and 280% of their salaries, respectively.
Executive Directors' total pay – explained further in the single figure table on page 77 This chart illustrates the components of total remuneration received in 2014 and 2015, as set out in further detail in the single figure table on page 77. Salaries increased by 2% in 2015, which was the first increase since the Executive Directors’ salaries were set in September 2012. The annual bonus payouts in 2015 were 83% and 86% of the maximum potential for Paul Geddes and John Reizenstein, respectively. As disclosed in the 2014 remuneration report, the single figure of remuneration for 2014 included the vesting outcomes of the last legacy awards under the RBS Group LTIP.
Introduction We have prepared this remuneration report in accordance with the requirements of the Companies Act 2006 and The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended) (the “Regulations”). The report also meets the relevant requirements of the Listing Rules of the Financial Conduct Authority, and describes how the Board has complied with the principles and provisions of the UK Corporate Governance Code relating to remuneration matters. Remuneration tables subject to audit in accordance with the relevant statutory requirements are contained in the annual remuneration report.
Annual remuneration report Remuneration Committee members and governance The following list details members of the Remuneration Committee during 2015. You can find information about each member’s attendance at meetings in the Remuneration Committee report on page 68. You can find their biographies on pages 48 to 49.
Statement of policy implementation in 2016 Executive Directors’ salaries in 2016 The salary increase awarded to the Executive Directors, effective 1 April 2016, is lower than the average increase awarded to UK employees.
Director Position 2016 base salary £’000 2015 base salary £’000 Annual change in base salary
Director Position Maximum annual incentive award for 2016 (% base salary) Deferred under the Deferred Annual
• As a result of measuring profit before tax, the Committee decided it was no longer necessary to apply a specific weighting to other profit & loss items not reflected in the definition of ongoing operating profit and the allocation of a specific weighting to this element will, therefore, be removed. The Committee will instead consider this in determining the overall level of payouts in its exercise of judgement
• The weighting allocated to the basket of customer measures will be increased from 20% to 25% in line with the Company’s strategic objectives
The list below sets out the gateway criteria for the AIP for 2016. There are more criteria than previously. This ensures the Committee considers a broader range of criteria when judging the level of AIP payments.
• Quality and sustainability of earnings, referring to reserving, gross written premium, costs and loss ratio, and relevant lead indicators
• Committee satisfaction that paying the bonus does not cause major reputational concerns
In considering such factors, and whether to adjust the overall payouts and/or operate malus and clawback, the Committee receives appropriate input from the Audit Committee and the Board Risk Committee through receiving reports from and discussion with the Chairs of those Committees.
Performance conditions for LTIP awards LTIP awards granted in 2016 will continue to be subject to performance against these performance conditions: • 60% based on RoTE over a three-year performance period (2016, 2017 and 2018)
The Committee reviewed the performance targets and, in line with its commitment to ensure that awards to Executive Directors would only be payable if significant value has been created for shareholders, decided that there should be no change to targets for 2016 as they remain appropriately stretching following their increase in 2015.
Performance measure Vesting for threshold performance Awards in 2015 and 2016 Awards in 2013 and 2014 Awards in 2015 and 2016 Awards in 2013 and 2014
For the TSR element, there is a straight-line interpolation between threshold and maximum performance, on a ranked basis. For the RoTE element, 40% of the award will vest for RoTE of 15.5% for awards to be made in 2016 (which remains unchanged from 2015). Otherwise, vesting is similar to TSR: a straight-line interpolation occurs from threshold to target, then from target to maximum performance.
Pension and benefits A pension contribution of 25% of base salary will continue to be paid to both Executive Directors in 2016.
External directorships The Company encourages Executive Directors to accept, subject to the Chairman's approval, an invitation to join another company's board outside the Group in a non-executive capacity. This recognises that such wider experience is valuable. Executive Directors can retain any remuneration from their non-executive appointment. Executive Directors are generally limited to accepting one external directorship.
Salary1 Benefits2 Annual bonus3 Long-term incentives4,5,6,7 All employee share plans8 Pension Total
2. Benefits include a company car or allowance; private medical and income protection insurance.
3. Includes amounts earned for performance during the year, but deferred for three years under the Deferred Annual Incentive Plan (“DAIP”). For more information, see page 83. These deferred awards are not subject to any conditions, except continuous employment. However, awards remain available for malus and clawback.
Strategic element (20% weighting) As described elsewhere in this Annual Report, during 2015 we have continued to invest in improved customer propositions and on improving the customer experience and reducing complaints. This has contributed to an increase in Net Promoter Scores across a number of measures, as well as a reduction in complaints. Overall, a strong performance on the basket of customer measures considered by the Committee has led to an above target payout of 75% of the maximum available under this element.
Consequently, the annual incentive awards for Executive Directors for the financial year ended 31 December 2015 were as follows: Maximum
Non-Executive Directors Fees were the only remuneration paid to Non-Executive Directors in 2014 and 2015. Non-Executive Directors may also claim for reasonable travel and subsistence expenses, in accordance with the Group’s travel and expenses policy, and, where these are classified as taxable by HMRC, they have been shown under Benefits below. The Non-Executive Directors receive no other benefits.
2. The values shown under benefits above comprise the value of travel and subsistence expenses reimbursed by the Company (including any potential gross-up for tax and NIC due). Similar amounts of taxable benefits have also been identified in respect of the 2012 and 2013 financial years of £4,031 for Mike Biggs and £35,516 for Jane Hanson which have not previously been included in the respective accounts but are noted here following HMRC’s clarification of the Directors' permanent place of employment for tax purposes issued in 2015.
4. Andrew Palmer was appointed as the Senior Independent Director with effect from 13 May 2015.
5. Priscilla Vacassin was appointed to the Nomination Committee with effect from 13 May 2015.
Percentage change in Chief Executive Officer's pay for 2014 to 2015 The table below shows the Chief Executive's year-on-year percentage change in salary, taxable benefits and bonus, compared to the average pay for all other UK employees.
3. Includes average amounts earned under the AIP and, for employees other than the Chief Executive Officer, other variable incentive schemes, including monthly and quarterly incentive schemes operated in certain parts of the Group.
Distribution statement This chart shows the overall pay expenditure across all Group employees compared with the total dividend value paid to shareholders for 2014 and 2015.
Note: There have been no share buy-backs since the IPO. The overall expenditure on pay has been taken from note 11 to the consolidated financial statements. Therefore, consistent with market practice, it has not been calculated in a manner consistent with the single figure in this report.
The table below shows historical levels of the Chief Executive Officer’s pay between 2012 and 2015. It also shows vesting of annual and long-term incentive pay awards as a percentage of the maximum available opportunity.
2. The 2014 single figure has been revised to reflect the actual vesting of the 2014 awards under the 2012 RBS Group LTIP and actual vesting under the RoTE element of the Direct Line Group LTIP granted in 2012. For 2015, the estimated vesting of the RoTE portion of the Direct Line Group LTIP granted in March and August 2013 has also been included at a value of £1,947,016. The vesting under the RoTE element of these awards has been calculated with reference to an adjusted 2015 RoTE of 17.6% as opposed to 18.5% in order to reflect the impact of the International division during 2015. Any shares vesting under the Direct Line Group LTIP granted in 2013 will not be delivered until the end of the applicable vesting periods in March and August 2016. However, they have been included in the single figure, as the performance period in respect of the RoTE portion has now been completed.
Annual General Meeting voting outcomes The table shows the percentage of shareholders voting for or against, and the percentage of votes withheld in relation to the resolution to approve the Directors’ annual remuneration report, which was put to the 2015 AGM and the resolution to approve the Directors’ remuneration policy, which was put to the 2014 AGM.
Note: The percentages of votes for and against are expressed as a percentage of votes cast, excluding votes withheld. The percentage of votes withheld is expressed as a percentage of total votes cast, including votes withheld.
Shareholdings This table sets out the share ownership guidelines and share ownership levels: Position
Notes: 1. Executive Directors are expected to retain all the Ordinary Shares they obtain from any of the Company’s share incentive plans until they achieve a shareholding level that is equal to 200% of base salary. This is calculated after any disposals necessary to pay personal taxes on acquiring such Ordinary Shares.
3. Shares held as at 31 December 2015 reflect the impact of the share consolidation on 30 June 2015 in which every 12 existing Ordinary Shares were replaced by 11 new Ordinary Shares, meaning the aggregate number of Ordinary Shares in issue was reduced.
Notes: 1. Shares held as at 31 December 2014 have been restated to reflect the impact of the share consolidation on 30 June 2015 in which every 12 existing Ordinary Shares were replaced by 11 new Ordinary Shares, meaning the aggregate number of Ordinary Shares in issue was reduced. These figures have been provided to facilitate a like-for-like comparison with shares held as at 31 December 2015.
3. Includes matching shares held under the SIP which are subject to forfeiture and deferred shares under the Direct Line Group DAIP. For more information, see page 85.
7. Beneficial share interests include partnership shares John Reizenstein purchased under the SIP and free shares held by both Executive Directors under the SIP. At 9 March 2016, the number of shares beneficially held by John Reizenstein has increased to 183,575. There was no change to the number of shares held by Paul Geddes.
Shares held at 31 December 2014 restated for share consolidation4 Shares held at
Notes: 1. There were no changes to the number of shares held by Directors between the year end and the date of this report.
3. Glyn Jones stepped down from the Board on 13 May 2015 and this represents his holding at that date.
No. of share options held at 31 December 2015 Vesting date
No. of dividend shares acquired at vesting No. of options exercised
Notes: The Company’s share price on 31 December 2015 was £4.075 and the range of prices in the year was £2.903 to £4.143.
2. The RoTE targets for awards granted in 2015, applying to 60% of the award, were 14.5% for 20% vesting, 15.5% for 40% vesting and 17.5% for full vesting. A straight-line interpolation occurs from threshold to target, and then from target to maximum performance. The remaining 40% of each award is based on TSR performance conditions, which are the same as noted on page 76.
3. The closing market price on the date of the vesting of the award was £3.944.
5. Awards lapsed on 30 June 2015 as a result of the share consolidation in which every 12 existing Ordinary Shares were replaced by 11 new Ordinary Shares.
Direct Line Group 2012 Share Incentive Plan During 2015, all employees, including Executive Directors, were eligible to invest from £10 to £150 a month from their pre-tax pay into the SIP, and receive one matching share for every two shares they purchased. This table details the number of shares held by John Reizenstein under the SIP. Paul Geddes does not participate in the plan.
At the time of the IPO, and under the same terms as other employees, Executive Directors received the opportunity to subscribe for 143 free Company shares, which vested in November 2015, three years from grant. Both Executive Directors subscribed for this offer. They were also eligible to participate in the award of approximately £400 worth of free shares in March 2015. However, both waived their eligibility to this award.
• The principles for setting base salary are similar to those applied to other employees in the Group, although the specific benchmarking groups used to review external market relativities may differ across employee groups
• For Executive Directors, at least 40% of the award is deferred into shares under the Deferred Annual Incentive Plan (the “DAIP”), typically vesting three years after grant (with deferred awards also capable of being settled in cash). The remainder of the award is paid in cash following year-end
• The Committee has determined that its policy will be to only set base salaries by reference to the factors set out in the previous column for the duration of this policy. In any event, no increase will be made if it would take an Executive Director’s salary above the median level of salaries for relevant roles in the FTSE 100 as determined using data available to the Committee at or shortly prior to when any increase is considered
• The maximum bonus level potential under the AIP is 175% of base salary per annum. The current maximum bonus level applying for each individual Executive Director is shown in the ‘Statement of policy implementation in 2016’ section of the annual remuneration report
• These may be financial, non-financial (Group, divisional or business line) and individual. Each year, at least 50% of the bonus is based on financial measures. The remainder of the bonus will be based on a combination of non-financial and individual performance measures
• Performance is measured against targets set at the beginning of the performance period which may be set by reference to the time of grant or financial year
• Pension contributions are paid only in respect of base salary
• Executive Directors are eligible to participate in the defined contribution pension arrangement or alternatively they may choose to receive a cash allowance in lieu of pension
Benefits • A comprehensive and flexible benefits package is offered, with the emphasis on individuals being able to choose the combination of cash and benefits that suits them
• The assessment of performance targets is based on an error or inaccurate or misleading information or assumptions
• Adjustments needed in certain circumstances (for example, rights issue, corporate restructuring or special interim dividend)
The Committee also retains the discretion to amend the performance measures, weightings and targets after they have been set if events make it appropriate to do so. Any changes will be explained in future annual remuneration reports and, if appropriate, be the subject of consultation with the Company’s major shareholders.
Adjustment to number of shares under deferred bonus and LTIP The number of shares subject to deferred bonus and LTIP awards may be increased to reflect the value of dividends that would have been paid in respect of any dates falling between the grant of awards and the date of vesting of awards (the date of transfer of shares for awards made prior to 2014).
Long-Term Incentive Plan The ultimate goal of our strategy is to provide long-term sustainable returns for our shareholders.
For 2016, awards under the LTIP will therefore continue to be subject to performance against both RoTE and relative TSR targets, which are important KPIs for the business. The Committee believes that this combination provides a balanced approach to the measurement of Group performance over the longer term by using both a stated financial KPI that incentivises individuals to keep growing the business in an efficient way and a measure based on relative shareholder return. This combination of measures achieves an appropriate balance of absolute and relative returns.
The Group has one consistent reward policy for all levels of employees. Therefore, the same reward principles guide reward decisions for all Group employees, including Executive Directors, although remuneration packages differ to take into account appropriate factors in different areas of the business: • AIP – approximately 3,200 employees participate in the AIP and the corporate performance measures for all employees are consistent with those used for Executive Directors, although the weighting attributable to those factors may differ. The Group’s strategic leaders also receive part of their bonus in Company shares deferred for a period of three years
• In setting the level of fees, the Company takes into account the expected time commitment of the role and fees at other companies of a similar size, sector and/or complexity to the Group
• For an internal appointment, any variable pay element awarded in respect of the prior role may either continue on its original terms or be adjusted to reflect the new appointment, as appropriate
Service contracts Subject to the discretion noted above for new recruits, it is the Company’s policy to set notice periods for Executive Directors of no more than 12 months (both by the Director or Company). The Executive Directors’ service agreements summary is as follows: Director Effective date of contract
There are no further obligations which could give rise to a remuneration or loss of office payment other than those set out in the remuneration policy table and termination policy summary.
The table overleaf sets out the general position although it should be noted that the Committee, consistent with most other companies, has reserved a broad discretion to determine whether an Executive Director should be categorised as a ‘good leaver’ and that discretion forms part of the approved policy. Similarly, while the policy is generally to reduce AIP and LTIP awards on a pro-rata basis, the Committee has reserved discretion to disapply such reduction if, in the circumstances, it considers that to be appropriate taking into account the performance of the departing Executive and the circumstances of leaving.
Other events, for example change in control or winding up of Company
Annual Incentive Plan No awards made Bonus paid at the normal time and on a time pro-rata basis, unless the Committee determines otherwise.
Bonus determined on such basis as the Committee considers appropriate and paid on a time pro-rata basis, unless the Committee determines otherwise.
The Chairman and Non-Executive Directors have notice periods of three months from either party, which do not apply in the case of a Director not being re-elected by shareholders or retiring from office under the Articles of Association. Other than fees for this notice period, the Chairman and Non-Executive Directors are not entitled to any compensation on exit.
Consideration of shareholders’ views The Committee takes into account the approval levels of remuneration related matters at the AGM in determining whether the current Directors’ remuneration policy remains appropriate.
The Committee, consistent with its approach of operating within the highest standards of corporate governance, takes significant account of guidelines issued by the Investment Association and other shareholder bodies (such as the National Association of Pension Funds) when setting the remuneration policy.
Performance scenarios The Directors’ remuneration policy has been designed to ensure that a significant proportion of total remuneration is delivered in the form of variable pay and is therefore dependent on performance against our strategic objectives.
The Committee has considered the level of remuneration that may be paid under different performance scenarios to ensure that it would be appropriate in each situation in the context of the performance delivered and the value created for shareholders.
Minimum Consists of fixed remuneration only (that is, base salary, benefits and pension): • Base salary is the salary to be paid from 1 April 2016
• Benefits measured as benefits paid in 2015 as set out in the single figure table on page 77, including the value of matching shares under the SIP where relevant
• Pension measured as the defined contribution or cash allowance in lieu of Company contributions, as a percentage of salary (25% of base salary for both Executive Directors)
• AIP – consists of the maximum bonus (175% of base salary for Paul Geddes, 150% for John Reizenstein)
Use of financial instruments 43 and 44 Important events since the financial year end
Corporate governance statement The FCA’s Disclosure and Transparency Rules require a corporate governance statement in the Directors’ report to include certain information. You can find information that fulfils the corporate governance statement’s requirements in this Directors’ report; the Corporate Governance report; the Committee reports; and the Directors’ remuneration report, on pages 46 to 95. This information is incorporated in the Directors’ report by reference.
Post-balance sheet events There were no post-balance sheet events to report.
The Group expects that one-third of the annual dividend will generally be paid in the third quarter as an interim dividend, and two-thirds will be paid as a final dividend in the second quarter of the following year. The Board may revise the dividend policy from time to time.
The final dividend resolution provides that the Board may cancel the dividend and therefore payment of the dividend at any time prior to payment if it considers it necessary to do so for regulatory capital purposes. Detailed explanatory notes can be found in the Notice of AGM.
The Company paid a special interim dividend of 27.5 pence per share in July 2015. This represented substantially all of the net proceeds from the sale of the International division.
The Company paid an interim dividend of 4.6 pence per share in September 2015.
Further information about dividends and capital management can be found in the Finance review on pages 44 and 45, and note 15 to the financial statements on page 143.
The Directors listed on pages 48 and 49 were the Directors of the Company throughout the year apart from Richard Ward, who was appointed on 18 January 2016, and Glyn Jones, who resigned as a Director on 13 May 2015 due to increasing commitments elsewhere.
Secretary Roger Clifton is the Company Secretary of Direct Line Insurance Group plc. He can be contacted at the Company’s Registered Office, details of which are on the inside back cover.
Directors’ interests You can find details of the Directors’ remuneration, service contracts, employment contracts and interests in the shares of the Company in the Directors’ remuneration report on pages 70 to 95.
The Company has also provided the directors of DLG Pension Trustee Limited with qualifying pension scheme indemnities. This is in accordance with section 235 of the Companies Act 2006. DLG Pension Trustee Limited acts as trustee for two of the Company’s occupational pension schemes.
Share capital The Company has a premium listing on the London Stock Exchange. As at 31 December 2015, its share capital comprised 1,375,000,000 fully paid Ordinary Shares of 10 10/11 pence each.
On 29 June 2015, shareholders approved a share consolidation. This resulted in issuing 11 new Ordinary Shares of 10 10/11 pence each for every 12 Ordinary Shares of 10 pence each in issue at close of business on 29 June 2015.
 make market purchases of up to 137,500,000 shares in the Company, representing approximately 10% of the Company’s issued share capital at the time.
Where the Company has issued a notice under section 793 of the Companies Act 2006 which is in default for at least 14 days, the person(s) interested in those shares shall not be entitled to attend or vote at any general meeting until the default has been corrected or the shares sold.
There is no arrangement or understanding with any shareholder, customer or supplier, or any other external party that provides the right to appoint a Director or a member of the Executive Committee, or any other special rights regarding control of the Company.
Significant agreements affected by a change of control A number of agreements may take effect, alter or terminate upon a change of control of the Company. None of these agreements are considered to be significant in terms of its impact on the business of the Group as a whole.
Substantial shareholdings In accordance with the provisions of chapter 5 of the FCA’s Disclosure and Transparency Rules, the Company has been notified of the following indirect interest in the Company’s voting rights. The Company has not been notified of any direct interests.
Political donations The Group made no political donations during the year (2014: nil).
An element of our Diversity Network Alliance focuses on matters important to employees with disabilities. It also identifies areas where we can improve. To help people continue working for us, we make reasonable adjustments to their working environments and equipment, and roles and role requirements. We also ensure that everyone can access the same opportunities.
Greenhouse gas emissions The Group has followed the 2013 UK Government environmental reporting guidance for greenhouse gas (“GHG”) emissions, used the UK Government’s greenhouse gas conversion factors, and adopted the financial control approach to setting the organisational boundaries of responsibilities for GHG emissions. GHG emissions are classified as direct or indirect, and divided into scope 1 and scope 2 emissions. Direct GHG emissions are those from sources that the Group owns or controls. Indirect GHG emissions are those that are a consequence of the Group’s activities, but occur at sources owned or controlled by another organisation. The Group has considered the six main GHGs, reported in tonnes of carbon dioxide equivalent (“CO2e”), and set 2013 as the base year. The Group has included emissions from the International division, until its sale in May 2015, under discontinued operations in the table opposite. It has not included emissions associated with its investment portfolio.
Scope 1 – direct emissions including fuels used in office buildings, accident repair centres and owned vehicles
Emissions per £ million of net earned premium 7.7 9.1 8.8 8.7
 they have taken all the steps they ought to have taken as a Director to make themselves aware of any relevant audit information and establish that Deloitte LLP is aware of that information.
Directors’ responsibility statement The Directors are responsible for preparing the Annual Report and financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare such financial statements for each financial year. Under that law, the Directors must prepare the Group financial statements in accordance with International Financial Reporting Standards (“IFRS”), as adopted by the EU and Article 4 of the International Accounting Standard (“IAS”) regulation. They have also chosen to prepare the Parent Company financial statements under IFRS, as adopted by the EU. Under company law, the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the Company’s state of affairs and profit or loss for that period.
 Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose, with reasonable accuracy, the Company’s financial position at any time, and enable them to ensure the financial statements comply with the Companies Act 2006. Additionally, they are responsible for safeguarding the Company’s assets and hence taking reasonable steps to prevent and detect fraud and other irregularities. The Directors are responsible for maintaining and ensuring the integrity of the corporate and financial information included on the Company’s website at www.directlinegroup.com . Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors, whose names and functions are listed on pages 48 and 49, confirms that, to the best of their knowledge:  the financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position, and profit or loss of the Company, and the undertakings included in the consolidation taken as a whole; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the International Accounting Standard (“IAS”) Regulation.
Independence We are required to comply with the Financial Reporting Council’s Ethical Standards for Auditors and we confirm that we are independent of the Group and we have fulfilled our other ethical responsibilities in accordance with those standards. We also confirm we have not provided any of the prohibited non-audit services referred to in those standards.
We agreed with the Directors’ adoption of the going concern basis of accounting and we did not identify any material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern.
The methodology and assumptions used in setting insurance reserves Insurance reserves include the Group’s insurance liabilities from continuing business totalling £4.5 billion, as detailed in note 31.The determination of the value of the insurance reserves requires significant judgement in the selection of key assumptions and methodologies. The Group has indicated to the market that assuming current claims trends continue, the contribution from prior-year reserve releases is expected to remain significant, albeit lower than in 2014. Management exercises significant judgement in respect of the trends in bodily injury claims frequency and severity, the speed of recognition of emerging data and trends, the propensity for large claims to settle as periodic payment orders (“PPOs”), the likely outcome of the Government’s consultation on the Ogden discount rate used by the courts to calculate claims for long-term damages and other regulatory developments.
The valuation of investments held at fair value, derivatives and loan loss provisioning The Group’s financial investments shown in note 26 represent the largest number on the balance sheet, £5.6 billion. As the Group’s investments portfolio has diversified, the risk associated with valuation has increased over instruments where market prices are not always readily available, such as securitised credit assets or infrequently traded assets. These investments are typically more illiquid, resulting in reduced availability of observable inputs and therefore increased judgement in their valuation. The valuation of the Group’s derivatives, held in order to hedge interest rate risk and foreign exchange risk, is also deemed to be complex, with small differences in interest rate curves resulting in material valuation changes.
Management are required to assess financial assets for indications of impairment. Where limited observable market inputs are available, this requires management to exercise increased judgement. The infrastructure debt portfolio has increased by 330% to £330 million in the year and is held at amortised cost. There are no readily observable market inputs for this portfolio and so this has resulted in an increased risk of material misstatement.
We have tested the valuation of securitised credit instruments where an observable market price could not be obtained by engaging our pricing and valuation specialists to calculate independent valuations using a discounted cash flow approach. We have used our financial instrument specialists to test the macro hedge arrangements, valuation of the related financial instruments and the accounting treatment applied. We have engaged our credit specialists to challenge the methodology used in the assessment of credit risk within the growing infrastructure debt portfolio.
In addition, we have checked that the Group’s disclosures satisfy the requirements of IFRS 7 and IFRS 13. We have reviewed the classification and accounting treatment of the Group’s investment portfolio in line with the accounting policies set out in note 1.12 to the financial statements.
We have tested the design and implementation and operating effectiveness of key business processes that have been subject to change. For example, we have tested the operating effectiveness of controls at a number of outsourced locations, involving site visits by the audit team. When testing the controls that had been impacted by the transformation programme, our testing focused on identifying that there remained an appropriate level of review and segregation of duties in the process.
Reinsurance asset valuation The valuation of the reinsurance asset, £1 billion in respect of the ceded part of the insurance reserves, as detailed in note 22, requires significant judgement to reflect the credit risk exposure to long-term assets arising from periodic payment orders. In addition, management refined their methodology for calculating the reinsurance bad debt. There is also a risk that reinsurance treaty terms and actuarial assumptions are not correctly applied when performing reinsurance valuations.
We have assessed the relevance and reliability of the data used in the calculation by reviewing the data against observable market inputs and other supporting documentation. To test the credit risk exposure, we engaged our credit and actuarial specialists in order to assess the reasonableness and appropriateness of the reinsurance bad debt valuation methodology and assumptions used. This included the distribution of withdrawals within the transitional matrix which estimates the probability of default at a point in time, the basis for allocating cash flows across future periods, and the selection of scenarios applied to calculate the renewed recovery rates.
We have tested the design, implementation and operating effectiveness of the key controls over revenue recognition, focusing on the flow of information from the underwriting systems to the financial reporting ledger. We have performed substantive testing of the flow of data from system downloads through to posting in the general ledger. In addition, we performed substantive analytical testing procedures on the gross and unearned premium balances.
Last year our report included a risk around IT migration, which has been captured within the IT control environment risk description. This is due to the migration programme finishing early in the year but there still being a significant level of change in the IT control environment during the year.
The description of risks above should be read in conjunction with the significant issues considered by the Audit Committee discussed on page 59. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £560,000 (2014: £560,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
Due to the completion of the International disposal in 2015, our Group audit scope has focused on the UK as this is now the Group’s single trading location. In addition, we perform site visits at the Group’s key outsourcers. Two entities in the UK were subject to a full audit, and a further two were subject to an audit of specified account balances where the extent of our testing was based on our assessment of the risks of material misstatement and of the materiality of the Group’s operations.
These four entities represent the principal business units and account for 99% (2014: 98%) of the Group’s net assets, 92% (2014: 99%) of the Group’s gross earned premium and 93% (2014: 95%) of the Group’s profit before tax. They were also selected to provide an appropriate basis for undertaking audit work to address the risks of material misstatement identified above.
Our audit work was executed at levels of materiality applicable to each individual entity which were lower than Group materiality.
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 Parent 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 and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Instalment income 100.1 100.4 Other operating income 8 50.7 46.9 Total income 3,269.8 3,349.1
Insurance claims recoverable from reinsurers 9 162.4 51.2 Net insurance claims 9 (1,666.9) (1,727.4)
Profit from continuing operations, net of tax 399.2 359.3 Profit from discontinued operations, net of tax 5A 181.2 13.3 Profit for the year attributable to owners of the Company 580.4 372.6
For the year ended 31 December 2015 www.directlinegroup.com 107 £m 2014 £m
Direct Line Group Annual Report & Accounts 2015 108 £m 2014 £m
Current tax assets 14 0.1 0.1 Deferred acquisition costs 23 203.8 208.4 Insurance and other receivables 24 955.8 959.9 Prepayments, accrued income and other assets 110.9 107.9 Derivative financial instruments 25 19.6 27.3 Retirement benefit asset 33 13.1 3.5
Cash and cash equivalents 27 963.7 880.4 Assets held for sale 5C 5.1 1,208.4 Total assets 9,956.6 11,225.6
Profit for the year – – – – – – 372.6 372.6
Transfer to non-distributable reserve 29 – – – – 32.1 – (32.1) – Shares acquired by employee trusts – (4.4) – – – – – (4.4) Credit to equity for equity-settled share-based payments 34 – – – – – – 6.6 6.6 Shares distributed by employee trusts – 1.0 – – – – (1.0) – Tax on share-based payments 14 – – – – – – 1.0 1.0
IFRS 3 (amended), ‘Business Combinations’ – The first amendment deals with the accounting for contingent consideration in a business combination and the second amendment clarifies that joint arrangements, not just joint ventures, are outside the scope of IFRS 3.
IFRS 13 (amended), ‘Fair Value Measurement’ – The amendment clarifies that the portfolio exception in IFRS 13 can also be applied to other contracts within the scope of IFRS 9 or IAS 39.
IAS 16 (amended), ‘Property, Plant and Equipment’ and IAS 38 (amended), ‘Intangible Assets’ – These amendments clarify that an asset may be revalued by reference to observable data either by adjusting the gross carrying amount of the asset to market value or by determining the market value of the carrying value and adjusting the gross carrying amount proportionately so that the resulting carrying amount equals the market value. In addition, they also clarify that accumulated depreciation and amortisation is the difference between gross and carrying amounts of the asset.
IAS 19 (amended), ‘Employee Benefits’ – The amendment simplifies the accounting for employee contributions in respect of defined benefit plans that are independent of the number of years of service.
IAS 40 (amended), ‘Investment Property’ – The amendment clarifies that IFRS 3 should be used to assess whether a transaction is the purchase of an asset or a business combination.
Where necessary, adjustments have been made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. The policies set out below have been applied consistently throughout the years ended 31 December 2015 and 31 December 2014 to items considered material to the consolidated financial statements.
Direct Line Group Annual Report & Accounts 2015 112 1. Accounting policies continued Assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into Sterling at the foreign exchange rates ruling at the balance sheet date. Income and expenses of foreign operations are translated into Sterling at average exchange rates unless these do not approximate the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on the translation of a foreign operation are recognised in the consolidated statement of comprehensive income. The amount accumulated in equity is reclassified from equity to the consolidated income statement on disposal or partial disposal of a foreign operation.
Income is recognised immediately when the customer or claimant is provided with the hire vehicle.
Revenue from vehicle recovery and repair 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.
Expenditure on internally generated goodwill and brands is written off as incurred. Direct costs relating to the development of internal-use computer software and associated business processes are capitalised once technical feasibility and economic viability have been established. These costs include payroll costs, the costs of materials and services, and directly attributable overheads. Capitalisation of costs ceases when the software is capable of operating as intended. During and after development, accumulated costs are reviewed for impairment against the projected benefits that the software is expected to generate. Costs incurred prior to the establishment of technical feasibility and economic viability are expensed as incurred, as are all training costs and general overheads.
1.11 Investment property Investment property comprises freehold and leasehold properties that are held to earn rentals or for capital appreciation or both. Investment property is not depreciated, but is stated at fair value based on valuations by independent registered valuers. Fair value is based on current prices for similar properties adjusted for the specific characteristics of each property. Any gain or loss arising from a change in fair value is recognised in the income statement.
1.12 Financial assets Financial assets are classified as AFS, held-to-maturity (“HTM”), designated at fair value through profit or loss, or loans and receivables. The Group only holds AFS financial assets, HTM financial assets and loans and receivables.
AFS Financial assets that are not classified as HTM or loans and receivables are classified as AFS. Financial assets can be designated as AFS on initial recognition. AFS financial assets are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at fair value. Impairment losses and exchange differences resulting from translating the amortised cost of foreign currency monetary AFS financial assets are recognised in the income statement, together with interest calculated using the effective interest rate method. Other changes in the fair value of AFS financial assets are reported in a separate component of shareholders’ equity until disposal, when the cumulative gain or loss is recognised in the income statement.
A financial asset is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The appropriate quoted market price for an asset held is usually the current bid price. When current bid prices are unavailable, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. If conditions have changed since the time of the transaction (for example, a change in the risk-free interest rate following the most recent price quote for a corporate bond), the fair value reflects the change in conditions by reference to current prices or rates for similar financial instruments, as appropriate.
Subsequent to initial recognition, HTM financial assets are measured at amortised cost using the effective interest rate method less any impairment losses.
Hedge relationships are formally documented at inception. The documentation identifies the hedged item and the hedging instrument and details the risk that is being hedged and the way in which effectiveness will be assessed at inception and during the period of the hedge. If the hedge is not highly effective in offsetting changes in cash flows and fair values attributable to the hedged risk, consistent with the documented risk management strategy, or if the hedging instrument expires or is sold, terminated or exercised, hedge accounting is discontinued.
Derecognition of financial assets A financial asset is derecognised when the rights to receive the cash flows from that asset have expired or when the Group has transferred its rights to receive cash flows from the asset and has transferred substantially all the risk and rewards of ownership of the asset.
1.18 Pensions and other post-retirement benefits The Group provides post-retirement benefits in the form of pensions and healthcare plans to eligible employees.
overnance Financial statem ents www.directlinegroup.com 117 1.20 Share-based payments The Group operates a number of share-based compensation plans under which it awards Ordinary Shares and share options to its employees. Such awards are generally subject to vesting conditions that vary the amount of cash or shares to which an employee is entitled.
The standard has introduced greater flexibility in the type of transactions eligible for hedge accounting and broadened the type of instruments that qualify as hedging instruments. The hedge effectiveness test has been replaced with the principle of an ‘economic relationship’.
IFRS 9 ‘Financial Instruments’ has been adopted for use from 1 January 2018 by the EU, with an option for insurance industry participants to either apply the standard from that date or defer adoption until the IASB issues IFRS 4 (Phase 2) ’Insurance Contracts’ and it is adopted by the EU. This option has been provided in order to avoid potential asset and liability mismatches which could arise within the remit of current IFRS until both standards are applied simultaneously.
The Group will make a decision as to the classification of financial assets and liabilities once further certainty exists as to the adoption of IFRS 4 (Phase 2). Accordingly, at this point in time, the Group is not able to fully quantify the impact of adopting IFRS 9 on its financial statements.
IFRS 16 applies to annual reporting periods beginning on or after 1 January 2019, although early adoption is permitted.
In the absence of an applicable standard or interpretation, IAS 8, ‘Accounting policies, Changes in Accounting Estimates and Errors’, requires management to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB’s Framework for the Preparation and Presentation of Financial Statements. The judgements and assumptions involved in the Group’s accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results.
Claims reserves are assessed separately for large and attritional claims, typically using standard actuarial methods of projection. Key judgements in this assessment include the selection of specific methods as well as assumptions for claims frequency and severity through the review of historical claims and emerging trends.
In August 2012, the Ministry of Justice announced a review of the approach to setting the Ogden discount rate within the existing legal framework. Following further consultation, in 2015 the Justice Secretary appointed a panel of three financial investment experts who will provide testimony on potential changes to the discount rate on personal injury damages. We are awaiting the outcome of their review.
Net of reinsurance Approved PPO claims provisions 221.2 594.2 206.0 557.1
The provisions for PPOs have been categorised as either claims which have already settled as PPOs (approved PPO claims provisions) or those expected to settle as PPOs in the future (anticipated PPOs). Anticipated PPOs consist of both existing large loss case reserves including allowances for development and claims yet to be reported to the Group. Reinsurance is applied at claim level and the net cash flows are discounted for the time value of money. The discount rate is consistent with the long duration of the claims payments and the assumed future indexation of the claims payments.
2.3 Fair value Financial assets classified as AFS debt securities and derivative financial instruments are recognised in the financial statements at fair value determined using observable market input. The fair value of AFS debt securities at 31 December 2015 amounted to £5,226.6 million (2014: £5,830.3 million with an additional £706.9 million included in assets held for sale). The fair value of derivative financial assets and liabilities amounted to £19.6 million (2014: £27.3 million) and £46.4 million (2014: £29.4 million) respectively.
Freehold and long leasehold properties that are classified as investment properties are recognised in the financial statements at fair value. The fair value at 31 December 2015 amounted to £347.4 million (2014: £307.2 million) and was determined using a valuation model that includes inputs that are unobservable.
Level 2 financial assets and liabilities are measured using a valuation technique based on assumptions that are supported by prices from observable current market transactions. These 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.
2.4 Deferred acquisition costs The Group defers a proportion of acquisition costs incurred during the year to subsequent accounting periods. Management uses 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. Total deferred acquisition costs at 31 December 2015 amounted to £203.8 million (2014: £208.4 million with an additional £111.1 million included in assets held for sale). During 2015, the Group reviewed these costs included in the calculation of deferred acquisition costs and considers them to be appropriate, and has determined that they are recoverable.
2.6 Property, plant and equipment The Group does not revalue property, plant and equipment. However, it takes appropriate steps to consider whether the aggregate value of property, plant and equipment exceeds the balance sheet carrying value of such items.
overnance Financial statem ents www.directlinegroup.com 121 3. Risk management 3.1 Enterprise Risk Management Strategy and Framework The ERMF sets out, at a high level, our approach and processes for managing risks. Further information can be found in the Risk management section of the Strategic report on page 26.
3.2 Risk and capital management modelling The Board has ultimate responsibility for ensuring that the Group has sufficient funds to meet its liabilities as they fall due. The Group carries out detailed modelling of its assets, liabilities and the key risks to which these are exposed. This modelling includes the Group’s own assessment of its SCR. The assessment has been submitted to the PRA as part of the Group’s application for IMAP. The SCR quantifies the insurance, market, credit, operational and liquidity risk that the regulated entities are undertaking.
3.3 Principal risks from insurance activities and use of financial instruments The Risk management section of the Strategic report sets out all the risks assessed by the Group as principal risks. Detailed below is the Group’s risk exposure arising from its insurance activities and use of financial instruments specifically in respect of insurance risk, market risk and credit risk.
The insurance risks that the Group faces include those referred to below: Reserve risk Reserve risk relates to both premiums and claims. This is the risk that reserves are understated arising from: • the random nature of claims; • data issues; and
The Group’s reserves are particularly susceptible to potential retrospective changes in legislation and new court decisions, for example, a change in the Ogden discount rate. This is the discount rate set by the relevant government bodies and used by courts to calculate lump sum awards in bodily injury cases. The rate is currently 2.5% per annum but is under review by the Ministry of Justice. The Group has calculated its estimated reserves based on an assumed Ogden discount rate of 1.5%, in recognition of the uncertainty regarding the future rate.
Uncertainty in claims reserves estimation is larger for claims such as PPOs for which annually indexed payments are made typically over the lifetime of the injured party. Claims reserves for PPOs are held on a discounted basis and are sensitive to a change in the assumed discount rate.
Direct Line Group Annual Report & Accounts 2015 122 3. Risk management continued The table below provides a 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 could have an additional financial impact on the Group.
3. These sensitivities reflect one-off impacts at 31 December excluding the impact of taxation and should not be interpreted as a prediction.
In addition, there is the risk that claims are reserved or paid inappropriately, including the timing of such activity. However, there are claims management controls in place to mitigate this risk, as outlined below: • Claims are managed utilising a range of IT system-driven controls coupled with manual processes outlined in detailed policies and procedures to ensure claims are handled in an appropriate, timely and accurate manner.
Underwriting risk This is the risk that future claims experience on policies written is materially different from the results expected, resulting in losses. The Group predominantly underwrites personal lines insurance including motor, residential property, roadside 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.
Underwriting risk includes catastrophe risk, the risk of loss, or of adverse change, in the value of the insurance liabilities resulting from significant uncertainty of pricing and provisioning assumptions related to extreme or exceptional circumstances.
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-year loss. The retained deductible is £150 million at 31 December 2015 (2014: £150 million); • 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
Reinsurance risk This is the risk of inappropriate selection and / or placement of a reinsurance arrangement, with either individual or multiple reinsurers which renders the transfer of insurance risk to the reinsurer(s) inappropriate and / or ineffective. Other risks include: • 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; • Reinsurance capacity being reduced and / or withdrawn; • Underwriting risk appetite and reinsurance contract terms not being aligned; • Reinsurance contract terms being inappropriate or ineffective resulting in classes or types of business not being appropriately reinsured; • Non-adherence to the reinsurance policy terms and conditions, in terms of both policy management and claims not being handled within the reinsurance contract terms and conditions or paid on an ex-gratia basis resulting in reinsurance recoveries not being made in full; • Inappropriate or inaccurate management information and / or modelling being used to determine the value for money and purchasing of reinsurance (including aggregate modelling); and
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
• transfer risk that is not within the Group’s current risk retention strategy.
The strategic asset allocation within the investment portfolio is reviewed by the Investment Committee, which makes recommendations to the Board for its investment strategy approval. The Investment Committee determines policy and controls, covering such areas as risk, liquidity and performance. The Investment Committee meets at least three times a year to evaluate risk exposure, the current strategy, associated policies and investment guidelines and to consider investment recommendations submitted to it. Oversight of the implementation of decisions taken by the Investment Committee is via the 1st and 2nd Lines of Defence.
The fixed interest rate up to 27 April 2022 on the Group’s 30-year maturity £500 million of subordinated guaranteed dated notes has been exchanged for a floating rate of interest (note 30).
The market value of the Group’s financial investments with fixed coupons is affected by the movement of interest rates. For the majority of investments in US Dollar corporate bonds, excluding £336.9 million of short duration high yield bonds (2014: £297.4 million), the Group hedges the exposure of this portfolio to the US Dollar interest rate risk using swaps. These derivatives reduce the duration of the portfolio to close to zero.
Property risk This risk results from adverse price fluctuations on commercial property investments. At 31 December 2015, the value of these property investments was £347.4 million (2014: £307.2 million). The property investments are located in the UK.
The Group maintains exposure to US Dollar securities through £1,876.3 million (2014: £1,892.3 million) of investments in US Dollar corporate bonds and US Dollar securitised credit. 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 currency risk on the hedging.
Spread Impact of a 100 basis points increase in spreads on financial investments and derivatives1,2,4,5 – – (160.1) (163.5) Interest rate Impact of a 100 basis points increase in interest rates on financial investments and derivatives1,3,4,5 22.1 19.1 (120.0) (122.8) Investment property5 Impact of a 15% decrease in property markets (52.1) (46.1) (52.1) (46.1)
Notes: 1. The income statement impact on financial investments is limited to floating rate instruments and interest rate derivatives used to hedge a portion of the portfolio. The income statement is not impacted in relation to fixed rate instruments, in particular AFS debt securities, where the coupon return is not impacted by a change in prevailing market rates, as the accounting treatment for AFS debt securities means that only the coupon received is processed through the income statement with fair value movements being recognised through total equity.
3. The sensitivities set out above reflect one-off impacts at 31 December with the exception of the income statement interest rate sensitivity on financial investments and derivatives, which projects a movement in a full year’s interest charge as a result of the increase in the interest rate applied to these assets or liabilities on those positions held at 31 December.
6. 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.
7. These sensitivities reflect one-off impacts at 31 December excluding the impact of taxation and should not be interpreted as a prediction.
Direct Line Group Annual Report & Accounts 2015 126 3. Risk management continued The Group has a number of open interest rate and foreign exchange derivative positions. Collateral management arrangements are in place for significant counterparty exposures. At 31 December 2015, the Group has pledged £12.3 million in cash (2014: £17.3 million) to cover out of the money derivative positions. At 31 December 2015, counterparties have pledged £19.7 million in UK Gilts (2014: £21.5 million in UK Gilts) to the Group to cover in the money derivative positions. The terms and conditions of collateral pledged for both assets and liabilities are market standard. When securities are pledged they are required to be readily convertible to cash, and as such no policy has been established for the disposal of assets not readily convertible into cash.
3.3.3 Credit risk This is the risk of loss resulting from fluctuations in the credit standing of issuers of securities, counterparties and any debtors to which the Group is exposed. The Group is mainly exposed to the following credit risk factors: • Counterparty default risk; and
Counterparty default risk This is the risk of loss from unexpected default, deterioration in the credit standing of the counterparties and debtors of the Group. It is primarily managed by the 1st Line of Defence and monitored by the Credit Risk Forum. The main responsibility of this forum is to ensure that all material aspects of counterparty risk within the Group are identified, monitored and measured.
The following tables analyse the carrying value of financial and insurance assets that bear counterparty risk between those assets that have not been impaired by age in relation to due date, and those that have been impaired.
Reinsurance assets 862.5 – – – 862.5 Insurance and other receivables 907.3 52.0 0.6 – 959.9 Derivative assets 27.3 – – – 27.3 Debt securities 5,830.3 – – – 5,830.3 Deposits with credit institutions with maturities > three months 54.7 – – – 54.7 Infrastructure debt 76.2 – – – 76.2 Cash and cash equivalents 880.4 – – – 880.4
Within the analysis of debt securities above are bank debt securities at 31 December 2015 of £1,305.1 million (2014: £1,328.3 million), that can be further analysed as: secured £86.4 million (2014: £104.1 million); unsecured £1,059.6 million (2014: £1,058.3 million); and subordinated £159.1 million (2014: £165.9 million).
Concentration risk on investments 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.
Direct Line Group Annual Report & Accounts 2015 128 3. Risk management continued The table below analyses the distribution of debt securities and infrastructure debt by geographical area.
Mortgage and other asset backed securities 356.1 7% 422.4 7% Sovereign, supranational and local government 688.1 13% 1,290.7 22%
Direct Line Group Annual Report & Accounts 2015 130 3. Risk management continued The tables below analyse the credit quality of financial and insurance assets that are neither past due nor impaired (excluding debt securities analysed above). The tables include reinsurance exposure, after provision. Note 3.3.1 details the Group’s approach to reinsurance counterparty risk management.
Cash and cash equivalents 831.9 – 60.8 71.0 – – 963.7
Note: 1. Includes receivables due from policyholders, agents, brokers and intermediaries which generally do not have a credit rating.
The Group has in place agreed policies and standards to manage key controls relating to operational risk.
At fair value through the income statement: Foreign exchange contracts (forwards) 27.1 0.4 – – 0.4
Designated as hedging instruments: Foreign exchange contracts (forwards) 5.0 0.3 – – 0.3
Derivative assets At fair value through the income statement: Foreign exchange contracts (forwards) 54.4 0.3 – – 0.3
Designated as hedging instruments: Foreign exchange contracts (forwards) 435.6 1.9 0.5 – 2.4
Derivative liabilities At fair value through the income statement: Foreign exchange contracts (forwards) 1,892.3 22.9 – – 22.9
Deposits with credit institutions with maturities in excess of three months 54.7 54.7 – – – –
overnance Financial statem ents www.directlinegroup.com 133 3.4 Capital adequacy Capital is managed in accordance with the Group’s capital management minimum standard, the objectives of which are to manage capital efficiently and maintain an appropriate level of capitalisation and solvency. The Group determines the appropriate level of capital on the basis of a number of criteria, including economic, regulatory and rating agency capital requirements. The Group seeks to hold capital resources consistent with an ‘A’ range credit rating.
Prior to 1 January 2016, the regulated insurance entities of the Group carried out an assessment of the adequacy of their overall financial resources in accordance with the PRA’s ICA methodology. The insurance capital requirement is calculated on an internal model which is calibrated to a 99.5% confidence interval and considers business written to date and one year of future business. Additionally, the model allows for the uncertainty around the run-off of this business.
4. Segmental analysis 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 operating segments: Motor This segment consists of personal motor insurance together with the associated legal protection cover. The Group sells motor insurance through its own brands, Direct Line, Churchill and Privilege, and through partnership brands.
Certain income and charges are not allocated to the specific operating segments above as they are considered by management to be outside underlying business activities by virtue of their one-off incidence, size or nature. Such income and charges are categorised as either run-off or restructuring and other one-off costs, described below.
Operating profit before restructuring and other one-off costs 338.0 109.9 52.0 20.8 520.7 73.1 593.8
Underwriting profit / (loss) 95.5 65.6 33.9 (19.8) 175.2 Loss ratio 63.6% 51.5% 59.9% 62.7% 59.5% Commission ratio 2.6% 20.9% 6.4% 19.6% 10.9% Expense ratio 26.2% 19.8% 24.9% 22.2% 23.6% COR 92.4% 92.2% 91.2% 104.5% 94.0%
Operating profit before restructuring and other one-off costs 297.1 113.9 48.0 47.0 506.0 55.3 561.3 Restructuring and other one-off costs (69.6) Operating profit 491.7 Finance costs (37.2) Gain on disposal of subsidiary 2.3 Profit before tax 456.8 Underwriting profit 49.8 63.5 29.6 5.2 148.1 Loss ratio 67.0% 50.8% 57.4% 57.1% 59.6% Commission ratio 3.2% 21.7% 9.4% 19.7% 11.8% Expense ratio 26.0% 20.2% 25.2% 22.0% 23.6% COR 96.2% 92.7% 92.0% 98.8% 95.0%
Disposal group – liabilities held for sale1 – – – – – (964.4) (964.4)
Direct Line Group Annual Report & Accounts 2015 136 5. Discontinued operations and disposal group Following a strategic review of the International segment during 2014, the Board concluded that, although the operations in Italy (represented by Direct Line Insurance S.p.A) and Germany (represented by Direct Line Versicherung AG) occupied strong positions, a disposal would be likely to generate the most value to shareholders. On 25 September 2014, the Group entered into a binding agreement with Mapfre International S.A., a wholly-owned subsidiary of Mapfre, S.A., for the sale of International. Accordingly, the Group has treated this segment as discontinued operations and a disposal group.
A) Discontinued operations The following table analyses performance relating to the discontinued operations for the period from 1 January to disposal on 29 May 2015 and the year ended 31 December 2014.
Note: 1. Realised net gains on AFS investments in 2015 included £29.9 million of gains reclassified through the income statement, on disposal of International (2014: £nil).
Net cash generated from operating activities 19.1 12.6 Net cash used by investing activities (1.5) (8.4) Net cash generated from the disposal of discontinued operations1 327.1 – Effect of foreign exchange rate changes (9.8) (6.1) Net increase / (decrease) in cash and cash equivalents 334.9 (1.9)
Note: 1. The net cash generated from the disposal of discontinued operations comprises the net cash consideration of £422.5 million less the cash held by the German and Italian subsidiaries at the point of sale of £95.4 million.
B) Disposal group The following table analyses the gain on disposal of discontinued operations during the year including the assets and liabilities held for sale in the disposal group immediately prior to the disposal on 29 May 2015.
Assets Intangible assets 5.4 5.6 Property, plant and equipment 5.2 5.9 Reinsurance assets 171.0 183.0 Deferred tax assets 41.9 9.2 Current tax assets – 1.4 Deferred acquisition costs 105.5 111.1 Insurance and other receivables 152.3 91.1 Prepayments and accrued income 3.1 3.6 Financial investments 665.5 706.9 Cash and cash equivalents 95.4 87.6 Total assets 1,245.3 1,205.4 Liabilities Insurance liabilities 504.5 553.4 Unearned premium reserve 355.0 326.2 Trade and other payables including insurance payables 125.3 82.0 Deferred tax liabilities 32.0 0.8 Current tax liabilities 4.0 2.0 Total liabilities 1,020.8 964.4 Net assets 224.5 Cash consideration received1 438.1 Transaction costs (15.6) Net cash consideration 422.5 Net assets disposed (224.5) Currency translation reserve reclassified to the income statement (30.9) Gain on disposal of discontinued operations 167.1
Assets held for sale: Disposal group (note 5B) – 1,205.4 Freehold property1 5.1 3.0
Note: 1. The freehold property held at 31 December 2015 comprises the Pudsey sites which were transferred from property, plant and equipment to assets held for sale in 2015 with a carrying value of £22.1 million and impaired by £17.0 million to reflect the estimated realisable value. The freehold property held at 31 December 2014 with a value of £3.0 million comprised the formerly occupied Coombe Cross site in Croydon which was disposed of during 2015, realising proceeds of £7.1 million and generating an impairment reversal of £4.1 million.
Gross earned premium: Gross written premium 3,152.5 3,099.0 Movement in unearned premium reserve (42.4) 45.2
Investment income: Interest income from debt securities 140.1 154.0 Cash and cash equivalent interest income 6.7 5.2 Rental income from investment property 17.9 16.2 Interest income from infrastructure debt 4.4 0.1
Derivative (losses) / gains Foreign exchange forward contracts (82.4) (19.1) (59.3) (46.4) Associated foreign exchange risk 44.9 61.9 (7.4) 115.9 Net (losses) / gains on foreign exchange forward contracts (37.5) 42.8 (66.7) 69.5
Associated interest rate risk 9.7 4.9 0.9 32.2 Net (losses) / gains on interest rate derivatives (19.0) 6.1 (19.5) 10.1 8. Other operating income
Vehicle replacement referral income 12.5 15.8 Revenue from vehicle recovery and repair services 15.5 18.0 Fee income from insurance intermediary services 2.4 2.1 Other income 20.3 11.0 9. Net insurance claims Gross Reinsurance Net Gross Reinsurance Net
Current accident year claims paid 1,037.0 – 1,037.0 1,086.4 – 1,086.4 Prior accident year claims paid 941.9 (15.9) 926.0 1,165.8 (21.8) 1,144.0
Commission expenses 253.2 263.3 Expenses incurred under profit participations 66.1 90.7 11. Operating expenses
The table below analyses the number of people employed by the Group’s operations.
Fees payable for the audit of: The Company’s annual accounts 0.3 0.4 The Company’s subsidiaries 1.6 1.5
Total audit fees 1.9 1.9 Fees payable for non-audit services: Audit-related assurance services 0.3 0.1 Taxation advisory services – 0.2 Other services 0.6 0.1
At 31 December 2015, one Director (2014: one) had retirement benefits accruing under the defined contribution pension scheme in respect of qualifying service.
During the year ended 31 December 2015, two Directors exercised share options (2014: two).
Note: 1. As described in note 30, 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 hedge to exchange the fixed rate of interest on the notes for a floating rate of three-month LIBOR plus a spread of 706 basis points, which increased to 707 basis points with effect from 29 July 2013.
Current taxation: Charge for the year 103.5 87.2 (Over) / under provision in respect of prior year (4.6) 3.9
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 20.25%1 (2014: 21.5%).
Per balance sheet: Current tax assets 0.1 0.1 Current tax liabilities (10.3) (35.7)
Transfer to liabilities / assets held for sale (8.4) – – – – – (8.4)
(Charge) / credit to the income statement on continuing operations (2.1) (0.1) – (3.9) (3.6) 0.3 (9.4) Charge to other comprehensive income – (1.6) – – – – (1.6) Credit direct to equity – – – – – 1.7 1.7
Direct Line Group Annual Report & Accounts 2015 144 16. Earnings per share continued Diluted Diluted earnings per share is calculated by dividing the earnings attributable to the owners of the Company by the weighted average number of Ordinary Shares during the period adjusted for dilutive potential Ordinary Shares. The Company has share options and contingently issuable shares as categories of dilutive potential Ordinary Shares.
The table below analyses net asset and tangible net asset value per share.
Net assets 2,630.0 2,810.5 Goodwill and other intangible assets (524.8) (517.5) Disposal group – intangible assets – (5.6) Tangible net assets 2,105.2 2,287.4 Number of Ordinary Shares (millions) 1,375.0 1,500.0 Shares held by employee share trusts (millions) (6.3) (6.4) Closing number of Ordinary Shares (millions) 1,368.7 1,493.6 Net asset value per share (pence) 192.2 188.2 Tangible net asset value per share (pence) 153.8 153.1
Accumulated amortisation and impairment At 1 January 2014 131.8 156.6 288.4 Charge for the year relating to continuing operations – 56.9 56.9 Charge for the year relating to discontinued operations – 2.2 2.2 Effect of foreign currency exchange adjustment – (2.2) (2.2) Disposal of subsidiary1 (110.1) (0.9) (111.0) Disposals and write-off2 – (67.2) (67.2) Impairment losses – 9.6 9.6 Transfer to assets held for sale (21.7) (33.0) (54.7)
Charge for the year relating to continuing operations – 63.1 63.1 Disposals and write-off2 – (8.0) (8.0) Impairment losses – 4.3 4.3
2. Disposals and write-off include fully amortised intangible assets no longer utilised by the Group in its operating activities.
There have been no impairments in goodwill for the year ended 31 December 2015 (2014: £nil).
Note: 1. Reflects a 1% decrease in the profit for each year of the five-year forecast.
Acquisition of subsidiary 25.1 – 25.1 Disposal of subsidiary – (3.5) (3.5) Effect of foreign currency exchange adjustment – (1.7) (1.7) Transfer to assets held for sale (note 5C) – (27.2) (27.2)
Accumulated depreciation and impairment At 1 January 2014 1.1 71.9 73.0 Depreciation charge for the year relating to continuing operations 0.6 22.0 22.6 Depreciation charge for the year relating to discontinued operations – 3.0 3.0
Depreciation charge for the year relating to continuing operations 1.2 29.5 30.7
Note: 1. The cost included in carrying value at 31 December 2015 is £295.5 million (2014: £279.5 million).
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 2014.
Lease agreements with tenants are drawn up in line with local practice and the Group has no exposure to leases that include contingent rents.
DL Insurance Services Limited United Kingdom Management services U K Insurance Limited United Kingdom General insurance
The Group sold 100% of the share capital of Tracker Network (UK) Limited on 5 February 2014. The fair value of the identifiable assets sold was £9.2 million (including cash and cash equivalents of £2.4 million) and the fair value of the identifiable liabilities was £8.8 million. The total cash consideration received was £2.7 million, generating a profit on disposal of £2.3 million.
The Group did not dispose of any other subsidiaries in the years ended 31 December 2015 and 31 December 2014.
The Group acquired 100% of the share capital of 10-15 Livery Street, Birmingham UK Limited on 22 December 2014 for total cash consideration of £26.1 million. The fair value of the identifiable assets acquired was £26.2 million (including cash and cash equivalents of £1.1 million) and the fair value of identifiable liabilities was £0.1 million.
Additional provision (5.0) (14.1) Release to income statement 17.5 0.9 23. Deferred acquisition costs 2015 £m 2014 £m
Net (decrease) / increase in the year (4.6) 5.4 Effect of foreign currency exchange adjustment – (7.4) Transfer to assets held for sale – (111.1)
overnance Financial statem ents www.directlinegroup.com 149 24. Insurance and other receivables 2015 £m 2014 £m
Other debtors 97.7 116.8 25. Derivative financial instruments £m 2014 £m
Designated hedging instruments at 31 December 2015 and 31 December 2014 include hedging in relation to supplier payments. At 31 December 2014, the Group also had a foreign currency hedge contract converting Euro to Sterling in respect of the proceeds from the sale of the International business which ceased on completion of the sale.
Loans and receivables Deposits with credit institutions with maturities in excess of three months 44.9 54.7 Infrastructure debt1 329.6 76.2
At 31 December 2015, 6,256,108 Ordinary Shares of 10 10/11 pence each (2014: 6,391,506 Ordinary Shares of 10 pence each) were owned by the employee share trusts with a cost of £20.4 million (2014: £13.6 million). These Ordinary Shares are carried at cost and have a market value of £25.5 million (2014: £18.6 million).
overnance Financial statem ents www.directlinegroup.com 151 29. Other reserves Movements in the revaluation reserve for AFS investments £m 2014 £m
The Group has the option to defer interest payments in certain circumstances on the notes but to date has not exercised this right.
Direct Line Group Annual Report & Accounts 2015 152 31. Insurance liabilities £m 2014 £m
Estimate of ultimate gross claims costs1: At end of accident year 3,789.2 4,014.7 3,393.4 3,823.3 3,941.7 2,698.1 2,372.7 2,184.0 2,094.5 2,118.1 One year later (256.0) (44.7) 50.8 121.6 (117.1) (99.3) (163.3) (117.6) 20.7 – Two years later (32.6) 7.8 51.7 (37.0) (99.1) (94.6) (118.9) (153.0) – – Three years later (10.7) 64.8 (36.7) (14.0) (50.3) (89.3) (49.3) – – – Four years later 18.3 (5.4) (16.7) (101.5) (105.5) (60.9) – – – – Five years later (18.2) (12.1) (55.5) (38.8) (57.7) – – – – – Six years later (11.0) (24.4) (45.7) (80.8) – – – – – – Seven years later (13.5) (18.8) (29.9) – – – – – – – Eight years later 2.2 (14.4) – – – – – – – – Nine years later (33.2) – – – – – – – – –
Estimate of ultimate net claims costs1: At end of accident year 3,743.4 3,970.3 3,334.7 3,790.6 3,902.0 2,644.4 2,271.8 2,093.9 1,971.0 1,926.7 One year later (239.7) (64.3) 52.0 70.0 (125.2) (131.5) (146.7) (123.6) (29.7) – Two years later (43.5) (14.5) 15.9 (17.4) (120.4) (82.1) (107.8) (134.4) – – Three years later (21.4) 32.9 (22.8) (54.1) (44.0) (76.5) (35.6) – – – Four years later 18.2 (8.9) (45.8) (67.0) (93.6) (48.7) – – – – Five years later (40.3) (17.6) (48.7) (29.6) (52.3) – – – – – Six years later (19.6) (19.6) (30.9) (74.6) – – – – – – Seven years later (13.1) (16.0) (24.5) – – – – – – – Eight years later 3.6 (12.5) – – – – – – – – Nine years later (25.3) – – – – – – – – –
Current estimate of cumulative claims1 3,362.3 3,849.8 3,229.9 3,617.9 3,466.5 2,305.6 1,981.7 1,835.9 1,941.3 1,926.7
Net liability recognised in balance sheet 108.6 153.4 98.3 209.3 234.5 246.0 242.3 369.2 591.2 1,014.3 3,267.1 2005 and prior 241.1 Claims handling provision 94.4 Total 3,602.6
Cash paid for claims settled in the year (2,671.6) 181.2 (2,490.4) Increase / (decrease) in liabilities: Arising from current-year claims 2,721.3 (288.3) 2,433.0 Arising from prior-year claims1 (538.5) 77.6 (460.9)
Cash paid for claims settled in the year (1,978.9) 16.0 (1,962.9) Increase / (decrease) in liabilities: Arising from current-year claims 2,307.6 (191.4) 2,116.2 Arising from prior-year claims (478.3) 29.0 (449.3)
Note: 1. Decrease in net liabilities arising from prior-year claims in 2014 includes a £10.1 million reserve release for the discontinued International business.
Net movement in the year (33.4) (18.6) (52.0) Effect of foreign currency exchange adjustment (24.9) 2.1 (22.8) Transfer to (liabilities) / assets held for sale (note 5C) (326.2) 23.2 (303.0)
Life expectancy at age 60 in 20 years’ time: Males 90.1 90.4
Equities – 3.0 Index-linked bonds 21.5 22.2 Government bonds 13.7 12.8 Corporate bonds 43.8 44.4 Liquidity fund 5.5 –
The majority of debt and equity instruments have quoted prices on active markets.
Income statement: Net interest income / (cost)1 2.9 (3.0) (0.1) Statement of comprehensive income: Actuarial gains arising from experience adjustments 12.9 1.0 13.9 Actuarial losses arising from changes in financial assumptions – (11.1) (11.1) Contributions by employer 2.8 – 2.8
Income statement: Net interest income / (cost)1 2.8 (2.7) 0.1 Statement of comprehensive income: Actuarial (losses) / gains arising from experience adjustments (1.9) 1.2 (0.7) Actuarial gains arising from changes in demographic assumptions – 1.1 1.1 Actuarial gains arising from changes in financial assumptions – 6.3 6.3
Present value of defined benefit scheme obligations (72.0) (79.6) (68.0) (61.2) (54.1) Fair value of defined benefit scheme assets 85.1 83.1 66.0 63.7 56.7
Experience adjustment gains / (losses) on scheme liabilities 1.2 1.0 (0.2) (0.1) 0.4 Experience adjustment (losses) / gains on scheme assets (1.9) 12.9 (1.3) 2.2 (2.6)
The most recent funding valuation of the defined benefit scheme took place as at 1 October 2014. The Group agreed with the trustees to make a contribution of £2.8 million in 2016 with further contributions of up to £1.5 million per annum in 2017 and 2018 to meet the scheme’s funding requirements.
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.
Awards were made in the year ended 31 December 2015 over 1.7 million Ordinary Shares with an estimated fair value of £5.5 million at the March 2015 grant date (2014: 2.2 million Ordinary Shares with an estimated fair value of £4.3 million) and 1.7 million Ordinary Shares with an estimated fair value of £5.9 million at the August 2015 grant date (2014: 2.0 million Ordinary Shares with an estimated fair value of £4.7 million).
Restricted Shares Plan The purpose of the Restricted Shares Plan is to facilitate the wider participation in Group share based awards to eligible employees. These awards can be granted at any time during the year, generally have no performance criteria, and vest over periods ranging between one and three years from the date of the grant, subject to continued employment. During the year awards were made over 15,705 Ordinary Shares (2014: 509,103 Ordinary Shares) with an estimated fair value of £0.1 million (2014: £1.4 million) using the market value at the date of grant.
Deferred Annual Incentive Plan To incentivise delivery of performance over a one-year operating cycle, Executive Directors and certain members of senior management are eligible for awards under the Annual Incentive Plan, 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.
In March 2015 awards were made over 1.0 million Ordinary Shares (2014: 1.1 million Ordinary Shares) under this plan with an estimated fair value of £3.4 million (2014: £2.6 million) using the market value at the date of grant.
Direct Line Group Annual Report & Accounts 2015 158 34. Share-based payments continued Direct Line Group Share Incentive Plans: Buy-As-You-Earn Plan The Buy-As-You-Earn Plan entitles employees to purchase shares from pre-tax pay for between £10 and £150 per month and receive one matching share for every two shares purchased.
In the year ended 31 December 2015, matching share awards were granted over 0.3 million Ordinary Shares (2014: 0.3 million Ordinary Shares) with an estimated fair value of £1.1 million (2014: £0.8 million). The fair value of each matching share award is estimated using the market value at the date of grant.
The following table details the outstanding number of share awards in issue (all nil-cost awards).
Note: 1. In accordance with the rules of the LTIP and DAIP award plans, additional awards of 0.8 million shares were granted during the year ended 31 December 2015 (2014: nil) in respect of the equivalent dividend.
In respect of the outstanding options at 31 December 2015, the weighted average remaining contractual life is 1.44 years (2014: 1.66 years). No share awards expired during the year (2014: nil).
overnance Financial statem ents www.directlinegroup.com 159 35. Trade and other payables including insurance payables £m 2014 £m
Direct Line Group Annual Report & Accounts 2015 160 36. Notes to the consolidated cash flow statement £m 2014 £m
Profit for the year 580.4 372.6 Adjustments for: Investment return (235.2) (237.2) Instalment income (101.5) (105.2) Finance costs 37.6 37.2 Equity-settled share-based payment transactions 12.1 6.6 Tax charge 127.7 105.2 Depreciation and amortisation expenses 95.3 84.8 Impairment of property, plant and equipment, goodwill and intangible assets 9.1 9.6 Impairment movements on reinsurance contracts (12.5) 13.2 Impairment movements on assets held for sale – freehold property 12.9 9.6 Profit on disposal of assets held for sale – disposal group (167.1) – Loss on sale of property, plant and equipment 4.7 0.3 Profit on disposal of subsidiary – (2.3)
Cash generated from / (used by) operations 149.3 (315.2) Taxes paid (107.4) (94.8) Cash flow hedges 0.2 (0.6) Net cash flow generated from / (used by) operating activities before investment of insurance assets 42.1 (410.6) Interest received 318.7 358.5 Rental income received from investment property 17.9 16.2 Purchases of investment property (16.0) (76.2) Proceeds on disposal of investment property – 21.1 Proceeds on disposal / maturity of AFS debt securities 3,549.3 3,141.0 Net (increase) /decrease in financial investments: loans and receivables (242.5) 304.8 Purchases of AFS debt securities (3,110.8) (2,644.3) Purchase of HTM debt securities (13.5) – Cash generated from investment of insurance assets 503.1 1,121.1 37. Contingent liabilities The Group did not have any contingent liabilities at 31 December 2015 (2014: none).
Lease payments under operating leases recognised as an expense in the year 18.4 25.6
Within one year 16.2 17.1 In the second to fifth years inclusive 51.7 55.1 After five years 161.9 178.5
Operating lease commitments where the Group is the lessor The following table analyses future aggregate minimum lease payments receivable under non-cancellable operating leases in respect of property leased to third-party tenants.
There were no commitments by third parties to make lease payments to the Group’s discontinued operations at 31 December 2015 (2014: £nil).
Comparison of carrying value to fair value of financial instruments The following table compares the carrying value and the fair value of financial instruments (excluding the disposal group – note 5B). Differences arise where the measurement basis of the asset or liability is not fair value (e.g. assets and liabilities carried at amortised cost).
Fair value Carrying value Fair value Carrying value £m £m 2014 £m
Fair values of the following assets and liabilities (including assets and liabilities held in the disposal group – note 5B) approximate their carrying values: • Insurance and other receivables
Fair value hierarchy analysis The tables below analyse the Group’s assets and liabilities carried at fair value (excluding the disposal group – note 5C) by reference to the Group’s fair value hierarchy (note 2.3).
Investment property (note 20) – – 347.4 347.4 Derivative assets (note 25) – 19.6 – 19.6 AFS debt securities (note 26) 442.7 4,783.9 – 5,226.6
Derivative liabilities (note 25) – 46.4 – 46.4 Total liabilities – 46.4 – 46.4
The movements in assets classified as Level 3 in the fair value hierarchy are all within Investment property and are analysed in note 20. There were no changes in the categorisation of assets between Levels 1, 2 and 3 during the year for assets and liabilities held at 31 December 2014.
overnance Financial statem ents www.directlinegroup.com 163 40. Related parties Transactions between the Group’s subsidiary undertakings, which are related parties, have been eliminated on consolidation and accordingly are not disclosed.
RBS Group was formerly a related party of the Group, as a result of its ownership of Ordinary Shares, up until the point of selling its remaining shares on 27 February 2014. The RBS Group transactions and balances included below are for historical transactions, prior to the date of sale when the related party relationship ceased.
Cash and cash equivalents 8 29.8 51.2 Assets held for sale 3 – 114.8 Total assets 3,645.5 3,763.0
The financial statements were approved by the Board of Directors and authorised for issue on 29 February 2016. They were signed on its behalf by: John Reizenstein Chief Financial Officer
The attached notes on pages 167 to 171 form an integral part of these separate financial statements.
Net cash used by operating activities 13 (3.1) (0.1) Cash flows from investing activities Interest received on loans to subsidiary undertakings 47.5 47.6 Dividends received from subsidiary undertakings 671.0 446.7 Net increase in loans advanced to subsidiary undertakings (21.8) – Capital contribution to subsidiary undertakings (225.0) – Disposal of investments in subsidiary undertakings 2 – 2.7 Disposal of assets held for sale 3 224.3 – Purchase of AFS debt securities (2.0) (5.1) Net cash generated from investing activities 694.0 491.9 Cash flows from financing activities Dividends paid 12 (666.0) (401.1) Finance costs (46.3) (46.3) Net cash used by financing activities (712.3) (447.4) Net (decrease) / increase in cash and cash equivalents (21.4) 44.4 Cash and cash equivalents at the beginning of the year 8 51.2 6.8 Cash and cash equivalents at the end of the year 8 29.8 51.2
The Company sold 100% of the share capital of its subsidiary Tracker Network (UK) Limited on 5 February 2014. The carrying value of the investment in Tracker was £4.0 million at the date of sale. The total cash consideration received was £2.7 million, generating a loss on disposal of £1.3 million.
Loans to subsidiary undertakings1 540.8 518.9 Receivables from subsidiary undertakings – 2.9 Other debtors – 1.5
6. Derivative financial instruments Notional amount Fair value Notional amount Fair value £m £m 2014 £m
Cash at bank and in hand 0.1 0.1 Short-term deposits with credit institutions with maturities less than 3 months 29.7 51.1 9. Share capital Full details of the share capital of the Company are set out in note 28 to the consolidated financial statements.
The subordinated guaranteed dated notes were issued on 27 April 2012 at a fixed rate of 9.25%. The nominal £500.0 million notes 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 the six-month LIBOR plus 7.91%.
The notes are guaranteed by U K Insurance Limited, a principal subsidiary of the Company.
At 1 January 2015 – Additional provision 8.3 Utilisation of provision (5.5)
12. Dividends Full details of the dividends paid and proposed by the Company are set out in note 15 to the consolidated financial statements.
Profit for the year 539.5 436.7 Adjustments for: Impairment of investment in subsidiary undertakings 234.6 4.3 Investment return (720.5) (495.1) Finance costs 47.1 46.9 Loss on disposal of subsidiary undertakings – 1.3 Profit on disposal of assets held for sale (109.5) – Tax charge / (credit) 3.0 (1.2)
Operating cash flows before movements in working capital (5.8) (7.1) Movements in working capital: Net (increase) / decrease in other receivables (4.0) 4.8 Net increase in trade and other payables 5.5 0.6 Tax received 1.2 1.6
overnance Financial statem ents www.directlinegroup.com 171 14. 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.
Management fees payable to subsidiary undertakings 6.0 7.3 Interest payable to subsidiary undertakings 0.2 –
Interest charged on borrowings from related parties was at rates ranging from 0.5% to 0.6% (2014: 0.5% to 0.6%).
17. Directors and key management remuneration The Directors and key management of the Group and the Company are the same. The aggregate emoluments of the Directors are set out in note 11 to the consolidated financial statements, the compensation for key management is set out in note 40 to the consolidated financial statements and the remuneration and pension benefits payable in respect of the highest paid Director are included in the Directors’ remuneration report in the Governance section of the Annual Report & Accounts.
Corporate website The Group’s corporate website is www.directlinegroup.com . It contains useful information for the Company’s investors and shareholders. For example, it includes press releases, details of forthcoming events, essential shareholder information, a dividend history, a financial calendar, and details of the Company’s AGM. You can also subscribe to email news alerts.
Shareholder enquiries Shareholders with queries about anything relating to their shares can contact our Registrar.
The website requires shareholders to quote their Shareholder Reference Number to access this information. Shareholders can find this number on their share certificates.
Shareholder warning Almost five thousand people contact the Financial Conduct Authority (“FCA”) about share fraud each year – and victims lose an average of £20,000.
How to avoid share fraud • Remember that FCA-authorised firms are unlikely to contact you out of the blue offering to buy or sell shares
• Check the Financial Services Register at www.fca.org.uk to see if the person and firm contacting you are authorised by the FCA
• Beware of fraudsters claiming to be from an authorised firm; copying its website; or giving you false contact details
• If you want to call them back, use the firm’s contact details listed on the Financial Services Register at www.fca.org.uk
• Remember that if you buy or sell shares from an unauthorised firm, you cannot access the Financial Ombudsman Service or Financial Services Compensation Scheme
• Get independent financial and professional advice before handing over any money
If you have already paid money to share fraudsters, contact Action Fraud on 0300 123 2040.
Tips on protecting your shares • Keep all your certificates in a safe place. Alternatively, consider holding your shares in the UK’s electronic registration and settlement system for equity, CREST, or via a nominee
• If you receive a letter from the Registrar regarding a change of address and you have not recently moved, contact them immediately
• If you are buying or selling shares, only deal with brokers registered in the UK or in your country of residence
• Be aware that the Company will never call you concerning investments. If you receive such a call from a person saying they represent the Group, please contact the Company Secretary immediately, by calling +44 (0)1132 920 667
• For internet sales, go to www.investorcentre.co.uk/directline . You will need your Shareholder Reference Number, as shown on your share certificate or your welcome letter from the Chairman
This change was announced by the Chancellor of the Exchequer, as part of the UK Government Budget, in July 2015. Draft legislation was published on 9 December 2015 and is intended to be enacted in the proposed UK Finance Bill 2016. If you have any tax queries, please contact your financial adviser.
Adjusted diluted earnings per share includes ongoing operations and excludes discontinued operations, the Run-off segment, restructuring and other one-off costs and the gain on disposal of subsidiary (using the UK standard tax rate of 20.25%; 2014: 21.5%). The comparative periods include profit after tax for discontinued operations (at the UK standard tax rate), as these were managed as part of ongoing operations.
This is designed to incentivise the performance of executives and employees over a one-year operating cycle. It focuses on the short to medium-term elements of the Group’s strategic aims.
Financial assets that are classified as available-for-sale. Please refer to the accounting policy note 1.12 on page 114.
Buy-As-You-Earn The HM Revenue & Customs approved Buy-As-You-Earn Share Incentive Plan allows all employees the opportunity to become shareholders in the Company.
The sum of the loss, commission and expense ratios. The ratio measures the amount of claims costs, commission and expenses compared to net earned premium generated. A ratio of less than 100% indicates profitable business.
Discontinued operations The Group has sold its International division to Mapfre, S.A. See note 5 to the consolidated financial statements on page 136.
Loss ratio Net insurance claims divided by net earned premium. Long-Term Incentive Plan (“LTIP”)
These are claims payments as awarded under the Courts Act 2003. PPOs are used to settle large personal injury claims. They generally provide claimants who require long-term care with a lump-sum award plus inflation-linked annual payments.
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”, “aspire”, “believes”, “continue”, “could”, “estimates”, “expects”, “guidance”, “intends”, “may”, “mission”, “outlook”, “plans”, “predicts”, “projects”, “seeks”, “should”, “strategy”, “targets” or “will” or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in 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, risk-based capital coverage ratio, the Group’s COR and investment income yield. 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.