Combined operating ratio 8.3m In-force policies £52.0m Operating profit £866.3m Gross written premium
77% of 25 to 34 year olds willing to buy insurance via smartphone1
Notes: 1. Association of British Insurers (“ABI”) Agenda 2015-2020 Insurance matters 2. ABI news release 18 December 2015 3. Thatcham, Autonomous Emergency Braking: The Facts, January 2016 90% UK households with one or more insurance products1
Each brand provides products for one or more insurance segments: motor, home, rescue, pet, travel and commercial. By tailoring the mix of distribution channels for each product, we offer customers a blend of brands, products and services that best suit their needs.
Dear shareholders, The Group achieved another good set of results in 2015, through our focus on operating efficiency and our disciplined approach to underwriting in competitive markets. This enabled us to deliver an improvement in operating profit from ongoing operations to £520.7 million (2014: £506.0 million). This was despite higher than normal claims from major weather events following three storms in December.
Linking remuneration to performance The Executive Directors guided the business in achieving another good performance in 2015, with operating profit from ongoing operations ahead of our financial targets. The Group has also made progress on its strategic objectives, including improving customers’ satisfaction with the service they experience. The delivery of these objectives is linked to the Executive Directors’ 2015 annual incentive plan (“AIP”) awards.
The cost of doing business, including paying our people, marketing expenses, and spending on infrastructure and IT. This includes the costs we incur handling claims, but excludes any commissions we pay to brokers or partners, and restructuring and other one-off costs.
To find out more about our CSR Committee, see page 63.
• Find ways to engage all audiences that can influence the situation including young drivers, parents, carmakers, road safety educators and policymakers, traffic planners and other insurers
• A masquerade ball in Leeds in aid of Cancer Research, Leeds MIND, Sue Ryder and Leeds Haven
• In-force policies for Rescue declined by 3.5% to 3.9 million through lower partner volumes and packaged bank account volumes
• Gross written premium for Rescue and other personal lines experienced growth of 6.0%, mainly due to Green Flag direct sales, and travel partnerships pricing and cover levels
The Group’s expense ratio remained stable at 23.6%, with the effect of the reduction in operating expenses offset by the impact of lower net earned premium.
Dividends paid amounted to £666.0 million (2014: £401.1 million) resulting in net cash used by financing activities of £722.0 million (2014: £443.4 million).
Reinsurance The objectives of the Group’s reinsurance strategy are to reduce the volatility of earnings, facilitate effective capital management and transfer risk outside of the Group’s risk appetite. This is achieved by the transfer of risk exposure through various reinsurance programmes: Direct Line Group Annual Report & Accounts 201542
Shareholders’ equity 2,630.0 2,810.5 Financial debt − subordinated guaranteed dated notes 521.1 526.3 Total capital employed 3,151.1 3,336.8 Financial-leverage ratio4 16.5% 15.8%
Following Glyn Jones’ resignation after the 2015 AGM, we changed the Committees’ membership. Clare Thompson became the Chair of the Investment Committee and Priscilla Vacassin was appointed a member of the Nomination Committee.
She is a graduate of the University of York with a degree in Music, and a Fellow of the Institute of Chartered Accountants in England and Wales.
All NEDs must be able to spend enough time in their roles to discharge their duties and responsibilities effectively. The letters of appointment for the Chairman and every NED set out the time the Group anticipates that they will commit to their roles. This is at least three days a week for the Chairman and an average of three days a month for the NEDs. The Nomination Committee reviews this time commitment annually.
Meetings The Board held nine scheduled meetings in 2015 and five additional meetings. The additional meetings were ad hoc or Board sub-committee meetings, for example, to consider specific matters in relation to the share consolidation. The Board also held its annual strategy day in June 2015.
The diagram summarises the split of responsibilities for the different parts of the Group’s governance framework.
The Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Group Financial Controller and Head of External Reporting are invited to attend Audit Committee meetings. The Actuarial Director, external actuarial advisers, External Auditor and Group Head of Audit are also invited to attend meetings and meet privately with the Audit Committee, in the absence of management. The Managing Director of Claims, Business Services and Technology Services is also invited to attend appropriate sections of Audit Committee meetings.
External audit The Audit Committee is responsible for overseeing the External Auditor and agreeing the audit fee. This also involves approving the annual audit’s scope.
• Governance around the calculation of the Standard Formula, and the justification of this capital requirement including a comparison to the IECM SCR
Meetings The CSR Committee held three scheduled meetings in 2015. This table shows attendance at the scheduled meetings: Scheduled meetings
The Human Resources Director, Head of Public Affairs and Sustainability, and CSR Manager are invited to attend CSR Committee meetings. The Chair reports on matters dealt with at each Committee meeting to the subsequent scheduled Board meeting.
JCA Group is a signatory to the Voluntary Code of Conduct for executive search firms. It is not connected in any way to the Company.
• Considering how the Group’s strategy or performance might affect its remuneration policy
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 oversaw 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.
Joint Remuneration Committee and Board Risk Committee meeting During the year, the Remuneration and Board Risk Committees held a joint meeting to ensure all remuneration arrangements remained appropriate. You can find out more about this in the Board Risk Committee report.
• Reported profit before tax replaces ongoing operating profit as primary and sole financial measure accounting for 55% of the total AIP outcome
Personal element (20% weighting) This element focuses on the individual's personal objectives as well as shared objectives with other Executive Committee members, set by the Remuneration Committee. Both Executives demonstrated strong leadership on various strategic initiatives during the year. As outlined in the Board Chairman’s letter on pages 10 to 11, during 2015 the Group progressed on delivering its strategic objectives and building future capability in line with its mission. These objectives also form part of the Executives’ personal and shared objectives and, in acknowledgement of progress made during the year, the Committee determined that Paul Geddes and John Reizenstein should each receive awards ahead of an on-target level of performance, of 65% and 80% of the maximum available under this element, respectively. In determining the level of personal achievement for the Chief Financial Officer, the Committee was particularly mindful to recognise the successful completion of the sale of the International business during 2015, in which he played a key role. Whilst the agreement was substantially complete in 2014, the Committee decided to wait until all regulatory approvals had been received during 2015 before recognising this exceptional personal performance.
When determining Directors’ remuneration, the Committee considers employment conditions elsewhere in the Group. The Committee particularly reviews overall pay and bonus decisions in aggregate for the wider Group. Through the Chief Executive Officer and the HR Director the Committee may, as required, consider input from employee groups, such as the Employee Representative Body.
2. This balance reflects the impact of the share consolidation on 30 June 2015, in which every 12 existing Ordinary Shares were replaced by 11 new Ordinary Shares.
− general base salary movement across the Group. • The Committee does not strictly follow data but uses it as a reference point in considering, in its judgement, the appropriate level having regard to other relevant factors including corporate and individual performance and any changes in an individual’s role and responsibilities
• The treatment of leavers within the rules of the plan and the termination policy summary shown on pages 92 to 93
Depending on the circumstances of departure, an Executive Director may have additional claims under relevant employment protection laws and the Company may contribute to any legal fees involved in agreeing a termination. It may also agree to incur certain other expenses such as the provision of outplacement services. Any such fees would be disclosed as part of the detail of any termination arrangements.
Non-Executive Director letters of appointment Non-Executive Directors are appointed for a three-year term which may be renewed by mutual agreement. In common with the Executive Directors, all Non-Executives are subject to annual re-election by shareholders.
The Company maintains directors’ and officers’ liability insurance. This provides appropriate cover for legal actions brought against its Directors.
Under the Company’s Share Incentive Plan, shares are held by a Trustee on behalf of employee participants. The Trustees will only vote on those shares and receive dividends that are beneficially owned by a participant, in accordance with the participant’s wishes. An Employee Benefit Trust is also in operation, the Trustee of which has discretion to vote on any shares it holds as it sees fit, save for any shares owned beneficially by participants, in which case the Trustee will only vote on such shares as per instructions from the participant. 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 28 on page 150. The Company is only aware of the dividend waivers and voting restrictions mentioned above.
In addition to total emissions, the Group also monitors emissions per £ million of net earned premium. In 2015, this was 7.7 tonnes per £ million of net earned premium for continuing operations (2014: 9.1 tonnes). This is a measure of how efficiently insurance products are provided and allows comparison between our year-on-year performance and performance against insurance companies.
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 Deloitte LLP’s reappointment in the Audit Committee report on pages 59 and 60.
In addition to this, we have performed work to understand the sensitivity of insurance reserves to changes in key assumptions and methodology, as well as reviewed the actuarial disclosure in the Annual Report.
We have tested the design and implementation and operating effectiveness of controls over the investment valuation process. We attended the year-end impairment review meeting in order to assess the operation of a key management review control.
Profit for the year 580.4 372.6 Other comprehensive (loss) / income Items that will not be reclassified subsequently to the income statement: Actuarial gain on defined benefit pension scheme 33 6.7 2.8 Tax relating to items that will not be reclassified 14 (1.6) (0.6)
1.4 Revenue recognition Premiums earned Insurance and reinsurance premiums comprise the total premiums receivable for the whole period of cover provided by contracts incepted during the financial year, adjusted by an unearned premium provision, which represents the proportion of the premiums incepted in prior periods that relate to periods of insurance cover after the balance sheet date. Unearned premiums are calculated over the period of exposure under the policy, on a daily basis, 24ths basis or allowing for the estimated incidence of exposure under policies.
AFS On a quarterly basis, the Group reviews whether there is any objective evidence that the direct investments in AFS debt securities are impaired based on the following criteria: • 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; • adverse movements in the credit rating for corporate debt; • actual, or imminent, default on coupon interest or nominal; or
Had all the declines in AFS asset values met the criteria above at 31 December 2015, the Group would suffer a loss of £48.7 million (2014: £15.8 million loss of which £0.3 million related to the disposal group), 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.
There was no impairment provision in respect of financial instruments classified as HTM or loans and receivables in the year ended 31 December 2015 (2014: £nil).
For disclosure purposes, fair value measurements are classified as Level 1, 2 or 3 based on the degree to which fair value is observable: Level 1 financial assets are measured in whole or in part by reference to published quotes in an active market. In an active market quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
Pricing risk This is the risk of economic loss arising from policies being incorrectly priced or accepted to achieve desired volume and profitability.
3.3.4 Operational risk This is the risk of loss due to inadequate or failed internal processes, people, systems or from external events. Sources of operational risk for the Group include: Change risk This is the risk of failing to manage the Group’s business change programme resulting in conflicting priorities and failure to deliver strategic outcomes to time, cost or quality.
Gross written premium 261.1 567.6 Gross earned premium 207.2 555.8 Reinsurance premium ceded (78.8) (226.0) Net earned premium 128.4 329.8 Investment return1 37.1 22.1 Instalment income 1.4 4.8 Other operating income 0.1 1.0 Total income 167.0 357.7 Insurance claims (156.2) (404.2) Insurance claims recoverable from reinsurers 60.9 159.5 Net insurance claims (95.3) (244.7) Commission expenses (28.0) (63.0) Operating expenses (10.2) (29.0) Total expenses (38.2) (92.0) Operating profit from discontinued operations 33.5 21.0 Gain on disposal of discontinued operations 167.1 – Profit before tax from discontinued operations 200.6 21.0 Tax charge (19.4) (7.7) Profit after tax from discontinued operations 181.2 13.3 Underwriting loss (5.1) (6.9) Loss ratio 74.2% 74.2% Commission ratio 21.8% 19.1% Expense ratio 8.0% 8.8%
Deferred taxation (note 14): Charge for the year 6.4 14.0 Under/ (over) provision in respect of prior year 3.0 (7.6)
Note: 1. In the Finance Act 2013 the UK Government enacted a reduction in the corporation tax rate from 23% to 21% effective from 1 April 2014 and a further reduction to 20% effective from 1 April 2015. The Finance (No 2) Act 2015 enacted further reductions to 19% effective from 1 April 2017 and 18% effective from 1 April 2020. As a consequence, the closing deferred tax assets and liabilities have been recognised at the tax rates expected to apply when the assets or liabilities are settled. The impact of these changes on the tax charge for the year is set out in the table above.
The trustees of the employee share trusts waived their entitlement to dividends on shares held to meet obligations arising from LTIP, DAIP and Restricted Shares Plan awards, which reduced the total dividend paid for the year ended 31 December 2015 by £1.7 million (2014: £0.9 million).
Disposal of subsidiary1 (110.1) (1.6) (111.7) Disposals and write-off2 – (67.2) (67.2) Transfer to assets held for sale (21.7) (38.6) (60.3)
Goodwill arose on the acquisition of U K Insurance Limited (£141.0 million) and Churchill Insurance Company Limited (£70.0 million), which is allocated across Motor, Home, Rescue and other personal lines and Commercial.
Note: 1. Infrastructure debt portfolio consists of UK floating rate senior loans with interest rates for the year ended 31 December 2015 ranging from 1.2% to 3.5% (2014: 1.8% to 3.4%) and remaining maturity of between 8 and 25 years (2014: 8 and 25 years).
Effect of foreign currency exchange adjustment (41.1) 11.5 (29.6) Transfer to (liabilities) / assets held for sale (note 5C) (553.4) 159.8 (393.6)
Direct Line Group Annual Report & Accounts 2015 156 33. Retirement benefit obligations continued Movement in net pension surplus / (deficit)
Direct Line Group Share Incentive Plans: Free Share awards In March 2015, the Group offered all eligible UK employees a Free Share award granting 122 Ordinary Shares free of charge. These awards have no performance criteria attached and vest on the third anniversary of the award grant date, subject to completion of three years, continuing employment. The Group initially granted 1.3 million Ordinary Shares with an estimated fair value of £4.2 million using the market value at the date of grant.
Sale of insurance contracts and other services – 0.3 Purchase of services – 19.7
Total comprehensive income for the year – – – (1.2) 539.5 538.3 Dividends paid – – – – (666.0) (666.0) Credit to equity for equity-settled share-based payments – – 12.1 – – 12.1 Shares distributed by employee trusts – – (11.0) – – (11.0)
• If it sounds too good to be true, it probably is
Shareholders who register their email address with our Registrar or at the Investor Centre can receive emails with news on events, such as the AGM. They can also receive shareholder communications like the Annual Report & Accounts and Notice of Meeting electronically.
Earnings per share The amount of the Group’s profit allocated to each Ordinary Share of the Company. Employee Representative Body
Financial Reporting Council The UK’s independent regulator responsible for promoting high-quality corporate governance and reporting to foster investment.
Return on tangible equity for 2015 is adjusted profit after tax from ongoing operations divided by the Group’s average shareholders’ equity, less goodwill and other intangible assets and net assets held for sale in the disposal group relating to discontinued operations. Profit after tax is adjusted to exclude discontinued operations, the Run-off segment, restructuring and other one-off costs and the gain on disposal of subsidiary. It is stated after charging tax (using the UK standard tax rate of 20.25%; 2014: 21.5%). RoTE for comparative periods include the net assets held for sale in the disposal group and profit after tax for discontinued operations, as the International division was managed as part of ongoing operations.
Compares share price movement with reinvested dividends as a percentage of the share price at the beginning of the period.
The forward-looking statements contained in this document reflect knowledge and information available as of the date of preparation of this document. The Group and the Directors expressly disclaim any obligations or undertaking to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by applicable law or regulation. Nothing in this document should be construed as a profit forecast.