Dividends and capital returns5 £595.2m (Includes £195.5m special dividend to replace the cancelled 2019 final dividend)
Other information Additional information 222 Glossary and Appendices 224 Forward-looking Statements Disclaimer 231 Contact information 232
To deliver this we need to build an insurance company of the future with technology and data at its core, adapting to an ever-changing world, delivering more for customers at speed.
As we navigated the challenges that 2020 presented, we focused on supporting our customers, the wellbeing of our people, contributing to society and stepping up our plans to tackle climate change.
We believe embracing sustainable practices creates a better corporate culture, more reliable products and brings long-term rewards for our shareholders.
Green Flag refreshes "Green Flag Rescue Me" app allowing more claims to be serviced digitally
Our Finance team delivers a new cloud-based Oracle accounting ledger and claims payment system 2020 Highlights
Covid-19: The Group moves the majority of its operations to homeworking, guaranteeing usual pay regardless of whether individual working practices are affected £3.5 million Community Fund launches, distributing £2 million in two weeks to charities supporting the most vulnerable
Group announces intention to set Science-Based Targets to strengthen our disclosures on tackling emissions
Group becomes a 100% carbon-neutral business by investing in high social impact projects to offset our Scope 1, 2 and 31 emissions
Notes: 1. Scope 3 emissions which are under our direct control – see page 61.
Task Force on Climaterelated Financial Disclosures: Issue our first comprehensive disclosure on how the Group approaches climate change risks and opportunities
As a UK-focused company, we have the ability to be a deep specialist in our chosen markets and our range of channels and products gives us real diversification and scale.
£1.2bn Dividends paid to shareholders in the last three years 2020: £3,180.4m 2020: £522.1m
Total shareholder return (%) This represents the cumulative dividends paid and change in share price over a three-year period 2019: £3,203.1m 2019: £546.9m 4 Direct Line Group Annual Report and Accounts 2020
Best at direct To be the UK’s leading insurer, because we anticipate our customers’ needs and develop services and products they want to buy.
Great people A home for empowered people who celebrate difference, and challenge the status quo to deliver for our customers.
Costs Target: Expense ratio1,2 of 20% in 2023 2020: Normalised current-year operating profit1,3
Target: Between 93-95% throughout the medium term 2020: Return on tangible equity (“RoTE”)1
2. Applies to operating expenses excluding restructuring and one-off costs. 3. Normalised for weather and changes to the Ogden discount rate. Reported contribution 66.7%. 4. Normalised for weather and changes to the Ogden discount rate. Reported COR 91.0%.
2. Mintel Vehicle Recovery – September 2020. 3. Mintel Pet Insurance – August 2020 & Mintel Travel Insurance – February 2021.
We help people carry on with their lives, giving them peace of mind now and in the future. Across the business we have a number of real strengths and our customers and our people are at the heart of our business.
We protect commercial businesses through our brands, including NIG and Direct Line for Business
We are Britain’s leading personal motor insurer measured by in-force policies1, mainly represented through our well-known brands Direct Line, Churchill, Privilege, our Darwin brand, and also through our partners
We are one of Britain’s leading personal home insurers measured by in-force policies1. We reach our customers by selling home insurance products through our brands Direct Line, Churchill and Privilege, and our partner NatWest Group
Investment return Our diversified investment portfolio provides additional income whilst also ensuring we can support our long-term claim commitments. See page 33.
Accident repair centres We own 21 accident repair centres, the largest owned network of any insurer, delivering lower repair costs and providing data-led insight enabling us to react to emerging trends and helping inform pricing.
Costs We invest in market-leading brands and strong customer service, whilst targeting cost reduction measures in order to increase our competitiveness.
We aim to deliver a sustainable and thriving business that generates attractive shareholder returns.
Society We use our expertise to improve outcomes for society and the communities we serve.
The planet We protect our business from the impact of climate change and give back more to the planet than we take out.
450k+ Customers benefited from support measures £7m+ Donated to charities and good causes
Carbon neutral via offsetting £3.8m Invested in free shares for our people £1.2bn Paid in dividends over the last three years
A win for our people and shareholders who are invested in our success.
We announced in December that Jane Hanson, who was appointed as an independent Non-Executive Director in December 2011, will be stepping down from the Board at the conclusion of the Annual General Meeting in May 2021. On behalf of the Board, I would like to thank Jane for her energetic leadership of the Board Risk Committee and for her hard work as a member of the Audit, Investment and Sustainability Committees.
Adrian Joseph OBE joined the Board as an independent Non-Executive Director on 1 January 2021. As the business is transformed into a technology- and data-led company, with the customer at its heart, Adrian’s deep experience of digital, artificial intelligence and data will be an important addition to the Board’s capabilities.
After the proposed final dividend and £100 million share buyback, the estimated solvency capital ratio was 191% as at 31 December 2020. The Group has outstanding Tier 2 debt issued in 2012 with nominal value of £250 million and a first call date during the first half of 2022. Excluding this debt, the Group’s solvency ratio after the proposed final dividend and share buyback would be 172%. In February 2021, the Group acquired the head lease of its Bromley office site, which reduced the Group’s coverage ratio by an additional 6 percentage points.
Assuming a return to more normal circumstances, the Group intends to move towards the middle of its risk appetite range of 140% to 180% of its solvency capital requirement, consistent with its previously stated target.
Our customers Customer experience is at the heart of everything we do, and it is the central element that connects all our people regardless of role. We recognise that the Covid-19 pandemic has had a huge, in some cases devastating, effect on many of our customers and we have sought to respond with sensitivity to customers whose travel plans have been disrupted, who find themselves under financial strain, or who have experienced bereavement. The Board oversees the Group’s conduct, aiming to ensure that the Group acts in our customers’ best interests and that there is an active and constructive dialogue with its insurance regulators on customer conduct matters.
Linking remuneration to performance We remain focused on ensuring that executive pay is aligned with the Group’s strategy of targeting sustainable shareholder and customer value, that it reflects investor experience and, particularly in respect of 2020, that it reflects the way in which the business has interacted with its customers, its people and its communities.
“We have responded with sensitivity to the huge disruption that Covid-19 has caused to many of our customers.”
I would also like to thank each member of the Board for their significant contribution, commitment and service and I look forward to my first full year as Chair of the Board working with them in supporting and encouraging our management team in the execution of the Group’s ambitious strategy.
Section 172(1) statement Direct Line Group is a leading motor, home and commercial insurer which depends on its reputation for high standards of business conduct and on the trust and confidence of its stakeholders to operate sustainably in the long term. The Group seeks to put its customers’ best interests first, continually invests in and engages with its employees, supports the communities in which it operates and strives to generate value for shareholders.
The Board recognises that the Group has a range of stakeholders with diverse interests and an analysis of its principal stakeholders can be found on pages 48 to 61 and on page 86.
Section 172(1) considerations are embedded in decisionmaking at Board-level and are demonstrated throughout its governance framework.
The Group has adapted to a change of working practices throughout the year and keeps engagement mechanisms under review so that they remain effective and so that the Board understands the evolving needs of its stakeholders.
In taking decisions, the Directors carefully consider the balance of interests of the stakeholders who might be affected. The Board and its Committees discuss stakeholders and their interests during the cycle of Board meetings, and in 2020 we increased both the frequency and length of meetings, not least to focus on stakeholder needs as a result of the Covid-19 pandemic.
In March 2020, the Board considered it prudent to cancel its share buyback programme and, in April 2020, to cancel the 2019 final dividend as a result of the volatile conditions arising from the Covid-19 pandemic, although an interim and a special interim dividend were paid later in the year when conditions stabilised and on the basis of a strong capital position. See pages 86 to 87 for more detailed examples of how the Board considered Section 172(1) when making decisions that affected its stakeholders.
I am proud of what the Group has achieved during 2020. Once again, we have demonstrated financial resilience by delivering another good set of results, whilst supporting our customers, our people and local communities through the challenges of the pandemic. Despite the disruption and uncertainty that 2020 has brought, we have made real progress towards becoming a technology-driven business which can adapt quickly to the changing world around us and deliver more for our customers at speed. We could not have done this without our highly engaged people, who have demonstrated the commitment and flexibility needed to do what it takes for our customers and to drive forward our business plans regardless of their personal circumstances. I am grateful to them for their dedication, skill and support.
Despite the many challenges we faced in the year as a result of the Covid-19 pandemic, we traded well and prioritised support for our customers, our people and local communities. I am proud that our people, even when working remotely, have continued both to care for our customers and to help us build an insurance company of the future.
– Launched Van and Tradesperson products on new Direct Line for Business platform
– Privilege Motor new business and renewals now live on the new platform
– Churchill Motor started roll-out to new platform in Q1 2021
– Enhanced API capabilities to enable potential Home partners to link and test
– New agile operating model embedded across digital, data and pricing
– Our people continued to deliver our transformation agenda while working remotely
– Our engagement scores remained high as we focused on the security and wellbeing of our people
– Awarding free shares and ensuring all eligible employees receive a bonus for the year
Chief Executive Officer’s review continued 12 Direct Line Group Annual Report and Accounts 2020
– Investments to support our customers, people and society totalling £93 million
Motor claims frequency levels were significantly lower than normal due predominantly to lockdown restrictions leading to claims frequency falling to around half normal levels during Q2. Whilst it increased during the second half of the year, claims frequency did not return to pre-Covid-19 levels during 2020. However, severity costs have increased due to the costs of making accident repair centres Covid-19 safe, longer repair times and consequently higher credit hire costs. We have seen an increase in the volume of claims within our Travel business and so have also incurred additional claims handling costs supporting our customers. In terms of business interruption, our standard wordings were clear from the outset and we were not party to the FCA’s test case nor the appeal to the Supreme Court, which has been relevant to many commercial insurers, and our overall Covid-19 related business interruption claims are estimated at £6 million.
Consistent with our “Force for Good” vision, we have invested extensively in our customers in the form of premium refunds, waived fees and reduced premiums, and also in our people by protecting jobs at the most critical points in lockdown, preserving salaries and incentives in return for flexibility and investing in strengthening home working capability. And finally we have invested in society: we have helped local communities with over £7 million of donations helping 100,000s of households and contributing to the ABI Covid-19 Support Fund. In total these initiatives represent an impact of around £93 million, of which £34 million is within our operating expenses and £59 million is within our loss ratio.
Many of the foundation blocks are now in place and we are increasingly moving to extracting benefits from the technology we have implemented rather than focusing purely on technology delivery.
We will remain focused around our core hub sites so our people can get together, but believe our approach gives both cost savings and advantages for our people, allowing us to support greater social mobility and assist us in identifying top talent. To this end we are reviewing our office site property strategy and have chosen to buy out our Bromley lease, the run costs of which were above market rate. This will accelerate the costs from the future 17 years of the lease and so we will take a charge to Solvency II own funds in 2021 of £85 million as we effectively de-leverage the business and, in return, make savings in excess of £10 million per annum from 2022, incremental to our original cost target plans. We will then have greater freedom to create the nature of property usage this business needs.
As you move through the Strategic report we will seek not only to guide you through understanding our financial performance and how that positions us for the future but also to bring to life examples of the technology development and the benefit we believe it will bring. I hope it will allow you to feel why we are so excited about the progress we have made and the opportunity ahead.
Looking into 2021 we will be continuing the roll-out of our technology transformation and increasingly turning our attention to utilising these new platforms to deliver benefits for our customers.
Our plans include: – Continuing the migration of Direct Line and Churchill Motor policies onto our new platform, enabling us to improve customers’ online journey and extend our product range even further.
– Rolling out a new policy and pricing system for Green Flag enabling it to grow beyond traditional breakdown services and look after customers’ motoring needs in and out of an emergency.
We are also heavily focused on improving efficiency in order to meet our cost targets by: – Continuing organisational transformation to further digitalise customer journeys, automate business processes and adopt new ways of working, as we aim to step change both customer experience and the efficiency of our cost base.
– Realising the benefits of agile ways of working throughout the organisation with the aim of reducing the cost and increasing the pace of change.
These plans are designed with fantastic customer experience and propositions at their heart. Supporting our activities and central to the long-term sustainability of the business, we have deeply embedded and fundamental principles: – Our values sit at the very heart of our everyday behaviours. – Our sustainability pillars bring environmental, social and governance (“ESG”) factors into the heart of our strategic thinking, whether that’s our customers, our people, our society, our planet, or the importance of strong governance – they all play central roles in helping deliver our business in a sustainable way.
Chief Executive Officer’s review continued 14 Direct Line Group Annual Report and Accounts 2020
Notes: 1. See glossary on pages 224 to 226 for definitions. 2. Scope 3 emissions which are under our direct control. 3. For more information please see our published 2020 TCFD Report on the Group’s website at www.directlinegroup.co.uk/2020_TCFD.
Protected Protected roles and salaries during initial lockdown, without government support, and offered maximum flexibility to help our people manage home and work
Free shares £3.8 million distributed as a thank you to our people £3.5m Established our first Community Fund which distributed £3.5 million to 250 charities, helping over 200,000 people £1.5m Extended our Community Fund into 2021 with £1.5 million to support charities dealing with the impact of the Covid-19 pandemic £3.6m Contributed £3.6 million to the Association of British Insurers Covid-19 Support Fund
Carbon neutral Became a 100% carbonneutral business by investing in high social impact projects to offset our Scope1 1, 2 and 32 emissions
– Agility is a must. We need to be quicker at implementing changes to fulfil changing customer needs.
– Cross collaboration is a must. We can achieve more by working together; co-operation across industries is essential to tackling climate change and ensuring greater diversity.
Financial Conduct Authority Pricing Practices In September 2020 the FCA released its General Insurance Pricing Practices Final Report, which remains a key focus for us. It included the FCA’s proposed remedy package aiming to ensure retail home and motor insurance products offer fair value to customers. The FCA recognised that insurers do not make excessive profits and their key proposal was that firms should offer renewal prices no higher than the equivalent new business price through the same sales channel. The consultation period ended on 25 January 2021 and we look forward to understanding the final details some time in Q2 2021.
We have previously published our Scope 1 and 2 emissions1, but this year we wanted to go further. For the first time we broke down our emissions across our offices and our accident repair centres to help us to focus our plans on where we can have the most impact. Alongside this we evaluated our Scope 3 emissions1 starting with those under our direct control and purchased goods and services which make a substantial contribution to our overall emissions. Our first comprehensive TCFD report (see page 62) provides us with a roadmap to strengthen our strategic response in tackling climate change and we see the Bank of England’s Climate Biennial Exploratory Scenario (“CBES”), in which the Group has been invited to participate, as a way to help enhance our climate change scenario analysis capability.
“We recognise that our actions as a business can contribute to climate risk mitigation and help accelerate the transition to a low carbon and sustainable future.”
“Given the progress we are making on our transformation, we enter 2021 with real momentum and are confident in delivering our vision of being a technology and data led insurance company of the future with our customers at its heart.”
The Group targets a combined operating ratio of 93-95% for 2021 and over the medium term, normalised for weather, although we acknowledge there will be increased uncertainty for a period as we progress through the implementation of the FCA pricing practices proposals and as the market reacts to the ongoing Covid-19 pandemic.
UK economy and Brexit Following the recession in 2020, economic uncertainty is expected to remain high throughout H1 2021 as a result of the Covid-19 pandemic, although the UK Government has acted to support UK businesses and employees and prevent lasting damage to the economy. However, the uncertainty surrounding the pandemic makes the overall impact and recovery progress unclear.
As a UK-based business with UK customers, we identified that the biggest potential financial exposure for the Group, from a disruptive or disorderly Brexit, would be to market volatility. We continue to work through the operational effects of Brexit for customers and supply chains but the potential effects have been helped by a trade deal which has avoided otherwise expected tariffs on EU goods needed to serve our customers.
Notes: 1. See glossary on pages 224 to 226 and Appendix A – Alternative performance measures on pages 227 to 230 for reconciliation to financial statement line items.
2. The 2019 dividends and capital returns have been adjusted to remove the cancelled 14.4p final dividend and £120 million of the share buyback as announced in March/April 2020. (The reported number were dividends and capital returns of £447.0 million).
This is calculated by dividing the earnings attributable to shareholders less coupon payments in respect of Tier 1 notes by the weighted average number of Ordinary Shares in issue.
A measure of financial year underwriting profitability. A COR of less than 100% indicates profitable underwriting. The COR is the sum of claims, expense and commission ratios and compares the cost of doing business against net earned premium generated.
A risk-based measure expressing the level of capital resources held as a percentage of the level of capital that is required under Solvency II.
Under normal circumstances, the Group aims to maintain a solvency capital ratio around the middle of the risk appetite range of 140% to 180%.
Solvency capital ratio within our risk appetite is an indicator of capital strength, which is one of the gateways for the AIP awards and an underpin for LTIP awards.
We made good progress against our targets to improve the sustainability of our earnings in a challenging environment and maintained our balance sheet strength.
Combined operating ratio improved to 91.0% (2019: 92.2%). Normalised combined operating ratio1, of 91.7%, was ahead of target of 93% to 95% predominantly due to the lower claims frequency in Motor.
Notes: 1. See glossary on pages 224 to 226 for definitions and appendix A – Alternative performance measures on pages 227 to 230 for reconciliation to financial statement line items.
In-force policies (thousands) 14,615 14,789 Of which: direct own brands (thousands) 7,454 7,290
Gross written premium 3,180.4 3,203.1 Of which: direct own brands 2,225.6 2,227.8
Underwriting profit 267.8 232.1 Instalment and other operating income 159.2 180.2 Investment return 95.1 134.6 Operating profit 522.1 546.9 Restructuring and other one-off costs (39.4) (11.2) Finance costs (31.3) (26.0) Profit before tax 451.4 509.7 Tax (84.2) (89.8) Profit after tax 367.2 419.9 Key metrics Current-year attritional loss ratio1,2 62.3% 71.6% Loss ratio1,2 57.9% 61.9% Commission ratio1,2 8.6% 7.1% Expense ratio1,2 24.5% 23.2% Combined operating ratio1,2 91.0% 92.2% Investment income yield2 2.1% 2.4% Net investment income yield2 1.8% 2.1%
Investment return yield2 1.6% 2.2% Basic earnings per share (pence) 25.8 29.5 Diluted earnings per share (pence) 25.5 29.2 Return on tangible equity2 19.9% 20.8% Return on equity 13.1% 15.5% Dividend per share – interim (pence) 7.4 7.2
Net asset value per share (pence) 199.7 193.4 Tangible net asset value per share (pence) 141.5 142.0 Solvency capital ratio post dividends3,4 191% 165%
2. See glossary on pages 224 to 226 for definitions and appendix A – Alternative performance measures on pages 227 to 230 for reconciliation to financial statement line items.
3. The solvency capital ratio as reported at 31 December 2019 is after taking into account the then expected 14.4p final dividend and the £150 million share buyback announced on 3 March 2020. The impacts of the cancellation of the dividend (as announced on 8 April 2020) and of the share buyback programme (as announced on 19 March 2020 after £30 million of the buyback had been executed) would have added 24 percentage points to the ratio as reported to give an adjusted solvency capital ratio of 189%.
premium deflation; additional travel claims and claims handling costs; and business interruption claims in Commercial. These factors together had a net positive impact on the underwriting result.
Outside of the impact from Covid-19, prior-year releases reduced to £173.8 million during 2020 (2019: £294.5 million), reflecting changes in the level of Motor excess of loss reinsurance some years ago and were materially offset by improvements in the underlying current-year loss ratio across Motor and Commercial.
Lower motor premium and claims volumes, primarily arising from the Covid-19 pandemic, led to a reduction in instalment and other operating income to £159.2 million (2019: £180.2 million).
Direct own brands 1,837 1,765 Partnerships 801 829 Home 2,638 2,594
Direct own brands 560 541 NIG and other 251 234 Commercial 811 775 Total in-force policies 14,615 14,789
Note: 1. See glossary on pages 224 to 226 for definitions and appendix A – Alternative performance measures on pages 227 to 230 for reconciliation to financial statement line items.
The Group again delivered an operating profit in 2020 above £500 million and saw underlying progress towards achieving more than 50% of the profit arising from the current year. The results have been affected by the usual variability around weather events but the addition of the factors surrounding Covid-19 make them more difficult to navigate than in previous years.
Second, the impact of the Covid-19 pandemic can be seen across all the main lines within the income statement, with the largest impact from reduced claims frequency in Motor. Whilst it is difficult to be exact about the impact of Covid-19 on the results, as the length of the pandemic has made initially ‘one-off’ impacts now more business as usual in their nature, (for example motor market pricing), this review will indicate the broad direction of these impacts.
Finance review continued 22 Direct Line Group Annual Report and Accounts 2020
Own brand policies increased to 7.5 million (2019: 7.3 million) driven by growth in Home, Commercial and Green Flag Rescue, whilst Motor was broadly stable. Total in-force policies reduced slightly to 14.6 million (2019: 14.8 million) primarily due to reductions in Home partnerships, as Prudential and Sainsbury’s partnerships are closed to new business, and the impact of Covid-19 on Travel sales.
Rescue 166.7 167.5 Travel 134.0 151.3 Pet 72.8 72.6 Other personal lines 44.3 44.6 Rescue and other personal lines 417.8 436.0
Gross written premium of £3,180.4 million (2019: £3,203.1 million) reduced by 0.7% with strong premium growth in Commercial offset by lower Motor and Home partnership premiums and the impact of Covid-19 disruption in Travel. Direct own brands gross written premium was broadly stable at £2,225.6 million (2019: £2,227.8 million). Growth across Commercial, Green Flag Rescue and Home own brands was offset by Motor.
Note: 1. See glossary on pages 224 to 226 for definitions and appendix A – Alternative performance measures on pages 227 to 230 for reconciliation.
Current-year combined operating ratio 94.5% 89.0% 103.3% 106.9% 96.9% For the year ended 31 December 2019 Net earned premium 4 1,507.7 573.6 425.2 478.4 2,984.9 Net insurance claims 4 1,043.3 268.4 284.4 251.5 1,847.6 Prior-year reserve releases 34 180.5 41.4 7.6 65.0 294.5 Major weather events n/a (3.0) n/a (3.0) (6.0) Attritional net insurance claims 1,223.8 306.8 292.0 313.5 2,136.1 Loss ratio – current-year attritional 81.2% 53.5% 68.7% 65.6% 71.6% Loss ratio – prior-year reserve releases (11.9%) (7.2%) (1.8%) (13.6%) (9.9%) Loss ratio – major weather events1 n/a 0.5% n/a 0.7% 0.2%
Ratio analysis by division 24 Direct Line Group Annual Report and Accounts 2020
Prior-year reserve releases reduced in 2020 to £173.8 million (2019: £294.5 million), equivalent to 5.9% of net earned premium (2019: 9.9%) and were concentrated towards more recent accident years. In 2019 prior-year reserve releases included a £16.9 million reserve strengthening in relation to the change in the Ogden discount rate to minus 0.25%. Assuming current claims trends continue, prior-year reserve releases are expected to remain a significant contribution to profits. The sensitivity analysis on page 32 includes information on the effect of claims inflation.
3. Depreciation and amortisation includes a £6.6 million impairment charge (2019: £1.3 million), which relates to capitalised software development costs for ongoing IT projects primarily relating to development of new systems.
4. Includes depreciation on right-of-use assets of £14.8 million (2019: £14.2 million).
Instalment and other operating income, which is primarily driven by premium and claims volumes, decreased by £21.0 million to £159.2 million. Instalment income fell primarily due to lower motor premium, whereas lower other operating income reduced due to Covid-19 related lower motor claims frequency.
Investment income 127.1 146.4 Hedging to a sterling floating rate basis (20.3) (22.1) Net investment income 106.8 124.3 Net realised and unrealised (losses)/ gains excluding hedging (11.7) 10.3 Total investment return 6 95.1 134.6
Investment income yield1 2.1% 2.4% Net investment income yield1 1.8% 2.1% Investment return yield1 1.6% 2.2%
Realised and unrealised losses excluding hedging were predominantly driven by lower investment property valuations and a reduction in gains from bond disposals. Overall the investment portfolio performed well in the context of challenging market conditions.
In 2021, the Group expects a net investment income yield of around 1.5% with minimal gains.
The Group’s investment strategy aims to deliver several objectives, which are summarised below: – to ensure there is sufficient liquidity available within the investment portfolio to meet stressed liquidity scenarios; – to match periodic payment orders (“PPOs”) and nonPPO liabilities in an optimal manner; and
Motor 4 363.5 302.6 Home 4 101.4 150.6 Rescue and other personal lines 4 6.8 39.1 Commercial 4 50.4 54.6 Operating profit 4 522.1 546.9 Restructuring and one-off costs (39.4) (11.2)
Profit for the year attributable to the owners of the Company 367.2 419.9
Operating profit by segment All divisions contributed to profit in 2020, demonstrating the diversity of the Group’s multi-product, multi-brand and multi-channel portfolio. Motor operating profit increased significantly primarily due to the reduction in claims frequency whereas Home operating profit reduced primarily due to higher weather-related costs and lower prior-year reserve releases. Commercial continued to generate strong profit despite higher weather claims while improved Rescue operating profit of £51.2 million (2019: £45.2 million) offset a weak result in other personal lines, mainly from Travel.
In addition, the Group is reviewing its office site property strategy and has bought out the lease of its Bromley office thus accelerating payment of an existing long-term liability. This transaction will incur restructuring costs of £85 million in 2021.
On 3 March 2021 the Chancellor announced that the rate of UK corporation tax will increase to 25% from 1 April 2023. This is not reflected in the figures above as it was not substantively enacted at the balance sheet date, however, the effect is not expected to be material.
Profit for the year was lower at £367.2 million (2019: £419.9 million) in line with the reduction in operating profit as well as increased restructuring and one-off costs and finance costs.
Return on tangible equity decreased to 19.9% (2019: 20.8%) due primarily to a £24.4 million decrease in adjusted1 profit after tax to £384.1 million (2019: £408.5 million). Profit after tax was adjusted for restructuring and one-off costs and coupon payments in respect of Tier 1 notes. Note: 1. See glossary on pages 224 to 226 for definitions and appendix A – Alternative performance measures on pages 227 to 230 for reconciliation to financial statement line items.
Cash flow The Group’s cash and cash equivalents increased by £271.9 million during the year (2019: £196.1 million decrease) to £1,168.2 million.
Net assets1 16 2,699.7 2,643.6 Goodwill and other intangible assets 16 (786.8) (702.5) Tangible net assets 16 1,912.9 1,941.1 Closing number of Ordinary Shares (millions) 16 1,351.8 1,366.6 Net asset value per share (pence) 16 199.7 193.4 Tangible net asset value per share (pence) 16 141.5 142.0
Balance sheet management Capital management and dividend policy The Group aims to manage its capital efficiently and generate long-term sustainable value for shareholders, while balancing operational, regulatory, rating agency and policyholder requirements. The Group aims to grow its regular dividend in line with business growth.
Notes: 1. Relates to the cancellation of the 2019 cash dividend (£198 million) and share buyback (£120 million) offset by the special dividend subsequently declared at half year 2020.
2. Foreseeable dividends included above are adjusted to exclude the expected dividend waivers in relation to shares held by the employee share trusts, which are held to meet obligations arising on the various share option awards.
In 2020, the Group generated £0.57 billion of Solvency II capital and added £0.26 billion via a Tier 2 debt issue, whilst cancelled distributions added £0.12 billion to own funds. This was offset by £0.16 billion of capital expenditure and distributions of £0.40 billion. Capital expenditure reflects the significant investment the Group is making in building future capability, including the development of the next generation core personal lines IT systems. In 2021 annual capital expenditure levels are expected to reduce to around £120 million. In addition, £85 million of restructuring costs in relation to the purchase of the Bromley office lease will decrease capital generation in 2021.
The Group’s SCR has increased by £0.02 billion in the year due to exposure changes. Model and parameter changes were largely offsetting.
Deterioration of small bodily injury motor claims equivalent to that experienced in 2008/09 (6pts) (7pts) One-off catastrophe loss equivalent to the 1990 storm “Daria” (8pts) (9pts) One-off catastrophe loss based on extensive flooding of the River Thames (8pts) (9pts) Change in Solvency II reserving basis for PPOs to use a real discount rate of minus 1%1 (10pts) (8pts) 100bps increase in credit spreads2 (9pts) (9pts) 100bps decrease in interest rates with no change in the PPO real discount rate (3pts) 1pt
2. Only includes the impact on available-for-sale (“AFS”) assets (excludes illiquid assets such as infrastructure debt) and assumes no change to the SCR.
Total shareholders’ equity 2.70 2.64 Goodwill and intangible assets (0.79) (0.70) Change in valuation of technical provisions 0.04 (0.06) Other asset and liability adjustments (0.11) (0.08) Foreseeable dividend and share buyback (0.30) (0.35) Tier 1 capital – unrestricted 1.54 1.45 Tier 1 capital – restricted 0.38 0.37 Tier 1 capital 1.92 1.82 Tier 2 capital – subordinated debt 0.53 0.26 Tier 3 capital – deferred tax 0.11 0.09 Total own funds 2.56 2.17
The Group reserves its large bodily injury claims at the relevant discount rate for each jurisdiction, with the overwhelming majority now reserved at minus 0.25% as most will be settled under the law of England and Wales. The Ogden discount rate will be reviewed again at the latest in 2024. There has been an ongoing reduction in large bodily injury exposures as a result of continued positive prior-year development of claims reserves, and a higher proportion of reserves being covered by reinsurance as a result of the decision to opt for a lower reinsurance attachment point from 2014 onwards.
The Group’s prior-year reserve releases were £173.8 million (2019: £294.5 million) with good experience in large bodily injury claims being a key contributor.
Impact of the Group reserving at a discount rate of 0.75% compared to minus 0.25% (2019: 0.75% compared to minus 0.25%) 43.7 53.3 Impact of the Group reserving at a discount rate of minus 1.25% compared to minus 0.25% (2019: minus 1.25% compared to minus 0.25%) (61.1) (75.0) Claims inflation Impact of a decrease in claims inflation by 100 basis points for two consecutive years (new scenario in 2020) 32.4 – Impact of an increase in claims inflation by 100 basis points for two consecutive years (new scenario in 2020) (32.2) –
Reinsurance The objectives of the Group’s reinsurance strategy are to reduce the volatility of earnings, facilitate effective capital management, and transfer risk outside the Group’s risk appetite. This is achieved by transferring risk exposure through various reinsurance programmes: – Catastrophe reinsurance to protect against an accumulation of claims arising from a natural perils event. The retained deductible is £130 million and cover is placed annually on 1 July up to a modelled 1-in-200 year loss event of £1,125 million.
Short and medium term − all other claims Investment-grade credit Fixed – “Key rate duration matched”
Tier 2 sub-debt (fixed) Investment-grade credit and cash Fixed or floating
Commercial real estate loans 6.5% 3.5% 4.0% 3.7% Cash and cash equivalents 6.0% 15.0% 7.0% 13.4%
Notes: 1. Asset allocation at 31 December 2020 includes investment portfolio derivatives, which have a mark-to-market asset value of £7.7 million included in investment-grade credit and £0.3 million in sovereign debt (31 December 2019: £81.8 million and nil respectively). This excludes non-investment derivatives that have been used to hedge interest on subordinated debt and operational cash flows.
At 31 December 2020, total investment holdings of £6,149.7 million were 3.5% higher than at the start of the year, primarily reflecting the cash received on issue of the Tier 2 subordinated debt. Total debt securities were £4,215.0 million (31 December 2019: £4,271.4 million), of which 2.6% were rated as ‘AAA’ and a further 54.4% were rated as ‘AA’ or ‘A’. The average duration at 31 December 2020 of total debt securities was 2.8 years (31 December 2019: 2.5 years).
At 31 December 2020, total unrealised gains, net of tax, on available-for-sale investments were £83.9 million (31 December 2019: £47.5 million).
Tax authorities The Group has open and cooperative relationships with the tax authorities with whom it deals in the countries where the Group operates, namely the UK, the Republic of Ireland, South Africa and India.
Tax policy and governance The Group’s tax policy has been reviewed and approved by the Audit Committee. The Group Tax function supports the Chief Financial Officer in ensuring the policy is adhered to at an operational level.
During 2020 the sum of taxes either paid or collected across the Group was £888.0 million. The composition of this between the various taxes borne and collected by the Group is shown below.
Current-year corporation tax charge 95.2 Irrecoverable value added tax incurred on overheads 79.1 Irrecoverable value added tax embedded within claims spend 158.6 Employer’s national insurance contributions 39.8 Other taxes 9.1 Total taxes borne 381.8
Own brand gross written premium reduced by 1.5%, overall gross written premium reduced by 2.1%.
Operating profit of £363.5 million was £60.9 million higher than prior year due to lower claims frequency, mainly due to Covid-19 restrictions, partly offset by lower prior-year reserve releases.
In-force policies (thousands) 4,061 4,043 Of which direct own brands 3,943 3,921
During the year, the Group continued to focus on technology and business transformation. Despite the operational challenges in moving to remote working, further progress was made on the roll-out of the Group’s new motor platform with roll-out completed for Privilege new business and renewal customers in the year and scheduled to be started for Churchill PCW and new phone business in Q1 2021. Motor improved its PCW competitiveness with the launch of the Darwin brand on two more PCWs helping drive strong growth during the year. In addition, the Group launched a new “Mileage Moneyback” proposition for Direct Line Motor customers.
Mileage refunds For our customers who were experiencing immediate financial difficulty due to the impact of Covid-19, we implemented a range of support measures. We waived cancellation fees and offered payment deferrals for people who had lost their job or seen changes to their employment. We recognised that the lockdown was changing customers’ behaviour and invited every customer to contact us if their annual mileage had reduced, resulting in thousands of premium refunds and waived administration fees. We also launched a new Direct Line “Mileage MoneyBack” proposition giving customers the flexibility to update their mileage at the end of their policy and claim a refund on the miles not driven when the policy comes up for renewal.
The Group offered premium refunds to all customers where miles driven were expected to be lower than anticipated at policy inception. Furthermore, the Group launched a “Mileage MoneyBack” proposition for all Direct Line customers such that customers would be able to receive a refund at the end of the policy period where they had driven less than expected. Gross written premium reduced by 2.1% to £1,616.9 million, primarily due to lower average premium.
Motor own brand average premium1 reduced 2.0% during 2020 due predominantly to a 4.0% impact from reducing risk mix following lower new car sales and fewer new drivers entering the market. Motor risk-adjusted prices, before taking account of lower claims frequency, increased by 1.8%. Market premium deflation accelerated through 2020 as claims frequency remained low.
Although it is not possible to entirely adjust for all of the above factors, the Group believes that it made some underlying progress in reducing the current-year loss ratio during the year.
In-force policies (thousands) 2,638 2,594 Of which direct own brands 1,837 1,765
The Home segment grew direct own brands policy count due to strong PCW performance reflecting the Group’s improved focus and capability in this channel. Direct Line policies remained stable over the period. Partnership policy count continued to reduce, partly due to the continued run-off of some schemes whilst bank branch sales reduced due to lower footfall.
Home continued to focus on its transformation with the acquisition of Brolly, a small digital insurer. The team behind Brolly joined the Group and will help fast track our ability to deliver tailored products to the market. We also agreed a two year extension with NatWest Group for Home insurance.
Home operating profit of £101.4m was lower due to higher weather-related claims costs, lower prior-year reserve releases and lower investment return, partly offset by favourable claims experience across other perils.
Peace of mind when it matters most At the start of the year we supported customers affected by Storms Ciara and Dennis, which saw the Group provide in the region of £25 million in claims payments so customers could get their lives back on track.
At one point 6,500 customers got in touch to tell us their homes had been damaged by Storm Ciara’s 100mph winds and torrential rain – over four times the calls we had seen the previous week. Our Claims teams coordinated our Group response, as well as colleagues on the ground in our Direct Line Defenders and Churchill branded vehicles who were there for our customers when it mattered most, so they could give them peace of mind that we were able to help at this difficult time.
The current-year attritional loss ratio, excluding major weather event claims, improved by 0.8 percentage points to 52.7%. Home has experienced a change in mix towards more accidental damage claims and fewer theft claims during 2020 with continuing positive trends in escape of water severity. Whilst the Covid-19 pandemic is believed to have contributed positively to these trends, the impact is not significant.
Home’s combined operating ratio increased by 6.8 percentage points to 87.1% (2019: 80.3%). This was driven primarily by a 5.3 percentage point reduction in prior-year releases and a 4.3 percentage point increase in major weather costs partly offset by an improvement in the current-year attritional loss ratio. Normalised for weather, the combined operating ratio was 3.4% percentage points higher than 2019 at 90.3%2 (2019: 86.9%).
2. See glossary on pages 224 to 226 for definitions and appendix A – Alternative performance measures on pages 227 to 230 for reconciliation.
The Group’s direct Rescue brand, Green Flag, grew in-force policies by 4.8% and gross written premiums by 5.2% in the year.
Operating profit of £6.8 million included £51.2 million (2019: 45.2 million) profit for Rescue largely offset by loss of £44.4 million (2019: £6.1 million loss) for Other Personal Lines.
In-force policies (thousands) 7,105 7,377 Of which direct own brands 1,114 1,063
Gross written premium £417.8m £436.0m Loss ratio 61.7% 66.9% Commission ratio 16.4% 6.4% Expense ratio 23.9% 22.1% Combined operating ratio 102.0% 95.4% Operating profit £6.8m £39.1m
Overall Rescue and other personal lines made a small operating profit of £6.8 million as the strong profit in Rescue was largely offset by a loss of £44.4 million in other personal lines due to Travel.
Transforming the way rescue service is delivered Being able to anticipate and adapt quickly is at the heart of our strategy. This year, Green Flag expanded its service to support the NHS during lockdown, whilst updating its user-friendly “Green Flag Rescue Me” app which has seen more customers interact digitally and receive exceptional1 service. It has coordinated 78,931 rescues and seen a 30% increase in people accessing it during 2020.
The combined operating ratio for Rescue of 76.5% was 5.0 percentage points better than 2019’s ratio of 81.5%. Lower claims frequency during Covid-19 lockdown alongside lower claims costs due to fewer long-distance recoveries, was partially offset by supplier network support payments and free rescue given to NHS staff. Approximately half of the improvement in the combined operating ratio is expected to be one-off.
Total gross written premium increased by 7.4% with direct own brands increasing by 9.3%.
Gross written premium £567.8m £528.9m Loss ratio 51.4% 52.7% Commission ratio 18.7% 18.5% Expense ratio 25.4% 24.5% Combined operating ratio 95.5% 95.7% Operating profit £50.4m £54.6m
Commercial also grew policy count through more competitive pricing in the traditional broker channel as well as through the PCW channel via the Churchill brand, following investment and focus on digital, pricing and marketing of the brand.
Prior-year reserve releases were £8.2 million lower at £56.8 million, primarily due to lower general liability reserve releases on older accident years. 2019’s result included a £1.0 million strengthening of prior-year reserves as a result of the change in the Ogden discount rate to minus 0.25% from an assumed rate of 0%.
We are transforming to maintain a competitive edge, but doing it in a way that is sustainable and mindful of our impact on society and the environment.
Use our expertise to improve outcomes for society and the communities we serve.
Look to the long term for our stakeholders, build a reputation for high standards of business conduct and a sustainable business.
Gaining confidence from 2020 We remained focused on our sustainability strategy despite the disruption created by the Covid-19 pandemic. Far from restricting the Group, it enhanced our response. The way we supported customers in need, made remote working effective, created flexible insurance products and made ourselves accountable for reducing carbon emissions are all significant milestones. We also supported partners in our supply chain when lockdown impacted their operations.
2020 has opened up new possibilities, provided fresh insight and given the business more confidence to drive sustainable outcomes, many of which have the potential to leave a lasting impact. More detail can be found in our summary of activity for each of our sustainability pillars on pages 48 to 61.
Maximising our impact for all our stakeholders In 2019, we conducted our first in-depth Materiality Assessment. It has helped shape the Group’s sustainability strategy as it prioritises what our stakeholders value, alongside the impact on the business and how we can use this insight to build a sustainable business for the future.
Building on the four priorities outlined opposite, in 2020 we chose to actively prioritise social mobility, as well as developing a diverse and inclusive workforce and reducing our impact on climate change which our stakeholders place in the high category. We did this because each of these issues is an integral part of living up to our vision of a world where insurance is personal, inclusive and a force for good.
Ensure healthy lives and promote wellbeing for all at all ages.
– Carbon offsetting projects: clean water in Kenya, clean cookstoves in Bangladesh
– Apprenticeships – Graduate programme – Continuous learning – Donation to Teach
Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation.
– Safe roads – Carbon offsetting project: clean water in Kenya
Climate Action Take urgent action to combat climate change and its impacts.
Sustainalytics: In 2020 the Group was ranked as an ESG leader out of all companies assessed in the property and casualty insurance sector and maintained its top ten position in the broader insurance industry group of 261 companies.
Direct Line Group actively supports various initiatives related to climate change, ESG and sustainability. These supplement our identification and management of climate-related risks, and include: www.directlinegroup.co.uk 47
We seek to understand customer needs, providing real value across our brands and products. It requires a deep appreciation of customer expectations, a determination to provide an exceptional insurance experience and a consistent desire to innovate.
Customers Earn our customers’ trust by demonstrating how we are acting in their best interests
Our Covid-19 response for customers Throughout 2020 we adapted quickly to the changing world around us so that we could deliver more for customers at speed, helping them navigate the disruption to their lives. Some of the highlights included: – free rescue cover, fast-track claims and free home emergencies for our NHS customers; – individualised support for customers in financial difficulty; – over 450,000 customers benefiting from support measures; – our Travel team settled claims for over 26,000 customers with payments for those who saw their travel plans cancelled or curtailed due to Covid-19 disruption and repatriated over 900 customers stranded abroad; and
Note: 1. Please see Net Promoter Score KPI on page 19 for further information.
Taking action on pricing The insurance sector operates in a highly competitive market which works well for most customers. We support change to improve outcomes for long-standing customers and that is why we welcome the FCA’s Market Study on General Insurance Pricing Practices. These reforms, that aim to equalise customer prices whether they are renewing or looking for a new policy, should reduce unnecessary turnover and deliver fairer prices to all.
Not all insurance products are equal across the market, with varying levels of cover and service. We offer a range of propositions to protect our customers, underpinned by a high-quality claims service for all customers to give them peace of mind.
– investing in a major technology upgrade to help us make it easier for our customers to manage their protection, from the moment they think about buying a policy, managing their cover 24/7, all the way through to making a claim.
– customers seeking medical assistance abroad are offered localised care as we can recommend the nearest medical facility that can support them.
First end-to-end online Home claim Our digital capability saw us deliver a first for the Group in 2020 by delivering an end-to-end online claims process for a Home customer – all registered, processed and settled fully online. This is the next step in our digital journey, giving customers the flexibility to handle their insurance matters how they want.
We aspire to create an environment where everyone feels free to be themselves and succeed in their careers. Our culture is one where we strive to care about our customers and one another. That’s what our values are designed to achieve, and they underpin who we are and what we stand for.
Diversity and inclusion strategy One of our values is “bring all of yourself to work” because as well as simply being the right thing to do, focusing on diversity and inclusion makes good business sense and delivers better outcomes.
These findings have helped to inform a refreshed diversity and inclusion strategy, with greater ambition and reach.
What we found: – One in six or 17% of our colleagues is Black, Asian or Minority Ethnic (“BAME”); Black colleagues make up 3% of the total.
– BAME representation is concentrated in our lower and middle grades and reduces with seniority.
– If you are Black, mixed ethnicity, or from one of the smaller ethnic groups, it doesn’t feel as positive to work for the Group as it does for other colleagues.
Making progress Supported by our employee networks, we have launched an awareness and education programme to build empathy and a greater understanding of issues. This includes a reverse mentoring scheme to help our senior leaders better appreciate the barriers and challenges faced by certain communities.
All our leaders are completing inclusive leadership training and in 2021 we’re launching a diversity and inclusion fluency programme to ensure all people managers are equipped to have better conversations and support their teams.
People Encourage a culture that celebrates difference and empowers people so that they can thrive
Our Covid-19 response for our people The Group is nothing without its people. When lockdown happened we quickly moved 9,000 people to home working and supported our motor accident repair centres with enhanced safety measures, offering maximum flexibility to help our people manage home and work.
The strands are led by volunteers from across the Group based in locations spanning the UK. They provide a network for colleagues and allies, as well as guiding our people policies and what we support externally.
Women in Finance Charter We are a signatory to the HM Treasury’s Women in Finance Charter. At the end of 2020, 30% of our senior leadership were women. We are determined to go further and this year we took the decision to increase our target from 30% to 35% female representation in our senior leadership by the end of 2022 in order to maintain a keen focus on progression.
Gender diversity of senior leadership figures based on 2020 Women in Finance reporting
Excludes 13% of colleagues who have not submitted an option for ethnicity
Mental health We strongly encourage our people to be open about how they feel both in and out of work so we can best support them. Our mental health programme includes ensuring people managers receive specialist training on dealing with mental health issues. Pre-lockdown we had a network of trained mental health first aiders (MHFA) – one on each floor of each of our sites and we are proud of how quickly our approach adapted to deliver the same support remotely.
Supporting and developing our people As we adjust to this new way of working remotely, we remain committed to looking after our people. This includes a programme where both financial and mental wellbeing are top priorities.
Minimum salaries Our success is down to the hard work and commitment of our people and we want to reward them for their contribution. Whilst we look for ways to boost the reward proposition for as many of our colleagues as possible, our focus is to ensure that those in our lowest-paid roles receive a meaningful pay increase. In March 2020, for the third year running, we increased our minimum salaries for full time colleagues working 37.5 hours from £19,000 to £19,500 which is 19% higher than the Government’s National Minimum Wage and 5% higher than the Living Wage Foundation rate outside London, benefiting 5,200 of our people.
Annual incentive plan The annual incentive plan ensures there is a strong link between pay and the Group’s performance on specific metrics, such as our Customers’ Experience agenda which focuses on making the customer’s journey as easy as possible, and broadening our diversity impact to include BAME and Black representation targets at senior leadership positions.
Tech Talent Charter As signatories to the Tech Talent Charter, we are committed to gender diversity across our technology teams. We are proud to have a 34% female tech team versus a UK average2 of 19% and a signatory average of 25%.
Flexibility Additionally, our My Life policies, offered to all our people, provide flexibility and support at work to do the things that matter to people outside work. We believe it’s important that everyone embraces flexibility because that’s the only way we’ll ever achieve gender equality. We have pushed this policy further over the last 12 months to ensure those with caring or home-schooling responsibilities as a result of Covid-19 are not disadvantaged.
Notes: 1. Board representation at 11 January 2021 and Executive Committee & direct report representation at 31 October 2020 as per HamptonAlexander data sourcing.
Talent pipeline We have continued to invest in our graduate and apprenticeship programme over the years and we recognise they are key to driving our digital agenda and building a ‘fit for the future’ organisation. To date, we have recruited over 180 people into our graduate programme and it is designed to develop the people who will enable us to create an exciting future. Our apprenticeship scheme has won the Top 100 Apprenticeship employer three years running, which reflects our standing in the market.
Our commitment to social mobility Our diversity makes us stronger. We are a business employing thousands of people throughout the UK who all possess a variety of skills, experiences and, crucially, bring different perspectives to our work.
The reasons can be complex and specific for each individual. That’s why we have a renewed sense of purpose in supporting people throughout their career. It’s not simply about attracting people into the Direct Line Group family, but also what happens once they have joined so that people can be helped to fulfil their career potential.
That’s why “Getting In, Getting On, Getting Ahead” is how we think about social mobility as a Company – creating an environment where people feel confident whatever their start in life.
SoMo DNA strand Our newly established Social Mobility Employee Network – known across the business as “SoMo”– is a driving force behind how we talk about the issue. What started as a small group is now growing with over 100 active members.
SoMo seeks to raise awareness of social mobility issues, establish role models to inspire others from similar backgrounds, and encourage more open conversations about social mobility in the workplace. It has provided an open forum for people to speak about barriers and inspire confidence, as well as driving some of the Group’s outreach activity.
– We are exploring how to take advantage of remote working so we can open up new recruitment areas, starting with a pilot scheme of over 20 apprentice home workers.
– We are reviewing our recruitment approach to target social mobility ‘cold spots’ where our main offices are based.
Insight day In 2020 we partnered with the Social Mobility Business Partnership to run our first work insight and skills day for bright students from less advantaged backgrounds to give them the opportunity to hear from companies directly and learn what career opportunities are available. It was a pleasure to support their future career aspirations by explaining what life is like at the Group.
Auto-Raise We’re delighted to have made a corporate donation to Auto-Raise, a long-standing charity partner that supports youngsters who wish to enter the bodyshop industry and receive relevant qualifications so they become the vehicle repairers of the future.
Envision This year we supported Envision, who are long-term partners of our Bristol office to provide the Community-Apprentice Programme for school children. By setting group tasks it aims to empower young people through problem solving, building confidence, as well as testing teamwork skills, all guided by mentors from the Group. Through programmes such as this it supports participants to gain knowledge about what skills are required in the work place.
Suppliers The Group is a long-standing signatory of the Prompt Payment Code. This year Green Flag supported our independent network of 200 local rescue businesses by offering a number of them support payments which contributed to the protection of over 4,000 key workers when lockdown started. We take our commitment to ensuring modern slavery is not present in our supply chain seriously. The Modern Slavery Act 2015 is incorporated into our risk profiling, with specific requirements incorporated in our due diligence and assurance processes.
Note: 1. The Group’s total tax contribution in 2020, including direct and indirect tax contributions.
We immediately responded to the Covid-19 crisis by establishing our very own Community Fund targeting much needed resource to charities and local authorities where our main office sites are based. It was a small way of providing a helping hand to a variety of causes throughout the UK.
ABI Covid-19 Support Fund We also donated £3.6 million to the ABI’s Covid-19 Support Fund which has supported hundreds of charities across the UK.
£1m directed towards recovery efforts£2m of immediate support to the most vulnerable £500k 180 charities received donations of up to £5,000
Giving back to our communities Colleagues have taken advantage of our popular Community Cashback initiative which awards £250 to chosen charities.
Community Fund 2021 We know that Covid-19 will continue to dominate our lives throughout 2021 and we have allocated £1.5 million to support charities across the coming year.
The impact of climate change has far reaching implications for economies and societies around the world. We are determined to contribute to a long-term sustainable future and know that through our actions as a business we can contribute to climate risk mitigation and help to accelerate the transition to a low carbon future. There are three steps to our plan.
We also began the process of evaluating our Scope 3 emissions starting with those under our direct control (such as waste disposal and business travel) and purchased goods and services. Plans are underway to evaluate the final part of our Scope 3 emissions, and our investment portfolio in 2021.
Step two: Commit to tangible actions We have committed to set Science-Based Targets for Scope 1, 2 and 3 emissions within the two-years timeframe set out by the SBTi. On Scope 1 and 2 emissions, we intend to set a target that enables us to play our part in holding off some of the worst climate impacts by limiting the global temperature rise to no more than 1.5°C above pre-industrial levels.
This year we achieved carbon neutrality by working with ClimateCare who has over 22 years of experience in project development, carbon asset development, and delivery of corporate carbon programmes.
Over the next three years we are funding carbon offsetting projects which will also deliver high social impact benefits in three countries.
2. Scope 1 and 2 emissions are reported here on a like-for-like basis against a 2013 baseline and exclude emissions from additional vehicles used during repairs, courtesy car fuel usage and from vehicles that are Company-funded. For our full Scope 1 and Scope 2 results inclusive of these emissions please see page 61.
3. Total scope 1 and 2 emissions. The 2019 result of 16,328 tCO2e differs from the reported result in the 2019 Annual Report and Accounts of 13,932 tCO2e as it now includes the additional emissions cited in footnote 2. The 2020 result is inclusive of these emissions.
Continuing to invest in energy reduction measures This year the Group continued to invest in energy efficient measures with over £2 million invested in our office estate including: – New electric air conditioning systems in our Bromley office enabling a reduction in gas usage and better maintainability
– Installation of LED lighting and new power systems in our Birmingham and Glasgow offices which could lead to a 50% reduction in electricity use
This year the Group was also awarded the ISO 14001 accreditation by the Lloyds Register Quality Assurance body for our office management – an internationally agreed standard that helps organisations improve their environmental performance.
– Two new dual electric car charging points in our Birmingham site preparing for the rise in electric vehicle usage
Our investments: moving climate up the agenda – 100% of our portfolio will be net carbon neutral by 2050 – Corporate bond portfolios are committed to a 50%
– A preference for companies with carbon reduction targets approved by the Science Based Targets initiative
– A preference for companies with at least a 2°C carbon performance alignment with the Transition Pathway Initiative
– The exclusion of any companies with a carbon transition score indicating assets could be economically stranded
– The exclusion of any mining companies that generate >5% of revenues from thermal coal production and electricity generators that derive >5% of revenues from thermal coal power generation (unless, in either case, the company has an approved Science Based Targets initiative plan)
– The exclusion of any companies that are developing new thermal coal mines or coal burning power plants
– Ensuring all of our investment-grade corporate bond portfolios maintain an average MSCI ESG rating of ‘A’
– Accident repair centres: Aiming to be the most energy-efficient repair network in the UK by investing in our estate and repair processes.
– Green Flag: Reducing mileage and supporting sustainable transport through efficiency initiatives, such as optimising our roadside fix rate to reduce our mileage and tow fewer vehicles.
Our offsetting projects Over the next three years, we will offset those emissions we can’t yet avoid through projects that cut carbon emissions whilst also delivering tangible benefits to local communities and environments in three countries: – Rainforest protection, Brazil: Our funding will support efforts to prevent unplanned deforestation across 350,000 hectares of the Portel micro region, through training and educating local communities in alternative agroforestry methods. By opening up new economic opportunities, the project is reducing slash and burn agriculture, which has been one of the largest contributors to deforestation. The project is also providing access to official land titles for native families and is protecting more than 30 vulnerable species.
Group emissions Our 2020 progress against our new 2019 baseline represents our most transparent emission reporting to date. In 2020 we were able, for the first time, to break out our Scope 1 and Scope 2 emissions into separate performance figures across our office sites and accident repair centres, and disclose a Scope 3 footprint with greater clarity of the activities under our direct control. Emission results reported below are all related to UK operations.
In addition, we monitor the intensity metric of emissions per £ million annually of net earned premium. This is a measure of how efficiently we provide our insurance products and allows us to compare our performance year-on-year and against other insurance companies.
Intensity metric Year Emissions per £ million of net earned premium7
Notes: 1. The 2019 result differs from the Group’s TCFD 2020 report published in December 2020 as a result of a reclassification of 320 tCO2e from upstream leased assets (Scope 3 under our direct control) to Scope 1 auto services.
2. The 2019 Scope 1 total of 9,719 CO2e differs from our previously reported figure of 7,365 CO2e in the 2019 Annual Report and Accounts as it now includes emissions from additional vehicles used during repairs, courtesy car fuel usage and vehicles that are Company funded, which had not previously been tracked. The 2020 result includes these emissions.
3. Figures for Scope 2 use standard location-based methodology. We follow GHG Protocol to disclose both location and market-based figures; and as we have secured our energy from 100% renewable sources since 2014, our Scope 2 market-based results are nil.
4. The 2019 Scope 2 total of 6,609 CO2e differs from our previously reported figure of 6,567 CO2e in the 2019 Annual Report and Accounts following recalculation.
5. Employee commuting is based on UK national averages, not actual individual methods of transport of Direct Line Group employees commuting. This data is not currently tracked.
Management’s role There are three primary management roles designed to assign responsibility for the delivery of the Group’s assessment and management of climate-related issues: – the CEO has overall responsibility for climate change and environmental matters; – the CRO is responsible for overseeing the management of climate change-related financial risk and sponsors the Planet pillar of the Group’s sustainability framework. The CRO is also the senior manager with responsibility for assessing and monitoring climate change-related risk. In that capacity, the CRO oversees the work of the Risk function in analysing and stress testing the potential future impact of climate change on the business. The results of these stress tests are submitted to the Risk Management Committee, the Board Risk Committee and the Board, including as part of the ORSA; and
This year the Group published its first comprehensive climate disclosure reporting against the Task Force on Climate-related Financial Disclosures (“TCFD”) framework. TCFD has enhanced our reporting and we are confident it will continue to do so as we strengthen our strategic response to one of the biggest challenges facing the world today. A summary of the Group’s 2020 TCFD Report follows.
Governance The Group prides itself on good sustainability governance underpinned by our Vision and Purpose and a clear commitment from the top to align sustainability goals and ensure relevant accountability across the business.
Board and Committees The potential impact of climate change on the business (“inbound”), as well as the Group’s impact on the environment (“outbound”), are issues that have grown in importance and sit firmly within the Group’s governance approach.
For access to the full report please go online at: www.directlinegroup.co.uk/2020_TCFD_Report
– the Chief Financial Officer (“CFO”) is responsible for setting the Group’s investment strategy and is advised by the Investment Committee on the application of ESG weightings, including those related to climate change, to the relevant portfolios. The CFO is a member of the Committee and the CEO, CRO and the Director of Investment Management & Treasury are attendees.
Strategy Our strategy is to drive change across our underwriting activity, our operations and our investments. The specific impacts of climate change on our business are diverse, and fall into three broad categories: – Physical risks and opportunities resulting from the physical effects of climate change such as weatherrelated events. This is important to our business as it includes the potential for increased insurance claims, driven by both the frequency and severity of natural catastrophes and other weather-related events in the UK.
– Transition risks and opportunities arising from efforts to mitigate climate change, which are driving the transition to a lower-carbon economy. This is significant as we navigate this transition, ensuring our insurance products and operations continue to meet our customers’ needs as a result of any changes in market dynamics and customer behaviour, for example a shift towards electric vehicle usage.
Increasing frequency and severity of natural catastrophes and other weather-related events in the UK. As a general insurer we have the ability to re-price annually and transfer risk through reinsurance arrangements. This is likely to limit insurance liability impact in the short term.
Strategic and operational response to the transition towards a lower-carbon economy. This will include including changes to risk nature, opportunities and risks within our supply chain and repair processes and changes to, and opportunities in, our product offerings.
The impacts of risks and opportunities that need to be considered over the longer term include significant adjustments to weather-related modelling, a shift in dynamics within the markets we operate in and continued efforts towards net carbon neutrality in our investment portfolio.
We have defined the following time horizons for these risks: Short (1-5 years), Medium (5-10 years), and Long (10+ years). In general, transition risks are likely to materialise more rapidly than physical risks, which are likely to be gradual and materialise in the longer term. The timing of liability risks is less certain due to the nature of the exposure.
– Scenario A, a rapid, disorderly transition to a lowcarbon economy.
– Scenario B, a slow, more orderly transition that keeps global temperatures well within the Paris Agreement target of 2°C of warming.
Whilst the transition scenarios saw material impacts on the investment portfolio, the most notable impacts on both investments and insurance liabilities arose from the physical effects of no transition, that is no additional actions beyond those already announced. Based on the PRA specifications, Scenario C, in which physical risk dominates, resulted in the most significant impact on the Group but did not breach risk appetite despite not allowing for reinsurance. This demonstrates the resilience of the Group’s strategy to such a scenario. Furthermore, the projected time frame (2100) for this scenario is likely to allow the business to adapt.
In our Motor business, the transition to electric-powered vehicles could affect strategic and operational considerations, including changes to the profile of accidents and changes to the nature of risks, supply chain and repair processes. Understanding this transition provides an opportunity to ensure optimum risk assessments influence pricing decisions and seek to ensure an efficient repair process in our accident repair centres.
Climate change also creates the opportunity to enhance our risk-modelling expertise that can strengthen our pricing decisions. Remaining active participants in developing solutions to influence the debate on weatherrelated events gives the Group an opportunity to enhance risk modelling and ensure commercial impacts are understood, particularly how claims and fulfilment operations function, for example flooding and resilient repairs in our Home business. Changes in building codes and standards could also impact the way the Group prices property underwriting risk.
Consumers and existing customers could gravitate in greater numbers to competitors as part of a desire for environmentally friendly products. This is a risk and opportunity in equal measure. Developing products that could encourage a reduction in emissions would highlight the Group’s capability to customers, opening up a potential commercial opportunity, for example mileage refund propositions for motor customers.
The Group is now conducting market research on consumer attitudes to green products in the insurance industry in order to give the Group greater insight into their commercial viability.
A failure to set long-term emission reduction targets for business operations could see energy consumption and costs increase. Targets, however, allow the Group to focus on energy reduction across its estate and be transparent about progress achieved.
We recognise that total Scope 3 emissions could either increase or reduce as a result of how we manage our supply chain, particularly the goods and services we purchase. Once approved, our new Science-Based Targets will enable the Group to monitor its progress and the effectiveness by reducing emissions in our supply chain.
A full explanation of our strategic response can be found in our 2020 TCFD Report1
Investments In recent years we have started to integrate more ESG considerations into our investment strategy, recognising this is a long-term process which will require assessment and challenge to inform future decision making. We know that the impacts of potential physical and transition risks arising in the wider economy can have an impact on our investment portfolio, through their influence on the value of assets.
Our largest asset portfolios are focused on corporate bonds, and in early 2019 we introduced a significant new initiative. The Group’s investment-grade portfolios, representing the bulk of its fixed income investments, now include a new investment objective: to achieve a minimum MSCI ESG rating of ‘A’ for the portfolio. Companies with higher ESG credentials have more sustainable practices, so this new objective has enabled us to better align our investment goals with our environmental and social goals. We are proud to have achieved the objective and, by the end of 2019, 100% of the investment-grade corporate bond portfolios had an average ESG rating of ‘A’.
We are also actively encouraging our investment managers to invest in green bonds. Green bonds are designated bonds intended to encourage sustainability and to support climate-related or other environmental projects. All our relevant bond mandate guidelines direct the portfolio manager to purchase a green bond where the risk/return characteristics are similar to those of a non-green bond.
Looking ahead, we intend to increase our efforts to develop a more focused climate-related investment approach with a long-term goal of ensuring our entire investment portfolio is net carbon neutral by 2050.
We recognise the importance of avoiding investing in the companies least prepared for the transition to a low-carbon economy due to the risk of stranded assets. In response, we are working to increase allocations to those companies providing the solutions and those demonstrating a serious intent to decarbonise.
We also know that to meet the aims of the Paris Agreement, energy generation from fossil fuels will have to be drastically reduced in the coming decade. From 2021, asset managers will not be authorised to buy bonds in mining companies that generate more than 5% of revenues from thermal coal production, and electricity generators that derive more than 5% of revenues from thermal coal power generation. To encourage positive climate action, an exception will be made for companies which have either made commitments for emission reduction targets through the SBTi or assigned a ’2 degree’ or better Carbon Performance Alignment from the Transition Pathway Initiative. We also plan to exclude companies that are developing new thermal coal plants or mines, in a time frame consistent with our application to the global corporate renewable energy initiative, RE100. We will review the above exclusions annually and may, in the future, divest completely from companies with any involvement in coal or expand the list to include other types of fossil fuels.
Alongside these actions against our investment-grade bonds, we are committed to a wider framework which encompasses all asset classes to deliver our net carbon neutral long-term goal (see page 31 of the Group’s 2020 TCFD Report).
Our most exposed policies renew annually and are priced according to risk. Pricing algorithms use sophisticated rating engines to account for recent trends and are supplemented with views of catastrophic risk to seek to ensure sufficient pricing. These prices will evolve as climate change influences manifest themselves through changing loss patterns, and views of catastrophic risk develop because of rising sea levels, changes in precipitation rates and urban resilience.
Risk pricing models are built using historical data covering a multi-decadal time period for perils most likely to be influenced by climate change. This allows us to understand and incorporate long-term signals and past trends into our modelling.
Increases in frequency and severity of large catastrophe weather events are mitigated by the Group’s use of catastrophe excess of loss reinsurance. This reinsurance covers property (Personal Lines and Commercial) and Motor physical damage losses; in addition to significant capital benefits, it transfers the volatility of low-frequency, high-severity natural perils events away from the Group. The reinsurance purchase decision is a combination of catastrophe modelling, capital analysis, the Group’s risk appetite, cost of cover and the overall income statement impact. Cover is purchased with an upper limit equivalent to a 200-year modelled loss and the retention will be based upon the amount that the Group is willing to sustain from such a loss. This cover has benefited from two substantial improvements in recent years that provide additional climate change mitigation against multiple events: – an increase in the number of reinstatement provisions. The reinsurance limit is purchased with a reinstatement provision where, in the event of a catastrophe loss, the limit of cover available is automatically reinstated to provide cover for the next event loss. Up until recently the cover was purchased with just a single reinstatement provision across the whole programme but this was increased to two in 2017 for a significant proportion of the reinsurance. This has resulted in more overall reinsurance cover being available for catastrophe losses; and
In addition, we purchase risk covers to protect against large individual commercial losses.
For a full summary of how the Group approaches Risk management please go to page 24 of our full 2020 TCFD report
Metrics and targets We take our environmental impact responsibilities seriously and recognise the value of target-setting and reporting in driving our emission reductions. We comply with the applicable greenhouse gas reporting requirements of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and apply the GHG Protocol Corporate Accounting and Reporting Standard (revised edition) to calculate our emissions, which includes emissions associated with electricity consumption using both the Scope 2 locationbased and Scope 2 market-based calculation methodologies. This year we also began the process of evaluating our Scope 3 emissions under our direct control and plans are underway to evaluate the final part of our Scope 3 emissions, and our investment portfolio in 2021.
In addition, we have two Group-wide environmental impact targets: – a 57% reduction in emissions (Scope 1 and 2) on a like-for-like basis by the end of 2020 against a 2013 baseline. We exceeded this target with a 69% reduction in energy related emissions in 2020, which takes into account the impact of Covid-19 where home working and lockdown measures altered our energy usage. Excluding the impact of Covid-19 we estimate energy related emissions would have been approximately 63% lower than 2013; and
Normalising by sales as the denominator allows the investor to compare carbon efficiency of different sized firms within the same industry and has become the standard metric used in the investment industry. Our aim in 2021 is to be able to report the weighted average carbon intensity of our corporate bonds portfolio. Furthermore, in order to improve monitoring, management and future reporting in this area, we are working towards an improved picture of the emissions intensity of other significant portions of our investment portfolio, where appropriate data and methodologies exist.
Looking forward, we are working with the Carbon Trust to set Science-Based Targets across the full Scope 1, 2 and 3 of our operations. These targets will be submitted for approval and subject to the two-year time frame set out by the SBTi.
Describe management’s role in assessing and managing climate-related risks and opportunities.
Strategy Describe the climate-related risks and opportunities the organisation has identified over the short, medium and long term.
The Group intends to conduct more analysis in order to present more detailed impact assessments of climate-related risks across different time horizons.
The Group intends to strengthen how it systematically considers climate-related issues from a risk and opportunity perspective across business areas, strategic decision making and financial planning in order to be better able to describe impacts.
Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.
To support this aim we have now set an interim target of a 50% reduction in weighted average GHG emissions intensity by 2030 within our corporate bonds portfolio, the largest part of our investment portfolio. We will use GHG emissions intensity1 as the key metric of measurement as follows: Note: 1. GHG emissions intensity is used to account for greenhouse gases other than just carbon dioxide which contribute to global warming (such as methane and nitrous oxide). These other gases are converted into a CO2 equivalent measure based on their warming potential.
Annual global energy consumption in kWh, being the aggregate of: – energy consumed from activities for which the Company is responsible 58
The proportion of GHG emissions and energy consumed relating to the UK and offshore area1 59 and 61
Non-financial information statement This Non-financial information statement highlights information necessary for an understanding of the Company’s development, performance, position and impact of its activity, information relating to environmental, employee, social, respect for human rights, anti-corruption and anti-bribery matters.
– Social Mobility Employee Network – Prompt Payment Code – Our Community Fund
Innovation – New products, channels and propositions – Digital customer journey
Managing risk in line with our strategy Our management team, with oversight from the Board and Board Risk Committee, is responsible for developing our strategy. Our strategic planning process aims to ensure we have developed clear objectives and targets, and identified the actions needed to deliver them, including the management of risk.
To begin with, the focus was on establishing standards and governance, articulating the Group’s risk appetite and ensuring we had appropriate capability across its three lines of defence. We now have an embedded Enterprise Risk Management and Strategy Framework (“Risk Management Framework”) with clear accountabilities and risk ownership designed to ensure that we identify, manage, mitigate and report on all key risks and controls through the three lines of defence model: First line: Management is responsible for embedding risk management into business as usual and change processes whilst creating transparent reporting of risks and management actions.
Third line: Group Audit is responsible and accountable for providing an independent and objective view of the adequacy and effectiveness of the Group’s risk management, governance and internal control framework.
Our risk appetite statements are documented in our policies and include: – monitoring whether the business remains within risk appetite, among other information, using key risk indicators; – deriving the key risk indicators from the risk appetite statements to drive and monitor risk-aware decisionmaking; and
– both qualitative and quantitative risk statements which are forward and backward-looking. We review our risk appetite statements and key risk indicators annually.
Collaboration took place across the business to manage other Group responses to the pandemic; such as, the management of the surge in customer claims related to Travel; the assessment of additional scenarios relating to operational resilience; and documenting how impacts of the pandemic may evolve, in order to identify and mitigate risk.
Our risk culture Our risk culture underpins our business and decisionmaking, and helps us embed a robust approach to managing risk. Our Risk Function drives ownership of risks in the business and ensures that risk consideration is integral to all decision-making. It also provides expert advice and guidance to business areas, whilst also challenging the effectiveness of controls to manage risk and compliance.
The Board is committed to promoting a culture of high standards of corporate governance, business integrity, ethics and professionalism in all our activities. An annual assessment of risk behaviours and attitudes is undertaken jointly by the Risk Function and Group Audit and considers a range of factors influencing risk culture.
We also have an annual Risk Communications Plan which features activity to reinforce the message that risk is everyone’s responsibility. The Plan features staff awareness campaigns, articles on the intranet and the imaginative “Risk Heroes” campaign which enabled members of staff to harness social media and mobile phone photograph filters; and enabled Risk to engage with colleagues about the importance of risk management in a unique and conversational way.
Three strategic risk objectives 1. Maintain capital adequacy The Group seeks to hold capital resources in the range of 140%-180% of its solvency capital requirement.
3. Maintain stakeholder confidence The Group has no appetite for material risks resulting in reputational damage, regulatory or legal censure, poor customer outcomes, fines or prosecutions and other types of non-budgeted operational risk losses associated with the Group’s conduct and activities. The Group will maintain a robust and proportionate internal control environment.
Overarching risk objective 70 Direct Line Group Annual Report and Accounts 2020
In response to this uncertainty we have used stress testing to understand the potential impacts of an economic downturn on frequency and severity of claims costs.
Finally, climate change presents a risk of more frequent extreme events and key risk indicators are being continually enhanced to monitor related risks across Home, Motor and Commercial.
Operational risks can arise within all areas of the business and can manifest themselves through inadequate or failed internal processes or systems, human error or from external events.
Our approach is to manage our operational risks to proactively mitigate potential customer harm, regulatory or legal censure, financial and reputational impacts. The decreasing trend in operational risk is driven mainly by the good progress made by the business in delivering technology improvements.
We have in place operational processes and systems, including prevention and detection measures. These include processes which seek to ensure we can absorb and/or adapt to internal or external events that could impact customer operations and the wider business.
With the majority of staff now working from home, we continue to work to improve the performance of our IT systems, focusing on improving both system stability and capability.
We continue to deliver sustainable improvements to the overall security control environment, designed to enable us to respond to malicious and unintended threats from both internal and external entities. Processes are also in place to automate controls to enhance risk monitoring.
We maintain a constructive and open relationship with our regulators and have a strong culture of delivering on our commitments to our customers (see pages 48 to 49).
We have worked closely with UK regulators on our Brexit preparations, and with the Central Bank of Ireland to establish an Irish Branch in preparation for the end of the Brexit transition period.
Finally, we have put in place a strong governance and accountability framework as part of the Senior Managers and Certification Regime, and carry out an annual declaration process to ensure the ongoing fitness and propriety of the Group’s Senior Managers and Certified Functions.
To manage credit risk, we set credit limits for each counterparty and actively monitor credit exposures. In addition, we only purchase reinsurance from reinsurers with at least an A- rating and, for liabilities with a relatively long period of time to settlement, this rating is at least A+.
The risk of direct or indirect adverse effects resulting from strategies not being optimally chosen, implemented or adapted to changing conditions.
To manage our risks, we have taken the following steps: – we agree, monitor and manage performance against the Boardapproved plan and targets; – the Board leads an annual strategy and five-year planning process which considers our performance, competitor positioning and strategic opportunities; – as part of the timetable for the Strategic Plan, the Risk Function carries out a risk review of the Plan which is documented in the Group’s Own Risk and Solvency Assessment and presented to the Board; and
– we identify and manage emerging risks using established governance processes and forums.
As a result of the Covid-19 pandemic, the UK Government has acted to support UK employees and prevent lasting damage to the economy. However, the uncertainty surrounding the pandemic makes the overall impact and recovery progress unclear.
The Group portfolio contains a proportion of short-maturity bonds which could be sold relatively quickly if necessary. Recent stress and scenario testing has highlighted that the largest impacts would be on the Group’s asset portfolio. The Group believes that the risks from global financial instability are being appropriately monitored.
The Group records emerging risks within an Emerging Risk Register. An update on emerging risk is presented to the Board Risk Committee annually and is supplemented by deep dives into selected emerging risks. During 2020, the Group Risk function worked with first line of defence subject matter experts to enhance the quality and detail of emerging risk updates.
The Covid-19 pandemic was not included within the Emerging Risk Register as an emerging risk, as it has emerged and is impacting and is reflected in our current Group risk profile. However, ‘Global Pandemic’ remains on the Emerging Risk Watchlist for monitoring, which focuses on the potential for a similar type of outbreak in years to come. Many of the lessons from the Covid-19 situation can be applied to how the Group would respond to another global pandemic.
Climate change The Group recognises that climate change potentially poses material long-term financial risks to the business and is receiving increased scrutiny from regulators and investors. Climate change risks can be divided into three categories: physical, transition and liability risks. All three of these categories can manifest themselves through a range of existing risks within the material risk register, including insurance, market, operational, strategic and reputational risks.
A group of stakeholders including the Chief Data Officer and the Privacy & Information Management team has been established to provide visibility of the challenge for the Group, and a working group has been established to gather external views and create visibility for the required timelines, and to provide the focus required to move development of a data ethics framework at an appropriate pace.
The Group has been outlining a proposed approach for the management and governance of data ethics. Work will continue in 2021 to confirm and embed the proposed principles-based approach. In addition, we have commenced work to determine how the Group could best incorporate emerging data ethics considerations into current customer conduct processes and forums.
In accordance with Provision 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Group for a period longer than the minimum 12 months required by the going concern statement.
Every year, the Board considers the Strategic Plan and an Own Risk and Solvency Assessment (“ORSA”) 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 new 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 period that the plan covered and the conclusions of the ORSA, based on the Group’s anticipated activities as set out in the strategic plan. This review includes reviews of solvency, liquidity, assessment of principal risks and risk management over a three-year period from 2020 to 2022 with a further two years of indicative planning from 2023 to 2024. The first year following approval of the business plan has greater certainty, so it was used to set detailed budgets across the Group. Outcomes
Viability statement 74 Direct Line Group Annual Report and Accounts 2020
Penny James Chief Executive Officer for the subsequent years in the plan are less certain. However, the plan provides a robust planning tool for strategic decisions. The Board recognises that, in a strategic plan, uncertainty increases over time and, therefore, future outcomes cannot be guaranteed or accurately predicted.
Covid-19 pandemic – The Plan has been stress tested for the impact of a deep UK recession triggered by the end of furlough and extended lockdown throughout the first half of 2021. This is a severe but plausible scenario that we have used to challenge our contingent management actions.
Brexit – Following the Brexit deal announced in December 2020 the likelihood and severity of impacts relating to a disorderly Brexit have significantly reduced. However, the Plan has been stress tested for the potential impact of adverse consequences on investment values.
A reverse stress test was also performed to identify the most probable combination of stresses that would result in capital loss and thus threaten the viability of the Group, i.e. a reduction of own funds to below the solvency capital requirement. The test combined a number of independent events and concluded that the Group’s solvency capital requirement would not be breached after management actions.
Based on the results of these reviews, the Board has a reasonable expectation that the Company and the Group can continue in operation, meet liabilities as they fall due and provide the appropriate degree of protection to those who are, or may become, policyholders or claimants in the period to 31 December 2024.
On behalf of the Board, I am pleased to present the Corporate Governance report for the year ended 31 December 2020.
I have been very impressed by the way the Group has responded to the challenge presented by Covid-19. I am extremely proud of our people who have played such an important part in continuing to deliver much needed services throughout the crisis. I am pleased to report that our governance operated well in a different working environment.
As Chair, it is my role to provide leadership of the Board to ensure that it operates effectively. In the light of the impact of Covid-19 and the unprecedented level of uncertainty for the business, the Board held a number of unscheduled meetings to consider significant operational matters, as well as to monitor the Group’s solvency through a period of market volatility.
Your Board is committed to underpinning all of the Group’s activities with the highest standards of corporate governance. This section of our Annual Report & Accounts explains how your Board seeks to ensure that we have effective corporate governance in place to help support the creation of long-term sustainable value for all our shareholders and other stakeholders.
Sustainability is at the heart of how we think about our business. We have always been conscious of our broader role in society, giving something back to our local communities and fostering social mobility. Further information on our sustainable business model can be found in the Strategic report.
There is a duty, enshrined in the Companies Act 2006, for your Directors to act in the way each of us considers, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, having regard to various matters identified in the legislation. In this Annual Report & Accounts, we have detailed the stakeholders and issues which the Directors considered when discharging this duty throughout the year. Our formal statement in relation to Section 172(1) of the Companies Act 2006 appears on page 10.
Communication with our shareholders and other stakeholders is extremely important to us. During 2020, directors attended virtual meetings with major investors to ensure their views were considered and our objectives were understood. For the safety of our shareholders and colleagues, we held a closed AGM in 2020 and encouraged shareholders to submit questions in advance of the meeting. In 2021, acknowledging that restrictions on public gatherings may remain in place, we plan to enable shareholders to participate in our AGM electronically. Shareholders are encouraged to contact us by email at ShareholderEnquiries@directlinegroup.co.uk.
Jane Hanson has served as a Non-Executive Director for over nine years and will step down from the Board at the conclusion of the 2021 AGM.
The Board recognises the benefit of recruiting leaders who live the Group’s culture and values and represent a diversity of gender, ethnicity, cognitive strengths and socio-economic, educational and professional backgrounds. For a wider understanding of the skills and experience of our Board, see pages 78 to 80 and pages 106 to 108.
As part of the annual evaluation process, all Non-Executive Directors were assessed as being independent and able to provide a valuable and effective contribution to the Board. Suggestions for further improving effectiveness that were raised during the review process have been taken into consideration by the Board. Further details can be found on page 94.
Remuneration The Board has delegated responsibility to the Remuneration Committee for the remuneration arrangements for the Chair, Executive Directors and Senior Management. The Remuneration Committee also reviews workforce remuneration and related policies and the alignment of incentives and rewards with the Group’s culture.
The Group’s Remuneration Policy was approved at the 2020 AGM and the current Policy will remain in place for a further two years.
Further details on the work of the Remuneration Committee can be found in the Directors’ remuneration report which begins on page 113.
UK Corporate Governance Code 2018 Board leadership and company purpose Read more on pages 84 to 88
Composition, succession & evaluation Read more on pages 91 to 94
Biography Danuta is Chair of the Nomination and Governance Committee and was appointed as Chair of the Board in August 2020. The Board benefits from her previous experience as Chair, Chief Executive and NED (including two positions as Chair of Remuneration Committees), significant experience in sales, marketing, customer services and technology and in leading and changing large businesses.
As CEO, Penny is leading both the delivery of the Group’s short-term strategic imperatives, including technological and business transformation, and the development of the next stage of our strategy of targeting long-term sustainability.
Penny was previously Group Chief Risk Officer and Executive Director at Prudential, where she was responsible for leading risk oversight globally. Before this, she was Director of Group Finance at Prudential. Penny was previously Group CFO at Omega Insurance Holdings Limited and CFO, UK General Insurance, at Zurich Financial Services. She was a NED of Admiral Group plc from 2015 to 2017. She is an Associate of the Institute of Chartered Accountants in England and Wales.
Tim was Deputy Chief Executive and Group Finance Director of the Royal London Group until July 2019. He joined Royal London as Group Finance Director in 2014 and was additionally appointed as Deputy Chief Executive in 2018. Before joining Royal London, Tim had been Group CFO of Torus Insurance, Deputy Group CFO and Chief Capital Officer of Aviva plc and a Partner in the Global Capital Markets practice of PricewaterhouseCoopers. Tim is also a Fellow of the Institute of Chartered Accountants in England and Wales and a Chartered Insurance Practitioner.
In January 2021, we announced that Tim would be taking a temporary leave of absence. During the interim period, Neil Manser is Acting Chief Financial Officer.
Key for Committee membership 78 Direct Line Group Annual Report and Accounts 2020
Jane has extensive experience of risk management, corporate governance and internal control. She also has wide experience of developing and monitoring customer and conduct risk frameworks and overseeing IT and transformation programmes.
Jane spent her early career with KPMG, working in the financial sector, becoming responsible for delivering corporate governance, internal audit and riskmanagement services in the north of England. Jane has also held a number of executive roles, including Director of Audit, and Risk and Governance Director at Aviva plc. She is a Fellow of the Institute of Chartered Accountants in England and Wales.
Biography Mark Gregory is Chair of the Investment Committee and interim Chair of the Remuneration Committee.
Mark previously held the role of Group CFO and Executive Director at Legal & General until 2017, and was CEO of Merian Global Investors from January 2019 to August 2020.
During his 19-year career at Legal & General, he held a variety of senior roles including CEO of the Savings business, Managing Director of the With-Profits business, and Resources and International Director. Before joining Legal & General, Mark held senior financial and business development roles at ASDA and Kingfisher. Mark is an Associate of the Institute of Chartered Accountants in England and Wales.
Fiona has over 30 years’ experience in retail financial services, both in the industry and as an auditor, in the UK and the USA. She is an Associate Member of the Institute of Chartered Accountants in England and Wales, qualifying as an accountant early on in her career at Arthur Young (now Ernst & Young). Until January 2019, she was Vice-Chair of Save the Children UK and a Trustee Director of the Humanitarian Leadership Academy. Previously, Fiona served as CEO of Scottish Friendly Group for 11 years, before which she was Scottish Friendly Group’s Finance Director.
– Chair of Audit Committee and NonExecutive Director of Monzo Bank Limited www.directlinegroup.co.uk 79
Richard was Chief Executive of Lloyd’s of London from 2006 to 2013. He was Non-Executive Chair of Brit Syndicates Limited and Executive Chair of Cunningham Lindsey from 2014 to 2018. He was a Non-Executive Director of Partnership Assurance Group plc, now part of Just Group plc, between 2013 and 2016. Before becoming Chief Executive of Lloyd’s of London, Richard was previously Chief Executive, later Vice Chair, of the International Petroleum Exchange, rebranded ICE Futures. Before this, he held a range of senior positions at British Petroleum and was a research scientist for the Science and Engineering Council. Richard was also a Non-Executive Director of London Clearing House, a member of the PwC Advisory Board and a Board member of the Geneva Association.
Gregor worked at Ernst & Young for 23 years, including 10 years as a partner in the financial services practice. Following his career at Ernst & Young, he was Finance Director for the Insurance division at Lloyds Banking Group plc, which included Scottish Widows, from 2009 to 2012. Gregor is a member of the Institute of Chartered Accountants of Scotland.
Adrian was a Non-Executive Director at the Home Office from 2016 to 2020, where he sat on the Home Office Data Board and advised on data science, digital transformation, and diversity and inclusion. From January 2012-2017, Adrian was Chair of the Race Equality Board, the race campaign of Business in the Community charity. In 2014 he was appointed to the main Board of Business in the Community and he continues to serve as an Advisor. He was awarded an OBE for services to equality and diversity in business in the 2019 New Year’s honours list and was announced as the most influential black, Asian and minority ethnic technology leader in the UK by the Financial Times and Inclusive Boards in 2018.
Adrian’s expertise in data analytics, AI and automation, as well as his passionate advocacy for diversity and inclusion, benefit the Board as it oversees the execution of a strategy of which these issues are a fundamental part.
Experience and qualifications Steve joined the Group in 2010 and is Chief Operating Officer.
Steve has nearly 30 years’ experience of the insurance industry. He is responsible for leading the Group’s Claims, Information Technology, Information Security, Procurement and Business Services functions.
Experience and qualifications Mark joined Direct Line Group in 2012 and is Managing Director of Marketing & Digital. He is responsible for leading the Group’s Marketing and Digital functions. Before joining the Group, Mark held roles at HSBC, 118 118 (now 118 118 Money) and Mars Inc. He is Chair of the Advertising Association’s Front Foot and a NED of LearnEtAl, an EdTech digital learning company. Mark is also co-founder of the School of Marketing which encourages more school children to consider a career in Marketing.
Penny James chairs the Executive Committee. In addition to Penny James and Tim Harris, the Committee comprises the following: Kate Syred Managing Director of Household, Partnerships And Data
On 11 January 2021, it was announced that Neil would be Acting Chief Financial Officer during Tim Harris’s leave of absence.
Neil has extensive industry and capital markets experience prior to joining the Group having previously worked at Brit Insurance and as an equity analyst at Merrill Lynch and Fox-Pitt, Kelton. He qualified as a Chartered Accountant with Ernst & Young and is an Associate of the Institute of Chartered Accountants in England and Wales.
Gus joined the Direct Line Group as Strategy Director before becoming Commercial Director for the Group’s Motor insurance business. Following this he was Managing Director of Motor Insurance and Business Development.
In February 2020, Gus became a Non-Executive Director of Five AI Inc.
Experience and qualifications Humphrey joined the Group in 2011 and is General Counsel.
Humphrey has over 30 years’ experience as a solicitor. He is responsible for the Group Legal function and oversees a range of areas of legal advice and services. He has been a Non-Executive Director of The Floow Limited since July 2014.
Experience and qualifications Jasvinder joined Direct Line Group in 2005. In January 2021, it was announced that Jasvinder would be Acting Chief Strategy Officer whilst Neil Manser took on the role of Acting Chief Financial Officer.
Prior to this Jasvinder has held roles leading the Pet Insurance portfolio, Head of Direct Line Home and across the Partnerships business.
Corporate governance report This report explains the Board’s role and activities, and how corporate governance operates throughout the Group.
– Board composition – Development, information, support, induction, training – Diversity and inclusion – Board effectiveness
The Company complied with all of the principles and provisions of the Code throughout the financial year and up to the date of this Annual Report & Accounts.
There is a Schedule of Matters Reserved for the Board, which contains items reserved for the Board to consider and approve, relating to strategy and management, material contracts, financial reporting and controls, internal controls and risk management, Board membership and succession planning, corporate governance, structure and capital, and delegation of authority.
Acting fairly between members and engagement methods The Board organises and directs the Group’s affairs in a way that it believes will help the Group succeed for the benefit of its members as a whole, whilst having regard to its stakeholders generally.
The Group seeks to ensure that it acts fairly between all members and considers all types of investors (including our institutional investors and private shareholders) when making decisions that impact them.
The Group ensures that it communicates the information that its investors require, using: traditional methods, such as annual report & accounts, RNS newswires and corporate and press releases; in person; and, (wherever possible) by virtual means. In 2020, virtual engagement included investor meetings attended by the Chair, CEO and CFO and broker attendance at Board meetings. Where appropriate, communication with investors is fed back to the Board.
Board meetings and activity in 2020 The activities undertaken by the Board in 2020 were intended to help promote the long-term success of the Company. Scheduled Board meetings focused on four main themes, as detailed below: Themes Description
– Approving and overseeing the Group’s key strategic targets and monitoring the Group’s performance against those targets; – Reviewing customer experience and trends and monitoring the Group’s performance against external brand metrics; – Reviewing and approving key projects aimed at developing the business or rationalising costs; – Considering growth opportunities; and – Reviewing the individual strategy of key business lines.
– Reviewing and agreeing the Group’s policies; – Setting risk appetites; – Approving the Own Risk and Solvency Assessment (“ORSA”); – Seeking to ensure that the Group complies with its regulatory obligations; – Reviewing the Group’s solvency position and forecast; – Reviewing the Group’s ESG initiatives; and – Reviewing and approving the Group’s TCFD and Sustainability reports.
Board calendar to hold a strategy day, giving the Directors the opportunity to focus solely on strategic matters. In June 2020, the Board held a session to set and monitor progress against the Group’s strategy and to discuss the Group’s long-term sustainability and its future opportunities as well as the strategic implications of Covid-19.
Board activity and stakeholder priorities Our stakeholders are at the root of both our strategy and our values. By engaging with our stakeholders we are able to understand who they are and what matters to them. This meant that the Group was able to react swiftly in challenging circumstances in 2020 while still planning for the long-term sustainable success of the Company.
The Board approved the following: – Covid-19 response to employees; – Agile working transformation; – Modern slavery statement; – Code of Business Conduct; – Whistleblowing procedures; – Buy As You Earn Plan; and – Free share award.
– Culture – Employee wellness – Human rights – Employee satisfaction – Employee development
The Board gives its full support to the Force for Good Initiative and the DLG Community Fund.
The Board approved the following: – Code of Business Conduct; – Modern slavery statement; and – Board diversity statement.
– Human rights – The welfare of the communities in which we operate
The Board actively supports initiatives to reduce the Group’s impact on the environment and manage climate change risks. The Board approved the following: – New measures for the investment portfolio to help the Group to achieve net zero carbon emissions by 2050; – Publication of commitments to setting Science-Based Targets and becoming a 100% carbon-neutral business from 2020; – Approval of climate change-related stress testing; and – TCFD Report.
– Corporate governance report 86 Direct Line Group Annual Report and Accounts 2020
Board and Committee meetings The Board and Board Committees held a number of scheduled meetings in 2020 at which senior executives, external advisers and independent advisers were invited to attend and present on business developments and governance matters. The Company Secretary attended all Board meetings and he, or his nominated deputy, attended all Board Committee meetings.
The table below sets out attendance at the scheduled meetings in 20201. Additional Board and Committee meetings were convened during the year to discuss ad hoc business development, governance and regulatory matters and in response to Covid-19.
Link to S172(1) Companies Act 2006 a the likely consequences of any decision in the long term a b the interests of the company’s employees b c the need to foster the company’s business relationships with suppliers, customers and others d the impact of the company’s operations on the community and the environment d e the desirability of the company maintaining a reputation for high standards of business conduct e f the need to act fairly between members of the company www.directlinegroup.co.uk 87
The Board recognises that culture and capability are key enablers for achieving the Group’s strategic objectives and encourages an open and inclusive culture and an environment in which people can be themselves.
During the year the Board championed the Group’s culture through: – Assessing and monitoring culture and satisfying itself that the Group’s purpose, values and strategy are aligned with its culture; – Reviewing the Code of Business Conduct to ensure that it reflects the Group’s purpose and sustainability strategy; – Reviewing means, for the workforce, to raise concerns in confidence and, if they wish, anonymously (“Whistleblowing”). Further details on the Group’s Whistleblowing arrangements can be found on page 105; – Seeking feedback from our people through the ‘DiaLoGue Survey’, a tool to measure engagement, which this year included questions on inclusivity and culture; – NEDs’ engagement with Employee Representative Body (“ERB”) activities. The NEDs have an active interest in the workings of the ERB and in the normal course of business attend the meetings on a rotation basis so all NEDs participate and engage with the workforce. Whilst circumstances during the year have made active participation difficult, our NEDs have been kept fully informed by the Chief People Officer and Chief Executive Officer, and the Chair has attended a virtual ERB conference; – Investing in and rewarding our workforce. During the year, the Group further built on its commitment to ensure that all of our people are rewarded fairly and have an interest in the success of the Group. See page 117 of the Remuneration Committee report for more detail; – Supporting the Strategic Leadership Development Programme, the aim of which is to create a pipeline of diverse talent for development into future senior leaders; – Enabling our employees to benefit from the Group’s success. All eligible employees can participate in the Group’s Buy As You Earn (“BAYE”) Plan which provides a cost-effective way for all employees to acquire shares in the Company; and
Communication with major investors The Group is committed to keeping investors informed of its strategy and progress and to ensuring appropriate channels of communication are in place. We believe that actively engaging with investors is fundamental to our business. Having an active dialogue and ongoing engagement is vital for keeping in touch with opinions and provides the opportunity to address questions and concerns. The Chief Executive Officer and Chief Financial Officer frequently meet investors and the Board is also kept up to date on investor views by the Group’s corporate brokers who regularly attend Board meetings. The Chair is also available to, and has engaged with, institutional shareholders. For more information on engagement with investors, see page 86.
Despite the challenges that we saw with physical meetings in 2020, the Chief Executive Officer and/or Chief Financial Officer had the following direct engagements with investors during 2020: – attended 15 sell-side investor events; – met 141 investors during 2020; and – had 53 interactions with the top 25 largest investors.
The Group’s governance framework is detailed in the Group’s High Level Control and System of Governance Framework document. This document details how the Group meets Solvency II and the Prudential Regulation Authority (“PRA”) requirements to identify key functions and to have and maintain a Responsibilities Map in respect of the PRA and FCA’s Senior Managers and Certification Regime requirements. The Board reviews this document annually.
The core elements of the governance framework are the: – Matters Reserved for the Board and the Board Committees’ terms of reference; – High Level Control and System of Governance Framework document; – Risk appetite statements, which are described on page 70; – Enterprise Risk Management Strategy and Framework, which is described on page 69; – Group policies, which address specific risk areas, are aligned to the Group’s risk appetite, and inform the business how it needs to conduct its activities to remain within risk appetite; and
– Minimum standards, which interpret the Group policies into a set of requirements that can be implemented throughout the Group.
The Board Risk Committee approves the Risk Management Framework and the policy risk appetite statements, following review by the Risk Management Committee (a committee comprised of executives).
Policy owner approves Minimum standards, subject to non-objection from the Risk Management Committee.
Chair – Guides, develops and leads the Board – Plans and manages the Board’s business – Oversees the governance framework
Senior Independent Director – Acts as a sounding board for the Chair and an intermediary for the other Directors when necessary – Is available to shareholders if they have concerns they cannot resolve through other channels – Leads the Chair’s performance evaluation
Board of Directors Each Director brings different skills, experience and knowledge to the Company, and the NEDs contribute additional independent thought and judgement. Depending on the business needs, the NEDs and the Chair commit at least two days a month and two days a week respectively to discharging their duties effectively in accordance with their letters of appointment. Biographies of the full Board can be found on pages 78 to 80.
Company Secretary – Ensures the Directors receive accurate, timely and clear information – Alongside the Chair, oversees the governance framework
The Board and Board Committees are satisfied that, in 2020, sufficient, reliable and timely information was received in order for them to perform their responsibilities effectively.
The reports by each Board Committee are given in this Annual Report & Accounts. The terms of reference for each Committee can be found on the corporate website at: www.directlinegroup.co.uk/en/who-we-are/governance/ board-committees.
Board composition As at the date of this report, the Board comprised the Chair, who had previously served as an independent Non-Executive Director and was independent when appointed as Chair; two Executive Directors; and seven independent Non-Executive Directors, including the Senior Independent Director. The current Directors served throughout all of 2020, except for Adrian Joseph who joined the Board as an independent Non-Executive Director on 1 January 2021. The Board has previously announced that Jane Hanson will retire at the conclusion of the AGM to be held in May 2021, having completed nine years of service.
Mike Biggs, our previous Chairman, stepped down from the Board on 4 August 2020.
Chair succession In March 2020, we announced that our former Chair, Mike Biggs, had decided, after having served as Chair, to step down from the Board later in the year.
As a first step in the process of searching for and selecting a successor, Non-Executive members of the Board were asked whether they might consider submitting themselves as candidates. Danuta Gray was the only existing member of the Board who wished to be considered. Richard Ward, Senior Independent Director, was asked to lead the selection process.
A Selection Board was constituted, consisting of all Board members except Mike Biggs, the outgoing Chair, and Danuta Gray, the internal candidate. The framework for the thorough and rigorous selection process, and the terms of reference for the Selection Board, were defined with the assistance of the Company Secretary. The Selection Board authorised Richard Ward and Penny James to appoint an executive search firm to assist in ensuring that a thorough review of both internal and external candidates was carried out.
Following presentations by shortlisted firms, Russell Reynolds, which is a signatory to the Voluntary Code of Conduct for Executive Search Firms, and has no other connection with the Company or any of its Directors, was selected. Russell Reynolds’ team was led by Julia Budd and Laura Sanderson.
The Selection Board acknowledged from the outset that Danuta Gray was an extremely strong, well-qualified and highly regarded candidate. Following approaches to external candidates, interviews by members of the Selection Board and the resulting further refinement of the shortlist, the Selection Board invited Danuta Gray to present her proposed approach to the role of Chair.
In March 2020, the Selection Board resolved unanimously that Danuta was the preferred candidate, subject to regulatory approval and to confirmation of the timing of succession. In May 2020, having obtained regulatory approval for Danuta Gray’s proposed appointment, the Board made its decision to appoint Danuta as Chair and we announced that she would succeed Mike Biggs as Chair with effect from 4 August 2020.
Board induction and training All new Directors appointed to the Board undertake an induction programme aimed at ensuring they develop an understanding and awareness of our businesses, people and processes, and of their roles and responsibilities as Directors of the Company. The programmes are tailored to suit each Director and include provision of relevant current and historical information about the Company and the Group; visits to operations around the Group; induction briefings from Group functions; and one-to-one meetings with Board members, Senior Management and the Company’s advisers.
The Board is committed to the training and development of Directors to improve their knowledge about the business and the regulatory environment in which it operates. The Company Secretary is responsible for helping the Chair identify and organise training for the Directors which is tailored to individual needs.
You can find out more about the activities of the Nomination and Governance Committee’s work during the year on pages 106 and 108.
The Board’s approach to diversity and inclusion The Board and executive management are dedicated to building a diverse and inclusive organisation, in which everyone is treated fairly, irrespective of their racial or ethnic origin, age, disability, gender, sexual orientation, belief or religion, or educational or professional background.
Note: 1. Senior Management is defined as the Executive Committee and direct reports (excluding administrative and support staff) as at 31 December 2020.
The Board has oversight of diversity and inclusion initiatives carried out through the remit of the Sustainability Committee. Further details on diversity inclusion initiatives can be found in the Strategic report, in the Sustainability Committee report and in the Nomination and Governance Committee report on pages 106 to 108.
Executive Committee gender diversity The Board remains committed to ensuring that highperforming women from within the business and from a variety of backgrounds, who have the requisite skills, are given the opportunity to progress their career internally.
Board and Committee effectiveness review three-year Board evaluation cycle The Board conducts an annual review of the effectiveness of the performance of the Board, its Committees, the Chair and individual Directors with the input of an external facilitator at least every third year. The effectiveness review in 2020 was managed internally.
The 2020 evaluation focused on both the preservation of the strengths identified in the 2019 and earlier evaluations and on themes for sustaining effectiveness suggested by Professor Goffee, including building Board cohesion, making space for strategic discussion, and equipping the Board to monitor the delivery of organisational transformation and to balance challenge with support.
The table below illustrates the areas of focus that resulted from the 2019 review and the actions taken in 2020 as a result.
Refresh the Board The Board has focused on strengthening its experience and diversity to enhance its ability to monitor the delivery and performance of technological and other change. Criteria for new Non-Executive Directors have reflected these priorities, resulting in the appointment of Adrian Joseph OBE as a Non-Executive Director on 1 January 2021.
Use of Non-Executive Directors’ experience Opportunities for the Non-Executive Directors to interact directly with the business in a remote working environment should continue to be found until site visits can be reinstated.
The Board’s agenda and information flow The sequence of strategic topics on the Board’s agenda to be aligned with the executive programme, taking the opportunity of longer meetings, when necessary, to allow for deeper and more regular strategic discussion. The early sharing of thinking on key strategic topics should continue. Key topics for 2021 to include the FCA’s pricing practices review, capital strategy, driving the benefits of investment in data and technology and growth.
External expertise Regular broker updates to be obtained during a time of market volatility and increased M&A activity, as well as from thought leaders on future trends in the industry.
Corporate governance report continued 94 Direct Line Group Annual Report and Accounts 2020
The Directors confirm that they consider that the Annual Report & Accounts, taken as a whole, are fair, balanced and understandable and provide the information that shareholders need to assess the Group’s position and performance, business model and strategy. In arriving at this conclusion, the Board was supported by a number of processes, including the following: – management drafted the Annual Report & Accounts to ensure consistency across sections, and a steering group comprising a team of cross-functional Senior Management provided overall governance and coordination; – a verification process, to ensure the content was factually accurate; – members of the Executive Committee reviewed drafts of the Annual Report & Accounts; – the Company’s Disclosure Committee reviewed an advanced draft of the Annual Report & Accounts; and
Assessing emerging and principal risks The Board determines the nature and extent of the risks that it is willing to take to achieve its strategic objectives. The Directors robustly assessed the emerging and principal risks facing the Company, including risks that would threaten its business model, future performance, solvency or liquidity. You can find a description of these risks, and their management or mitigation, on pages 71 to 72.
The frameworks for risk management and internal control were in place for the financial year under review and up to the date of this report. They are regularly reviewed by the Board and comply with the FCA’s updated guidance on Risk Management, Internal Controls and Related Financial and Business Reporting.
The Group operates a Three Lines of Defence model. You can find out more about this in the Risk management section on page 69.
The Board was also supported in its review of the annual Internal Risk and Control Assessment. This process involved each function completing a self-assessment of its risks and key controls and an Executive Sponsor, responsible for the function, attesting to the status of the effectiveness of the risk management and internal control systems. The Risk function reviewed and challenged these findings and the Group Audit function provided an independent assessment of the overall effectiveness of the governance and risk and control framework of the Group. The Group then combined the overall findings into a Group-level assessment, which the CEO approved. The process included reporting on the nature and effectiveness of the controls, and other management processes that manage these risks.
Remuneration The Board is mindful at all times that remuneration policies and practices must be designed to support strategy and promote the long-term sustainable success of the Group. It delegates responsibility to the Remuneration Committee to ensure that there are formal and transparent procedures for developing policy on executive remuneration and determining Director and Senior Management remuneration. The Remuneration Policy was approved by the shareholders in the 2020 AGM and was drafted to include provisions and principles in the Code.
In his report on pages 113 to 139, the Remuneration Committee Chair provides an overview of the Committee’s work in setting an appropriate framework for remuneration of the Executive Directors, Executive Committee and other senior managers as well as the wider workforce to ensure fair pay for all our colleagues.
For details on how the Company has applied Provision 40 of the Code in determining Executive Director remuneration policy and practices, see the summary on page 121.
Corporate governance report continued 96 Direct Line Group Annual Report and Accounts 2020
Areas of focus in the reporting period – Financial reporting: reviewed and challenged the key accounting and actuarial estimates and judgements made by management to support the financial statements, and gave due consideration to the increased level of uncertainty in respect of Covid-19, with reference to the Financial Reporting Council’s guidance issued on this matter.
– Subordinated Tier 2 Notes: oversaw certain matters in relation to the issue of £260 million Subordinated Tier 2 Notes at a 4.0% coupon in June 2020.
– Actuarial and Finance Transformation: received updates from management on: the progress of the transformation programme, including oversight of the budget; IFRS 17 accounting policies; and the general ledger migration.
– TCFD Report: reviewed and challenged the Group’s first Task Force on Climate-related Financial Disclosures Report.
To keep their skills current and relevant, members of the Committee received training during the period on matters including IFRS 17, the Internal Economic Capital Model and Solvency II technical provisions and have a schedule of technical updates planned for 2021.
For more information on the Subordinated Tier 2 Notes see page 221.
Reserves The Committee reviewed and challenged the key assumptions and judgements, emerging trends, movements and analysis of uncertainties underlying the estimate of reserves. These assumptions and judgements are informed by actuarial analysis, wider commercial and risk management insights, and principles of consistency from period to period. After reviewing the reserves, the Committee recommended them to the Board.
TCFD Report The Group is aware that investors, regulators and other stakeholders expect transparent and high quality disclosure on matters relevant to climate change and expect companies to provide details on their approach to the risks and opportunities associated with climate change. At the end of 2020, the Group published its first TCFD Report, which highlighted the Group’s response to the issues of climate change and how the TCFD framework has been used to enhance the Group’s reporting in this area. The Committee discussed how production of the report had been integrated into the existing financial reporting control framework, reviewed the report on behalf of the Board and recommended its approval to the Board. A summary of the TCFD report is included in the Sustainability section which starts on page 44, and this also includes a link to the full report which can be found on the Group’s website.
Going concern and viability statement The Committee also considered the going concern assumptions and viability statement in the 2020 Annual Report & Accounts, valuation of assets and impairment reviews, non-recurring period-specific transactions and clarity of disclosures. The Committee reviewed and concluded that the Annual Report & Accounts taken as a whole were fair, balanced and understandable and provided sufficient information to enable the reader to assess the Group’s position and performance, business model and strategy.
The Committee challenged the estimates and judgements being made and also discussed these matters with the External Auditor.
The Committee reviewed the level of insurance reserves of the Group. Insurance reserves relate to outstanding claims at the balance sheet date, including claims incurred but not reported at that date. By their nature, insurance reserves require analysis of trends and risks and the application of management judgement, knowledge and experience. Further information on reserves is provided on pages 30 to 32.
In 2020, the Committee reviewed and challenged the level of insurance reserves and monitored developing trends that could materially impact them. On an ongoing basis it received updates from the Actuarial Director on how estimates of reserves compared to claims paid. The Committee also obtained insight from an independent actuarial review of the reserves.
Valuation of investments not held at fair value and investment property
In 2020, the Committee considered major accounting estimates and judgements in respect of assets not held at fair value and the investment property portfolio and was satisfied with the carrying value of investments and the basis for their valuation. The Committee considered the impact of Covid-19 on the investment property portfolio and noted the year-end independent valuation reflected factors in relation to the impact of Covid-19 on certain sectors of the portfolio, primarily in relation to the retail and hospitality sectors.
Accounting estimates and judgements made in the Group’s financial statements are subject to increased levels of uncertainty as a result of Covid-19. The Committee referred to the Financial Reporting Council’s guidance on this matter, which encourages companies to explain the significant estimates and judgements made in accounting for the impact of Covid-19. As part of its review, the Committee: evaluated the going concern basis used to prepare the half-year 2020 and full-year 2020 results; reviewed the impact on principal risks and uncertainties; and assessed whether the pandemic could trigger an impairment of assets.
The Committee reviewed and challenged the reports presented by management and was satisfied that the financial statements of the Group presented the impact of Covid-19 in sufficient detail to enable users to understand the impact of the pandemic on the Group’s position and financial performance.
The Committee received regular reports on the general ledger migration, in particular with reference to the overall progress of the project and the migration of data from the previous general ledger to the new ledger. The Committee was satisfied that the data migration had been performed in a controlled manner and that appropriate reconciliations had been performed to ensure the integrity of the Group’s financial data.
Internal control and Group Audit During the year, the Committee reviewed the adequacy and effectiveness of the Group’s internal control systems. The Group’s financial reporting control framework is part of the wider internal controls system and addresses financial reporting risks. The Board delegates supervision of the framework to the Committee while the CFO is responsible for the framework’s operation on a day-to-day basis. During 2020, the Committee received regular reports on any control deficiencies, compensating controls and the mitigating actions taken by management.
In February, we welcomed Mark Stock to the Group who was appointed as Group Head of Audit. 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 CEO.
Group Audit has continued to build on the improvements suggested in the 2018 PwC External Quality Assessment as part of an ongoing Continuous Improvement Plan. In line with recommendations from PwC, the Chair of the Committee, along with the Group Head of Audit, promoted the adoption of new tooling and training to enhance the insight delivered by Group Audit function reviews through the greater use of data analytics. PwC was appointed this year by Group Audit to provide insight and challenge to the function’s vision and strategy, as well as taking on Quality Assurance activity. The Committee approved the Group Audit Charter, which is reviewed annually.
During the year, Group Audit provided the Committee with independent and objective reports on the adequacy and effectiveness of the Group’s governance, risk management and internal controls. The Committee approved Group Audit’s annual plan and received quarterly reports detailing internal audit activity, key findings, management responses, and proposed action plans. Group Audit also monitored progress so as to be able to confirm that the most significant actions were completed. There were no significant failings or weaknesses reported to the Committee in the year.
Committee effectiveness review During the year, an internal evaluation of the effectiveness of the Committee was conducted as part of the wider review of the Board and the Board Committees by the Chair of the Board. The review found that the Committee functions effectively and that issues are dealt with in a thoughtful and rigorous manner.
Auditor independence and non-audit services The Group has a minimum standard in relation to the independence of the External Auditor. This establishes parameters for preventing or mitigating anything that compromises the External Auditor’s independence or objectivity. The minimum standard includes a formal process for the approval of certain non-audit-related services by the External Auditor. The minimum standard has been revised and updated in light of the Financial Reporting Council’s review of its Ethical Standard for Auditors which was published in December 2019.
Effectiveness of the external audit process and re-appointing Deloitte as External Auditor In 2020, the Committee assessed the External Auditor’s effectiveness. This was in addition to regularly questioning the External Auditor during its meetings. The Committee assessed the External Auditor through: i. a detailed questionnaire completed by key stakeholders; ii. discussing matters with the CFO; iii. formally reviewing the External Auditor’s independence; iv. assessing the key risks identified by the External Auditor, the quality controls put in place to deliver the audit and whether the agreed audit plan was fulfilled; and v. private meetings with the External Auditor in the absence of management.
In addition, through regular interaction with the External Auditor, the Committee was satisfied that the External Auditor continued to demonstrate professional scepticism and challenged management’s assumptions.
The quality of the audit was assessed through review and discussion of the External Auditor’s report to the Committee at each meeting and from the challenges and insights brought to significant areas of judgement in the Group’s financial statements.
After taking into account all of the information available and considering FRC Audit Quality: Practice aid for audit committees, the Committee concluded that Deloitte had performed its obligations effectively and appropriately as External Auditor to the Group.
The Committee recommended to the Board that the Group re-appoint Deloitte as External Auditor, to which the Board agreed. A resolution regarding the reappointment of Deloitte as auditor of the Group will be put to shareholders at the 2021 AGM.
Key responsibilities – Provide oversight and advice to the Board in relation to current and emerging risk exposures of the Group and the strategic approach to managing risk, including determination of risk appetite and tolerance
– Promote a risk-aware culture within the Group – Review the design and implementation of the
Areas of focus in the reporting period – Considered the Group’s approach to pricing practices, aiming to ensure that they are delivering fair and appropriate outcomes for its customers.
– Proactively monitored the impacts and risks of the Covid-19 global pandemic.
– Oversaw change risk arising from the Group’s multi-year transformation programmes.
– Monitored the progress of the Group’s proactive operational resilience programme.
The Committee received regular updates and challenged management on the actions being taken across the business to support customers during the pandemic with a particular focus on factors such as public perception, affordability and the importance of doing the right thing for the Group’s financially distressed customers. The Committee also closely monitored and challenged management on the impact that Covid-19 was having on colleague morale and wellbeing, travel and business interruption claims, the supply chain of goods, operational resilience, the Group’s technology and business transformation programme timelines, market risk, solvency capital requirements and risk appetite range and the Strategic Plan. Details of stress testing in relation to Covid-19 can be found in the financial risk section of the Committee report.
The Committee held an ad hoc meeting and received regular updates on cyber mitigation planning to manage cyber risk appetite which was being monitored closely by the Risk function. The Committee probed to ensure that risks were being managed appropriately and compensating controls and mitigating actions were in place to manage the Group’s transition to homeworking for all of its in-house and outsourced operations, including in the UK and offshore in South Africa and India. The Committee subsequently reviewed plans for the reopening of offices, gaining assurance from management on their plans for the return of limited numbers of staff and the measures taken to ensure social distancing was maintained.
Compliance and regulatory risk As part of the Chief Risk Officer’s (“CRO”) report submitted to each meeting, the Committee reviewed regular updates on key ongoing regulatory developments and interactions with the PRA and FCA. Areas on which the Committee focused included pricing practices, operational resilience, Brexit, the status of cyber risk and travel and business interruption claims as a result of the pandemic, the implementation of the Insurance Distribution Directive to improve customer demands and needs and the approach to assessing customer affordability.
During the year, the Committee considered the Group’s compliance with regulatory requirements including those relating to conduct and financial crime. The Committee approved the annual Compliance Plan setting out the compliance activities to be undertaken in the coming year with the objectives of ensuring compliance, maintaining an open and co-operative relationship with regulators and ensuring the Board and colleagues understand their regulatory responsibilities. The Committee reviewed and challenged the outputs from conduct and compliance assurance reviews, including in relation to Solvency II compliance. The Committee received data privacy updates and a report on the Group’s adherence to privacy and data protection legislation during 2020, including actions taken to respond to data information requests to comply with the General Data Protection Regulation and the Information Commissioner’s Office guidelines. The Committee reviewed the actions being undertaken to ensure compliance with the regulators’ Senior Managers and Certification Regime, which included a comprehensive review of the Group’s High Level Control and System of Governance Framework and Management Responsibilities Map.
Operational risk The oversight of change risk was a central focus for the Committee as the Group made good progress on its strategic transformation, continuing major technical deliveries in the remote working environment, whilst also focusing on business transformation to take advantage of the tools being built.
The Committee received updates on the progress of the Group’s transformation of its operating model and challenged how the risk framework had been adapted to align with the new model as well as on the mitigating actions in place to address the key impact risks of the programme.
The Committee reviewed and challenged the stress and scenario testing plan with a particular focus on certain scenarios including in relation to the potential financial, operational and reputational impacts of Covid-19, the potential financial risks of climate change, the potential impacts to the business following a rapid reduction of motor in-force polices and premiums as well as the impacts of a potential hard Brexit combined with economic implications resulting from the end of the furlough scheme and further lockdown periods in 2020 and 2021.
During the year, the Committee also scrutinised the Group’s risk appetite guidance for affirmative and non-affirmative cyber underwriting risks and challenged the actions taken to mitigate such risks.
Risk monitoring and oversight At each scheduled meeting, the Committee received a report from the CRO which provided an overview and assessment of the Group’s risk profile. It detailed the key activities undertaken by the Risk function to further embed risk management across the Group and, provided outputs of regular risk monitoring and details of specific risk issues, including in relation to Covid-19 and Brexit. The Committee also received and discussed details of the Group’s current and forward-looking solvency position.
Principal and emerging risks The Committee assessed the principal risks facing the Group, which are listed on pages 71 and 72, through reviewing and challenging the matters listed in the Group’s Material Risk Register in the context of the Group’s risk appetite and through consideration of the risk assessment contained in the CRO’s report received at each scheduled meeting.
Whistleblowing As delegated by the Board, the Committee routinely reviewed the arrangements by which employees may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters (“whistleblowing”) during the year. The Committee also reviewed reports relating to whistleblowing, including anonymised, individual cases, to ensure arrangements were in place for the proportionate and independent investigation of such matters and for appropriate follow-up action.
Financial Crime and anti-bribery and corruption The Group has a fraud and financial crime policy, which includes the requirement that all employees of the Group comply with an anti-bribery and corruption minimum standard. The aim of the standard is to ensure compliance with applicable anti-bribery and corruption legislation and regulation and that employees act responsibly and ethically at all times when conducting and awarding business.
The Committee also considered the results of the annual Group assessment of the effectiveness of the internal controls environment undertaken by each business division, as well as monitoring controls on an ongoing basis. The Committee considered, challenged and approved the annual risk operational plan and the adequacy and objectivity of the Risk function’s resources.
The Committee has unrestricted access to management and external advisers to help discharge its duties. It is satisfied that in 2020 it received sufficient, reliable and timely information to perform its responsibilities effectively. In addition to monthly one-to-one meetings with the Chair, the Chief Risk Officer also met privately with the Committee without management being present. The Chair also reported on matters dealt with at each Committee meeting to the subsequent Board meeting.
Committee effectiveness review During the year, an internal evaluation of the effectiveness of the Committee was conducted as part of the wider review of the Board and the Board Committees by the Chair of the Board. The review found that the Committee functions effectively and that issues are dealt with rigorously and in a considered manner.
– Danuta Gray – appointed as Chair 26 October 2020 Chair
– Sebastian James – appointed 26 October 2020 Independent Non-Executive Director
Key responsibilities – Review Board composition – Lead the process for Board appointments and make recommendations to the Board – Ensure orderly succession plans are in place for the Board – Oversee executive succession planning at a high level to ensure the development of a diverse Senior Management talent pipeline
– Oversee and monitor the corporate governance framework of the Group
Areas of focus in the reporting period – Reviewed the skills and experience of the Board with regard to the oversight of the Group’s strategy and led the search for a new Non-Executive Director, which resulted in the appointment of Adrian Joseph on 1 January 2021.
Main activities during the year Board and Senior Management succession planning The Committee regularly monitors the composition of the Board and its Committees to ensure that they have a suitable balance of skills and experience to oversee and challenge the delivery of the Group’s strategy and to discharge the Committee’s responsibilities effectively.
At the Committee’s recommendation, the Board also agreed that, from 1 January 2021, Adrian would join the Sustainability Committee, Richard Ward would become a member of the Remuneration Committee and Fiona McBain would become a member of the Investment Committee.
Electing and re-electing Directors Before recommending the proposed election or reelection of Directors at the 2020 AGM, the Committee reviewed the independence of the Non-Executive Directors and concluded that all Non-Executive Directors remained independent in judgement and character and met the criteria for independence set out in the Code. The then Chair, Mike Biggs, was independent at the time of his appointment as Chair and was not involved in his own review.
Special attention was paid to the Non-Executive Directors’ external responsibilities and it was concluded that all Directors had sufficient time to dedicate to their respective roles. The Board considered and approved Jane Hanson’s new roles as a Non-Executive Director of Welsh Water and Rothesay Life PLC, concluding that she would continue to have sufficient time to devote to her role as a Non-Executive Director of the Company. The Committee recommended to the Board and shareholders that all serving Directors be submitted for election or re-election at the Company’s 2020 AGM.
With the exception of Jane Hanson, who will be stepping down from the Board after having served as a NonExecutive Director for over nine years, all current Directors will submit themselves for election or re-election at the Company’s 2021 AGM.
In its search for candidates, the Board aims only to engage with executive search firms which are signatories to the Voluntary Code of Conduct for Executive Search Firms.
The Board’s diversity policy is available to view on the Company’s website at www.directlinegroup.co.uk/en/ who-we-are/governance/other-policies. This policy, which is annually reviewed and monitored by the Committee, is presented to any executive search firm engaged to assist with the selection and appointment process for Board positions. The objective of the diversity policy is to seek to ensure that individual differences, which contribute to the success of the Company and represent the diversity of our customers and colleagues, are reflected at Board level.
The Board supports the recommendations set out in the Parker Review and was delighted to welcome Adrian Joseph as a member as of 1 January 2021. Adrian brings a wealth of experience in data strategy and analytics and has a history of commitment to diversity and inclusion initiatives. The Board looks forward to benefiting from his knowledge and experience, particularly in these fields, which are central to its strategy.
The Group has a detailed diversity and inclusion plan which is supported by the Board and overseen by the Sustainability Committee, and which includes the objectives both of encouraging diversity in our succession planning and of fostering a culture of growing inclusivity. The Group also supports the empowerment of its senior managers through its Emerge development programme.
In August 2020, the Board was proud to mark a historic moment when it became one of only four FTSE 250 companies with both a female CEO and female Chair.
Board effectiveness review In accordance with our three year cycle of Board effectiveness evaluation, the review was facilitated internally in 2020.
Committee effectiveness review During the year, I conducted an internal evaluation of the effectiveness of the Committee as part of the wider review of the Board and its Committees. The review found that the Committee functions effectively and that issues are dealt with in a thoughtful and rigorous manner.
The activity of the Committee was reviewed during the year against the Committee’s terms of reference and found that the Committee had discharged its responsibilities effectively in 2020. The Committee’s terms of reference can be found on the corporate website: www.directlinegroup.co.uk/en/who-we-are/governance/ board-committees.
Corporate governance The Committee monitors emerging governance matters, compliance with the Corporate Governance Code and ESG standard and subsidiary governance. It will continue to monitor consultations, developments and reforms which affect the Group’s corporate governance obligations.
– Adrian Joseph – appointed 1 January 2021 Independent Non-Executive Director
– Challenged the robustness of management decisionmaking relating to the five pillar sustainability strategy.
– Agreed to expand its remit to ensure alignment with the Group’s sustainability strategy; and vision to be a force for good.
– Changed its name from Corporate Responsibility Committee to Sustainability Committee.
The Committee received updates on the work to understand the reasons behind the marginalisation of certain customer groups from various rights, opportunities and resources that are normally available to others, defined by management as social exclusion. The Committee reviewed and challenged reasons proposed by management as explanations for social inclusion which www.directlinegroup.co.uk 109
People The Committee considered management’s mission to build a culture that celebrates difference and empowers people so that they can thrive. The Committee and Board regard diversity and inclusion as an integral aspect of ensuring that people can thrive at the Group, and the Committee was pleased to receive updates on management’s progress against its diversity and inclusion priorities. The Group’s first diversity and inclusion survey as well as insights from the Group’s Diversity Network Alliance were incorporated into a new diversity and inclusion strategy, setting targets for progress.
The Committee received updates on measures to protect people during Covid-19 including remote working arrangements, safeguarding roles and remuneration, and on efforts to support mental health and wellbeing. The Committee noted the increased frequency of engagement with employees through regular employee pulse surveys and impactful internal communications campaigns such as #WeCare.
The Committee was supportive of management’s commitment to continue building a great place to work despite the challenges of Covid-19 through the Agile transformation programme. The Committee was pleased to see management’s focus on empowering employees to self-organise and provide solutions for customers as quickly as possible and noted progress updates regarding upskilling and the development of Agile behaviours.
Planet During the year, the Committee oversaw management actions towards protecting the business from the impact of climate change and giving back to the planet more than it takes out. The Committee monitored progress against the Group’s climate targets for reducing energy consumption and greenhouse gases and environmental initiatives and was pleased to see that at Half Year the Group had: – exceeded its target to reduce Group-wide emissions on a like-for-like basis by 2020 against a 2013 baseline by 57%; and
The Committee also received updates on the Group’s work to set science-based carbon targets for Scope 1 and 2 emissions, and Scope 3 emissions under the Group’s control, and submit them in line with the Science-Based Targets Initiative framework. More information regarding the Group’s greenhouse gas emissions data can be found on page 61 of the Strategic report.
Society During 2020, the Committee monitored how the Group used its expertise to improve outcomes for our society and the communities it served. The Committee received updates on the Group’s Community Fund, created to support communities during Covid-19 in areas where Direct Line had a presence. The Committee was pleased to see £3.5 million of assistance given to vulnerable groups, small, local charities and charitable projects supporting public policy areas.
The redevelopment of Shotgun, the Group’s initiative aimed at reducing young driver accidents, continued during 2020. Despite the delayed relaunch of Shotgun, the Committee noted management’s conviction in the core aims of the mobile application to: reduce young driver accidents; and have a positive influence on young drivers’ behaviours on our roads.
The Committee’s Terms of Reference can be found on the corporate website: www.directlinegroup.co.uk/en/who-we-are/governance/ board-committees.
Sustainability Committee report continued 110 Direct Line Group Annual Report and Accounts 2020
Key responsibilities – Provide oversight of the Group’s investment strategy – Oversee the management and performance of the
Areas of focus in the reporting period – Understood the potential risks and monitored the financial consequences for investment assets from the economic downturn driven by the Covid-19 global pandemic.
– Considered how the investment portfolio started to respond proactively to the global challenge to reduce greenhouse gas emissions and support the transition to a low carbon economy.
– Monitored developments and progress towards a trade agreement between the EU and the United Kingdom and any attendant impact on investment assets.
In July, the Committee considered the findings and recommendations resulting from a detailed review of the investment property portfolio. The review examined the business case for continuing to hold each property asset in the portfolio against the medium-term changes expected to impact the commercial property market as a result of the move to increased working from home and online shopping. At the meeting, the Committee also sought assurances from the asset manager that tenants were being offered flexibility, where necessary, regarding finding mutual solutions for rent payments due in situations where the tenant’s cash flows had deteriorated markedly due to the pandemic.
Responsible investing – climate change In 2020, the Committee approved new measures for the corporate bond portfolios (75% of the total investment portfolio benchmark) to help achieve the Group’s ambition to limit its impact on the climate and to achieve net zero carbon emissions by 2050. In summary, a commitment was given to set a target to reduce the Green House Gas (“GHG”) Emissions Intensity1 across the relevant portfolios by 50% before the end of 2030 (benchmarked against the end of 2020 GHG emissions intensity). In addition, the Committee agreed that asset managers should be encouraged to allocate capital increasingly towards companies demonstrating an intent to decarbonise through the following guideline changes and restrictions: – A preference for companies with carbon reduction targets approved by the Science-Based Targets Initiative; – A preference for companies with at least a 2°C carbon performance alignment with the Transition Pathway Initiative; – The exclusion of any companies with a carbon transition score indicating assets could be economically stranded; – The exclusion of any mining companies that generate >5% of revenues from thermal coal production and electricity generators that derive >5% of revenues from thermal coal power generation (unless, in either case, the company has an approved Science-Based Targets Initiative Plan); and
Market developments At each scheduled meeting, the Committee received a market update from the Director of Investment Management and Treasury. The updates covered: economic conditions in the UK, the US and the Eurozone; market levels for key asset classes (notably credit); the outlook for interest rates and inflation; and developing issues viewed as appropriate to be brought to the attention of the Committee. The Committee also monitored the development of interest rate policies set by the Bank of England, the US Federal Reserve and the European Central Bank and the impact of non-sterling assets held on hedged yields.
Monitoring investment activity and performance The Committee received a comprehensive report at each scheduled meeting covering: the financial results of investment activity; aggregate portfolio positioning against strategic benchmarks; performance of each individual portfolio against benchmark; adherence to operational controls; performance of suppliers; and compliance with an agreed framework of risk limits. During the year the Committee invited the managers responsible for the investment property portfolio, the CRE loans portfolio and the private placements portfolio to present updates on their respective portfolios.
Note: 1. Greenhouse gas (GHG) emissions intensity = metric tonnes CO2e (CO2 equivalent) GHG emissions/million $ sales
Investment Committee report continued 112 Direct Line Group Annual Report and Accounts 2020
During 2020, we have sought to balance the needs of our different stakeholders, by caring for our people, looking after our customers, protecting the business for the long term, and supporting the national effort and our local communities. After reinstating our ordinary dividend as soon as possible in August (along with a 2020 special dividend, reflecting a full catch-up of the cancelled 2019 final dividend) we have also delivered to our investors. We had voluntarily withdrawn our ordinary dividend to indicate restraint and consistency with the PRA when it asked insurers to consider the protection of policyholders. As a result of the Covid-19 pandemic, and delivering on our desire to be a force for good, the Group also established our first Community Fund which distributed £3.5 million to 250 charities supporting over 200,000 people, and we have extended this by a further £1.5 million for 2021 to serve our local communities. More information on these initiatives can be found on page 57.
– Dr Richard Ward – appointed 1 January 2021 Senior Independent Director
Key responsibilities – Determines the policy for rewarding Directors and senior leadership for results that are generated within the risk appetite set by the Board and oversees how the Group implements its Remuneration Policy; – Oversees the level and structure of remuneration arrangements for senior executives, approves share incentive plans, and recommends them to the Board and shareholders; and
– Reviews workforce remuneration and related policies and the alignment of incentives and rewards with culture.
Note: 1. Mark Gregory was appointed to the Committee on 29 May 2020 and as Chair on 26 October 2020. Mike Biggs was a member of this Committee until he retired from the Board on 4 August 2020.
Further details of decisions which the Committee has made in respect of key components of executive remuneration as a consequence of Covid-19 are summarised on pages 115 and 116.
We also know from regular engagement surveys that our employees have remained exceptionally engaged during the challenges that Covid-19 has brought in 2020.
– having oversight of remuneration policies throughout the Group and ensuring all our colleagues are paid fairly.
The Report is set out in the following sections: Section Page
Chair’s statement 113 to 118 Remuneration at a glance – summarising the remuneration arrangements for Executive Directors 119 Annual Report on Remuneration – detailing pay outcomes for 2020 and covering how the Group will implement remuneration in 2021 120 to 135 Summary of the Policy approved at the 2020 AGM 136 to 139
The Committee would consider the extent to which cash dividends have been paid over 2020, and hence the alignment of pay decisions with shareholder experience.
The Group consulted with the PRA before re-starting dividends and concluded that the Group was financially strong. Decisions on pay outcomes for senior leadership and the wider workforce for 2020 reflect the Group’s performance.
The Committee would consider whether the Company had used any direct government support, such as the Coronavirus Job Retention Scheme, VAT deferral, or business interruption loans.
The Group has not sought or received any direct government support during the year.
The Committee would consider whether the Company has made (or intends to make) any staff redundancies as a result of Covid-19, or other impacts on the wider workforce such as salary freezes, the scaling back of salary increases or incentive opportunity reductions. The Committee would ensure that management are treated consistently with the approach for the general workforce.
The Committee would consider the expectations of institutional shareholders and proxy voting agencies.
At the time that 2019 bonuses were paid, it was expected that the 2019 ordinary final dividend would be paid in May 2020.
The CFO did not receive an increase, due to his joining date in the final quarter of 2019.
During the year, we have made a commitment not to furlough any employees as result of Covid-19.
2020 bonus (AIP) The Committee has used the performance conditions and weightings agreed at the start of the year.
2020 LTIP grant The Committee approved the grants of the 2020 LTIP awards on the normal timetable and made no changes to the performance conditions and targets agreed with shareholders.
Despite the initial decline experienced in our share price in March 2020, similar to the declines experienced across the market, overall the Company’s share price has been less adversely affected by Covid-19 than that of many other companies and recovered well during the year.
The Committee will assess the value of the 2020 LTIP awards at vesting and will ensure that the final outturns reflect all relevant factors, including consideration of any ‘windfall gains.’
Wider workforce engagement and pay considerations for 2020 The Committee has consistently considered wider employee pay as context for the decisions it makes. Every year we review and act on the outcome of our DiaLoGue People Survey. The Chair of the Committee has attended meetings of the Group’s Employee Representative Body (“ERB”) since 2018, at appropriate times during the year. However, given the unprecedented activity of the ERB during 2020, it was not possible for the Remuneration Committee Chair to attend directly, but I have been kept abreast of matters by the Chief People Officer and Chief Executive Officer throughout the year. Our existing workforce engagement is strengthened through internal social networking, “town halls” and other forums. To supplement this, the Committee receives papers setting out details of all-employee pay and workforce policies across the Group at each meeting. We found that this standing agenda item gave us further valuable insight and context for framing executive pay and policies.
During 2020, the Group further built on its commitment to ensure that all of our people are rewarded fairly and have an interest in the success of the Group, with a minimum salary increase of £500 in 2020, bringing the minimum salary across the Group to £19,500 in the UK.
We are also pleased that, through our continued focus on building an inclusive organisation, we have maintained our female representation in senior jobs in line with the Women in Finance Charter target of 30% during 2019 and 2020, and we will continue with the programmes underway to further reduce our gender pay gap. The Group’s Gender Pay Gap Report can be found at www.directlinegroup.co.uk.
LTIP The Group grants LTIP awards in two tranches each year. RoTE performance (60% of the award) is measured over three financial years. Relative TSR performance (40% of the award) is measured over the three-year period from the date of grant. All LTIP awards granted to Executive Directors in August 2017 or later are subject to a two-year holding period after vesting. The March 2017 and August 2017 LTIP awards (which vested during 2020) were granted before the appointment of Penny James and Tim Harris; however, the outcomes of these awards are relevant to certain former Directors. The overall outcome of the March 2017 and August 2017 LTIP awards was 70.8% and 78.0% of maximum respectively. Performance under each metric was as follows: – As disclosed last year, average RoTE performance of 20.4% over 2017, 2018 and 2019 was above the maximum target level of 18.0%, leading to a maximum payout for this element. In calculating the RoTE achievement, the reported RoTE for 2018 was adjusted downwards to exclude the favourable impact of the capital management exercises executed in the 2017 financial year on the outcome for these awards. Consistent with the regulation, the value in respect of this element was disclosed in last year’s Report.
The March and August 2018 LTIP awards are due to vest in 2021, subject to the Committee’s satisfaction that the financial and risk underpins have been met at the end of the vesting period. These awards were granted before Tim Harris’s appointment, and have the following characteristics: – Average RoTE performance of 20.7% over 2018, 2019 and 2020, is above the maximum target level of 20.5%, and therefore this element will vest at the maximum level (subject to the above underpins). In calculating the RoTE achievement, the reported RoTE for 2018 was adjusted downwards to exclude the favourable impact of the capital management exercises executed in the 2017 financial year on the outcome for these awards.
Committee decisions on outcomes As mentioned, the Group has delivered a good performance this year in extremely challenging circumstances and the overall outcomes for the annual bonus resulted in a payout (after application of downward discretion) of £1,166,296 for the CEO and £767,725 for the CFO, which the Committee believes is appropriate in the context of the Group’s performance in 2020. The Committee believes that the application of downward discretion to the profit before tax outturn of the AIP was appropriate and balanced in light of the positive and negative effects of Covid-19 on our financial performance. This demonstrates that the Policy (which provides the Committee with such discretionary powers) operated as intended during the year.
The level of vesting of the LTIP awards made in 2017 was considered appropriate in the light of the Group’s performance over the three-year performance period, and therefore no discretion was exercised in relation to these awards.
We are not proposing any changes to the performance conditions for the 2021 awards under the LTIP. Likewise, the target RoTE scale of 17.5% to 20.5% will remain at the same level as in 2020 and reflects an appropriate performance range in the context of the Group’s planned underlying RoTE performance.
Committee performance The Committee’s performance was assessed as part of the annual Board evaluation. I am pleased to report that the Committee is regarded as operating effectively and the Board takes assurance from the quality of the Committee’s work.
Should you have any questions about my Committee’s Report please email our AGM email address shareholderenquiries@directlinegroup.co.uk and I or one of my colleagues at Direct Line Group will respond to you.
MARK GREGORY Chair of the Remuneration Committee 118 Direct Line Group Annual Report and Accounts 2020
Release of value under the LTIP This chart illustrates the total value of the 2017 LTIP awards that vested in 2020.
Advisers to the Committee The Committee consults with the Chief Executive Officer, the Chief People Officer, and senior representatives of the HR, Risk and Finance functions on matters relating to the appropriateness of all remuneration elements for Executive Directors and Executive Committee members. The Chair of the Board, Chief Executive Officer and Chief People Officer are not present when their remuneration is discussed. The Committee works closely with the Chairs of the Board Risk Committee and the Audit Committee, including receiving input from those Chairs regarding target-setting and payouts under incentive plans, and whether it is appropriate to apply malus and/or clawback. The Chair of the Board Risk Committee attended Committee meetings on three occasions in 2020. The Remuneration and Board Risk Committees can also hold joint meetings to consider matters of common interest.
The Committee appointed PricewaterhouseCoopers LLP (“PwC”) as its independent adviser from 1 January 2019 following a competitive tender process. PwC is a signatory to the Remuneration Consultants Group’s Code of Conduct.
During the year, PwC advised on market practice, corporate governance and regulations, incentive plan design and target-setting, recruitment, investor engagement and other matters that the Committee was considering. PwC supported the Group in several ways, including the provision of IFRS 17, tax, technology consulting and immigration services during 2020. The Committee is satisfied that the advice PwC provided was objective and independent.
Annual Report on Remuneration Introduction We have prepared this 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 FCA and describes how the Board has complied with the principles and provisions of the Corporate Governance Code relating to remuneration matters. Remuneration tables subject to audit in accordance with the relevant statutory requirements are contained in this report and stated to be audited. Unless otherwise stated, the information within the Report is unaudited.
Committee members and governance The following list details members of the Committee during 2020. You can find information about each member’s attendance at meetings on page 87. You can find their biographies on pages 78 to 80.
– The remuneration arrangements for the Executive Directors are set out in a clear and simple way in the Directors’ Remuneration Policy (“Policy”) and in the plan rules for each incentive plan.
– The Group’s remuneration arrangements are intentionally simple in nature and well understood. Executive Directors (and senior leadership) receive fixed pay (salary, benefits, pension), and participate in a single short-term incentive (the “AIP”) and a single long-term incentive (the “LTIP”).
– The ability to mitigate potential risk associated with remuneration is built into the Policy. Examples include: – the Committee’s discretionary powers to amend the formulaic outcome from incentive awards
– The Committee considers that the incentive arrangements do not encourage inappropriate risktaking, due to the Committee’s rigorous process for reviewing incentive outcomes, which includes seeking the view of the Chair of the Board Risk Committee before making its final variable pay determinations.
– Full information on the potential values of the AIP and LTIP are provided, with strict maximum opportunities and minimum, target and maximum performance scenarios provided when the Policy was approved.
– Outcomes do not reward poor performance due to the Committee’s overriding discretion to depart from formulaic outcomes which do not reflect underlying business performance.
– Performance conditions consist of both financial and non-financial metrics to support Group strategy, including measures focused on delivering for our customers (for example, Net Promoter Score and complaints), our people (diversity and engagement) and our shareholders (profit before tax and TSR).
Alignment to culture Incentive schemes should drive behaviours consistent with company purpose, values and strategy.
– Our values are reflected in the measures used in our incentive schemes. In particular, our incentive arrangements link to the following values: – Do the right thing – AIP and LTIP performance measures incentivise participants to choose the right path for our customers, our people and shareholders by using measures which directly assess outcomes for these stakeholders.
– Take ownership – financial targets under the AIP are the same for all participants, regardless of seniority, linking everyone’s individual contribution to AIP reward outcomes.
– The use of annual bonus deferral, LTIP holding periods and our shareholding requirements strengthen the focus on our strategic aims, and ensure alignment with the interests and experiences of shareholders, both during and after employment.
Implementing policy and pay outcomes relating to 2020 performance Single figure table (Audited)
4. The 2019 LTIP figure for Penny James disclosed in the 2019 Report should have included the value of the RoTE element of her LTIP award granted in November 2017, which was based on average RoTE over 2017, 2018 and 2019. As disclosed in last year’s Report, the performance outcome for this element was 100% of maximum. The 2019 LTIP figure has been restated this year to include that value, based on the share price at the date of vesting (28 November 2020) of £2.97. The 10-year CEO history and 2019 CEO pay ratios have been updated accordingly.
5. The 2020 LTIP figure for Penny James reflects the relative TSR element of her November 2017 LTIP award and the RoTE element of her 2018 awards. The value is calculated based on the share price at date of vesting for the November 2017 LTIP award, of £2.97, and a three-month average share price to 31 December 2020 of £2.91 for the 2018 awards. Further information on LTIP awards can be found on pages 127-128.
– Strong brand NPS scores on Direct Line and Churchill continue with motor claims and renewals journeys showing particularly positive performance.
– Rescue claims NPS performance ended the year well ahead of target. Record performance levels have been sustained across the year including during summer holidays as ‘staycation boom’ put pressure on our recovery network and migrating our systems to a new operating platform.
– We continued to enhance digital capabilities for customers needing to claim, amend and renew policies to meet even more customer needs.
– The volume of complaints reduced significantly in 2020 to lowest ever levels. However, focus on continual improvement and taking learnings from dissatisfaction helped ensure that our customer outcomes continue to be positive.
– Over 1.2 million responses from customers across the Group have provided feedback on the experience delivered by our people. 84% (Claims) and 90% (Customer Operations) of customers rated our people as 9 or 10 out of 10.
– MyCustomer performance in Customer Operations and Claims Operations achieved record levels during 2020 despite the challenges we faced in migrating a workforce from office to home working in an extremely short period.
– To prepare future successors we made a number of internal talent moves in 2020 and provided broadening experiences as well as promotional moves to some of those who feature in our talent pools. The gender diversity of our succession pipeline is now extremely strong, something we have improved again in 2020.
– Finally, we maintained our commitment to recruiting graduates into our future leaders’ programme and have continued to rotate those already on the programme to provide a broad set of early-career experiences. We successfully recruited a further 12 graduates and 51 apprentices in 2020.
– We gathered deeper insights via an employee survey where around two thirds of our people shared their perceptions and experiences on diversity and inclusion, which has informed an updated strategy, with greater ambition and reach.
– We have strengthened senior leadership sponsorship for our Diversity Network Alliance, which promotes, champions and supports diversity and inclusion within our business.
– At the start of the pandemic we adopted lighter touch and more regular employee pulse surveys in contrast to our usual bi-annual in-depth process. Short pulse surveys were initially run on a weekly basis and as pandemic conditions gradually stabilised they extended to fortnightly and eventually monthly frequency.
– In the first half of the year, we transitioned to full-scale home working, whilst carrying out major system changes. Where appropriate we deferred certain elements of programmes, primarily to mitigate potential risks arising from system stability and programme complexity, and to reprioritise resources to Covid-19-related work. These actions have been well managed and controlled.
– deployed a new telephony system and migrated our mainframe. – Alongside launching new systems, we have made good progress on setting the foundations for changes to come in 2021.
– We continued to make significant steps to put Churchill and Direct Line onto our new motor system meeting key technical deployment milestones; whilst overall operational deployment has been slower due to the build of additional scope and impact of Covid-19 on delivery.
LTIP outcomes for 2020 (Audited) LTIP awards are granted in March and August of each year. Each grant is subject to the following performance conditions: – RoTE (60% weighting) – performance is measured over three financial years starting from the 1 January preceding the March and August grants; and
2017 LTIP awards (vesting in 2020) Awards under the LTIP granted in March, August and November 2017 vested during 2020. They were subject to relative TSR performance over the three-year period from the date of grant, and RoTE performance in 2017, 2018 and 2019.
Between median and upper quintile 2018 LTIP awards (vesting in 2021) Awards under the LTIP granted in March and August 2018 will vest during 2021. They are subject to relative TSR performance over the three-year vesting period, and RoTE performance in 2018, 2019 and 2020. The RoTE performance period for these awards ended on 31 December 2020 and performance in respect of this element is set out in the table below. Performance under the relative TSR measure will be assessed at the end of the vesting periods in March 2021 and August 2021 respectively and will be disclosed in the 2021 Directors’ Remuneration Report. This is subject to the Committee’s satisfaction that the financial and risk underpins have been met at the end of the vesting period.
Consistent with the Regulations, the expected RoTE vesting outcomes for the 2018 LTIP awards (together with the TSR elements from the 2017 awards) are included in the 2020 single remuneration figures for the Executive Directors based on the three-month average share price to 31 December 2020. As the awards were granted before Tim Harris joined the Group, figures are for Penny James only. You can find details of this on page 122.
Using shares (Audited) In receiving a share award, Executive Directors commit not to hedge their exposure to outstanding awards under these plans or in respect of shares they are reporting to the Company within their ownership for the purposes of any share ownership guidelines. They also agree not to pledge as collateral their participation under any of the plans or any shares which they are required to hold in the Company for any purposes, including for share ownership guidelines. There have been no changes to the share interests below since 31 December 2020.
At 31 December 2020 Share plan interests exercised during the year to 31 December 2020
The table below shows the Non-Executive Directors’ beneficial interests in the Company’s shares1.
Mike Biggs2 – – Danuta Gray 10,000 10,000 Mark Gregory – – Jane Hanson 11,083 11,083 Sebastian James 5,000 5,000 Fiona McBain – – Gregor Stewart 2,925 2,925 Richard Ward – –
Notes: 1. This information includes holdings of any connected persons, as defined in section 253 of the Companies Act 2006. 2. Mike Biggs stepped down from the Board on 4 August 2020.
Non-Executive Directors (Audited) Fees were the only remuneration paid to Non-Executive Directors in 2019 and 2020. Non-Executive Directors may also claim for reasonable travel and subsistence expenses, in accordance with the Group’s travel and expenses policy, and, where these are classified as taxable by HMRC, they are shown under ‘Taxable benefits’ below. The Non-Executive Directors receive no other benefits.
Notes: 1. Non-Executive Directors are not eligible to participate in any of the Group’s bonus or share incentive schemes or to join any Group pension scheme.
Year Method 25th percentile pay ratio Median pay ratio 75th percentile pay ratio 2020 Option A 128:1 105:1 71:1 20191 Option A 123:1 101:1 67:1
Option A, as set out under the reporting regulations, was used to calculate remuneration for 2020 as we believe that it is the most robust methodology for calculating these figures. The value of each employee’s total pay and benefits was calculated using the single figure methodology consistent with the CEO. No elements of pay have been omitted. Where required, remuneration was approximately adjusted to be full-time and full-year equivalent basis based on the employee’s average full-time equivalent hours for the year and the proportion of the year they were employed.
2. For all employees, there were no changes in benefits provision between 2019 and 2020. For the CEO the decreased value of benefits relate to the car service not used by the CEO for travelling on journeys between home and office since March, in respect of which the Group also pays for any associated tax liability that arises on this benefit. For Non-Executive Directors, benefits comprise taxable travel and subsistence expenses reimbursed by the Company (including any gross-up for tax and national insurance contributions due).
4. The figure for the CFO is based on an annualised amount for 2019, as he joined in the final quarter of the year. 5. For Non-Executive Directors, increased fees relate to Board changes. The decreased value of benefits relates to a decrease in travel expenses due to the Covid-19 pandemic.
Directors’ Remuneration report continued 130 Direct Line Group Annual Report and Accounts 2020
Chief Executive Officer’s pay between 2012 and 2020 and historical performance of TSR The table below shows historical levels of the CEO’s pay between 2012 and 2020. It also shows vesting of annual and long-term incentive pay awards as a percentage of the maximum available opportunity. This is presented against the Company’s TSR since its shares began trading on the London Stock Exchange in October 2012, against the FTSE 350 Index (excluding Investment Trusts) over the same period. This peer group is the same used for measuring relative TSR under the LTIP.
Notes: 1. Based on closing share price of £2.86 on the vesting date (27 March 2020). 2. Based on closing share price of £2.95 on the vesting date (29 August 2020). LTIP awards for Executive Directors are subject to an additional two-year holding period following the three-year vesting period, during which time awards may not normally be exercised or released.
March and August 2018 LTIP The performance period in respect of the RoTE elements of these awards ended on 31 December 2020; however, the performance periods in respect of the TSR elements of these awards end on 25 March 2021 and 27 August 2021 and the awards will vest on these dates. The value of the 2018 LTIP awards vesting for Paul Geddes and Mike Holliday-Williams will therefore be disclosed in the 2021 report.
Distribution statement This chart shows the overall pay expenditure across all Group employees compared with the total dividend value paid to shareholders in 2019 and 2020.
The resolutions approving the Directors’ Remuneration Report and Remuneration Policy were passed by 94.88% and 97.55% of the votes cast in favour of the resolutions, respectively.
Directors’ Remuneration report continued 132 Direct Line Group Annual Report and Accounts 2020
Penny James Chief Executive Officer 250% 426% Tim Harris Chief Financial Officer 200% 33%
Notes: 1. Executive Directors are expected to retain all the ‘after tax’ Ordinary Shares they obtain from any of the Company’s share incentive plans until they achieve a shareholding level that is equal to 250% of base salary for the CEO and 200% of base salary for the CFO respectively.
2. For these purposes, holdings of Ordinary Shares will be treated as including all vested but unexercised awards, or awards unvested but after the performance period in the holding period, valued on a basis that is net of applicable personal taxes payable on acquiring such Ordinary Shares.
Penny James Chief Executive Officer 200% 581,357 1,617,000 Tim Harris Chief Financial Officer 200% 384,941 1,070,000
Proportion of award Performance for threshold vesting (20%) Performance for maximum vesting
The remaining 40% of each award is based on TSR performance against the FTSE 350 (excluding Investment Trusts), for which there is a straight-line interpolation between threshold and maximum performance on a ranked basis.
DAIP awards granted during 2020 (Audited) The table below shows the deferred share awards granted under the DAIP to Executive Directors on 27 March 2020 in respect of the 2019 AIP. Awards will vest after three years, normally subject to continued service, and were granted in the form of nil-cost options.
Service contracts Subject to the discretion set out in the recruitment remuneration policy, it is the Group’s policy to set notice periods for Executive Directors of no more than 12 months (by the Director or by the Company). The Executive Directors’ service agreements summary is as follows: Director Effective date of contract
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 the termination policy.
– The Executive Directors’ pension is set in line with the pension level received by the majority of the employee population
– Maximum opportunity of 175% of salary for the CEO and the CFO
– No change to the maximum opportunity – No change from the weightings or measures used for 2020 – There will be a straight-line vesting between AIP
– The performance targets are considered commercially sensitive and will therefore be disclosed in next year’s Report
– Awards typically granted as nil-cost options – Awards typically granted twice a year – The LTIP allows for awards with a maximum value of 200% of base salary per financial year – Performance is measured over three years – Awards vest subject to financial underpin and payment gateway – Malus and clawback provisions apply – Awards are subject to an additional two-year holding period following the end of the three-year performance period
– No change to the maximum annual award levels – Nil-cost options will continue to be used for the grants – The current 60% RoTE and 40% TSR mix will continue to apply for 2021 – A RoTE target range of 17.5% (threshold) to 20.5%
– Staying competitive in the market allows us to attract, retain and motivate high-calibre executives with the skills to achieve our key aims while managing costs
– When reviewing base salaries, the Committee typically takes the following into account: – level of skill, experience and scope of responsibilities, individual and business performance, economic climate, and market conditions; – the appropriate benchmarking peer group(s) that reflects the Group’s size and industry focus, the corresponding market pay range(s) and the relevant positioning within the market pay range(s); and
– When determining salary increases, the Committee will consider the factors outlined in this table under ‘Operation’
– The costs of benefits provided may fluctuate from year to year, even if the level of provision has remained unchanged
Directors’ Remuneration report continued 136 Direct Line Group Annual Report and Accounts 2020
Base salary – This is the core element of pay that reflects the individual’s role and position within the Group
– Where an Executive Director is required to relocate to perform their role, they may be offered appropriate relocation benefits. The level of such benefits would be determined based on the circumstances of the individual and typical market practice and be consistent with the relocation arrangements available to the workforce generally. In normal circumstances, relocation benefits will only be paid for a period of up to 12 months
– Clawback provisions apply to the AIP. Further explanatory notes can be found on the Direct Line Group website, under the ‘Results and reports’ heading on the Investors page, and on pages 128 to 138 in the 2019 Directors’ Remuneration Report
– No more than 10% of the bonus is paid for threshold performance
– Dividends will accrue during the deferral period – Malus and clawback provisions apply to the cash and deferred elements. Further explanatory notes can be found on the Direct Line Group website, under the ‘Results and reports’ heading on the Investors page, and on pages 128 to 138 in the 2019 Directors’ Remuneration Report.