Privilege targets customers who predominantly buy through PCWs, focusing on a quick customer experience at the best possible price.
NIG is our specialist commercial insurance brand sold to SMEs in the UK through brokers; including an in-house intermediary that brokers all of the Royal Bank of Scotland (“RBS Group”) and NatWest business.
Rescue and other personal lines We are a leading provider of rescue and other personal lines insurance in the UK with 9.4 million in-force policies. This includes Green Flag, the UK’s third largest roadside recovery provider. We also have an 11% share in both the pet and travel insurance markets.
Operating profit £19.5m 5Direct Line Group Annual Report & Accounts 2012
Our customers We provide a range of brands, products and channels to our customers
The Group has adopted a progressive dividend policy which from 2013 will aim to raise the dividend annually in real terms to reflect the cash flow generation and the long-term earnings potential of the Group.
Moving from the roads and into the home, some of our home insurance customers have had to endure another unprecedented year of rainfall and flooding. Our advisers were immediately on the ground in heavily affected areas to help customers through the claims process and provide them with alternative accommodation where needed.
We employ a multi-channel distribution model and look to optimise the mix of these channels for each of our products and brands. This includes selling our products directly via the phone and internet, through the UK’s four largest PCWs, and via partners and brokers.
Our strategy in action For customers, the moment of truth comes when they make a claim. When many parts of the UK experienced severe flooding in 2012, our people were quickly at hand to provide assistance to the homes and businesses affected. Our Property Insurance Advisers assessed property damage, guided customers through the claims process and arranged temporary accommodation and cash advances to help with essential purchases where needed.
In Italy, we are the leading direct motor insurer with one million policies, and are focusing on disciplined profit growth through targeted segmentation and cost initiatives. Our German business is number three in the direct motor market with around half a million policies and is targeting accelerated growth through PCWs and brand partnerships.
Definition The return generated by investing the assets we hold. These investments are held to pay out future claims and to support our capital base. It is calculated by dividing investment income (excluding net realised gains) by average investment assets under management.
Definition The cost of doing business including paying our people, marketing, infrastructure and IT. This includes the costs we incur in handling claims but excludes any commissions we pay to brokers or partners.
Liquidity risk – the risk of maintaining insufficient financial resources to meet business obligations as and when they fall due.
• Removing recoverability of conditional fee agreements offset by a 10% uplift to general damages
The improvement in the loss ratio was despite the wettest year in England and the second wettest in the UK since records began and a number of larger than normal fire claims in Commercial in the first half of 2012. Claims relating to weather events in Home totalled to £105 million (2011: £20 million) and were £25 million more than would be expected in a normal year.
Prior-year reserve releases increased to £322.0 million (2011: £188.8 million) equivalent to 8.7% of net earned premium (2011: 4.9% of net earned premium).
Cash flows from investing activities were an outflow of £154.2 million in 2012, comprising £63.7 million for the purchase of property, plant and equipment, £96.6 million of investment in software development costs and £6.1 million cash inflow relating to net investment hedges of foreign subsidiaries. Cash flows from investing activities were a cash outflow of £126.2 million in 2011 due largely to investment in software development costs of £119.8 million.
Run-off 856.4 1,148.7 42 Direct Line Group Annual Report & Accounts 2012
Capital management actions In 2012, Direct Line Group paid three dividends totalling £1 billion to its parent company, RBS Group, as part of a number of capital actions aimed at creating a more efficient capital structure ahead of its IPO in October 2012.
• 4% higher for the extent to which our people feel the values have been embedded
The reduction of crime and anti-social behaviour in our communities We are building a programme to enable us to interact more closely with our communities and to use our knowledge, people and presence to draw attention to crime and anti-social behaviour and the impact this has on our communities. Our aim is to make our communities safer by raising awareness of the issues amongst employees and the wider community, and to work with relevant community partners to help prevent people slipping into crime and anti-social behaviour.
• We have improved our paper sourcing and for marketing and customer documents we use Forest Stewardship Council certified, vegetable and water-based inks with the ability to track from source. We are also actively working on reducing the volume of paper mailed and archived through electronic and alternative delivery channels.
• Set financial targets for the Group, including COR and RoTE.
In summary Your Board is hardworking and committed, well placed to challenge robustly the proposals put before it and to provide independent oversight. In addition the Group has implemented a governance framework which provides it with a firm foundation for the future. This is aimed at ensuring that the outputs of our various work streams are subjected to robust systems of challenge and independent oversight, with material decisions on the items specifically reserved to the Board being promptly escalated to it.
John Reizenstein 8 of 8 10 of 10 3 of 3 1 of 1
2. Acting Chairman from 27 January 2012 to 27 April 2012.
The Directors are aware that any system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable, and not absolute, assurance against material misstatement or financial loss.
Minimum number of meetings per annum The Risk Committee is to meet at least four times a year at appropriate times in the risk and regulatory reporting cycle.
• Overseeing the Group’s compliance with its health and safety statutory and regulatory requirements and embedding a health and safety culture across the Group.
Role and focus The role of the Investment Committee is to propose investment policies and guidelines for the management of Group funds for approval by the Board and to oversee the management and performance of the investment strategy of the Group. The International and Life boards independently review and approve the investment guidelines of those entities.
Meeting frequency The Committee is to meet at least four times a year.
Relations with shareholders What does ‘relations with shareholders’ mean? Actively engaging with our shareholders is fundamental to our business. We believe that ensuring an active dialogue and ongoing engagement is vital to keeping in touch with opinions, providing us with the opportunity to address any questions and concerns in a proactive way.
As an insurance business, the Group is not subject to the provisions of the FSA’s Remuneration Code. However, the Group seeks to comply with the core requirement of this code that it should establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote sound and effective risk management. Accordingly, for all senior employees, significant elements of incentive-related pay are subject to deferral and potential clawback as explained on pages 80 to 81.
• Company and individual performance can be reflected through variable pay.
• To motivate and incentivise delivery of sustained performance over the long term, aligning interests with those of the shareholders.
Notes: 1. The only remuneration paid to the Directors in 2011 and 2012 was in the form of fees.
Shareholdings The Executive Directors are subject to the Group’s Share Ownership Guidelines and until they reach the required amount they must retain the Ordinary Shares obtained from any of the Group’s employee share plans after any disposals necessary for the payment of personal taxes on the acquisition of such Ordinary Shares. For these purposes, the holding of Ordinary Shares will be treated as including all vested but unexercised awards, valued on a basis that is net of applicable personal taxes.
Dilution Direct Line Group is not permitted to make awards over unissued shares while remaining a major subsidiary undertaking of RBS Group. In due course, unissued shares may be used and the Direct Line Group will ensure that it complies with both of the dilution levels recommended by the ABI guidelines (of 10% in 10 years for all share plans and 5% in 10 years for discretionary plans) consistent with the rules of the Direct Line Group’s share plans. To date, legacy RBS Group awards to be satisfied in Direct Line Group shares will be satisfied by RBS Group rather than the Direct Line Group and RBS Group have placed shares in trust to facilitate this.
Transfer value of total accrued pension at 31 December 2011 £
The Board has approved a number of authorisations in this manner. Notwithstanding such authorisation, the Board continues to ensure that any actual conflict of interest or duty, should it arise, is dealt with appropriately, which will usually be by arranging that the Director takes no part in the relevant Board or Committee discussion or decision.
Details of the Company’s share capital and shares under option at 31 December 2012 are given in notes 27 and 34 of the consolidated financial statements.
Details of Directors’ remuneration, service contracts, employment contracts and interests in the shares of the Company are set out in the Directors’ remuneration report.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
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 UK court can award damages for future pecuniary loss in respect of personal injury or for other damages in respect of personal injury and may order that the damages are wholly or partly to take the form of PPOs. These are covered in more detail in note 2.1. Costs for both direct and indirect claims handling expenses are also included.
1.10 Impairment of intangible assets, goodwill and property, plant and equipment At each reporting date, the Group assesses whether there is any indication that its intangible assets, goodwill or property, plant and equipment are impaired. If any such indication exists, the Group estimates the recoverable amount of the asset and the impairment loss, if any. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. If an asset does not generate cash flows that are independent of those of other assets or groups of assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Value in use is the present value of future cash flows from the asset or cash-generating unit, discounted at a rate that reflects market interest rates, adjusted for risks specific to the asset or cashgenerating unit that have not been reflected in the estimation of future cash flows.
Amendments to IAS 19 ‘Employee Benefits’ require the immediate recognition of all actuarial gains and losses eliminating the ‘corridor approach’; interest costs to be calculated on the net pension liability or asset at the appropriate corporate bond rate; and all past service costs to be recognised immediately when a scheme is curtailed or amended. The amendments are effective for annual periods beginning on or after 1 January 2013. Earlier application is permitted. The Group is reviewing the amendments to determine their effect on the Group’s financial reporting. The new standard is not expected to have any material effect on the Group.
The Group holds provisions for a reduction in the Ogden discount rate at 31 December 2012 to 1.5% (2011: 1.5%), excluding PPOs, which are reserved for separately. A reduction in the Ogden discount rate would reduce the amount by which the cost of settling a claim as a PPO exceeds a lump sum settlement and this offset is allowed for in the provision. Outstanding claims provisions based on expected future settled amounts, are not discounted from settlement date to valuation date except for those in respect of PPOs under the Courts Act 2003. PPOs give rise to additional claims costs which are in excess of those calculated based on the Ogden tables and discounting is applied to the total cost of the PPO and not just the additional cost. The following table provides information regarding the outstanding claims provisions in respect of PPOs on a discounted and undiscounted basis. These represent the total cost of PPOs rather than any costs in excess of purely Ogden-based settlement.
For creditor insurance, contracts were issued either on a monthly renewable basis (regular premium), which can be amended or cancelled by the customer at any point during the contract, or cover period of a loan (single premium). In the former case, the Group can cancel or amend the policy following a 90-day written notice period. In the latter case (these policies were withdrawn from sale in April 2009), the customer has the option to cancel the contract at any point but generally the Group is obligated for the full term up to a maximum of 10 years, but typically three to five years.
The Group uses derivatives for hedging its exposure to foreign currency and interest rate risks. The market risk policy explicitly prohibits the use of derivatives for speculative or gearing purposes.
The Group also invests in floating rate notes. A downward movement of the short-term interest rate will affect the expected return on the investments.
6. The sensitivities set out above have not considered the impact of the general market changes on the value of the Group’s insurance contract liabilities or retirement benefit obligations.
The main sources of credit risk for the Group are: • investment counterparty – this arises from the investment of monies in the range of investment vehicles permitted by the investment policy; and
The tables below show the gross liability analysed by remaining duration for each category of insurance and financial liabilities. The total liability is split by remaining duration in proportion to the cash flows expected to arise during that period.
Commercial This segment consists of the underwriting of commercial insurance for micro businesses and SMEs in the UK. The Group sells commercial products through its own brands – NIG and DL4B – and through its partnership with RBS and NatWest.
Amortisation and impairment of other intangible assets 40.7 29.8 Impairment of goodwill – 10.2 Other operating expenses 228.4 87.1
Direct Line Group Annual Report & Accounts 2012 134 12. Tax charge £m 2011 £m
Investment properties were purchased during the year to provide an investment return over the long term in accordance with the Group’s investment strategy. These properties are managed, on behalf of the Group, by a property services company.
The Group did not dispose of any of its subsidiaries in the year ended 31 December 2012.
Available-for-sale debt securities Sovereign, supranational and local government debt securities 2,635.7 3,481.2 Corporate debt securities 4,475.6 3,843.2 Mortgage backed securities 45.2 283.5 £m 2011 £m
3. The Group held no Level 3 securities at 31 December 2012 and 31 December 2011.
Revaluation during the year – gross 6.3 103.6 109.9 Revaluation during the year – tax (1.5) (19.1) (20.6) Realised gains – gross (23.2) (66.3) (89.5) Tax on realised gains 5.7 16.2 21.9 144 Direct Line Group Annual Report & Accounts 2012
Reinsurers’ share of life insurance Long-term insurance contracts: With fixed and guaranteed terms (91.1) (78.6) Benefits outstanding (3.6) (4.1)
Benefits paid (1.2) (1.3) Closing fair value of plan assets 63.7 56.7
Movements in working capital Net decrease in net insurance liabilities (532.5) (885.4) Net decrease in prepayments and accrued income and other assets 9.6 36.9 Net decrease in insurance and other receivables 86.5 238.4 Net increase in derivative financial instruments – (0.4) Net (decrease) / increase in trade and other payables including insurance payables (253.4) 158.3 Increase in cash contribution to retirement obligation (2.5) (2.5) Cash used by operations (731.4) (378.0)
Dividends The Group aims to generate long-term sustainable value for shareholders, while balancing all operational, regulatory, rating agency and policyholder requirements. The Board has adopted a progressive dividend policy for the Company, which will aim to increase the dividend annually in real terms to reflect its cash flow generation and long-term earnings potential.
• If you receive a letter from the Registrar regarding a change of address and you have not recently moved, please contact them immediately.
Return on tangible equity is adjusted profit after tax from ongoing operations divided by the Group’s average tangible shareholders’ equity. Profit after tax is adjusted to exclude Run-off operations and restructuring and other one-off costs and is stated after charging tax (using the UK standard tax rate).
Registrars Computershare Investor Services plc The Pavilions Bridgwater Road Bristol BS99 6ZZ