Our vision is to create a world where insurance is personal, inclusive and a force for good.
Protecting customers when it matters the most through our powerful brands offering a range of products.
We believe that by serving the needs of our customers we can create value for our people, our society, our planet and our shareholders.
4. Estimates based on the Group’s Solvency II partial internal model. 5. See page 35 for the dividend policy. 6. ESG refers to environmental, social and governance issues.
Rescue and other personal lines We are one of the leading providers of rescue, travel and pet insurance in the UK. Green Flag is the third largest roadside recovery provider2. We are also the second largest travel and the fourth largest pet insurer3, as well as providing insurance for mid-to-high-net worth customers.
We’ve built a new technology platform to better support customers who become ill on holiday, easily accessible through any device.
Direct Line stands for hassle-free insurance that fixes problems like no other. Our insurance products are available by phone and online.
Churchill effortlessly takes care of real life problems, so customers can relax. Our insurance products are available by phone, online and through PCWs.
DLG Partnerships specialises in providing personal insurance as well as roadside rescue and recovery products to some of the UK’s most well-known brands.
Direct Line for Business keeps up with the changing business needs of small and medium-sized enterprises. Our business insurance products are available by phone and online.
Direct We give our customers a reason to shop direct with our powerful brands and great propositions, because we want to deliver excellent value for our customers.
Partnerships We partner with big brands to offer insurance to their customers and look for ways to innovate to give people choice about how they insure the things they love.
Brokers Many small and medium-sized commercial enterprises choose to arrange their insurance using brokers who understand their specific needs. We have an extensive, wellestablished broker network that offer our NIG insurance products to these customers.
We are transforming our technology and changing the way we work to increase the competitiveness of our business. Our aim is to improve the quality of the earnings of the group, with a greater proportion coming from current-year business, reflecting the Group’s improved competitiveness.
WE ARE DRIVING TO ACHIEVE THIS THROUGH OUR SIX NEW STRATEGIC OBJECTIVES: See pages 15 and 21 to 23
Notes: 1. See glossary on pages 222 to 224 for definitions and Appendix A –
Note: 1. Results for the year ended 31 December 2018 have been restated to reflect the fully retrospective adoption of IFRS 16 ‘Leases’.
In June 2019, Mike Holliday-Williams stepped down as an Executive Director. Responsibility for leading our Personal Lines businesses has been taken by three new Executive Committee members: Kate Syred as Managing Director of Household, Partnerships and Data; Gus Park as Managing Director of Motor, Pricing and Underwriting; and Mark Evans as Managing Director of Marketing and Digital. I would like to thank Paul, Clare and Mike for their exceptional contributions to the leadership of the Group.
In January 2020, Neil Manser, our Deputy CFO and previously Managing Director of NIG, was appointed as Chief Strategy Officer. Neil is a member of the Executive Committee and will lead the development of the Group’s strategy and the alignment of priorities to help execute it.
After six years with the Group, our Human Resources Director, Simon Linares, will be retiring in March 2020. He will be succeeded by Vicky Wallis, who will join us from Santander UK in May 2020. I would like to thank Simon for his leadership in making Direct Line Group one of the best big companies to work for and wish him every success as he develops a career as a NED.
It has been my immense privilege to serve as your Chairman since before the Company’s flotation in 2012. As I am approaching the ninth anniversary of my appointment, and as our new senior management team is now firmly established, I believe that the time is right for the Company to be searching for my successor. My fellow Directors, led by our Senior Independent Director (“SID”), Richard Ward, will carry out a thorough process in the coming months with the objective of identifying the right person to lead your Board, preserve this Group’s enviable culture and support our talented people in the years to come.
Dividend and capital management The Group’s solvency capital ratio as at 31 December 2019, prior to the proposed dividend and share buyback was 191%. This resulted from good capital generation from the business, supported by higher unrealised mark-to-market gains on the Group’s available-for-sale investments, as credit spreads narrowed. This strong capital generation allowed us to continue to invest high levels of capital expenditure to support the Group’s strategic objectives.
The Board has recommended a final dividend of 14.4 pence per share (2018: 14.0 pence), an increase of 0.4 pence per share (2.9%). If approved, the total regular dividend of 21.6 pence per share will represent a 2.9% growth on 2018’s regular dividend (21.0 pence per share).
The Board has also approved a share buyback of up to £150 million which it expects to complete by the end of July 2020. After taking into account these dividends and share buybacks, the solvency capital ratio was 165% as at 31 December 2019. This reflects the Board’s continued confidence in the Group’s capital position and the sustainability of its earnings. In normal circumstances, the Board expects the Group to operate around the middle of its solvency capital ratio risk appetite range of 140% to 180%.
Culture Your Board recognises that culture and capability are key enablers for achieving the Company’s strategic objectives and encourages an open and inclusive culture and an environment in which people can be themselves.
A sustainable and responsible business and an inclusive and collaborative culture are critical to the Group’s commercial success.
Accountability Your Board provides shareholders with an assessment of the Group’s position and prospects. We monitor and review the effectiveness of the Group’s risk management and internal control systems.
Remuneration Your Remuneration Committee focuses on ensuring a close correlation between creating value for shareholders, and remunerating Executive Directors and senior executives appropriately.
See pages 90 to 92 See pages 106 to 138 See pages 88 to 89
Culture and Sustainability The Board believes that a sustainable and responsible business and an inclusive and collaborative culture are critical to making the Group more commercially successful. The Board encourages openness and an environment where people can be themselves. The Board promotes this culture through the Group’s Code of Business Conduct which sets out for our employees the vision, purpose and values of the organisation and aims to preserve the Group’s reputation for high standards of conduct.
Among other things, this strategy has further assisted the Board in considering the interests of all of our stakeholders. The Strategic report includes a statement on how the Board promotes the success of the Company for the benefit of its members as a whole, having regard to the stakeholders and matters set out in section 172(1) of the Companies Act 2006. The Corporate Governance report contains examples of how the Board has engaged with and considered the interests of our stakeholders and the effect of doing so on principal decisions taken by the Company during the financial year.
Our Customers Meeting the needs of our customers is central to the Group’s corporate strategy. Along with its investment in IT capability to improve the efficiency and effectiveness of the business, the Board encourages a range of customer experience initiatives which are designed to deliver increased levels of customer satisfaction. The Board oversees the Group’s conduct towards its customers, aiming to ensure that fair customer outcomes are achieved, and active and constructive dialogue with its insurance regulators on customer conduct matters.
I would also like to thank each member of the Board for their significant contribution, commitment and service, and I look forward to working with them in 2020, supporting management in the execution of the Group’s ambitious strategy.
We have delivered another good set of financial results, with improved quality, demonstrating our discipline and the value of our business model.
A direct relationship with our customers provides an opportunity for profitable growth by meeting a broader set of customer needs, and the foundation for future product and service innovation.
PCWs will continue to be the biggest market for new business and therefore our primary route for profitable growth.
As disruption in our market increases, we need to become brilliant at innovation and change. We can only do this by empowering and developing the best people.
We aim to bring our cost base in line with the market to compete better, in particular through PCWs and partnerships. We will introduce new ways of working to better enable us to exploit our advantages within each product and channel.
– Strong brand recognition – Strong technical risk pricing – Fast modelling deployment – Fast and flexible use of primary and third-party data
– Increasing pace of change needed to respond to changes in our markets and consumer behaviour
– Importance of diverse skillsets required to win; for example, data and analytics, digital, technicians that can deal with evolving car technology
– Real insight and expertise – Valuable and timely data – Control and delivery of the value chain
Our 2020 priorities are all aligned to these six strategic objectives and in the first half of 2020 we will focus on continuing the development and roll out of our technology change. Our plans include moving towards launching Direct Line and Churchill motor new business onto our new platform, launching Darwin on two more PCWs, rolling out a new claims system for Green Flag and building Contractors into NIG’s new Commercial Combined product. At the same time we are completing the re-engineering of our technology platform to support these new systems and enhance productivity.
We are also heavily focused on improving efficiency in order to meet our cost targets. We have launched a consultation in our head office areas which aims to improve our speed of delivery at a lower cost by implementing more agile principles including moving to multi-disciplinary teams and away from working in functional silos. We are also looking to rationalise our site footprint over the next two years.
– Our sustainability pillars bring environmental, social and governance 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 delivering our business in a sustainable way.
Investing in technology and new ways of working While these core strengths persist today, we recognise that to succeed in the future we need to continue to change and we are on an ambitious transformation journey to increase the competitiveness of our business.
The first has been building the key technology blocks, which is characterised by high investment expenditure. The run costs are being managed alongside careful expenditure on organisational change and on existing systems that are set to be phased out.
That technology is beginning to land and although there is still much to do in this ambitious and complex programme, we are now moving into the second phase: our business transformation. From this phase, we plan to improve our cost position by reducing double run-costs and improving efficiency. We also aim to further increase the accuracy and speed of our pricing and underwriting; improve our competitiveness and responsiveness to change; and enhance our customer experience.
Through increased competitiveness and by increasingly adopting more agile working practices, particularly in the areas of our business that are at the forefront of delivering change, we believe we can realise the incredible potential of our business to innovate faster and grow. This is the third phase of our transformation.
External environment We have continued to operate within a highly dynamic and evolving regulatory landscape, influenced by the views and initiatives from several parties, including the UK Government, the FCA and the PRA. During 2019, both the FCA and the PRA have been focused on Brexit preparations, amongst other activities.
The PRA has continued to focus generally on the pillars of its financial risk framework, namely reserving, pricing, reinsurance and investments, as well as operational resilience, cyber underwriting risk and the financial risks arising from climate change.
Consumer trends New products, new routes to market and technology, particularly in cars, are emerging. In response we are preparing for a shift in the risk pool and an increase in the importance of data and analytics. Our new brand Darwin is using new pricing technology for motor customers who purchase via the PCW channel and our new motor insurance platform is being rolled out to make customer journeys easier. In our accident repair centres we are preparing for the future by investing in specialist equipment to repair cars with advanced driver-assistance systems (“ADAS”) technology, as well as supporting FiveAI’s recent trial of autonomous vehicles and partnering with Europe’s largest car-subscription service Drover.
Business performance In 2019, we delivered £546.9 million of operating profit, a combined operating ratio of 92.2% and a return on tangible equity of 20.8%.
Direct own brands in-force policies grew by 1.4% to 7.3 million (2018 restated: 7.2 million) as Green Flag and Commercial direct own brands continued their strong growth, offset by lower volumes in Motor and Home. Total in-force policies were 1.9% lower than 2018, primarily due to lower Travel policies as lower packaged bank account volumes reduced and lower Motor and Home partner volumes reflecting previously announced partner exits.
The current-year attritional loss ratio improved by 1.0 percentage point (2019: 71.6%, 2018 restated: 72.6%) with Home, Rescue and other personal lines and Commercial all improving and Motor remaining broadly steady. This demonstrates the benefits of our focus on underwriting discipline and claims management in a competitive market.
We made good progress on costs in 2019, reducing operating expenses before restructuring and one-off costs by £24.5 million to £693.7 million. We aim to reduce
We are aiming for a win for the customer in the creation of true value.
A company that cares First and foremost, we are a people business, which means we really care and have a passion to serve our customers.
Targeting margin improvement in portfolio as full benefits of technology realised
More competitive and agile business to deliver the full potential of the Group enabling it to win market share and innovate faster to grow
Outlook The Group targets a combined operating ratio of 93% to 95% for 2020 and over the medium term, normalised for weather. By the end of 2021, the Group aims to increase the annual proportionate contribution from current-year operating profit to more than half of the Group’s total operating profit.
Long-term sustainability Underpinning our vision, purpose and strategy are deeply embedded and fundamental principles which are central to how we make decisions and enable us to build our business for the long term.
To use our data, scale, skill and insight across claims, pricing and underwriting to deliver value to customers.
A home for empowered people who celebrate difference, and challenge the status quo to deliver for our customers.
Transforming our business We are transforming every part of our business to ensure that our products are easy to use and available everywhere. The 2019 transformation in action highlights demonstrate how we deliver great value and an excellent customer experience.
New travel system Customers value convenience which is why we’ve built a technology platform that gives our customers a seamless digital experience on their travel insurance policy. Our customers can buy online, upgrade and renew from their smartphone, tablet or PC. There are two major benefits – we now offer an intuitive, full online medical screening, while using up to date medical risk scoring technology. We also offer customers the ability to submit their claims online allowing them to track and manage the progress of their claim, no matter what time of day.
Note: 1. Kantar Brand Power Share – H2 2019. Churchill ranked third in this index with the top two brands not sold via the PCW channel.
Enhancing the Direct Line proposition Since relaunching in 2014, Direct Line has relentlessly pursued its goal of being Britain’s greatest fixer. This year, it improved its onward travel process for motor insurance and cut the dispatch time for some home insurance replacements to within two hours of making a claim.
Delivering for our stakeholders We have unique strengths which allow us to deliver sustainable value for our stakeholders.
Data and technology We harness our brands to design more personalised products and services as well as easier customer journeys.
Capital strength We have a strong balance sheet with further opportunities to improve its effectiveness.
– We have a number of the UK’s most loved brands giving us a deep understanding of changing market dynamics and customer needs
– We manage our tax obligations responsibly contributing either directly or indirectly over £950 million in tax to the Exchequer this year
And a win for society and the planet And a win for society and the planet as we know our long-term success is intrinsically linked with the success of the community and environment around us.
– Our long-established position in the UK insurance market and vertically integrated business model gives us a platform to continually enhance our pricing capability
– As a leading motor insurer we benefit from running a network of 21 accident repair centres creating high operating efficiency
The return generated on the capital that shareholders have in the business. This is calculated by dividing adjusted earnings by average tangible equity.
The amount of cash paid in dividends to shareholders and amount of share buybacks funded from the Group’s retained profits. (See page 29 for dividend breakdown).
This is calculated by dividing the earnings attributable to shareholders less coupon payments in respect of Tier 1 notes by the weighted average numbers of Ordinary Shares in issue.
We aim to make an underwriting profit. The target in the medium term is a COR in the range of 93% to 95% normalised for weather.
We base the LTIP awards partly on adjusted RoTE over a three-year performance period.
We base LTIP awards partly on relative total shareholder return performance, which includes dividends. Directors also receive dividends on their beneficial shareholdings and accrue these on unvested LTIP awards.
This is a broad measure of earnings and reflects the results of the Group after tax less Tier 1 coupon payments. We base part of the AIP awards on profit before tax.
3. Estimates based on the Group’s Solvency II partial internal model for 2016 to 2019. Solvency capital coverage based on the standard formula for 31 December 2015.
The number of complaints we received during the year as a proportion of the average number of in-force policies.
To make the Group best for employees and best for our customers. We gauge employee engagement through our employee opinion survey and we aim for high employee engagement scores each year.
This measure indicates where our customer service has not met expectations to the extent that the customer has initiated a complaint. We aim to improve this over time.
Risk management within our risk appetite, which includes an assessment of capital strength, acts as a gateway for the AIP awards and underpin for LTIP awards.
.6 4. On an aggregated 12-month rolling basis, with 2013 rebased to 100. 5. FCA complaints reporting requirements have changed for periods after 29 June 2016. Before 29 June 2016, only complaints resolved after two business days were classed as FCA reportable. From July 2016 all complaints resolved are classed as FCA reportable. 6. For the Group’s principal underwriter, U K Insurance Limited.
Grew direct own brand in-force policies by 1.4% with strong growth in Green Flag and Commercial direct own brands. Total in-force policies were lower as partnership volumes reduced.
Total Group gross written premium was broadly steady as underwriting discipline resulted in fewer Motor and Home policies and lower premiums which was largely offset by growth in Green Flag and Commercial direct own brands.
Operating expenses before restructuring and one-off costs of £693.7 million (2018 restated: £718.2 million) were in line with target of less than £700 million. Restructuring and one-off costs were £11.2 million (2018: £nil).
Underwriting profit 232.1 259.8 Instalment and other operating income 180.2 192.0 Investment return 134.6 154.6 Operating profit 546.9 606.4 Restructuring and other one-off costs (11.2) – Operating profit after restructuring and one-off costs 535.7 606.4 Finance costs (26.0) (25.9) Profit before tax 509.7 580.5
Net investment income yield4 2.1% 2.0% Investment return yield4 2.2% 2.4% Basic earnings per share (pence) 29.5 33.3 Diluted earnings per share (pence) 29.2 32.9 Return on equity 15.5% 17.3% Dividend per share – interim (pence) 7.2 7.0 – final (pence) 14.4 14.0 – total ordinary (pence) 21.6 21.0 – special (pence) – 8.3
Notes: 1. See glossary on pages 222 to 224 for definitions and appendix A
Underwriting profit decreased to £232.1 million (2018 restated: £259.8 million) as lower prior-year reserve releases of £294.5 million, including the effects of changes to the Ogden discount rate detailed below, were partially offset by lower operating expenses and reduced weatherrelated claims of £6 million (2018: £75 million weatherrelated claims).
Operating profit decreased by £59.5 million to £546.9 million (2018 restated: £606.4 million) as a result of reductions in underwriting profit, instalment and other operating income and investment return. Current-year operating profit, as a proportion of total operating profit, improved, making progress towards the Group’s target of achieving more than half of the Group’s annual operating profit from current-year earnings by the end of 2021.
Notes: 1. Commercial direct own brands include Direct Line for Business and commercial products sold under the Churchill brand, the Churchill in-force policies were previously reported within NIG and other. Prior periods have been re-presented accordingly.
2. In-force policies, including direct own brands as at 31 December 2018 have been restated to include 41,000 policies previously omitted from previously reported amounts.
Total in-force policies reduced to 14.8 million (31 December 2018: 15.1 million), primarily due to lower volumes in policies attached to packaged bank accounts, small reductions in Motor and Home own brands, and reductions in Home partnerships as Prudential and Sainsbury’s partnerships are closed to new business. Own brands in-force policies grew to 7.3 million (2018 restated: 7.2 million), with growth in Green Flag and Commercial direct own brands partly offsetting the overall reduction.
Other personal lines 44.6 43.1 Rescue and other personal lines 436.0 422.8
The loss ratio was stable at 61.9% (2018 restated: 61.9%) as a number of factors offset each other. The current-year attritional loss ratio improved by 1.0 percentage point as the Group benefited from benign weather and this was offset by lower prior-year reserve releases in part due to Ogden discount rate changes.
– Alternative performance measures on pages 225 to 228 for reconciliation.
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%
Current-year combined operating ratio 106.6% 87.6% 97.2% 109.2% 102.1% For the year ended 31 December 20182 (restated)
Loss ratio – current-year attritional 81.4% 57.0% 70.7% 66.8% 72.6% Loss ratio – prior-year reserve releases (17.9%) (4.9%) (3.9%) (17.1%) (13.1%) Loss ratio – major weather events1 n/a 9.7% n/a 2.1% 2.4%
The Group has continued to invest in its technology transformation and other operational efficiency improvements. The core areas of focus include selfservice and digitalisation, process improvement and automation, as well as reducing costs through targeted procurement activity.
3. In 2018 other income included a £9.6 million gain on the sale of a property.
Instalment and other operating income decreased by £11.8 million, primarily as a result of the non-repeat of a £9.6 million property gain in 2018.
The movement in the current-year attritional loss ratio is an indicator of underlying accident year performance as it excludes prior-year reserve releases and claims costs from major weather events. The Group’s current-year attritional loss ratio of 71.6% improved by 1.0 percentage point compared to 2018, demonstrating good progress on the Group’s target to improve current-year underwriting profitability. This was primarily due to improvements in escape of water claims in Home and small improvements across other divisions.
Prior-year reserve releases continued to be significant at £294.5 million (2018: £404.4 million), equivalent to 9.9% of net earned premium (2018: 13.1%) and were concentrated towards more recent accident years. In 2019, prior-year reserves increased by £16.9 million in relation to a change in the Ogden discount rate to minus 0.25% (2018: £54.8 million reserve release). Assuming current claims trends continue, prior-year reserve releases are expected to continue to reduce further in future years, although they are expected to remain a significant contribution to profits.
The Group’s current-year combined operating ratio improved by 2.6 percentage points to 102.1% (2018 restated: 104.7%) as a 2.2 percentage point improvement in claims due to major weather events and a 1.0 percentage point improvement to the current-year attritional loss ratios were partially offset by a 0.6 percentage point increase in the commission ratio.
3. IT and other operating expenses include information technology costs, professional fees and property costs.
5. Depreciation and amortisation include a £1.3 million impairment charge for year ended 31 December 2019 (2018: £1.5 million), which relates to capitalised software development costs for ongoing IT projects primarily relating to development of new systems.
Investment income 146.4 159.2 Hedging to a sterling floating rate basis (22.1) (30.8) Net investment income 124.3 128.4 Net realised and unrealised gains excluding hedging 10.3 26.2 Total investment return 6 134.6 154.6
– Alternative performance measures on pages 225 to 228 for reconciliation to financial statement line items.
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 (“PPO”) and non-PPO liabilities in an optimal manner; and
– to deliver a suitable risk-adjusted investment return commensurate with the Group’s risk appetite.
Note: 1. Results for the period ended 31 December 2018 have been restated to reflect the fully retrospective adoption of IFRS 16 ‘Leases’. See note 44 to the consolidated financial statements.
Effective corporation tax rate The effective tax rate for 2019 was 17.6% (2018: 18.7%), which was lower than the standard UK corporation tax rate of 19.0% (2018: 19.0%) driven primarily by an increase in respect of prior-year over provisions, tax relief for the Tier 1 coupon payments offset by a reduction in disallowable expenses.
2. See glossary on pages 222 to 224 for definitions and appendix A – Alternative performance measures on pages 225 to 228 for reconciliation to financial statement line items.
Cash flow The Group’s cash and cash equivalents decreased by £196.1 million (2018: £212.1 million decrease) to £896.3 million.
Goodwill and other intangible assets 16 (702.5) (566.8) Tangible net assets 16 1,941.1 1,991.4 Closing number of Ordinary Shares (millions) 16 1,366.6 1,364.6 Net asset value per share (pence) 16 193.4 187.5 Tangible net asset value per share (pence) 16 142.0 145.9
Notes: 1. Results for the period ended 31 December 2018 have been restated to reflect the fully retrospective adoption of IFRS 16 ‘Leases’. See note 44 to the consolidated financial statements.
In the normal course of events the Board will consider whether or not it is appropriate to distribute any surplus capital to shareholders once a year, alongside the fullyear results.
The Board has recommended a final dividend of 14.4 pence per share (2018: 14.0 pence), an increase of 0.4 pence per share (2.9%). The Board has also approved a share buyback of up to £150 million which it expects to complete by the end of July 2020. This reflects the Board’s continued confidence in the Group’s capital position and the sustainability of its earnings. In normal circumstances, the Board expects the Group to operate around the middle of its solvency capital ratio risk appetite range of 140% to 180%.
Capital position At 31 December 2019, the Group held a Solvency II capital surplus of £0.85 billion above its regulatory capital requirements, which was equivalent to an estimated solvency capital ratio of 165%, post capital distributions of proposed final dividends and share buyback.
The Group’s SCR and solvency capital ratio are as follows: Solvency capital requirement (£ billion) 1.32 1.26 Capital surplus above solvency capital requirement1 (£ billion) 0.85 0.89 Solvency capital ratio post-capital distributions 165% 170%
Capital surplus at 1 January 0.89 0.91 Capital generation excluding market movements 0.60 0.47 Market movements 0.06 (0.06) Capital generation 0.66 0.41 Change in solvency capital requirement (0.06) 0.13 Surplus generation 0.60 0.54 Capital expenditure (0.19) (0.15) Management capital action – – Capital distribution – ordinary dividends2 (0.30) (0.30) Capital distribution – special dividends2 – (0.11) Capital distribution – share buyback (0.15) – Net surplus movement (0.04) (0.02) Capital surplus at 31 December 0.85 0.89
Own funds The following table splits the Group’s own funds by tier on a Solvency II basis.
Tier 1 capital before foreseeable capital distributions 1.80 1.76 Foreseeable capital distributions (0.35) (0.31) Tier 1 capital – unrestricted 1.45 1.45 Tier 1 capital – restricted 0.37 0.35
Total shareholders’ equity 2.64 2.56 IFRS 16 ‘Leases’ adjustment to remove restated equity movement1 Goodwill and intangible assets
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 2020, the level of expenditure is expected to be approximately £150 million. Thereafter, expenditure levels are expected to reduce to around £100 million from 2021.
2. Only includes the impact on AFS assets (excludes illiquid assets such as infrastructure debt) and assumes no change to the SCR.
Leverage The Group’s financial leverage decreased by 0.6 percentage points, and continued to remain conservative at 18.6% (2018 restated: 19.2%). The decrease was primarily due to the increase in shareholders’ equity as a result of improvements to the valuation of the Group’s AFS investments.
Credit ratings Moody’s Investors Service provide insurance financialstrength ratings for U K Insurance Limited, the Group’s principal underwriter. Moody’s rate U K Insurance Limited as ‘A1’ for insurance financial strength (strong) with a stable outlook.
Reconciliation of IFRS shareholders’ equity to solvency II own funds (£bn)
Reserving The Group makes provision for the full cost of outstanding claims from its general insurance business at the balance sheet date, including claims estimated to have been incurred but not yet reported at that date and claims handling costs. The Group considers the class of business, the length of time to notify a claim, the validity of the claim against a policy, and the claim value. Claims reserves could settle across a range of outcomes, and settlement certainty increases over time. However, for bodily injury claims the uncertainty is greater due to the length of time taken to settle these claims. The possibility of annuity payments for injured parties also increases this uncertainty.
If the claimant prefers, large bodily injury claims can be settled using a PPO. This is an alternative way to provide an indemnity for recurring costs, making regular payments, usually for the rest of the claimant’s life. These claims are reserved for using an internal discount rate, which is progressively unwound over time. As it is likely to take time to establish whether a claimant will prefer a PPO or a lump sum, until a settlement method is agreed, the Group makes assumptions about the likelihood that claimants will opt for a PPO. This is known as the PPO propensity. In line with the Group’s experience, and the negative Ogden discount rate, the assumed PPO propensity has reduced in 2019.
2. These sensitivities reflect one-off impacts at 31 December and should not be interpreted as predictions. 3. The sensitivities relating to an increase or decrease in the real discount rate used for PPOs illustrate a movement in the time value of money from the assumed level of 0% for reserving. The PPO sensitivity has been calculated as the direct impact of the change in the real discount rate with all other factors remaining unchanged.
4. Ogden discount rate sensitivity has been calculated as the direct impact of a permanent change in the discount rate in England and Wales with all other factors remaining unchanged. The Group will consider the statutory discount rate when setting its reserves but not necessarily provide on this basis, as was the case at the year ended 31 December 2018. This is intended to ensure that reserves are appropriate for current and potential future developments.
Investment portfolio The 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 PPO and non-PPO liabilities in an optimal manner – to deliver a suitable risk-adjusted investment return commensurate with the Group’s risk appetite
More than 10 years, for example PPOs Property and infrastructure debt Inflation linked or floating Short and medium term − all other claims Investment-grade credit, short-term high yield and subordinated financial debt Key rate duration matched
Tier 1 equity Investment-grade credit Fixed Tier 2 sub-debt (swapped fixed to floating) Commercial real estate loans and cash Floating Surplus − tangible equity Investment-grade credit, cash and government debt securities Fixed or floating
Notes: 1. Asset allocation at 31 December 2019 includes investment portfolio derivatives, which have been included and have a mark-to-market asset value of £81.8 million included in investment grade credit (31 December 2018: mark-to-market asset value of £11.8 million). This excludes non-investment derivatives that have been used to hedge interest on subordinated debt and operational cash flows.
At 31 December 2019, total investment holdings of £5,943.2 million were 3.6% lower than at the start of the year, primarily reflecting the cash paid in 2019 for dividends partially offset by an increase in fair value of debt securities. Total debt securities were £4,271.4 million (31 December 2018: £4,258.4 million), of which 2.8% were rated as ‘AAA’ and a further 58.6% were rated as ‘AA’ or ‘A’. The average duration at 31 December 2019 of total debt securities was 2.5 years (31 December 2018: 2.5 years).
At 31 December 2019, total unrealised gains, net of tax, on available-for-sale (“AFS”) investments were £47.5 million (31 December 2018: £36.8 million unrealised losses).
Tax Management The Board recognises that the Group has an important responsibility to manage its tax position effectively. The Board has delegated day-to-day management of taxes to the Chief Financial Officer and oversight is provided by the Audit Committee.
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.
The Group’s tax policy has been reviewed and approved by the Audit Committee in 2019. The Group Tax team supports the Chief Financial Officer in ensuring the policy is adhered to at an operational level.
Current-year corporation tax charge 101.9 Irrecoverable value added tax incurred on overheads 102.8 Irrecoverable value added tax embedded within claims spend 193.8 Employer’s national insurance contributions 39.2 Other taxes 8.4 Total 446.1
Insurance premium tax 398.9 Value added tax 13.2 Employee’s pay as you earn and national insurance contributions 98.4 Total 510.5
Insurance premium tax £398.9m 42 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
Market overview Market changes and developing trends impact our customers. This year we examined our external environment, our internal capabilities and how to position ourselves for the long-term success of the business.
Insurers extend their reach by using new capability to secure more customers through PCWs, acquisitions and partnerships.
Our first three strategic objectives aim to ensure that our products are easy to use and available everywhere, all underpinned by data expertise, IT investment and business agility.
The FCA Market Study on General insurance pricing practices may impact on how the market approaches pricing and contracts
Increased consumer, investor and regulatory focus on Brexit and wider market uncertainty.
– We are supportive of the FCA Market Study on General insurance pricing practices, building on the steps we have taken over the last five years. We want a level playing field so the industry can improve outcomes for long-standing customers.
– The Group has proactively considered a variety of possible implications of a disruptive end to the Brexit implementation period, taking into account the political and economic environment.
Future success will be predicated on combining great customer-focused brands with a strong technology foundation where new customer platforms can make it easier for us to onboard new books of business and gain new insight on claims trends.
– Our new brand Darwin is using new pricing technology for motor customers who purchase via the PCW channel and our new motor insurance platform is being rolled out to make customer journeys easier.
Own brand gross written premium reduced by £17.1 million to £1,597.1 million, overall gross written premium reduced by 1.2%.
Overview In 2019, the Group maintained a focus on underwriting discipline and indemnity management in a highly competitive market, and this strategy helped to deliver an improvement in the current-year attritional loss ratio to 81.2% (2018: 81.4%). Excluding the effect of changes to the Ogden discount rate in both 2018 and 2019, operating profit was down £49 million, primarily due to lower bodily injury reserve releases and lower investment returns.
Combined operating ratio 44 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
Performance Motor in-force policies reduced by 1.2% to 4.0 million with gross written premium also reducing by 1.2% to £1,651.6 million as the Group continued to focus on maintaining target loss ratios in a highly competitive market.
A number of pricing initiatives have helped to support new business competitiveness. Motor risk-adjusted prices increased by 3.1% in 2019 while targeted changes to the risk mix reduced average premiums by 3.7%. This led to Motor average premium1 falling slightly in 2019.
The current-year attritional loss ratio in Motor improved by 0.2 percentage points to 81.2% (2018: 81.4%). Claims severity experience was consistent through 2019 with underlying inflation at the upper end of the Group’s long-term expectations of 3% to 5%. Frequency was lower as a result of improvements to risk mix, counter fraud initiatives as well as benign weather.
In total, prior-year reserve releases were £95.8 million lower year-on-year at £180.5 million and included an increase in reserves of £15.9 million as a result of the change in the Ogden discount rate to minus 0.25% from an assumed rate of 0% (2018: £47.9 million release). Bodily injury claims reserves continued to develop favourably.
Motor’s reported combined operating ratio increased by 6.2 percentage points to 94.8% (2018 restated: 88.6%). Small improvements in the current-year attritional loss and expense ratios were offset by a 0.6 percentage point increase in the commission ratio, primarily due to increased volume related commission payments to price comparison websites, and a 6.0 percentage point reduction in prior-year reserve releases. Note: 1. Average incepted written premium excluding IPT for
Motor own brands (excluding Darwin and Privilege policies underwritten on the Group’s new IT platform) for year-end 31 December 2019.
It will overhaul the bodyshop industry because ADAS technology requires calibration when accidents occur. The Group has invested in our specialist repair facility in Birmingham, acquiring calibration kits and recruiting technicians who have the expertise to assess and fix this technology. By anticipating this change the Group is investing in our people, adding to our skills base and maximising the prospects of delivering efficient repairs for our customers.
The shift in distribution of Home’s business from partners to price comparison websites continued in 2019. The Group maintained strong retention rates across all brands. RBS Group Home in-force policies remained broadly flat, with an increase in the proportion of three-year fixed price policies. Run-off partnerships (Sainsbury’s and Prudential) continued to perform in line with expectations. The Group also launched an affinity partnership with Starling Bank acting as an introducer to the Group’s Churchill brand.
Total in-force policies 2.2% lower at 2.6 million. Own brand in-force policies were 1.3% lower at 1.8 million.
Total gross written premium was 3.3% lower at £586.6 million as a number of partnership schemes continued to run-off. Own brand gross written premium was 1.2% lower.
Total operating profit was £66.7 million higher than 2018 reflecting improvements to escape of water claims and benign weather in 2019.
Home’s 2019 experience was better than its long-term expectation of claims inflation which, excluding the impact of major weather events, remained at 3% to 5%.
The commission ratio of 9.7% was 0.3 percentage points higher compared to 2018 due to higher prior-year reserve releases and benign weather resulting in higher profit share payments to partners.
The current-year attritional loss ratio, excluding major weather event claims, improved by 3.5 percentage points to 53.5%, reflecting improvements to escape of water claims, disciplined underwriting and benign weather.
In-force policy numbers reduced by 2.6% driven primarily by reductions in packaged bank customer volumes.
The Group’s direct Rescue brand, Green Flag, grew in-force policies by 13.7%, to over 1 million policies, and gross written premium by 13.5% in the year.
Green Flag was awarded Superbrand1 status, in the latest annual ranking of the UK’s strongest consumer brands. And its bold summer advertising campaign set out to show that it is a smarter, credible alternative to the competition, offering the same service for half the price.
Travel launched its new policy and claims management platform in April 2019 with the migration of Ulster Bank, RBS and NatWest packaged current account customers. In 2019, the Group registered around 35,000 claims on the new system, with customers benefiting from faster settlement times and full online medical screening. The Group will continue to migrate its remaining partnership and own brand policies onto the new system.
In-force policies (thousands) 7,377 7,573 Of which Green Flag direct 1,063 935
Our new travel platform is enabling us to interact with customers through the channel that is most convenient for them. Online medical screening means customers can renew and update the level of cover they need without having to speak to a consultant, and our more intuitive risk rating features enables flexibility so that more competitive pricing is possible. There are now over 1.5 million live policies on the platform, and the enhanced capability allows us to process claims faster while regularly updating customers on the progress of their claim, so they know exactly what to expect.
Performance Rescue and other personal lines in-force policies reduced by 2.6% to 7.4 million. However, gross written premium increased by 3.1% to £436.0 million compared with 2018 as lower premium packaged bank account volume was replaced with higher premium own brand policies.
In-force policies for the Group’s linked Rescue channel, where cover can be purchased with a Group Motor policy, reduced to 857,000, driven by the end of the Churchill “Free Rescue” campaign in July 2018. Rescue partnerships in-force policies reduced by 4.2%, where margins tend to be lower than for direct business, driven primarily by a reduction in packaged bank account volumes.
Gross written premium for total other personal lines increased by 3.5%.
Rescue’s combined operating ratio of 81.5% was 3.5 percentage points better than 2018’s ratio of 85.0%, as it benefited from lower claims frequency due to mild weather, the mix effects of own brand growth and lower expenses following front-line efficiency savings. Other personal lines combined operating ratio increased by 3.7 percentage points to 102.0%, due to lower prior-year reserve releases in UK Select and Travel, alongside additional headwinds in UK Select from higher large loss severity.
Strong performance in Direct Line for Business as it continued to roll out its new digital platform targeting small and micro businesses.
Commercial direct own brands grew in-force policies by 5.2% as it continued to grow in its traditionally well performing areas of Van and Landlord, together with strong growth across the small and micro business products on its new platform. Gross written premium increased by 8.3% to £149.4 million with increases across all product lines.
NIG and other in-force policies numbers were 2.9% lower and gross written premium grew by 1.7% to £379.5 million. This reflected NIG’s focus on underwriting discipline and underwriting margins.
Our Landlord emergency cover has been introduced as an optional add-on to Direct Line for Business Landlord insurance. It provides peace of mind when the worst does happen, through our 24-hour emergency claims line which sends out a certified contractor to secure or prevent further damage to the property.
The cover includes call out charges and costs for labour and materials. Landlords can rest assured in the knowledge that a plumber or electrician, among other tradesmen, could be at their property within hours, even when they’re not able to be there themselves. Tenants can also be authorised to ring us directly so there is no need for landlords to take on the role of the middle man when reporting emergencies.
With one less thing to worry about, looking after your property just became a little easier for landlords, who are increasingly concerned with the long-term investment potential of their property rather than just the short-term income it can provide.
The combined operating ratio for Commercial increased slightly by 0.3 percentage points to 95.7% (2018 restated: 95.4%) as an improvement in the current-year attritional loss ratio of 1.2 percentage points and a reduction in claims related to severe weather were offset by the reduction in prior-year reserve releases.
2. Stable/efficient access to funding and liquidity The Group aims to meet both planned and unexpected cash outflow requirements, including those requirements that arise following a 1-in-200 year insurance, market or credit risk event.
The Group’s risk strategy is aligned with the Group strategy and supports business decision-making through the proactive identification, assessment and management of risks.
Our aim is to make risk management simple, well understood and embedded. We will provide oversight which is pragmatic and commercial to help the business make good risk-based decisions and to move quickly whilst understanding the risks.
Risk appetite statement 52 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
Our Enterprise Risk Management Strategy and Framework The Enterprise Risk Management Strategy and Framework document sets out, at a high level, the Group’s approach to setting risk strategy and managing risks to the strategic objectives and day-to-day operations of the business.
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, this year, the delivery of the imaginative ‘Risk Heroes’ campaign. ‘Risk Heroes’ 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.
Insurance risk is the risk of loss due to fluctuations in the timings, amount, frequency and severity of an insured event relative to the expectations at the time of underwriting.
Changes to the Ogden discount rate have led to uncertainty in pricing and reserving. To help mitigate this, underwriting guidelines are set for all transacted business and pricing is refined by analysing comprehensive data. We invest in enhanced external data to analyse and mitigate our exposures and we set our reserves using the latest internal and external data and trends.
Market risk is the risk of loss resulting from fluctuations in the level and in the volatility of market prices of assets, liabilities and financial instruments.
To address this, we have an investment strategy which is approved by the Board and includes limiting exposure to individual asset classes and the amount of illiquid investments we hold. We also use risk reduction techniques such as hedging foreign currency exposures with forward contracts.
Operational risk is the risk of loss due to inadequate or failed internal processes or systems, human error or from external events.
Our approach is proactively to manage our operational risks to mitigate potential customer detriment, regulatory or legal censure, financial and reputational impacts.
We have in place appropriate 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 occurrences that could disrupt business operations.
Operational risk (continued) We have a mature process in place designed to enable us to maintain the right number of capable and engaged people, supported by activities that cultivate a positive culture through robust employment practices. Alongside this, we operate a strong procurement and supply chain framework for the sourcing, appointment and ongoing management of our suppliers and outsource providers.
Regulatory and conduct risk describes the risks arising out of breaches of and/or changes to law, regulatory rules, policy or interpretation, or to supervisory expectations or approach that have an adverse operational and financial impact as a result of reputational damage, regulatory or legal censure, fines or prosecutions, and any other type of non-budgeted operational risk losses, associated with our conduct and activities.
We maintain a constructive and open relationship with our regulators and have a culture of delivering on our commitments to our customers (see pages 61 to 62).
The issue of pricing practices within the general insurance market continues to be a focus of the FCA and it’s an issue to which we have devoted a lot of attention. Our conduct risk management framework is designed to deliver fair outcomes to customers and minimise our risk exposure. It is supported by a set of conduct pricing principles to enable the fair pricing of business across our book. We continue to develop our approach to seek to anticipate developments and to ensure that we can continue to provide good outcomes for our customers.
Credit risk is the risk of loss resulting from defaults in obligations due and/or changes in credit standing of either issuers of securities, counterparties or any debtors to which the Group is exposed.
Strategic risk is the risk of direct or indirect adverse effects resulting from strategies not being optimally chosen, implemented or adapted to changing conditions.
Strategic risk is influenced by external developments such as Brexit and motor market conditions. To manage our risks, we have taken the following steps: – we agree, monitor and manage performance against the Board-approved 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
Crisis management The Group has also been focusing on Brexit from a potential crisis management perspective, with the objective of maintaining operational resilience in the event of a disruptive Brexit and with a view to being able to react better to events as they unfold, including during and following the implementation period.
Emerging risks We define emerging risks as newly developing risks that are often difficult to quantify but may materially affect our business. Emerging risks are usually highly uncertain risks which are external to the Group and we take a proactive approach to the emerging risk management processes, with the objective of enabling us to: – identify, manage and monitor a broad range of potential emerging risks; and
– mitigate the impact of emerging risks which could impact the delivery of the Plan.
– Increased operating costs due to the potential increase in carbon costs and regulatory requirements are also likely to impact all participants in the industry. The Group monitors its own impact on the climate and has an established environmental management programme.
Technological developments change consumer needs for insurance In the near term, we expect data to emerge as a key area of innovation, as insurers learn to access and use new sources of customer data to improve their understanding of risk and improve customer journeys. We expect a greater focus on transparency and fairness and developments in new car technology, particularly automated driving and electric vehicles, are likely to be a new area for us to understand and compete in. We also expect price comparison websites to use digital technology and data to continue to build their role with customers. These changes could significantly affect the size and nature of the insurance market and the role of insurers. Our strategy is designed to help us transform our business and deliver insurance our customers want and need in the future.
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.
Our success comes from a breadth of expertise and relationships forged over many years. It rests on understanding the needs of the numerous individuals and organisations we interact with and how to respond
How we act as a sustainable and responsible business is critical because we believe it will make us more commercially successful in the long term.
This year we’ve taken time to evaluate what really matters to our stakeholders. We’ve done this to understand what they value, the business impact it has on the Group and how we can use this insight to build a sustainable business for the future.
With this insight a business impact assessment was conducted where a robust assessment of risks, impacts and opportunities was considered and a significance rating was assigned for each topic.
Taking a broader look at our matrix overleaf and at what our stakeholders told us, shows there are four important themes for the Group. These are: – Meeting customer needs each and every day – Investing in and supporting our great people – Realising the potential of data and technology – Understanding and managing the impact of climate change
Our sustainability pillars to those needs. It also requires an open mind that forming new relationships and developing ways of doing things can improve how we operate.
Governance Look to the long term for our stakeholders, build a reputation for high standards of business conduct and a sustainable business.
The Directors of Direct Line Insurance Group plc have acted in accordance with their duties codified in law, which include their duty to act in the way in which they consider, 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 the stakeholders and matters set out in section 172(1) of the Companies Act 2006.
Earn our customers’ trust by demonstrating how we are acting in their best interests.
Customer Experience Pillars Customer experience is at the heart of everything we do, and it is the central element that connects all our people regardless of role. This year we sent out over 1.5 million requests for customer feedback about their experiences with our brands. Our Executive Committee also attended a customer closeness workshop to hear first hand about what customers value and what they expect from us.
As a result we’ve developed our Customer Experience Pillars which provide a framework for the high-quality products and services we design and deliver for our customers. Using this customer framework, we hope to live our purpose of helping people carry on with their lives, giving them peace of mind now and in the future.
Feedback from our Customer Stories “Direct Line has delivered, I want peace of mind and I’ve got that. With Direct Line I’ve got the trust.” – Debbie
“They set really clear boundaries, they did what I would expect them to do.” – Charlotte
– We have named Executives in place responsible for Group pricing.
We are proud of our culture where we always aim to do the right thing by our customers. Given our internal focus on mental health our customer consultants told us they wanted to do more to support vulnerable customers who were finding it difficult to cope either because of their specific circumstances relating to their claim or in many cases because of personal issues. We have responded this year by testing an initiative aimed at assisting vulnerable customers. Some Claims colleagues have given Direct Line customers the option of a referral to Health Assured where they identify potential vulnerability during the conversation at the initial notification of loss. This will enable those customers who are struggling to receive the necessary support, through trained counsellors and a network of support organisations.
We recognise that customers sometimes need specialist support when experiencing difficult circumstances. We are proud of our new bereavement team who have undertaken specialist training to help customers during difficult circumstances. Those who have suffered a bereavement now have all of their queries dealt with in one place, while being supported through the process by our consultants who are experienced with the sensitive nature of these conversations.
“Pauline was extremely helpful and empathetic with my situation and ensured that the reason for my call was dealt with efficiently and completely, cannot commend her highly enough, please pass on my thanks.”
“Very polite, courteous and professional during a very emotional time for me.”
We know customers value digital self-service which is why we have invested in new capability to give customers easier access to their documents making the whole journey simpler. We are providing greater product choice and flexibility at more accurate prices, achievable through our capacity to quickly adapt to market conditions and opportunities.
Behind the scenes we are transforming our processes, including policy administration and our claims system, making them more efficient so our consultants can focus on what matters most for customers.
“It was an honour to be one of the first consultants to use our new motor insurance platform which will transform our customers’ experience.” – Mary-Anne Hunter, Consultant, Customer Operations
Employee Representative Body Our Employee Representative Body is comprised of elected representatives from across our business who are consulted on matters related to business strategy as well as future change programmes. The Employee Representative Body are a platform through which colleagues can share ideas and feedback progress.
Dialogue Our engaged workforce reflects this with 88% of employees taking part in our employee opinion survey. This year 91% of respondents reported that they are proud to work for the Group, and we have retained the same high levels of employees reporting that they would tell others that Direct Line Group is a great place to work, at 85%. As of October 2019, our gross staff turnover rate was 17%.
Our senior leadership team all have diversity and inclusion plans linked to their remuneration which helps support the promotion of diversity across the business.
Mental health We are determined to tackle the stigma associated with mental health, supporting everyone to be open about how they feel in and out of work. We have trained every people manager on dealing with mental health issues and have mental health first aiders on every floor of every site. This year we held our second mental health first aiders conference in Leeds with our remarkable people sharing learnings and best practice. Externally, we continue our partnerships with Mind, This Can Happen and supporting the Where’s Your Head At campaign. We have also signed the One Mind at Work Charter which aims to develop and implement a gold standard for workplace mental health and wellbeing.
Employee share incentive scheme Nearly 80% of our people have shares in the company. All colleagues can benefit from the Group’s Buy As You Earn share scheme where a free top up share is awarded for every two shares purchased. The Group’s schemes are equivalent to an Employee Stock Purchase Plan and Employee Stock Ownership Plan in the US. Our 2019 performance saw colleagues receive £500 of free shares each. This builds on the four other free share awards the
Group has issued since IPO which were worth approximately £1,400 (approximately £2,100 if all dividends had been reinvested) at 31 December 2019.
Annual Incentive Plan Through our purpose of giving customers peace of mind now and in the future, the Group’s Customer Experience agenda focuses on making the customer’s journey as easy as possible whether they are taking out cover or making a claim. This is delivered through our people, and the Annual Incentive Plan ensures there is a strong link between pay and the Group’s performance on these specific metrics. Our people are judged on their delivery for customers and awarded accordingly, as we know that a good experience will result in our customers valuing the service and security that our products offer and come back to us every year. Through regular engagement with our people we are closely tuned into the feedback we receive, and adapt our offering to align with it.
In many areas our employment policies and practices exceed those in the Universal Declaration of Human Rights. We have a vibrant wellbeing strategy which includes leading family related policies, and our diversity and inclusion practices are in line with the Universal Declaration of Human Rights. It is important to us that our people are fairly rewarded and our starting salaries are above those suggested by the Living Wage Foundation.
Age range of employees 64 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
We’re delighted that our first cohort of graduates have completed our three-year programme and most have taken permanent roles within the business. The programme goes from strength to strength with over 80 graduates rotating across a variety of roles within the business. We also have over 220 apprentices developing technical expertise across various functions, while studying for vocational qualifications with over 160 apprentices having completed their programmes.
Through the StreetWise consortium the Group has been working with FiveAI and TRL to trial autonomous vehicles on the streets of Bromley and Croydon. By testing the technology, analysing its performance in a complex environment with other road users and assessing passenger feedback we are gaining unique insight that will help to develop insurance solutions for new tech enabled mobility services.
The trials which took place throughout Autumn 2019 demonstrated how technology can be used to build a compelling automated, shared mobility solution that offers an alternative to the urban commuter and helps to reduce accident rates and lowers emissions.
Road safety As a leading motor insurer, we see first hand the devastation that car accidents bring to those involved. That’s why we make it our business to utilise our knowledge and experience with the aim of making the UK’s roads safer for drivers and pedestrians alike. We do this through identifying issues to focus on and working with expert organisations to campaign for change.
Seat belt campaign This year we worked with the Parliamentary Advisory Council for Transport Safety to conduct an analysis of seat belt wearing in the UK following the high number of deaths and serious injury among those not wearing seat belts. Through better enforcement, education and data collection there is the potential to increase seat belt wearing and ultimately reduce those numbers. Our aim is for the introduction of three penalty points for those flouting the law to form part of the Government’s road safety plans.
Brake As our partnership with the road safety charity Brake, continued this year, we have produced a series of reports analysing drivers’ attitudes and behaviour towards speed as well as considering the value that drivers place on advanced driver assistance systems. We have also worked to increase awareness of campaigns aiming to make our roads safer and Brake’s annual parliamentary reception celebrated the work of supporters and campaigners on road safety issues.
Community investment programme We know that participating in fundraising and volunteering is linked to higher engagement levels amongst our people. That’s why every one of our people can volunteer for ‘One Day’ during company time, with a charity of their choice and we run a network of Community and Social Committees across all of our sites. The Community and Social Committees receive central funding and support so they can enable our people to get involved in national appeals and create a bespoke programme of events, activities and fundraising to support the things that matter to everyone across the business.
Sprintathon This year’s Sprintathon took the form of a North versus South competition where colleagues from our Leeds offices and those based in Bromley competed in simultaneous sprint marathons to raise the largest amount of money for charities Stand Up To Cancer and Mind. Through this extraordinary group effort, in which over 600 of our people participated, more than £104,000 was raised. With so many people affected by cancer and mental health issues, Sprintathon brings together colleagues from across the business to fight for these significant causes.
Million Makers Direct Line for Business raised funds for The Prince’s Trust as part of their Million Makers competition, which sees a number of businesses aim to raise £1 million to support young people in difficult situations.
Apprenticeships A shortage of skills in the Body Repair Industry is making it increasingly difficult to attract young talent, impacting the sector as a whole. The Group has worked with the British Standards Institution and Thatcham to establish ways to support smaller body shops and repair centres who do not qualify for the apprenticeship levy. This year we’ve funded 33 new apprenticeships in our external network benefiting the industry and our business.
Suppliers The Group is a long-standing signatory of the Prompt Payment Code which focuses on the requirement to ensure fair payment terms for our suppliers and partners. We acknowledge the importance of maintaining the highest standards of ethical conduct and behaviour in our business practices. We engage regularly with stakeholders to continue to refine and develop the processes that ensure compliance to our regulatory, legislative and social responsibilities.
Fundamentally we believe that embracing sustainable practices leads to a better corporate culture, more reliable products and greater long-term profitability. We have long been conscious of our impact on the planet and have recently embedded the five sustainability pillars into the heart of our business strategy.
These results are submitted, as part of the Group’s Own Risk and Solvency Assessment (“ORSA”), to the Risk Management Committee, the Board Risk Committee and the Board.
We are committed to playing our part in helping the UK become a sustainable, low carbon economy. Our ambition is to set a challenging but realistic target to be carbon neutral as a business. As part of our journey we aim to be TCFD compliant by the end of 2020 and drive change across the business by using technology, changing behaviours and maximising our investment power as a framework.
We are already making active choices in these three areas in order to reduce our carbon footprint.
Protect our business from the impact of climate change and give back more to the planet than we take out.
Technology is enabling the Group to maximise the opportunities to manage our environmental impact.
– Cars of the future: We are enhancing our understanding of electric vehicle adoption, including pricing risk, rescue products and our repair process. We have also invested in partnerships such as StreetWise and Move_UK to understand how autonomous vehicles and car sharing could reduce the number of vehicles on UK roads.
See page 58 2.1 million pages of A4 saved in 2019
– Investing in our estate: We’ve continued to invest in our estate with new energy efficient boilers, LED lights, chillers and air conditioning units delivered across a range of sites.
– Green incentives: We have negotiated a catering contract offering a discount for colleagues who bring their own reusable cups saving nearly 14,000 disposable cups.
We actively choose what we invest in and our objective in 2019 was to ensure that our holdings in investment grade corporate bonds were tilted more towards companies with better ESG credentials. We delivered this by changing most portfolios to Bloomberg/MSCI ESG weighted benchmark indices and adding a new investment objective to all relevant guidelines, namely to achieve a minimum MSCI ESG rating of ‘A’ for the portfolio.
Our portfolio at a glance: – At the end of 2019 100% of the investment-grade corporate bond portfolios had an average ESG rating of ‘A’. This represents 87% of the credit investments in the portfolio and 62% of our total investment portfolio.
– We hold a similar size commercial property portfolio. All assets in the portfolio must have an energy efficiency certificate of D or better which is one level above the government mandated level of E, or a plan and funds in place for achieving that level.
Metrics and targets As part of our TCFD implementation plan we are developing our approach to reporting metrics and targets. This will include a challenging but realistic carbon neutral target for the business, alongside a long-term reporting framework, enabling us to track our performance against our sustainability strategy, as well as the financial impact of climate change-related risks and opportunities.
– As close to 100% of total waste being recycled or recovered for energy use.
– Electricity: Since 2014 we have sourced 100% of our electricity from renewable sources.
The Group has participated in the PRA’s 2019 insurance stress test which considered the impact of climate change on our business based on three hypothetical climate change scenarios: – A rapid disorderly transition to a low carbon economy
– A lack of action leading to warming in excess of 4°C by the end of the century
The exercise included the consideration of impacts to both liabilities (physical risk only) and investments (physical and transition risk) and the PRA specified high level assumptions for each scenario.
The next stage is for us to adapt these scenarios to match better to our own risk profile and use that as a basis for future climate change risk analysis, followed by the development of our own bespoke scenarios.
Within this, the risk management process is a key element in the development and ongoing maintenance of an accurate risk profile. The objective of the risk management process is to identify, assess, manage and monitor the risks that the directorate is exposed to.
Directorates are expected to follow the requirements set out in all applicable risk policies and minimum standards and report any notable control weaknesses in the Internal Risk and Control Assessment process.
This has the effect of embedding the management of climate-related risks in normal processes for managing risks across our risk profile. Each directorate is required to have a clear understanding of Group risk appetite and how it cascades to their directorate, the risks that they are exposed to and the potential impacts of these risks.
We have defined the following time horizons for climaterelated issues: – Short (1 to 5 years) – Medium (5 to 10 years) – Long (10 years+)
of total waste recycled 70 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
– We comply with the Companies Act 2006 (Strategic and Directors’ Report) Regulations 2013 and apply the GHG Protocol Corporate Accounting and Reporting Standard (revised edition) which includes emissions associated with electricity consumption using both the Locationbased Scope 2 and Market-based Scope 2 calculation methodologies.
– We also continue to engage with the Carbon Disclosure Project (CDP) and received a ‘B’ rating for 2019.
– We also monitor the intensity metric of emissions per £ million of net earned premium and in 2019 this improved to 4.7 down from 5.4 for 2018. This is a measure of how efficiently insurance products are provided and allows us to compare our performance year-on-year and against other insurance companies.
Scope 3 (T&D losses from electricity, commuting, paper, business travel & waste)8
2. 2013 baseline has been calculated using the Scope 2 Location-based methodology. 3. Historical Scope 1 direct emissions have been restated to include emmissions from leased vehicle mileage previously excluded. 4. Historical Scope 2 indirect emissions differ from previously reported figures as Scope 2 results have been recalculated to reflect the Group’s purchase of low carbon electricity. The Group procures its energy under Green Tariff or Renewable Energy Guarantees or Origin scheme. The Renewable Energy Guarantees of Origin purchased are 100% renewable and therefore electricity consumption is calculated as zero carbon.
5. Scope 2 Location-based methodology is used for year-on-year comparisons. 6. We disclose emissions associated with electricity consumption using both Scope 2 Location-based and Scope 2 Market-based methodologies. All total calculations follow GHG protocol.
Note: 1. The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016, SI 2016 No 1245.
In October 2019, the Group received an A rating highlighting our Corporate Governance as a strength in the Company’s performance.
External ratings Our performance is assessed externally by Environmental, Social, Governance (ESG) rating agencies where we score highly.
– Our business model, pages 24 to 25 – Non-financial key performance indicators page 27 – Principal risks and impact on business activity, pages 54 to 55 – The Company’s employees, pages 63 to 65 and page 102
– Social matters, pages 66 to 67 and page 103 – Environmental matters, pages 68 to 71 and page 104 – Anti-bribery and anti-corruption, page 99 – Human rights, pages 64 and 103
Statement of the Directors in respect of the Strategic report The Board reviewed and approved the Strategic report on pages 1 to 73 on 2 March 2020.
– YouMe.Car has launched a Car Share scheme where a customer accesses a brand new car at minimal cost and then shares the vehicle between a selfselected community of friends and neighbours who can hire the car via an app and pay for the number of hours hired.
Providing the insurance for these two exciting partnerships enables us to learn more about car ownership models and what consumers want and need.
More information about the activities of each of the Committees can be found in the Committees’ reports on pages 93 to 109
The Nomination and Governance Committee monitors developments in governance and investor ESG expectations, as well as being responsible for Board succession planning.
Sustainability is at the heart of how we think about our business. We have always been conscious of our broader role in society, including improving road safety, creating an inclusive environment that encourages diversity of experience and background, and giving something back to our local communities. Further information on our sustainable business model can be found in the Strategic report.
I would like to thank you for your support and look forward to discussing the Group’s progress with you at our forthcoming AGM on 14 May 2020.
Communication with our shareholders and other stakeholders is extremely important to us. By maintaining dialogue with you we aim to ensure that your views are considered and our objectives are understood.
Committees at least every three years. In 2019, Robert Goffee, Professor of Organisational Behaviour at the London Business School, facilitated the Board and its Committees’ effectiveness review. The review focused on the Board’s role and composition; the relevance, flow and quality of information, and the NEDs’ balance of knowledge, skills and expertise.
Further details on the proposed changes to the Directors’ Remuneration Policy and the work of the Remuneration Committee can be found in the Directors’ remuneration report which begins on page 106.
Build sustainable outcomes not processes. Think commercially and choose the right path for our customers, our people and wider stakeholders.
Own our success by getting things done. Take the initiative and be accountable. Be curious and own your development and performance.
Diversity delivers better outcomes. Be the real you and celebrate difference. Respect others, have fun and make this a great place to be.
the 2019 AGM and Mike Holliday-Williams, who served as Managing Director, Personal Lines, stepped down as a Director on 30 June 2019.
On 16 September 2019, we announced the appointment of Tim Harris, who joined the Board as CFO on 1 October 2019. Further information on the process culminating in Tim’s appointment can be found in the Nomination and Governance Committee report on page 100.
Current external appointments Penny is a member of the Association of British Insurers Board.
Biography Mark is Chair of the Investment Committee. The Board benefits from his previous extensive experience and knowledge of the financial services sector, particularly in life and general insurance, gained through his roles at Legal & General. Additionally, he has a detailed understanding of the retail sector and customer service.
Jane spent her early career with KPMG, latterly becoming responsible for delivery of corporate governance, internal audit and risk management consulting services in the north of England. Jane has also held many executive roles, including Director of Audit and Risk and Governance Director at Aviva plc. She has a degree in Music from the University of York and is a Fellow of the Institute of Chartered Accountants in England and Wales. Jane is also a Magistrate.
Biography The Board benefits from Fiona’s profound knowledge of the financial services industry and her previous extensive experience as both a business leader and an auditor makes her well suited to her role as a member of the Audit and Board Risk Committees.
Current external appointments Fiona is Chair of Scottish Mortgage Investment Trust plc and a NED of Dixons Carphone plc. She is also a NED of Monzo Bank Limited.
Biography Richard is the SID. Richard’s previous experience as a Chief Executive, a NED and a Chairman makes him well suited to the role of SID of the Company. The Board benefits from his experience in the insurance industry and his insight into prudential regulation.
Current external appointments Richard is Executive Chairman of Specialty at the Ardonagh Group.
Experience and qualifications Mark 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.
Mark is a member of Save the Children’s Digital Advisory Board and also a Fellow of the Marketing Society.
Experience and qualifications 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.
Jonathan was previously Managing Director of the Group’s household and life businesses. He joined the Group as Product and Pricing Director for UK Partnerships. Before joining the Group, Jonathan held roles at HBOS, MBNA and Pinnacle.
Experience and qualifications Neil has worked in a number of roles within the Group, including Deputy CFO, Managing Director of NIG and Director of Investor Relations. He is now responsible for leading the Group’s corporate strategy.
Neil has extensive industry and capital markets experience prior to joining the Group having worked in roles at Brit Insurance, Merrill Lynch and Fox-Pitt, Kelton. He qualified as a Chartered Accountant with Ernst & Young (now EY) and is an Associate of the Institute of Chartered Accountants in England and Wales.
Experience and qualifications Kate is responsible for delivering the strategy and developing products for the Group’s Home, Pet, Travel, Life and Private Businesses as well as leading the Partnerships and Data divisions. Kate has 20 years’ experience of the insurance industry and is Chair of the Group’s Diversity Network Alliance.
Experience and qualifications José has over 25 years’ experience of the insurance industry. He is responsible for the Group’s Risk Management and Compliance function and is a Fellow of the Institute of Actuaries.
Experience and qualifications Gus is responsible for leading the Group’s personal motor business across all brands, as well as the Pricing and Underwriting function across all consumer products.
Gus has over 25 years’ experience in a wide range of sectors and roles, having started his career as a civil servant for the Home Office. After this he moved into strategy consulting for the Boston Consulting Group and then into retail banking for Bradford & Bingley.
The Board The Board receives regular updates on the views of the Company’s shareholders from the Group’s brokers and directly from institutional shareholder meetings with senior executives and the Chairman. The Board has regard to the interests of a range of stakeholders including customers, employees and suppliers when agreeing the Group’s strategic and financial plans and in all other decision-making. Illustrations of the breadth and depth of the Board’s regard to stakeholders interests are contained in the Sustainability section of the Annual Report on pages 59 to 71.
Biographical details of the Directors of the Company as at the date of this report are set out on pages 76 to 78.
This report explains the Board’s role and activities, and how corporate governance operates throughout the Group.
2. Due to other prior commitments, Paul Geddes was unable to attend the March 2019 Corporate Responsibility Committee meeting and Clare Thompson was unable to attend the April 2019 Audit Committee meeting. Due to illness, Richard Ward was unable to attend the January 2019 Board meeting. Papers were circulated to all Directors before the meetings and those unable to attend could raise issues and give comments to the Chairman in advance of the meetings.
Structure of the Board, Board Committees and executive management Pages 83 and 84 summarise the role of the Board, its Committees and the responsibilities of the Chairman, the SID, the NEDs, the Executive Directors and the Executive Committee. The Board and Board Committees have unrestricted access to management and external advisers to help discharge their responsibilities. The Board and Board Committees are satisfied that, in 2019, sufficient, reliable and timely information was received to perform their responsibilities effectively. Each Committee plays a vital role in helping the Board to operate efficiently and consider matters appropriately.
Board Board Committees Leadership The Board has clear divisions of responsibility and seeks the long-term sustainable success of the Group. Information on how opportunities and risks to the future success of the business have been considered and addressed, and about the sustainability of the Company’s business model, is set out in the Strategic report which begins on page 1.
Culture The Board develops and promotes the collective vision of the Group’s purpose, culture, values and behaviours.
The Audit Committee: – Monitors the integrity of the Group’s financial statements – Oversees and challenges the effectiveness of the Group’s systems of financial and other controls – Monitors the work and effectiveness of the Group’s internal and external auditors and actuaries – Oversees the Group’s financial and non-financial disclosures, including any climate-related financial disclosures
The Board Risk Committee: – Provides oversight and advice to the Board in relation to current and emerging risk exposures of the Group and the future risk strategy, including determination of risk appetite and tolerance
– Oversees all aspects of financial, regulatory and operational risk, including the long-term risk to the Group of climate change
– Reviews workforce remuneration and related policies and the alignment of incentives and rewards with culture
The Nomination and Governance Committee: – Reviews the Board’s structure, size, composition, and balance
– Ensures plans are in place for orderly succession to both the Board and, oversees executive succession planning at a high level to ensure the development of a diverse senior management talent pipeline
– Oversees and monitors the corporate governance framework of the Group
The Corporate Responsibility Committee: – Provides oversight and advice on how the Group conducts its business responsibly, including matters relating to the environment, employee engagement and wellbeing, community involvement, ethics and diversity
The Investment Committee: – Provides oversight of the Group’s investment strategy – Oversees the management and performance of the Group’s investment portfolio
The Chairman – Guides, develops and leads the Board – Plans and manages the
The SID – Acts as a sounding board for the Chairman and an intermediary for the other Directors when necessary
– Is available to shareholders if they have any concerns they cannot resolve through normal channels
Executive Directors The CEO and CFO are the members of the Board with delegated responsibility for the day-to-day operation of the Group and delivering its strategy. The CEO delegates certain elements of her authority to Executive Committee members to help ensure that senior executives are accountable and responsible for managing their business and functions.
Board meetings and activity in 2019 The activities undertaken by the Board in 2019 were intended to help promote the long-term success of the Company. Scheduled Board meetings (set out on the timeline on pages 86 and 87) focused on four main themes: Strategy and execution, including: 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.
Financial performance and investor relations, including: setting financial plans, annual budgets and key performance indicators, and monitoring the Group’s results against them; considering the Group’s reserving position; approving the Solvency II narrative reports; approving financial results for publication; approving main reinsurance arrangements and motor reinsurance renewals; considering the Group’s share buyback programme announced on 3 March 2020; and reviewing broker reports on the Group, alongside feedback from investor meetings.
Risk management, regulatory and other related governance, including: reviewing and agreeing the Group’s Policies; setting risk appetites; approving the ORSA; reviewing the Group’s Solvency II partial internal model; seeking to ensure that the Group complies with its regulatory requirements; reviewing the Group’s solvency position and forecast; and reviewing the Group’s ESG initiatives.
Board and Board Committee governance, including: receiving reports from the Board’s Committees; updating the Schedule of Matters Reserved for the Board; updating terms of reference for the Board Committees; receiving corporate governance updates; succession planning; implementing an annual review of the Board’s and Board Committees’ effectiveness; approving the Company’s Code of Business Conduct and conducting an annual review of the Group’s governance framework.
In addition to routine business, the Board sets aside time each year outside the annual Board calendar to hold a strategy day giving the Directors the opportunity to focus solely on strategic matters. In June 2019, the Board held a session offsite 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 evolution of the insurance industry.
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. Tim Harris, who joined the Board as CFO in October 2019, completed his induction programme following his appointment. Tim’s induction included meetings with Board members and members of senior management and visits to the Group’s operations to gain a more detailed understanding of our businesses.
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 Chairman identify and organise training for the Directors which is tailored to individual needs.
The Company Secretary maintained the training agenda for the Board and its Committees during the year. Training topics during the year included competition law, the senior managers and certification regime, the IT transformation programme, data privacy, cyber and operational resilience and the Internal Economic Capital Model.
Board and Committee effectiveness review In accordance with the Code, the Board conducts a thorough annual review of the effectiveness of the performance of the Board, its committees, the Chairman and individual Directors, with the input of an external facilitator at least once every three years. In 2019, the Nomination and Governance Committee recommended that an independent Board effectiveness review be facilitated by Robert Goffee, Professor of Organisational Behaviour at the London Business School, who has no other connection with the Company or any Director. Professor Goffee, who also conducted the Board and committee effectiveness review in 2016, agreed the process with the Chairman and the Company Secretary.
Professor Goffee conducted one-to-one interviews with Board members and regular attendees to discuss their views on the effectiveness of the Board and its six committees, and the contributions to proceedings made by Directors and others, to provide wider context for, and clarification of the results of, the questionnaire.
The final report was presented to the Board and its committees in January 2020. Observations about individual Directors’ contributions assisted the Chairman in his reviews of Directors’ performance and the SID in the review of the Chairman’s performance, on which he consulted in advance with other Board members.
Based on the responses to the questionnaire and resulting reports, the Directors are satisfied that the Board and its committees operated effectively in 2019 and there has been progress in areas for potential improvement identified in 2018.
The Board and its committees were regarded by participants in the review to benefit from effective leadership and to have clear remits and access to appropriate resources. Opportunities were identified, as a result of the review, for fine-tuning the information provided to the Board, refining the NED induction programme, refocusing the Corporate Responsibility Committee’s supervision of the increasingly important sustainability agenda and drawing on individual NEDs’
The Nomination and Governance Committee regularly considers the Group’s short- and medium-term strategic challenges to assess the collective skills and experience needed by the Board to support and challenge management. Some suggestions for further strengthening the membership of some of the Board’s committees were made in the course of the 2019 effectiveness review and these will be taken into account as the Board’s composition is refreshed in 2020 and 2021.
Culture 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 and updating the Code of Business Conduct to ensure that it reflects the Group’s purpose and sustainability strategy.
– Investing in and rewarding our workforce. During the year, we continued to review our pay budget focusing specifically on those in lower paid roles. We increased
– Supporting the Strategic Leadership Development Programme, the aim of which is to create a pipeline of diverse talent for development into future senior leaders.
2. Engaging executive search firms who have signed up to the Voluntary Code of Conduct for Executive Search Firms on gender diversity and best practice In its search for candidates, the Board aims to only engage with executive search firms who are signatories to the Voluntary Code of Conduct for Executive Search Firms as recommended by Lord Davies.
Senior management 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.
The Group is a signatory to the Women in Finance Charter which aspires to see gender balance at all levels across financial services firms. The Group aimed to increase female representation at senior management level to 30% by the end of the year and as at 31 December 2019, 31% of the Group’s senior leadership positions were held by women.
Additional 2019 diversity initiatives The Board acknowledges that diversity includes but is not limited to gender and aims to increase demographic and philosophical differences at Board level and throughout the Group.
The Board has oversight of diversity initiatives carried out through the remit of the Corporate Responsibility Committee. Further details on diversity initiatives can be found in the Strategic report and in the Corporate Responsibility Committee report.
Examples of stakeholder matters to which the directors have had regard and, where relevant, the effect of their considerations on principal decisions taken by the Board and the Company during 2019 are set out in the table below.
Our Shareholders The Board believes that engagement with the Company’s shareholders is vital to the Group’s success. The Board engages with investors to communicate its strategy, provide updates on performance and receive regular feedback.
– The Board continues to engage with our investors and private shareholders through reports, announcements and presentations available on our corporate website. The AGM provides the Board with the opportunity to receive valuable feedback and understand the views of all shareholders.
– Our Executive Directors host conference calls for analysts following announcements of the Company’s results. In 2019, the Chairman met some of the Company’s major shareholders to discuss their views on the Group’s governance arrangements and performance against the Company’s strategy. The Chair of the Remuneration Committee consulted with our major shareholders and governance analysts on our proposed Directors’ remuneration policy, further details of which are on pages 107, 128-133 and 137.
– The Capital Markets Day in November 2019 championed our customer centricity and enabled investors and analysts to see how investments in technology and staff training are supporting our customer experience.
Board’s engagement with the workforce. During the year, the Board continued to engage with our formal workforce advisory panel, the ERB, with NEDs attending sessions on a rotational basis. Throughout 2019, topics discussed at ERB meetings included the possible effects of Brexit, customer experience, the regulatory landscape and updates on the CEO and CFO selection processes. In April 2019, members of the Board, the strategic leadership team and approximately 180 ERB representatives from across the business attended the ERB’s annual conference. At the conference, ERB representatives were given business updates by members of the Executive Committee and had the opportunity to voice their opinions. NEDs attending the conference engaged with employees and shared output from the event with the Board.
– NEDs also visited the Group’s operations in Doncaster, India, Glasgow and other sites, meeting colleagues in a number of functions including IT transformation, security operations, sales and claims.
– Each year, the Board reviews and approves the Group’s Code of Business Conduct, which provides guidance to our people on the high standards of professional and ethical conduct expected of them.
Our Society The Board is conscious of the Group’s wider role in society and of the importance of supporting the local communities on which our business depends.
– The Group continues to engage with important road safety partners including, road safety charity Brake and the Parliamentary Advisory Council for Transport Safety. Further information on how we improve outcomes for society and the communities we serve can be found on pages 66 and 67.
– The Group is conscious of the risks and opportunities of climate change, including the impact of the business on the environment and potential risks to the business from climate change. This Annual Report contains disclosures which aim to comply with the recommendations of the TCFD by the end of 2020. During the year, the CRO was appointed as the Senior Management Function-holder with responsibility for the Our Planet pillar of the Group’s sustainability strategy.
– The Group publishes its energy and carbon emissions reduction targets and encourages employees to participate in initiatives aimed at reducing the impact of the business on the environment, including travel-free weeks and recycling programmes.
Governance framework and structure The Board oversees the system of governance in operation throughout the Group. This includes a robust system of internal controls and a sound risk management framework. The Board has established a risk management model that separates the Group’s risk management responsibilities into three lines of defence. An explanation of these responsibilities can be found on page 52.
– Minimum Standards, which interpret the Group policies into a set of requirements that can be implemented throughout the Group.
The Group operates a Three Lines of Defence model. You can find out more about this in the Risk management section on page 52.
The Group Audit function supports the Board by providing an independent and objective assurance of the adequacy and effectiveness of the Group’s controls. It brings a systematic and disciplined approach to evaluating and improving the effectiveness of the Group’s risk management, control and governance frameworks, and processes.
The Committee reviewed the adoption of IFRS 16 ‘Leases’, scrutinising the approach to the recognition and valuation of right-of-use assets and lease liabilities to satisfy itself that the accounting standard had been properly adopted and its effect disclosed in accordance with International Accounting Standards (“IAS”) 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’.
The Committee reviewed the Group’s insurance reserves to obtain assurance that they remained appropriate for discharging expected liabilities. In doing so, the Committee challenged the actuarial best estimate of technical provisions and the prudential margin for IFRS 4, ‘Insurance Contracts’.
All Committee members are members of the Institute of Chartered Accountants in England and Wales, with the exception of the Chair, Gregor Stewart, who is a member of the Institute of Chartered Accountants of Scotland. Each member has recent and relevant financial experience gained in a number of different financial services businesses including insurance, enabling them to contribute diverse expertise to the Committee’s proceedings. 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.
Main activities during the year At each scheduled Committee meeting, the Committee received reports on financial and non-financial reporting, reserves, internal controls and Group Audit, except at the December 2019 meeting, the focus of which was primarily on pre-year-end financial matters.
Financial reporting The Committee considered the integrity of the Group financial statements and all external announcements relating to its financial performance. In 2019, this included the Group’s 2018 Annual Report & Accounts and Solvency and Financial Condition Report and its 2019 Half Year Report.
The Committee followed a review process before recommending the reports to the Board which focused on the choice and application of significant accounting policies, emphasising those requiring a major element of estimation or judgement. The Committee also considered the Financial Reporting Council’s guidance on the Strategic Report and the Companies (Miscellaneous Reporting) Regulations 2018 and discussed the Group’s approach to reporting on matters such as the nonfinancial information statement, section 172 of the Companies Act 2006, the Government’s Green Finance Strategy and the TCFD and the year-end reporting environment.
When considering the 2019 Annual Report & Accounts, the Committee focused on the significant judgements and issues which could be material to the financial statements. These included the matters set out in the table on page 94.
The Committee also considered an appropriate balance between internal and external actuarial review. An external actuarial review of the material risk areas of the insurance reserves was carried out for the Directors of the Company by PricewaterhouseCoopers LLP (“PwC”). The appointment of consultants to provide actuarial reviews of reserves is subject to approval by the Committee.
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 page 94.
In 2019, 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 matched the claims paid. The Committee also obtained insight from an independent actuarial review of the reserves.
In 2019, the Committee considered major accounting estimates and judgements in respect of the valuation of goodwill and intangible assets and was satisfied that the assets did not warrant any impairment with the exception of £1.3 million of capitalised software costs.
In 2019, the Committee considered major accounting estimates and judgements in respect of assets not held at fair value and was satisfied with the carrying value of investments and the basis for their valuation.
Following assessment by the Committee during the year, it concluded that the Group Audit function was effective. The Committee assessed the resources available and those required to complete the Group Audit Plan. In addition, the Committee continued to monitor the completion of actions from the External Quality Assessment undertaken in 2018 by PwC. In line with the recommendations from the Assessment, 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. The Committee approved the Group Audit Charter, which is reviewed annually.
The Company has complied with the provisions of the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014.
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 in December 2019.
During the year, the Committee approved fees of £0.2 million to Deloitte for services unrelated to audit work. The following is a breakdown of fees paid to Deloitte for the year ended 31 December 2019.
Effectiveness of the external audit process and re-appointing Deloitte as External Auditor In 2019, 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
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.
The Committee reviewed and monitored climate-related risk. The Committee examined management’s plan to address the PRA’s expectations in relation to climate change, including: the outputs of the stress testing of potential climate change scenarios to assess the impact on the Group’s risk appetite, liabilities, investments and longer-term strategy; and the implementation of the recommendations made by the TCFD. The Committee identified the CRO as the most appropriate Senior Management Function holder to be allocated responsibility for identifying and managing the financial risks from climate change. Further details on the risks due to climate change faced by the Group can be found on pages 57, 70 and 71.
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, provided outputs of regular risk monitoring and details of specific risk issues. The Committee also received and discussed details of the Group’s current and forward-looking solvency position.
Operational risk Significant progress was made during the period with the delivery of new platforms in the Group’s substantial portfolio of technological transformation programmes. The Committee received updates at each of its meetings on the building, testing and implementation of releases under the programmes, on interdependencies between programmes and on the overall management of the Group’s change portfolio, reviewing and challenging the operational and financial risks and controls and the potential impact on customers, people and the Group’s strategic and financial plan. Each report was accompanied by an update from the Risk function on its assurance activity, which included reviewing and challenging programme plans, testing methodology and performance, and reviewing preparations for implementation. Additional assurance was provided to the Committee by Deloitte, which had been engaged to conduct a number of deep dive reviews over the lifetime of the programme covering a range of programme stages and risks.
The Committee received a report on the risks associated with cloud computing, including operational, technological risk, information security and cyber risk. Having regard to the market for cloud services, the Committee probed concentration risk and considered the Group’s diversification strategy. The Committee obtained assurance from the Group’s Risk function that the risks were being managed within risk appetite. The Committee received updates on the management of information security risk and the close monitoring of the continuously evolving cyber-attack landscape, and noted that all of the Group’s colleagues received cyber security awareness training.
Throughout the year the Committee received reports on the internal model, including independent validation results and the internal model owners’ report. This outlined the scope of the capital model, key outputs, risk drivers, significant parameters, expert judgements and key assumptions. The Committee challenged management on the assumptions in relation to the process for quantifying the risks associated with settling bodily injury claims reserves as a result of reviewing the internal model owners’ report.
The Committee also scrutinised the Group’s cyber underwriting risk strategy before recommending it to the Board for approval and the action taken to mitigate both affirmative and non-affirmative cyber underwriting risk.
Assessment of risk behaviours and attitudes The Committee reviewed the annual Assessment of Risk Behaviours and Attitudes undertaken jointly by the Risk and Group Audit functions, which covered areas including: tone from the top; decision-making; and risk management framework. The Committee discussed the outputs of the assessment, as well as areas for further improvement, seeking to ensure the appropriateness of the actions identified. The Committee also considered the activities of the Risk function in driving a good risk culture across the Group through mechanisms such as training and its internal communications strategy.
Risk governance During the reporting period, with the aim of balancing efficiency and appropriate ownership and oversight, the Committee reviewed the Group’s most significant policies. The Committee reviewed and challenged each of these policies as part of the Group’s Solvency II requirements and recommended them for approval by the Board.
The Committee probed management and was satisfied that the whistleblowing process met the necessary standards and that it was adequately designed, operated effectively and adhered to regulatory requirements. This was supported by Group Audit’s review of the Group’s whistleblowing arrangements during the year which concluded that whistleblowing procedures and controls were fit for purpose and operating effectively.
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.
Annually, the Committee considers an anti-bribery and corruption report, which includes an annual risk assessment of the level of anti-bribery and corruption risk to the Group. The Group’s annual anti-bribery and corruption risk assessment was completed, noting that no allegations or suspicions of bribery or corruption were identified or reported in 2019. Following review and challenge, the Committee was satisfied that the Group’s policies and procedures on anti-bribery and corruption were fit for purpose and that anti-bribery and corruption risks were managed appropriately.
In November 2019, the Company announced Fiona McBain’s appointment as a member of the Risk Committee and Tim Harris’ appointment as a member of the Investment Committee in place of Penny James, who stepped down as a member of the Committee.
As I have said in my Chairman’s Statement, I am approaching the ninth anniversary of my appointment to the Board and I believe that the time is right for the Company to be searching for my successor. Richard Ward, our SID, is leading the process of considering internal and external candidates. The selection of a new Chairman is a matter which will be decided by all your Directors other than myself and any fellow NED(s) who may ask to be considered as a candidate. Jane Hanson will have served nine years as a NED in December 2020. The Committee has launched a search for one or more new NEDs and will make a recommendation to the Board about Jane’s tenure later in 2020.
CFO appointment Following the announcement that the Group’s previous CFO, Penny James, would be appointed as CEO of the Group, the Committee launched the process of identifying her successor. This included reviewing the role profile for the CFO, taking into account the Group’s medium and long-term strategic and cultural leadership requirements and the selection and appointment of external executive search specialists.
The Committee appointed Egon Zehnder, which is a signatory to the Voluntary Code of Conduct for Executive Search Firms and has no other connection to the Company or any director, to lead the search.
The Committee regularly monitors the NEDs’ length of service and the composition of the Board and its Committees to ensure that there remains a suitable balance of skills and experience.
An internal and external search for a new CFO was launched following the selection of Penny James as CEO and resulted in the appointment of Tim Harris with effect from 1 October 2019.
The remit of the Committee was extended during the year to include overseeing and monitoring the Group’s corporate governance arrangements.
Membership, attendance and responsibilities of the Committee, including the outcome of the annual effectiveness review can be found on pages 76 to 79, 82, 83 and 86 100 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
Board effectiveness review In 2019, the Board and its Committees chose to have their annual effectiveness review facilitated by Professor Robert Goffee, who has no other connection to the Company or any Director. Professor Goffee, Professor of Organisational Behaviour at the London Business School, also conducted the Board effectiveness review in 2016.
Further information on the evaluation process, including the outcomes and actions proposed, can be found in the Corporate Governance report on page 86.
Mark Gregory, NED, joined the Board of Merian Global Investors (UK) Limited as CEO in March 2019. Jane Hanson, NED, joined the Board of William Hill plc in July 2019 and Fiona McBain, NED, joined the Board of Monzo Bank Limited in January 2020 . Following a review of their time commitments, the Board was satisfied that Mark’s CEO role and Jane and Fiona’s NED roles do not restrict them from carrying out their duties to the Group effectively and agreed to the appointments.
All current Directors will submit themselves for election or re-election at the Company’s 2020 AGM.
– The Group maintained its “B” rating in the Carbon Disclosure Project. 100% of office waste has been diverted from landfill and all electricity has been procured under the Green tariff or Renewable Energy Guarantees of Origin Scheme, which is 100% renewable.
Our People Throughout 2019, the Committee reviewed management’s initiative to build an inclusive culture through diversity and inclusion and received updates on key diversity and inclusion activities including a recruitment strategy review, further unconscious bias and inclusive leadership training and diversity and inclusion data collection. The Committee was supportive of the collection of personal diversity-related data from colleagues to help management identify and address the Group’s diversityrelated challenges and opportunities. The Committee noted that data collection had improved throughout the year due to ongoing dialogue with colleagues and the incorporation of surveys in to starters’ induction plans.
The Committee monitored management’s evaluation of corporate responsibility matters in the context of ESG reporting to ensure that the Group’s external corporate responsibility position was consistent and appropriate. Throughout 2019, it reviewed key areas including the development of the Group’s sustainability strategy and the results of a benchmarking analysis on external reporting of responsible business activity. The Committee was supportive of the work that had been carried out to address the gaps identified. This included the production of a business impact assessment developed by obtaining the views and expectations of our business and external stakeholders on how they prioritise environmental, social and governance factors. The results of this assessment are illustrated on page 60.
Membership, attendance and responsibilities of the Committee including the outcome of the annual effectiveness review can be found on pages 76 to 79, 82, 83 and 86
The Committee reviewed the moving #ThisIsMe video launched in March 2019 which showcased the essence of the Group’s value ‘Bring All of Yourself to Work’ through stories of insight from colleagues across the Group. These stories are published regularly on the Group’s website at www.directlinegroup.co.uk/en/insights/people.
Our Society During 2019, the Committee monitored how the Group used its expertise to improve outcomes for our society and communities and enabled its people to give something back.
Shotgun, the Group’s corporate responsibility initiative aimed at reducing young driver accidents, has been under redevelopment throughout 2019. The Committee reviewed and challenged progress updates to ensure that the new version of the mobile phone application continues with its aims to reduce young driver accidents and has a measurably positive influence on young drivers’ behaviours on our roads.
The Committee reviewed the results of the employee engagement surveys conducted during the year and was pleased to see that, in October 2019, 86% of colleagues agreed that the Group takes its responsibilities towards the environment and society seriously. However, the Committee is mindful that, as the Group’s sustainability strategy evolves, it is important that management continues to maintain this trend and identifies and focuses on activities that impact positively on society and the environment.
The Committee acknowledges the importance of maintaining the highest standards of ethical conduct and behaviour in our business practice and in the workplace. In December 2019, the Committee examined the content and effectiveness of the Group’s Code of Business Conduct and concluded that it was effective and reflected the Group’s purpose and sustainability strategy and its corporate responsibility position.
Brexit During 2019 the Committee continued to keep under review the economic and financial market implications of the UK leaving the EU and examined how management was positioning investments within the portfolio in the run-up to each of the Brexit deadlines. The Committee’s view was that the positioning and asset holdings within the investment portfolio were proportionate to the need to balance risk and reward across the year. The Committee noted also the likelihood of higher cash balances at the end of 2019 and certain sterling fixed income portfolios having a shorter duration than benchmark reflecting a continuing defensive position within the portfolio prior to the UK General Election in December and the Brexit extension until the end of January 2020. The Committee’s conclusions were reported to the Board during its discussions on the wider implications of Brexit on business operations and the capital position of the Group.
The Committee will now monitor the results from the framework adopted, continue to examine developments and trends within ESG investing and expects to make further adjustments to the framework in the next 1-3 years.
The Committee recognised that it was important to comply with the recommendations made by the TCFD and carry out climate change scenario stress testing. Further information about the Group’s approach to the TCFD can be found on pages 68 to 70.
A review of retail exposure within the Group’s investment property portfolio was undertaken with agreement reached on selling certain properties to reduce overall exposure to the sector.
The Committee monitored the delivery of actions and key milestones, forming part of management’s initiative to reduce costs by transitioning and consolidating certain portfolios with one “core” external manager.
The Group has had a good year and achieved significant progress against our key strategic aims despite the challenges we have faced in the broader external market. Our strategic objective is to turn the Group’s potential into growth through combining our customer-focused philosophy, strong brands and technology transformation and by becoming a simpler, leaner and more agile organisation, all with the aim of establishing the Group as the most successful business in our chosen markets. Therefore, we are committed to being a home for capable people who celebrate difference and challenge the status quo to deliver for our customers. We can only do this by empowering and developing the best people.
I hope that, once you have read the documents, you will vote in favour of the resolutions at the forthcoming AGM.
The report is set out in the following sections: Section Page
– Simplification of the non-financial AIP performance measures to emphasise our short-term strategic areas of focus and the use of a straight-line vesting between AIP threshold and maximum performance.
– Significantly increased shareholding requirements to 250% of salary for the CEO.
– A new post-employment shareholding requirement equal to the shareholding requirement in office (or actual shareholding on departure, if lower) for a period of two years following cessation of employment.
To coincide with the review of the Policy we have also carried out a timely review of the executive share incentive scheme rules. There are two schemes which shareholders have been asked to vote on: The LTIP and the Deferred Annual Incentive Plan (“DAIP”). The main changes being proposed to the plans are to update legislative references and simplify leaver provision wording, (although no substantial changes are proposed).
Remuneration Policy We will be proposing a new Policy to shareholders for approval at the AGM in May 2020. The Policy covers how decisions on Directors’ remuneration will be made, and the remuneration philosophy and strategy which underpin these decisions.
As part of the comprehensive policy review process, a range of remuneration structures were explored fully. The Committee decided to retain the key features of the current policy, enhance some components to achieve further simplicity and increase shareholder alignment whilst reinforcing our strategic priorities. The revised Policy ensures continued regulatory compliance relating to remuneration and reflects evolving good governance practice in many areas. The Committee considers it essential that the policy for Executive Director remuneration reflects the interests of the wider workforce.
The Remuneration Committee is committed to aligning Executive Directors’ pay to the Group’s business strategy and demonstrable success and the interests of our shareholders.
For the 2019 AIP, the Group’s diversified product and channel portfolio, disciplined underwriting and our engaged employees have helped us to achieve a commendable profit before tax result of £509.7 million. The outturn was ahead of the target leading to a pay-out of 69% of maximum for this element. Performance across the Customer measures was particularly strong for the year and the Committee awarded a maximum outturn for this element. The People measures were assessed as being around maximum. The Committee is pleased to report this year that management have made significant progress on the technology transformation and cost reduction agenda on which the Shared objective was measured and awarded an outturn of 70% for this element. Full details on the outcomes for the year are included on pages 114-117. We therefore awarded bonuses of 76% of the maximum to the Executive Directors. In line with the Remuneration Policy, 40% of any AIP award will be deferred for three years under the DAIP.
The 2016 LTIP (awards granted in March and August 2016) vested during 2019 and merited a pay out at 100% of maximum based on strong performance against our RoTE targets over the three-year performance period (2016, 2017 & 2018). 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.
The 2017 LTIP (awards granted in March and August 2017) are due to vest during 2020, subject to the Committee’s satisfaction that the financial and risk underpins have been met at the end of the vesting period.
In calculating this outcome the same downward adjustments have been made to the reported RoTE for 2018 per the 2016 RoTE achievement.
Committee decisions on outcomes As mentioned, this year has been a good one and the overall outcomes for the annual bonus resulted in a payout of £1,004,747 for the CEO and £177,888 for the CFO which the Committee believes is appropriate in the context of the Group’s performance in 2019.
The level of vesting of the LTIP was considered appropriate in the light of the Group’s performance over the three-year performance period. The Committee believes the Policy has delivered an appropriate quantum of reward for the corporate performance achieved. The Committee were therefore satisfied that the Group’s Remuneration Policy had operated as intended.
Your AGM vote The Committee welcomes investor feedback on an ongoing basis and this report seeks to describe and explain our remuneration decisions clearly, and I hope to receive your support for it at the AGM. At this years’ AGM you are being asked to vote on four remuneration-related resolutions: the Directors’ Remuneration Policy, updates to the share incentive schemes (LTIP and DAIP) and the Directors’ Remuneration Report.
Should you have any questions about my Committees’ report or our Remuneration Policy proposals please email our AGM email address shareholderenquiries@directlinegroup.co.uk and I or my team will respond to you.
During 2019, 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 increase of £650 in 2019, bringing the minimum salary across the Group to £19,000 (depending on contractual hours).
We are also delighted that, through our continued focus on building an inclusive organisation, we have improved our female representation in senior jobs to exceed the Women in Finance Charter target of 30% during 2019, and we will continue with the programmes underway to further reduce our gender pay gap. See our 2019 Gender Pay Gap Report for more details at www.directlinegroup. co.uk/2019GenderPayGapReport.
Executive Director changes During the year the Group completed the appointment of Penny James as CEO and the search was completed for a new CFO culminating in Tim Harris’s appointment on 1 October 2019. Details of the remuneration arrangements for Penny on appointment to CEO were disclosed in last year’s report. Full details of Tim’s remuneration can be found on page 124. When assessing the appropriate remuneration for both Penny and Tim, the positions were benchmarked externally as well as with consideration to the remuneration arrangements of the whole workforce. Broadly speaking the elements of the all-employee reward and Director reward are similar and in particular, both Directors’ pension contributions are in line with the wider workforce. The Committee determined that it was appropriate to grant awards to Tim Harris as compensation for awards forfeited from his previous employer. Further details are set out on page 127.
Following a reassessment of the Executive Committee and Board it was agreed the position of Managing Director Personal lines was no longer required and consequently this role was made redundant on 30 June 2019. Mike Holliday-Williams served his notice commencing on 1 July 2019, and found a new external role, which the Committee considered not to be in competition with the Group. Consequently, a redundancy date was agreed and he was by definition a ‘good’ leaver as of 30 September 2019. The Committee did not exercise any discretion with regard to Mike’s share incentive scheme awards.
His LTIP awards will be pro-rated to this date and for any awards granted after the AGM in 2017 will be subject to a two-year post-vesting holding period. In addition, in anticipation of the new Policy, as part of Mike’s redundancy arrangements it was agreed that he will maintain his shareholding requirement for a period of two years from 30 September 2019.
LTIP Shareholding at year-end This chart illustrates the number of shares held at the end of 2019 by the Executive Directors against the share ownership guidelines of 200% of salary.
– The Committee considers a range of factors when determining salaries, including pay increases throughout the Group, individual performance and market data
given his joining date in the latter quarter of the year
– Pension contributions are paid only in respect of base salary
– No change to the maximum opportunity – No change from the weightings or measures used for 2019 – There will be a straight-line vesting between AIP
threshold and maximum performance – Financial measures (55%): Profit before tax – Non-financial measures (45%): People, Customer &
(excluding investment trusts) peer group. Vesting for median TSR performance (threshold) is 20% and for upper quintile TSR performance (maximum) is 100% with straight-line vesting in between these points
Advisers to the Committee The Committee consults with the Chief Executive Officer, the Group Human Resources Director, 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 Chairman, Chief Executive Officer and the Group Human Resources Director 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 operate malus and clawback. The Chair of the Board Risk Committee attended Committee meetings on two occasions. The Remuneration and Board Risk Committees can also hold joint meetings to consider matters of common interest.
4. 2016 LTIP awards RoTE – the expected vesting outcome figures for the RoTE portion of the awards granted under the LTIP in 2016 and reported in 2018 have been updated. These updates are based on the actual vesting of the RoTE portion of the awards and a share price of £3.53 and £2.831 on 29 March 2019 and 30 August 2019 respectively, compared to the three-month average share price of £3.20042 used in reporting this figure in the 2018 report. The revised figures include the actual number of dividends accrued on this portion of the award at vesting. This results in an adjusted reportable increase of approximately £12,167 for Paul and £12,543 for Mike with a corresponding increase of the single figure for 2018 reflected in the table above. Further information on LTIP awards can be found on pages 118-119.
LTIPs vesting by reference to performance conditions met while he was on the Board in 2019. Details of Paul’s salary, pension and benefits paid following his cessation as an Executive Director on 9 May 2019 until the date of his exit on 31 July 2019 can be found on page 122.
Note: 1. The award made to Tim Harris represents a pro-rated amount for the period since joining the Board. 2. The AIP awards made to Paul and Mike represent pro-rated amounts for the period to their departure from the Board.
Financial element (55% weighting) The financial performance measure is profit before tax. The Committee established a target performance level at the start of the year. In the table below, we have disclosed the target set for profit before tax performance.
Mike Holliday-Williams2 76% of maximum £323,695 114 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
Customer element (15% weighting) Customer experience is at the heart of the Group’s strategy and success. As part of our customer strategy, and to ensure that the business strives to achieve a sustained and competitive level of service, the Board sets challenging customercentric KPIs. These are intended to ensure that remuneration is aligned with and supports continuous improvement.
We set ourselves the highest standards for customer service and demonstrate this by assessing our progress in customer outcomes from the views of our customers. The Group has continued to improve on an already strong performance against stretching targets. Our brands performed well (mainly top quartile) across the majority of insurance customer experience benchmarking studies.
Having considered performance against targets and an assessment of the quality of performance achieved, the Committee determined that a maximum outturn for the Customer measures was appropriate, giving a total of 15% out of 15% attributable to this element. A detailed assessment of the Customer measures is set out below. Measure Assessment
Net promoter score (“NPS”) Improvement of customer advocacy across the Group
– We continued the trend for high renewal NPS, with particularly strong performance in H1 on Motor and Home with favourable market conditions for customers.
– Rescue NPS performance ended the year well ahead of target as a new supplier framework was embedded delivering great customer outcomes.
– Over 1.5 million responses from customers across the Group have provided feedback on the experience delivered by our people and 85% (claims) and 87% (customer ops) rated our people as 9 or 10 out of 10.
Succession Ensure a succession plan in place for senior roles, nurturing our people to support progression in accordance with succession plan
– We continue to retain our high potential people across our Emerging Leaders and Graduate population of 33 individuals with just one voluntary leaver. Two cohorts of our emerging leaders programme have taken place in 2019 (with a 50:50 gender split), with five of this group moving into new roles in 2019, including three promotions.
– Since becoming a signatory to the Women in Finance Charter, we have actively recruited and promoted more women into senior roles; women now account for 31% of our senior management (2018: 28%, 2017: 22%) and we are looking forward to working towards our next milestone.
– All senior leaders have Diversity and Inclusion action plans in place. – We launched Thrive – an employee movement aimed at helping them and others to grow and feel empowered to drive their own path and inspire other Direct Line Group women to be the best they can be.
– Mental health continued to be a focus in 2019, and we further developed the agenda by hosting a Mental Health First Aiders conference and sponsorship of events to provide awareness and support on this subject, including financial wellbeing and targeted training around suicide awareness training. It is our aspiration to enable mental health conversations and support to be at the same level as they are for physical health.
Engagement Ensure we are fully engaged with our employees via the DiaLoGue programme with leaders setting the tone demonstrating the Group’s Values and Behaviours in all aspects of their role
– In 2019 following our accreditation and 3rd place position in the Sunday Times ‘Best Big Companies to Work For’ survey, we identified personal growth, people management, and leadership as the key priority areas to concentrate on to improve our ability to attract and retain employees.
Shared element (20% weighting) For the Shared element of the AIP, the Board set a range of strategic measures specifically around technology and business transformation and cost savings, with the aim of ensuring the Group has the capabilities and cost base to ensure its sustained success. The Committee considered the delivery of the major technology transformation programmes, for which specific measures and milestones were set; and for the cost objective the Committee focused on the articulation and commencement of activities required to achieve the 2020 and 2021 cost base. The Committee therefore agreed an outturn of 70% for the Shared measures, giving a total of 14% out of 20% attributable to this element. A detailed assessment of the technology transformation and costs measures is set out below. Measure Assessment
– There has been successful delivery in our Motor IT platform which will transform our customers’ experience, and early signs of performance are meeting expectations.
– Travel for our partnership with RBS/NatWest; a new Travel platform, initially for our major partnerships, and migrated over 1.6 million policies for RBS and NatWest customers. This new platform includes full medical screening and enables automated processing for low value claims; and
– We delivered on our target to reduce operating expenses to below £700 million in 2019. This was delivered through generally tighter cost control together with specific actions relating to media spend and contact centre efficiency.
– Furthermore, we are investing in technology to digitalise processes through either increasing customer self-service and automation including the use of robotic process automation. Over time, the results of these investments will be to reduce the headcount of the group and to reduce our property footprint.
– We set additional cost targets for 2021 disclosed as part of Capital Markets Day in November 2019.
– Relative TSR (40% weighting) – performance is measured over a three-year period from the date of grant.
The 2019 single remuneration figure includes the value of the 2016 TSR elements (for which the performance period ended in March and August 2019, and the awards vested shortly after). Details of the targets and performance achieved are set out in the table below.
Consistent with the regulations, the expected RoTE vesting outcomes (together with the TSR elements from the 2016 awards) are included in the 2019 single remuneration figures for the Executive Directors based on the three-month average share price to 31 December 2019. You can find details of this on page 113.
Performance period not yet complete 118 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
Paul Geddes 105,978 0% – – Mike Holliday-Williams 55,342 0% – –
2. 2017 RoTE elements are based on the three-month average share price to 31 December 2019 of £2.92.
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 2019.
At 31 December 2019 Share plan interests exercised during the year to 31 December 2019
2. LTIP awards made from August 2017 include an additional two-year holding period before awards may be released. 3. Unvested awards subject to performance conditions represents LTIP awards for which 60% is based on RoTE performance and 40%
Michael Biggs – – 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 – Clare Thompson2 44,065 44,065 Richard Ward – –
Fees Taxable Benefits2 Total 2019 £’000 2018 £’000 2019 £’000 2018 £’000 2019 £’000 2018 £’000
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. 2. The values shown under ‘Taxable Benefits’ above comprise the value of taxable travel and subsistence expenses reimbursed by the
CEO pay ratio In 2018, the Committee chose to adopt early the CEO pay ratio disclosure requirements which would otherwise come into effect in this year’s Directors’ Remuneration Report. Since then, the Committee have determined that the appropriate methodology to be used in future years is Option A, as the Committee believes this is the most robust approach to use going forward.
The table below compares the 2019 single total figure of remuneration for the CEO with that of the Group employees who are paid at the 25th percentile (lower quartile), 50th percentile (median) and 75th percentile (upper quartile) of its employee population. Year Method 25th percentile pay ratio Median pay ratio 75th percentile pay ratio 2019 Option A 86:1 71:1 47:1
Option A, as set out under the reporting regulations, was used to calculate remuneration for 2019 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.
The Group’s employees are fundamental to the Group’s strategy and to ensuring a high level of service to our customers. We are proud that the high number of consultants in our customer service centres are employed by the Group (rather than being outsourced) and note that the impact of these lower paid roles is reflected in the ratios above. Further details on the differences between remuneration of Executive Directors and the wider workforce are set out on pages 108 and 109. The Committee is satisfied that these policies drive the right behaviours and reinforces the Group’s values which in turn drives the correct culture.
Notes: 1. Based on the change in average pay for employees employed in the year ended 31 December 2019 and the year ended 31 December 2018. The increase for the CEO includes the salary increase received as part of promotion from CFO to CEO. 2. For all employees, there were no changes in benefits provision between 2018 and 2019. For the CEO the increased value of benefits relates to the car service used by the CEO for travelling on journeys from home to office, of which the Group also pays for any associated tax liability that arises on this benefit.
CEO single figure of remuneration (£’000s) Penny James – – – – – – 1902
3. The 2018 single figure has been revised to reflect the actual vesting of the 2016 awards under the LTIP, an increase of £12,167 for Paul. 4. The 2019 single figure reflects the estimated vesting of the RoTE portion of the LTIP granted in March and August 2017. Any shares under the LTIP granted in 2017 will not be delivered until the end of the applicable vesting periods in March and August 2020. However, they have been included in the single figure, as the performance period in respect of the RoTE portion has now been completed. The LTIP vesting figure reflects part of the year for the outgoing CEO, Paul Geddes, only.
5. The 2019 single figure reflects part of the year for the outgoing CEO, Paul Geddes, and the entire year for the newly appointed CEO, Penny James.
The awards made in August 2017 and March 2018 will be subject to a further two year holding period after vesting.
No LTIP awards have been made to Paul since March 2018.
Appointment at QA Limited On 13 August 2019 Paul’s appointment as CEO of QA Limited, a digital education and skills provider was announced. The Committee had been made aware of Paul’s new role prior to its formal announcement and considered Paul’s leaver status in detail. The Committee determined (in the context of his exit terms) that it was appropriate that Paul remains a good leaver for the following reasons: – An education provider, QA Limited is not a competitor of the Group; and – Paul confirmed (via a formal attestation process and statement) that QA Limited does not operate a long-term incentive plan and (as such) will not buyout unvested Direct Line Group awards.
The Committee will continue to monitor his ‘good’ leaver status and will seek further attestation before the vesting of each future award to ensure this remains appropriate. This is facilitated by the LTIP mitigation clause included in his settlement agreement. All awards will continue to be subject to malus and clawback provisions.
The Committee had determined its approach to the post-cessation shareholding requirements for the 2020 Policy at the point of Mike’s departure. The Committee therefore early adopted post-employment shareholder requirements for Mike ahead of the Policy renewal. Mike is required to maintain his shareholding at exit for a period of two years after he has left the Group.
Mike also received a final statutory payment of £4,725 in connection with the cessation of his employment.
Mike was treated as a ‘good’ leaver under the Company’s incentive schemes given his redundancy. The treatment of his awards was therefore as follows: AIP The 2019 AIP was subject to the satisfaction of the gateway criteria and the relevant performance criteria. The award was also pro-rated to reflect the period worked until the end of his employment. 40% of the award will be deferred into shares. Further detail is set out on page 126.
The single figure table on page 113 includes only the value of the AIP based on the period up to 30 June 2019 when Mike stepped down from the Board. As his total 2019 AIP award was pro-rated to the end of his employment (30 September 2019) following the handover period, the additional value of his AIP for 2019 was £164,530 (based on the period from 30 June 2019 to 30 September 2019).
LTIP The 2017, 2018 and 2019 LTIP awards will be time pro-rated to reflect the period from their date of grant to the end of his employment. The awards will vest on the third anniversary of their grant, remain subject to their original performance conditions and to all scheme rules, including malus and clawback provisions.
The awards made in August 2017, March and August 2018 and March 2019 will be subject to a further two-year holding period after vesting.
Mike was granted 109,568 awards under the August 2016 LTIP. As disclosed in last year’s report, the RoTE outcome was 100% of maximum. As outlined on page 118, the relative TSR outcome was 0% of maximum. Based on this performance, a total of 83,013 shares vested on 30 August with a value of £235,010 based on the share price of £2.831 on that date. As the vesting date was before the date his employment ended, no pro-rata reduction was applied to the number of shares.
On joining he received an LTIP award over 200% of salary on the same terms as the August 2019 grant (except that the vesting dates will run from the date of grant). This was granted at the annual award level as no separate buyout was made to compensate him for the loss of his 2019 award at his previous employer. Full details of this award is set out on page 126.
Shareholdings (Audited) This table sets out the share ownership guidelines and actual share ownership levels: Name Position
Penny James Chief Executive Officer 200% 293% Tim Harris Chief Financial Officer 200% 20%
Director Position Award as % of salary Number of shares granted Face value of Awards £
March 2019 and £2.8727 in August 2019. 2. The LTIP awarded to Tim Harris on joining the Group in October 2019 was based on the average share price in the three days prior to grant of £2.9997 in October 2019. The LTIP awarded to Penny James in March 2019 was whilst she was CFO, whereas the August 2019 was awarded to her as CEO.
3. Mike Holliday-Williams was made redundant on 30 June 2019 and therefore did not receive the second LTIP grant in August 2019.
The remaining 40% of each award is based on TSR performance conditions, for which there is a straight-line interpolation between threshold and maximum performance on a ranked basis.
The performance period for the awards granted on 29 March 2019 will end on 31 December 2021 for the RoTE element and 28 March 2022 for the TSR element. The performance period for the awards granted on 30 August 2019 will end on 31 December 2021 for the RoTE element and 29 August 2022 for the TSR element.
The performance period for the LTIP award granted to Tim Harris on 1 October 2019 ends on 31 December 2021 for the RoTE element and 30 September 2022 for the TSR element.
Awards granted in 2019 under the DAIP Awards granted in 2019 under the DAIP
Director Position Value of deferred bonus £ Number of shares granted Value of deferred bonus £ Number of shares granted
Note: 1. The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £3.5227. In accordance with the DAIP rules, dividends in respect of the deferred shares are reinvested in additional shares, which vest when the deferred shares vest.
Non-Executive Directors’ fees The current fees for the Chairman and Non-Executive Directors are set out below and were unchanged in 2019. No changes are anticipated for 2020.
Directors’ Remuneration Policy The following sets out our proposed Directors’ policy for the Executive and Non-Executive Directors of the Group. This policy will be put forward for shareholder approval at the 2020 AGM on 14 May 2020 and, if approved, will apply to payments made from that date. Until this time, the policy approved on 11 May 2017 will continue to apply. The main changes in this policy from the 2017 policy have been summarised in the Remuneration Committee Chair’s letter above and in the notes to the policy table.
Benefits – A comprehensive and flexible benefits package is offered, emphasising individuals being able to choose the combination of cash and benefits that suits them
– Executive Directors are eligible to participate in any of the employee share plans operated by the Company, in line with HMRC guidelines (where relevant) and on the same basis as other eligible employees. Currently, this includes HMRC-approved SIP, which has been used to provide an award of free shares to all employees (including Executive Directors) and permits employees to purchase shares with a corresponding matching award
– Not applicable 128 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
– Additionally, the limit for any employee share plans in which the Executive Directors participate will be in line with the caps permitted by HMRC from time to time
Element and purpose in supporting the Group’s strategic objective Operation Maximum opportunity Performance measures
– Clawback provisions apply to the AIP. These are explained in the notes to the policy table
DAIP – To enable a stronger focus and alignment with the short to medium-term elements of our strategic aims
– Vested options will remain exercisable for up to the tenth anniversary of grant – Malus and clawback provisions apply to the LTIP. These are explained in the notes to the policy table – Awards under the LTIP may be made at various times during the financial year – Executive Directors will be 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
– During the additional holding period the awards will continue to accrue dividends. Following the holding period awards will cease to accrue dividends if not exercised
– Not less than 50% of the award shall be subject to one or more financial measures, and not less than 25% shall be subject to a relative TSR measure
– Executive Directors are expected to retain all the ordinary shares vesting under any of the Company’s share incentive plans, after any disposals for paying applicable taxes, until they have achieved the required shareholding level; unless such earlier sale, in exceptional circumstances, is permitted by the Chairman
– Shares considered will include those held by the director and their connected persons, vested awards subject to holding requirements and unvested awards not subject to performance conditions (on a net of tax basis)
– The AIP is measured based on performance over the financial year against performance targets which the Committee considers to be appropriate
– The Committee will keep the percentage deferred and terms of deferral under review This will ensure levels are in line with regulatory requirements and best practice and may be changed in future years but will not, in the Committee’s view, be changed to be less onerous overall
– Executive Directors are also expected to retain an equivalent level of shareholding post their employment for a period of two years
– In exceptional circumstances, earlier sale is permitted subject to the Chairman’s discretion
– Introduction of the post-employment shareholding requirements in line with the requirements of the new Code. – Reviewed malus and clawback trigger events to ensure they continue to reflect the guidance set out by the FRC and remain consistent with emerging best practice in this area. Enabling the Committee to apply discretion and override formulaic outcomes, in line with the requirements of the new Code.
Malus and clawback Malus (reducing or forfeiting unvested LTIP awards, DAIP awards or un-exercised options in the holding period) and clawback (the Group’s ability to claim repayment of paid amounts) provisions apply to the AIP (cash and deferred element) and LTIP (after options have been exercised) if, in the Committee’s opinion, any of the following has occurred: – There has been a material misstatement of the Group’s financial results, which has led to an overpayment – The assessment of performance targets is based on an error, or inaccurate or misleading information or assumptions – Circumstances warranting summary dismissal in the relevant period – A material failure of risk management – An event during the relevant period which has, in the view of the Committee, sufficiently and adversely affected the
Amounts in respect of awards under both plans (LTIP and DAIP) may be subject to clawback for up to four years post payment or vesting / exercise of options (with such period lengthened if there is an investigation as to whether relevant circumstances exist) as appropriate. Consistent with developments in the market generally, the provisions clarify that any recoupment is out of the post-tax amount, except to the extent that the participant recovers tax from the relevant tax authority.
Exercise of discretion In line with market practice, the Committee retains discretion relating to operating and administering the AIP, DAIP and LTIP. This discretion includes, but is not limited to: – timing of awards and payments; – size of awards, within the overall limits disclosed in the policy table; – determination of vesting; – ability to override formulaic outcomes; – treatment of awards in the case of change of control or restructuring; – treatment of leavers within the rules of the plan, and the termination policy shown on page 136; and – adjustments needed in certain circumstances, for example, a rights issue, corporate restructuring or special interim dividend.
While performance conditions will generally remain unchanged once set, the Committee has the usual discretions to amend the measures, weightings and targets where the original conditions would cease to operate as intended. Any such changes would be explained in the subsequent annual remuneration report and, if appropriate, be the subject of consultation with the Company’s major shareholders. Consistent with best practice, the LTIP rules also provide that any such amendment must not make, in the view of the Committee, the amended condition materially less difficult to satisfy than the original condition was intended to be before such event occurred.
Adjusting the number of shares under deferred bonus and LTIP The number of shares subject to deferred bonus and LTIP awards may be increased to reflect the value of dividends that would have been paid in respect of any dates falling between the grant of awards and the date of vesting (or, if later, the expiry of any holding period) of awards.
Annual Incentive Plan The Committee has selected the AIP performance measures to incentivise Executive Directors to achieve financial targets for the year, and specific strategic objectives. These measures are aligned with the key performance indicators we use as a business to monitor performance against our strategic priorities, as shown on pages 26 and 27.
Long-Term Incentive Plan The goal of our strategy is to provide long-term sustainable returns for our shareholders. Therefore, for 2020 (as in prior years), awards under the LTIP will continue to be subject to performance against RoTE (an important KPI to the business) and relative TSR targets. The Committee believes this combination provides a balanced approach to measuring Group performance over the longer term by using a stated financial KPI that incentivises individuals to keep growing the business efficiently, and a measure based on relative shareholder return. This combination of measures appropriately balances absolute and relative returns.
The performance measures are set with reference to internal and external forecasts and the Group’s strategic targets.
– LTIP – our strategic leaders participate in the LTIP, currently based on the same performance conditions as those for Executive Directors.
To enable the Group to recruit and retain Non-Executive Directors of the highest calibre, at an appropriate cost
– Fee levels for Non-Executive Directors are reviewed and may be increased at appropriate intervals by the Board, with affected individual Directors absenting themselves from deliberations
– In setting the level of fees, the Company accounts for the role’s expected time commitment, and fees at other companies of a similar size, sector and/or complexity to the Group
– Fees (including expenses which are deemed to be benefits) for Non-Executive Directors are subject to an aggregate cap in the Articles of Association (currently £2,000,000 per annum). The Company reserves the right to change how the elements and weightings within the overall fees are paid, and to pay a proportion of the fees in shares within this limit
2. The Company would normally disclose clearly the terms of any recruitment package on announcing the appointment of any new Executive Director.
3. For an internal appointment, any variable pay element awarded in respect of the prior role may either continue on its original terms or be adjusted to reflect the new appointment, as appropriate.
4. For external and internal appointments (including a major change in role), the Committee may agree that the Company will meet certain relocation expenses, legal and other fees involved in negotiating any recruitment, or pay expatriate benefits in line with the policy table, as appropriate.
5. Where it is necessary to make a recruitment-related pay award to an external candidate, the Company will not pay more than necessary, in the view of the Committee, and will in all cases seek to deliver any such awards under the terms of the existing incentive pay structure.
In exceptional circumstances, the initial notice period may be longer than the Group’s 12-month policy up to a maximum of 24 months. However, this will reduce by one month for every month served, until it has reduced to 12 months in line with the Group’s policy position.
The remuneration policy for the Chairman and Non-Executive Directors as set out earlier in this report will apply relating to any recruitments to those positions.
– DAIP – for any reason other than summary dismissal or resignation. However, the Committee may determine that, in the case of resignation only, awards may be retained
If a leaver is a ‘bad’ leaver, for example leaving through resignation or summary dismissal
Annual Incentive Plan No awards made Bonus based on performance, paid at the normal time and on a time pro-rata basis, unless the Committee determines otherwise
Bonus determined on such basis as the Committee considers appropriate and paid on a time pro-rata basis, unless the Committee determines otherwise
All awards will lapse Deferred shares typically vest on the normal vesting date, although the Committee reserves discretion to accelerate vesting. In the case of the participant’s death or other exceptional circumstances, awards may vest immediately
Awards will vest subject to applying the performance conditions and, unless the Committee determines otherwise, time pro-rating. The Committee may determine that such awards shall not vest early and, instead, be rolled over into replacement awards (subject to approval for the acquiring company) granted on a similar basis, but over shares in the acquirer or another company or settled in cash or other securities. In the event of a demerger or similar event, the Committee may determine that awards vest on the same basis
Service agreements for all Executive Directors provide that they are not eligible to receive any enhanced redundancy terms which may be offered by the Group from time to time. Their rights to a statutory redundancy payment are not affected.
Non-Executive Director letters of appointment Non-Executive Directors have letters of appointments (as opposed to service contracts) and are appointed for a threeyear term which may be extended by mutual agreement. In common with the Executive Directors, all Non-Executives are subject to annual re-election by shareholders.
The Directors may appoint additional members to join the Board during the year. Directors appointed in this way will be subject to election by shareholders at the first AGM after their appointment. In subsequent years, the Directors who wish to remain on the Board must submit themselves for re-election at each AGM.
Terms and conditions of appointment of all the Directors are available for anyone to inspect at the Company’s registered office and AGM.
In accordance with prevailing commercial practice, the Committee did not consult with employees in preparing the Directors’ Remuneration Policy.
The Committee is satisfied that no element of the Directors’ Remuneration Policy conflicts with the Group’s approach to environmental, social and governance matters.
Total fixed pay Short-term incentives Long term incentives Share price growth
On-target Based on the on-target remuneration receivable (excluding share price appreciation and dividends): – Fixed remuneration as above – AIP – as there is no target, for the purposes of this illustration, taken as vesting half-way between threshold and maximum (55% of maximum) – LTIP – consists of the threshold level of vesting (20% vesting)
Maximum Based on the maximum remuneration receivable (excluding share price appreciation and dividends): – Fixed remuneration as above – AIP – consists of the maximum bonus (175% of base salary) – LTIP – consists of the face value of awards (200% of base salary)
The Board reviewed and approved this policy on 2 March 2020.
The Directors present their report for the financial year ended 31 December 2019.
You can find the forward-looking statements disclaimer on page 229 and statements regarding stakeholder engagement, including information on engagement with employees and how the Directors foster relationships with suppliers, customers and others on pages 88 and 89.
The final dividend resolution provides that the Board may cancel the dividend and, therefore, payment of the dividend at any time before payment, if it considers it necessary to do so for regulatory capital purposes. You can find detailed explanations about this, as well as a proposed amendment to the Articles of Association regarding the cancellation of dividends by the Board in the Notice of AGM 2020.
The Directors listed on pages 76 to 78 were the Directors of the Company throughout the year apart from: Tim Harris, who was appointed as a Director on 1 October 2019; Paul Geddes and Clare Thompson who retired from the Board on 9 May 2019 and Mike Holliday-Williams who stepped down from the Board on 30 June 2019.
The Company’s Articles of Association set out the Directors’ powers. You can view these on the Company’s website at www.directlinegroup.co.uk. The Directors’ powers are also subject to relevant legislation and, in certain circumstances, authority from the Company’s shareholders. You can find details of the Directors’ remuneration, service contracts, employment contracts and interests in the shares of the Company in the Directors’ remuneration report on pages 106 to 138.
These indemnities are qualifying third-party indemnities as defined by section 234 of the Companies Act 2006. No amount was paid under any of these indemnities during the year. The Company maintains directors’ and officers’ liability insurance. This provides appropriate cover for legal actions brought against its Directors. The Company has also provided the Directors of DLG Pension Trustee Limited with qualifying pension scheme indemnities. This is in accordance with section 235 of the Companies Act 2006. DLG Pension Trustee Limited acts as trustee for two of the Company’s occupational pension schemes.
Share capital The Company has a premium listing on the London Stock Exchange. As at 31 December 2019, the Company’s share capital comprised 1,375,000,000 fully paid Ordinary Shares of 10 10/11 pence each.
At the Company’s 2019 AGM, the Directors were authorised to: – allot shares in the Company or grant rights to subscribe for, or convert any security into shares, up to an aggregate nominal amount of £50,000,000 and to allot further shares up to an aggregate nominal amount of £50,000,000, for the purpose of a rights issue; – allot shares having a nominal amount not exceeding in aggregate £7,500,000 for cash, without offering the shares first to existing shareholders in proportion to their holdings; – allot additional shares having a nominal amount not exceeding in aggregate £7,500,000 for the purposes of financing a transaction which the Board of the Company determines to be an acquisition or other capital investment, without offering the shares first to existing shareholders in proportion to their holdings; – make market purchases of up to 137,500,000 shares in the Company, representing 10% of the Company’s issued share capital at the time; and
To date, the Directors have not used these authorities. At the 2020 AGM, shareholders will be asked to renew these authorities. The Company has not held any shares in treasury during the period under review. You can find out more about the Company’s share capital and shares under option as at 31 December 2019 in notes 30 and 36 of the consolidated financial statements.
The Trustee of the Employee Benefit Trust has waived its right to dividends on all shares within the Trust. You can find out more about the number of shares held by the employee share plan trusts in note 36 on page 204. The Company is only aware of the dividend waivers and voting restrictions mentioned above.
Significant agreements affected by a change of control A number of agreements may take effect, alter or terminate upon a change of control of the Company. None of these agreements is considered significant in terms of its impact on the Group’s business as a whole. All the Company’s employee share incentive plans contain provisions relating to a change of control. Outstanding awards would typically vest and become exercisable. This is subject to satisfying any performance conditions, and normally with an additional time-based pro-rata reduction where performance conditions apply, and approval from the Remuneration Committee.
BlackRock, Inc. 9.97% 9.97% T.Rowe Price Associates, Inc 4.94% 4.94% Artemis Investment Management LLP 4.75% 4.75% Standard Life Aberdeen plc 4.57% 4.57% APG Asset Management N.V 2.99% 2.99%
Political donations The Group made no political donations during the year (2018: nil).
Our DNA focuses on a number of strands including employees with disabilities. It identifies areas where we can improve and help people to continue working for us. We reasonably adjust employees’ working environments and equipment, and roles and role requirements. We also ensure that everyone can access the same opportunities. You can find more information regarding employee involvement in the Strategic report on pages 63 to 65.
Having made due enquiries, the Directors reasonably expect that the Company and the Group have adequate resources to continue in operational existence for at least 12 months from 2 March 2020 (the date of approval of the financial statements). Accordingly, the Directors have adopted the going concern basis in preparing the financial statements.
Disclosing information to the Auditor Each Director at the date of approving these Annual Report & Accounts confirms that: as far as they are aware, there is no relevant audit information of which Deloitte, the Company’s External Auditor, is unaware; and they have taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information, and to establish that Deloitte is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.
Legislation in the UK governing preparing and disseminating financial statements may differ from legislation in other jurisdictions.
Each of the Directors, whose names and functions are listed on pages 76 to 78, confirms that, to the best of their knowledge: – the financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position, and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; – the Strategic report (on pages 1 to 73) and Directors’ report (on pages 139 to 142) include a fair review of: (i) the business’s development and performance; and (ii) the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face; and
Notes to the consolidated financial statements 1. Accounting policies 158 2. Critical accounting judgements and key sources of estimation uncertainty 3. Risk management 169 4. Segmental analysis 181 5. Net earned premium 184 6. Investment return 184 7. Other operating income 185 8. Net insurance claims 185 9. Commission expenses 185 10. Operating expenses 185 11. Finance costs 187 12. Tax charge 187 13. Current and deferred tax 188 14. Dividends and appropriations 188 15. Earnings per share 189 16. Net assets per share and return on equity 190 17. Goodwill and other intangible assets 191 18. Property, plant and equipment 192 19. Right-of-use assets 193 20. Investment property 193 22. Reinsurance assets 194 23. Deferred acquisition costs 194 24. Insurance and other receivables 194 25. Prepayments, accrued income and other assets 195 26. Derivative financial instruments 195 27. Retirement benefit obligations 195 28. Financial investments 198 29. Cash and cash equivalents and borrowings 199 30. Share capital 199 31. Other reserves 199 33 Subordinated liabilities 200 34. Insurance liabilities 201 35. Unearned premium reserve 203 36. Share-based payments 204 38. Trade and other payables including insurance payables 39. Notes to the consolidated cash flow statement 206 40. Commitments and contingent liabilities 207 42. Fair value 208 43. Related parties 209 44. First-time adoption of IFRS 16 210
Report on the audit of the financial statements 1. Opinion In our opinion: – the financial statements of Direct Line Insurance Group plc (the “Parent Company”) and its subsidiaries (together the “Group”) give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2019 and of the Group’s profit for the year then ended; – the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union and IFRSs as issued by the International Accounting Standards Board (“IASB”); – the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including Financial Reporting Standard 101 ‘Reduced Disclosure Framework’; and
We have audited the financial statements which comprise: – the Consolidated Income Statement; – the Consolidated and Parent Company Statements of Comprehensive Income; – the Consolidated and Parent Company Balance Sheets; – the Consolidated and Parent Company Statements of Changes in Equity; – the Consolidated Cash Flow Statement; and – the related notes 1 to 44 on the Consolidated financial statements and related notes 1 to 16 on the Parent Company financial statements, excluding the capital adequacy disclosures in note 3 calculated in accordance with the Solvency II regime which are marked as unaudited.
3. Summary of our audit approach Key audit matters The key audit matters that we identified in 2019 were: – valuation of insurance reserves: 1) The frequency and severity of bodily injury claims; and 2) The inflation and discount rate assumptions for valuing periodic payment orders (“PPOs”).
We considered as part of our risk assessment the nature of the Group, its business model and related risks including where relevant the impact of Brexit, the requirements of the applicable financial reporting framework and the system of internal control. We evaluated the Directors’ assessment of the Group’s ability to continue as a going concern, including challenging the underlying data and key assumptions used to make the assessment, and evaluated the Directors’ plans for future actions in relation to their going concern assessment.
We are required to state whether we have anything material to add or draw attention to in relation to that statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the audit.
Going concern is the basis of preparation of the financial statements that assumes an entity will remain in operation for a period of at least 12 months from the date of approval of the financial statements.
– the Directors’ explanation on page 58 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
5. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team.
The Group’s insurance reserves total £3.8 billion (2018: £4.0 billion) and represent the single largest liability on the balance sheet. Valuation of these liabilities requires management to select methods and assumptions that are subject to high levels of estimation uncertainty. Consequently, small changes in these methods or assumptions can materially impact the valuation of these liabilities. We have identified the following two key areas of focus for our audit given their significance to the Group’s result and the high level of estimation uncertainty. We have also identified these as potential fraud risk areas.
146 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019 5.1.1 The frequency and severity of large bodily injury claims
How the scope of our audit responded to the key audit matter We have gained a detailed understanding of the end-to-end claims and reserving process and obtained an understanding of relevant controls. Our work included attendance at the year-end reserving committee meeting in order to observe the operation of a key management review control.
In order to gain assurance over the completeness and accuracy of source data used in the Group’s actuarial calculations and by our in-house actuarial specialists in performing their work, we have tested the data reconciliation controls and performed reconciliations on the actuarial data back to the financial ledger.
Having done this, we worked with those specialists to: – challenge the Group’s frequency and severity assumptions through market benchmarking, considering the comparison in the context of the Group’s portfolio; – review and challenge the Group’s claim development patterns, and identify any emerging trends, by using our inhouse reserving software; – analyse the consistency in reserving strength and reserve releases in comparison with prior years; and – review and challenging the output of the Group’s Ogden sensitivity model and assess the adequacy of the Group’s disclosures regarding the rate change.
Key observations In the prior financial year, we considered the frequency and severity assumptions for large bodily injury claims to be reasonable, albeit slightly prudent. In the current financial year, we have concluded that the assumptions continue to be reasonable and the insurance liabilities are prudent, albeit somewhat less prudent than last year, as the Group’s actuaries have given credit for recent favourable experience.
Key audit matter description We have identified a key audit matter over the valuation of intangible assets totalling £488.3 million (2018: £354.1 million). Our work has specifically focused on the development of the Group’s new trading platform for Motor, Home and Brand Partnership products, which is expected to deliver revenue growth and cost saving benefits. The system capabilities required to realise these benefits are being deployed in a phased roll out which began in 2019. The phased roll out is expected to continue in 2020 with additional capabilities released and more brands and products transitioning to the platform.
Although the first phase of deployment reduces delivery risk, we continue to identify a heightened risk of impairment while the full suite of capabilities is not yet ready for use or utilised across the Group. Given the significant level of judgement required in determining the recognition of such an impairment charge, we continue to identify this area of the key audit matter as a potential fraud risk. Furthermore, in determining the useful economic life of the asset and the point at which various elements of the platform should begin amortisation, management also exercises judgement.
We then performed the following audit procedures in order to address the impairment risk over the intangible asset that is not ready for use: – inquired of system integrators and programme managers, and inspected internal reports, system architecture maps and meeting minutes in order to challenge whether all components will be fully utilised in the end-state platform; – reviewed the business case for the intangible asset and challenged whether there had been any significant changes made to the platform that could compromise the expected benefits; and
In addition to the above, we challenged management’s approach to determining when the platform becomes available for use and the useful economic life of the assets through a combination of market benchmarking and sensitivity testing.
Key observations We concluded that it was reasonable for no impairment charge to be booked for the intangible assets that are not yet ready for use. We also concur with management’s view on the useful economic life of the assets and the point in time at which those intangible assets were, or will be, brought into use.
Key audit matter description We have identified a key audit matter in relation to investments that are not held at fair value totalling £587.8 million (2018: £592.2 million). Our work primarily focused on the following three portfolios, which are less liquid and represent a higher credit risk relative to the majority of the Group’s investment portfolio: – commercial real estate loans; – infrastructure debt; and – private placement bonds
Given the Group continues to recognise and measure financial instruments under IAS 39, these debt instruments are measured at amortised cost and require the recognition of an impairment when an incurred loss event arises. Significant management judgement is required in determining if an incurred loss event has occurred and, in the instance an event has occurred, there is significant estimation uncertainty in determining the impairment charge.
How the scope of our audit responded to the key audit matter We have obtained an understanding and tested the key controls that mitigate the risk over the valuation of investments not held at fair value. Our work included attendance at the year-end impairment review meeting in order to observe the operation of a key management review control.
How the scope of our audit responded to the key audit matter continued In addition, we performed the following audit procedures: – traced a sample of interest payments to bank during the year to test for default or delinquency in interest payments; – engaged our in-house complex pricing team to determine an independent fair value of these assets and identify any significant decreases in fair value below book cost; – assessed the need for impairment on a collective basis through analysing significant macroeconomic and sector specific developments, such as the ongoing high street decline; and – challenged management on loans of interest where indicators could point to issuer financial difficulty, obtaining evidence to assess whether the position taking by management is reasonable.
We determined that the critical benchmark for the Group was average profit before tax. This measure uses a threeyear average of profit before tax which we deemed appropriate due to the inherent volatility of profits in the insurance industry. We also elected to exclude the impact of the Ogden discount rate change to 0% in the 2018 results and minus 0.25% in the 2019 results due to the non-recurring nature of these events. We also considered this measure to be suitable having compared to other benchmarks: our materiality equates to 5.5% (2018: 4.8%) of statutory profit before tax, 0.9% (2018: 0.9%) of gross earned premium and 0.9% (2018: 1.0%) of total equity.
We determined that the critical benchmark for the Parent Company was shareholder’s equity. This is because the Parent Company is not a trading entity but rather received dividend income from its subsidiaries. When determining materiality for the Parent Company, we also considered the appropriateness of this materiality for the consolidation of this set of financial statements to the Group’s results.
Group materiality is used for setting audit scope and the assessment of uncorrected misstatements. Materiality is set for each significant component in line with the components proportion of the chosen benchmark. This is capped at the lower of 90% of Group materiality and the component materiality determined for a standalone audit. The main UK insurance trading entity, U K Insurance Limited, which makes up 100% of Group gross earned premium and 72% of Group statutory profit before tax, is scoped to a component materiality of £25.2 million (2018: £25.2 million). Component materialities for other entities within the scope of our Group audit ranged from £0.8 million to £9 million.
Average PBT Group materiality 148 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019
AUDIT REPORT V5.2 WWW.DIRECTLINEGROUP.CO.UK 149 6.2 Performance materiality We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole. Group performance materiality was set at 70% of Group materiality for the 2019 audit (2018: 70%) and this equates to £19.6 million (2018: £19.6 million). In determining performance materiality, we considered the following factors: – we have audited the Group for a number of years and so have knowledge of both the group and the environment it operates in; – our ability to rely on controls over a number of significant business processes; – our past experience of the audit, which has indicated a low number of corrected and uncorrected misstatements identified in prior periods; and – misstatements noted in prior periods have not been indicative of deficiencies in internal control and so there is a low likelihood they will occur in the current period.
These four entities represent the principal trading and service operations of the Group and account for 99% (2018: 99%) of the Group’s net assets, 100% (2018: 100%) of the Group’s gross earned premium and 98% (2018: 98%) of the Group’s profit before tax. They were also selected to provide an appropriate basis for undertaking audit work to address the risks of material misstatement identified above.
IT Controls In planning our 2019 audit we identified 10 systems that were material to the Group’s financial reporting processes. These systems handled data relating to premiums, claims, expenses and payroll and we intended to rely on the IT and business controls associated with these systems. Having worked with our in-house IT specialists to assess the operating effectiveness of the IT controls associated with these systems, as well as the wider general IT control environment across the Group, we were able to rely upon the IT controls associated with all 10 systems identified.
8. Other information The Directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon.
In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information include where we conclude that: – fair, balanced and understandable – the statement given by the Directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud and noncompliance with laws and regulations are set out below.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
– the matters discussed among the audit engagement team and involving relevant internal specialists, including tax, valuations, pensions, IT and industry specialists regarding how and where fraud might occur in the financial statements and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified the greatest potential for fraud in the following areas: the valuation of the insurance liabilities as well as the valuation of the intangible assets due to the estimates and judgements exercised by management. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override.
11.2. Audit response to risks identified As a result of performing the above, we identified valuation of insurance liabilities and valuation of intangible assets as key audit matters related to the potential risk of fraud or non-compliance with laws and regulations. The key audit matters section of our report explains the matter in more detail and also describes the specific procedures we performed in response to those key audit matters.
– the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the Directors’ report.
152 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019 13. Matters on which we are required to report by exception continued 13.2 Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors’ remuneration have not been made or the part of the Directors’ remuneration report to be audited is not in agreement with the accounting records and returns.
Gross earned premium 3,202.6 3,306.7 Reinsurance premium (217.7) (217.2) Net earned premium 5 2,984.9 3,089.5
154 DIRECT LINE GROUP aNNUAL REPORT & ACCOUNTS 2019 £m restated
Items that may be reclassified subsequently to the income statement: Cash flow hedges (0.7) 0.5 Fair value gain / (loss) on AFS investments 31 118.1 (121.4) Less: realised net gains on AFS investments included in the income statement 31 (16.5) (19.5) Tax relating to items that may be reclassified 31 (17.3) 23.9
Cash and cash equivalents 29 948.6 1,154.4 1,358.6 Assets held for sale – – 4.2
Trade and other payables, including insurance payables 38 478.1 481.3 583.8
The attached notes on pages 158 to 211 form an integral part of these consolidated financial statements.
Profit for the year – – – – – 472.0 472.0 – 472.0
Note: 1. Results for the year ended 31 December 2018 have been restated to reflect the fully retrospective adoption of IFRS 16 ‘Leases’, see note 44.
Corporate information Direct Line Insurance Group plc is a public limited company registered in England and Wales (company number 02280426). The address of the registered office is Churchill Court, Westmoreland Road, Bromley, BR1 1DP, England.
1. Accounting policies Basis of preparation As required by the Companies Act 2006 and Article 4 of the EU IAS Regulation, the Group’s consolidated financial statements are prepared in accordance with IFRSs issued by the IASB as adopted by the EU. The Group has elected to prepare its parent entity financial statements in accordance with FRS 101 ‘Reduced Disclosure Framework’.
The Company’s financial statements and the Group’s consolidated financial statements are presented in sterling, which is the functional currency of the Company and the Group.
– The Group has issued sterling‑denominated fixed rate subordinated debt which it hedges to fair value using a sterling fixed to GBP LIBOR interest rate swap.
– The Group holds investments in US dollar and Euro fixed rate debt securities which it includes in a macro fair value hedge of the USD LIBOR and EURIBOR risk component of these investments respectively.
A number of further narrow scope amendments which become mandatorily effective for the Group but do not have an impact on existing accounting policies, are as follows: Amendments to IAS 28: ‘Long-term Interests in Associates and Joint Ventures’ clarifies that an entity applies IFRS 9 to long-term interests in associates or joint ventures that form part of the net investment in the associate or joint venture but to which the equity method is not applied.
Amendments to IAS 19 ‘Employee Benefits: Plan Amendment, Curtailment or Settlement’ clarify the accounting when a pension plan amendment, curtailment or settlement occurs.
‘Annual Improvements to IFRS Standards 2015-2017 Cycle’ includes the following three amendments: – IFRS 3 ‘Business Combinations’ and IFRS 11 ‘Joint Arrangements’ – the amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, it remeasures previously held interests in that business; the amendments to IFRS 11 clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business; – IAS 12 'Income Taxes' – the amendments clarify that all income tax consequences of dividends (including payments on financial instruments classified as equity) are recognised consistently with the transactions that generated the distributable profits; and
– IAS 23 ‘Borrowing Costs’ – the amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalisation rate on general borrowings.
1.1 Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and the entities that are controlled by the Group at 31 December 2019 and 31 December 2018. Control exists when the Group is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing if the Group controls another entity, the existence and effect of the potential voting rights that are currently exercisable or convertible are considered.
A subsidiary acquired is included in the consolidated financial statements from the date it is controlled by the Group until the date the Group ceases to control it. On acquisition of a subsidiary, its identifiable assets, liabilities and contingent liabilities are included in the consolidated financial statements at fair value.
Premiums collected by intermediaries or other parties, but not yet received, are assessed based on estimates from underwriting or past experience and are included in insurance premiums. Insurance premiums exclude insurance premium tax or equivalent local taxes and are shown gross of any commission payable to intermediaries or other parties.
160 DIRECT LINE GROUP aNNUAL REPORT & ACCOUNTS 2019 1.4 Revenue recognition continued