Other information 187 Additional information 189 Glossary and appendices 195 Forward-looking statements disclaimer 196 Contact information
Our mission: To make insurance much easier and better value for our customers
Building our technology and data capabilities Find out more on page 20
Financial highlights • Gross written premium for Ongoing operations1,2 up 3.9%
to £3,274.1m (2015: £3,152.4m), driven by growth in Motor and Home own-brand in-force policies (up 4.3%)
• 2016 results reflect the one-off impact of using the new Ogden discount rate of minus 0.75%. Operating profit from Ongoing operations of £403.5m (pre-Ogden discount rate reduction3: £578.6m; 2015: £520.7m) and profit before tax of £353.0m (pre-Ogden3: £570.3m; 2015: £507.5m). Return on tangible equity1,2 of 14.2%, (pre-Ogden3: 20.2%; 2015: 18.5%)
• 5.4% increase in final dividend per share to 9.7 pence per share, (2015: 9.2 pence). Total dividends per share for 2016, including special interim dividend of 10.0 pence per share paid in September 2016 following the approval of the Group’s partial internal model (“PIM”), of 24.6 pence per share (2015: 50.1 pence)
Strategic and operational highlights • Direct Line Motor and Home new business growth at the highest annual level since IPO, demonstrating the success of the investment in brand, proposition and customer service
• Total costs for Ongoing operations of £923.7m broadly flat year on year before non-cash impairment charge of £39.3m, after absorbing £24.1m Flood Re levy and supporting growth in Motor and Home own brands
• Extended Home and Private Insurance partnership with RBS for a further three years, and implemented faster and easier sales journeys using cloud-based technology making connectivity and future change easier
• Received approval from the Prudential Regulation Authority (“PRA”) to use the Group’s Solvency II PIM
Notes: 1. See glossary on pages 189 and 190 2. See appendix A – Alternative performance measures on page 191 for reconciliation to financial statement line items 3. See appendix B – Proforma results on page 194 for the Group’s results excluding the recent impact of the Ogden discount rate reduction 4. Estimates based on the Group’s Solvency II PIM for 31 December 2016 www.directlinegroup.com 3
Brand Partners is the Group’s partnerships arm. We specialise in providing personal lines insurance, and roadside rescue and recovery products to some well-known brands.
Privilege targets customers who mainly buy through PCWs. We focus on making sure they experience a quick service at the best price.
Note: 1. The Royal Bank of Scotland Group plc, including National Westminster Bank plc
Notes: 1. Includes Direct Line, Churchill, Privilege and partner brands: RBS, Nationwide (home only), NatWest, Prudential and Sainsbury’s © GfK Financial Research Survey six months ending November 2016, 13,665 adults interviewed for motor insurance and 12,270 for home insurance 2. Mintel Vehicle Recovery – UK, September 2016 3. Mintel Pet Insurance – UK, August 2016 and Mintel Travel Insurance – UK, February 2016 www.directlinegroup.com 5
Rising costs for insurers and customers Customers’ motor premiums have been rising over the past two years. Increasing claims costs have continued to push premiums higher, with increases in Insurance Premium Tax (“IPT”) also contributing. Despite sustained declines in the number of claims in recent years, average motor claim payouts rose again in 2016, with an increase of over 2.5% as personal injury claims have escalated2,3.
Notes: 1. KPMG – The Pulse of Fintech [Converted to GBP at 2015 12 month average – £1 = $1.52860] 2. Association of British Insurers (“ABI”) – Key facts 2015 3. ABI – Key Facts 2016
Brand investment pays off for insurers Insurance brands that are well known and valued by customers2 are consistently amongst the most successful in the industry3. Brand strength and visibility is an important factor in consumers’ insurance acquisition process. Therefore, to generate new business, insurers must invest in their brands to stay at the front of the public’s minds. Providing quality customer service and offering something above and beyond the average insurer reaps its benefits, with the market cost of acquiring new customers up to five times the cost of retention4.
Our multi-brand, multi-product and multi-distribution channel business offers different propositions to distinct customers. We believe this approach should enable us to generate value for customers and sustainable returns for our shareholders.
Customers are at the centre of our business model. So our mission is clear: we want to make insurance much easier and better value for them. We aspire to give them products that best suit their needs and exceptional service throughout their relationship with us. We also strive to adapt to their changing needs. From the moment customers choose our products, to the time they claim or need to resolve an event we treat every step of the customer journey as an opportunity to provide excellent service and outcomes.
We seek to make sure our business is well governed and controlled. We manage our finances carefully and balance this with targeting a suitable and sustainable return for our shareholders.
Customers can buy products online – including through PCWs – by phone, and indirectly through our partners. In our Commercial business, they can also buy our products through brokers.
Our business has been in operation for over 30 years, giving us a deep insight into the risks we underwrite. This insight enables us to make our pricing more reflective of the risks we underwrite. It also allows us to invest substantially in data and increase efficiencies. Again, this means we are better able to set accurate prices for the risks we underwrite.
Customers experience the value of their cover when they come to claim. So we aim to settle claims as quickly and easily as possible by engaging closely with our customers. This helps us demonstrate why our products and services are valuable, and to manage our claims costs.
Returns to our shareholders remain a key focus in this challenging market environment. Cumulative dividends represent approximately 72% of the share price at the initial public offering.
Linking remuneration to performance We remain committed to ensuring that executive pay is aligned with the Company’s strategy of delivering long-term shareholder value.
Remuneration Your Remuneration Committee ensures a close correlation between creating value for shareholders, and remunerating Executive Directors and senior executives appropriately. See pages 63 and 82.
Relationships with shareholders Your Board maintains strong relationships and regular interaction with our shareholders. Their continued support for our strategic aims is important. See page 63.
The Remuneration Committee has consulted our major shareholders and other stakeholders, on our proposed Directors‘ remuneration policy on which shareholders will be given the opportunity to vote at the forthcoming AGM. More information on awards and our proposed Directors’ remuneration policy is provided in the letter from the Chair of the Remuneration Committee on page 82.
IT Infrastructure The Group has been making positive changes to its IT infrastructure, including working towards the implementation and integration of major IT systems which is inherently complex and challenging. The Board’s ongoing areas of focus include developing future capability, and continuing to monitor risks associated with IT systems’ stability, cyber security, and the internal control environment.
I would like to thank the entire Board for their significant contribution, commitment and service; and look forward to working with them in 2017 as the Group continues to build on its strategic priorities.
The fact that our own brands have grown shows that customers like the many changes we have made in recent years. In particular, the success of Direct Line has encouraged us to keep innovating for our customers.
What is your view on the Group’s financial performance? It was a strong year, maintaining our record of strong financial performance and underwriting discipline since our IPO, but also with an added ingredient: growth. This is particularly gratifying because it shows that customers really like the new propositions, the great value and the excellent service that our brands are delivering, especially Direct Line.
The Group has hit nearly all its targets since its IPO four years ago. To what do you attribute this success? We found the whole IPO process actually helped us get really clear on our strategy and plans, and motivated the whole team to deliver against them. In particular, the fact that we have now given all of our colleagues three grants of free shares helps everyone to care about the Company enough to change it. We listen to colleagues’ ideas, for example, through the employee representative bodies and through our IdeasLab scheme, and continue to invest in their training and development. All this has helped us to do hard things like reducing our costs yet at the same time increase the engagement of our colleagues and improve our service to customers.
However, as 2016 revealed, we can do well in uncertain times. We hold our head, know what we’re trying to achieve, and have experienced teams that are well prepared to tackle whatever the world throws at us. We also have to keep pace with what customers expect from technology. We expect profound revolution with connected cars and homes; the risks we cover; new sources of data; and new propositions for customers. That’s exciting.
This year saw many success stories. What were the highlights for you? Apart from the great success of Direct Line, we made good progress on our other brands too. Churchill equals Direct Line for customer recognition, and it has been great to see how the brand is so central to the British sense of identity. Launching a “Bring Back Lollipoppers” campaign for schools also linked the brand to improving road safety in a tangible way.
What is the Group’s opinion on driverless cars? We have an open-minded, optimistic attitude to new car technology. However, there are two dangerous attitudes that I sometimes hear in our industry. The first is that new technology will remove the need for insurance because cars won’t have accidents at all, or that drivers will not be held responsible for any accidents. I think that, for now, this remains in the realms of science fiction. It’s not the way legislation is shaped, it’s not the current reality, and it won’t be for many years ahead.
I believe we are thought leaders regarding what car technology will mean. We talk to many groups, including car manufacturers and technology companies. There are also many strands to our work, such as developing the legal framework for autonomous driving, through to becoming the market leader for insuring safer cars. We are already giving customers discounts, for example, if their cars have features such as autonomous emergency braking.
What are your thoughts about 2016’s employee engagement survey “Dialogue”? I’m delighted that our efforts on engaging and motivating our colleagues continue to pay off. There is a risk that engagement can suffer in organisations like ours that are undergoing rapid change, seeking to improve their efficiency and lower costs.
We have seen quite the opposite, and the fact that 88% of our people complete the Dialogue survey means it represents all the various views across our business.
This year’s survey showed that we now also have a record number of colleagues we can identify as “champions” – people who are both fully engaged and committed to the Group. They want to contribute to our success, something which I’m able to see and feel when I visit our sites and talk to individual teams. I believe it is our engaged colleagues themselves who can drive the changes and efficiency improvements in our business.
What do you feel unites and defines the Group’s people? We are unique in that we are small enough as a business that every person can make a difference, but also big enough that we can invest in our people and support their growth and progress. This investment is crucial and we have been developing our frontline teams, managers and professional technical teams to ensure that we have the best people, trained to the highest standards that can ‘Do the right thing’ for our customers, investors and other external stakeholders.
My thanks go to our people for their hard work and support throughout the year. I am excited by their passion and by how they work tirelessly to make insurance much easier and better value for our customers.
Focusing strategy to deliver now and build for the future Our mission is to make insurance much easier and better value for our customers. Our strategy to achieve this is based on three strategic pillars: great retailer, smart & efficient manufacturer and lead & disrupt the market.
Compelling brands, propositions and customer experience to meet diverse and long-term customer needs We aim to make it easy for our customers to access our products and services at every stage of their journey. This includes increasing online servicing for customer policies and claims, and evolving telephone sales and servicing by investing in next-generation customer systems. We focus on training our contact centre employees to understand and respond better to our customer needs.
How we performed in 2016 The differentiation of our brands remained a key focus in 2016. For Direct Line we have built strong foundations since our ‘reboot’ of the brand just over two years ago, introducing a succession of effectively marketed product enhancements. This year we added a three-hour emergency plumbing service for our Home Plus customers. Our strong marketing and branding is key to clearly articulating these enhancements to our customers so they want to come directly to us. The success of our marketing to drive Direct Line growth was recognised when we won the Gold Institute of Practitioners in Advertising award for marketing effectiveness.
Efficiency and flexibility to deliver better claims and customer service at lower cost We aim to improve efficiency and effectiveness across the organisation everyday. While we re-established our traditional partnership capabilities, we intend to establish ourselves as the UK insurance partner of choice for less traditional partners.
How we performed in 2016 Our underlying costs (excluding higher non-cash impairments to intangible assets than in recent years) were stable compared to 2015, having absorbed the £24m Flood Re levy and still supporting 4.3% in-force policy growth in our Motor and Home own brands. Excluding the impairment, H2 2016 costs were lower than H2 2015, primarily due to lower claims handling expenses.
In our Partnerships, we extended our Home and Private Insurance arrangement with RBS for a further three years and our Travel insurance contract with Nationwide Building Society until the end of 2018.
Our objectives for 2017 While we made good progress in establishing new partners in 2016, we continue to be on the lookout for more opportunities where our flexibility and expertise can benefit all stakeholders.
We maintain a firm focus on improving the efficiency of the business through cost efficiency programmes, while investing in systems and capabilities to increase customer self-service.
We are investing to further strengthen our application and claims fraud capabilities.
We have extended our partnership with PSA Finance UK (part of Peugeot Citroën) for a further four years. The partnership has found success by packaging insurance with car finance to create innovative mobility solutions for consumers, particularly young or inexperienced drivers through the use of telematics in the Peugeot Just Add Fuel and Citroen SimplyDrive offers. Extending the partnership allows us to create propositions based on the technology being fitted to the car.
In Commercial, we continued to be recognised for our leading capabilities in eTrade and direct Commercial insurance, both of which are expected to continue to grow.
Our objectives for 2017 New car technology centred on improving safety is emerging at a fast pace and the Group aims to take a lead by becoming the insurer of choice for the owners of the cars equipped with such technology. We continue to look for new partners and ways to help our customers benefit from these new technologies.
Harness the power of technology and the scale of our data
We are continuing to invest in our employees’ skills. This will help us to improve effectiveness and customer experiences. We aim to create excellent Group-wide employee engagement by focusing on leadership and people management at all levels. This has helped improve our employee engagement metrics year on year.
How we performed in 2016 During the year we continued to invest in employees’ skills to improve effectiveness and customer experience. We are committed to broadening the diversity of our talent pool and this year signed up to the Women in Finance Charter, seeking to increase the number of women in senior roles in the organisation.
We also launched a major new training programme for our people, designed to help flex their approaches to improve engagement with customers. Not only has this strengthened our front office staff skills, as they handle customers in often difficult situations, but it has also strengthened the way our people interact with one another.
We have used the PIM to establish a clear capital target range which provides additional security over the regulatory SCR.
Committed support Because our people are our biggest asset and have the biggest impact on our customers, we wanted this cultural change to touch every customer facing area of our business. This includes contact centres, accident repair centres, offshore partners and suppliers. This contributes to our aim of creating an effortless journey for our customers.
Building our technology and data capabilities Further advances of in-car technology and driverless cars are set to change British roads. As a leading insurer we have a key role to play in the development and, in particular, the adoption of this technology which has the potential to improve road safety significantly.
Embracing new technology With ADS observing and recording in the background while MOVE_UK vehicles are driven normally, it’s a unique opportunity to learn how ADS technology would respond in real life situations.
Building our brands by offering more We take pride in investing in our brand propositions to give customers increased certainty around the service they can expect from their insurance.
Support around the clock We identified escape of water as a costly problem for both homeowners and insurers and one that requires a quick remedy – a burst pipe can result in 30 gallons of water escaping in as little as two minutes. To tackle this, in 2016 we introduced our commitment to providing an emergency plumber within three hours of reporting an uncontrollable leak for all Direct Line Home Insurance Plus policyholders and those who add ‘Home Emergency’ to their standard Direct Line Home policy.
The amount of cash paid to shareholders from the Group’s profit.
A measure of financial year underwriting profitability. It is the sum of the net claims, commissions and expenses divided by net earned premium. This excludes instalment and other operating income, and investment return. A combined operating ratio (“COR”) of less than 100% indicates profitable underwriting.
We have a progressive dividend policy and aim to increase the dividend in real terms each year. Additionally, we look to return surplus capital to shareholders when appropriate.
We aim to make an underwriting profit. For 2017, we expect to achieve a COR in the range of 93% to 95% for Ongoing operations, assuming a normal level of claims from major weather events and no further change to the Ogden discount rate.
This is a broad measure of earnings and reflects the results of the Group after tax. We base part of the Annual Incentive Plan (“AIP”) awards on profit before tax and earnings per share is closely linked to this.
We base part of the AIP awards on profit before tax. COR is closely linked to this.
Net Promoter Score (“NPS”) is an index that measures the willingness of customers to recommend products or services to others. It is used to gauge customers’ overall experience with a product or service, and the customer’s loyalty to a brand.
This measure indicates the level of customer service we provide. We aim to improve this over time.
While the proportion of complaints received improved on 2015, we recognise we have more to do to reduce these.
Notes: 1. Estimates based on the Group’s Solvency II partial internal model for 31 December 2016 and 30 June 2016. Solvency II capital coverage based on standard formula for 31 December 2015 2. On an aggregated 12-months rolling basis, with 2013 rebased to 100 3. For the Group’s principal underwriter, U K Insurance Limited; it excludes discontinued operations
Our risk governance structure The Board sets and monitors adherence to the risk strategy, risk appetite, and risk framework. It has established a risk management model that separates responsibilities into ‘Three Lines of Defence’.
Our First Line of Defence is responsible for owning and managing risks to achieve our business objectives on a day-to-day basis. The Second Line of Defence is responsible for providing proportionate oversight, and challenging risks, events and management actions. Group Audit is the Third Line of Defence, providing an independent and objective view of the adequacy and effectiveness of the Group’s risk management, governance and internal control framework.
Risk appetite Our risk appetite statements define the opportunities and associated risks we are prepared to accept to achieve our business objectives. The Group has recalibrated its risk appetite range relating to the Solvency II internal model – see the table below. To monitor whether the business remains within risk appetite, we use key risk indicators (“KRIs”). We derive the KRIs from the risk appetite statements which are used to drive and monitor risk-aware decision-making.
These KRIs are qualitative and quantitative, and forward and backward looking. We review our risk appetite statements and KRIs annually, using outputs from the Internal Economic Capital Model (“IECM”).
1. Maintain capital adequacy The Group seeks to hold own funds in the range of 140% to 180% of the internal model SCR. The Group also seeks to maintain sufficient economic capital consistent with its strategic aim of achieving a standalone credit rating in the ‘A’ range.
The Group aims to meet planned and unexpected cash outflow requirements, including those requirements that arise following a one-in-200 years insurance, market or credit risk event.
The Group has no appetite for material risks resulting in reputational damage, regulatory or legal censure, fines or prosecutions, and other types of non-budgeted operational risk losses associated with Group conduct and activities. The Group will maintain a robust and proportionate internal control environment.
The ERMF enables us to run the business with the necessary understanding of our risks and controls, as well as having appropriate oversight to manage risks proactively. The ERMF is aligned to the Three Lines of Defence model, and intends to provide a coherent, robust, fit-for-purpose, end-to-end approach for managing all material risks. Our policy framework is a central part of the ERMF, and includes policies and minimum standards. These inform the business about how it needs to conduct activities to remain within its risk appetite.
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. See pages 136 to 139.
The risk of loss resulting from fluctuations in the level and volatility of market prices of assets, liabilities and financial instruments. See pages 139 to 141.
• We manage and control the risks in our investment portfolio through: − an investment strategy approved by the Board; − diversifying the types of assets; limits on the amount of illiquid investments; tightly controlling individual credit exposures; and risk-reduction techniques, such as hedging foreign currency exposures with forward contracts, and hedging exposure to US interest rates with swap contracts
• Information security • IT and business continuity • Outsourcing • Financial reporting • Model • Partnership contractual obligations • Change
The risk of loss due to inadequate or failed internal processes, people, systems, or from external events.
• We use specific risk management tools and resources to help manage our exposure to regulatory risk
• Our robust customer conduct risk management is designed to minimise our risk exposure
Changes to traditional insurance business models New market entrants and changes in consumer expectations could result in significant changes to the structure of the general insurance market, and require us to update our business model. Our strategy, aligned to our mission to make insurance much easier and better value for our customers, is positioned to take advantage of changes in technology and customer behaviours.
Climate change Climate change could increase the frequency of severe weather events in the UK, and particularly flooding claims costs. We continue to monitor changes in claims experience and consider weather trends as part of our pricing and underwriting processes.
• We agree, monitor and manage performance against the plan and targets
Safer young drivers In December last year we launched Shotgun, a free smartphone app that aims to reduce road deaths among new young drivers.
In the UK, around half a million 17 to 25 year olds pass their driving test each year. It is a significant rite of passage for many young people, but it is also a time when young drivers are at their most vulnerable. Our data shows that accident rates among young drivers are, perhaps not surprisingly, enormously higher during the first year of driving, with one in five young drivers having some form of accident during this time. Young drivers are also hugely over-represented in the most serious accidents.
There are various reasons why young drivers crash; these include over-confidence, a natural human urge to test personal boundaries and take risks, and little experience of recognising hidden hazards. Using road-safety data and our knowledge of driver behaviour, we identified contextual speed (speed relative to other safe road users) as a significant cause of fatal and serious crashes involving young drivers. In particular, the first 1,000 miles for a new driver are critical; this is when the gap between perceived and actual driving competence drives much higher risk.
Shotgun acts as the wingman for newly qualified drivers and was developed with their direct input. Through GPS technology on a user’s smartphone, Shotgun uses the best of our telematics capability to assess driving performance, evaluating smoothness, contextual speed and a number of other factors to generate a score for each journey taken. Each user builds up a personal score which is a core indicator of accident risk. In turn, this score earns app users a place on the Shotgun leaderboard, gamifying the experience and allowing users to compete with their peers. Shotgun re-frames what it takes to be a good driver, and explodes the myth that everybody else is driving fast. The app also gives users detailed feedback, highlighting what they have done well, and how they could improve their driving score next time. When users hit pre-determined point thresholds, they unlock rewards. This encourages drivers to use the app through 1,000 miles and to improve their performance still further to earn ever more valuable rewards.
PACTS In November, we launched our third Road Safety Dashboard with the Parliamentary Advisory Council for Transport Safety (“PACTS”). This pioneering tool uses Department for Transport statistics to produce an index that ranks the road safety record of individual parliamentary constituencies. MPs tell us they find the tool valuable. In July, we also ran an event in Parliament at which 33 parliamentarians signed up to our pledge to improve road safety awareness. We also sponsored the PACTS Annual Westminster Transport Safety Lecture in the House of Commons where policymakers and campaigners come together to share ideas and best practice.
Brake We maintained our partnership with road safety charity, Brake, to produce a series of survey reports on driver behaviour and attitudes. We released the results to the media to raise awareness of road safety issues and educate the public. This year’s reports have covered ‘drink driving’, ‘eating and drinking at the wheel’, ’texting while driving’, ‘winter driving’ and ‘speed awareness in urban areas’. Brake uses this research for its wider campaigning, education, community and professional engagement activities. We also sponsored Brake’s Parliamentarian of the Year Awards, which recognise Members of Parliament who have campaigned on road safety issues.
Note: 1. This excludes discontinued operations, the Group’s former International division. Total Group emissions for 2014 and 2015 were 28,759 and 23,143, respectively
Reduce, Reuse and Recycle We aim to manage our operations sustainably and have progressed well in reducing our impact on the environment.
Emissions You can find information on Group-wide greenhouse gas (“GHG”) emissions in the chart below – and more details of our emissions in the Directors’ report on page 112.
Energy use is the main cause of our emissions. In absolute terms, we have reduced our emissions significantly after rationalising and implementing an energy-savings plan across our estate. This covered location management, air-conditioning, heating and lighting, for instance. We are targeting a 30% like-for-like reduction in the Group’s energy use by 2020 against a 2013 baseline.
Waste We have further improved our systems for managing waste and increased the percentage of waste we recycle at our UK Accident Repair Centres to 61% from 54% in 2015 and at our office sites to 42% from 40% in 2015. These figures exclude paper waste which is 100% recycled. Including paper, we recycled 80% of waste at our UK Accident Repair Centres and 78% at our offices in 2016. All of our office waste is diverted from landfill, including recycling.
Suppliers Our Ethical Code for Suppliers sets out our approach to managing CSR related matters across our supply chain. We support the aims of the Modern Slavery Act 2015 and are committed to ensuring that modern slavery is not present in our supply chain. We have extended our Ethical Code to expressly cover this commitment. In accordance with the Act, we publish an annual statement on slavery and human trafficking on the Group website at www.directlinegroup.com.
We continue to focus on building pride in Direct Line Group, encouraging and celebrating the strength of our workforce. Various volunteer groups, such as our Employee Representative Bodies and Local Co-ordination Teams, increase our employees’ voice. Last year we invited employees to participate in research to help shape their future way of working. The research considered how the future working environment, technology and culture could give our people the tools they need to live and work at their best.
We also invested significantly in a new Graduate Programme. The Programme offers opportunities equally to existing employees and new applicants and will help further drive the pipeline of qualified, bright young people coming into our business.
Employee feedback remains an important gauge of how our initiatives affect change. In 2016 our people managers created over 900 action plans to improve their teams’ experience. Again this played a major part in significantly improving our engagement score from 60% in 2015 to 73%. The percentage of our employees who are proud to work for the Group also increased from 80% in 2015 to 87%, while 81% tell others that the Group is a great place to work (70% in 2015).
Our diversity and inclusion practices are in line with the Universal Declaration of Human Rights. Our Ethical Code for Suppliers requires that all our suppliers adhere to the core International Labour Organisation standards.
• organising quiz nights, fun runs, masquerade balls, festivals, cake sales, sky dives, charity football matches and much more to raise thousands of pounds for local causes.
Matched giving and grants In 2016, our employees donated £149,000 through our payroll giving scheme and we donated a further £100,000 in matched giving. We also provided £68,250 in grants to organisations for which our employees fundraise or volunteer.
In 2016, the Group signed up to the Women in Finance Charter. The Charter is a commitment by HM Treasury and signatory firms to work together to build a more balanced and fairer industry. Our pledge to the Charter reinforces our other initiatives such as our Diversity Network Alliance in promoting diversity and inclusion in our business. The Group committed to increase female representation in senior management to 30% by the end of 2019.
In 2016, the Group was proud to be named in the OUTstanding Power Lists. We started working with OUTstanding, a professional network of executives committed to diversity, alongside other partner organisations to help shape our plans and bring new ideas and thinking on diversity and inclusion.
Motor Highlights  Britain’s leading personal motor insurer measured by in-force policies
 In-force policies increased by 4.5% with growth in own brands in-force policies in each quarter
 Operating profit reduced to £149.1 million due to higher non-cash intangible asset impairments and the reduction in the Ogden discount rate
The COR for the Motor division was 106.3% (2015: 92.4%), including an 11.2 percentage points one-off increase due to the recent reduction in the Ogden discount rate. Prior-year reserve releases were significantly lower at £123.5 million (2015: £266.8 million), including a £139.8 million charge in respect of the recent Ogden discount rate change.
Operating profit was £149.1 million, lower than 2015 primarily as a result of a one-off charge due to the reduction in the Ogden discount rate of £150.3 million and higher intangible asset impairments of £39.3 million.
Regulatory On 27 February 2017, the Lord Chancellor announced a reduction in the Ogden discount rate to minus 0.75% with effect from 20 March 2017, which has led to an increase in the amount of claims reserves necessary to be held by the Group, specifically those that are settled as lump sums by the Courts. This follows a consultation process instigated by the Ministry of Justice some years ago in connection with the rate to be applied to personal injury lump sum damages awards in settling such claims. The Group is committed to ensuring claimants receive appropriate compensation and has made appropriate provision in its claims reserves for the ruling, which will apply to all open unsettled claims. The Lord Chancellor’s announcement referred to a consultation to consider options for reform concerning the discount rate and accordingly has left open the possibility of further changes to the process by which the rate is set, and therefore to the rate itself. The Group welcomes the consultation to consider options for reform, with a view to achieving a better and fairer framework for claimants and defendants.
Outlook The market was highly competitive and faced a number of significant government policy and regulatory changes during 2016 and 2017. In the face of these challenges, we demonstrated our resilience and appeal to customers by growing our own brand policies while maintaining overall margins, which has continued into early 2017. We do not expect any material residual impact on 2017 Motor profit as a result of adopting the reduction in the Ogden discount rate to minus 0.75%.
Note: 1. Average incepted written premiums excluding IPT for total Motor for year ended 31 December 2016
 COR increased by 13.9 percentage points to 106.3% primarily reflecting the increase in reserves following the reduction in the Ogden discount rate
The market experienced high levels of shopping during 2016. The Direct Line brand was able to use this environment to continue to improve its competitive position, resulting in strong new business growth. The comparatively high level of persistency and attractive customer base allowed the Group to reinvest some of that value back into propositions and price competitiveness.
The expense ratio increased due to higher non-cash intangible asset impairments of £39.3 million. The commission ratio remained broadly stable compared to 2015.
On 23 February 2017, the Government announced measures to reduce the volume and cost of soft tissue damage ‘whiplash’ claims and stated its expectation that this will see a reduction in motor insurance premiums by £40 on average. The measures include a fixed tariff for payment of injuries up to 24 months in duration. Further measures detailed in the paper are still being considered. The Government is keen to introduce all changes to whiplash claims as a package in late 2018. The Group has been calling for reform in this area for some time and continues to work with Government and industry bodies on how the reforms should be implemented.
Note: 1. Average incepted written premiums excluding IPT for total Motor for year ended 31 December 2016 www.directlinegroup.com 35
Home Highlights  Britain’s leading personal home insurer measured by in-force policies
Performance In-force policies for Home own brands increased by 2.3% to 1.8 million over 2016, while partner in-force policies reduced by 4.7%. Gross written premium was 3.7% lower than for 2015 primarily due to partnerships which were 6.2% lower, while own brands experienced a smaller reduction of 0.9%.
Following a prolonged period of significant deflation, the home market showed signs of some stability during the second half of 2016. Home‘s average written premium1 decreased by 3.9% in 2016 compared with 3.6% in 2015, primarily due to changes to tenure and distribution channel mix including higher sales through the PCW channel. Home market new business premiums improved during the year after years of premium deflation. New business pricing for the Group’s Home own brands was sufficiently competitive to allow the Home division to continue to grow own brands through web and aggregator channels.
In Home, the COR improved by 7.2 percentage points primarily as a result of a lower loss ratio, which was 10.8 percentage points lower than 2015. The impact of major weather events in 2016 was approximately £18 million (2015: £90 million) and was lower than the normal annual level of claims costs expected from major weather events of approximately £70 million. Prior-year reserve releases, which included some favourable development from the storms in late 2015, were higher than last year at £75.9 million (2015: £41.9 million).
Flood Re From 1 April 2016, Flood Re, the Government and industrybacked scheme to provide affordable home insurance to households at high risk of flooding, became operational. The Group has supported Flood Re’s formation and was ready to cede chosen risks to Flood Re on its inception.
Note: 1. Average incepted written premiums excluding IPT for Home own brands for year ended 31 December 2016 www.directlinegroup.com 35
Operating profit reduced by 11.7% to £45.9 million. Within Rescue and other personal lines, Rescue operating profit was similar to the prior year at £42.8 million (2015: £42.2 million).
Outlook Rescue continued to build its underlying capability to provide an excellent customer experience. During 2016 strong improvements in NPS underlined the progress being made and Green Flag has a strong focus for 2017 to seek to further enhance customer experience. The Group also continues to roll-out improvements in Pet and Travel to enhance our service while updating our customer propositions.
Gross written premium for Rescue and other personal lines grew by 1.7% compared with 2015. Rescue gross written premium remained broadly stable compared with 2015. Green Flag performed well supported by competitive propositions. Gross written premium for other personal lines grew by 3.0% compared to 2015.
The COR for Rescue and other personal lines was 2.1 percentage points higher than 2015 at 93.3% (2015: 91.2%). The Rescue COR was 83.4% (2015: 82.3%) with a higher loss ratio reflecting changes in business mix and investment in the network. The commission ratio of 7.2% was 0.8 percentage points higher than 2015, reflecting higher partner profit share, while the expense ratio was stable compared to 2015.
Note: 1. Rescue in-force policies have been revised to exclude partner post-accident vehicle recoveries www.directlinegroup.com 37
 Gross written premium increased by 3.0 percentage points to £499.8 million. Direct Line for Business gross written premium grew by 7.7 percentage points to £109.6 million
 COR reduced by 5.8 percentage points and operating profit increased by £21.0 million with both benefitting from lower claims costs from major weather events
Performance Commercial in-force policy growth across 2016 was achieved by increased sales through the Direct Line for Business and NIG. By 31 December 2016, there were more than 433,000 Direct Line for Business in-force policies.
The Commercial market has remained competitive during 2016, in particular in the broker channel. Overall premium rates have slightly lagged claims inflation albeit with variation by class of business and channel. Commercial continued to maintain its underwriting discipline and seek to balance the retention of customers with premium rate inflation.
The Commercial COR of 98.7% was 5.8 percentage points lower compared to 2015. This benefited from lower weather related claims costs, which were offset by the impact of the recent Ogden discount rate change.
Outlook The Commercial division continued to develop both its direct to customer and broker led operations. Direct Line for Business continues to invest in its proposition to take advantage of the growing direct Commercial insurance market. Meanwhile, NIG is consolidating its position in the broker market with a focus on delivering effortless trading to its broker partners across both electronically and regionally traded business.
 Combined operating ratio1 from Ongoing operations of 97.7% (pre-Ogden3: 91.8%; 2015: 94.0%) increased as a result of the reduction in the Ogden discount rate, partially offset by improved current-year underwriting performance and favourable weather claims. Adjusted for normal weather and before the Ogden discount rate change, the combined operating ratio was 93.5%, towards the lower end of the target range of 93% to 95%
Ongoing operations1 In-force policies1 (thousands) 15,806 16,068 Gross written premium1 3,274.1 3,152.4 Net earned premium1 3,000.6 2,920.8 Underwriting profit 70.1 175.2 Investment return1 168.1 194.7 Instalment and other operating income 165.3 150.8
Operating profit1 – Ongoing 403.5 520.7 Run-off1 26.6 73.1 Restructuring and other one-off costs (39.9) (48.7) Operating profit 390.2 545.1 Finance costs1 (37.2) (37.6) Profit before tax 353.0 507.5 Tax (74.2) (108.3) Profit from discontinued operations, net of tax – 181.2 Profit after tax 278.8 580.4
Of which is Ongoing operations 293.0 385.3 Key metrics Loss ratio1 60.9% 59.5% Commission ratio1 11.5% 10.9% Expense ratio1 25.3% 23.6%
Notes: 1. See glossary on pages 189 and 190 2. See appendix A – Alternative performance measures on page 191 3. See appendix B – Proforma results on page 194 which presents the Group’s results excluding the recent impact of the Ogden discount rate reduction 4. Estimates based on the Group’s Solvency II partial internal model for 31 December 2016
 2016 results reflect the one-off impact of using the new Ogden discount rate of minus 0.75%. Operating profit from Ongoing operations of £403.5m (pre-Ogden discount rate reduction3: £578.6m; 2015: £520.7m) and profit before tax of £353.0m (pre-Ogden3: £570.3m; 2015: £507.5m). Return on tangible equity1, 2 of 14.2%, (pre-Ogden3: 20.2%; 2015: 18.5%)
Other personal lines 237.7 230.8 Rescue and other personal lines 400.8 394.1 Direct Line for Business 109.6 101.8 NIG and other 390.2 383.5
At the start of the year, the Group set 2016 COR guidance for Ongoing operations in the range of 93% to 95%. This assumed a normal level of claims from major weather events. On this basis and excluding the recent Ogden discount rate reduction, the Group achieved a normalised COR of 93.5% which is towards the lower end of the Group’s target range. This also includes a non-cash intangible asset impairment charge of £39.3 million.
Within the loss ratio, the current-year attritional loss ratio improved by 0.2 percentage points to 69.2% (pre-Ogden: 68.8%; 2015: 69.4%) with improvements in Motor and Commercial offset by a deterioration in Home and Rescue and other personal lines.
Notes: 1. Home claims from major weather events, including inland and coastal flooding, and storms 2. See definition in glossary on pages 189 and 190 www.directlinegroup.com 39
Total costs for Ongoing operations were £923.7 million for 2016, after non-cash intangible asset impairments of £39.3 million and the Flood Re levy of £24.1 million (2015: £884.7 million). The non-cash impairment charge is in respect of intangible assets previously capitalised on the balance sheet and primarily relates to ongoing IT projects which aim to enhance the Group’s digital offering, customer experience and operational efficiency. Notes: 1. Commercial attritional loss ratio includes weather costs 2. Home claims for major weather events, including inland and coastal flooding and storms
For the year ended 31 December 2016 Net insurance claims 4 1,001.7 332.0 243.0 250.5 1,827.2
Total costs for Ongoing operations were £923.7 million for 2016, after non-cash intangible asset impairments of £39.3 million and the Flood Re levy of £24.1 million (2015: £884.7 million). The non-cash impairment charge is in respect of intangible assets previously capitalised on the balance sheet and primarily relates to ongoing IT projects which aim to enhance the Group’s digital offering, customer experience and operational efficiency. Notes: 1. Commercial attritional loss ratio includes weather costs 2. Home claims for major weather events, including inland and coastal flooding and storms www.directlinegroup.com 41
On 16 January 2017 the Financial Services Compensation Scheme announced that it would raise a supplementary levy of £63 million on general insurers to compensate policyholders of the Enterprise and Gable insurance companies. The Group’s share of the levy, approximately £5 million for 2017, will be charged to operating expenses in Q1 2017.
Instalment income 107.1 100.1 Other operating income: Vehicle replacement referral income 14.1 12.5 Revenue from vehicle recovery and repair services1 19.3 15.5 Other income 24.8 22.7 Other operating income 58.2 50.7 Total Ongoing 165.3 150.8
Instalment and other operating income from Ongoing operations of £165.3 million increased 9.6% on the prior year (2015: £150.8 million). Instalment income increased by £7.0 million compared to 2015, primarily as a result of higher Motor volumes. Other operating income increased by £7.5 million in 2016 to £58.2 million (2015: £50.7 million).
Investment income 164.5 165.6 Net realised and unrealised gains 3.6 29.1 Investment return – Ongoing 168.1 194.7
The total investment return for Ongoing operations decreased to £168.1 million compared to £194.7 million in 2015. The decrease is primarily as a result of lower net realised and unrealised gains. Investment income remained broadly stable, at £164.5 million compared with 2015, despite lower average assets under management (“AUM”) of £6,581.0 million (2015: £6,818.7 million) and a reduction of 25 basis points by the Bank of England in the UK base rate during the year. These downward factors were partially offset by portfolio actions.
Net realised and unrealised gains for Ongoing operations of £3.6 million were significantly lower than the comparative period (2015: £29.1 million) primarily due to lower unrealised property gains, which were £4.1 million for the year (2015: £24.2 million).
Notes: 1. Vehicle recovery includes post-accident and pay-on-use recovery. Repair services constitute the provision of non-insurance related repairs services 2. See glossary on pages 189 and 190 www.directlinegroup.com 41
Taxation The effective tax rate in 2016 was 21.0% (2015: 21.3%), which was higher than the standard UK corporation tax rate of 20.0% (2015: 20.25%), primarily due to disallowable expenses. Based on current information, the Group expects the effective tax rate to be broadly in line with the UK standard tax rate.
The Group reiterates its ongoing target of achieving at least a 15% RoTE. Following a review of the approach to the Group’s Directors’ remuneration policy, the Remuneration Committee is proposing that the level of RoTE required for the March 2017 long-term incentive plan awards to vest be increased from the current range of 14.5% to 17.5% to a range of 15.0% to 18.0%. This will ensure that awards will only vest in full if significant value has been delivered to shareholders.
The net asset value at 31 December 2016 was £2,521.5 million (31 December 2015: £2,630.0 million) with a tangible net asset value of £2,012.6 million (31 December 2015: £2,105.2 million). The decrease since the beginning of the year reflected the payment of dividends, offset by the profit in 2016 and an increase in AFS investment reserve.
Dividends The Board is proposing a final dividend of 9.7 pence per share making a total regular dividend for 2016 of 14.6 pence per share. This represents 5.8% growth over the 2015 regular dividend and is in line with the Group’s aim to grow the regular dividend annually in real terms, see page 110 for the Group’s dividend policy. The final dividend will be paid on 18 May 2017 to shareholders on the register on 17 March 2017. The ex-dividend date will be 16 March 2017.
Dividends paid amounted to £450.6 million (2015: £666.0 million) resulting in net cash used by financing activities of £528.4 million (2015: £722.0 million).
Net assets 2,521.5 2,630.0 Goodwill and intangible assets (508.9) (524.8) Tangible net assets 2,012.6 2,105.2 Closing number of shares 1,365.1 1,368.7 Net asset value per share (pence) 184.7 192.2 Tangible net asset value per share (pence) 147.4 153.8
The Group seeks to adopt a conservative approach to assessing liabilities, as evidenced by the favourable development of historical claims reserves. Reserves are based on management’s best estimate, which includes a prudent margin that exceeds the internal actuarial best estimate. This margin is made in reference to various actuarial scenario assessments and reserve distribution percentiles, and considers other short and long-term risks not reflected in the actuarial inputs, as well as management’s view on the risks and improvements in relation to the actuarial best estimate.
Following the Lord Chancellor’s announcement on 27 February 2017 of a reduction in the Ogden discount rate to minus 0.75%, the Group has assessed its liabilities in light of the reduction in the rate. The Ogden discount rate primarily affects the value of large bodily injury claims in the Motor, Commercial and Run-off divisions, and as a result also impacts reinsurance recoveries and the propensity for claims to settle as periodic payment orders (“PPO”). As a result, the Group has made provision within its claims reserves for a reduction in the Ogden discount rate to minus 0.75%. The impact of this on the income statement for the year ended 31 December 2016 is shown in Appendix B on page 194 and has reduced operating profit from Ongoing operations by £175.1 million and profit before tax by £217.3 million.
The Group’s prior-year reserves releases were £290.1 million (2015: £449.3 million) after £205.2 million of strengthening due to the recent reduction in the Ogden discount rate. Excluding the change in the Ogden discount rate, the releases have arisen as a result of good experience in large bodily injury claims and PPOs. Home prior-year reserve releases increased to £75.9 million (2015: £41.9 million) with the increase coming mainly from favourable development on the December 2015 weather events.
Prior to the recent reduction in the Ogden discount rate, the Group established claims reserves at an assumed Ogden discount rate of 1.5%, compared with the rate then in force of 2.5%. This differential resulted in lower current-year profits, with a small and diminishing prior-year reserve release in the Group’s reported profits as claims settled. The Group will now hold claims reserves at the new Ogden discount rate pending the outcome of the consultation and so the timing difference between current and prior-year profit recognition will no longer exist. The net impact of this change in approach on currentyear profit is expected to be small.
Following the Group’s normal actuarial review process, the Group reduced its margin during 2016 due to improved claims experience, particularly in large bodily injury claims, not yet recognised in the actuarial best estimate. The Group continues to hold a significant margin above the actuarial best estimate and its overall reserving strength has been maintained following the recent reduction in the Ogden discount rate.
For details relating to the sensitivity for changes in the assumed Ogden discount rate and the discount rate used in relation to periodical payment orders see note 3.3.1 of the consolidated financial statements.
 Commercial property risk reinsurance to protect against large individual claims with a retained deductible of £4 million which renews annually on 1 October.
Asset allocation and benchmarks The current strategic asset benchmarks for the Group are detailed in the following table: At 31 December
At 31 December 2016, total unrealised gains, net of tax, on AFS investments were £92.1 million (31 December 2015: £5.4 million).
In 2016, the Group delivered a robust investment result against a background of increased financial market uncertainties and further yield compression for much of the year. Investment in three new mandates commenced, with two fully funded to benchmark holdings (subordinated financial debt and global credit). The commercial real estate loans mandate is expected to be fully funded to its benchmark holding by the end of 2017.
 To deliver a suitable risk-adjusted investment return commensurate with the Group’s risk appetite
Derivatives are permitted only for risk mitigation and efficient portfolio management within the investment portfolio. Derivatives used include interest rate swaps, for example to hedge exposure to US Dollar interest rate movements, and forward currency contracts to hedge assets denominated in foreign currency back to Sterling. Separately, interest rate swaps have also been used to change the interest rate liability on the Group’s debt issuance to a floating rate basis.
Investment holdings and yields – total Group 2016 2015 £m Allocation Income Yield Allocation Income1 Yield
Capital management Capital management policy The Group seeks to manage its capital efficiently, maintaining an appropriate level of capitalisation and solvency, while aiming to grow its regular dividend annually in real terms.
As has been its practice, where the Board believes the Group has capital which is expected to be surplus to the Group’s requirements for a prolonged period, it would intend to return the excess to shareholders.
The Board has considered the risk appetite range of the Group under its Solvency II PIM and considers that the appropriate range, which should enable it to meet its operational, regulatory and rating agency requirements, is 140% to 180% of its SCR.
Solvency ratio sensitivity analysis The following table shows the Group’s solvency ratio sensitivities estimated based on assessed impact of scenarios as at 31 December 2016.
Notes: 1. Investment income for the year ended 31 December 2015 relates to continuing operations 2. Asset allocation at 31 December 2016 includes investment portfolio derivatives, which have been netted and have a mark-to-market liability value of £5.8 million included in investment grade credit (31 December 2015: mark-to-market liability value of £45.7 million of which £40.4 million included in investment grade credit and £5.3 million in securitised credit). This excludes derivatives that have been used to hedge interest on subordinated debt and operational cash flows 3. Securitised credit was disposed of during 2016 4. Net of bank overdrafts, includes cash at bank and in hand and money market funds with no notice period for withdrawal (31 December 2015: also included money market funds with maturities greater than three months www.directlinegroup.com 45
Capital position At 31 December 2016, the Group held a Solvency II capital surplus of approximately £0.92 billion above its regulatory capital requirements. This was equivalent to an estimated capital coverage ratio of 165%, post-dividend. Excluding the impact of the recent reduction in the Ogden discount rate to minus 0.75%, the capital coverage ratio would have been approximately 189% post-dividend. Other than the effects of the Ogden discount rate change, which increased the SCR by £0.08 billion, the SCR remained largely stable in the second half of 2016, since the Group was approved to use its PIM. In the first half of 2016, the Group’s SCR fell from £1.68 billion to £1.37 billion, largely as a result of the transition from the standard formula to the PIM. The SCR calculation fully recognises the new Ogden discount rate of minus 0.75%, but does not take into account any implications of uncertainty around the future rate. The Group’s capital coverage is as follows: At 31 December
The following table splits the Group’s own funds by tier on a Solvency II basis.
Tier 1 capital after foreseeable dividends represents approximately 72% of own funds and 118% of the Group’s estimated SCR. Tier 2 capital relates solely to the Group’s subordinated debt issued in 2012, which has a market value of £0.62 billion. The Group also recognises a deferred tax asset of £0.04 billion as Tier 3 capital. Therefore, the Group’s Tier 2 and 3 capital is within the limits established by Solvency II of up to 50% of the SCR in Tier 2 and 3 combined, and 15% for Tier 3 alone.
Shareholders’ equity 2.52 2.67 Goodwill and intangible assets (0.51) (0.54) Change in valuation of technical provisions (0.04) 0.11 Other asset and liability adjustments (0.16) (0.20) Foreseeable dividends (0.13) (0.20)
During 2016, the Group’s own funds reduced from £2.47 billion to £2.34 billion. The Group generated £0.49 billion of Solvency II capital, excluding the effects of the Ogden discount rate change, offset by £0.12 billion of capital expenditure and capital distribution of £0.34 billion, including the 2016 interim and final ordinary dividends and special interim dividends. Mark to market gains, as lower interest rates and credit spread tightening increased the value of the bond portfolio, were offset by a change in the basis of the risk margin calculation following approval of the Group’s PIM.
Note: 1. Total financial debt as a percentage of total capital employed
Outlook The Group’s markets were highly competitive and faced a number of significant government policy and regulatory changes during 2016 and in early 2017. In the face of these challenges, the Group demonstrated both its resilience and its appeal to customers by growing its own brands policies while maintaining overall margins, which has continued into early 2017. The Group does not expect any material residual impact on 2017 profit as a result of adopting the reduction in the Ogden discount rate to minus 0.75%.
The Group aims to reduce its expense ratio during 2017, absorbing its investment in future capability. The Group also aims to deliver a lower commission ratio during 2017, normalised for major weather events: this will in part reflect changes in its distribution channel mix. Over the longer term, the Group aims to achieve further reductions in both the expense and commission ratios.
0BStatement of the Directors in respect of the Strategic report The Board reviewed and approved the Strategic report on pages 1 to 47 on 6 March 2017.
The Board recognises the importance of succession planning and understands the need to have leaders who reflect the Group’s culture and values.
During 2016, the Nomination Committee reviewed the Board’s expertise and experience and engaged an external consultant in the search for new candidates. The Board’s Nomination Committee oversaw the selection and appointment of Richard Ward as Senior Independent Director. Following Priscilla Vacassin’s retirement from the Board in March 2016, a number of changes were made to the chairmanship and membership of the Board’s Committees. I am pleased to report that Danuta Gray was appointed as a Non-Executive Director and Mike HollidayWilliams was appointed as an Executive Director on 1 February 2017. Having previously held executive and non-executive roles in a number of sectors, including financial services, Danuta brings vast experience to the Board whilst Mike’s appointment reflects the importance of the Personal Lines business to the Group. The Nomination Committee report on page 76 contains further information on the Board’s approach to succession planning and Board and Committee changes.
UK Corporate Governance Code The Board is committed to the principles of the UK Corporate Governance Code issued by the Financial Reporting Council (the “Code”). I am pleased to report that we have complied with all of the principles of the 2014 edition of the Code which applied to the financial year under review. You can find further explanation and details on pages 53 to 63.
Culture and values The Board is responsible for securing the long-term success of the Group. The Board aims to deliver this success by creating an open culture that encourages the Group to make decisions that are best for our stakeholders. I believe that the values and the Code of Business Conduct set by the Board are central to the Group’s culture. Our Code of Business Conduct governs the way we treat our stakeholders, and our values determine our behaviours. Together, these elements reflect the way we do business with the objectives of delivering long-term sustainable shareholder value and of ensuring our Group’s long-term success.
Do the right thing For our people, our customers, our shareholders and our wider stakeholders; make decisions based on what is right, not what is easy; demonstrate personal and professional integrity; do what’s right for the long-term sustainability of our business.
Aim higher Strive to be the best in every area of the business; be ambitious, courageous and innovative; relentlessly challenge and improve; seek and embrace change; learn from our mistakes; persevere, always deliver our promises and don’t settle for second best.
Say it like it is Be real, authentic and true to yourself; have adult-to-adult conversations with all audiences; listen, seek to understand and respect diversity of views; be open, call out issues we see; share information and keep things as simple as possible.
Dealing with competitors We will compete fairly and honestly and in accordance with all applicable competition laws.
Mike was previously Chairman of Resolution, then a FTSE 100 UK life assurance business, and has acted as Chief Executive Officer and Group Finance Director of Resolution plc. He was previously Group Finance Director of Aviva plc. He is an Associate of the Institute of Chartered Accountants in England and Wales.
After joining RBS Group in 2004 as Managing Director responsible for products and marketing, he became the Chief Executive Officer of RBS Group’s mainland UK retail banking business. Before joining RBS Group, Paul held various senior multi-channel retailing roles in the GUS and Kingfisher groups. Paul started his career in marketing, with UK and European roles at Procter & Gamble.
External appointments Paul is the Deputy Chairman of the Association of British Insurers Board and a Non-Executive Director of Channel Four Television Corporation.
Biography Jane is Chair of the Board Risk Committee. She has extensive experience of risk management, corporate governance and internal control. She also has wide experience in developing and monitoring customer and conduct risk frameworks.
She spent her early career with KPMG, working in the financial sector, later becoming responsible for delivering corporate governance, internal audit and risk-management services in the north of England. Jane has also held a number of executive roles, including Director of Audit, and Risk and Governance Director at Aviva’s UK Life business. She is a Fellow of the Institute of Chartered Accountants in England and Wales.
External appointments Jane is Chair of Reclaim Fund Ltd and an Independent Member of the Fairness Committee at ReAssure Ltd. She has her own financial sector consulting business and is also a magistrate.
External appointments Mike is a member of the Association of British Insurers General Insurance Council.
External appointments Sebastian is Group Chief Executive of Dixons Carphone plc and is also a trustee of the charities Save the Children and The DSG International Foundation.
External appointments Andrew is a Non-Executive Director of Royal London Mutual Insurance Society Limited and Royal London Asset Management Limited. He is also a member of the Financial Reporting Review Panel of the Financial Reporting Council, a Trustee of the Royal School of Needlework and a Trustee and Treasurer of Cancer Research UK.
Biography Clare is Chair of the Remuneration Committee. She has extensive experience and knowledge of people and remuneration gained from her roles at PwC. These included People Partner for Assurance which focused on talent management and career development planning, as well as involvement in the design and operation of remuneration structures across PwC UK. She also has significant financial and audit experience.
Clare was a partner at PwC from 1988 to 2011. During her 23 years as a partner, she held several senior and high-profile roles, particularly in the insurance sector. She is a Fellow of the Institute of Chartered Accountants in England and Wales.
External appointments Clare is a Non-Executive Director of British United Provident Association (Bupa) and Retail Charity Bonds plc. She is also a Non-Executive member of the partnership board of Miller Insurance Services LLP, and Treasurer of the Disasters Emergency Committee.
The only exception is the recommendation contained in Provision E.1.1 of the Code that the Senior Independent Director (”SID”) should attend sufficient meetings with major shareholders to listen to their views. Throughout 2016, the Board received regular updates from the Company’s corporate brokers on the views of its institutional shareholders and, in addition, the Investor Relations team provided regular updates to the Board. The Chairman, Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) met with key shareholders following announcements of results and reported shareholders’ views back to the Board. On this basis the Board is satisfied that it understands the views of shareholders, and major shareholders have been invited to meet with the SID should they wish to do so. It is open to all shareholders to raise any issues they wish with the Chairman, the SID and the Chair of the Remuneration Committee. The Board has therefore concluded that it has complied with the main and supporting principles under section E.1 of the Code regarding dialogue with shareholders.
For more information about the Code, visit the Financial Reporting Council’s website at www.frc.org.uk
Leadership The Board The Board has a collective objective of promoting the long-term success of the Company for its shareholders and provides leadership of the Company. The main role of the Board is to organise and direct the Group’s affairs in a way that is most likely to help it succeed in the long-term for the benefit of shareholders as a whole. The Board supervises the Group’s operations, with the objectives of ensuring that they are effectively managed, that prudent controls are in place, and that risks are assessed and managed appropriately. In addition, it also sets the Group’s strategy, and monitors management’s performance and progress against the strategic aims and objectives. The Board also develops and promotes the collective vision of the Group’s purpose, culture, values and behaviours.
You can find the names of the current Directors of the Company as at the date of this report and their biographical information on pages 50 and 51.
Meetings The Board held nine scheduled meetings in 2016. The Company Secretary attended all Board meetings. At its discretion, the Board invited senior executives and external advisers to attend Board meetings, and to present on business developments and governance matters.
The table below sets out attendance at the scheduled meetings in 2016: Scheduled meetings1
Chairman Mike Biggs 9 of 9 100% Senior Independent Director Richard Ward 9 of 9 100% Non-Executive Directors Jane Hanson 9 of 9 100% Sebastian James 9 of 9 100% Andrew Palmer 9 of 9 100% Clare Thompson 9 of 9 100% Priscilla Vacassin1 2 of 2 100% Executive Directors Paul Geddes 9 of 9 100% John Reizenstein 9 of 9 100%
Note: 1. Attendance is expressed as the number of scheduled meetings attended out of the number of such meetings possible or applicable for the Director to attend
Board Mike Biggs, Chairman  Organises and directs the Group’s affairs in a way that is believed most likely to help it succeed in the long-term for the benefit of shareholders as a whole.
 Approves the terms of reference for the Board Committees and, where appropriate, reviews and agrees their recommendations.
 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 management and performance of the Group’s investment portfolio.
 Leads the process for Board appointments and makes recommendations to the Board.
Remuneration Committee Clare Thompson, Chair  Sets and oversees how the Group implements its remuneration policy.
Executive Committee The Executive Committee is the principal management committee that helps the CEO manage the Group’s operations. It helps him: set performance targets; implement the Board-determined Group strategy and direction; and monitor key objectives and commercial plans to help achieve the Group’s targets. It also helps him evaluate new business initiatives and opportunities, and considers reports on operational matters that are material to the Group or have cross business implications.
Chairman: Responsible for maintaining, developing and leading an effective Board. Planning and managing the Board’s business, presiding at Board meetings and acting as figurehead for the Board. } The Board has agreed individual role profiles for the Chairman, Mike Biggs, and the CEO, Paul Geddes. These clearly define their roles and responsibilities. This is to ensure no one person has unlimited powers of decision making.
Chief Executive Officer: Responsible for managing the Group, and delivering the Group’s strategy and financial results. Certain elements of his authority have been delegated to Executive Committee members to help ensure that senior executives are accountable and responsible for managing their businesses and functions.
Information and support All Directors can access assistance and advice from the Company Secretary. The Board is satisfied that it receives information of appropriate quality and in a timely manner, to enable the Directors to discharge their duties. Directors may seek external independent professional advice at the Company’s expense, if they need it to discharge their duties. The Company Secretary attends all Board meetings and he or his nominated deputy attends all Board Committee meetings.
Strategy and management  Overall leadership of the Group and setting the Company’s values and standards.
 Material extension of the Group’s activities into new business or geographical areas.
 Decisions to cease operation of any material part of the Group’s business.
Structure and capital  Changes to the Company’s capital structure and debt securities structure.
Delegation of authority  Division of responsibilities between the Chairman and Chief Executive.
Board membership and other appointments  Appointment and removal of Directors,
Internal controls & risk management  The internal controls and risk management system, including the Group’s Risk Appetite Statements.
 Introduction of new share incentive plans or major changes to existing plans, for approval by shareholders.
Board & Board Committee governance, including: receiving reports from the Board’s Committees; updating terms of references for the Committees; and implementing an annual review of Board and Committees’ effectiveness.
September  Update on implementation of the next generation of customer systems
Board induction, resources and training The Board is committed to training and developing all Directors and employees. The Company Secretary is responsible for helping the Chairman regularly review and organise training for the Directors. The Company Secretary also maintains an annual training agenda for the Board and its Committees.
In order for our Directors, particularly the NEDs, to discharge their responsibilities, it is essential that they understand our business. The diagram below illustrates the various ways in which the Directors’ understanding and knowledge of the business and the regulatory environment in which it operates is enhanced.
Richard Ward undertook a tailored induction programme during 2016 which was disclosed in the 2015 Annual Report and Accounts.
A similar programme has been put together for Mike HollidayWilliams, MD Personal Lines, who has recently been appointed as an Executive Director. This programme will focus on his duties and responsibilities as a Director of the Company and corporate governance matters.
 NED visits to operational business units to meet the management teams and better understand how the business operates. These included visits to Claims, Fraud and Legal Services teams in Leeds and Bromley, the Group’s UK Assistance Accident and Repair Centres in Manchester, to the offices of The Floow in Sheffield and the offices of EXL (the Group’s principal offshore business processing services provider).
 Quarterly industry and market updates from the Group’s brokers and financial advisers.
Agenda The relevance of agenda items; Directors’ ability to influence agenda content; and how much time is allocated to strategic issues and corporate performance.
Information The flow of information, including: the quality and sufficiency of reports; access to external advice; induction and understanding of the Group’s businesses; and volume and timeliness of paper submission.
Group performance The Board’s contribution to the Group’s strategic direction; and the procedures for approving, and monitoring the Group’s performance against, the approved strategic objectives.
Leadership & culture The Board’s environment and culture, including: working relationships; succession planning; and leadership of the Board, including Board meeting management.
Governance framework and structure The Board is responsible for ensuring there is an appropriate 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.
 Enterprise Risk Management Strategy and Framework. This sets out the Group’s approach to setting risk strategy and for managing risks to the strategic objectives and day-to-day operations of the business.
 Minimum Standards, which interpret the Group Policies into a set of operational requirements that can be implemented throughout the Group.
The Board has authorised certain potential conflicts of interest in this way. However, the Board still ensures that it will appropriately deal with any actual conflict of interest or duty that might arise. This usually would involve making sure a Director does not participate in a relevant Board or Committee discussion or decision.
The Nomination Committee’s terms of reference state that it should duly regard the benefits of diversity, including gender diversity, when choosing Board candidates. You can find more information about the Board’s diversity policy in the Nomination Committee report on page 78.
The Nomination Committee’s work during the year led to the appointment of Danuta Gray as an additional NED, and Mike Holliday Williams, MD Personal Lines, as an Executive Director, both with effect from 1 February 2017. You can find out more about these activities and the Nomination Committee’s work during the year on pages 76 to 78.
Accountability An explanation of how the Board meets its responsibilities under the Code is set out below, except for the following matters, which are covered elsewhere in the Annual Report & Accounts:  How the Company seeks to generate value over the longterm is explained in the business model on pages 8 and 9, and the strategy for delivering Company objectives is on pages 14 to 17.
 How the Board has assessed the Group’s longer-term viability and the adoption of the going concern basis in the financial statements is set out in the Directors’ report on pages 112 and 113.
The Directors confirm that they consider that the Annual Report & Accounts, taken as a whole, is fair, balanced and understandable, and provides the information that shareholders and stakeholders need to assess the Group’s position and performance, business model and strategy. In arriving at this conclusion, the Board was supported by a number of processes, including the following:  Management drafted the Annual Report & Accounts to ensure consistency across sections, and a steering group comprising a team of cross-functional senior management provided overall governance and co-ordination.
This confirmation is based on the Directors’ twice-yearly review and challenge of the Group’s Material Risk Assessment (“MRA”), and their review and approval of the Group’s risk appetite statements. The MRA identifies risks quantified as having a residual risk impact of £40 million or more based on a 1-in-200years likelihood period. The quantifications are produced through stress and scenario analysis, and the IECM. Each directorate’s bottom-up risk identification and assessment supplements the MRA. The MRA also plays a key role in developing the ORSA and assessing the Group’s strategic plan.
Remuneration The Board has delegated responsibility to the Remuneration Committee for the remuneration arrangements of the Group’s Executive Directors and Chairman. It recommends and monitors the remuneration level and structure for senior executives. You can find out more about this in the Directors’ remuneration report starting on page 82.
Relations with shareholders Engagement with shareholders The Board believes that engaging regularly with the Company’s shareholders is vital to the Group’s business. Communicating and engaging with investors means the Board can stay up to date on opinions. It also gives the Company the opportunity to answer questions and concerns.
During 2016, the Board received regular updates from the Company’s corporate brokers on the views of its institutional shareholders and, in addition, the Investor Relations team provided regular updates to the Board. During the reporting period, the Company Secretary wrote to the Company’s major shareholders, to offer them opportunity to meet with the Chairman and/or the SID.
As part of the development of a revised remuneration policy for Executive Directors, to be put before shareholders at the forthcoming AGM, the Chair of the Remuneration Committee led a wide ranging consultation with key stakeholders. Further details of this process can be reviewed on page 80 of this document and the resultant remuneration policy proposed is detailed on pages 100 to 109.
The Investor Relations team helps Directors continue communicating with institutional investors, fund managers and analysts. The Board receives regular updates on investor relations, including feedback from analysts. The Company’s corporate brokers also regularly attend Board meetings to inform the Board of shareholder views.
The outcome of the resolutions put to the AGM, including poll results detailing votes for, against and withheld, are published on the Company’s website once the AGM has concluded.
 As part of the Committee’s review of the Financial Reporting Control Framework (“FRCF”) it looked at the processes which are used to produce financial asset valuations. In 2016 the Committee asked for details of the processes that were followed to give it assurance that the valuations were appropriate.
Responsibilities of the Audit Committee The Committee is responsible for overseeing and challenging the effectiveness of the Group’s systems of financial and other controls. The Committee monitors the work and effectiveness of the Group’s internal and external auditors and actuaries.
 monitor and manage the relationship with the External Auditor, including agreeing the external audit fee, assessing its effectiveness, independence and managing any tender process for the audit services contract.
 The Committee reviews and monitors the reserving process. The Committee challenged the key reserving assumptions and judgements, emerging trends, movements, and analysis of uncertainties underlying the Actuarial Best Estimate (“ABE”) and Management Best Estimate (“MBE”) of technical provisions.
 The Committee provides oversight of the accounting estimates and judgements used in the preparation of the financial statements. A particular area of focus for 2016 was the level of change and the impact on intangible asset carrying values. Following the annual review of the intangible assets, which was considered and challenged by the Committee, an impairment of intangible assets of £39.3 million was agreed.
 In relation to Group Audit, members of the Committee requested a presentation to explore, and provide an opportunity to challenge, how the function is developing its use of data analytics. In the light of a significant level of change within the Group Audit plans, the Committee also requested and received additional analysis to evidence that an appropriate breadth and depth of internal audit coverage was being maintained across the Group.
 review and monitor the reserving process and recommend the reserves to the Board.
 continually review the adequacy and effectiveness of the Group’s internal financial controls and internal control systems, and the monitoring procedures.
The Audit Committee held five scheduled meetings in 2016. Two sub-committee meetings were also held to approve the Group’s trading updates for the first and third quarters of 2016. Three additional meetings were held to review drafts of the Solvency II narrative reports and to review the Group’s Solvency II balance sheet following receipt of internal model approval.
Andrew Palmer (Chair) 5 of 5 100% Jane Hanson 5 of 5 100% Clare Thompson 5 of 5 100%
The Committee requested an in depth review of PPO reserving methodology and in September 2016 the Committee met to discuss a report by management. The topics covered were: emerging experience; key judgements and assumptions; industry benchmarking; regulation and standards; and long-term financial projections. The Committee focused its efforts on the recommendations of the Group’s Chief Actuary in the ABE and in related reserve margins proposed by the CFO.
Recognising the need for significant expert judgement in such long-term cash flow projections the Committee challenged the assumptions, specifically: life expectations; inflation assumptions; discounting; and reinsurance. It discussed the sensitivities to alternative values and approaches, and considered the long-term economic assumptions including past data and the compatibility of assumptions for International Financial Reporting Standards (“IFRS”) and Solvency II.
The Committee requested a long-term projection of the Group’s balance sheet under different assumed reinsurance arrangements. This was presented by management and showed how liabilities to PPOs would gradually accumulate over time as expected and more slowly under lower retention levels. The Committee was satisfied that the longterm trend in the Group’s balance sheet was reasonable and within risk appetite and that exposure to reinsurance bad debts was being appropriately captured.
Financial reporting The Committee monitors the integrity of the financial statements of the Group, and any other formal announcement relating to its financial performance. Solvency II related information has been incorporated into the Group’s financial reporting processes.
During the year, the Committee reviewed the preliminary announcement of the Group’s 2015 financial results, the 2015 Annual Report & Accounts, and the 2016 Half Year Report. The Committee then recommended them to the Board for approval.
The review process focused on critical accounting policies and practices, emphasising those requiring a major element of judgement. The review also considered the going concern assumptions and viability statement, valuation of assets and impairment reviews, reserving provisions, unusual transactions, clarity of disclosures and significant audit adjustments. This included the Solvency II balance sheet and certain Quantitative Reporting Templates.
The Committee also advised the Board whether the financial statements, taken as a whole, were fair, balanced and understandable and provided sufficient information to enable the reader to assess the Group’s position and performance, business model and strategy.
The Committee considered reports prepared by management on the significant estimates and judgements that were material to the financial statements and challenged the judgements being made, in particular in relation to the non-cash intangible asset impairment of £39.3 million. This relates to capitalised software development costs for ongoing IT projects primarily relating to the development of new systems. The Committee also discussed these matters with the External Auditor.
Reserves The Committee reviews and challenges the key assumptions and judgements, emerging trends, movements, and analysis of uncertainties underlying the ABE of technical provisions. At the same time, the Committee considers and challenges the appropriateness of the CFO’s proposals for management’s best estimate of reserves. These are informed by actuarial analysis, wider commercial and risk management insights, and principles of consistency from period to period.
The Group’s FRCF is part of its wider internal controls system. It addresses financial reporting risks. The Board delegates supervision of the FRCF to the Audit Committee. The CFO is responsible for the FRCF on a day-to-day basis.
Additional information The Committee has unrestricted access to management and external advisers to help discharge its duties. It is satisfied that in 2016 it received sufficient, reliable and timely information to perform its responsibilities effectively.
Note: 1. The relevant affiliates are U K Insurance Limited and Churchill Insurance Company Limited www.directlinegroup.com 67
Auditor independence and non-audit services policy The Group has an Independence of External Audit Minimum Standard. This establishes parameters for preventing or mitigating anything that compromises the External Auditor’s independence or objectivity, by virtue of it providing the Group with non-audit services. The Committee reviews and refreshes the standard annually to make sure it remains appropriate. The standard is compliant with the FRCs implementation of the EU Audit Regulation and Directive in adopting the list of prohibited non-audit services which cannot be provided to the Group.
Before each financial year, the Committee formally approves a list of audit and non-audit services that the External Auditor will provide. This is in accordance with the Minimum Standard.
The Group has delegated authority to the Audit Committee’s Chair to approve any non-audit services costing up to £100,000. Non-audit services costing over £100,000 require the Committee’s approval. At least twice a year, the Committee receives and reviews a report on all consultancy spending, including non-audit services.
Audit fees1 1.8 81.8% Non-audit fees 0.4 18.2% Total fees for audit and other services 2.2
The Committee subsequently recommended to the Board that the Group reappoint Deloitte as External Auditor. The Group will put a resolution regarding this to shareholders at the 2017 AGM.
The Audit Committee’s effectiveness A formal and rigorous annual evaluation of the Committee’s performance and effectiveness was undertaken during the year. Professor Rob Goffee of London Business School facilitated this effectiveness review, and prepared a report based on responses from Committee members and other stakeholders to a questionnaire and interview. After reviewing and discussing the report, the Committee concluded that it was operating effectively and has access to sufficient resources to perform its duties.
 review and approve the design and implementation of the ERMF, and the procedures for monitoring its adequacy and effectiveness.
 approve the Risk and Compliance function operational plans and adequacy of resourcing.
 review the governance of, and methodology and assumptions used in, the Group’s Internal Economic Capital Model, approve changes to the model and validation thereof.
The BRC held six scheduled meetings in 2016. Two additional meetings were held to consider IT controls and cyber risk; and a review of the Conduct Risk Management Framework. Additionally, the Committee held a strategy day which considered the Group’s approach to the management of risk, the risk oversight model and the operation of the Three Lines of Defence model. The table below shows attendance at the scheduled meetings: Scheduled meetings
Jane Hanson (Chair) 6 of 6 100% Andrew Palmer 6 of 6 100% Richard Ward1,2 3 of 4 75% Clare Thompson1 1 of 1 100% Priscilla Vacassin1 1 of 1 100% Notes: 1. Attendance is expressed as the number of scheduled meetings attended out of the number of such meetings possible or applicable to attend 2. Dr. Ward was unable to attend one meeting due to an overseas business commitment that he had agreed before joining the Board
 The Group received approval from the PRA for the use of its Group PIM in June 2016, successfully concluding a multi-year project. The case study on page 69 details how the Committee provided oversight to enable the Group to meet the challenges of complying with Solvency II and obtain internal model approval.
The Committee’s main responsibilities are to:  consider and recommend the Group’s risk appetite, framework and tolerance to the Board for its approval.
 consider the Group’s risk profile relative to current and future Group strategy, and to risk appetite.
The main role and responsibilities of the BRC are set out in written terms of reference and are available at www.directlinegroup.co.uk/termsofreference
Jane Hanson (Chair) 6 of 6 100% Andrew Palmer 6 of 6 100% Richard Ward1,2 3 of 4 75% Clare Thompson1 1 of 1 100% Priscilla Vacassin1 1 of 1 100% Notes: 1. Attendance is expressed as the number of scheduled meetings attended out of the number of such meetings possible or applicable to attend 2. Dr. Ward was unable to attend one meeting due to an overseas business commitment that he had agreed before joining the Board www.directlinegroup.com 69
 The IECM change process and framework, particularly in relation to the aggregation of model changes.
 The method and governance for calculating the Standard Formula, and the justification of this capital requirement including a comparison to the IECM SCR.
 The ongoing application of, and controls over, the IECM including the annual exercise to compare the IECM to the Material Risk Register.
Main activities during the year Risk monitoring At each scheduled meeting, the Committee received a report from the CRO detailing the outputs of regular risk monitoring and providing details of specific issues to the Committee. The report was enhanced during the year to set out more clearly the Group’s current risk profile, the areas of management focus and the key activities being undertaken by the second line of defence to drive forward the embedding of risk management across the Group.
The Committee assessed the principal risks facing the Group, which you can find listed on pages 27 to 29. The Committee achieved this by reviewing and challenging the Group’s Material Risk Register in the context of the Group’s risk appetite and through consideration of the risk assessment contained in the CRO’s report that was discussed at each scheduled meeting.
On behalf of the Board, the Committee also monitored the Group’s risk management systems, and reviewed their effectiveness. The monitoring and review involved examining an assessment of the control environment and material controls at Group level, based on directorate-level risk and control selfassessments. These assessments were subject to challenge by the Risk and Group Audit functions.
Additionally, the Committee considered other subjects in more detail at each scheduled meeting. These related to: compliance and regulatory risk including oversight of the Group’s regulatory relationships; operational risk; financial risk, Solvency II and IECM; emerging risks and risk governance.
The Committee received regular updates on the Group’s major change programmes, including the next generation of customer systems for Personal Lines and Commercial. The Committee monitored and examined the oversight and challenge of major change initiatives by the Risk function and reviewed the outputs of the assurance work undertaken by the Risk function and Group Audit.
Risk governance Every year, the Committee reviews and approves the ERMF, which includes the Group’s Policies and Minimum Standards, and the Regulatory Governance Map as part of the Group’s Solvency II requirements. The Committee reviewed and challenged each Group Policy and the Regulatory Governance Map and recommended them for approval by the Board. The Committee also considered the results from the annual Group assessment of the effectiveness of the internal control environment undertaken by each business directorate, as well as monitoring controls on an ongoing basis.
The Committee considered, challenged and approved the Annual Risk and Compliance operational plan. It also reviewed the outputs of the assessment of risk behaviours and attitudes across the Group, which is part of an ongoing process to drive continued improvement in risk behaviours and attitudes by providing feedback on current state, highlighting areas of good practice and areas for focus.
The CEO, CFO, CRO, Group Head of Audit, General Counsel and a representative from the External Auditor are invited to attend Committee meetings. In addition to regular one-to-one meetings with the Chair, the CRO also met privately with the Committee without management being present.
 Overall, the Committee was keen this year to ensure that the Group’s CSR activity was as tightly focused as possible on those areas where the Group could be a real force for good, bring high levels of specific expertise and have an authentic voice.
 The Committee was delighted to note the continued strong performance in raising employee engagement scores across the Group as measured by the annual employee survey and continues to push for initiatives to further increase engagement.
Responsibilities of the CSR Committee The CSR Committee oversees and advises on how the Group conducts its business responsibly. This includes matters relating to environmental, social, governance and ethics.
 assessing the Group’s role in society and the Group’s external positioning on CSR matters.
Committee composition, skills and experience and meetings in the year Sebastian James was appointed Chair of the CSR Committee as of 1 March 2016. This appointment was part of the changes to the Committees that were announced on 16 February 2016.
The CSR Committee held three scheduled meetings in 2016. This table shows attendance at the scheduled meetings: Scheduled meetings
Main activities during the year The Committee monitors the implementation of the CSR strategy through regular updates on the different focus areas and challenges the robustness of and progress against the targets relating to each strand of the CSR strategy. The Committee also receives a report on CSR developments at each of its meetings.
 The Committee reviewed the Group’s response to the 2015 Modern Slavery Act and signed off the Group policy and approach to this issue both within the Company and with respect to outside suppliers. The Committee agreed with management’s assessment that the Group’s risk exposure to the requirements of the Modern Slavery Act was currently considered to be low but should be monitored on an ongoing basis. The Committee noted management’s procedures to mitigate the risk of a breach in the Group’s supply line.
The Committee’s main responsibilities are:  approving the Group’s CSR strategy and reviewing performance against the strategy.
The Committee’s principal focus in the reporting period was on Shotgun, the CSR initiative developed by management with the goal of reaching ‘no young driver deaths in their first 1,000 miles of driving’. This is a goal across the UK irrespective of whether the young driver is insured with the Group or not.
The Committee scrutinised the development of the initiative, the consumer research, the reward partners, the communications campaign and the design and build of the app. The Committee questioned the rationale for the name ‘Shotgun’, and probed management on the designs and visual identity of the app. The Committee also requested that management implement controls to help ensure that the potential for negative behaviours was mitigated.
CSR strategy The Group’s CSR strategy focuses on four areas. A member of the Executive Committee sponsors each area. They are:  Helping to make our society safer (Shotgun): Mike Holliday-Williams, MD Personal Lines.
You can find out more about the Group’s CSR approach and priorities in the CSR report on pages 30 to 33.
Being recognised as part of our communities The Committee received reports about how the Group was strengthening the level of support provided to the network of Community and Social Committees operating at the Group’s main office locations. The Committee challenged the main targets which related to volunteering, fund raising, matched payroll giving and the Community Cashback scheme.
The ‘One Day’ volunteering initiative and Community Cashback scheme continued to be considered the two areas with the greatest potential for impact. These arrangements encourage colleagues to take part and raise funds for local causes.
CSR activities The Committee was kept up to date with the Group’s external positioning, including the Group’s stakeholders and its approach to managing the external relationships, including use of the corporate website and the AGM. The Committee continues to challenge management’s approach to ensure that it is strategic and continues to focus on initiatives with the potential to add discernible value.
The Committee monitored the Group’s performance against the targets set in relation to CSR KPIs.
The Committee reviewed the CSR-related feedback received from proxy voting advisers following publication of the Company’s 2015 Annual Report & Accounts and the Notice of 2016 AGM and encouraged management to consider addressing the relevant feedback.
The CSR Committee’s effectiveness A formal and rigorous annual evaluation of the Committee’s performance and effectiveness was undertaken during the year. Professor Rob Goffee of London Business School facilitated this effectiveness review, and prepared a report based on responses from Committee members and other stakeholders to a questionnaire and interview. After reviewing and discussing the report, the Committee concluded that it was operating effectively and has access to sufficient resources to perform its duties.
 A slowing global economy, a “lower for longer” interest rate outlook and the EU Referendum shaped the Committee’s concerns when it met in January 2016. The case study on page 75 details how the Committee met the challenge of ensuring: the Company was prepared in advance of the EU Referendum vote; and the investment portfolio was appropriately positioned to respond to events after the vote to leave the EU.
Responsibilities of the Investment Committee The Committee is responsible for the oversight of how the Group develops its investment strategy. It also oversees the management and performance of the Group’s investment portfolio.
 The in-house Investment team undertook a material change of outsource arrangements during the year, moving custody, treasury banking, middle-office and collateral activities to a new provider. The Committee monitored delivery of key milestones and challenged reasons for changes to project plans. The project was executed successfully in 2016.
The Committee’s main responsibilities are to:  examine the rationale for, and the risks and financial implications of, any proposed changes to the Group’s investment strategy and, where agreed, recommend these changes to the Board.
 review global financial market developments and changes to the regulatory environment, and consider the ongoing appropriateness of investment activities in light of such developments.
Committee composition, skills and experience and meetings in the year The Committee comprises two independent NEDs: Andrew Palmer and Jane Hanson. You can find their biographical information on pages 50 and 51.
The Investment Committee held four scheduled meetings in 2016. The table below shows attendance at the scheduled meetings: Scheduled meetings
Concerned that the leave vote could lead to a period of recession in the UK, the Committee (at its meeting in July 2016) requested management to carry out a comprehensive study of all Sterling assets held in the portfolio, in addition to considering any appropriate wider stresses on the entire portfolio, and make recommendations as necessary to position the portfolio for a recession. The Committee reviewed the study conclusions at its subsequent meeting, noting that the portfolio was very well diversified and certain illiquid asset classes had been built defensively from the outset, given the Company was a long-term investor and thus expected to be subject to periods of market turbulence from time to time. Management advised the Committee of some minor sales within the portfolio designed to provide some further defensive positioning, which was in part, the result of examining a recessionary outlook.
Main activities during the year At every scheduled meeting the Committee receives a market update from the Director of Investment Management and Treasury. This includes a report on the economic conditions in the UK, United States of America and the Eurozone; an update on commodity prices, credit markets and interest rates; and anything appropriate for the Committee to know.
Investment strategy The Investment strategy was materially changed in 2015. Because of this, the Committee spent its time reviewing and challenging the new investments. The Committee focused on the three new asset mandates; two investing in global credit and subordinated financial credit, and one investing in Sterling CRE loans which was a new asset class in the Group’s investment portfolio.
Risk framework and operating model As reported in the Annual Report & Accounts 2015, the Committee agreed to proposals to move custody and middle-office services to a new provider. The Committee ensured it received regular updates on the project, including implementation and the benefits achieved since the transfer. The final part of the transfer was completed successfully in November 2016.
Solvency II The Committee examined progress on initiatives linked to preparing for Solvency II, notably:  preparing a liquidity plan and contingent management actions.
 restructuring the securitised credit portfolio to meet Solvency II requirements.
The Nomination Committee’s main role and responsibilities are set out in written terms of reference and are available at www.directlinegroup.co.uk/termsofreference
Committee composition, skills and experience, and meetings in the year The Committee comprises the Chairman, Mike Biggs, and two independent Non-Executive Directors: Andrew Palmer and Richard Ward. You can find their biographical information on pages 50 to 51.
The CEO and the Group Human Resources Director are invited to attend Committee meetings.
Responsibilities of the Nomination Committee The Committee is responsible for leading the process for Board appointments and making recommendations to the Board. It keeps the Board's structure, size, composition, and balance of skills, experience, independence and expertise under review. It also provides guidance to management on executive succession planning.
 succession planning for Directors and other senior executives, accounting for the skills and expertise the Group needs to deliver its strategy.
Your Board needs a balance of experience, expertise and diversity, to support the quality of the Board’s debate and to be able to encourage and challenge senior management to develop and execute a sustainable strategy. In addition to its three scheduled formal meetings, the Committee convened a further eight meetings throughout 2016 to pursue its succession planning agenda. The Committee oversaw the process of recruiting a new Non-Executive Director following Priscilla Vacassin’s retirement from the Board in March 2016. With the objective of staggering Non-Executive Directors’ terms of appointment to ensure continuity and stability, the Committee also launched a search for a further two Non-Executive Directors in the last quarter of the year. Since the year end, Danuta Gray has been appointed as a Non-Executive Director and Mike Holliday-Williams, MD Personal Lines, has been appointed as an Executive Director.
The Committee has encouraged management to identify and develop high potential individuals, and create a working environment in which our talented women can also rise to senior management positions. The Committee will monitor progress in achieving the targets committed to by the Group in subscribing to the Women in Finance Charter.
Main activities during the year Succession planning The Committee places great importance on Board and executive succession planning and monitors its progress as a standing agenda item at each of its scheduled meetings. The Committee guides management in executive succession planning.
Board changes The Company appointed Richard Ward as Senior Independent Director on 18 January 2016. Priscilla Vacassin stepped down from the Board on 1 March 2016 and the Committee recommended to the Board a number of changes to the chairmanship and membership of the Board’s Committees, which the Board subsequently approved and were announced on 16 February 2016. The Committee also recommended the appointment of Richard Ward as a member of the BRC, which the Board subsequently approved. Following a recommendation from the Committee, the Board appointed Danuta Gray as a Non-Executive Director, and Mike Holliday-Williams, Managing Director Personal Lines, as an Executive Director on 1 February 2017. Following a further recommendation from the Committee, the Board approved the appointment of Danuta Gray as a member of the Remuneration Committee on 6 March 2017.
Egon Zehnder prepared a long list of candidates of appropriate merit from diverse backgrounds. The Committee agreed a shortlist and interviewed candidates. It then approached the PRA and FCA for approval, and recommended appointing Danuta Gray as a Non-Executive Director to the Board. The Committee recommended the appointment of Mike Holliday-Williams to the Board in recognition of his leadership of the Personal Lines business and to leverage his expertise for the benefit of all of the Group’s businesses.
As Danuta Gray and Mike Holliday-Williams were appointed since the last AGM, they will submit themselves for election at the Company’s 2017 AGM. Danuta Gray is considered independent within the Code’s meaning.
Electing and re-electing Directors Before recommending the proposed election and re-election of Directors at the 2016 AGM, the Committee reviewed the independence of Non-Executive Directors. It concluded that Jane Hanson, Sebastian James, Andrew Palmer, Clare Thompson and Richard Ward were all independent within the Code’s meaning. Andrew Palmer has served on the Board since March 2011, and his performance and independence were subject to a particularly rigorous review by the Committee pursuant to the requirements of the Code. The Board is satisfied that he remains independent, continues to make a significant contribution to the Board and its Committees, and provides valuable continuity to the Board. Mike Biggs was independent when appointed as Chairman. The Committee recommended to the Board and shareholders to elect and re-elect all serving Directors at the Company’s 2016 AGM.
You can find out more about the Group’s approach to diversity in the CSR report on pages 32 and 33.
The Nomination Committee’s effectiveness A formal and rigorous annual evaluation of the Committee’s performance and effectiveness was undertaken during the year. Professor Rob Goffee of London Business School facilitated this effectiveness review, and prepared a report based on responses from Committee members and other stakeholders to a questionnaire and interview. After reviewing and discussing the report, the Committee concluded that it was operating effectively and has access to sufficient resources to perform its duties.
Diversity The Group celebrates the diversity of its workforce. It seeks to recruit the best candidates for all positions throughout the business. At the date of this report, three of the Group’s 10 Directors are women, which equates to 30% of the Board. This exceeds the target set in Lord Davies’ Women on Boards Review Five Year Summary published in October 2015, to be achieved by 2020. The Board also acknowledges the benefits of diversity.
 The Directors’ remuneration policy was approved at the Company’s 2014 AGM, and the Company is required to submit a new remuneration policy for shareholder approval at the 2017 AGM. The case study on page 80 explains how the Committee: reviewed the remuneration policy; challenged how Directors’ reward structures were aligned to the Group’s strategic objectives; and participated in the consultation process with major shareholders and governance agencies.
 The Committee reviewed the submission of the Remuneration Policy Statement to the PRA, which was a new Solvency II requirement. The statement contained details of the remuneration policy that applied throughout the Group as well as particular requirements for Solvency II identified staff.
Responsibilities of the Remuneration Committee The Committee is responsible for setting and providing oversight of how the Group implements its remuneration policy. The Committee oversees the level and structure of remuneration arrangements for senior executives. It also approves share incentive plans, and recommends them to the Board and shareholders. Where applicable, it also oversees share plan changes that need shareholder approval.
 recommending and monitoring the level and structure of remuneration for senior executives and Solvency II identified staff.
 considering how the Group’s strategy or performance might affect its remuneration policy.
Clare Thompson1 (Chair) 3 of 3 100% Mike Biggs 5 of 5 100% Sebastian James 5 of 5 100% Andrew Palmer 5 of 5 100% Priscilla Vacassin1 2 of 2 100%
Note: 1. Attendance is expressed as the number of scheduled meetings attended out of the number of such meetings possible or applicable to attend
The CEO, Group Human Resources Director and senior representatives of the Human Resources function are invited to attend Committee meetings. FIT Remuneration Consultants LLP (“FIT”), who act as independent advisers to the Committee, also attend Committee meetings. The Chair reports on matters dealt with at each Committee meeting to the subsequent scheduled Board meeting.
For the 2016 financial year, the Committee approved the performance metrics and monitored performance against them. The Committee also discussed and challenged the performance metrics for the 2017 AIP and, subsequently approved the metrics. The Committee discussed proposed new customer and people measures and was satisfied that the proposed measures were sufficiently challenging. The Committee scrutinised the new approach to performance management that was introduced for 2016 and commended management on simplifying the appraisal process.
Long-term incentives During 2016, the Committee reviewed and approved the level of vesting of the 2013 awards made under the Company’s LTIP against the performance criteria. These awards had two performance metrics based on RoTE and TSR. After assessing performance against these metrics, the awards vested at a level of 96.4%. Before vesting, the Committee considered the LTIP’s financial and risk underpins. The Committee also determined the quantum of awards made in 2016 under the LTIP in view of business and individual performance.
The review included interviews with members of the Remuneration Committee and Executive Committee in order to capture views on the current remuneration structures, test the appropriateness of the remuneration arrangements and to consider how they furthered the Group’s strategy and long-term interests. A report was then produced by FIT on their findings for the Committee’s strategy day.
Consider: At the strategy day the Committee reviewed the current remuneration policy, and considered alternatives in the light of the Group’s objectives, regulatory and market landscape and highlighted areas in which it considered changes could be made so that formal proposals could be put forward to the Committee. The Committee also considered areas which were not currently in the remuneration policy and could be added.
The proposed changes to the Directors’ remuneration policy were then considered against: the Group’s strategic objectives; statutory and regulatory requirements; and investors published guidance. Following the review the Committee identified a number of changes to the remuneration policy and wrote to major shareholders and a number of governance agencies advising them of the proposals and asking for their views on them.
The proposals were generally well received and based on the responses adjustments were made to the proposed remuneration policy. You can find out more about the Directors’ remuneration policy to be voted on by shareholders at the 2017 AGM on pages 100 to 109.
Main activities during the year Review of remuneration policy As we approached the end of the first three-year cycle since the introduction of the new remuneration reporting regulations, the current Directors’ remuneration policy, that was approved at the Company’s 2014 AGM, is due for review. The new remuneration policy will be submitted to shareholders’ binding vote at the 2017 AGM and will be expected to remain in place for the next three years.
Directors and other senior executives During the year, the Committee reviewed and approved the level and structure of the pay and incentives of the Executive Directors and other senior executives. Additionally, it reviewed remuneration for the strategic leadership team. As part of this review, the Committee considered the Share Ownership Guidelines for the Executive Directors and Executive Committee members.
Consult: The Committee continued to consider the proposals in the light of subsequent guidance issued from August 2016 to 31 December 2016 by organisations such as the Investment Association, the Executive Remuneration Working Group, the General Counsel and Company Secretaries of FTSE 100 companies (“GC100”) and Legal & General Investment Management’s principles. The Committee concluded its consultation with major shareholders, the investor community and governance agencies in January 2017.
The Remuneration Committee’s effectiveness A formal and rigorous annual evaluation of the Committee’s performance and effectiveness was undertaken during the year. Professor Rob Goffee of London Business School facilitated this effectiveness review and prepared a report based on responses from Committee members and other stakeholders to a questionnaire and interview. After reviewing and discussing the report, the Committee concluded it was operating effectively and has access to sufficient resources to perform its duties.
The policy provides a clear and simple framework for remunerating the Company’s Directors, and aligning the Executive Directors’ variable pay opportunity to the business strategy and the Company’s demonstrable success.
The LTIP rules will be amended to reflect the introduction of a holding period.
He initially joined the Group as an executive in 2014 and has participated in the Company’s remuneration arrangements on a similar basis to the Executive Directors since then. He received an award on joining to buy-out shares forfeited on leaving his previous employer with the last tranche (worth c.£107,000 at grant) vesting in May 2017. The award was not affected by his promotion to the Board.
Approach to pay in 2017 In addition to the proposed introduction of a post-vesting holding period as described above, we set out below our approach to pay for Executive Directors in 2017:  The salaries of all three Executive Directors will increase by 2% in April 2017. This is the same as the average salary increase for employees across the rest of the organisation.
Pay outcomes for 2016 By focusing on the value, service and brand propositions we offer to our customers, and maintaining underwriting discipline, 2016 was another strong year for the Group. Before the reduction in the Ogden discount rate announced on 27 February 2017 (being two months following the year end), PBT was £570.3m (up 12.4% on 2015). This would have likely delivered a maximum payment of 55% of the AIP linked to this measure. This post-year-end announcement led to the Board adjusting the PBT, which reduced to £353.0m as explained in the Chairman’s introduction to this report and accounts.
In determining pay-out levels, the Committee carefully considered performance in its assessment of over or underperformance of the target. It applied overall judgement in light of the year-end corporate performance and decided an out-turn of 10% (out of the 55% available for PBT) was appropriate and should be payable under this element. The Committee concluded that given the strong profit progress absent the Ogden discount rate change, a small level of vesting recognised both the exceptional timing of this announcement and, therefore, the impossibility of management taking any mitigating steps and the need to align with the experience of shareholders.
The Committee understands that the Government is considering a further review of the approach to setting the Ogden discount rate which may or may not lead to a further change to the Ogden discount rate. In these exceptional circumstances and, given that the impact of the post-year-end announcement was to reduce this element from paying out at the likely full 55% to 10%, the Committee will keep the out-turn under the 2016 AIP assessment under review until the end of 2017. If, during 2017, in connection with the consultation the Ogden discount rate is raised from minus 0.75%, the Committee will recalculate the out-turn for this element and adjust it accordingly; the impact of such a subsequent change in the Ogden discount rate would be excluded from the 2017 AIP.
Accordingly, the incentive outcomes for our Executive Directors were as follows:  We awarded bonuses of 43% of the maximum to the Chief Executive Officer and to the Chief Financial Officer for 2016. We have detailed the bonus determination process for 2016 on pages 88 and 89.
 Awards under the LTIP granted in March and August 2013 vested during 2016. They were subject to TSR performance over the three-year vesting period, and RoTE performance in 2013, 2014 and 2015. As disclosed last year, the Group achieved an average RoTE of 17.6% over the threeyear performance period. This resulted in 94% of the maximum potential vesting of the RoTE element (56.4% of the total award). The TSR element comprises the other 40% of the total award. For the March 2013 and August 2013 awards, the Company’s TSR was positioned above upper quintile against its comparator group. This resulted in 100% of the maximum potential vesting under the TSR element. Overall, 96.4% of the total awards vested in March 2016 and August 2016. You can find details of this on page 90.
 Awards under the LTIP granted in March and August 2014 are due to vest during 2017. This is subject to the Committee’s satisfaction that the financial and risk underpins have been met at the end of the vesting period. The RoTE performance period for these awards ended on 31 December 2016. The three-year average RoTE performance for 2014, 2015 and 2016 was 16.2% against a maximum target of 17.0%. Awards under the RoTE element are due to vest at 76% of the maximum potential, again reflecting the returns delivered to shareholders. The Committee’s practice has not been to moderate the LTIP outcome for exceptional events and, therefore, the formulaic result was approved with no adjustment. Consistent with the regulations, the TSR element of the awards due to vest during 2017 will be reported separately next year. We have included these RoTE vesting outcomes plus the TSR vestings from the 2013 awards in the single remuneration figure for the CEO and the CFO. You can find details of this on pages 87 and 90.
Voting on the annual remuneration report and the policy report We will put the policy report and annual report on remuneration to a vote of shareholders at the AGM on 11 May 2017.
 The Committee considers a range of factors when determining salaries, including pay increases throughout the Group, individual performance and market data
 2% salary increase for the MD Personal Lines to £548,862
 40% of the award is deferred into shares, typically vesting after three years
 No change to maximum annual award granted to the CEO, CFO and MD Personal Lines
 Nil-cost options will continue to be used for the grants
www.directlinegroup.com 85 2016 pay decisions reflect performance achieved during the year Aligning performance and reward The Committee has considered performance over 2016, as demonstrated by achieving key performance indicators on pages 24 and 25. As a result of this performance, the Remuneration Committee has approved the following incentive outcomes for the Executive Directors.
Achievement under the Annual Incentive Plan The actual amounts earned from the AIP this year reflect performance in 2016. 60% of this amount will be payable in March 2017 and 40% will be deferred into shares for three years and generally be contingent on continued employment.
Further details of performance against targets set is set out on pages 88 to 89.
Executive Directors’ shareholdings at year end The interests of shareholders and Executive Directors are closely aligned as they are required to hold Company shares at multiples of salary levels and at the share ownership guidelines of 200% of salary. They continue to build on these shareholdings and hold above these guidelines, as illustrated below. As at 31 December 2016, the number of shares beneficially held by the CEO and the CFO represented 266% and 529% of their salaries, respectively.
Executive Directors’ total pay This chart illustrates the total remuneration components received in 2015 and 2016. This is explained further in the single figure table on page 87.
 2013 LTIP awards: As disclosed in the 2015 remuneration report, the single figure of remuneration for 2015 included the RoTE vesting outcomes of the March and August 2013 LTIP awards. This has now been updated to reflect the actual number of dividends accrued on this portion of the award on vesting and the share price on the relevant vesting dates.
Statutory Remuneration Report Introduction We have prepared this remuneration report in accordance with the requirements of the Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended) (the “Regulations”). The report also meets the relevant requirements of the Listing Rules of the Financial Conduct Authority, and describes how the Board has complied with the principles and provisions of the UK Corporate Governance Code relating to remuneration matters. Remuneration tables subject to audit in accordance with the relevant statutory requirements are contained in the annual remuneration report and stated to be audited. Unless otherwise stated, the information within this Directors’ remuneration report is unaudited.
Advisers to the Committee The Committee consults with the Chief Executive Officer, the 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 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 reports from those Chairs regarding setting targets and pay-outs under incentive plans, and whether it is appropriate to operate malus and clawback. The Chair of the Audit Committee is a member of the Remuneration Committee; and the Chair of the Board Risk Committee attended Remuneration Committee meetings on three occasions. The Remuneration and Board Risk Committees also hold a joint meeting at least annually to consider matters of common interest.
During the year, FIT advised on market practice, corporate governance, incentive plan design and target setting, regulations, and other matters that the Committee was considering. FIT does not provide the Company with other services. The Committee is satisfied that the advice FIT provides is objective and independent.
FIT’s total fees for remuneration related advice in 2016 were £162,171 exclusive of VAT. FIT charged its fees based on its standard terms of business for providing advice.
In the table below, we have disclosed the target set for PBT performance. We have expanded our description of the performance achieved against the non-financial measures to improve transparency for shareholders although some metrics remain commercially sensitive.
The Committee also considered performance against the “gateway” criteria outlined on page 98 and determined that it was appropriate to pay a bonus and that it was not necessary to reduce the payment in light of performance against these criteria.
Financial element (55% weighting) As discussed above, there is no pre-set scale around the PBT target for the 2016 financial year and, in accordance with the AIP terms, the Committee determined the appropriate pay-out for the performance achieved.
The Committee understands that the Lord Chancellor, while announcing a discount rate of minus 0.75%, is launching a further consultation regarding the approach to setting the Ogden discount rate which may or may not lead to a change to the Ogden discount rate. In these exceptional circumstances, and given that the impact of the post-year-end announcement was to reduce this element from paying out at the likely full 55% to 10%, the Committee will keep the out-turn under the 2016 AIP assessment under review until the end of 2017. If, during 2017, in connection with the consultation, the Ogden discount rate is raised from minus 0.75%, the Committee will recalculate the out-turn for this element and adjust it accordingly; the impact of such a subsequent change in the Ogden discount rate would be excluded from the 2017 AIP.
The Group remains focused on improving its digital offering, customer experience and operational efficiency. A key focus of management was the level of change the Group has been making to its IT infrastructure. It remains focused on adopting the right capabilities and will take the time necessary seeking to do so. While progress has been made in each of the three areas, implementation and integration of a range of new IT systems is inherently complex and challenging. The Group has made progress improving the performance and security of the core infrastructure during the year, supporting its people in performing their roles more reliably. However, the Committee noted that there was less progress on delivering against the Group’s IT plans than had been envisaged. The team has reflected on the experience over the past year and will apply key learnings as it continues on this change journey in 2017.
Taking performance against each Executive Directors’ individual performance and the above challenges into account, the Committee determined that Paul Geddes and John Reizenstein should each receive awards of 50% respectively of the maximum available under this element.
Relative TSR test – To be tested based on performance to 29 August 2017
Non-Executive Directors (Audited) Fees were the only remuneration paid to Non-Executive Directors in 2015 and 2016. Non-Executive Directors may also claim for reasonable travel and subsistence expenses, in accordance with the Group’s travel and expenses policy, and, where these are classified as taxable by HMRC, they are shown under ‘Benefits’ below. The Non-Executive Directors receive no other benefits.
Percentage change in Chief Executive Officer’s pay for 2015 to 2016 The table below shows the Chief Executive’s year-on-year percentage change in salary, taxable benefits and bonus, compared to the average pay for all other UK employees.
Notes: 1. Based on the change in average pay for UK employees employed in the year ended 31 December 2016 and the year ended 31 December 2015. Salaries are not adjusted for the number of working hours; therefore the increase partly reflects the increase in working hours for some employees during the year 2. There were no changes in benefits provision between 2015 and 2016 3. Includes average amounts earned under the AIP; and for employees other than the Chief Executive Officer, other variable incentive schemes, including monthly and quarterly incentive schemes operated in certain parts of the Group
Note: There have been no share buy-backs since the IPO. The overall expenditure on pay has been taken from note 11 to the consolidated financial statements. Therefore, consistent with market practice, it has not been calculated in a manner consistent with the single figure in this report www.directlinegroup.com 91
% change: Dividend (£m), including 2015 special dividend relating to the sale of the International division 16y15y 6.
Notes: 1. Based on actual vesting under the 2010, 2011 and 2012 RBS Group LTIP. The value included in the single figures in respect of these awards is £205,000 in 2012, £728,000 in 2013 and £2,437,428 in 2014 2. The 2016 single figure reflects the estimated vesting of the RoTE portion of the LTIP granted in March and August 2014. Any shares under the LTIP granted in 2014 will not be delivered until the end of the applicable vesting periods in March and August 2017. However they have been included in the single figure, as the performance period in respect of the RoTE portion has now been completed 3. The 2015 single figure has been revised to reflect the actual vesting of the 2013 awards under the LTIP, a decrease of £19,277
AGM voting outcomes The table shows the percentage of shareholders voting for or against, and the percentage of votes withheld relating to the resolution to approve the Directors’ annual remuneration report, which was put to the 2016 AGM; and the resolution to approve the Directors’ remuneration policy, which was put to the 2014 AGM.
Note: The percentages of votes for and against are expressed as a percentage of votes cast, excluding votes withheld. The percentage of votes withheld is expressed as a percentage of total votes cast, including votes withheld
Using shares In receiving an award under the LTIP or DAIP, Executive Directors agree not to hedge their exposure to outstanding awards under these plans or in respect of shares they are reporting to the Company as 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.
Notes: 1. This relates to awards under the Direct Line Group LTIP. As described on page 90, 76.0% of awards made under the Direct Line Group LTIP in March and August 2014 that are subject to the RoTE performance condition measured to 31 December 2016 are expected to vest. These shares will be delivered to Executive Directors in March and August 2017 2. Includes matching shares held under the SIP which are subject to forfeiture and deferred shares under the Direct Line Group DAIP. For more information, see pages 95 and 97 3. On 30 August 2016, Paul Geddes exercised a DAIP award granted on 28 March 2013 and LTIP awards granted on 28 March 2013 and 28 August 2013. Following this exercise, 997 DAIP shares remain vested but unexercised 4. Includes holdings of connected persons, as defined in section 96B(2) of the Financial Services and Markets Act 2000, and free and partnership shares held under the SIP which are not subject to forfeiture and considered beneficially owned 5. Beneficial share interests include partnership shares John Reizenstein purchased under the SIP and free shares held by the CEO and the CFO under the SIP. At 6 March 2017, the number of shares beneficially held by John Reizenstein has increased to 195,733. There was no change to the number of shares held by Paul Geddes
Mike Biggs   Jane Hanson 26,190 26,190 Andrew Palmer 10,475 10,475 Clare Thompson 38,378 35,220 Priscilla Vacassin3 35,220 35,220 Sebastian James   Richard Ward4  
Direct Line Group share awards Direct Line Group Deferred Annual Incentive Plan (“DAIP”) awards (Audited) This table details the awards made to all Executive Directors under the Direct Line Group DAIP
No. of share options held at 31 December 2016 Vesting date
Mike Holliday-Williams4 25-Mar-15 3.3007 239,997 66,651 – – – – – 66,651 25-Mar-18
Direct Line Group LTIP awards (Audited) This table details the Directors’ interests in the Company’s LTIP. For all LTIP awards, 20% of the awards granted would vest if the minimum performance was achieved.
Notes: The Company’s share price on 31 December 2016 was £3.694, and the range of prices in the year was £3.333 to £4.096 1. These awards take the form of nil-cost options over the Company’s shares and are subject to performance conditions to be assessed by the Committee. Awards granted before 2014 accrue dividend entitlements until the date of transfer of shares. Awards granted from 2014 accrue dividend entitlement from the grant date to the date on which an award vests 2. The RoTE targets for awards granted in 2016, applying to 60% of the award, were 14.5% for 20% vesting, 15.5% for 40% vesting and 17.5% for full vesting. A straight-line interpolation occurs from threshold to target, and then from target to maximum performance. The remaining 40% of each award is based on TSR performance conditions, which are the same as noted on page 99 3. The closing market price on the dates of the vesting of the awards were £3.716 on 29 March 2016 and £3.634 on 30 August 2016 4. Awards under the LTIP vested at 96.4% of the maximum potential on 29 March 2016 and 30 August 2016 5. Dividends added post-vesting are shown to 31 December 2016, although these are not realised until exercise 6. Although not required in order to comply with statutory requirements we have provided the detail for Mike Holliday-Williams for completeness
Direct Line Group 2012 SIP (Audited) During 2016, all employees, including Executive Directors, were eligible to invest from £10 to £150 a month from their pre-tax pay into the SIP, and receive one matching share for every two shares they purchased. This table details the number of shares held by John Reizenstein under the SIP. Paul Geddes does not participate in the plan.
Dilution The Company complies with the dilution levels that the Investment Association guidelines recommend. These levels are 10% in 10 years for all share plans and 5% in 10 years for discretionary plans. This is consistent with the rules of the Company’s share plans.
Statement of policy implementation in 2017 Executive Directors’ salaries in 2017 The salary increase awarded to the Executive Directors, effective 1 April 2017, reflects the average increase awarded to UK employees.
Paul Geddes Chief Executive Officer 810 795 2% John Reizenstein Chief Financial Officer 491 481 2% Mike Holliday-Williams MD Personal Lines 549 538 2%
AIP 2017 The maximum annual incentive awards which may be paid to Executive Directors have not changed since the IPO.
Director Position Maximum annual incentive award for 2017 (% base salary) Deferred under the DAIP
Net Promoter Score and complaints 0% 25% Strategic Based on a basket of:  customer measures, including Net Promoter Score and complaints; and
 people measures, including measures of gender diversity and engagement 25% 0%
Like previous years, all AIP outcomes will be determined after the Committee determines a payment gateway. To do this, the Committee must be satisfied that it is appropriate to permit a bonus award at all, or at a given level. The gateway involves some subjectivity about performance. This may result in positive or negative moderation of each AIP performance measure or the overall bonus outcome.
Gateway criteria for the AIP for 2017 – outcomes for Executive Directors  Year-on-year changes in profit before tax
 Quality and sustainability of earnings, referring to reserving, gross written premium, costs and loss ratio, and relevant lead indicators
The Committee may also use its discretion to account for additional factors. These include the quality of financial results; the ’direction of travel’ of all measures; more widely considering reputation, risk, and audit.
In considering such factors, and whether to adjust the overall pay-outs and/or operate malus and clawback, the Committee receives appropriate input from the Audit Committee and the Board Risk Committee through receiving reports from, and discussion with, the Chairs of those Committees.
Performance conditions for LTIP awards LTIP awards to be granted in 2017 will continue to be subject to performance against these performance conditions:  60% based on RoTE over a three-year performance period (2017, 2018 and 2019)
Non-Executive Directors’ fees The current fees for the Chairman and Non-Executive Directors were set in 2012 and have not been changed since then.
You can find further details regarding the policy’s operation for 2017 on page 103.
 Base salaries are typically reviewed annually and set in April of each year, although the Committee may undertake an out-of-cycle review if it determines this to be appropriate
 When reviewing base salaries, the Committee typically takes the following into account:  level of skill, experience and scope of responsibilities, individual and business performance, economic climate, and market conditions;  the median market pay in the context of companies of a similar size, particularly FTSE 31-100 companies, as they are considered to reflect the size and complexity of the Group;  the practice of insurance peers such as Admiral Group, Aviva, esure Group, Hastings Group,
 The principles for setting base salary are similar to those applied to other employees in the Group. However, the specific benchmarking groups used to review external market relativities may differ across employee groups
AIP  To motivate executives and incentivise delivery of performance over a one-year operating cycle, focusing on the short to medium-term elements of our strategic aims
 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
 Malus and clawback provisions apply to the cash and deferred elements. These are explained in the notes to the policy table
LTIP  Aligning executives’ interests with those of shareholders to motivate and incentivise delivering sustained business performance over the long term
 Awards will typically be made in the form of nil-cost options or conditional share awards, which vest to the extent performance conditions are satisfied over a period of at least three years. Under the Plan rules, awards may also be settled in cash at the discretion of the Committee. This may be appropriate, for example, if legal difficulties arise with settling in shares
 For awards made after adopting the new policy at the 2017 AGM, 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
 The maximum bonus opportunity under the AIP is 175% of base salary per annum. The current maximum bonus opportunity applying for each individual Executive Director is shown in the statement of implementation of policy. This is in the 2016 section of the annual remuneration report
 Performance over the financial year is assessed against performance measures which the Committee considers to be appropriate
 Before any payment can be made, the Committee will perform an additional gateway assessment (including in respect of any risk concerns). This will determine whether the amount of any bonus is appropriate in view of facts or circumstances which the Committee considers relevant. This assessment may result in moderating (positively or negatively) each AIP performance measure, subject to the individual maximum bonus levels
 The AIP remains a discretionary arrangement. The Committee reserves discretion to adjust the out-turn (from zero to the cap), should it consider it appropriate
 Awards of up to 300% of base salary are permitted in exceptional circumstances, relating to recruiting or retaining an employee, as determined by the Committee
 The Committee will determine the performance conditions for each award made under the LTIP, measuring performance over a period of at least three years with no provision to retest
 Performance is measured against targets set at the beginning of the performance period, which may be set by referring to the time of grant or financial year
 Additionally, there is a financial underpin relating to the Committee’s view of the Group’s underlying financial performance for the TSR and RoTE (and any other) elements, 20% of the award vests for threshold performance, with 100% vesting for maximum performance. The Committee reserves the right in respect of future awards to lengthen (but not reduce) any performance period and/or amend the terms of any holding period; however, there is no intention to reduce the length of the holding period www.directlinegroup.com 101
Benefits  A comprehensive and flexible benefits package is offered, emphasising individuals being able to choose the combination of cash and benefits that suits them
 The Committee may periodically amend the benefits available to some or all employees. The Executive Directors are eligible to receive such additional benefits as the Committee considers appropriate having regard to market norms
 In line with our approach to all employees, certain Group products are offered to Executive Directors at a discount
 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
 The maximum pension contributions is set at 25% of base salary per annum
 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
 Similarly, while not benefits in the normal usage of that term, certain other items such as hospitality or retirement gifts may also be provided
 200% of salary for all Executive Directors  The Committee reserves the discretion to amend these levels in future years
Changes from 2014 policy The main changes from the 2014 policy are summarised below. To aid the administration and clarity of its operation, other minor changes have also been made to the policy:  For LTIP awards made after adopting the new policy at the 2017 AGM, 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
 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 in exceptional circumstances (such as a major transaction) 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 (legacy awards made before 2014 accrue dividends to exercise).
Remuneration payments agreed before appointment to the Board The Committee reserves the right to make any remuneration payments and payments for loss of office (including, where relevant, exercising any discretions available to it connected with such payments) notwithstanding that they are not in line with the policy set out above where the terms of the payment were agreed (i) before 13 May 2014 (the date the original shareholder approved policy came into effect);(ii) provided the terms of the payment were consistent with any shareholder-approved Directors’ remuneration policy in force at the time they were agreed; (iii) at a time when the relevant individual was not a Director of the Direct Line Insurance Group plc and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a Director of the Company. For these purposes, ‘payments’ include pension arrangements and the Committee satisfying awards of variable remuneration. Relating to an award over shares, the terms of the payment are ‘agreed’ at the time the award is granted.
Long-Term Incentive Plan The goal of our strategy is to provide long-term sustainable returns for our shareholders. Therefore, for 2017 (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 Group has one consistent reward policy for all levels of employees. Therefore, the same reward principles guide reward decisions for all Group employees, including Executive Directors. However, remuneration packages differ to account for appropriate factors in different areas of the business:  AIP – approximately 3,600 employees participate in the AIP. The corporate performance measures for all employees are consistent with those used for Executive Directors, although the weighting attributable to those factors may differ. The Group’s strategic leaders (approximately 60 employees) also receive part of their bonus in Company shares deferred for three years
 Incentive awards – approximately 3,800 employees, excluding Executive Directors, participate in a function or team specific incentive plan which assesses personal performance over a monthly period. These incentive awards may pay out monthly or quarterly
 LTIP – our strategic leaders participate in the LTIP, currently based on the same performance conditions as those for Executive Directors
 RSP – RSP awards are used on a limited basis across the Company to help recruit and retain critical staff, and for talent management. Executive Directors do not receive grants under the RSP
 All employee share plans – the Committee considers it important for all employees to have the opportunity to become shareholders in the Company. The HMRC-approved SIP has operated since 2013, and, in addition, the Company has made periodic awards of free shares. At year-end, approximately 3,000 employees throughout the Group had signed up to these schemes with 9,500 holding free shares in the Company
To enable the Company to recruit and retain NonExecutive Directors of the highest calibre, at an appropriate cost
 The fees paid to the Chairman include all Board and Committee membership fees, and are determined by the Remuneration Committee
 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
Principles for recruitment remuneration 1. In terms of the principles for setting a package for a new Executive Director, the starting point for the Committee will be to look to the policy for Executive Directors as set out in the policy table, and structure a package in accordance with that policy. Consistent with the Regulations, the caps contained in the policy table for fixed pay do not apply to new recruits, although the Committee would not envisage exceeding these caps in practice 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 www.directlinegroup.com 105
Buy-out awards 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 6. All such awards for external appointments, whether under the AIP, LTIP or otherwise, to compensate for awards forfeited on leaving their previous employer will be determined taking into account the commercial value of the amount forfeited, and the nature, time horizons and performance requirements of those awards. In particular, the Committee’s starting point will be to ensure that any awards being forfeited which remain subject to outstanding performance requirements (other than where substantially complete) are bought out with replacement requirements, and any awards with service requirements are bought out with similar terms. However, exceptionally, the Committee may relax those obligations where it considers it to be in the interests of shareholders and those factors are, in the Committee’s view, equally reflected in some other way, for example through a significant discount to the face value of the awards forfeited
The elements of any package for a new recruit, including the maximum level of variable pay, but excluding buy-outs, will be consistent with the Executive Directors’ remuneration policy described in this report, as modified by the above statement of principles where appropriate. The Committee reserves the right to avail itself of the current Listing Rule 9.4.2 (being the rule which permits exceptional recruitment awards on terms different from any shareholder approved ongoing plans) if needed to facilitate, in exceptional circumstances, recruiting an Executive Director. Awards granted under this provision will only be used for buy-out awards.
Service contracts Subject to the discretion noted above for new recruits, it is the Company’s policy to set notice periods for Executive Directors of no more than 12 months (both by the Director or Company). The Executive Directors’ service agreements summary is as follows: Director Effective date of contract Notice period (by Director or Company) Exit payment policy
There are no further obligations which could give rise to a remuneration or loss of office payment other than those set out in the remuneration policy table and the termination policy overleaf.
 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
The table below sets out the general position. However, it should be noted that the Committee, consistent with most other companies, has reserved a broad discretion to determine whether an Executive Director should be categorised as a ‘good leaver’, and that discretion forms part of the approved policy.
In the event of a demerger or similar event, the Committee may determine that awards vest on the same basis
Non-Executive Director letters of appointment Non-Executive Directors are appointed for a three-year 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 must submit themselves for re-election at each AGM.
External directorships The Company encourages Executive Directors to accept, subject to the Chairman’s approval, an invitation to join the board of another company outside the Group in a non-executive capacity, recognising the value of such wider experience. In these circumstances, they are permitted to retain any remuneration from the non-executive appointment. Executive Directors are generally limited to accepting one external directorship, but may accept more with the Chairman’s prior approval.
Considering shareholders’ views The Committee accounts for the approval levels of remuneration related matters at the AGM in determining whether the current Directors’ remuneration policy remains appropriate.
The Committee also seeks to build an active and productive dialogue with investors on developments in the remuneration aspects of corporate governance generally, and particularly, any changes to the Company’s executive pay arrangements.
The Committee is satisfied that no element of the Directors’ remuneration policy conflicts with the Group’s approach to environmental, social or corporate governance matters.
Performance scenarios The Directors’ remuneration policy has been designed to ensure that a significant proportion of total remuneration is delivered as variable pay and, therefore, depends on performance against our strategic objectives.
The following charts show the potential remuneration which Executive Directors may earn under three performance scenarios (assuming the adoption of the proposed Policy) as set out below. These exclude share price appreciation and dividends which could have a significant impact on the final outcome.
The elements of remuneration included in each scenario are as follows: Minimum Consists of fixed remuneration only (that is, base salary, benefits and pension):  Base salary is the salary to be paid from 1 April 2017
 Benefits measured as benefits paid in 2016 as set out in the single figure table on page 87, including the value of matching shares under the SIP where relevant
 AIP – consists of the on-target bonus of 60% of maximum bonus opportunity
 LTIP – consists of the threshold level of vesting (20% vesting)
 AIP – consists of the maximum bonus (175% of base salary for the CEO and 150% for the CFO and the MD Personal Lines)
The Company’s Articles of Association set out the Directors’ powers. You can view these on the Company’s website at www.directlinegroup.com. 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 82 to 109.
Strategic report The Company’s Strategic report is on pages 1 to 47. It includes the following information that would otherwise need to be disclosed in this Directors’ report: Subject Pages
Use of financial instruments 44 and 45 Likely future developments in the business
Contracts of significance involving a director Not applicable Contracts of significance involving a controlling shareholder
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 in the Notice of AGM.
The Articles of Association of the Company permit it to indemnify the Company’s officers, and officers of any associated company, against liabilities arising from conducting Company business, to the extent permitted by law. As such, www.directlinegroup.com 111 the Company has executed deeds of indemnity for each Director’s benefit, regarding liabilities that may attach to them in their capacity as Directors of the Company or associated companies. These indemnities are qualifying thirdparty 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.
 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.
The Trustee of this 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 29 on page 166. The Company is only aware of the dividend waivers and voting restrictions mentioned above.
Employees in the Company and Directors must conform with the EU Market Abuse Regulation and the Company’s share dealing rules. These rules restrict particular employees’ and Directors’ ability to deal in the Company’s shares at certain times, and require the employee or Director to obtain permission to deal before doing so. Some of the Company’s employee share plans also include restrictions on transferring shares while the shares are held within the plans.
Each general meeting notice will specify the time for determining a shareholder’s entitlement to attend and vote at the meeting. This will not be more than 48 hours before the time fixed for the meeting. To be valid, all proxy appointments must be filed at least 48 hours before the time of the general meeting. In calculating this time period, no account shall be taken of any part of a day that is not a working day.
Greenhouse gas emissions In order to comply with the Companies Act 2006 (Strategic and Directors’ Report) Regulations 2013, the Group has followed the 2013 UK Government environmental reporting guidance for GHG emissions; used the UK Government’s greenhouse gas conversion factors; and adopted the financial control approach to setting the organisational boundaries of responsibilities for GHG emissions. In applying the GHG Protocol Corporate Accounting and Reporting Standard (revised edition) we have calculated emissions associated with electricity consumption solely using the location-based scope 2 calculation method. GHG emissions are classified as direct or indirect, and divided into scope 1 and scope 2 emissions. Direct GHG emissions are those from sources that the Group owns or controls. Indirect GHG emissions are those that are a consequence of the Group’s activities, but occur at sources owned or controlled by another organisation. The Group has considered the six main GHGs, reported in tonnes of carbon dioxide equivalent (“CO2e”), and set 2013 as the base year. The Group has not included emissions from the International division, which was sold in May 2015, nor has it included emissions associated with its investment portfolio.
Scope 1 – direct emissions including fuels used in office buildings, accident repair centres, and owned vehicles
The Finance review on pages 45 and 46 describes the Group’s capital management strategy, which covers how it measures its regulatory and economic capital needs, and deploys capital.
Our Diversity Network Alliance focuses on a number of strands including employees with disabilities. It identifies areas where we can improve and help people 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.
Intensity metric: tonnes CO2e/ million GBP net earned premium 8.5 8 6.4 -24%
Viability statement The Strategic report, on pages 1 to 47, sets out the Group’s financial performance, business environment, outlook and financial management strategies. It covers how the Group measures its regulatory and economic capital needs, and deploys capital. You can find discussion about the Group’s principal risks and risk management on pages 26 to 29. Note 3 to the consolidated financial statements starts on page 136 and sets out financial disclosures relating to the Group’s principal risks. This covers insurance, market and credit risk; and the Group’s approach to monitoring, managing and mitigating exposures to these risks.
Every year, the Board considers a five-year strategic plan for the Group. The plan makes certain assumptions in respect of the competitive markets in which the Group operates, and the delivery and implementation of the next generation of customer systems. Appropriate aspects of the strategic plan are stress-tested to understand and help set capital and other requirements.
Disclosing information to the Auditor Each Director at the date of approving this Annual Report & Accounts confirms that: as far as they are aware, there is no relevant audit information of which Deloitte LLP, the Company’s External Auditor, is unaware; and they have taken all the steps they ought to have taken as a Director to make themselves aware of any relevant audit information, and establish that Deloitte LLP is aware of that information.
Auditor Deloitte LLP has expressed its willingness to continue in office as the External Auditor. A resolution to reappoint Deloitte LLP will be proposed at the forthcoming AGM. You can find an assessment of the effectiveness and recommendation for reappointing Deloitte LLP in the Audit Committee report on page 67.
The Directors confirm that, to the best of their knowledge: the financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position, and profit or loss of the Company, and the undertakings included in the consolidation taken as a whole; and the Strategic report (on pages 1 to 47) and Directors’ report (on pages 110 to 113) include a fair review of the business's development and performance; and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.
Independent Auditor’s report to the shareholders of Direct Line Insurance Group plc www.directlinegroup.com 115
The financial statements, including within the Annual Report and Accounts, comprise:  the Consolidated Income Statement;  the Consolidated and Parent Company Statement of Comprehensive Income;  the Consolidated and Parent Company Balance Sheets;  the Consolidated and Parent Company Cash Flow Statements;  the Consolidated and Parent Company Statements of Changes in Equity; and
 the related notes 1 to 42 on the consolidated financial statements, and the related notes 1 to 16 on the Parent Company financial statements.
Going concern and the Directors’ assessment of the principal risks that would threaten the solvency or liquidity of the Group As required by the Listing Rules we have reviewed the Directors’ statement on pages 61 and 62 regarding the appropriateness of the going concern basis of accounting to the financial statements and the Directors’ statement on the longer-term viability of the Group. We have nothing material to add or draw attention to in relation to:  the Directors’ confirmation on pages 61 and 62 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity;  the disclosures on pages 27 to 28 that describe those risks and explain how they are being managed or mitigated;  the Directors’ statement on page 112 to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group’s ability to continue to do so over a period of at least 12 months from the date of approval of the financial statements; and
 the Director’s explanation on pages 112 to 113 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.
Our assessment of risks of material misstatement The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. The procedures described in our response to each risk are not exhaustive and we have focused on those procedures that we consider address areas of judgement or subjectivity; see overleaf.
Independent Auditor’s report to the members of Direct Line Insurance Group plc continued 116 Direct Line Group Annual Report & Accounts 2016
Insurance reserves valuation Refer to page 65 (Audit Committee Report), page 129 (accounting policies) and page 168 (financial disclosures).
1) We have identified the estimation of the ultimate number of large bodily injury claims as being inherently uncertain. Management also exercises significant judgement in assessing the impact of market factors which could materially impact the valuation of excess bodily injury claims and hence the insurance reserves. On 27 February 2017 the Lord Chancellor announced a reduction in the Ogden discount rate used to value lump sum injury claim settlements from 2.5% to minus 0.75%. This change in discount rate has a significant impact on the valuation of large bodily injury claims, as detailed on page 137.
We have gained a detailed understanding of the end to end reserving process, including the process for adjusting the reserves as a result of the change in the Ogden discount rate and assessed the design and implementation of selected controls. We have tested the operating effectiveness for actuarial data reconciliations and key management review controls over the reserving process. Our work included attendance at the December Loss Ratio Committee and January Reserve Review Committee.
We have tested the completeness and accuracy of the underlying data used in the Company’s actuarial calculations and the actuarial data used by our Deloitte actuarial specialists in performing their audit through performing reconciliations on the data back to the financial ledger.
Key observations: We have determined that the estimate for the ultimate value of large bodily claims to be within a reasonable range. We observed that the frequency and severity assumptions were set towards the prudent end of a reasonable range.
We have assessed the design and implementation of controls surrounding the propensity of a claim to become a PPO, the discount rate used and the severity assumption applied. In addition we tested the operating effectiveness of a direct and precise business control, performed weekly, over the completeness of the PPO listing; this is a key data input which has a material impact on the PPO assumptions and hence the valuation.
We have worked with our actuarial specialists to:  challenge management’s assumptions by performing market benchmarking, sensitivity analysis and reviewing historical trends to assess the reasonableness of long term future expectations, including consideration of the change in the Ogden discount rate;  assess whether the assumptions were consistent in the period or, based on emerging market data, that the assumptions needed to be reconsidered;  consider the suitability of the methodology and model used in estimating the propensity, severity and discount rate; and
Key observations: We have determined that key assumptions used in the calculation of the PPO claims reserve are within a reasonable range. We observed that the investment yield component of the discount rate was towards the optimistic end of a reasonable range, but that the propensity and severity assumptions were set towards the prudent end of a reasonable range.
Independent Auditor’s report to the members of Direct Line Insurance Group plc continued 118 Direct Line Group Annual Report & Accounts 2016
We have assessed the design and implementation and tested the operating effectiveness of key business processes that have been subject to change. For example, we have tested the operating effectiveness of controls at a number of outsourced locations, involving site visits by the audit team. When testing the controls that had been impacted by the transformation programme our testing focussed on determining that there remained an appropriate level of review and segregation of duties.
We have identified a key risk for investments relating to the valuation of loan portfolios that are not held at fair value totalling £502m (2015: £388m) as detailed in note 40. During 2016 the Group has invested in a new commercial real estate loan portfolio and has increased investment in its private placement bond portfolio, with investment in infrastructure debt remaining stable at £337m (2015: £330m). These debt instruments are carried at amortised cost and represent a higher credit risk relative to the majority of DLG’s investment portfolio. As a result, there is a risk that the Group does not recognise an impairment provision on these loans when required by IAS 39.
We have assessed the design and implementation and tested the operating effectiveness of 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 assess the operation of a key management review control.
We have consulted with our credit and valuation specialists to challenge the methodology used in the assessment of credit risk within the investment portfolios that are held at amortised cost against best practice. In addition we performed the following:  independently calculated the fair value for a sample of assets to identify any significant decreases in fair value below book cost;  traced a sample of interest payments to bank during the year to test for default or delinquency in interest payments; and
Independent Auditor’s report to the members of Direct Line Insurance Group plc continued 120 Direct Line Group Annual Report & Accounts 2016
Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.
Following us reassessing the levels at which we would report to the Audit Committee, and as discussed and agreed with the Committee, we report to them all audit differences in excess of £1.4m (2015: £0.6m), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
Similarly to prior year, our Group audit scope has focused on the UK as this is the Group’s single trading location. In addition, we perform site visits at the Group’s key outsourcers. This resulted in two entities being subject to a full scope audit, a further two were subject to an audit of specified account balances where the extent of our testing was based on our assessment of the risks of material misstatement and of the materiality of the Group’s operations.
Opinion on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit:  the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006;  the information given in the Strategic report and the Directors’ report for the financial year for which the
overnance Financial statem ents www.directlinegroup.com 121 financial statements are prepared is consistent with the financial statements; and
 the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion:  we have not received all the information and explanations we require for our audit; or
 the Parent Company financial statements are not in agreement with the accounting records and returns.
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. We have nothing to report arising from these matters.
Our duty to read other information in the Annual Report Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the Annual Report is:  materially inconsistent with the information in the audited financial statements; or
 apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or
Respective responsibilities of Directors and Auditor As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews.
Profit for the year 278.8 580.4 Other comprehensive income / (loss) Items that will not be reclassified subsequently to the income statement: Actuarial (loss) / gain on defined benefit pension scheme 34 (4.4) 6.7 Tax relating to items that will not be reclassified 14 0.7 (1.6)
Other comprehensive income / (loss) for the year net of tax 84.5 (92.1) Total comprehensive income for the year attributable to owners of the Company 363.3 488.3
Assets Goodwill and other intangible assets 18 508.9 524.8 Property, plant and equipment 19 180.9 186.3
The financial statements were approved by the Board of Directors and authorised for issue on 6 March 2017. They were signed on its behalf by: John Reizenstein Chief Financial Officer
Dividends 15 – – – – – – (450.6) (450.6) Transfer from non-distributable reserve 30 – – – – (152.9) – 152.9 – Shares acquired by employee trusts – (39.5) – – – – – (39.5) Credit to equity for equity-settled share-based payments 35 – – – – – – 16.8 16.8 Shares distributed by employee trusts – 25.6 – – – – (25.6) – Tax on share-based payments – – – – – – 1.5 1.5
The attached notes on pages 127 to 178 form an integral part of these consolidated financial statements.
Direct Line Group Annual Report & Accounts 2016 126 £m 2015 £m
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, BR11DP, England.
1. Accounting policies Basis of preparation As required by the Companies Act 2006 and Article 4 of the EU IAS Regulation, the consolidated financial statements are prepared in accordance with IFRSs issued by the IASB as adopted by the EU. The Company’s financial statements have been prepared in accordance with and full compliance with IFRSs as issued by the IASB.
The International segment was classified as a discontinued operation until disposed of in 2015.
IAS 1 (amended) ‘Presentation of Financial Statements’ Disclosure Initiative – the amendments are intended to assist entities in applying judgement when meeting the presentation and disclosure requirements in IFRS, providing clarity to the materiality requirement in IAS 1, that specific line items in the income statement, other comprehensive income and balance sheet may be disaggregated. The amendments clarify that an entity’s share of the other comprehensive income of associates and joint ventures accounted using the equity method should be presented separately from those arising from the Group. The amendment also addresses that entities have flexibility as to the order in which they present the notes to the financial statements.
IAS 27 (amended) ‘Separate Financial Statements’, Equity Method in Separate Financial Statements – the amendments allow an entity to use the equity method for its investments in subsidiaries, joint ventures and associates in its separate financial statements.
IAS 19 (amended) ‘Employee Benefits’ – a further amendment has been made to IAS 19 to clarify that the high quality corporate bonds used to estimate the discount rate for postemployment benefits should be issued in the same currency as the benefits to be paid.
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 2016 and 31 December 2015. 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.
Where necessary, adjustments have been made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. The policies set out below have been applied consistently throughout the years ended 31 December 2016 and 31 December 2015 to items considered material to the consolidated financial statements.
1.2 Foreign currencies The Group’s consolidated financial statements are presented in Sterling which is the presentational currency of the Group. Group entities record transactions in the currency of the primary economic environment in which they operate (their functional currency), translated at the foreign exchange rate ruling at the date of the transaction.
Assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into Sterling at the foreign exchange rates ruling at the balance sheet date. Income and expenses of foreign operations are translated into Sterling at average exchange rates unless these do not approximate the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on the translation of a foreign operation are recognised in the consolidated statement of comprehensive income. The amount accumulated in equity is reclassified from equity to the consolidated income statement on disposal or partial disposal of a foreign operation.
Legal services revenue represents the amount charged to clients for professional services provided during the year including recovery of expenses but excluding value added tax. Revenue is only recognised once services have been provided and certainty exists as to the outcome of the respective cases.
1.5 Insurance claims Insurance claims are recognised in the accounting period in which the loss occurs. Provision is made for the full cost of settling outstanding claims at the balance sheet date, including claims incurred but not yet reported at that date, net of salvage and subrogation recoveries. Outstanding claims provisions are not discounted for the time value of money except for claims to be settled by PPOs established under the Courts Act 2003. A court can award damages for future pecuniary loss in respect of personal injury or for other damages in respect of personal injury and may order that the damages are wholly or partly to take the form of PPOs. These are covered in more
overnance Financial statem ents www.directlinegroup.com 129 detail in note 2.1. Costs for both direct and indirect claims handling expenses are also included.
A reinsurance bad debt provision is assessed in respect of reinsurance debtors, to allow for the risk that the reinsurance asset may not be collected or where the reinsurer’s credit rating has been downgraded significantly and this is taken as an indication of a reinsurer’s difficulty in meeting its obligations under the reinsurance contracts. This also includes an assessment in respect of the ceded part of claims provisions to reflect the counterparty default risk exposure to long-term reinsurance assets particularly in relation to periodical payments. Increases in this provision affect the Group by reducing the carrying value of the asset and the impairment loss is recognised in the income statement.
1.9 Property, plant and equipment Items of property, plant and equipment (except investment property – note 1.11) are stated at cost less accumulated depreciation and impairment losses. Where an item of
1.12 Financial assets Financial assets are classified as AFS, held-to-maturity (“HTM”), designated at fair value through profit or loss, or loans and receivables.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place are recognised on the date that the Group commits to purchase or sell the asset.
HTM and loans and receivables If there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as HTM or loans and receivables has been incurred, the Group measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of estimated future cash flows from the asset or group of assets, discounted at the effective interest rate of the instrument at initial recognition.
Receivables also include amounts due in respect of the provision of legal services.
In a cash flow hedge, the effective portion of the gain or loss on the hedging instrument is recognised directly in equity. Any ineffective portion is recognised in the income statement.
Direct Line Group Annual Report & Accounts 2016 132 1. Accounting policies continued A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires.
The Group’s defined benefit pension scheme, as described in note 34, was closed in 2003. Scheme liabilities are measured on an actuarial basis, using the projected unit credit method, and discounted at a rate that reflects the current rate of return on a high-quality corporate bond of equivalent term and currency to the scheme liabilities.
1.20 Share-based payments The Group operates a number of share-based compensation plans under which it awards Ordinary Shares and share options to its employees. Such awards are generally subject to vesting conditions that vary the amount of cash or shares to which an employee is entitled.
1.23 Accounting developments New IFRSs and amendments that are issued, but not yet effective for the 31 December 2016 reporting periods and have not been early adopted by the Group are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective, except for IFRS 9 as explained below.
In September 2016, the IASB issued amendments to IFRS 4 to address issues arising from the different effective dates of IFRS 9 and the upcoming new insurance contracts standard (IFRS 17). The amendment to IFRS 4 is expected to be endorsed by the EU before the effective date of IFRS 9.
During 2016 the Group performed an assessment of the temporary exemption from IFRS 9 criteria and concluded that the carrying amount of its liabilities connected with insurance relative to the carrying amount of all its liabilities as at 31 December 2015 is greater than 90% and therefore satisfies the exemption criteria.
In January 2016 the IASB issued IFRS 16 ‘Leases’ to replace the existing standard IAS 17, which subject to endorsement from the EU will be effective from 1 January 2019. IFRS 16 sets out the principles for recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. There are two exemptions for leases of a low value and for leases of short-term nature of 12 months or less. At the start of a lease, a lessee will recognise a liability for the lease payments and an asset representing the right to use the asset during the lease term. Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessor accounting under IFRS 16 is substantially unchanged from the current approach under IAS 17.
In 2017, the Group will assess the potential effect of IFRS 16 on its consolidated financial statements, the undiscounted value of the Group’s lease obligations are disclosed in note 39.
The IASB amended IAS 12 ‘Income Taxes’ – Recognition of Deferred Tax Assets for Unrealised Losses to clarify the accounting for deferred tax assets where an asset is measured at fair value and that fair value is below the asset’s tax base for accounting; the amendment is effective from 1 January 2017.
Amendments to IAS 7 ‘Statement of Cash Flows’ was issued as part of the IASB’s Disclosure Initiative to require entities to explain changes in their liabilities arising from financing activities; the amendment is effective from 1 January 2017.
The IASB amended IFRS 2 ‘Share-based Payments’ – Classification and Measurement of Share-based Payment Transactions, to address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash-settled to equity-settled; the amendments are effective from 1 January 2018.
2.1 General insurance: outstanding claims provisions and related reinsurance recoveries 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. Outstanding claims provisions net of related reinsurance recoveries at 31 December 2016 amounted to £3,388.3 million (2015: £3,602.6 million).
Claims reserves are assessed separately for large and attritional claims, typically using standard actuarial methods of projection. Key sources of estimation uncertainty include those arising from the selection of specific methods as well as assumptions for claims frequency and severity through the review of historical claims and emerging trends.
The Group will continue to exercise judgement around the Ogden rate used in its reserves allowing for the possibility for it to change in the future. The Lord Chancellor’s statement bases the choice of the rate on a 3-year average of yields on index-linked government securities which will be sensitive to future movements in these instruments. It is not yet clear how often the Lord Chancellor plans to review the rate and the coming consultation is proposed to look at the wider framework for setting the rate and compensation. The Group considers the risks to the rate in future as being significant but broadly balanced and therefore provisions at the current proposed rate of minus 0.75% with no additional allowance for further movements. Details of the sensitivity analysis to the assumed Ogden discount rate are shown in note 3.3.1.
The table below analyses the outstanding PPO claims provisions on a discounted and an undiscounted basis at 31 December 2016 and 31 December 2015. These represent the total cost of PPOs rather than any costs in excess of purely Ogden-based settlement.
In the majority of cases, the inflation agreed in the settlement is the Annual Survey of Hours and Earnings SOC 6115 inflation published by the Office for National Statistics, for which the long-term rate is assumed to be 4.0% (2015: 4.0%). The rate of interest used for the calculation of present values is 4.0% (2015: 4.0%), which results in a real discount rate of 0.0% (2015: 0.0%). Prior to 20 March 2017 lump sum payments were calculated using a real discount rate of 2.5% (2015: 2.5%) meaning that the PPOs reserved cost was greater than that of lump sum settlements. This will reverse when the new discount rate of minus 0.75% becomes effective.
2.2 Impairment provisions – financial assets The Group determines that financial assets are impaired when there is objective evidence that an event or events since initial recognition of the assets have adversely affected the amount or timing of future cash flows from the asset. The determination of which events could have adversely affected the amount or timing of future cash flows from the asset requires judgement. In making this judgement, the Group evaluates, among other factors, the normal price volatility of the financial asset, the financial health of the investee, industry and sector performance, changes in technology and operational and financing cash flow or whether there has been a significant or prolonged decline in the fair value of the asset below its cost. Impairment may be appropriate when there is evidence of deterioration in these factors.
On a quarterly basis, the Group reviews whether there is any objective evidence that a financial asset is impaired based on the following criteria:  actual, or imminent, default on coupon interest or nominal;  adverse movements in the credit rating for the investee / borrower; or
 price performance of a particular AFS debt security, or group of AFS debt securities, demonstrating an adverse trend compared to the market as a whole.
Had all the declines in AFS asset values met the criteria above at 31 December 2016, the Group would suffer a loss of £12.6 million (2015: £48.7 million), being the transfer of the total AFS reserve for unrealised losses to the income statement. These movements represent mark-to-market movements and where there is no objective evidence of any loss events that could affect future cash flows, no impairments are recorded for these movements.
2.4 Goodwill and other intangible assets Goodwill impairment testing inherently involves estimation uncertainty in a number of areas including: the preparation of the five-year strategic plan and the extrapolation of cash flow forecasts beyond the normal requirements of management reporting; the assessment of the discount rate appropriate to the CGUs; estimation of market values of CGUs; and the valuation of the separable assets of each business whose goodwill is being reviewed. Details of a sensitivity analysis on the recoverable amount in excess of carrying value are shown in note 18.
3.2 Risk and capital management modelling The Board has ultimate responsibility for ensuring that the Group has sufficient funds to meet its liabilities as they fall due. The Group carries out detailed modelling of its assets, liabilities and the key risks to which these are exposed. This modelling includes the Group’s own assessment of its SCR. In 2015, this SCR assessment was submitted to the PRA as part of the Group’s application for IMAP for which approval was subsequently granted in June 2016. The SCR quantifies the insurance, market, credit and operational risks that the regulated entities are undertaking.
The Group is mainly exposed to the following Insurance risks: Reserve risk Reserve risk relates to both premiums and claims. This is the risk of understatement of reserves arising from:  the uncertain nature of claims;  data issues and changes to the claims reporting process;  operational failures;  failure to recognise claims trends in the market; and
Understatement of reserves may result in not being able to pay claims when they fall due. Alternatively, overstatement of reserves can lead to a surplus of funds being retained resulting in opportunity cost for example lost investment return or insufficient resource to pursue strategic projects and develop the business.
 the use of external actuaries to review periodically the actuarial best estimate reserves produced internally, either through peer review or through provision of independent reserve estimates;  accompanying all reserve reviews with actuarial assessment of the uncertainties through a variety of techniques including bootstrapping and scenario analysis;  oversight of the reserving process by relevant senior management and the Board;  regular reconciliation of the data used in the actuarial reviews against general ledger data and reconciliation of the claims data history against the equivalent data from prior reviews; and
Uncertainty in claims reserves estimation is larger for claims such as PPOs for which annually indexed payments are made typically over the lifetime of the injured party. Claims reserves for PPOs are held on a discounted basis and are sensitive to a change in the assumed real discount rate.
The table below provides a sensitivity analysis of the potential impact of a change in a single factor with all other assumptions left unchanged. Other potential risks beyond the ones described could have an additional financial impact on the Group.
Increase / (decrease) in profit before tax and equity3 £m 2015 £m