D
i
r
e
c
t
L
i
n
e
I
n
s
u
r
a
n
c
e
G
r
o
u
p
p
l
c
A
n
n
u
a
l
R
e
p
o
r
t
&
A
c
c
o
u
n
t
s
2
0
1
5
Annual Report & Accounts 2015
Our mission
To make insurance
much easier and
better value for
our customers
Our strategy supports our
aspiration to be the leading
personal and small business
general insurer in the UK.
That is why our customers are
at the centre of everything we do.
For all the latest news
and announcements visit
www.directlinegroup.com
Contents
Strategic report
Governance
Financial statements
46 Chairman’s introduction
48 Board of Directors
50 Executive Committee
51 Corporate governance report
58 Committee reports
70 Directors’ remuneration report
96 Directors’ report
Chief Executive Officer’s review
2 Group highlights
4 Group at a glance
6 Market overview
8
Business model
10 Chairman’s statement
12
14 Our strategy
24 Our key performance indicators
26 Risk management
30 Corporate social responsibility
34 Operating review
38 Finance review
100 Contents
101 Independent Auditor’s report
106 Consolidated
financial statements
111 Notes to the consolidated
financial statements
164 Parent Company
financial statements
167 Notes to the Parent Company
financial statements
Other information
172 Additional information
174 Glossary
176 Forward-looking
statements disclaimer
Contact information
Our strategic pillars
p18
p20
p22
Great retailer
Smart & efficient
manufacturer
Lead & disrupt
the market
www.directlinegroup.com
1
Group highlights
Delivering for our
customers and shareholders
We achieved good results in 2015 while making progress on implementing our strategy.
We remained focused on operating efficiency and disciplined underwriting which helped
us to improve operating profit from ongoing operations.
Financial highlights
• Gross written premium from ongoing operations1 up 1.7% to £3,152.4 million,
with 4.8% growth in Motor for 2015 and 7.1% in the fourth quarter. Motor and
Home own brands in-force policies1 up 1.4%
• Operating profit from ongoing operations increased to £520.7 million for 2015
(2014: £506.0 million). Combined operating ratio1 from ongoing operations
of 94.0% for 2015, an improvement of 1.0 percentage point
• Return on tangible equity1 of 18.5% for 2015 (2014: 16.8%). Profit before tax
for continuing operations1 increased to £507.5 million (2014: £456.8 million)
• Results benefited from our disciplined underwriting, prior-year reserve releases from
ongoing operations of £378.9 million (2014: £397.6 million) which were higher
than expected, together with lower costs, partially offset by higher claims from
major weather events and lower volumes
• 4.5% increase in final dividend per share to 9.2 pence per share and additional
special dividend of 8.8 pence per share. Total dividends for 2015, including
special interim dividend of 27.5 pence per share following sale of International
division, of 50.1 pence per share (2014: 27.2 pence per share)
Strategic and operational highlights
• Investment in brand differentiation through further enhancements, a succession
of initiatives to Direct Line proposition and improved trading capability across
Churchill and Privilege, particularly on price comparison websites
• Improved customer retention rates for motor and home products, and Net Promoter
Score for Direct Line brand
• Reduced total costs1 for ongoing operations by 4.6% in 2015 while investing
in technical pricing, claims management and self-service initiatives
• Doubled Motor telematics insurance in-force policies; and growth in Commercial
in-force policies through eTrade and direct channels
• Invested in digital capability, including the roll out of new quote and buy journeys
for Home and Green Flag insurance products, and development of next generation
of customer systems
Note:
1. See glossary on pages 174 and 175
2
Direct Line Group Annual Report & Accounts 2015 Return on tangible equity1
(%)
Combined operating ratio1
Ongoing operations1 (%)
Gross written premium1
Ongoing operations (£m)
18.5%
8
.
6
1
0
.
6
1
5
.
8
1
Target
At least 15%
94.0%
2
.
5
9
0
.
5
9
0
.
4
9
£3,152.4m
1
.
2
2
2
,
3
4
.
9
9
0
,
3
4
.
2
5
1
,
3
13y
14y
15y
13y
14y
15y
13y
14y
15y
Total costs1
Ongoing operations (£m)
Operating profit
Ongoing operations (£m)
Profit before tax
Continuing operations1 (£m)
£884.7m
£520.7m
£507.5m
0
.
5
8
9
7
7.
2
9
7
.
4
8
8
9
.
9
0
5
0
.
6
0
5
7
.
0
2
5
5
7.
0
5
8
.
6
5
4
3
7.
0
4
13y
14y
15y
13y
14y
15y
13y
14y
15y
Dividend per share2
(pence)
Adjusted diluted earnings
per share1
(pence)
Basic earnings per share
Continuing operations (pence)
50.1p
5
7.
2
8
.
8
8
.
3
1
0
.
4
1
2
.
3
1
0
.
8
6
.
2
1
26.6p
0
.
5
2
5
.
5
2
6
.
6
2
27.9p
9
7.
2
0
.
4
2
8
.
0
2
13y
14y
15y
13y
14y
15y
13y
14y
15y
Notes:
1. See glossary on pages 174 and 175
2. The Board is proposing a final dividend of 9.2 pence per share, making a total regular dividend for 2015 of 13.8 pence per share.
A first special dividend of 27.5 pence per share was paid in relation to the sale of the International division. In addition, the Board has resolved
to pay a further special interim dividend of 8.8 pence per share.
G
o
v
e
r
n
a
n
c
e
F
i
n
a
n
c
i
a
l
t
s
t
a
e
m
e
n
t
s
3
www.directlinegroup.comStrategic report
Group at a glance
Protecting our customers
We have multiple brands, products and distribution channels. Each allows our customers to
choose the right cover to protect their cars, homes, holidays, businesses and pets.
Personal lines
Motor
We are Britain’s leading personal motor insurer measured
by in-force policies1, mainly represented through our highly
recognised brands Direct Line, Churchill and Privilege, and
also through our partners. We insure around one in seven
cars on the road, representing 3.7 million in-force policies.
Home
We are Britain’s leading personal home insurer measured
by in-force policies1. We reach our customers by selling
home insurance products through our brands, Direct Line,
Churchill and Privilege, and our partners – Sainsbury’s Bank,
RBS, NatWest and Prudential.
£1,406.7m
Gross written premium
3.7m
In-force policies
92.4%
Combined operating ratio
£338.0m
Operating profit
£866.3m
Gross written premium
3.4m
In-force policies
92.2%
Combined operating ratio
£109.9m
Operating profit
Rescue and other personal lines
We are one of the leading providers of rescue and other
personal lines insurance in the UK2,3 with 8.3 million in-force
policies. This includes providing roadside assistance and
recovery for customers through Green Flag, the UK’s third-
largest roadside recovery provider2. We also offer customers
protection for their pets and holidays, and we are the third
largest insurer in the UK for these insurance products3.
£394.1m
Gross written premium
8.3m
In-force policies
91.2%
Combined operating ratio
£52.0m
Operating profit
Commercial
We protect small and medium-sized enterprises (“SMEs”)
through our brands, NIG, Direct Line for Business and
Churchill, and through our partners RBS and NatWest.
NIG sells its products exclusively through brokers operating
across the UK. Direct Line for Business provides business,
van and landlord insurance products direct to customers.
Churchill sells van insurance direct to customers and through
price comparison websites (“PCWs”).
£485.3m
Gross written premium
655k
In-force policies
104.5%
Combined operating ratio
£20.8m
Operating profit
Notes:
1. Includes Direct Line, Churchill, Privilege and partner brands: RBS, Nationwide (home only), NatWest, Prudential and Sainsbury’s © GfK Financial
Research Survey (FRS) 6 months ending December 2015, 13,729 adults interviewed for motor insurance and 13,148 for home insurance
2. Mintel Vehicle Recovery – UK, September 2015
3. Mintel Pet Insurance – UK, August 2015 and Mintel Travel Insurance – UK, February 2015
4
Direct Line Group Annual Report & Accounts 2015 Our brands
Direct Line has maintained its brand
heritage by selling products direct
to customers exclusively by phone
and internet. We target customers
with a high affinity to the brand,
and focus on providing a fast and
straightforward service.
Churchill is a household name.
We market our products by phone
and internet, including PCWs.
We target customers who have
a high affinity to the brand, and
who need an extra helping hand.
Privilege targets customers who
mainly buy through PCWs. We focus
on making sure they experience
a quick service at the best price.
www.directline.com
www.churchill.com
www.privilege.com
Green Flag is our roadside
rescue and recovery provider.
We sell it as a standalone
service and an additional
optional product alongside
motor insurance.
Direct Line for Business
is an extension of our Direct
Line brand. It is our direct
commercial insurance brand
for small businesses that have
straightforward commercial
insurance requirements.
NIG is our specialist
commercial insurance brand,
focused on SMEs. We sell
our products through brokers,
including an in-house
intermediary that arranges
RBS1 and NatWest
commercial insurance.
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.
www.greenflag.com
www.directlineforbusiness.co.uk
www.nig.com
Note:
1. The Royal Bank of Scotland Group plc, including National Westminster Bank plc
5
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Market overview
Our changing environment
We operate in a dynamic environment and the way we interact with customers is evolving.
Customer expectations of insurance are being shaped by changes both inside and outside
the industry with technology and regulation important parts of this. Providing excellent customer
service and managing claims remain key aspects.
Digitalisation
New services and escalating risk
The retail world continues to digitalise. Insurance needs to keep pace
with customers who expect great service using different types of
devices, and to interact directly with products and services themselves.
Customers are willing to buy multiple products from one source,
where businesses can provide what the customer needs and wants.
The digital economy creates new data sources. These are useful
for marketing and underwriting, but come with new risks. Cyber risk
affects insurers like any other online business. However, it also gives
the industry new protection product opportunities.
77% of 25 to 34 year olds willing to
buy insurance via smartphone1
Motor claims trends
Managing bodily injury claims
costs remains key
UK road accidents have fallen for a number of years, but this trend has recently
reversed. The cost per claim is also climbing, with bodily injury and repair
costs being aspects of this increase. The UK still has one of the highest whiplash
claims rates in Europe, over double that of many other European countries.
This raises the potential for claims fraud. Insurers need to keep focusing on anti-fraud
activities, without compromising service for genuine claimants. Civil justice reforms
in 2013 have helped, but the industry and Government need to do more to tackle
this fully. The recently announced Government intention to change the approach
to soft tissue injury claims should be a step in the right direction.
3% reduction of casualties
from all severities2
Notes:
1. Deloitte report – UK Insurance Disrupted
2. Department for Transport – Statistical Release published on 4 February 2016 for year ending September 2015
6
Direct Line Group Annual Report & Accounts 2015 Customer expectations
Every customer is different
Some see buying motor insurance as a way of staying
on the right side of the law. Others see it as vital
for protecting their livelihoods. People tend to view
home and pet insurance as a more personal purchase,
and the flooding in December has shown that home
insurance can be invaluable. Whatever customers’
needs, it is essential we offer them the best products
and services, at the right price.
90% UK households with one
or more insurance products1
Regulation
The pace of change remains rapid
The regulatory environment has changed significantly over the
last few years. We expect this to continue. Solvency II’s arrival,
changes to add-on selling practices and Flood Re’s expected
introduction in 2016 are major developments for the industry.
The Financial Conduct Authority (“FCA”) has indicated that
consumer data will be an area of interest in the future. It remains
important for us to continue communicating with regulatory
bodies and to be ready to adapt in our changing world.
£3bn industry expenditure
on Solvency II2
Car technology
Disruptive technologies emerging
now and in the future
This is an exciting time for the motor industry, creating opportunities
and challenges for supporting companies. Telematics and diagnostics
products are available through third-party and manufacturer-produced
devices. The cost of these devices continues to drop as take-up increases.
Advanced safety technologies, such as autonomous emergency braking,
are here today and will advance in the next few years. Connected car
technologies are still developing and are likely to become more common
in future models. In time, the world may see fully autonomous cars.
The insurance industry will need to be ready.
41% of new vehicles on sale have the available option
of an autonomous emergency braking system3
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
7
www.directlinegroup.comStrategic reportGovernanceFinancial statements Business model
Creating value
for our customers
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.
Read more about our key performance indicators on page 24
Read more about our risk management on page 26
Our customers
Servicing
Our people
Premiums
Claims
Costs
Investment and
other income
Managing
finances
Reinvest in the business
Profit
Capital
Dividends
Our shareholders
Managing risk
8
Direct Line Group Annual Report & Accounts 2015 Making insurance much easier and better value for our customers
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.
Everyone, from our front-line staff to employees in support
and central functions, helps ensure we meet customers’
needs. Without our people, we could not generate value
for customers and sustainable returns for our shareholders.
Our shareholders are a big part of our business model.
They invest in the business expecting to achieve a good
level of return. So we aim to give our shareholders value
by generating sustainable business profits. We reinvest
part of this profit in the business or add to capital and,
where appropriate, distribute the remainder to shareholders
as dividends.
Our focused processes
We aim to make it easy for our customers to access
our products, and to give them what they are looking for.
We want to make sure they have appropriate cover
to protect against the unexpected.
Customers can buy products online – including through
PCWs – by phone, and indirectly through our partners.
In our Commercial business, they also buy our products
through brokers.
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.
Our business has operated on a large scale for almost
30 years, giving us a deep insight into the risks we
underwrite. This insight enables us to make our pricing
more accurate. 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.
Our disciplined approach
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.
We ensure our products meet regulatory standards and
that customers understand what they are buying from us.
We also aim to price our policies accurately and invest
our assets appropriately to minimise potential losses.
We hold assets that exceed our expected liabilities as capital.
This is intended to absorb unexpected losses that might occur
and is important to meet our regulatory capital requirements.
We prefer to adopt a conservative approach to claims
reserving in order to hold sufficient funds to pay customer
claims. This may result in subsequent releases from these
reserves, which contribute to our annual profit.
We transfer insurance risk through reinsurance in our normal
business activities. External experts review our insurance
claims reserves regularly. We mitigate risks by implementing
our Group policies and minimum standards. These are
reviewed regularly to ensure we are in line with the risk
appetite that the Board sets.
9
www.directlinegroup.comStrategic reportGovernanceFinancial statements Chairman’s statement
Focused on creating
long-term value
“ Returns to shareholders remained
a key priority for the Board.
Cumulative dividends represent
approximately 60% of the share
price at the initial public offering.”
Mike Biggs
Chairman
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.
This consolidation was to maintain comparability of share
price and earnings per share before and after the payment
of a special interim dividend. A special interim dividend
of 27.5 pence per share, being substantially all of the net
proceeds from the sale, was then paid on 24 July 2015.
In addition, the Board has resolved to pay a further special
interim dividend of 8.8 pence per share. This takes the total
special interim dividends for 2015 to 36.3 pence per share.
Strategy update
Our mission is to make insurance much easier and better value
for our customers. During 2015, our business progressed on
delivering its strategic objectives and building future capability
in line with this mission. We recognise that the changes
we have planned are ambitious. They require substantial
investment to deliver a step change in our digital capability
together with an enhancement of core systems, which
combined will be for our customers’ benefit.
Dividends
Under our progressive dividend policy, see page 96, we aim
to increase the dividend annually in real terms. This aim reflects
the potential of the Company’s cash-flow generation and
long-term earnings. We are recommending a final dividend
of 9.2 pence per share. If approved, the total regular dividend
of 13.8 pence per share would represent 4.5% growth on
2014’s regular dividend (13.2 pence per share), which is
consistent with this policy.
Earlier in 2015, the Group completed the sale of its
International division to Mapfre, S.A. and shareholders approved
an 11-for-12 consolidation of the Company’s shares.
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 Group achieved a return on tangible equity (“RoTE”) of
18.5% for 2015. An increase of 39.9% in the share price to
407.5 pence at 31 December 2015, together with dividend
payments, provided a total shareholder return (“TSR”) of
46.9% for the year. Since the initial public offering (“IPO”),
the Group has delivered good results each year, enabling
the Board to declare cumulative dividends, including special
interim dividends, equivalent to approximately 60% of the
IPO price. The delivery of this level of return to shareholders
is reflected in the level of awards vesting under the long-term
incentive plan (“LTIP”). More information on awards is given
in the letter from the Chair of the Remuneration Committee,
see page 70.
10
Direct Line Group Annual Report & Accounts 2015 Solvency II
We are assessing the Group’s solvency capital requirements
(“SCR”) using the standard formula until such time that the
Group-wide partial internal model is approved by the Prudential
Regulation Authority (“PRA”). At 31 December 2015, the Group
held a capital surplus of £794.6 million above its capital
requirements. This was equivalent to a pro forma1 Solvency II
capital coverage ratio of 147.4%. Following approval, which
is expected in mid-2016, we will disclose the recalibrated
risk appetite range based on our Solvency II internal model
which will take into account the sensitivities of the Group’s
capital position on this basis. Whilst receiving internal model
approval will remove a key uncertainty in relation to the
Group’s capital position, the Board does not currently expect
the recalibration of the risk appetite range to lead to a step
change in the appropriate level of capital to be held.
Migrating IT infrastructure
The migration of our IT infrastructure away from RBS Group,
while giving rise to many challenges, is now essentially
complete. Your Board provided oversight of this substantial
change. Ongoing focuses of the Board’s supervision include
the development of future capability and the monitoring
of risks associated with IT systems’ stability, cyber security
and the internal control environment.
Regulation, conduct and culture
We maintain active relationships with our regulators. Your Board
oversees the Group’s conduct risk policy and culture, which
aim to ensure that we treat customers appropriately and
that employees behave with integrity. We recognise that
we have more to do to improve processes for our customers;
however, your Board is pleased with improvements derived
from our customer programmes. We continue to focus on this,
as we develop new digital capabilities, core systems and
new ways of interacting with our customers.
Board and Committee membership changes
Glyn Jones, our former Senior Independent Director (“SID”),
stood down as a Director after the Company’s 2015 Annual
General Meeting (“AGM”), having decided to reduce the
number of his non-executive directorships after becoming
Chairman of a second listed company. I wish Glyn well
and thank him for his dedicated commitment and excellent
contribution to the Board.
I am grateful to Andrew Palmer, an Independent Non-Executive
Director (“NED”) and Chair of our Audit Committee, for
having agreed to act as our SID while a search for a new
SID was undertaken. At the same time, Priscilla Vacassin,
NED and Chair of the Remuneration Committee, was
appointed as a member of the Nomination Committee.
Clare Thompson, NED and Chair of the Corporate Social
Responsibility (“CSR”) Committee, was appointed as Chair
of the Investment Committee, of which she was already
a member.
Governance highlights
Leadership
Your Board seeks to ensure that decisions are of the highest
standard. It challenges strategic proposals, performance
delivery and management responsibilities. See page 51.
Effectiveness
The effectiveness of your Board’s and its Committees’
performance is considered annually in effectiveness
reviews. See page 53.
Accountability
Your Board provides shareholders with an assessment
of the Group’s position and prospects. We monitor and
review the effectiveness of the Group’s risk management
and internal control systems. See pages 26 and 56.
Remuneration
Your Remuneration Committee ensures a close correlation
between creating value for shareholders, and remunerating
Executive Directors and senior executives appropriately.
See pages 57 and 70.
Engagement
Your Board maintains strong relationships and regular
interaction with our shareholders. Their continued support
for our strategic aims is important. See page 57.
As we announced on 16 February, Priscilla Vacassin
has decided to step down from the Board with effect from
1 March 2016. Priscilla has made a crucial contribution
to the Board, exercising effective stewardship of the Group’s
executive remuneration arrangements, and I wish her every
success for the future. Clare Thompson has agreed to act as
interim Chair of the Remuneration Committee from 1 March.
At the same time she will step down as Chair and member
of the CSR Committee and the Investment Committee and
as a member of the Board Risk Committee. Andrew Palmer
will be appointed as Chair of the Investment Committee
and Sebastian James as Chair of the CSR Committee with
effect from the same date.
Employees
I would also like to thank our employees for their hard
work and commitment this year. I am always struck by their
positive attitudes and energy. Their pride and dedication
to supporting our customers helped our business progress
in 2015, and has put us in a strong position.
On 18 January 2016, I was delighted to welcome Dr Richard
Ward to the Board as our new SID. Your Board will benefit
from his deep knowledge of the insurance industry and his
experience as Chairman and NED of other firms in the sector.
Further details about Richard are to be found on page 49.
Michael N Biggs
Chairman
11
www.directlinegroup.comStrategic reportGovernanceFinancial statements Chief Executive Officer’s review
Building our
future capability
“ Our customers are benefiting from the many
improvements we’ve been making including
new propositions and enhanced customer service.
This has resulted in more customers coming
to our brands and renewing with us.”
Paul Geddes
Chief Executive Officer
Overview of financial performance
As we celebrate our third year as a listed company, I am
pleased with our performance in 2015. A focus on operating
efficiency and disciplined underwriting in competitive
markets enabled us to deliver an improved performance.
Operating profit from ongoing operations increased 2.9%
to £520.7 million, despite higher than normal claims
following the floods that hit northern parts of the UK towards
the end of 2015. This result included prior-year reserve
releases of £378.9 million (2014: £397.6 million) which
were higher than expected.
Desmond, Eva and Frank storms
We recognise that events like the flooding across the North
of England and parts of Scotland are a reminder of just
how important it is to have the right insurer and it gives us
the opportunity to show our customers the benefit of being
insured by one of our brands. When the floods hit we
immediately put our emergency response plan into action.
We had a visible presence on the ground with a network
of almost 200 claims advisers and loss adjustors assessing
damage, distributing emergency payments and putting
customers in alternative accommodation as quickly as
possible. Following the efforts of our people, who worked
tirelessly on the ground and on the phones to process over
5,000 claims, the cost to our business was approximately
£130 million, but I am very proud of the way we responded
and supported our customers during this time.
Being a great retailer
Throughout 2015 we have focused on differentiating our
brands and improving our propositions. Customers have
responded well to the Direct Line brand’s new positioning
and propositions and helped strengthen our retention rates,
which are over 80%.
We also refreshed the Churchill brand, emphasising the
‘depend on the dog’ strapline in new TV advertisements.
The refresh also highlighted its protective nature, such as the
promise to pay a claim even if our customers are hit by
an uninsured driver.
Additionally, we have improved our trading capability. This
boosted our competitiveness significantly, including on PCWs.
Together, this activity has led to us improving performance,
with Motor and Home in-force policies up 1.4% in 2015
in our own brands.
Operating as a smart and efficient manufacturer
We know that staying efficient and flexible is key to increasing
our competitiveness and improving our customers’ experience.
Everyone working together to improve efficiency reduced our
costs by 4.6% this year. Furthermore, our strategic leaders are
spearheading a programme that will get the entire organisation
thinking differently about how we spend our money.
We have also simplified and improved our claims services.
For example, customers can now upload images of damage
in their homes for assessors; track vehicle repairs on an online
portal; and use Direct Line’s seven-day car repair service.
12
Direct Line Group Annual Report & Accounts 2015 Additionally, we invested in our pricing capabilities across our
Personal Lines and Commercial businesses. This is aimed at
broadening our footprint and improving our competitiveness.
Our people are working hard and providing benefits for
our business and customers. We have continued recognising their
outstanding achievements through our Chief Executive Awards.
Leading and disrupting our marketplace
We have a strong heritage in leading and disrupting our
marketplace, and we want to build on our strong market
positions. We will do this by identifying and investing in market
developments that we believe can drive future growth.
We also introduced a new initiative which rewards employees
for proposing ideas that reduce Group costs or make insurance
easier for customers. This has generated excitement throughout
the organisation and, to date, we have received over
4,000 entries.
Strategic priorities for 2016
Following the rearticulation of our strategy in 2015, many
of our 2016 priorities build on initiatives begun in 2015.
Improving customer experience remains key, with a focus
on cross channel distribution, while reducing complaints and
improving the customer renewal process. We will continue
to strive to improve operating efficiency.
Outlook
Our markets remained highly competitive during 2015 and
in early 2016. While premium rates in the motor market
have increased, this should be viewed in the context of rising
claims costs and higher levels of insurance premium tax (”IPT”).
The home market experienced premium deflation in 2015
overall, although underlying market pricing was broadly stable
towards the end of 2015 as IPT increases were reflected.
Overall, the increase in IPT has seen shopping in the market
increase modestly. The rescue and commercial markets also
experienced increased competitor activity during the year.
Against this backdrop, we continue to adopt a disciplined
approach to managing the trade-off between margin and
volumes, whilst continuing to seek opportunities to improve
efficiency. We aim to reduce total costs in absolute terms in
2016 compared to 2015. The rate of reduction is expected
to be lower in 2016 than in 2015 due in part to the cost
of the Flood Re levy. Meanwhile, we are continuing
to invest in building future capability.
For 2016, we expect to achieve a COR in the range of
93% to 95% for ongoing operations, assuming a normal
annual level of claims from major weather events.
My thanks go to our people for their hard work and support
throughout the year. I am excited by their passion and
dedication, and by how everyone works tirelessly to make
insurance much easier and better value for our customers.
Paul Geddes
Chief Executive Officer
We have continued growing our telematics offering, more
than doubling our policy numbers in 2015. Our work analysing
data for over 400 million miles of motoring is giving us pricing
insights, which we expect will benefit us and our customers.
Within Commercial, we have been recognised for our leading
capabilities in eTrade and direct. To meet our customers’
evolving needs, we have launched Professional Indemnity
cover for Direct Line for Business and a cyber insurance
product through NIG.
We believe we are making great progress, but know we
have more to do to stay at the front of our markets.
Investing in data and technology
Consumers are surrounded by emerging technologies.
So we want to make sure our systems can support future
developments. We have now essentially finished the migration
of our IT systems from RBS Group. This has been a complex
and challenging programme, and we are still working to
improve the performance of our IT systems across the board.
At the same time, we are building the next generation of
systems that can help us interact with our customers in a
digitally efficient way. Furthermore, like businesses worldwide,
we are increasing our focus on cyber security.
Developing our culture and capability
Our people continue to be a foundation of our business.
They have been instrumental in delivering the changes we
needed to realise our goals. In 2014, to mark three years
since our IPO and recognise their dedication, we told our
employees that they would receive free shares, on top of the
shares they received at the time of the IPO. In view of our
performance in 2015, we made a further award of around
£250 of free shares to all eligible employees. We are
pleased that overall our people are engaged in developing
our business and can share in its success.
Our latest total engagement levels have risen to 60%,
which is a 15 percentage points rise compared to 2014.
We have a series of action plans evolving, so we will
continue gathering feedback from our people to ensure
we are focusing on areas where we need to improve.
We have also invested in training and developing our
customer-facing employees, helping them interact with
customers in a new and refreshing way. This is delivering
good results and resonating well with our customers.
Our satisfaction rating tool, MyCustomer, has shown
an improvement of 23% and our Net Promoter Score
for the Direct Line brand has increased by 7.5 points,
a good reflection of this success.
13
www.directlinegroup.comStrategic reportGovernanceFinancial statements Our strategy
Our clear and concise
strategic direction
We have articulated our strategy around a simple mission: to make insurance much easier
and better value for our customers. We believe that delivering this strategy will allow us
to grow sustainably, whilst targeting at least a 15% return on tangible equity.
Our mission
Our strategic pillars
Make insurance much easier
and better value for our customers
Great
retailer
Smart & efficient
manufacturer
Lead & disrupt
the market
Long-term ambition:
Sustainable growth
and at least 15% RoTE
Our key enablers
Data & technology
Culture & capability
Capital & risk management
14
Direct Line Group Annual Report & Accounts 2015 Great
retailer
Smart & efficient
manufacturer
Compelling brands, propositions and customer
experience to meet diverse and long-term
customer needs
Efficiency and flexibility to deliver better
claims and customer service at lower cost
We aim to make it easy for our customers to access our
products and services at every stage. 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 customer needs better.
We aim to improve efficiency and effectiveness across
the organisation. We intend doing this by delivering
transformational initiatives, and making sure we provide
quality and value for money every day. This goes beyond
reducing costs. We always seek to design and deliver
new capabilities in a cost-efficient way.
How we performed in 2015
Work to differentiate our brands has continued with enhancements
for the Direct Line brand’s customers. Following a succession
of initiatives during 2015, Direct Line customers now benefit
from a seven day car repair service, guaranteed hire car
as standard on comprehensive motor policies, an eight hour
turnaround to dispatch certain lost or damaged household
goods and the removal of amendment fees from all Direct Line
branded products.
Churchill’s branding has also been refreshed with a campaign
to highlight its dependability. We have reinforced the product
and service to differentiate it from other brands, including
on PCWs. This, together with an increased trading capability
across Churchill and Privilege, has contributed to an improvement
in Motor and Home own brands PCW sales.
These improved propositions, as well as a focus on improving
customer experience and reducing complaints, have contributed
to an increase in our Direct Line brand’s Net Promoter Score,
along with further improvements in retaining customers in our
Motor and Home own brands.
Our investment in digital capability continued with the roll
out of smartphone and tablet optimised websites, including
new quote and buy journeys, for Home and Green Flag
insurance products. These have built on last year’s successful
implementation of a new quote and buy journey for Motor.
Quote and buy journeys have continued to be optimised
to take account of customer preferences depending on brand
and distribution channel.
Our objectives for 2016
Improving customer experience remains a key target,
with a focus on cross-channel distribution, while reducing
complaints and improving the customer renewal process.
How we performed in 2015
We continued to improve efficiency in 2015 with a reduction
in total costs of 4.6% while continuing to invest in capability.
Reductions in underlying costs have been achieved in a
number of areas including marketing, technology and property.
New pricing projects have been implemented which aim
to broaden our competitive quote footprint for Motor and
Home products. We continue to invest in and to evolve the
sophistication of our telematics pricing.
We have given our customers additional self service options
within claims management where certain stages of Motor,
Home, pet and travel claims can be managed online.
This has improved efficiency and led to faster settlement times.
We’re continuing to aim to beat market claims inflation.
We are importing relevant Personal Lines capabilities into
our Commercial operations, including improved Van technical
pricing and the launch of webchat for the broker market.
Our objectives for 2016
We continue to strive to improve operating efficiency and
aim to reduce total costs in absolute terms in 2016 compared
to 2015. The rate of reduction will be lower in 2016 than
in 2015 due in part to the cost of the Flood Re levy.
Partnerships remain strategically important and we will look
to build on our improving manufacturing capability to deliver
what we aim to be market leading propositions to current
partners, as well as to build relationships with future partners.
15
www.directlinegroup.comStrategic reportGovernanceFinancial statements Our strategy continued
Lead & disrupt
the market
Data &
technology
Maximise existing growth opportunities while
creating and driving future areas of value
Harness the power of technology
and scale of our data
We aim to harness the power of technology to make things
easier for our customers and our people. By implementing
integrated systems that are flexible and efficient, we can
reduce costs while improving customer interactions such as
self-service. We also enjoy a wealth of data from being a major
insurer for a number of years, which we can use to make our
business better for our customers.
How we performed in 2015
We have now essentially finished the migration of our
IT systems from RBS. This has been a complex and challenging
programme for the business.
Our investment in digital capability continued with the build,
roll out and support of smartphone and tablet optimised
websites for our Home and Green Flag insurance products.
These have built on last year’s successful implementation
and support of a new website for Motor.
Consumers are surrounded by emerging technologies,
so we continued to develop our next generation of systems
that can help us interact with our customers in a digitally
efficient way.
Our objectives for 2016
We are targeting improved performance and cost effectiveness
from our IT systems.
We aim to remain a leading competitor in our chosen markets
by providing quality propositions and value for money.
Where there are opportunities, we will look to launch new
and exciting products and services. These will aim to put
us at the forefront of disruptive market changes.
How we performed in 2015
We continue to build on our current strong market position
by identifying and investing in market developments we believe
can contribute to future growth. In particular, we’re focusing
on growing our telematics-based motor insurance product,
more than doubling our telematics customers in the year to
78,000. As of the fourth quarter of 2015, 28% of our under
25 year olds’ driver Motor premium was from telematics
products. This growth has been achieved with the help of
wider market appreciation of the benefits of telematics for
younger drivers, recognition of our straightforward, self-install
product and improved distribution through PCWs. Retention
has proved strong amongst better drivers. Furthermore, the
Group has launched an app-based over 25s offering and
has supported a major motor manufacturer by using telematics
as a key part of a new car customer proposition.
In Commercial, we continue to be recognised for our leading
capabilities in eTrade and direct Commercial insurance,
both of which are expected to be growing parts of the
commercial market place. Commercial products are now
more widely available to customers directly, with the launch
of Churchill Van on two of the major PCWs. Commercial’s
product offering has been extended with the roll-out of
professional indemnity for Direct Line for Business and cyber
cover for NIG’s customers distributed through the broker
channel. These new products are fully reinsured.
Our objectives for 2016
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 these cars.
The Group is the insurance partner to the Move UK research
consortium which is looking at analysing the development
and deployment of automated driving systems, as well as
investigating the motor liability legal framework in the future.
In Commercial, the Group is looking at ways to leverage its
leading capabilities in eTrade and direct Commercial insurance
as these markets adapt to evolving distribution trends.
16
Direct Line Group Annual Report & Accounts 2015 Culture &
capability
Capital & risk
management
Unlock and accelerate our people’s potential
Sound foundation of capital and
risk management
We are continuing to invest in our employees’ skills. This will
help us to improve effectiveness and customer experiences,
and get the best from our new systems. 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 2015
Our people engagement scores improved during 2015
and we made progress in preparing our staff for new
systems and processes. We launched a number of people
engagement events over the course of the year, including:
• ‘Launch pad’ event, communicating our new strategy
framework to our people managers
• ‘Idea Lab’ launched with more than 6,000 employees
active on it. They submitted more than 1,500 business
development ideas in the first month alone and
4,000 entries have been received to date
Our objectives for 2016
We will aim to sustain high performance whilst building
on our improvements in people engagement in 2015.
Improving efficiency and effectiveness across the organisation
will also be an important part of our 2016 plans.
Our capital management policy seeks to maintain an
appropriate level of capital and solvency to support our
business, whilst growing dividends annually in real terms.
How we performed in 2015
Our hard work throughout 2015 meant we were well
positioned for Solvency II’s introduction at the start of 2016.
We submitted an application to the PRA for the Group’s
principal underwriter, U K Insurance Limited (“UKI”), to use
its internal economic capital model, validated by external
experts, as part of a Group-wide partial internal model.
We have a strong culture of considering customers’ perspectives.
Our objectives for 2016
We aim to embed further and build on our risk management
decision-making processes developed in 2015, and to
continue to identify and mitigate risks. Additionally, and subject
to PRA approval, we plan to operate from mid-2016 using our
internal model for calculating solvency capital requirements.
17
www.directlinegroup.comStrategic reportGovernanceFinancial statements 18
Direct Line Group Annual Report & Accounts 2015
Our strategic pillars
Great
retailer
We’re delivering
improved customer
experience
and satisfaction
This year, we built on Direct Line’s new
positioning. For example, we made the
bold move to include a guaranteed hire
car as standard for all Direct Line Motor
customers, a benefit that customers can
only get with our motor insurance product.
In addition, we introduced or continued
the following Direct Line propositions: the
proposition to repair vehicles within seven
days; replace stolen or damaged essential
household items with cash or a brand
new replacement within eight hours; and
remove amendment fees.
These initiatives have helped strengthen
retention of customers.
Aside from introducing new propositions,
we were also there for our customers
at their time of need during the floods that
hit homes in the northern parts of England
and in parts of Scotland towards the end
of 2015. The robust plans that we have
in place for handling these types of events
meant we were able to respond quickly
to the needs of our customers.
96,000
social media interactions
1,100
homes affected by floods visited
www.directlinegroup.com 19
Our strategic pillars
Smart & efficient
manufacturer
We’re delivering
efficiency and
improving processes
for our customers
We aim to reduce costs by improving and
embedding efficiency throughout the business.
Delivering efficiency in our claims methods
and processes benefits us and our
customers. This year, we introduced new
propositions that helped us drive down
claims inflation and improve efficiency.
Motor customers can now upload images
of damage to their vehicles and track
repairs on an online portal, plus we have
also introduced a service to repair cars
within seven days for Direct Line customers.
10%
increase in productivity from
nitro-thermal painting spraying system
300,000
vehicle repair SMS text updates sent
20
Direct Line Group Annual Report & Accounts 2015
www.directlinegroup.com 21
22
Direct Line Group Annual Report & Accounts 2015
Our strategic pillars
Lead & disrupt
the market
We’re focused
on delivering
innovation to meet
customer needs
Direct Line for Business targets the UK’s
growing number of small businesses.
It appeals to customers who want to buy
robust and clear cover quickly and easily.
Our award-winning Landlord Insurance
is delivering on this promise.
This highly flexible cover for landlords and
buy-to-let owners gives them the confidence
of knowing their properties are protected.
Customers also receive support from
a dedicated claims handler, who manages
claims efficiently from start to finish.
71,000
new Landlord insurance in-force policies
4,000
downloads of smartphone Landlord app
www.directlinegroup.com 23
Our key performance indicators
Defining and measuring
our performance
These key performance indicators assess our performance against our strategy.
Read more about our rewards for performance on page 70, and for definitions see the glossary on pages 174 and 175.
Return on tangible equity
(%)
Dividend per share1
(pence)
Basic earnings per share
Continuing operations
(pence)
Combined operating ratio
Ongoing operations (%)
18.5%
5
.
8
1
8
.
6
1
0
.
6
1
Target
At least 15%
50.1p
5
7.
2
8
.
8
8
.
3
1
0
.
4
1
2
.
3
1
0
.
8
6
.
2
1
27.9p
9
7.
2
0
.
4
2
8
.
0
2
94.0%
2
.
5
9
0
.
5
9
0
.
4
9
13y
14y
15y
13y
14y
15y
13y
14y
15y
13y
14y
15y
Definition
The return generated on the capital
that shareholders have in the business.
This is calculated by dividing adjusted
earnings by average tangible equity.
The amount of cash paid to
shareholders from the Group’s profit.
This is calculated by dividing the
earnings attributable to shareholders
by the weighted average number
of Ordinary Shares in issue.
Aim
We aim to achieve at least a
15% RoTE. We achieved this
in 2015.
Performance
We have a progressive dividend
policy and aim to grow the dividend
in real terms each year. Additionally,
we look to return surplus capital
to shareholders when appropriate.
We have not set a target.
However, growing earnings per
share is considered an indicator
of a healthy business.
A measure of financial year underwriting
profitability. It is the sum of the claims,
commissions and expenses divided by
net earned premium. This excludes
instalment and other operating income,
and investment return. A COR of less than
100% indicates profitable underwriting.
We aim to make an underwriting
profit. For 2016, we expect
to achieve a COR in the range
of 93% to 95% for ongoing
operations, assuming a normal
annual level of claims from major
weather events.
See Finance review page 41.
See Finance review page 42.
See Finance review page 41.
See Finance review page 39.
Link to Directors’ remuneration
We base LTIP awards partly on RoTE
over a three-year performance period.
Note:
1. See note 2 on page 3.
24
We base LTIP awards partly on
relative TSR performance, which
includes dividends. Directors also
receive dividends on their beneficial
shareholdings and accrue these
on unvested LTIP awards.
This is a broad measure of earnings
and reflects the results of the Run-off
segment and restructuring and other
one-off costs, in addition to underlying
operating profit. The AIP awards
have a weighting to these other
financial measures.
We base part of the AIP awards
on ongoing operating profit.
COR is closely linked to this.
Direct Line Group Annual Report & Accounts 2015
Total costs
Ongoing operations (£m)
Capital coverage1
Total Group (%)
Net Promoter Score2
Direct Line brand (points)
Complaints
Principal underwriter3 (%)
£884.7m
147.4%
7.5pts increase
0.33%
0
.
5
8
9
7
7.
2
9
7
.
4
8
8
7
.
8
4
1
2
.
8
4
1
4
7.
4
1
3
.
8
1
1
8
.
0
1
1
0
.
0
0
1
5
3
0
.
3
3
.
0
3
3
.
0
13y
14y
15y
13y
14y
15y
13y
14y
15y
13y
14y
15y
Definition
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.
Aim
Our aim for 2015 was to reduce
the level of overall costs by improving
efficiency, which we achieved. We will
continue to strive to improve operating
efficiency and aim to reduce total costs
in absolute terms in 2016 compared
to 2015. The rate of reduction will be
lower than previous years, due in part
to the cost of the Flood Re levy.
Performance
See Finance review page 40.
Link to Directors’ remuneration
AIP awards relating to 2015 include
a weighting relating to cost targets.
A measure to show the level of
capital held compared to the level
that is required, taking into account
the risks we face.
Net Promoter Score 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.
The number of complaints we received
during the year as a proportion of the
average number of in-force policies.
We target capital coverage to remain
within our risk appetite. We also aim
to maintain a rating in the ‘A’ range
from our credit rating agencies. Both
of these aims were satisfied in 2015.
Our aim is to improve this
incrementally to achieve high
levels of customer loyalty and
retention rates.
This measure indicates the level
of customer service we provide.
We aim to improve this over time.
See Finance review pages 44 and 45. Customer claims experience
programmes and improved
propositions have contributed to an
increase in our overall brand score.
While the proportion of complaints
received improved on 2014,
we recognise that we have more
to do to reduce these.
Risk management within risk appetite,
which includes an assessment of capital
strength, acts as a gateway for the
AIP awards.
The AIP awards include a weighting
to a balance of customer metrics.
The AIP awards include a weighting
to a balance of customer metrics.
Notes:
1. Pro forma based on Solvency II standard formula estimated preliminary regulatory returns for 31 December 2015 and adjusted for final and second special
interim dividends.
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.
25
www.directlinegroup.comStrategic reportGovernanceFinancial statements Risk management
Managing our risks
Our business is risk, so managing this effectively and efficiently is critical to the success
of our strategy.
Managing risk in line with our strategy
Management, and ultimately the Board, are responsible
for developing our strategy. Our strategic planning process
aims to ensure we have developed clear objectives and
targets, and identified the actions needed to deliver them,
including the management of risks. These clear objectives are
consistent with our overall long-term ambition of sustainable
growth and at least a 15% RoTE within our risk appetite.
To find out more about our strategy, see page 14.
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 ownership
and management of risks to the achievement of business
objectives on a day-to-day basis. The Second Line of Defence
is responsible for the provision of proportionate oversight
and challenge of risks, events and management actions.
Group Audit are the Third Line of Defence and provides
an independent view of the effectiveness of risk management
and controls – see diagram below.
Risk appetite
Our risk appetite statements define the opportunities and
associated risks we are prepared to accept to achieve our
business objectives – see table on the next page. To monitor
whether the business remains within risk appetite, the statements
are aligned to key risk indicators (“KRIs”) which are used
to drive risk-aware decision making.
These KRIs are qualitative and quantitative, and both forward
and backward looking. We review our risk appetite statements
and KRIs annually, using outputs from the internal economic
capital model.
The Group is recalibrating its risk appetite range in relation
to the Solvency II internal model and expects to disclose
the output of this later in 2016.
Our risk governance structure
Board
Nomination
Committee
Remuneration
Committee
CSR
Committee
Board
Investment
Committee
Board Risk
Committee
Audit
Committee
Executive
First Line of Defence
Risk ownership
Personal Lines
Commercial
Claims
Finance
Chief Information Office
Human Resources
Legal Company Secretariat
Disclosure
Committee
Chief Executive
Officer
Risk Management
Committee
Third Line of Defence
Independent assurance
Group Audit
Second Line of Defence
Risk and Compliance oversight, challenge
and support of First Line
Specialist functions
with Second Line
responsibilities for certain
policies and
minimum standards:
Finance
Chief Information Office
Claims (Business Services)
Human Resources
Legal Company Secretariat
Tools:
High level controls and
systems of governance
Enterprise Risk Management
Strategy and Framework
Delegated authorities Policies
Minimum standards
Risk appetite
Assurance and monitoring
Oversight and governance
Own Risk and Solvency Assessment
26
Direct Line Group Annual Report & Accounts 2015
Our risk objectives and appetite
Risk objective
Risk appetite statement
Overarching risk objective
1. Maintain capital adequacy
The Group recognises that its long-term sustainability is dependent on having sufficient
economic capital to meet its liabilities as they fall due, thus protecting its reputation
and the integrity of its relationship with policyholders and other stakeholders.
As part of this, its appetite is for general insurance risk, focusing on personal lines
retail and SME insurance in the UK. The Group has appetite for non-insurance risks,
as appropriate, to enable and assist it to undertake its primary activity of insurance.
The Group seeks to maintain sufficient economic capital consistent with our strategic
aim of achieving a standalone credit rating in the ‘A’ range.
2. Stable and efficient access
to funding and liquidity
The Group aims to meet both planned and unexpected cash outflow requirements, including
those requirements that arise following a one-in-200 years insurance, market or credit risk event.
3. Maintain stakeholder
confidence
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.
Our Enterprise Risk Management Strategy
and Framework
This sets out, at a high level, our approach to setting risk
strategy and the Enterprise Risk Management Framework (“ERMF”)
for managing risks. It documents the high-level principles and
practices to achieve appropriate risk management standards,
and demonstrates the inter-relationships between components
of the ERMF – see diagram.
The ERMF enables us to run the business with the requisite
understanding of our risks and controls, as well as having
appropriate oversight in place to manage risks proactively.
It is aligned to the Three Lines of Defence model and is intended
to provide a coherent, robust, fit for purpose, end-to-end
approach for managing all material risks. A central component
of the ERMF is our policy framework, which includes policies
and minimum standards. These inform the business how
it needs to conduct activities to remain within risk appetite.
The Board approves our strategy, risk appetite and policies,
and the Board Risk Committee approves the Enterprise Risk
Management Strategy and Framework.
Our risk culture
Our risk culture underpins our business and decision-making,
and helps us embed a robust approach to risk management.
Our risk culture is demonstrated in the understanding and
business-wide use of the risk management systems and processes,
and through risk-aware decision making. The Board is committed
to promoting a culture of high standards of corporate governance,
business integrity, ethics and professionalism in all of our activities.
Group strategy
Risk appetite
Policy framework
Principal risks
Risk management
Identify
Assess
Manage
Monitor
Report
Reporting &
monitoring
Risk
profile
27
www.directlinegroup.comStrategic reportGovernanceFinancial statements Risk management continued
Principal risks and uncertainties
We carry out a robust assessment of the principal risks facing us. Principal risks are defined as having a residual risk impact
of £40 million or more on profit before tax or net asset value on a one-in-200 years basis, taking into account customer,
financial and reputational impacts. We believe that the risk profile remains broadly unchanged over the last year.
Principal risks
Insurance risk
• Reserve
• Underwriting
• Distribution
• Pricing
• Reinsurance
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 123 to 124.
Market risk
• Spread
• Interest rate
• Property
The risk of loss resulting from
fluctuations in the level and in the
volatility of market prices of assets,
liabilities and financial instruments.
See pages 124 to 126.
Credit risk
• Counterparty default
• Concentration
Owner
Management and mitigation examples
Chief Financial
Officer,
Managing Directors
of Personal Lines
and Commercial
• We estimate technical reserves using various actuarial and
statistical techniques. Management’s best estimate of total
reserves is set at not less than the actuarial best estimate
• Third parties carry out reviews of our reserves
• Underwriting guidelines are set for all transacted business
and pricing refined by analysing comprehensive data
• Catastrophe and motor excess of loss reinsurance limits
our exposure to events and large losses
• We invest in enhanced external data to analyse and
mitigate exposures
Chief Financial
Officer
• We manage and control the risks in our investment
portfolio through:
− investment strategy approved by the Board
− diversification of the types of assets, limits on the amount
of illiquid investments, and tight control of individual
credit exposures
− risk-reduction techniques, such as hedging foreign currency
exposures with forward contracts and hedging exposure
to US interest rates with swap contracts
Chief Financial
Officer
• Credit limits are set for each counterparty and we actively
monitor credit exposures
• We only purchase reinsurance from reinsurers with at least
an ‘A-’ rating
The risk of loss resulting from fluctuations
in the credit standing of issuers of
securities, counterparties and any
debtors to which we are exposed.
See pages 126 to 130.
Operational risk
• Information security
• IT and business continuity
• Partnership contractual obligations
• Change
• Financial reporting
• Model
• Outsourcing
The risk of loss due to inadequate
or failed internal processes, people,
systems or from external events.
Specific members
of the Executive
• We have appropriate operational processes and systems,
including detection systems for fraudulent claims
• We are working to improve the performance of our IT systems
across the board, while focusing on the development of future
systems capability. With significant change underway,
we are monitoring risks associated with our IT systems’
stability, cyber security and the internal control environment
• Our risk management system is designed to enable us to
capture risk information in a robust and consistent way
• We monitor performance of outsourced activities
28
Direct Line Group Annual Report & Accounts 2015 Principal risks
Owner
Management and mitigation examples
Regulatory and conduct risk
• Regulatory
• Conduct
• Compliance
Chief Financial
Officer,
Chief Risk Officer
and Managing
Director of
Personal Lines
The risks leading to reputational
damage, regulatory or legal censure,
fines or prosecutions and other
types of non-budgeted operational
risk losses associated with our
conduct and activities.
Strategic risk
• Strategy formulation
• Strategy implementation
Chief Executive
Officer
The risk of direct or indirect adverse
impact on the earnings, capital, or
value of our business as a result of the
strategies not being optimally chosen,
implemented or adapted to changing
conditions.
• We maintain a constructive and open relationship with
our regulators
• Specific risk management tools and resources are used
to help manage our exposure to regulatory risk
• Risk-based monitoring is designed to ensure we use
our resources effectively
• We have a strong culture of considering customers’
perspectives, and delivering the right outcomes for our
customers is central to how we operate
• Robust customer conduct risk management is intended
to minimise our exposures
• We agree, monitor and manage strategic targets
• An annual strategy process is run which considers our
performance, competitor positioning and strategic opportunities
• Emerging risks are identified and managed using established
governance processes and fora
Brand and reputational risk is now considered within the drivers of other risk types such as regulatory and conduct,
operational and strategic risks.
Emerging risks
Our definition of emerging risk is newly developing or changing risks that are often difficult to quantify, but may materially
affect our business. We have further defined emerging risks as highly uncertain risks that are external to our business.
We record emerging risks within an Emerging Risk Register. These are reported to the Risk Management Committee and
Board Risk Committee for them to review, challenge, approve and feed into the Board’s strategic planning process.
Our emerging risks processes aim to:
• Achieve ‘first mover advantage’ by recognising risks and associated opportunities early
• Reduce the uncertainty and volatility of our business’s results
• Manage emerging risks proactively
We consider our main emerging risks to be the following:
Technological change in driving habits reduces consumer need for motor insurance
New car technologies, such as crash-prevention technologies and driverless cars, could significantly affect the size and nature
of the insurance market, and the role of insurers.
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.
New methods of gathering and using customer data
Using ‘big data’ as part of our strategy could create new data management risks and issues; for example, complying with
regulations relating to third-party access to telematics data.
29
www.directlinegroup.comStrategic reportGovernanceFinancial statements Corporate social responsibility
Connecting with society
We seek to serve our customers in a way which recognises our wider commitment to society.
We do this both through providing insurance and other services and through an understanding
of the different ways in which our business connects with society.
Approach
Our CSR strategy provides the framework for managing the
different ways we connect with society. The strategy has four
strands. As shown in the graphic, they are ‘Helping to make
our society safer’, ‘Proud to be here’, ‘Recognised as part
of our communities’ and ‘Reduce, Reuse and Recycle’.
We manage our strategy through our CSR Advisory Group,
which comprises senior managers from across the business.
Our sustainability team supports the Advisory Group.
Individual members of our Executive Committee are
accountable for each strand of the strategy. The CSR
Committee’s role is to oversee our approach. See page 63.
You can find more details of our approach, including our
CSR Charter, policy framework, performance against last
year’s targets, and targets for 2016, on the Group’s website
at www.directlinegroup.com.
To find out more about our CSR Committee, see page 63.
Helping to make
our society safer
Proud to be here
Recognised as part of
our communities
Reduce, Reuse
and Recycle
Helping to make our society safer
We recognise that our products, services and operations
affect our many stakeholders, and we seek to make our society
safer for everyone. We contribute to many aspects of the
road safety agenda, and aim to inspire a generation of safer
young drivers.
Road safety
Despite increasing traffic on our roads, the number of serious
accidents has reduced significantly since the turn of the century.
Unfortunately, this trend has stalled in 2014. As Britain’s
biggest car insurer, we believe we can have a vital role
to play in making our roads safer.
During 2015, we worked with various partners to address
road safety.
Brake
We have worked with Brake, the road safety charity, for
13 years. In this time, we have produced survey reports on
driver behaviour, attitudes and understanding, and released
the results to the media to raise awareness of safe driving.
This year’s reports have covered ‘driving offences and
deterrents’, ‘crash protection and vehicle selection’, ‘winter
driving’ and ‘use of head restraints’. Brake uses this research
for its wider campaigning, education, community and
professional engagement activities. We held an event in
Westminster with parliamentarians to showcase this research.
We also sponsored Brake’s Parliamentarian of the Year
Awards, which recognise Members of Parliament who
have campaigned on road safety issues.
PACTS
We launched the Road Safety Dashboard with the
Parliamentary Advisory Council for Transport Safety (“PACTS”).
This pioneering tool uses Department of Transport statistics
to produce an index that ranks the road safety record of
individual parliamentary constituencies. This is the first time
the data has been used to this level. We aim to encourage
Members of Parliament to do more for road safety in their
local constituencies.
We also sponsored PACTS’ Road Safety Summit. This saw
practitioners, civil servants, academics and enforcement
services discussing changes to the law associated with drink,
drugs and using mobile phones while driving. Additionally,
policymakers and campaigners attended the annual PACTS
Westminster lecture.
30
Direct Line Group Annual Report & Accounts 2015
Department for Transport
We have proactively engaged with the Department for
Transport on various topics, including telematics technology,
driverless cars and the concept of a graduated driving licence.
Young drivers
Last year, the CSR Committee held a strategy session to
consider how we might best use our expertise and experience
to reduce deaths and life-changing injuries on the UK’s roads.
In the UK, 490,000 drivers pass their test each year. It is still
a significant rite of passage for many young people. However,
it is also often a time when young drivers are at their most
vulnerable.
Our data shows that accident rates among young drivers
spike during their first year of driving, with one in four young
drivers crashing in this time. Young drivers are also hugely
over-represented in the most serious accidents. The impact
on them, their passengers, their families and other road users
can last a lifetime and has a huge effect on society generally.
There are various reasons why young drivers crash.
These include over-confidence, a natural human urge to test
personal boundaries and take risks, and hidden hazards.
Using road-safety data and our knowledge of driver behaviour
collected through telematics, we’ve identified contextual
speed as a significant cause of fatal crashes involving
young drivers.
New drivers only tend to fine-tune their decision-making when
they no longer have an instructor in the car. In particular, deciding
how fast they should or can go relies on experience of road
conditions and predicting how other road users behave.
Young drivers’ first 1,000 miles are key. This is when the gap
between perceived and actual driving competence, and hence
risk, is greatest. So we have set ourselves the ambitious goal
of cutting deaths in the first 1,000 miles to zero.
The biggest barrier to addressing this issue is that young
drivers may feel immune to the risks. Our goal of inspiring
a generation of safe careful drivers sits at odds with many of
their motivations. They are pro-risk (although less than previous
generations), competitive and relish the freedom of being
a new driver. They may believe that most people drive faster
than the speed limit and that good driving means travelling
as fast as you can. To change behaviour, we have to change
this perspective.
Manifesto
Safer young drivers
We want to cut deaths in the first 1,000 miles
of driving to zero
Young drivers have an unacceptably high risk
of death when they first take to the road:
• 1.5% of drivers are 17 to 19 years old, but they
are involved in 12% of all fatal crashes
• A typical new driver becomes more dangerous
in their first 1,000 miles of driving, even though
they feel invincible
As Britain’s biggest motor insurer, we believe that
every driver in Great Britain should have a safe first
1,000 miles. We are planning to:
• Proactively use our brands, knowledge and
expertise to find new ways to fix this problem
• 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
We’ll start by developing a behavioural change
campaign aimed directly at young drivers in 2016.
We believe talking at young people or trying to shock them
does not work. To engage them we need to find a way
to add to their driving experience. So we are looking to use
our telematics technology to produce a smartphone app.
We will support this with a communication and reward
campaign that leverages peer pressure. It will also engage
young drivers by making road safety conversations more
relevant to them. If successful, we aim to make the app
available to all newly-qualified young drivers in the UK.
31
www.directlinegroup.comStrategic reportGovernanceFinancial statements Corporate social responsibility continued
Reduce, Reuse and Recycle
UK Accident Repair Centres. By the end of 2015, we were
diverting 100% of waste away from landfill including recycling.
We aim to manage our operations sustainably. As outlined
below, we have progressed well. Looking ahead, we are
focusing on our property and claims supply chain, where
there is potentially more opportunity to improve.
Paper use
We have used new technology to reduce the amount of printer
and copier paper we use. Our office paper is made from
recycled material.
We are now focusing on reducing the paper we use to
produce customer policy documents and are looking at ways
to send customers these documents electronically. In 2015,
we used 829 tonnes of paper for policy documents.
Suppliers
Our Ethical Code for Suppliers sets out our approach
to managing CSR-related matters across our supply chain.
For example, we have developed our partnership with ‘Anyjunk’.
Following a claim, Anyjunk provide a waste-collection service
that seeks to recycle household waste and is currently recycling
almost 90% of waste that it collects from our customers.
Proud to be here
We approved a new people strategy in 2015. This supports
our new business strategy, particularly regarding culture and
our employees’ capabilities. In 2015, we focused on pride
in Direct Line Group, encouraging and celebrating the strength
of our workforce.
Engagement
In 2015, we continued developing and championing our
various volunteer groups, such as Employee Representative
Bodies, Community and Social Committees (“CASCs”),
Local Coordination Teams, Health and Safety Representatives,
and the Diversity Network Alliance. This has helped increase
our employees’ voice and enabled the Group to serve
customers better.
Employee feedback remains an important gauge of how our
many varied initiatives affect change. In 2014, we began
using a new and more challenging methodology that is aligned
to our ambition to be a top employer.
In 2015, our people managers created over 460 individual
action plans to improve their teams’ experience. This has played
a major part in significantly improving our engagement score
from 45% in 2014 to 60%. The percentage of our employees
who are proud to work for the Group also increased from 68%
in 2014 to 80%, while 70% tell others that the Group is a great
place to work (up from 55% in 2014).
Emissions
You can find information on Group-wide greenhouse gas
(“GHG”) emissions in the chart – and more details of our
emissions in the Directors’ report on page 98. We were
delighted to win two awards at the Carbon Disclosure
Project UK Results event last year. The awards recognised
how we improved our performance and enhanced our
disclosure of our emissions-related information.
Energy use is the main cause of our emissions. In absolute
terms, we have reduced our emissions following the exit
of several office buildings. Furthermore, our Property
Management team has developed an energy-saving plan.
This seeks to optimise our buildings’ heating, ventilation
and air-conditioning systems, and invest in energy-efficient
devices, such as lighting. Throughout 2015, 100% of the
Group’s UK electricity was purchased on a green tariff.
Waste
Our system of sorting waste at source and introducing
new signage has helped us increase the waste we recycle.
In 2015, we recycled approximately 40% of waste from
our office sites. We also recycled 54% of waste from our
Greenhouse gas
emissions1 (tonnes)
17.2%
7
2
1
,
9
2
8
0
3
,
7
2
1
1
6
,
2
2
13y
14y
15y
Office waste
(%)
90%
recycled or
diverted
Waste recycled 38.7
Diverted from landfill 51.3
Waste to landfill 10.0
Note:
1. Emissions for continuing operations. This excludes discontinued operations, the Group’s former International division. Total Group scope 1
and 2 emissions including discontinued operations were 23,143 tonnes (2014: 28,759 tonnes; 2013: 30,624 tonnes).
32
Direct Line Group Annual Report & Accounts 2015 Living wage
We comply with the principles of the Living Wage Foundation,
relating to our employees.
Recognised as part of our communities
We believe that our people’s feelings about working for the
Group link to our reputation in the community. So we seek
to align our giving with our employees’ interests.
Community and social committees
To engage our people, we run a network of CASCs, which
comprise local volunteers. The CASCs receive central funding
and support. Within an agreed framework, they are free to
create their own programme of events and activities at their
sites. They are also free to build relationships with local charities
and voluntary organisations. Examples of events include:
• 450 employees from seven offices spending an evening
manning phone lines for Comic Relief, taking 8,000 calls.
Hundreds more fundraised on the day
• A masquerade ball in Leeds in aid of Cancer Research,
Leeds MIND, Sue Ryder and Leeds Haven
• 50 employees from Manchester running 10 kilometres
around the city centre to raise £5,000 for various
local causes
Volunteering
We encourage all employees to volunteer individually or as
a team through our ‘One Day initiative’. For example, our
Finance team supported the Brook Lane Community Garden
in Bromley. The team spent a day renovating the open space.
This supported the Garden’s aim to enable people of all ages
to learn cultivation skills and manage habitats that support
wildlife. Our Employee Opinion Survey revealed that 32%
of staff volunteered or fundraised in company time last year.
Matched giving and grants
In 2015, our employees donated £144,000 through our
payroll giving scheme and we donated a further £97,000
in matched giving. We also provided £51,000 in grants to
organisations for which our employees fundraise or volunteer.
Diversity, inclusion and human rights
We continue to work towards an environment based
on meritocracy and inclusion, where every employee can
achieve their full potential, whatever their characteristics.
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 Organization standards.
During 2015, our Diversity Network Alliance became more
visible throughout the business and externally. The team had
a branded presence at various Pride events and a week-long
internal focus on work-life balance. It also placed articles
on our intranet and discussions on other internal platforms
covering many diversity and inclusion issues. Many of our
locations organised health and wellbeing events to advise
on health and raise mental health awareness.
You can find the ratio of female-to-male employees
at 31 December 2015 in the charts below.
To make it easier for our deaf and profoundly deaf
customers to communicate with us, we introduced a Video
Relay Service. This enables customers to connect to a sign
interpreter. The interpreter then contacts our call centre
and relays the conversation.
Gender diversity of all employees
Male 5,512
Female 4,798
Gender diversity of senior managers
Male 103
Female 29
Gender diversity of Board of Directors
Male 5
Female 3
33
www.directlinegroup.comStrategic reportGovernanceFinancial statements Operating review
Personal lines
Motor
Highlights
• Retained position as Britain’s leading personal motor
insurer ranked by in-force policies
• In-force policies increased by 1.0% during 2015 with
growth in each quarter following enhancement to own
brands propositions
• Gross written premium increased by 4.8% as premium
inflation returned to the motor market, with growth
accelerating during the year
• COR improved by 3.8 percentage points reflecting a better
current-year attritional loss ratio from a refinement in the risk
margin approach and reduced large bodily injury claims
• Operating profit improved by 13.8% to £338.0 million
Performance highlights
In-force policies (thousands)
2015
3,707
2014
3,672
Gross written premium
£1,406.7m
£1,342.0m
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
63.6%
2.6%
26.2%
92.4%
67.0%
3.2%
26.0%
96.2%
Operating profit
£338.0m
£297.1m
Performance
Total in-force policies increased by 1.0% during 2015.
Own brands grew by 1.3% whilst partner in-force policies
fell by 3.5%. Gross written premium increased by 4.8% in
comparison to 2014, as premium inflation returned to the
market alongside ongoing claims inflation.
Effect on premium income of changes in price and risk mix1
Change in price
Change in risk mix
Q4
2015
7.7%
(1.0%)
Q3
2015
7.0%
0.1%
FY
2015
5.8%
(0.7%)
Improvements in the Group’s trading capability across Churchill
and Privilege, and better price competitiveness in an inflating
market all contributed to the improved performance. The
growth in gross written premium accelerated during the year
with growth of 7.1% in the fourth quarter. Risk-adjusted prices
increased by 7.7% compared with the fourth quarter of 2014,
whilst for the full year risk-adjusted prices were 5.8% higher
than in 2014. Annual premium inflation in 2015 reflected
expected claims inflation in addition to a catch up for higher
than expected claims inflation during the previous period.
The market experienced continued high levels of shopping
behaviour, especially during the fourth quarter following the
rise in IPT. In this context, Motor’s retention ratio remained
strong and for 2015 was 1.0 percentage point higher than
for 2014.
One of Motor’s partners, Sainsbury’s, has reviewed its
insurance arrangements and Motor will no longer write
new business from February 2017. Arrangements for the
Sainsbury’s renewal book will follow contractual terms.
In 2015, Sainsbury’s accounted for 3.5% of Motor’s gross
written premium.
The COR for the Motor division improved by 3.8 percentage
points reflecting a better loss ratio while the expense and
commission ratios were stable. The loss ratio improvement was
due to a lower current-year attritional loss ratio. Stable prior-
year reserve releases represented a similar percentage of net
earned premium, and primarily relate to large bodily injury
claims. Prior-year reserve releases in 2015 were £266.8
million (2014: £278.4 million) and are expected to be
lower in 2016.
The current-year attritional loss ratio improved by 3.5
percentage points to 85.0%. Of this improvement, 2.0 points
related to the refinement in approach to determining the level
of risk margin above the actuarial best estimate for the current
year. The underlying loss ratio, excluding the change in risk
margin, improved by 1.5 points compared to last year,
primarily arising from lower levels of large bodily injury claims
which were elevated in 2014. Motor’s experience in relation
to large bodily injury claims has improved during the second
half of 2015 versus 2014 and the first half of 2015, but
remains elevated versus 2013. In addition, Motor has
experienced a modest increase in accident frequency during
the second half of 2015. Operating profit improved by
13.8% to £338.0 million in 2015, reflecting better
underwriting performance on lower net earned premium.
Regulatory
During November, the Government announced plans designed
to reduce the cost of soft tissue damage whiplash claims.
These plans, which will be subject to consultation, include
increasing the value of claims settled through the small claims
track and removing general damages for certain claims. The
Group has been calling for reform in this area for some time
and is working with the Government and industry bodies on
how these reforms should be implemented. The reforms are
not expected to be in place before 2017.
Outlook
The market remained highly competitive during 2015 and
in early 2016. While premium rates in the market have
increased, this should be viewed in the context of rising claims
costs and higher levels of IPT. Against this backdrop, Motor
continues to adopt a disciplined approach to managing the
trade-off between margin and volumes, whilst continuing to
identify opportunities to improve efficiency. Meanwhile,
Motor is continuing to invest in building future capability.
Note:
1. Risk mix reflects the expected level of claims from the portfolio. It measures the estimated movement based on risk models used in that period and is revised when
risk models are updated.
34
34 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Home
Highlights
• Britain’s leading home insurer ranked by in-force policies
• In-force policies overall decreased 3.1% following a
reduction in partner in-force policies, while own brands
increased by 1.5% with strong retention
• Gross written premium was 3.6% lower primarily due to
partnerships, while own brands fell 1.9%
• COR improved by 0.5 percentage points, despite higher
than normal claims from major weather events, and current-
year attritional loss ratio improved 3.5 percentage points
• Operating profit was broadly stable at £109.9 million,
despite higher than normal claims from major weather events
Performance highlights
In-force policies (thousands)
2015
3,418
2014
3,526
Gross written premium
£866.3m
£898.6m
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
51.5%
20.9%
19.8%
92.2%
50.8%
21.7%
20.2%
92.7%
Operating profit
£109.9m
£113.9m
Performance
In-force policies for Home own brands increased by 1.5% to
1.7 million over 2015, while partner in-force policies reduced
by 7.3%. Gross written premium was 3.6% lower than for
2014 primarily due to partnerships which were 5.1% lower,
while own brands experienced a smaller reduction of 1.9%.
Effect on premium income of changes in price and risk mix –
own brands
Change in price
Change in risk mix
Q4
2015
(3.0%)
(2.6%)
Q3
2015
(1.6%)
(0.5%)
FY
2015
(2.4%)
(1.1%)
Home’s strong own brands maintained their competitiveness
in a deflationary market supported by previous investments
in claims and pricing initiatives. Risk-adjusted Home prices
decreased by 3.0% in the fourth quarter of 2015 compared
with the same quarter last year, while risk mix decreased by
2.6%. Own brands retention continued to be strong, supported
by previous investments in propositions.
Two of the Group’s Home partners, Nationwide Building
Society (“NBS”) and Sainsbury’s have recently reviewed their
insurance arrangements. In respect of NBS, Home will no
longer underwrite home insurance for its customers from early
2017, while in respect of Sainsbury’s, Home will no longer
write new business from February 2017. Arrangements for
the Sainsbury’s renewal book will follow contractual terms.
Whilst these developments are disappointing, it is the nature
of the partnership market that relationships will be reviewed
periodically and in the case of Sainsbury’s, it is reviewing its
current insurance operating arrangements. In 2015, NBS
and Sainsbury’s accounted for 25.5% of Home’s gross
written premium, albeit they contributed a considerably
lower proportion of Home’s operating profit.
Partnerships remain strategically important and Home will look
to build on its improving manufacturing capability to deliver
what it aims to be market leading propositions to current
partners, as well as to build relationships with future partners.
Consistent with this, Home is in discussion with RBS on a three-
year extension to its insurance partnership, which includes the
RBS and NatWest brands.
In Home, the COR improved to 92.2% despite higher than
normal claims costs from major weather events. The weather
impact in 2015 was higher than expected with claims costs
from major weather events of approximately £90 million
(2014: £63 million). The Home division normally expects in
the region of £80 million of annual claims from major weather
events. Prior-year reserve releases were lower than last year
at £41.9 million (2014: £49.8 million).
The current-year attritional loss ratio, excluding claims costs
from major weather events, improved by 3.5 percentage
points on 2014. This reflected the strength of Home’s pricing
approach and retention performance. Home claims trends
remained benign with 2015 underlying inflation, excluding
major weather events, lower than the long-term average.
In particular, claims from accidental damage and theft
remained low.
Operating profit of £109.9 million was broadly stable in
comparison to the prior year, despite a deflationary market
and higher than normal claims from major weather events.
Flood Re
From 1 April 2016, Flood Re, the Government and industry-
backed scheme to provide affordable home insurance to
households at high risk of flooding, is planned to become
operational. The Group has supported Flood Re’s formation
and is expected to be ready to cede chosen risks to Flood Re
on its inception. Home’s share of the annual levy, based on its
market share, is expected to be in the region of £24 million
for 2016 and will be charged to operating expenses.
Outlook
The market remained highly competitive during 2015 and
in early 2016. The market experienced deflation in 2015
overall, although underlying market pricing was broadly
stable in the fourth quarter after adjusting for the change in
IPT. Overall, the increase in IPT has increased shopping in
the market modestly. Home continues to adopt a disciplined
approach to managing the trade-off between margin and
volumes, and the effect on retention.
www.directlinegroup.com 35
35
www.directlinegroup.comStrategic reportGovernanceFinancial statements
The COR for Rescue and other personal lines was stable
at 91.2% (2014: 92.0%). The Rescue COR was 82.3%
(2014: 81.5%) with a higher loss ratio reflecting changes
in the partner channel following favourable experience in the
prior year being broadly offset by an improvement in the
commission ratio.
Operating profit increased by 8.3% to £52.0 million. Within
Rescue and other personal lines, Rescue operating profit
improved to £42.2 million (2014: £41.5 million).
Outlook
Rescue and other personal lines continued to create additional
value for the Group and represent an opportunity to meet
customers’ broader insurance needs. While competition
was recently stronger in the rescue market, initiatives aim to
position Green Flag well for 2016. We also aim to roll out
improvements to our claims capability in Pet and Travel to
enhance our service while updating our customer propositions.
Operating review continued
Rescue and other personal lines
Highlights
• Retained position as one of the UK’s leading providers
of rescue and other personal lines insurance ranked by
in-force policies
• 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
• COR for Rescue and other personal lines was stable at 91.2%
• Operating profit increased by 8.3% to £52.0 million
Performance highlights
In-force policies (thousands)
Rescue1
Other personal lines
Total in-force policies
Gross written premium
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
2015
2014
3,932
4,356
8,288
3,976
4,517
8,493
£394.1m
£371.8m
59.9%
6.4%
24.9%
91.2%
57.4%
9.4%
25.2%
92.0%
Operating profit
£52.0m
£48.0m
Performance
In-force policies for Rescue declined by 1.1% to 3.9 million
in comparison to the prior year through lower partner volumes.
The reduction in in-force policies for other personal lines of
3.6% across 2015 primarily reflected lower packaged bank
account volumes.
Gross written premium for Rescue and other personal lines
experienced growth of 6.0% compared with 2014. Rescue
gross written premium increased by 4.1% compared with
2014, mainly due to Green Flag direct sales. Refreshed web
content, a new quote and buy journey and additional PCW
distribution, together with take up of higher levels of cover
and competitive propositions, supported this. Gross written
premium for other personal lines rose 7.4% compared to
2014, driven primarily by pricing and upgraded levels of
cover on travel partnerships.
Note:
1. Rescue in-force policies have been revised to exclude partner post-accident vehicle recoveries.
36
36 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Overall, operating profit was £20.8 million, a reduction of
£26.2 million compared with 2014, as higher than normal
claims from weather impacted profitability. Adjusting for
weather-related claims and large losses, operating profit
would have been similar to 2014.
Regulatory
The Insurance Act 2015 will come into effect on 12 August
2016, which represents a significant change to commercial
insurance contract law. Commercial is working through the
requirements of the Act and aims to deliver these appropriately
for customers and brokers.
Outlook
The Commercial market became more competitive during the
year. In the fourth quarter, rate increases on renewed business
across the division’s main lines were at the lowest level for a
number of years. The market trend towards direct and etrade
channels for small business insurance is expected to continue
and Commercial is well placed to take advantage of this.
Commercial
Highlights
• Commercial in-force policies grew by 7.2% and Direct Line
for Business in-force policies now exceed 400,000
• Gross written premium was broadly stable reflecting
competitive pressures. Direct Line for Business gross written
premium surpassed £100 million
• COR increased by 5.7 percentage points and operating
profit decreased by £26.2 million, both impacted by higher
than normal claims from weather
• Adjusting for a normal level of claims from weather and
other large claims, COR was approximately 99%
Performance highlights
In-force policies (thousands)
2015
655
2014
611
Gross written premium
£485.3m
£487.0m
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Operating profit
62.7%
19.6%
22.2%
104.5%
£20.8m
57.1%
19.7%
22.0%
98.8%
£47.0m
Performance
Commercial in-force policy growth across 2015 was achieved
by increased sales through the Direct Line for Business and
eTrade channels. Gross written premium was broadly stable
at £485.3 million in comparison to 2014. In the first half of
2015, gross written premium decreased following competitive
pressures in the regional broker market, while growth of
1.9% was achieved in the second half primarily through the
eTrade and direct channels.
Premium rates have been under pressure from a competitive
market place across all channels, especially during the fourth
quarter following the rise in IPT. Commercial continues to
maintain its underwriting discipline and seeks to balance the
retention of customers with rate inflation.
Commercial has further enhanced its product coverage with
the launch of Professional Indemnity cover for Direct Line for
Business’s customers, and Cyber cover for NIG’s customers
distributed through the broker channel. These products are
fully reinsured.
The Commercial COR of 104.5% was 5.7 percentage points
higher than 2014 and affected by above average claims
from weather events, including those in December which cost
approximately £40 million. Overall, weather-related claims
and large claims were approximately £25 million more than
expected. Adjusting for this, the COR would have been 99%
as underlying claims and the loss ratio have remained broadly
stable in comparison to the previous year. Prior-year reserve
releases of £56.6 million increased on the previous year
(2014: £53.7 million).
www.directlinegroup.com 37
37
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Ongoing operations1
In-force policies1 (thousands)
Gross written premium1
Net earned premium1
Underwriting profit
Instalment and other
operating income
Investment return1
Operating profit1 – ongoing
Run-off1
Restructuring and other
one-off costs
Operating profit
Finance costs1
Gain on disposal of subsidiary
Profit before tax
Tax
Profit from discontinued
operations, net of tax
Profit after tax
Of which is ongoing
operations
Key metrics
Loss ratio1
Commission ratio1
Expense ratio1
COR1
Investment income yield1 –
continuing operations1
Investment return1 –
continuing operations
Basic earnings per share –
continuing operations (pence)
Adjusted diluted earnings per
share1 (pence)
Return on tangible equity1
Net asset value per share
(pence)
Tangible net asset value
per share (pence)
Dividend per share
– interim (pence)
– final (pence)
– regular (pence)
– first special (pence)
– second special (pence)
– total (pence)
2015
£m
2014
£m
16,068
3,152.4
2,920.8
175.2
16,302
3,099.4
2,987.1
148.1
150.8
194.7
520.7
73.1
(48.7)
545.1
(37.6)
−
507.5
(108.3)
181.2
580.4
147.3
210.6
506.0
55.3
(69.6)
491.7
(37.2)
2.3
456.8
(97.5)
13.3
372.6
385.3
368.0
59.5%
10.9%
23.6%
94.0%
2.4%
2.9%
59.6%
11.8%
23.6%
95.0%
2.4%
2.9%
27.9
24.0
26.6
18.5%
25.5
16.8%
192.2
188.2
153.8
153.1
4.6
9.2
13.8
27.5
8.8
50.1
4.4
8.8
13.2
10.0
4.0
27.2
Finance review
Improved
operational
efficiency
John Reizenstein
Chief Financial Officer
Highlights
• Operating profit from ongoing operations1 increased
to £520.7 million for 2015 (2014: £506.0 million).
COR1 from ongoing operations of 94.0% for 2015,
an improvement of 1.0 percentage point
• Return on tangible equity1 of 18.5% for 2015 (2014:
16.8%). Profit before tax for continuing operations
increased to £507.5 million (2014: £456.8 million)
• Results benefited from disciplined underwriting, prior-year
reserve releases from ongoing operations of £378.9 million
(2014: £397.6 million) which were higher than expected,
together with lower costs, partially offset by higher claims
from major weather events and lower volumes
• Reduced total costs1 by 4.6% in 2015 while building
on technical pricing and claims management initiatives
• 4.5% increase in final dividend per share of 9.2 pence
per share and additional special dividend of 8.8 pence
per share. Total dividends for 2015, including special
interim dividend of 27.5 pence per share following sale
of International division, of 50.1 pence per share
(2014: 27.2 pence per share)
Note:
1. See glossary on pages 174 and 175
38
38 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Performance
Operating profit – ongoing operations
Underwriting profit
Instalment and other operating
income
Investment return
Operating profit
2015
£m
175.2
150.8
194.7
520.7
2014
£m
148.1
147.3
210.6
506.0
Total in-force policies for ongoing operations during 2015
reduced by 1.4% to 16.1 million (31 December 2014:
16.3 million). The fall primarily related to other personal lines,
within the Rescue and other personal lines division, and
Home partnerships. Commercial grew in-force policies by
7.2% across the period, while Motor increased marginally.
Gross written premium of £3,152.4 million increased by
1.7% compared with 2014 (£3,099.4 million).
Underwriting profit – ongoing operations
In 2015, operating profit from ongoing operations increased
to £520.7 million (2014: £506.0 million) primarily due to
an improvement in the underwriting result, while the investment
return decreased. The underwriting result improved significantly
to £175.2 million (2014: £148.1 million) principally due to a
better current-year attritional claims performance and reduced
costs, partially offset by a higher level of claims costs from
major weather events and lower volumes. This result included
higher than expected prior-year reserve releases of £378.9
million (2014: £397.6 million). Investment return was lower
primarily due to lower assets under management (“AUM”)
impacting investment income and a reduction in net realised
and unrealised gains.
In-force policies and gross written premium
In-force policies – ongoing operations (thousands)
At 31 December
Own brands
Partnerships
Motor total
Own brands
Partnerships
Home total
Rescue
Other personal lines
Rescue and other personal lines
Commercial
Total ongoing
2015
3,459
248
3,707
1,719
1,699
3,418
3,932
4,356
8,288
655
2014
Revised1
3,415
257
3,672
1,693
1,833
3,526
3,976
4,517
8,493
611
16,068
16,302
Underwriting profit (£ million)
Loss ratio
Commission ratio
Expense ratio
COR
2015
175.2
59.5%
10.9%
23.6%
94.0%
2014
148.1
59.6%
11.8%
23.6%
95.0%
The COR for ongoing operations improved by 1.0 percentage
point to 94.0% (2014: 95.0%). The loss and expense ratios
were stable, whereas the commission ratio decreased by
0.9 percentage points.
At the start of the year, the Group set 2015 COR guidance
for ongoing operations in the range of 94% to 96%. This
assumed a normal level of claims from major weather events.
The range reflected uncertainty surrounding claims inflation
versus motor market pricing. This guidance, which assumed
normal weather, was subsequently updated in the year to
between 92% and 94%. Following higher than expected
prior-year reserve releases, a COR of approximately 93%,
normalised for weather, was achieved.
Within the stable headline loss ratio, the attritional loss ratio
improved, but this was offset by a lower contribution from
prior-year reserve releases and higher weather-related claims.
The reduction in the commission ratio primarily reflected lower
payments to partners, particularly in Home, following higher
weather-related claims.
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.
Gross written premium – ongoing operations
Current-year attritional loss ratio – ongoing operations
Reported loss ratio
Prior-year reserve releases
Major weather events – Home2
Current-year attritional
loss ratio
2015
59.5%
13.0%
(3.1%)
2014
59.6%
13.3%
(2.1%)
69.4%
70.8%
Own brands
Partnerships
Motor total
Own brands
Partnerships
Home total
Rescue
Other personal lines
Rescue and other personal lines
Commercial
Total ongoing
Notes:
2015
£m
1,307.5
99.2
1,406.7
408.4
457.9
866.3
163.3
230.8
394.1
485.3
3,152.4
2014
£m
1,248.4
93.6
1,342.0
416.2
482.4
898.6
156.9
214.9
371.8
487.0
3,099.4
1. Rescue in-force policies have been revised to exclude partner post-accident vehicle recoveries.
2. Home claims from major weather events, including inland and coastal flooding, and storms.
www.directlinegroup.com 39
39
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Finance review continued
Analysis by division
For the year ended 31 December 2015
COR
Current-year attritional loss ratio
Prior-year reserve releases (£ million)
For the year ended 31 December 2014
COR
Current-year attritional loss ratio
Prior-year reserve releases (£ million)
Motor
Home
Rescue and other
personal lines
Commercial
Total ongoing
92.4%
85.0%
266.8
96.2%
88.5%
278.4
92.2%
45.8%
41.9
92.7%
49.3%
49.8
91.2%
63.5%
13.6
92.0%
61.7%
15.7
104.5%
75.5%
56.6
98.8%
69.2%
53.7
94.0%
69.4%
378.9
95.0%
70.8%
397.6
The movement in the current-year attritional loss ratio is a
key indicator of underlying accident year performance as it
excludes prior-year reserve movements and claims from major
weather events in the Home division. The Group’s current-year
attritional loss ratio improved by 1.4 percentage points to
69.4% in 2015 (2014: 70.8%) with improvements in Motor
and Home partially offset by a deterioration in Rescue and
other personal lines, and in Commercial primarily because of
higher weather claims.
Prior-year reserve releases from ongoing operations continued
to be significant at £378.9 million (2014: £397.6 million)
and were equivalent to 13.0% of net earned premium (2014:
13.3% of net earned premium). Reserve releases were higher
than expected in 2015 and the overall level for 2016 is
expected to remain significant, albeit lower than in 2015.
By division, the COR improved in Motor, Home and Rescue
and other personal lines compared with 2014, but deteriorated
in Commercial, primarily due to the December 2015 storms.
Total costs
Staff costs
Other operating expenses
Marketing
Amortisation and impairment
of other intangible assets
Depreciation
Total operating expenses
Claims handling expenses
Total costs
2015
£m
254.2
219.0
117.8
67.4
30.7
689.1
195.6
884.7
2014
£m
247.6
244.9
123.9
66.4
22.6
705.4
222.3
927.7
The total costs for ongoing operations of £884.7 million were
4.6% lower than the previous year (2014: £927.7 million).
The Group’s expense ratio was stable at 23.6%, with the
effect of the reduction in operating expenses offset by the
impact of lower net earned premium. Reductions in underlying
costs have been achieved in a number of areas including
marketing, technology and property. The reduction in claims
handling expenses was primarily as a result of improved
efficiencies in a number of areas, including head office
functions that support claims operations. Costs in the second
half of 2015 were lower than the prior year, but higher than
in the first half. This was mainly due to write offs on redundant
software, property, plant and equipment.
Instalment and other operating income – ongoing operations
Instalment income
Other operating income:
Vehicle replacement referral
income
Revenue from vehicle recovery
and repair services1
Other income
Other operating income
Total ongoing
2015
£m
100.1
12.5
15.5
22.7
50.7
150.8
2014
£m
100.4
15.8
18.0
13.1
46.9
147.3
Instalment and other operating income from ongoing
operations of £150.8 million increased 2.4% on the prior year
(2014: £147.3 million). Other operating income increased,
while instalment income was stable. The increase in other
income was due primarily to the inclusion of a full year of
legal services income in 2015.
Investment return – ongoing operations
Investment income
Net realised and unrealised
gains
Investment return – ongoing
2015
£m
165.6
29.1
194.7
2014
£m
171.7
38.9
210.6
The total investment return for ongoing operations decreased
to £194.7 million compared to £210.6 million in 2014. This
was driven by a decrease in net realised and unrealised gains
and a small reduction in investment income. Investment income
was £165.6 million, a 3.6% decrease from 2014, primarily
as a result of lower average AUM (31 December 2015:
£6,818.7 million; 31 December 2014: £7,051.3 million).
Net realised and unrealised gains for ongoing operations
of £29.1 million were lower than the comparative period
(2014: £38.9 million) due primarily to lower realised gains
on disposals of fixed income debt securities and a small
decrease in unrealised property gains, which were
£24.2 million for the year (2014: £25.9 million).
Note:
1. Vehicle recovery includes post-accident and pay-on-use recovery. Repair services constitute the provision of non-insurance related repairs.
40
40 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Investment yields – continuing operations
Investment income yield1
Investment return2
2015
2.4%
2.9%
2014
2.4%
2.9%
The investment income yield for continuing operations in
2015 was 2.4%, in line with the yield achieved in 2014.
Portfolio actions to diversify the portfolio in 2015 and prior
years, including infrastructure debt, commercial property and
high yield debt instruments, have helped offset yield pressure
from the continuing low interest rate environment. The Group
will continue to diversify its investment portfolio appropriately
and based on current yield curves, which reflect delays in
market expectations for a base rate rise, the Group currently
forecasts an investment income yield of 2.5% for 2016 and
2.6% for 2017.
Operating profit – ongoing operations
Motor
Home
Rescue and other personal lines
Commercial
Total ongoing
2015
£m
338.0
109.9
52.0
20.8
520.7
2014
£m
297.1
113.9
48.0
47.0
506.0
All divisions were profitable in 2015, with Motor and Rescue
and other personal lines improving operating profit on 2014.
Home operating profit was broadly stable, while Commercial
reduced compared to the previous year, primarily due to the
storms in December.
Reconciliation of operating profit
Operating profit – ongoing
operations
Run-off
Restructuring and other one-off
costs
Operating profit
Finance costs
Gain on disposal of subsidiary
Profit before tax
Tax
Profit from discontinued
operations, net of tax
Profit after tax
2015
£m
520.7
73.1
(48.7)
545.1
(37.6)
−
507.5
(108.3)
181.2
580.4
2014
£m
506.0
55.3
(69.6)
491.7
(37.2)
2.3
456.8
(97.5)
13.3
372.6
Run-off
The Run-off segment generated a profit of £73.1 million in
2015 compared with £55.3 million in 2014. Improved
experience from large bodily injury claims led to higher prior-
year reserve releases in comparison to the previous year. It is
expected that the Run-off segment will continue to contribute
positively to operating profit in future years, albeit at a lower
level than in 2015.
Restructuring and other one-off costs
Restructuring and other one-off costs for 2015 of £48.7 million
(2014: £69.6 million) primarily reflected the costs associated
with the exit of one location announced at the beginning of
the year and IT migration. Over the three-year period 2015
to 2017, the Group expects cumulative restructuring and
other one-off costs to continue to be substantially offset by
the operating profit from the Run-off segment.
Finance costs
Finance costs remained stable at £37.6 million
(2014: £37.2 million).
Gain on disposal of subsidiaries
The gain on disposal of £2.3 million in 2014 relates to the
sale of the Group’s stolen vehicle recovery business, Tracker.
Taxation
The effective tax rate for continuing operations in 2015 was
21.3% (2014: 21.3%), which was higher than the standard
UK corporation tax rate of 20.25% (2014: 21.5%), primarily
due to disallowable expenses.
Discontinued operations
On 29 May 2015, the Group completed the sale of its
International division, which comprised its Italian and German
operations, to Mapfre, S.A. Accordingly, this division is
treated as discontinued operations. The gain on disposal of
£167.1 million is included in profit after tax from discontinued
operations of £181.2 million. Operating profit includes
£29.9 million of realised net gains on divisional available-for-
sale (“AFS”) investments reclassified through the income
statement on disposal. Further details on discontinued
operations are presented in note 5 to the consolidated
financial statements, see page 136.
Profit for the year and return on tangible equity
Profit for the year amounted to £580.4 million (2014:
£372.6 million), a significant increase on the previous
year following the gain on the disposal of the Group’s
International division.
RoTE increased to 18.5% (2014: 16.8%) due to a lower
equity base, from the sale of the Group’s International
division, and higher profit from ongoing operations.
Earnings per share
Basic earnings per share for continuing operations of
27.9 pence increased by 16.3% (2014: 24.0 pence).
This reflected the reduction in restructuring and other one-off
costs and the improved operating profits from the Run-off
segment and ongoing operations.
Adjusted diluted earnings per share, from ongoing operations,
increased by 4.3% to 26.6 pence (2014: 25.5 pence)
reflecting the increase in operating profit.
Notes:
1.
2.
Investment income yield excludes net gains and is calculated on income divided by the average AUM based on the opening and closing balance for
Group – continuing operations.
Investment return includes net gains and is calculated on income divided by the average AUM based on the opening and closing balance for
Group – continuing operations.
www.directlinegroup.com 41
41
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Finance review continued
Dividends
The Board is proposing a final dividend of 9.2 pence per
share making the total regular dividends for 2015 13.8 pence
per share. This represents 4.5% growth over the 2014 regular
dividends and is in line with the Group’s aim to grow the
regular dividends annually in real terms, see page 96 for the
Group’s dividend policy.
Financial management
Accessing sufficient funding as liabilities fall due is central to
the Group’s long-term sustainability. The Group’s integrity and
brand reputation for customers and other stakeholders relies
on this sustainability. The Group’s key financial risks are
reserving for insurance liabilities and market risk connected
to the investment portfolio.
In addition, the Board has resolved to pay a further special
interim dividend of 8.8 pence per share. This takes the total
special interim dividends for 2015 to 36.3 pence per share
and includes the 27.5 pence per share dividend in relation to
the sale of the International division.
Cash flow
Net cash generated from operating activities totalled £42.6
million (2014: £410.6 million used by operating activities).
This reflected an increase in cash generated from operations
to £149.8 million (2014: £315.2 million used by operations),
primarily due to a decrease in insurance payables of current
and prior-year claims.
The movement in net cash generated from investing activities
in 2015 of £190.8 million from £216.0 million used in 2014
primarily represented the sale of discontinued operations.
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).
Overall, cash and cash equivalents increased by £14.0
million (2014: £51.1 million increase) across the year to
£902.4 million (31 December 2014: £898.2 million).
Net asset value
At 31 December
Net assets
Goodwill and other intangible
assets
Disposal group – intangible
assets
Tangible net assets
Net asset value per share
(pence)
Tangible net asset value per
share (pence)
2015
£m
2014
£m
2,630.0
2,810.5
(524.8)
(517.5)
−
2,105.2
(5.6)
2,287.4
192.2
188.2
153.8
153.1
The net asset value at 31 December 2015 was £2,630.0 million
(31 December 2014: £2,810.5 million) with a tangible net asset
value of £2,105.2 million (31 December 2014: £2,287.4
million). The decrease since the beginning of the year reflected
the payment of dividends and reduction of the AFS investments
reserve, partially offset by profit in 2015.
Reserving
Financial management includes the central aspect of estimating
claims reserves. Uncertainty is an inherent part of insurance
and requires judgement when assessing claims liabilities.
The Group considers the class of business, the length of time
to notification of a claim, the validity of the claim against a
policy, and the claim value. Claims reserves could settle at
a range of outcomes, and settlement certainty increases over
time. However, for bodily injury claims, the uncertainty is greater
due to the length of time taken to settle these claims. Annuity
payments for injured parties also increase this uncertainty.
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 incorporates a prudent
margin in excess of the internal actuarial best estimate. This
margin is made in reference to a range of actuarial scenario
assessments and percentiles and also considers other short
and long-term risks not reflected in the actuarial inputs. For
more information, see pages 152 to 154.
The significant level of prior-year reserve releases in recent
years (2015: £378.9 million; 2014: £397.6 million) has
arisen primarily from reductions in the actuarial best estimate.
Over these time periods, the percentage margin above
actuarial best estimate has been broadly maintained or
increased. Looking forward, the Group will continue to set
its initial management best estimate for future accident years
conservatively, and provided that the risk outlook remains
stable, it does not expect to need to increase the overall
margin further. Over time, the share of the Group’s
underwriting profit attributable to current year is expected
to increase. Assuming current claims trends continue, the
contribution from prior-year reserve releases is expected
to remain significant, albeit lower than in 2015.
Claims reserves net of reinsurance
At 31 December
Motor
Home
Rescue and other personal lines
Commercial
Total ongoing
Run-off
Discontinued operations
Total Group
2015
£m
2,125.9
387.7
79.3
627.3
3,220.2
382.4
−
3,602.6
2014
£m
2,355.1
335.2
77.0
607.5
3,374.8
523.8
393.6
4,292.2
Reinsurance
The objectives of the Group’s reinsurance strategy are to
reduce the volatility of earnings, facilitate effective capital
management and transfer risk outside of the Group’s risk
appetite. This is achieved by the transfer of risk exposure
through various reinsurance programmes:
42
42 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015 • Catastrophe reinsurance to protect against an accumulation
of claims arising from a natural peril event. The retained
deductible is £150 million and cover is purchased up to a
modelled one-in-200 years loss event of £1,350 million
• Motor reinsurance to protect against a single or an
accumulation of large claims. The retained deductible has
been reduced to an indexed level of £1 million per claim
providing an enhanced and substantial level of protection
against large motor bodily injury claims
• Commercial risk reinsurance to protect against large
individual claims with a retained deductible of £4 million
Taxation
The Board recognises that the Group has an important
responsibility to its stakeholders to manage its tax position
effectively. The Board has delegated day-to-day management
of taxes to the Chief Financial Officer and oversight is
provided by the Audit Committee.
These arrangements are intended to ensure that the Group:
complies with applicable laws and regulations, and meets
its obligations as a contributor of taxes and a collector of
taxes on behalf of the tax authorities; and manages its tax
affairs efficiently, claiming reliefs and other incentives
where appropriate.
Investment portfolio
The investment strategy is designed to deliver several
objectives, which are summarised below:
• To ensure there is sufficient liquidity available within the
investment portfolio to meet stressed liquidity scenarios
determined by the Risk function
• To duration match non-PPO liabilities
• To back inflation-linked PPO liabilities with growth assets
and other appropriate long-term assets expected to
generate long-term returns in line with the inflating cost
of claims
• To deliver a suitable risk adjusted investment return
commensurate with the Group’s risk appetite
Asset and liability management
The following table summarises the Group’s high level
approach to asset and liability management.
Liabilities
Assets
Characteristics
More than 10 years,
for example PPOs
Short and medium
term − all other
claims
Tier 2 sub-debt
(swapped fixed to
floating)
Surplus − tangible
equity
Property and
infrastructure debt
Investment-grade
credit and short-
term high yield
Securitised credit,
commercial real
estate loans and
cash
Investment-grade
credit, cash and
government debt
securities
Inflationary linked
or floating
Key rate duration
matched
Floating
Fixed or floating
Asset allocation and benchmarks
The current strategic asset benchmarks for the Group are
detailed in the following table:
At 31 December
Investment-grade credit
High yield
Investment-grade private placements
Credit
Securitised credit
Sovereign
Total debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents
Investment property
Total
Current
benchmark
holding
54.0%
6.0%
4.0%
64.0%
5.0%
9.0%
78.0%
6.0%
3.0%
7.0%
6.0%
2015
59.5%
4.8%
0.2%
64.5%
5.2%
6.5%
76.2%
4.8%
−
13.9%
5.1%
100.0%
100.0%
At 31 December 2015, total investment holdings of £6,818.7
million were 3.3% lower, reflecting operating cash flows and
dividends paid. Total debt securities were £5,194.4 million
(31 December 2014: £5,802.5 million), of which 14.6% were
rated as ‘AAA’ and a further 59.4% were rated as ‘AA’ or ‘A’.
Corporate, supranational and local government debt securities
account for 64.5% of the portfolio. The average duration at
31 December 2015 of total debt securities was 2.3 years
(31 December 2014: 2.1 years).
At 31 December 2015, total unrealised gains, net of tax,
on AFS investments were £5.4 million (31 December 2014:
£94.4 million). Due to the reduction in unrealised gains, net
realised gains from the fixed income debt securities portfolio
for 2016 are expected to be lower than in 2015.
During 2015, the Group reviewed its investment strategy
resulting in approval to implement mandates in commercial
real estate loans, subordinated financial debt and global
credit. The subordinated debt mandate replaces holdings
of similar securities previously contained in the Group’s
general investment grade mandates. All new mandates will
be investment grade. In addition, a further 2% allocation to
the existing high-yield mandate was approved, increasing this
to a maximum of 6%. The mandates are funded primarily from
reductions in government debt securities and existing holdings
in investment grade securities. In 2015, the primary addition
to the investment portfolio was the £253.4 million further
investment in infrastructure debt. Given market pricing,
additional investment in commercial property during 2015
was limited to one property acquisition.
Investment risk is, in part, mitigated by the following
characteristics within the investment portfolio:
• All holdings within the short duration US Dollar high-yield
portfolio have a credit rating of BB or B. The Group’s
strategy does not permit any debt securities to be held
below B-. At year end, actual exposure to the energy
and midstream sector was 8.4% of the high-yield portfolio
• The infrastructure debt portfolio is made up of UK assets
only, which are purchased via the secondary market
post the construction phase of the project concerned.
www.directlinegroup.com 43
43
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Finance review continued
The portfolio is weighted heavily towards social
infrastructure with 88% of the year-end portfolio invested
in projects across this sector (38% in healthcare, 45%
in education and 5% in other). At year end, 88% of
investments were underpinned by availability based
payment schedules
• The investment property portfolio consists presently of 26
UK based properties. The Group’s strategy does not permit
any overseas holdings. The portfolio is predominantly based
in the South East and invested mainly in the prime (rather
than secondary) sector of the market. The mandate targets
a real return objective resulting in 41% of current leases
producing inflation-linked rental income
• The securitised credit portfolio was restructured in 2015
in line with Solvency II risk retention requirements. At year end,
88% was invested in AAA tranches, 7% in AA tranches and
5% held in cash. The primary sectors the portfolio was invested
in were mortgage backed securities (46%), collateralised loan
obligations, where the underlying borrowers are rated sub-
investment grade (30%), and asset backed securities secured
on Federal Family Education Loan Program student loans (14%)
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
US Dollars 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 portfolio at 31 December 2015
(%)
Corporate debt securities 60.9
Supranational 2.1
Local government 1.5
Securitised credit 5.2
Sovereign 6.5
Infrastructure debt 4.8
Cash and cash equivalents 13.9
Investment property 5.1
Investment portfolio at 31 December 2014
(%)
Corporate debt securities 58.0
Supranational 2.5
Local government 1.7
Securitised credit 6.0
Sovereign 14.1
Infrastructure debt 1.1
Cash and cash equivalents 12.3
Investment property 4.3
Investment holdings and yields – total Group
£m
Corporate2
Supranational2
Local
government2
Credit
Securitised
credit2
Sovereign2
Total debt
securities
Infrastructure
Cash3
Investment
property
Total Group
2015
2014
Allocation
4,155.9
140.1
104.9
4,400.9
Income1
Allocation1
Income1
117.1 4,092.7
176.2
2.6
118.2
4.9
1.7
120.3
121.4 4,389.2
2.4
125.5
350.8
442.7
6.0
12.7
419.6
993.7
6.1
22.4
5,194.4
329.6
947.3
347.4
6,818.7
140.1 5,802.5
76.2
865.4
4.4
6.8
154.0
0.1
5.2
17.8
307.2
169.1 7,051.3
16.2
175.5
Corporate
Supranational
Local government
Credit
Securitised credit
Sovereign
Total debt
securities
Infrastructure
Cash
Investment
property
Total Group
Weighting
Yield Weighting
60.9%
2.1%
1.5%
64.5%
5.2%
6.5%
76.2%
4.8%
13.9%
2.8%
1.7%
1.5%
2.8%
1.6%
1.8%
2.6%
2.2%
0.8%
58.0%
2.5%
1.7%
62.2%
6.0%
14.1%
82.3%
1.1%
12.3%
5.1%
100.0%
5.4%
2.4%
4.3%
100.0%
Yield
2.8%
1.9%
1.9%
2.8%
2.0%
1.9%
2.6%
0.3%
0.5%
6.1%
2.4%
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 dividend annually in real terms.
In determining the appropriate level of capitalisation and
solvency, the Group considers capital across a number of
metrics. These include economic capital, regulatory capital
and rating agency capital. The Group targets holding capital
sufficient to maintain a credit rating in the ‘A’ range.
Where the Board believes the Group has capital that is surplus
to requirements, it looks to return it to shareholders.
Solvency II
Solvency II is the new solvency framework of the capital
adequacy regime for the European insurance industry. It
establishes a revised set of EU-wide capital requirements
and risk management standards with the aim of increasing
protection for policyholders. Solvency II was implemented on
Notes:
1. Continuing operations
2. Asset allocation at 31 December 2015 includes investment portfolio derivatives, which have been netted and have a mark-to-market liability value of £45.7
million of which £40.0 million is in corporate debt securities, £0.4 million in local government and £5.3 million in securitised credit (31 December 2014: mark-
to-market liability value of £27.8 million of which £24.4 million is in corporate debt securities, £0.1 million in supranationals, £0.4 million in local government,
£2.8 million in securitised credit and £0.1 million in sovereign). This excludes non-investment derivatives that have been used to hedge subordinated debt,
operational cash flows and the disposal of the International division.
3. Net of bank overdrafts and including term deposits with financial institutions with maturities exceeding three months.
44
44 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
1 January 2016 and the Group is presenting pro forma
information at 31 December 2015 for the first time on
that basis.
The following table splits the Group’s own funds by tier on a
Solvency II basis.
The Group is regulated by the PRA on both a Group basis and,
for the Group’s principal underwriter, UKI, on a solo basis.
Initially, the Group (including UKI) will assess its capital
requirements using the standard formula. UKI has applied
for its internal economic capital model to be approved as its
internal model and approval is expected from the PRA in mid-
2016. From this point, UKI will calculate its capital requirement
using the internal model which will form part of a Group-wide
partial internal model.
At 31 December
Tier 1 capital before
foreseeable dividends
Foreseeable dividends
Tier 1 capital
Tier 2 capital
Tier 3 capital
Own funds
20152
£m
2,045.2
(247.5)
1,797.7
614.9
58.2
2,470.8
Capital position
At 31 December 2015, the Group held a capital surplus
of £794.6 million above its pro forma1 regulatory capital
requirements on a Solvency II standard formula basis. This was
equivalent to a pro forma capital coverage ratio of 147.4%.
Comparative figures are on a risk-based capital basis.
At 31 December
Pro forma1 solvency capital
requirement (£ million)
Capital surplus above pro forma
solvency capital requirement
(£ million)
Pro forma capital coverage ratio
Risk-based capital coverage
ratio (adjusted for dividends3)
Solvency II2
2015
Risk-based capital
2014
1,676.2
794.6
147.4%
n/a
n/a
n/a
n/a
148.2%
Tier 1 capital after foreseeable dividends represents 72.8%
of own funds and 107.2% of pro forma solvency capital
requirement (“SCR”). Tier 2 capital relates solely to the
Group’s £500 million subordinated debt issue in 2012.
Notes:
Reconciliation of IFRS shareholders’ equity to Solvency II
own funds
At 31 December
Shareholders’ equity
Goodwill and intangible assets
Change in valuation of technical provisions
Other asset and liability adjustments
Foreseeable dividends
Tier 1 capital
Tier 2 capital: subordinated debt
Tier 3 capital: deferred tax asset
Own funds
20152
£m
2,630.0
(524.8)
202.9
(262.9)
(247.5)
1,797.7
614.9
58.2
2,470.8
Leverage
The Group’s financial leverage continues to be conservative.
During 2015, the leverage increased from 15.8% to 16.5%
due mainly to the sale of the Group’s International operations and
subsequent special dividend which reduced shareholders’ equity.
At 31 December
Shareholders’ equity
Financial debt − subordinated
guaranteed dated notes
Total capital employed
Financial-leverage ratio4
2015
£m
2014
£m
2,630.0
2,810.5
521.1
3,151.1
16.5%
526.3
3,336.8
15.8%
1. Calculated on a pro forma basis, assuming expected changes to hedging
arrangements were in effect at 31 December 2015
2. Figures are estimated and based on preliminary regulatory returns for
31 December 2015.
3. Adjusted for final and second special interim dividends
4. Total financial debt as a percentage of capital employed
Credit ratings
Standard & Poor’s and Moody’s Investors Service provide
insurance financial-strength ratings for UKI. UKI is currently
rated ‘A’ (strong) with a stable outlook by Standard & Poor’s
and ‘A2’ (good) with a stable outlook by Moody’s.
Statement of the Directors in respect of the Strategic report
The Board reviewed and approved our Strategic report on pages 1 to 45 on 29 February 2016.
By order of the Board
Paul Geddes
Chief Executive Officer
29 February 2016
John Reizenstein
Chief Financial Officer
29 February 2016
www.directlinegroup.com 45
45
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Chairman’s introduction
Corporate
governance
Mike Biggs
Chairman
Dear shareholders and other
stakeholders
Our commitment to good corporate governance
An important part of the Board’s role and mine as Chairman is
to oversee the good governance of the Group. It is now more
than three years since the Group was floated through an IPO.
In that time, we have continued developing and refining our
governance processes and procedures so that they remain fit
for a FTSE 100 company.
Board and Committee structure and membership
The Board has established Committees to focus on specific
governance areas and to help it to meet its obligations and
discharge its duties. The following Committees have been
established with effect from the IPO: Audit, Board Risk,
Remuneration, CSR, Nomination and Investment. You can find
a report from each Committee in the Governance section of
this Annual Report & Accounts. Other than the CSR Committee,
all Committees only have Non-Executive Directors as members.
Our Code of Business Conduct
Business practices
We shall engage in honest,
professional and ethical
conduct and maintain effective
procedures to prevent
confidential information
being misused.
Dealing with customers
We shall treat customers
fairly, openly and honestly,
and operate an effective
complaints process to address
any perceived departure
from these standards.
46
46 Direct Line Group Annual Report & Accounts 2015
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.
I am pleased to report that Dr Richard Ward was appointed
a Non-Executive Director (“NED”) and the Senior Independent
Director (“SID”) on 18 January 2016. He brings a deep
knowledge of the insurance industry to the Group. I would also
like to thank Andrew Palmer for agreeing to act as SID while
we were in the process of completing Richard’s appointment.
As we announced on 16 February, Priscilla Vacassin has
decided to step down from the Board with effect from 1 March
2016. Clare Thompson has agreed to act as interim Chair
of the Remuneration Committee from 1 March. At the same
time she will step down as Chair and member of the CSR
Committee and the Investment Committee and as a member of
the Board Risk Committee. Andrew Palmer will be appointed
as Chair of the Investment Committee and Sebastian James as
Chair of the CSR Committee with effect from the same date.
Key matters
I highlight the following key governance and shareholder
matters from the Corporate Governance report, which the
Board considered during the year.
Change and IT migration
The Board oversaw the Group’s major change programmes
and associated risks and challenges relating to the migration
of IT infrastructure from RBS Group and development of the
next generation of customer systems, including focusing on risks
relating to IT systems’ stability, cyber security and the internal
control environment.
Solvency II
Preparation for the transition to the Solvency II regulatory
regime was a priority for the Board, the Board Risk Committee
and the Audit Committee during the year. Additionally, the
Remuneration Committee considered how Solvency II might
affect senior managers’ remuneration.
Sale of the International division
The sale of the International division completed at the end
of May. The Board resolved to return substantially all of
the net proceeds to shareholders through a special dividend,
which was paid on 24 July 2015.
Succession planning
The Nomination Committee focused on succession planning
for the Board and Executives, and on recruiting Richard Ward
as the SID.
Dealing with shareholders
and other stakeholders
We shall seek to maximise
shareholder value over time,
recognising that wealth
generated also benefits
customers, employees and
the communities where
we operate.
Dealing with employees
We shall maintain a working
environment that attracts,
motivates and retains
employees, and shall be
intolerant of any type of
discrimination, harassment
or victimisation.
Final dividend 2014
As explained in last year’s Annual Report & Accounts, due to the
uncertainty around the timing of the completion of the sale of the
International division, the Board decided to pay an additional
interim dividend for 2014 on 17 April 2015 in place of a final
Our values
Do the right thing
dividend. We will ask shareholders to approve a final dividend
For our people, our customers, our shareholders and our wider
for 2015 at the Annual General Meeting in May 2016.
Share consolidation
The Board proposed a share consolidation based on a
consolidation ratio of 11 new shares for 12 existing shares
due to the size of the special dividend relating to the sale
Aim higher
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.
of the International division, and to maintain comparability
Strive to be the best in every area of the business; be ambitious,
of share price and earnings per share before and after
courageous and innovative; relentlessly challenge and improve;
payment of the special dividend. Shareholders approved
seek and embrace change; learn from our mistakes; persevere,
always deliver our promises and don’t settle for second best.
this on 29 June 2015.
Vesting of LTIPs
The Remuneration Committee considered and approved the
first vesting of the Direct Line Group LTIP on 9 November
2015, at 89.2% of the potential maximum award, which
reflected good progress against the objectives set at the time
of the IPO.
UK Corporate Governance Code
We, the Board of Direct Line Group, are committed to the
Work together
Collaborate across all levels and across all functions; leverage
the skills, knowledge and experience, irrespective of hierarchy,
to deliver the best possible results; develop relationships based
upon trusting each other, partnerships and win-wins; recognise
and celebrate success.
principles of the UK Governance Code issued by the Financial
Take ownership
Reporting Council. I am pleased to report that we have
complied with substantially all of the provisions of the UK
Corporate Governance Code (September 2014). You can
find further details in the Corporate Governance report.
The way we do business
Treat it like it’s OUR business; take the initiative, if you can
see a better way, go and make a difference; take decisions,
be accountable for your actions in whatever role you carry
out; take responsibility for your own personal development
and performance.
The way we do business and our underlying values are central
to the Group’s success. Our Code of Business Conduct
Say it like it is
governs the way we treat our stakeholders, and our values
Be real, authentic and true to self; have adult to adult
determine our behaviours. Both determine how we do business
conversations with all audiences; listen, seek to understand
throughout the Group and define our corporate identity. They
and respect diversity of views; be open, call out issues we
also influence our business relationships and reputation, which
see; share information and keep things as simple as possible.
Bring all of yourself to work
Be the best you can be, the real and whole you; celebrate our
diversity of skills, experiences and personalities; be a role model
to others, demonstrate ‘can do’ spirit, have fun and make this
a great place to be; be excited about our Company and our
future; believe in yourself, feel confident and empowered.
are key to our long-term success.
Yours sincerely
Michael N Biggs
Chairman
Dealing with suppliers of
Dealing with communities
Dealing with competitors
Dealing with regulators
goods and services and
and the environment
We shall compete with
We shall contribute to the
competitors honestly and
We shall maintain a
constructive and open
social and economic well-
in accordance with the
relationship with our regulators
business partnerships
We shall maintain the
highest possible standards
being of those communities
relevant competition law.
of integrity in business
where we are an employer,
relationships with suppliers
and encourage employees
and partners by treating them
to participate in projects
honestly and with respect,
and initiatives to strengthen
and avoiding compromising
those communities.
offers of gifts and hospitality.
to foster mutual trust, respect
and understanding, and will
not offer anything to officials in
return for favourable treatment.
www.directlinegroup.com 47
Direct Line Group Annual Report & Accounts 2015
Final dividend 2014
As explained in last year’s Annual Report & Accounts, due to the
uncertainty around the timing of the completion of the sale of the
International division, the Board decided to pay an additional
interim dividend for 2014 on 17 April 2015 in place of a final
dividend. We will ask shareholders to approve a final dividend
for 2015 at the Annual General Meeting in May 2016.
Share consolidation
The Board proposed a share consolidation based on a
consolidation ratio of 11 new shares for 12 existing shares
due to the size of the special dividend relating to the sale
of the International division, and to maintain comparability
of share price and earnings per share before and after
payment of the special dividend. Shareholders approved
this on 29 June 2015.
Vesting of LTIPs
The Remuneration Committee considered and approved the
first vesting of the Direct Line Group LTIP on 9 November
2015, at 89.2% of the potential maximum award, which
reflected good progress against the objectives set at the time
of the IPO.
UK Corporate Governance Code
We, the Board of Direct Line Group, are committed to the
principles of the UK Governance Code issued by the Financial
Reporting Council. I am pleased to report that we have
complied with substantially all of the provisions of the UK
Corporate Governance Code (September 2014). You can
find further details in the Corporate Governance report.
The way we do business
The way we do business and our underlying values are central
to the Group’s success. Our Code of Business Conduct
governs the way we treat our stakeholders, and our values
determine our behaviours. Both determine how we do business
throughout the Group and define our corporate identity. They
also influence our business relationships and reputation, which
are key to our long-term success.
Yours sincerely
Our values
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.
Work together
Collaborate across all levels and across all functions; leverage
the skills, knowledge and experience, irrespective of hierarchy,
to deliver the best possible results; develop relationships based
upon trusting each other, partnerships and win-wins; recognise
and celebrate success.
Take ownership
Treat it like it’s OUR business; take the initiative, if you can
see a better way, go and make a difference; take decisions,
be accountable for your actions in whatever role you carry
out; take responsibility for your own personal development
and performance.
Say it like it is
Be real, authentic and true to self; 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.
Bring all of yourself to work
Be the best you can be, the real and whole you; celebrate our
diversity of skills, experiences and personalities; be a role model
to others, demonstrate ‘can do’ spirit, have fun and make this
a great place to be; be excited about our Company and our
future; believe in yourself, feel confident and empowered.
Michael N Biggs
Chairman
Dealing with suppliers of
goods and services and
business partnerships
We shall maintain the
highest possible standards
of integrity in business
relationships with suppliers
and partners by treating them
honestly and with respect,
and avoiding compromising
offers of gifts and hospitality.
Dealing with communities
and the environment
We shall contribute to the
social and economic well-
being of those communities
where we are an employer,
and encourage employees
to participate in projects
and initiatives to strengthen
those communities.
Dealing with competitors
We shall compete with
competitors honestly and
in accordance with the
relevant competition law.
Dealing with regulators
We shall maintain a
constructive and open
relationship with our regulators
to foster mutual trust, respect
and understanding, and will
not offer anything to officials in
return for favourable treatment.
www.directlinegroup.com 47
47
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Board of Directors
1
2
3
4
5
1 Mike Biggs (63), Chairman of the Board
(appointed April 2012) (N and R)
4 Jane Hanson (48), Non-Executive Director
(appointed December 2011) (A, B, C, I and +)
Biography
Mike is also Chair of the Nomination Committee. He has over 40
years’ experience of the UK and international financial services sector.
He is a respected figure in the insurance industry and well regarded
by City investors.
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 years 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 graduate of the University of York with a degree in Music,
and a Fellow of the Institute of Chartered Accountants in England
and Wales.
External appointments
Jane is Chair of Reclaim Fund Ltd and a Non-Executive Director
and Chair of the Board Risk Committee of Old Mutual Wealth
Management Limited. She is also an Independent Member of
the Fairness Committee at ReAssure Ltd.
She has her own financial sector consulting business, which provides
audit, enterprise risk management and corporate governance advisory
and consulting services. Jane is also a magistrate.
5 Sebastian James (49), Non-Executive Director
(appointed August 2014) (C, R and +)
Biography
Sebastian has been Group Chief Executive of Dixons Carphone plc
since 2014. He joined Dixons in April 2008 and held various roles,
including Group Operations Director, before becoming Group Chief
Executive in February 2012.
Before joining Dixons Retail, Sebastian was Chief Executive Officer
of Synergy Insurance Services Limited and subsequently gained wide
retail experience as Strategy Director responsible for developing and
implementing the turnaround strategy at Mothercare. After completing
an MBA at INSEAD and an MA at the University of Oxford, he started
his career at The Boston Consulting Group.
External appointments
Sebastian is Group Chief Executive of Dixons Carphone plc and
is also a trustee of the charities Save the Children and Dixons
Carphone Foundation.
Mike was previously Chairman of Resolution Limited, 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 has a Masters degree in History from the University of Oxford, and
is an Associate of the Institute of Chartered Accountants of England
and Wales.
External appointments
None
2 Paul Geddes (46), Chief Executive Officer
(appointed August 2009) (C)
Biography
Paul is Chief Executive Officer. He led one of the UK’s largest retail
banking businesses during a challenging period, improving its
customer and financial performance against peers. In 2009, this
experience singled him out as a Chief Executive who could turn
around Direct Line Group and lead its divestment from RBS Group.
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. He read Philosophy, Politics
and Economics at the University of Oxford, and is a Fellow of the
Chartered Institute of Bankers in Scotland.
External appointments
Paul is the Senior Independent Director of the Association of British
Insurers Board.
3 John Reizenstein (59), Chief Financial Officer
(appointed December 2010)
Biography
John is an experienced Chief Financial Officer and former banker.
He has extensive City and financial services experience.
John was previously an Executive Director at the Co-operative
Insurance Society, CIS General Insurance and The Co-operative Bank.
He was Chief Financial Officer of these organisations between 2003
and 2007, and subsequently Managing Director, Corporate and
Markets. Before this, John spent more than 20 years in investment
banking with UBS and Goldman Sachs. He is an Economics graduate
of the University of Cambridge.
External appointments
John is a trustee and Director of Farm Africa. He is also an alternate
representative of the Association of British Insurers on the Panel on
Takeovers and Mergers.
48
48 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
6
7
8
9
6 Andrew Palmer (62), Non-Executive Director
(appointed March 2011) (A, B, I, N, R and +)
8 Priscilla Vacassin (58), Non-Executive Director
(appointed September 2012) (B, N, R and +)
Biography
Andrew is Chair of the Audit Committee. He was Senior Independent
Director from the AGM in 2015 until the Group appointed Dr Richard
Ward on 18 January 2016. He has performed various senior roles
in the financial services and insurance industries. Additionally, he has
insight into corporate governance developments and best practice in
financial reporting. This comes largely through his membership of the
Financial Reporting Review Panel of the Financial Reporting Council.
In 2009, Andrew retired from Legal & General Group plc, where
he was the Group Finance Director. He is a Fellow of the Institute of
Chartered Accountants in England and Wales.
External appointments
Andrew is a Trustee of the Royal School of Needlework, a Trustee and
Treasurer of Cancer Research UK, and a Non-Executive Director of Royal
London Mutual Insurance Society Limited. He is also a member of the
Financial Reporting Review Panel of the Financial Reporting Council.
7 Clare Thompson (61), Non-Executive Director
(appointed September 2012) (A, B, C, I and +)
Biography
Clare is Chair of the Corporate Social Responsibility Committee
and the Investment Committee. She has extensive experience and
knowledge gained from roles across the professional services industry.
These include Lead Audit Partner at PwC, where she guided companies
through change and advised insurance organisations. In her later role,
she gained significant experience of general and life insurance.
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 graduate of the University of York with
a degree in Mathematics, and 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.
Biography
Priscilla is Chair of the Remuneration Committee. She has extensive
experience developing organisational values, and creating the
leadership, succession, development and remuneration structures
required to support corporate strategy. As she has worked as a
practitioner and an adviser, Priscilla understands the technical and
market complexity of remuneration.
Priscilla was most recently Group Human Resources Director at
Prudential plc, and a Non-Executive Director at the Ministry of
Defence. Priscilla has previously held senior human resources positions
in various financial services and customer-facing industries. These
include roles at Abbey National plc, where she was Executive
Director, Human Resources; BAA plc, where she was Group Human
Resources Director; and Kingfisher plc. She graduated in Law from
the University of North East London.
External appointments
Priscilla has her own search and consultancy business.
9 Dr Richard Ward (59), Non-Executive Director and Senior
Independent Director (appointed January 2016) (N and +)
Biography
Dr Richard Ward joined Cunningham Lindsey as Executive Chairman
in June 2014. Cunningham Lindsey is the leading global provider of
claims management and risk service solutions.
Prior to this, Richard was Chief Executive of Lloyd’s of London, from
2006 to 2013.
Richard previously worked for over ten years at the London-based
International Petroleum Exchange (“IPE”), the second largest energy
trading exchange, re-branded ICE Futures, as both Chief Executive
Officer and Vice-Chairman. Prior to the IPE, Richard held a range of
senior positions at British Petroleum and was Head of Marketing &
Business Development for energy derivatives worldwide at Tradition
Financial Services.
Richard has a 1st Class Honours degree in Chemistry, and a PhD
in Physical Chemistry from Exeter University.
External appointments
Richard is Executive Chairman of Cunningham Lindsey and Non-
Executive Chairman of Brit plc. He also serves as a Non-Executive
Director of Partnership Assurance Group plc and is a member of the
PRA Practitioner Panel, Bank of England.
Key:
(A) Audit Committee
(B) Board Risk Committee
(C) Corporate Social Responsibility Committee
(I) Investment Committee
(N) Nomination Committee
(R) Remuneration Committee
(+) Independent
www.directlinegroup.com 49
49
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Executive Committee
1
6
2
7
3
4
5
Paul Geddes chairs the Executive Committee. In addition to Paul
Geddes and John Reizenstein, the committee comprises the following:
4 Steve Maddock, Managing Director of Claims, Business Services
and Technology Services (joined 2010)
1 Jonathan Greenwood, Managing Director of Commercial
(joined 2000)
Experience and qualifications
Jonathan joined the Group in 2000 as Product and Pricing Director for
UK partnerships. After the Group acquired Churchill, Jonathan became
Commercial Director and then Managing Director of the Group’s
household and life businesses. Jonathan was appointed Managing
Director of Commercial in 2009.
2 Mike Holliday-Williams, Managing Director of Personal Lines
(joined 2014)
Experience and qualifications
Mike was previously Chief Executive Officer of RSA Group’s
Scandinavian businesses, Codan A/S and Trygg-Hansa. Before
joining RSA, Mike worked in the energy, telecoms and retail sectors.
He started his career at WHSmith plc, before moving to various
Centrica-owned businesses, including British Gas and Onetel. He
has also served as Managing Director of MORETH>N and holds
an EMBA from Ashridge Business School.
3 Simon Linares, Group Human Resources Director (joined 2014)
Experience and qualifications
Simon joined the Group in September 2014. He was previously
Group HR Director for O2, and responsible for all of Telefonica global
digital businesses. Before this, he held various senior global HR roles
at Diageo, including responsibility for Spain, Africa and several UK-
based leadership positions. Before moving into HR, Simon held several
commercial business roles in the fast-moving consumer goods and
financial services sectors.
Experience and qualifications
In addition to leading our Claims and Business Services divisions,
Steve is currently leading the management of our IT estate, while
Angela Morrison dedicates herself to our next generation of customer
systems programme. From 2004, Steve was Director of Strategic and
Technical Claims at RSA. He has over 20 years’ insurance industry
experience, including roles as Director of Claims and Customer
Service at Capita, and as Director of Operations at AMP. Steve holds
an MBA from the University of Reading, and is Chairman of the Motor
Insurers’ Bureau and Insurance Database Services Limited.
5 Angela Morrison, Chief Information Officer (joined 2010)
Experience and qualifications
Since completing the migration of systems from RBS Group, Angela
has been focusing on our next generation of customer systems. She
was previously Chief Information Officer at J Sainsbury and a member
of its Operating Board. She previously worked for ASDA/Wal-Mart.
Her roles included European Strategy Director; Chief Information
Officer through the ASDA/Wal-Mart integration; and e-Commerce
Director, which involved establishing ASDA’s home grocery business.
Angela holds a degree in Electrical and Electronic Engineering from
the University of Bristol.
6 Humphrey Tomlinson, General Counsel (joined 2011)
Experience and qualifications
Humphrey was previously Group Legal Director at RSA and is a
solicitor with over 25 years’ experience. His experience includes
advising on corporate and commercial matters, steering corporate
transactions in the UK and internationally, managing legal risk, and
dealing with corporate governance issues. Before joining RSA, he
worked at the City law firm, Ashurst Morris Crisp. He is a graduate
of the University of Oxford.
7 José Vazquez, Chief Risk Officer (joined 2012)
Experience and qualifications
José was previously Global Chief Risk Officer at HSBC Insurance.
Before joining HSBC, José held senior actuarial roles at Zurich
Insurance and was a consultant with KPMG in London. José is a
Mathematics graduate from Brunel University and a Fellow of the
Institute of Actuaries.
50
50 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Corporate governance report
This report explains the Board’s role and activities, and how
corporate governance operates throughout the Group.
• Board and Committee membership and succession planning
• The remuneration policy for Directors and senior executives
The UK Corporate Governance Code
Direct Line Insurance Group plc (the “Company”) has complied
with the UK Corporate Governance Code 2014’s principles
and provisions (the “Code”) throughout the financial year. The
exception is the recommendation contained in Provision E.1.1
of the Code that the Senior Independent Director should attend
sufficient meetings with major shareholders to listen to their
views. During 2015, the Board received regular updates
from the Company’s corporate brokers on the views of its
institutional shareholders and, in addition, the Group’s Investor
Relations team provided regular updates to the Board. It is
open to major shareholders to raise any issues they wish with
the Chairman, the SID and the Chair of the Remuneration
Committee. On this basis the Board is satisfied that it
understands the views of major shareholders and it was not
necessary for the SID to meet them. 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.
You can find details of how the Company applied the Code’s
principles and complied with its provisions in this report and
the Directors’ remuneration report. For more information about
the Code, visit the Financial Reporting Council’s website at
www.frc.org.uk .
Leadership
The Board
The Board’s main role 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, ensuring it is effectively
managed, that prudent controls are in place, and that risks
are assessed and managed appropriately. The Board sets the
Group’s strategy, and monitors management’s performance
and progress against the strategic aims and objectives.
The Board’s specific duties are set out in the Schedule
of Matters Reserved for the Board, which contains items
reserved for the Board to consider and approve, including:
• The Group’s strategic aims and objectives
• The annual operating and capital expenditure budgets
• Corporate governance matters
• Capital structure, financial reporting and controls, including
dividend policy
• The internal controls and risk-management system, including
the Group’s risk appetite statements
• Major capital projects, major investments and contracts that
are either materially strategic or above the Chief Executive
Officer’s delegated authority
In addition to the schedule of Matters Reserved, each Board
Committee has written terms of reference defining its role and
the standing authority delegated to it. You can find out more
about the Board Committees in the Board Committees’ section
from pages 58 to 69.
Board composition
As at the date of this report, the Board comprises the
Chairman, who was independent when appointed to the
Board; the Chief Executive Officer; the Chief Financial Officer;
and six independent NEDs. Every current Director served
throughout the reporting period, except for Richard Ward,
who was appointed to the Board on 18 January 2016.
You can find the names of the Directors as at the date of
this report, and their biographical information, on pages
48 and 49.
Glyn Jones, who was a NED and the SID, retired from the
Board at the end of the Annual General Meeting on13 May
2015. Following Mr Jones’ stepping down, Andrew Palmer
was appointed SID while the search for a new NED was
undertaken. Richard Ward was appointed SID on his
appointment to the Board.
Structure of the Board
The Board and its Committees have been established to
ensure that an appropriate balance of skills, experience,
independence, sector knowledge and diversity exists to
enable the Directors to discharge their duties and
responsibilities effectively.
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.
On behalf of the Board, the Nomination Committee assessed
the NEDs’ independence, skills, knowledge and experience as
part of its annual review of each Director’s performance. The
Board concluded that every current NED was independent,
continued to contribute effectively, and showed they were
committed to the role. The Nomination Committee’s work
during the year led to the appointment of Richard Ward as an
additional NED. It also resulted in changes to the membership
of the Committees. The Group announced these changes in
May 2015 and February 2016. You can find out more about
these activities and the Nomination Committee’s work during
the year on pages 66 to 67.
www.directlinegroup.com 51
51
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Board activities during 2015
At each scheduled meeting, the Board receives updates
from the Chief Executive Officer, Chief Financial Officer and
the Chief Risk Officer. The officers update the Board on the
operational performance against the agreed plan, financial
performance and risk management. The Board also has an
annual planner of agenda items. This ensures the Board
considers matters in a timely manner during the financial year.
During 2015, the Board’s areas of focus, challenge and
supervision included:
• Developing and challenging the Group’s strategic plan
• Overseeing the prudent management of the Group’s
capital, ensuring that capital reserves remain robust, while
enabling the return of surplus capital to investors through
special dividends
• Overseeing the change programmes and associated risks
relating to the IT migration from RBS Group. Furthermore,
the Board monitored risks relating to IT systems’ stability,
cyber security and the internal control environment
• Approving and monitoring a comprehensive programme
of investment in technology, organisational restructuring and
cultural change. This programme aims to improve customer
experience, making it easier to do business with the Group,
and helping the Group provide outstanding customer service
• Overseeing the management and reduction of the Group’s
cost base
• Overseeing a review of the Group’s governance
framework, including reviewing and approving
risk-based policies
• Encouraging management initiatives for cultural
transformation
• Overseeing the Group’s regulatory relationships and
preparations for implementing Solvency II
• Overseeing the sale of the International division, the
effect on shareholders and the distribution of the
proceeds to shareholders, and the share consolidation
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.
Corporate governance report continued
Chairman and Chief Executive Officer
The Board has agreed role profiles for the Chairman, Mike
Biggs, and the Chief Executive Officer, Paul Geddes. These
clearly define their roles and responsibilities. This is to ensure
no one person has unlimited powers of decision making.
The Chairman’s priority is leading the Board and ensuring
its effectiveness. The Chief Executive Officer’s priorities are
managing the Group, and delivering the Group’s strategy
and financial results.
Senior Independent Director
Richard Ward is the SID. The role of the SID is: to be a
sounding board for the Chairman; to act as an intermediary
for the other Directors when necessary; and to be available
to shareholders if they have any concerns they cannot resolve
through normal channels. His responsibilities also include
evaluating the Chairman’s performance annually.
NEDs
The NEDs objectively and constructively challenge
management. They also use their wider business experience
to help develop the Group’s strategy.
NEDs are initially appointed for a term of three years. They
will normally serve two fixed terms of three years. When
appropriate, they may be invited to serve up to a further three
years. The Nomination Committee nominates the Directors for
appointment. The Board then approves the appointments. NEDs
are subject to election or re-election annually at the Company’s
AGM. You can find the standard terms and conditions of the
NED appointments at www.directlinegroup.com .
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.
Conflicts of interest
The Company’s Articles of Association allow the Board
to authorise matters where there is, or may be, a conflict
between the Group’s interests and the direct or indirect
interests of a Director, or between the Director’s duties to
the Group and another person. This is in accordance with
the Companies Act 2006.
Each Director has a duty to avoid conflicts of interest. They
must declare any conflict of interest that could interfere with
their ability to act in the Group’s best interests.
The Board has authorised various conflicts 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
involves making sure a Director does not participate in a
relevant Board or Committee discussion or decision.
To do this, the Company Secretary maintains a register of
conflicts, and any conflicts that the Board has authorised.
The Board reviews this register regularly.
52
52 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
The Company Secretary attended all Board meetings. At its
discretion, the Board invited senior executives and external
advisers to attend Board meetings, and present on business
developments and governance issues.
This table sets out attendance at the scheduled meetings in 2015:
Direct Line Group’s approach to diversity
The Board carefully considered the diversity of its members
from various perspectives. It also sought to ensure that
Directors had the relevant knowledge, skills, experience
and, where necessary, independence to help the Group
deliver its strategy.
Scheduled
meetings1
Percentage
attendance
9 of 9
100%
The Company believes in the benefits of diversity. At the date
of this report, of the Board’s nine members, three are women.
However, while the Board will strive to consider diversity when
choosing new members, it is committed to appointing the most
appropriate candidates.
Chairman
Mike Biggs
Senior Independent Director
Andrew Palmer
Glyn Jones
NEDs
Jane Hanson
Sebastian James
Clare Thompson
Priscilla Vacassin
Executive Directors
Paul Geddes
John Reizenstein
9 of 9
4 of 4
9 of 9
9 of 9
9 of 9
9 of 9
9 of 9
9 of 9
100%
100%
100%
100%
100%
100%
100%
100%
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
appropriate training for the Directors. The Company Secretary
also maintains an annual training agenda for the Board and
its Committees.
A tailored induction programme, comprising 16 sessions,
was prepared for Richard Ward. The programme will focus
on the Group’s businesses, strategic and transformational
priorities, regulatory and governance frameworks, capital
and financial management, and risk framework.
The main Board training and development activities in the
year under review included:
• Training on topics including customer behaviour, the
Group’s investment portfolio, and cyber risk
• NED visits to operational business units to meet the
management teams and better understand how the business
operates. These included visits to the Human Resources,
Risk, Legal, Audit and Actuarial teams in Bromley
• Internal training workshops on Solvency II
• The Company Secretary updating the Board regularly
on corporate governance
• The Group’s brokers and financial advisers presenting
quarterly industry and market updates to the Board
• The Investor Relations team reporting regularly to the
Board on the Group’s relationship with institutional
investors and analysts
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.
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 pages 66 and 67.
The CSR Committee considers diversity as part of its ‘Proud
to be here’ work stream. This is to ensure the Group’s talent
pipeline remains diverse to meet future requirements. The
Group provides mentoring schemes and associated training
and development programmes for high-potential candidates.
You can find numerical data relating to the gender diversity
of the Board, senior managers and employees in the CSR
section on page 33.
Board effectiveness review
In 2015, the Board chose to conduct its effectiveness review
in-house. The Company Secretary designed and coordinated
the process. This involved agreeing a structured questionnaire
with the Chairman and Board members, distributing it to
stakeholders, collating responses, and preparing reports.
The Board and each of its Committees reviewed and
discussed these reports.
Relating to the Board, its Committees and individual Directors,
the questionnaire focused on:
• The flow of information, including the quality and sufficiency
of reports, management information and training
• The behaviour of, and interaction between, the Board or
Committee and management, including how much time they
spent on strategic matters; how much NEDs challenged the
Executive Directors; and the Board’s culture and composition
• Administration, including how many and how often
meetings occurred; paper volumes; the quality of systems
and processes; and Board and Committee support
The questionnaire also asked respondents to comment on aspects
they thought worked well in the 2014 review, and areas they
thought needed to improve.
The Chairman discussed the outcome of the effectiveness
review with the NEDs and Chief Executive Officer. The SID
gave feedback on the Chairman’s performance, with input
from his fellow NEDs.
www.directlinegroup.com 53
53
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Corporate governance report continued
Based on the questionnaire responses and resulting reports,
the Directors are satisfied that the Board and its Committees
operated effectively in 2015. The Directors are also satisfied
that they made significant progress in areas identified in 2014
as needing to improve. The Board and its Committees agreed
an action plan for improving further, which they will pursue
in 2016.
The Board has agreed that external facilitators will conduct
the 2016 effectiveness review.
Governance framework and structure
The Board is responsible for ensuring there is an appropriate
system of governance throughout the Group. This includes a
robust system of internal controls and a sound risk management
framework. The Group’s governance framework is detailed in
the High Level Control and System of Governance document.
The Board reviews this document annually.
The core elements are the:
• Matters Reserved to the Board and the Board Committees’
Terms of Reference
• Regulatory Governance Map
• Risk Appetite
• Group Policy Framework, which comprises policies that
the Board approves. Minimum Standards interpret these
policies into a set of operational requirements and these
are implemented throughout the Group
• Enterprise Risk Management Strategy and Framework. This
sets out the Group’s approach to managing risks robustly,
and owning and overseeing risks
• Executive Governance Framework, which outlines how
each business function is governed and details the authority
delegated to Executive Committee members
The diagram summarises the split of responsibilities for the
different parts of the Group’s governance framework.
Board approves
Board
High Level Governance framework,
risk appetite and Group Policies
are set by the Board, following
review by the Board Risk Committee,
for implementation by the Executive.
Policies are drafted by Executive
policy owners.
Board Risk
Committee approves
Board Risk Committee
Enterprise Risk Management framework
is approved by the Board Risk
Committee, following review by the
Risk Management Committee.
Risk Management
Committee approves
Risk Management Committee
Developed by the Executives within
the framework approved by the Board.
Minimum Standards are reviewed
by the Group’s Policy and Minimum
Standard owners’ review forum.
The Executive Governance Framework
and Minimum Standards are approved
by Executives within the Risk
Management Committee.
Policy owner approves,
subject to non-objection
from Risk Management
Committee
.
Matters Reserved
to the Board and
Board Committees’
Terms of Reference
High Level Control and System of
Governance document
Regulatory
Governance Map
Risk Appetite
Group Policies
ERM Strategy and Framework
Executive Governance Framework
Minimum Standards
Business unit and operational area implementation
54
54 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Board of Directors
Mike Biggs
Chairman
Audit Committee
Andrew Palmer
Chair
Board Risk
Committee
Jane Hanson
Chair
Corporate Social
Responsibility
Committee
Clare Thompson
Chair
Investment
Committee
Clare Thompson
Chair
Nomination
Committee
Mike Biggs
Chair
Remuneration
Committee
Priscilla Vacassin
Chair
Executive Committee
The Executive Committee is the principal management
committee that helps the Chief Executive Officer manage
the Group day to day. 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.
The diagram outlines the current executive management structure.
Board Committees
The Board has established various Committees to help meet
its responsibilities. Each Committee plays a vital role in
ensuring the Board operates efficiently and considers matters
appropriately. The diagram above details the names of the
Board Committees and Chairs, as at the date of this report.
Each Committee has separate terms of reference. The Board
reviews these annually. You can find details of each
Committee’s composition, attendance, role and focus on
pages 58 to 69.
The Chief Executive Officer
The Board is ultimately responsible for the Company’s success.
However, the Board has authorised Paul Geddes, the Chief
Executive Officer, to manage the Group’s day-to-day
operations and deliver its strategic objectives.
In turn, Paul Geddes has delegated certain elements of his
authority to Executive Committee members. This helps ensure
that senior executives are accountable and responsible for
managing their businesses and functions. Such delegation also
involves ensuring the senior executives have the appropriate
financial and other authorities needed to manage those
business areas.
Paul Geddes
Chief Executive Officer
Managing Director
Commercial
Jon
Greenwood
Managing Director
Personal Lines
Mike
Holliday-Williams
Managing Director
of Claims,
Business Services &
Technology Services
Steve Maddock
Currently also
leading our
IT estate
Chief Risk
Officer
José
Vazquez
Chief Financial
Officer
John
Reizenstein
General
Counsel
Humphrey
Tomlinson
Human Resources
Director
Simon
Linares
Chief Information
Officer
Angela
Morrison
Currently focusing
on the next
generation of
customer systems
www.directlinegroup.com 55
55
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Corporate governance report continued
Accountability
Financial and business reporting
Responsibility for preparing the Annual Report & Accounts
The Board is responsible for giving shareholders a fair,
balanced and understandable assessment of the Company’s
position and prospects. The Board is also responsible for
maintaining adequate accounting records, and ensuring
compliance with statutory and regulatory obligations.
The Group’s financial position is also covered in that section,
including a commentary on cash and investment levels,
reserves, currency management, insurance liability
management, liquidity and borrowings. Additionally, note 3
to the consolidated financial statements describes capital
management needs and policies and also covers insurance,
market, liquidity and credit risks which may affect the Group’s
financial position.
After making due enquiries, the Directors reasonably expect
that the Company and the Group have adequate resources to
continue in operational existence for at least 12 months from
the date of approval of the financial statements. Accordingly,
they have adopted the going concern basis in preparing the
financial statements.
Risk management and internal control
Assessing principal risks
The Directors confirm that they robustly assessed the principal
risks facing the Company, including risks that would threaten its
business model, future performance, solvency or liquidity. You
can find a description of these risks, and their management
or mitigation, on pages 28 and 29.
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-200-years likelihood period. The quantifications are
produced through stress and scenario analysis, and the internal
economic capital model. Each directorate’s bottom-up risk
identification and assessment supplements the MRA. The
MRA also plays a key role in developing the Own Risk and
Solvency Assessment (“ORSA”) and assessing the Group’s
strategic plan.
Viability statement
The Strategic report, on pages 1 to 45, 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 121
and sets out financial disclosures relating to the Group’s
principal risks. This covers insurance, market and credit;
and the Group’s approach to monitoring, managing and
mitigating exposures to these risks.
Every year and on a rolling basis, the Board considers
a 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.
You can find an explanation from the Directors about their
responsibility for preparing the financial statements in the
statement of Directors’ responsibilities on page 99. The
Company’s external Auditor explains its responsibilities
on page 105.
The Directors confirm that they consider that the Annual Report
& Accounts, taken as a whole, is fair, balanced and
understandable, and provides the information shareholders need
to assess the Group’s position and performance, business model
and strategy. In arriving at this conclusion, the Board was
supported by a number of processes, including the following:
• Management drafted the Annual Report & Accounts to
ensure consistency across sections, and a steering group
comprising a team of cross-functional senior management
provided overall governance and co-ordination
• A verification process, to ensure the content was
factually accurate
• Members of the Executive Committee reviewed drafts of
the Annual Report & Accounts
• The Company’s Disclosure Committee reviewed an
advanced draft
• The Audit Committee reviewed the substantially final
draft before consideration by the Board
The Board meets its responsibilities under the Code as follows:
• How the Company seeks to generate value over the long
term 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 follows below
• The Board’s arrangements for applying risk management
and internal control principles follow
• The Board has delegated the Audit Committee to oversee
managing the relationship with the Company’s external
Auditor. You can find details of the Committee’s role,
activities and relationship with the internal and external
auditors in the Audit Committee report on pages 58 to 60
Going concern
The Group has sufficient financial resources to meet its
financial needs, including managing a mature portfolio
of insurance risk. The Directors believe the Group is well
positioned to manage its business risks successfully in the
current economic environment.
The Finance review on pages 44 and 45 describes the
Group’s capital management strategy, which covers how it
measures its regulatory and economic capital needs, and
deploys capital.
56
56 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015 When reviewing the strategic plan, the Board considered the
Group’s prospects over the one and four-year periods that
the plan covered. This review includes reviews of solvency,
liquidity, assessment of principal risks and risk management.
The one-year planning period has greater certainty, so it was
used to set detailed budgets across the Group. Outcomes
for the four-year period are less certain. However, the plan
provides a robust planning tool for strategic decisions. The
Board recognises that uncertainty increases over time and,
therefore, future outcomes cannot be guaranteed or
accurately predicted.
Considering the Group’s current position, four-year strategic
plan and principal risks, the Board has a reasonable
expectation that the Company and the Group can continue
in operation and provide the appropriate degree of protection
to those that are, or may become, policyholders or claimants
in the period to 31 December 2019.
Risk management and internal control system
The Board oversees the Group’s risk management and internal
control system. It has complied with the Code by establishing
a continuous process for identifying, evaluating and managing
the principal risks the Group faces.
The Board has established a management structure with
defined lines of responsibility and clear delegation of authority.
This control framework cascades through the divisions and
central functions, detailing clear responsibilities to ensure the
Group’s operations have appropriate controls. This includes
controls relating to the financial reporting process.
The Group operates a Three Lines of Defence model. You can
find out more about this in the risk management section on
pages 26 and 27.
The Board, with the assistance of the Board Risk Committee
and the Audit Committee as appropriate, monitored the
Company’s risk management and internal control systems,
and reviewed their effectiveness. The monitoring and review
covered all material controls, including financial, operational
and compliance controls. The Board and its Committees are
overseeing the ongoing work to improve the performance
across the board of the Group’s IT systems, including focusing
on risks relating to IT systems’ stability, cyber security and the
internal control environment.
The Board was also supported in its review of the annual
Control Environment Certification process. As part of this,
each directorate self-assessed its risks and whether its key
controls were adequate and effective. The Risk and Group
Audit functions reviewed and challenged these findings. The
Group then combined the overall findings into a Group-level
assessment, which the Chief Executive Officer approved. The
system reported on the controls’ nature and effectiveness, and
other management processes that manage these risks.
The Board Risk Committee regularly reviews significant risks
and how they might affect the Group’s financial position;
comparisons to agreed risk appetites; and what the Group
does to manage risks outside its appetite.
The Group Audit function supports the Board by providing an
independent and objective assurance of the adequacy and
effectiveness of the Group’s controls. It brings a systematic
and disciplined approach to evaluating and improving the
effectiveness of its risk management, control and governance
frameworks, and processes.
The Directors acknowledge that any internal control system
can manage, but not eliminate the risk of not achieving business
objectives. It can only provide reasonable, not absolute,
assurance against material misstatement or financial loss.
On behalf of the Board, the Audit Committee regularly reviews
the effectiveness of the Group’s internal control systems. Its
monitoring covers all material controls. Principally, it reviews
and challenges reports from management, the Group Audit
function and the external Auditor. This enables it to consider
how to manage or mitigate risk in line with the Group’s
risk strategy.
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 70.
Relations 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.
The Executive Directors meet frequently with investors and
inform the Board about shareholder concerns. This gives
Directors the opportunity to discuss governance and strategy
with shareholders. The Chairman, SID and NEDs are available
to attend meetings with major shareholders at their request.
The Company’s 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.
Annual General Meeting
The Board sees the Company’s AGM as a good opportunity
for private shareholders to talk directly with the Board. All
shareholders can attend the AGM if they wish. All Directors
attended the AGM in 2015.
At the AGM, the Chief Executive Officer presents the Group’s
financial results. Next, the Chairman proposes the AGM’s
formal business. The AGM’s facilitators encourage
shareholders to ask questions about the meeting’s business. The
Chairman, the Committee Chairs and the remaining Directors
and members of the Executive team are also available to talk
with shareholders at the end of the meeting.
www.directlinegroup.com 57
57
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Committee reports
Audit Committee report
Andrew Palmer
Chair of the Audit Committee
The Audit Committee’s role
The Committee is responsible for overseeing and challenging
the effectiveness of the Group’s systems of financial and other
controls. It also monitors the work and effectiveness of the
Group’s internal and external auditors and actuaries.
The Committee has unrestricted access to management and
external advisers to help discharge its duties. It is satisfied that
in 2015 it received sufficient, reliable and timely information
to perform its responsibilities effectively.
Responsibilities
The Committee’s main responsibilities are to:
• Monitor the integrity of the Group’s financial statements
and any other formal announcement relating to its
financial performance
• Review and monitor the reserving process and recommend
the quarterly 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
• Monitor and evaluate the Group Audit function’s performance
• Monitor and manage the relationship with the External
Auditor, including agreeing the external audit fee, assessing
effectiveness, and managing any tender process for the
audit services contract
You can find the Audit Committee’s terms of reference at
www.directlinegroup.com .
Committee composition, skills and experience
The Committee comprises three independent NEDs: Andrew
Palmer, Jane Hanson and Clare Thompson. You can find their
biographies on pages 48 and 49.
On 13 May 2015, Glyn Jones stepped down as a NED
and a member of the Committee.
Note:
1. Attendance is expressed as the number of scheduled meetings attended out
of the number of such meetings possible or applicable to attend.
58
58 Direct Line Group Annual Report & Accounts 2015
All Committee members are members of the Institute of Chartered
Accountants in England and Wales. They also have recent and
relevant financial experience, enabling them to contribute diverse
expertise to the Committee’s proceedings. To keep their skills
current and relevant, in addition to Board training, members of
the Committee have received training by Deloitte LLP focused on
changes to the Code and in particular the new requirements
for the longer term viability statement.
Meetings
The Audit Committee held five scheduled meetings in 2015,
at appropriate times in the financial and regulatory reporting
and audit cycle. This table shows attendance at the
scheduled meetings:
Andrew Palmer (Chair)
Jane Hanson
Glyn Jones1
Clare Thompson
Scheduled
meetings
Percentage
attendance
5 of 5
5 of 5
2 of 2
5 of 5
100%
100%
100%
100%
Sub-committees of the Audit Committee met in May and
November 2015 to approve the Group’s Interim Management
Statements for the first and third quarters of 2015. The quorum
of both sub-committee meetings comprised Andrew Palmer,
Paul Geddes and John Reizenstein.
There were four additional meetings to consider outputs and
approve reports from the Solvency II programme.
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.
The Chair reports on matters dealt with at each Committee
meeting to the subsequent scheduled Board meeting.
Main activities during the year
At every scheduled Committee meeting, the Committee
receives reports on financial reporting, reserves, internal
controls, Group Audit and Solvency II. You can find out more
about this in the following sections.
Financial reporting
During the year, the Committee reviewed the preliminary
announcement of the Group’s 2014 financial results, the 2014
Annual Report & Accounts, and the 2015 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, impairment reviews, reserving provisions, unusual
transactions, clarity of disclosures and significant audit adjustments.
Direct Line Group Annual Report & Accounts 2015
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 performance,
business model and strategy.
When considering the Annual Report & Accounts for 2015, the
Committee focused on the significant risks and judgements which
could be material to the financial statements. These included:
Reserve valuation – The Committee reviewed the actuarial
best estimates of the level of reserves with external consultants.
Further information on reserves is given below.
Reinsurance recoverables – The Committee considered the
proposed methodology for an impairment provision.
Financial investments – The Committee considered reports
on the judgements applied to the carrying value of the Group’s
financial investments and the need for any impairment provision.
Goodwill and other intangible assets – The Committee
considered the carrying value of goodwill and other intangible
assets and whether any impairment provision was required.
Transformation projects – The Committee considered
major change projects including the IT migration from
RBS Group systems.
Internal control environment – The Committee considered
reports on the internal control environment and associated
mitigating actions/remedial action plans.
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. The Committee also discussed these matters
with Deloitte, the External Auditor.
Reserves
Every quarter, the Committee reviews and challenges the key
assumptions and judgements, emerging trends, movements,
and analysis of uncertainties underlying the actuarial best
estimate of technical provisions. At the same time, the
Committee considers and challenges the appropriateness of
the Chief Financial Officer’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 Committee approves annual plans for reviews of reserves,
informed by emerging internal and external issues.
It also considers an appropriate balance between internal and
external actuarial review. Consultants appointed to provide
actuarial reviews of reserves are subject to approval by the
Committee. The external actuarial review was carried out by
PricewaterhouseCoopers LLP for the Directors of Direct Line
Insurance Group plc and its relevant affiliates1.
After reviewing the actuarial best estimate and management’s
best estimate of reserves, the Committee recommends them to
the Board.
Note:
1. The relevant affiliates are U K Insurance Limited and Churchill Insurance
Company Limited.
Internal control and Group Audit
During the year, the Audit Committee reviewed the adequacy
and effectiveness of the Group’s internal control systems.
The Group’s Financial Reporting Control Framework (“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 Chief Financial Officer is responsible
for the FRCF on a daily basis.
During 2015, the Audit Committee received regular reports on
the FRCF and the testing of it. Part of those reports focused on
control deficiencies, and mitigating and remedial actions taken.
The Committee considered the Group’s internal controls and
processes for identifying and responding to risks.
The Audit Committee oversees Group Audit’s work and seeks
to ensure it adopts industry best practice appropriately. The
Group Head of Audit’s primary reporting line is to the Chair of
the Committee. The secondary reporting line – for day-to-day
administration – is to the Chief Financial Officer. Group Audit
gives the Committee independent and objective reports on
the appropriateness and effectiveness of the Group’s internal
controls and governance frameworks. The Committee approves
Group Audit’s annual plan of reviews, and receives quarterly
reports detailing internal audit activity, key findings,
management responses, and proposed action plans. Group
Audit also monitors that these actions are completed. The
Committee also approves the Group Audit Charter.
During the year, the Committee assessed whether the Group
Audit function was effective and concluded that it was. This
included the Committee satisfying itself that the Group Audit
function has the appropriate resources. The Committee also
continued monitoring ongoing actions from 2014’s external
quality assessment review.
Solvency II
During the year, the Committee held four additional meetings
to consider matters relating to the Solvency II governance and
Internal Model Approval Process (“IMAP”) application. At
those meetings, the Committee considered:
• Reports to the PRA for the preparatory reporting stage of
Pillar III as at 31 December 2014 and 30 September 2015
• Reviews by the external auditor, mandated by the PRA
for the Pillar III reports for 31 December 2014
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.
The Committee monitored the performance of the work of and
relationship with the External Auditor during the year. Deloitte
LLP were appointed as Auditor to the Group at IPO in 2012.
Deloitte LLP, as the auditor of the RBS Group, audited the
Group as a division of RBS between 2000 and 2012. The
Company cannot reappoint Deloitte LLP as its auditor after June
2023. This complies with the transitional rules for audit tendering
and auditor rotation, as set out in the Competition & Markets
Authority’s (“CMA”) Order and the EU Audit Regulation.
www.directlinegroup.com 59
59
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Committee reports continued
Deloitte LLP must regularly rotate the partner it engages on the
audit. The current partner is David Rush. He will be rotated
after completing the 2015 year-end audit. This complies with
the Group’s Minimum Standard on making sure the external
audit remains independent.
The Committee has fully considered how the EU Audit Regulation
and the CMA’s Order on mandatory audit contract tendering
affect the Group. Under the CMA Order, the Group will conduct
a competitive tender and enter into a new audit services contract
before June 2023. The Committee will tender the audit contract
for the year ended 31 December 2021 at the latest. The
Committee considers that this is in the best interests of the
shareholders as it will coincide with the next audit partner’s
rotation and therefore limit operational disruption during a time
of significant regulatory and organisational change over the next
few years. However, in conjunction with the results of the annual
assessment of the Auditor’s effectiveness, this position will be
reviewed again in 2016.
There are no contractual obligations restricting the Company’s
choice of external auditor and no auditor liability agreement
has been entered into. Equally, any recommendation to
reappoint Deloitte LLP as auditor of the Company depends
on continued satisfactory performance.
Auditor independence and non-audit services policy
The Group has an Independence of External Audit minimum
standard. This established parameters for preventing or mitigating
anything that compromises the External Auditors’ independence or
objectivity, by virtue of them providing the Group with non-audit
services. The Committee reviews and refreshes the standard
annually to make sure it remains appropriate.
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.
During the year, the Committee approved fees of £0.9 million
to Deloitte LLP for services unrelated to audit work. The
following is a breakdown of fees paid to Deloitte LLP for the
year ended 31 December 2015.
Audit fees1
Non-audit fees
Total fees for audit
and other services
Proportion
67.9%
32.1%
Fees
£m
1.9
0.9
2.8
The non-audit fee of £0.9 million relates to audit-related
assurance services, tax services and an IT project.
The Committee reviewed how the Group applied its minimum
standard on audit and non-audit services in 2015. It is satisfied
that the Group has adequate procedures to make sure the
External Auditors are independent and objective.
Effectiveness of the external audit process and
reappointing Deloitte as External Auditors
In 2015, the Audit Committee assessed the External Auditors’
effectiveness. This was in addition to regularly questioning the
Auditor during its meetings. The Audit Committee assessed
the Auditor through: a detailed questionnaire which key
stakeholders completed; discussing matters with the
Chief Financial Officer; formally reviewing Deloitte LLP’s
independence; and assessing whether it fulfilled the
agreed audit plan.
The Financial Reporting Council’s Audit Quality Review team
selected to review the audit of the 2014 Group financial
statements as part of their 2015 annual inspection of audit
firms. The focus of the review and their reporting was on
identifying areas where improvements were required rather
than highlighting areas performed to or above the expected
level. The Chairman of the Audit Committee received a full
copy of the findings of the Audit Quality Review team and
discussed these with Deloitte. The Committee confirms that
there were no significant areas for improvement identified
within the report. The Committee is also satisfied that there
is nothing within the report which might have a bearing on
the audit appointment.
The Committee, after taking into account all of the information
available, concluded that Deloitte LLP had performed its
obligations effectively and appropriately as External Auditor
to the Group.
The Audit Committee subsequently recommended to the Board
that the Group reappoint Deloitte LLP as External Auditor. The
Group will put a resolution regarding this to the shareholders
at the 2016 AGM.
The Audit Committee’s effectiveness
The Company Secretary facilitated the Committee’s review
of its effectiveness during the year. The Company Secretary
also prepared a report based on responses from Committee
members and other stakeholders to a pre-agreed
questionnaire. After reviewing and discussing the report, the
Committee concluded that it was operating effectively, and
has access to sufficient resources to perform its duties.
The Board reviewed and approved this report on
29 February 2016.
Andrew Palmer
Chair of the Audit Committee
Note:
1. You can find further information in note 11 to the consolidated
financial statements.
60
60 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Board Risk Committee report
Jane Hanson
Chair of the Board Risk Committee
The Board Risk Committee’s role
The Committee is responsible for overseeing and advising
the Board on the Group’s current and potential future risk
exposures, and its strategic approach to managing risk. The
Committee recommends risk appetite and tolerance levels to
the Board, and supports the Board in promoting a risk-aware
culture across the Group.
The Committee has unrestricted access to management and
external advisers to help discharge its duties. It is satisfied
that during 2015 it received sufficient, reliable and timely
information to perform its responsibilities effectively.
Responsibilities
The Committee’s main responsibilities are to:
Committee composition, skills and experience
The Committee comprised four independent NEDs: Jane
Hanson, Andrew Palmer, Clare Thompson and Priscilla
Vacassin. You can find their biographies on pages 48
and 49.
Meetings
The Board Risk Committee held six scheduled meetings
in 2015. One of these was a joint meeting with the
Remuneration Committee. Additionally, six sub-committee
meetings were held to consider Solvency II and IMAP matters.
This table shows attendance at the scheduled meetings:
Jane Hanson (Chair)
Andrew Palmer
Clare Thompson
Priscilla Vacassin
Scheduled
meetings
Percentage
attendance
6 of 6
6 of 6
6 of 6
6 of 6
100%
100%
100%
100%
The Chief Executive Officer, Chief Financial Officer,
Chief Risk Officer, Group Head of Audit, General Counsel
and a representative from the External Auditor are invited to
attend meetings. In addition to regular one-to-one meetings
with the Chair, the Chief Risk Officer also met privately with
the Committee.
The Board Risk Committee also invites the Director of
Compliance and Regulatory Risk, Director of Financial Risk and
Enterprise Risk Director to appropriate sections of its meetings.
• Consider and recommend the Group’s risk appetite,
framework and tolerance to the Board for its approval
The Chair reports on matters dealt with at each Committee
meeting to the subsequent scheduled Board meeting.
• Review and approve the design and implementation of
the Enterprise Risk Management Framework, and the
procedures for monitoring its adequacy and effectiveness
• Consider the Group’s risk profile relative to current and
future Group strategy, and to risk appetite
• Approve the Risk Management and Compliance
Operating Plans
• Review the governance of, and methodology and
assumptions used in, the Group’s internal economic
capital model and approval of changes to the model
and associated policies and minimum standards
• Review and recommend the ORSA process and report
to the Board
• Review and recommend the High Level Control and
System of Governance Framework to the Board
• Review the Group’s procedure for detecting internal
and external fraud
You can find the Board Risk Committee’s terms of reference
at www.directlinegroup.com .
Main activities during the year
Risk monitoring
At each of its scheduled quarterly Committee meetings, the
Committee receives a report from the Chief Risk Officer. This
report highlights the outputs of regular risk monitoring and
provides further detail of specific issues to the Committee.
The Committee received regular reports regarding the three
strategic risk appetite statements: maintain capital adequacy;
stable and efficient access to funding and liquidity; and
maintain stakeholder confidence. The Committee also received
reports on the risks pertaining to the lower level risk appetite
statements that support the three main statements. The
Committee monitored the Group’s exposure to these appetites,
and assessed the drivers that affect its risk appetite status.
The Committee robustly assessed the principal risks facing
the Company, which you can find listed on pages 28 and 29.
The Committee achieved this by reviewing and challenging the
Group’s MRA in the context of the Group’s risk appetite.
On behalf of the Board, the Committee also monitored the
Company’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 self-
assessments. These assessments were subject to challenge
by the Risk and Group Audit functions.
www.directlinegroup.com 61
61
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Committee reports continued
Additionally, the Committee considered more detailed subjects
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
IMAP; and risk governance. The Committee also requested
specific reviews of areas of the risk and control environment.
Compliance and regulatory risk
During the year, the Committee considered the Group’s
compliance with regulatory requirements including conduct
and financial crime. In particular, the Committee reviewed
how the PRA’s Senior Insurance Managers Regime and the
FCA’s Approved Persons regime would affect the Group.
The Committee also reviewed the outputs from conduct and
compliance assurance activity, including approving the
Annual Assurance Plan.
Additionally, the Committee monitored the Group’s actions
relating to a financial promotions assurance review; and the
management of ongoing regulatory interactions, in particular
with the FCA and the PRA.
The Committee received regular reports on the Group’s whistle-
blowing process; and the Group’s actions to prevent financial
crime, including review of the Annual Financial Crime Report.
Operational risk
The Committee considered and monitored the risks associated
with the migration of the Group’s IT infrastructure away from
RBS Group. The Committee monitored the Company’s risk
management and internal control systems, and reviewed their
effectiveness. The monitoring and review covered all material
risks, including financial, operational and compliance,
reviewing the net risk position after the operation of controls,
and also considered the effectiveness of any associated
mitigating actions. The Committee is overseeing the ongoing
work to improve the performance across the board of the
Group’s IT systems, including focusing on risks relating to IT
systems’ stability, cyber security and the internal control
environment.
The Committee also received regular updates on the Group’s
major change programmes, including the next generation of
customer systems, and considered progress towards the
planned significant change to the Group’s IT capabilities,
including the development of new technology and new
digital tools.
The Committee considered the Group’s broader operational
risk control environment and commissioned reviews by the Risk
function on controls relating to major third-party suppliers and
the execution of pricing changes. In addition, the Committee
considered the Group’s cyber risk assessment and associated
controls, as well as the governance structures across the Group.
Financial risk
At each meeting, the Committee monitored the Group’s
performance against the financial risk appetite through the
Chief Risk Officer’s report. The Committee also considered
risks in the strategic plan against risk appetite.
As part of this, the Committee considered the stress and scenario
testing plan, and monitored and challenged the test results.
Solvency II and IMAP
One of the Committee’s main considerations in 2015 was
preparing for the implementation of Solvency II. This is the
European Insurance Industry’s new framework for ensuring
capital adequacy. It involves using a forward-looking risk
assessment based on ORSA principles. The Committee
also monitored and challenged progress on the Group’s
IMAP application.
During the year, the Committee reviewed and considered
Solvency II matters, including:
• The 2015 IMAP validation framework, scope and process,
including an independent assessment and the resolution of
validation issues and delivery against regulatory deadlines
• The Group’s Solvency Capital Requirement (“SCR”),
including the key assumptions and dependencies within the
calculation methodology such as the materiality limits and
the approach to catastrophe modelling
• Governance around the calculation of the Standard
Formula, and the justification of this capital requirement
including a comparison to the IECM SCR
• Approval of the ORSA including its alignment to the
business planning process
• The ongoing application of, and controls over, the IECM
including recommendation for Board approval of the
defined management actions and the validation approach
for 2016
The Committee also received comprehensive training on
the requirements of Solvency II.
Risk governance
Every year, the Committee reviews and approves the Enterprise
Risk Management Framework, which includes the Group risk
policies and minimum standards. The Committee reviewed
and challenged each Group policy and recommended the
final versions 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 Plan. It also reviewed
an ‘Assessment of Risk Behaviours and Attitudes’ across the
Group, which is part of an ongoing process to drive continued
improvement in these areas by providing feedback on current
state, highlighting areas of good practice and areas for focus.
Additionally, the Committee held a Risk Strategy day. During
the event, the Committee considered the Group’s approach
to the management of risk, the risk oversight model and the
operation of the Three Lines of Defence model in the Group.
62
62 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015 Remuneration
During the year, the Board Risk and Remuneration Committees
held a joint meeting. This was to ensure the Group’s
remuneration arrangements were still appropriate in the light
of regulatory developments and did not encourage excessive
risk-taking. As part of this review, the joint Committee also
considered the Group’s preparedness for Solvency II. This
followed published requirements, including how the Group
would assess the performance of individuals in Control
Functions. This Committee also monitored how incentive
schemes operated for roles in the insurance sales and service
contact centres, and for technicians and support staff in the
UK Assistance Accident and Repair Centres.
The Board Risk Committee’s effectiveness
The Company Secretary facilitated the Committee’s review
of its effectiveness during the year. The Company Secretary
also prepared a report based on responses from Committee
members and other stakeholders to a pre-agreed
questionnaire. After reviewing and discussing the report,
the Committee concluded that it was operating effectively,
and has access to sufficient resources to perform its duties.
The Board reviewed and approved this report on
29 February 2016.
Jane Hanson
Chair of the Board Risk Committee
Corporate Social Responsibility
Committee report
Clare Thompson
Chair of the Corporate Social Responsibility Committee
The Corporate Social Responsibility Committee’s role
The CSR Committee oversees and advises on how the Group
conducts its business responsibly. This includes matters relating
to environmental, employee engagement and wellbeing,
community involvement, and ethics.
Responsibilities
The Committee’s main responsibilities are:
• Approving the Group’s CSR strategy
• Reviewing the Group’s performance relating to CSR matters
• Assessing the Group’s role in society
Committee composition
The Committee comprised three independent NEDs: Clare
Thompson, Jane Hanson and Sebastian James. Paul Geddes,
Chief Executive Officer, and Angela Morrison, Chief
Information Officer, are also Committee members.
You can find their biographies on pages 48 to 50.
Meetings
The CSR Committee held three scheduled meetings in 2015.
This table shows attendance at the scheduled meetings:
Clare Thompson (Chair)
Paul Geddes
Jane Hanson
Sebastian James
Angela Morrison
Scheduled
meetings
Percentage
attendance
3 of 3
3 of 3
3 of 3
3 of 3
3 of 3
100%
100%
100%
100%
100%
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.
www.directlinegroup.com 63
63
www.directlinegroup.comStrategic reportGovernanceFinancial statements
The CSR Committee‘s effectiveness
The Company Secretary facilitated the Committee’s review
of its effectiveness during the year. The Company Secretary
also prepared a report based on responses from Committee
members and other stakeholders to a pre-agreed
questionnaire. After reviewing and discussing the report,
the Committee concluded that it was operating effectively,
and has access to sufficient resources to perform its duties.
The Board reviewed and approved this report on
29 February 2016.
Clare Thompson
Chair of the CSR Committee
Committee reports continued
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 – Mike Holliday-Williams
• Proud to be here – Simon Linares
• Being recognised as part of our communities –
Jon Greenwood
• Reduce, Reuse and Recycle – Steve Maddock
You can find out more about the Group’s CSR approach
and priorities in the CSR section on pages 30 to 33.
Main activities during the year
The Committee monitors the implementation of the CSR strategy
through regular updates on the different focus areas. It
challenges the robustness of the targets in relation to each
strand. It receives regular updates on each element of the CSR
strategy and at each of its meetings the Committee receives a
report on developments in CSR.
Helping to make our society safer
During the year, the Committee held a strategy session to
consider how the Group could best use its expertise and
experience to reduce deaths and life-changing injuries on the
UK’s roads. The overall aim is to cut deaths in the first 1,000
miles of driving to zero, by engaging young drivers and
helping them to drive more safely. The Committee received
regular progress reports on, and provided valuable insight into,
this initiative. You can find further details on this initiative and
the manifesto in the CSR section on page 31.
Proud to be here
The primary objective of this strand was to improve employee
engagement in order to support a key enabler of the Group’s
2015 strategy. The KPIs for this element are linked to the
People Strategy and focus on employee engagement and
wellbeing. During the year the Committee discussed and
challenged the proposed targets and the focus of the work
stream. It was agreed that the focus should be on (i) pride in
working for the Group; (ii) telling others that the Group is a
great place to work; and (iii) employee wellbeing.
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
main Group locations. The main targets which had been
agreed related to volunteering, fund raising and matched
payroll giving.
The ‘One Day’ volunteering initiative and Community
Cashback scheme were considered to be the two areas
with the greatest potential for impact.
Reduce, Reuse and Recycle
This strand of the strategy considered energy use, waste
management and resource use within our operations as well
as environmental matters in the Group’s supply chain. Key
objectives related to a reduction in greenhouse gas emissions
and diverting waste from landfill.
64
64 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Investment Committee report
Meetings
The Investment Committee held four scheduled meetings in
2015. This table shows attendance at the scheduled meetings:
Clare Thompson (Chair)
Jane Hanson
Glyn Jones1
Andrew Palmer
Scheduled
meetings
Percentage
attendance
4 of 4
4 of 4
2 of 2
4 of 4
100 %
100 %
100 %
100 %
Clare Thompson
Chair of the Investment Committee
The Investment Committee’s role
The Committee is responsible for overseeing how the Group
develops its investment strategy. It also oversees the management
and performance of the Group’s investment portfolio.
Responsibilities
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
The Chief Executive Officer, Chief Financial Officer, Chief Risk
Officer, Director of Investment Management and Treasury,
and Director of Financial Risk are invited to attend Investment
Committee meetings. The Chair reports on matters dealt with
at each Committee meeting to the subsequent scheduled
Board meeting.
Main activities during the year
Investment strategy
After considering and challenging, the Committee
recommended to the Board the following material changes
to the Group’s investment strategy. The Board approved the
changes during 2015.
• A revised minimum requirement for access to liquidity
in stressed business or economic conditions
• Consider and approve material changes to the risk
• The introduction of three new asset mandates. Two
framework that underpins investment activity, and any
proposals to change the operating model. This typically
relates to how outsource service providers are used
• Review global financial market developments and changes
to the regulatory environment, and consider the ongoing
appropriateness of investment activities in light of such
developments
mandates will invest in global credit and subordinated
financial credit respectively, and the third mandate will
invest in Sterling commercial real estate loans, a new asset
class for the Group’s investment portfolio
• Changes to benchmark allocations for various existing asset
classes including gilts, investment-grade credit, high-yield
credit, securitised credit and investment property
• Monitor the results from investment activities, namely
• A revised investment objective for existing investment-grade
adequacy of financial results delivered, compliance with
agreed risk tolerances and external service provider
performance. The Committee also ensures that any material
breaches are reported to the Board Risk Committee
Committee composition, skills and experience
The Committee comprised three independent NEDs: Clare
Thompson, Jane Hanson and Andrew Palmer. You can find
their biographies on pages 48 and 49.
Clare Thompson was appointed Chair of the Committee on
13 May 2015, after the AGM and when Glyn Jones stepped
down as a NED and Committee member.
fixed-income mandates
Risk framework and operating model
In October, the Committee agreed to proposals to move
custody and middle-office services to a new provider. During
the year, the Committee reviewed the credit exposure limits
framework and agreed changes to issuer and concentration
limits. It also agreed to limited changes to commercial property
guidelines during the year. This gave the Group some flexibility
to invest in property that needs development or major
refurbishment before letting.
Note:
1. Attendance is expressed as the number of scheduled meetings attended
out of the number of such meetings possible or applicable to attend.
www.directlinegroup.com 65
65
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Committee reports continued
Monitoring investment activity and performance
The Committee monitored the performance of investments every
quarter. It also received reports from the Director of Investment
Management and Treasury on various matters. These included:
key market developments; financial results from investment
activity; investment performance versus benchmark for internally
and externally managed portfolios; operational performance
by the custodian and other service providers; and compliance
with risk limits and internal delegated authorities. The
Committee also received presentations from Investment
Managers on their performance against benchmark.
Nomination Committee report
Solvency II
The Committee examined progress on initiatives linked to
preparing for Solvency II, notably:
Mike Biggs
Chair of the Nomination Committee
• Preparing a liquidity plan and contingent management
actions
• Developing various asset and derivative reports to submit to
the PRA and European Insurance and Occupational
Pensions Authority
• Restructuring the securitised credit portfolio to meet Solvency
II requirements
The Investment Committee’s effectiveness
The Company Secretary facilitated the Committee’s review of
its effectiveness during the year. The Company Secretary also
prepared a report based on responses from Committee
members and other stakeholders to a pre-agreed
questionnaire. After reviewing and discussing the report, the
Committee concluded that it was operating effectively, and has
access to sufficient resources to perform its duties.
The Board reviewed and approved this report on
29 February 2016.
Clare Thompson
Chair of the Investment Committee
The Nomination Committee’s role
The Committee is responsible for keeping 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.
Responsibilities
The Committee’s main responsibilities are:
• Considering and recommending to the Board matters
regarding appointment of Directors, membership and
chairmanship of Board Committees
• Succession planning for Directors and other senior
executives, accounting for the skills and expertise the Group
needs to deliver its strategy
• Keeping under review the leadership needs of the Group
• Reviewing the NEDs continued independence
• Considering and recommending to the Board Directors’
annual re-election and reappointment at the end of their
term in office
You can find the Nomination Committee’s terms of reference at
www.directlinegroup.com .
Committee composition
The Committee comprised the Chairman, Mike Biggs, and two
independent NEDs, Andrew Palmer and Priscilla Vacassin. You
can find their biographies on pages 48 to 49.
Priscilla Vacassin was appointed as a Committee member on
13 May 2015, when Glyn Jones stepped down as a NED
and Committee member.
Richard Ward was appointed a member of the Committee on
25 February 2016.
Meetings
The Nomination Committee held three scheduled meetings in
2015. It also held additional meetings to deal with
membership of the Board’s Committees and the search for the
new SID.
66
66 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Electing and re-electing Directors
Before the proposed re-election of Directors at the 2015
AGM, the Committee reviewed the independence of NEDs.
It concluded that Jane Hanson, Sebastian James, Andrew
Palmer, Clare Thompson and Priscilla Vacassin were all
independent within the Code’s meaning. Mike Biggs was
independent when appointed as Chairman. The Committee
recommended to the Board and shareholders to re-elect all
serving Directors at the Company’s 2015 AGM.
Diversity
The Group celebrates the diversity of its workforce. It seeks
to recruit the best candidates for all positions throughout the
business, whatever their gender. At the date of this report,
three of the Group’s nine Directors are women, which equates
to 33% of the Board. This is 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 benefit of diversity. The Nomination
Committee has encapsulated in its terms of reference a
requirement to consider candidates for appointment to the
Board on merit, against objective criteria and with due regard
to diversity, including gender diversity.
You can find out more about the Group’s approach to diversity
in the CSR section on page 33.
The Nomination Committee’s effectiveness
The Company Secretary facilitated the Committee’s review
of its effectiveness during the year. The Company Secretary
also prepared a report based on responses from Committee
members and other stakeholders to a pre-agreed
questionnaire. After reviewing and discussing the report, the
Committee concluded that it was operating effectively, and
has access to sufficient resources to perform its duties.
The Board reviewed and approved this report on
29 February 2016.
Michael N Biggs
Chair of the Nomination Committee
This table shows attendance at the scheduled meetings:
Mike Biggs (Chair)
Glyn Jones1
Andrew Palmer
Priscilla Vacassin1
Scheduled
meetings
Percentage
attendance
3 of 3
2 of 2
3 of 3
1 of 1
100%
100%
100%
100%
The Chief Executive Officer is invited to attend Nomination
Committee meetings. The Human Resources Director is also
invited to attend appropriate sections of the Nomination
Committee meetings. The Chair reports on matters dealt with
at each Committee meeting to the subsequent scheduled
Board meeting.
Main activities during the year
Board composition
During the year, the Committee: considered the Board’s skills
and experience; reviewed the structure, size and composition
of the Board; reviewed the membership and chairmanship of
the Board’s Committees; and reviewed NEDs’ letters of
appointment, terms of appointment and time commitment.
Succession planning
The Committee acknowledges the importance of Board and
executive succession planning, monitoring its progress as a
standing agenda item at each of its scheduled meetings and
providing guidance on executive succession planning to
management.
Board changes
Glyn Jones stepped down from the Board following the AGM
on 13 May 2015, due to his increasing responsibilities as
Chairman of other listed companies. On 18 January 2016,
the Group appointed Richard Ward as a NED of the
Company and SID.
Board appointment and reappointment process
The Committee oversaw the process to appoint Richard Ward
as a NED and SID. The Committee reviewed the Board
members’ expertise and experience. It then produced a
detailed brief and engaged external search consultants, JCA
Group, to find suitable candidates.
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.
JCA Group 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
Richard Ward as a NED to the Board.
As Richard Ward was appointed since the last AGM, he will
submit himself for election at the Company’s 2016 AGM. He
is considered independent within the Code’s meaning.
Note:
1. Attendance is expressed as the number of scheduled meetings attended out
of the number of such meetings possible or applicable to attend.
www.directlinegroup.com 67
67
www.directlinegroup.comStrategic reportGovernanceFinancial statements
In addition, the Committee actively interacts with the Audit
Committee and Board Risk Committee when considering the
setting of targets and payouts. As part of this, the Committee
receives reports from the Chairs of those Committees at least
twice a year. The Chair of the Audit Committee serves on the
Committee. The Chair of the Board Risk Committee attended
on three occasions.
The Chief Executive Officer, Human Resources Director and
senior representatives of the Human Resources function are
invited to attend Remuneration Committee meetings. FIT
Remuneration Consultants LLP, who act as independent
advisers to the Committee, are also invited to attend
Remuneration Committee meetings. The Chair reports on
matters dealt with at each Committee meeting to the
subsequent scheduled Board meeting.
Main activities during the year
Annual Incentive Plan
During the year, the Committee monitored the operation of the
Annual Incentive Plan (“AIP”). For the 2014 financial year, this
involved assessing the Group’s performance against the targets
that the Committee set at the start of the year. It also received
reports from the Chairs of the Audit Committee and Board Risk
Committee about whether the Group had achieved the
required performance within risk appetite. The Committee
concluded that no clawback of awards was required in 2015.
For the 2015 financial year, the Committee approved the
performance metrics and monitored performance against them.
The Committee also discussed and challenged the AIP’s
performance metrics for the 2016 financial year and,
subsequent to the year end, approved the metrics.
Long-Term Incentives
In 2015, the first awards, made in November 2012 under the
Direct Line Insurance Group 2012 Long-Term Incentive Plan
(“LTIP”), vested. These awards were made shortly after the IPO,
and had two performance metrics based on RoTE and TSR.
After assessing performance against these metrics, the awards
vested at a level of 89.2%. Before vesting, the Committee
considered the LTIP’s financial and risk underpins. The
Committee considered whether to operate the malus
provisions. You can find out more about this in the Directors’
remuneration report on pages 70 to 95.
The Committee also determined the quantum of awards in
2015 under the LTIP in view of business and individual
performance.
The Committee advised and supported RBS Group when it
was assessing the Group’s performance for the purpose of LTIP
awards it had made. The awards were made under an RBS
Group LTIP scheme to Direct Line Group employees over
Direct Line Group shares prior to the IPO.
Committee reports continued
Remuneration Committee report
Priscilla Vacassin
Chair of the Remuneration Committee
The Remuneration Committee’s role
The Committee is responsible for setting and overseeing how
the Group implements its remuneration policy. The Committee
oversees the level and structure of remuneration arrangements
for senior executives, approves share incentive plans, and
recommends them to the Board and shareholders. Where
applicable, it also oversees share plan changes that need
shareholder approval.
Responsibilities
The Committee’s main responsibilities are:
• Setting the remuneration policy for the Executive Directors
and Board Chairman and monitoring its operation
• Recommending and monitoring the level and structure of
remuneration for senior executives
• Considering how the Group’s strategy or performance
might affect its remuneration policy
• Approving the Group’s remuneration governance framework.
This includes approving the design and target of any
performance-related pay arrangements, and liaising with the
Board Risk and Audit Committees where appropriate
• Reviewing the design of all share incentive plans for the
Board and shareholders to approve
You can find the Remuneration Committee’s terms of reference
at www.directlinegroup.com .
Committee composition, skills and experience
The Committee comprised three independent NEDs: Priscilla
Vacassin, Sebastian James and Andrew Palmer, and the
Chairman of the Board, Mike Biggs. You can find their
biographies on pages 48 and 49.
Meetings
The Remuneration Committee held five scheduled meetings in
2015. One was a joint meeting with the Board Risk
Committee to discuss matters relating to overlapping remits
between the two Committees. This table shows attendance at
the scheduled meetings:
Priscilla Vacassin (Chair)
Mike Biggs
Sebastian James
Andrew Palmer
Scheduled
meetings
Percentage
attendance
5 of 5
5 of 5
5 of 5
5 of 5
100%
100%
100%
100%
68
68 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
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.
The Committee also considered how the 11-for-12 share
consolidation would affect existing awards under the
Company’s Share Incentive Plan.
It also considered how selling the Group’s International division
would affect overseas participants in the Company’s share
incentive plans.
Remuneration strategy
In addition to the scheduled Committee meetings, the
Committee held an additional meeting to review the
remuneration framework and ensure that it was aligned to
the Group strategy, and to set future priorities.
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.
The Remuneration Committee’s effectiveness
The Company Secretary facilitated the Committee’s review
of its effectiveness during the year. The Company Secretary
also prepared a report based on responses from Committee
members and other stakeholders to a pre-agreed
questionnaire. After reviewing and discussing the report, the
Committee concluded that it was operating effectively, and
has access to sufficient resources to perform its duties.
The Board reviewed and approved this report on
29 February 2016.
Priscilla Vacassin
Chair of the Remuneration Committee
www.directlinegroup.com 69
69
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ remuneration report
Priscilla Vacassin
Chair of the Remuneration Committee
Dear shareholder
As Chair of the Remuneration Committee (the “Committee”)
I am pleased to introduce our report on Directors’ remuneration
for the 2015 financial year. We have set out this report in the
following sections:
Section
Executive remuneration snapshot – summarising the
remuneration arrangements for Executive Directors
Annual report on remuneration – covering how the
Group will implement its remuneration policy in
2016, and detailing pay outcomes for 2015
Approved policy report
Pages
72 to 73
74 to 85
86 to 95
Linking remuneration to performance – pay outcomes
for 2015
As highlighted in the Board Chairman’s letter on pages 10 to
11, 2015 has marked another good performance year for the
Group with operating profit from ongoing operations ahead
of target, despite higher than normal claims costs from major
weather events. The incentive outcomes for our Executive
Directors as set out in the annual report on remuneration
reflect this level of performance.
We base bonuses under the AIP on performance against
key financial, strategic and personal measures. We awarded
bonuses of 83% of the maximum to the Chief Executive Officer
and 86% of the maximum to the Chief Financial Officer for
2015. This reflects achievement of operating profit from
ongoing operations ahead of the target set under the AIP,
strong progress made on customer experience metrics, as
evidenced by improved Net Promoter Scores in Personal Lines
and highlighted in the Group highlights section of the Annual
Report on page 2, and achievement against personal
objectives. We have provided enhanced disclosure this year
relating to the AIP outcome for 2015. You can find this on
page 78.
November 2015 marked the vesting of the inaugural awards
under the Direct Line Group LTIP. These LTIP awards were
granted shortly following the IPO. They were subject to total
shareholder return (“TSR”) performance over the three years
70
70 Direct Line Group Annual Report & Accounts 2015
since IPO and RoTE performance in 2013 and 2014. Since
November 2012, grants under the LTIP have been made
approximately every six months.
As disclosed last year, the Group achieved an average RoTE
of 16.4% over the two-year performance period in 2013 and
2014 which resulted in 82% of the maximum potential vesting
of the RoTE element, which comprises 60% of the total award.
A strong share price performance in the three years from
Admission, together with dividend payments during the period,
resulted in a TSR of 135.1% for the three-year TSR
performance period and positioned the Group above the
upper quintile compared to companies in the FTSE 350
(excluding investment trusts). This resulted in 100% of the
maximum potential vesting under the TSR element, which
comprises 40% of the total award.
Overall, 89.2% of the total award vested in November 2015,
which is a good level of achievement and is reflective of the
business performance and returns to shareholders over the
same period.
Awards under the LTIP granted in March and August 2013
are due to vest during 2016. The RoTE performance period
for these awards ended on 31 December 2015 and, subject
to the Committee’s satisfaction that the financial and risk
underpins have been met at the end of the vesting period,
awards under the RoTE element are due to vest at 94% of
the maximum potential, again reflecting the returns delivered
to shareholders.
We have included these vesting outcomes in the single
remuneration figure for both Executive Directors, details of
which you can find on page 77.
Consistent with the regulations, the TSR element of the awards
due to vest during 2016 will be reported separately next year.
Pay approach for 2016
Our remuneration policy has worked well since its approval
by shareholders at the 2014 AGM and is still aligned with
our key strategic priorities. As such, we will not change the
approved policy this year. However, we intend to review
this in 2016 and we will propose a policy for shareholders
to approve at the 2017 AGM.
Here are the highlights of our approach to pay for the
Executive Directors in 2016:
• The salaries of both Executive Directors will increase by
2.5% in April 2016, a lower increase compared to the
average increase to employees across the Group generally
• Our overall approach to measuring performance under the
AIP in 2016 will be broadly similar to our approach in
2014 and 2015. We will continue measuring performance
using financial, strategic and personal targets and the
Committee will also use its broader judgement to carefully
assess payouts. From 2016, to better align AIP outcomes
with shareholders’ experience, we will assess financial
performance using profit before tax, as opposed to ongoing
operating profit. Consequently, we will remove the specific
allocation of other financial measures not included in the
definition of ongoing operating profit
Direct Line Group Annual Report & Accounts 2015
• We continue to build on the focus on customer measures
and will be increasing the allocated AIP weighting for this
element from 20% to 25% to reflect this. At the same time,
we will increase the range of the specific customer
measures taken into account in order to better reflect the
focus of the business in the upcoming year
• We are not proposing to change the performance
conditions for 2016 awards under the LTIP. The Committee
has considered the current targets, and has determined that
the levels of TSR performance (upper quintile) and RoTE
performance required for full vesting, as increased in 2015,
remain stretching
Separately to the executive share plans, we believe it is
important for all our employees to have the opportunity to
become shareholders in the Company. We run a Buy-As-You-
Earn Share Incentive Plan (the “SIP”) which allows employees
to receive one matching share for every two shares they
purchase. In addition, to recognise the continued contribution
of our employees to the success of our business, we will be
granting a further free share award of around £250 to each
eligible employee during March 2016. This award will be
the third offer of free shares to employees since the IPO.
Voting on the annual remuneration report
As we are not making any changes to our policy, the policy
report will not be put to shareholders until the 2017 AGM.
Therefore, the annual report on remuneration will be the only
report that we put to an advisory shareholder vote at the
AGM on 12 May 2016.
I hope you find this report informative and I welcome any
comments you may have.
Finally, on a personal note, this will be my last report as Chair
of the Committee as I step down from the Board on 1 March.
I hope that you will agree that the work of the Committee,
which I have chaired since IPO, has struck an appropriate
balance and served well the interests of shareholders. I know
that my successor, Clare Thompson, will continue to do so.
Priscilla Vacassin
Chair of the Remuneration Committee
www.directlinegroup.com 71
71
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ remuneration report continued
Executive remuneration snapshot
The information in this section relates to the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”).
Implementing the remuneration policy in 2016
Key elements
Base salary
Key operation features
(For more information, see the policy report on pages 86 to 95)
Implementation in 2016
• Reviewed annually with any increases taking effect on 1 April
• 2.5% salary increase for the CEO
• The Committee considers all factors including market data
AIP
• Maximum opportunity level is 175% of salary for the CEO
and 150% for the CFO
• 40% of the award is deferred into shares, typically vesting after
three years
• At least 50% of bonus is based on financial measures. The
Committee considers various non-financial and individual
performance measures. It bases its judgement over the payment
outcome at the end of the performance period on its assessment
of the level of stretch inherent in targets
• Any payment is subject to an additional gateway assessment
• Malus and clawback conditions apply
LTIP
• Awards typically granted as nil-cost options
• Plan allows for awards with a maximum value of 200% of base
salary per financial year
• Awards typically granted every six months at half the annual level
• Performance is measured over three years and determined by
RoTE and relative TSR measures
• Awards vest subject to financial underpin and risk gateway
• Malus and clawback conditions apply
to £794,600. 2.5% salary increase
for the CFO to £480,900
• Reported profit before tax replaces
ongoing operating profit as primary
and sole financial measure
accounting for 55% of the total
AIP outcome
• The weighting allocated to the basket
of customer measures has been
revised upwards from 20% to 25%
in line with the Company’s strategic
objectives and the number of
measures has been broadened
• Nil-cost options to be granted in
March and August 2016 at a total
annual grant level of 200% of salary
• Performance conditions as per
2015 awards
2015 pay decisions reflect performance achieved during the year
Aligning performance and reward
The Committee has considered the performance over 2015, as demonstrated by the achievement of key performance indicators
on pages 24 to 25, which marks the third year of good performance for the Group. As a result of this performance, the
Remuneration Committee has approved the following incentive outcomes for the Executive Directors.
Achievement under the AIP
The actual payouts from the AIP this year reflect performance in 2015, with operating profit from ongoing operations ahead
of the target set under the AIP, the progress made towards achieving our strategic objectives and the Executives’ achievement
of personal and shared goals. Further details of the assessment of performance against the targets are provided on page 78.
Chief Executive Officer
Chief Financial Officer
Maximum
(% of salary)
175%
150%
Target
(% of salary)
105%
90%
Actual
(% of salary)
145%
129%
Actual
(£’000)
£1,120
£602
72
72 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Release of value under the LTIP
The first award under the 2012 LTIP vested in November 2015. The value of the award on vesting, as illustrated below, reflects
the significant value generated for shareholders through share price growth and dividends over the three-year period. The value
of these awards has been captured across both 2014 and 2015 single figures for the RoTE and TSR elements respectively on
page 77 of the implementation report. The total value of the award vesting at the end of the three-year performance period in
November 2015, inclusive of shares vesting under both the RoTE and TSR elements, was £1,706,857 to Paul Geddes and
£1,033,095 to John Reizenstein. This compares with an increase in the value of the Company of over £2.5 billion plus
£1.3 billion returned to shareholders by way of dividends over the same time period.
Release of value under the LTIP
(£)
Chief
Executive
Officer
Chief
Financial
Officer
Grant
Vesting
47%
38%
15%
Grant
Vesting
£0m
£0.5m
£1m
£1.5m
£2m
Shares under award Dividends Share price growth
Executive Directors’ shareholding at year end
The interests of shareholders and Executive Directors are closely aligned through the Chief Executive Officer and Chief Financial Officer
holding Company shares at multiples of salary levels above the share ownership guidelines of 200% of salary. The Executives
continue to build on these shareholdings as illustrated below. As at 31 December 2015, the number of shares beneficially held by
the Chief Executive Officer and the Chief Financial Officer represented 249% and 280% of their salaries, respectively.
Executive Directors’ shareholding at year end
(Number of shares)
Chief
Executive
Officer
Chief
Financial
Officer
47%
38%
15%
0m
0.1m
0.2m
0.3m
0.4m
0.5m
2014 2015
Note:
1. Shares held as at 31 December 2015 reflect the impact of the share consolidation on 30 June 2015 in which every 12 existing Ordinary Shares were replaced
by 11 new Ordinary Shares, meaning the aggregate number of Ordinary Shares in issue was reduced. For the purposes of this chart, holdings include all vested
but unexercised awards, valued on a basis that is net of applicable personal taxes.
Executive Directors' total pay – explained further in the single figure table on page 77
This chart illustrates the components of total remuneration received in 2014 and 2015, as set out in further detail in the single
figure table on page 77. Salaries increased by 2% in 2015, which was the first increase since the Executive Directors’ salaries
were set in September 2012. The annual bonus payouts in 2015 were 83% and 86% of the maximum potential for Paul
Geddes and John Reizenstein, respectively. As disclosed in the 2014 remuneration report, the single figure of remuneration
for 2014 included the vesting outcomes of the last legacy awards under the RBS Group LTIP.
Executive Directors’ total pay
(£’000)
6,000
5,000
4,000
3,000
2,000
1,000
0
31%
2014
2015
2014
2015
Chief Executive Officer
Chief Financial Officer
Salary
Pension and Benefits (including all employee share plans)
Annual bonus
LTIP
www.directlinegroup.com 73
73
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ remuneration report continued
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.
Annual remuneration report
Remuneration Committee members and governance
The following list details members of the Remuneration Committee during 2015. You can find information about each member’s
attendance at meetings in the Remuneration Committee report on page 68. You can find their biographies on pages 48 to 49.
Committee Chair
Priscilla Vacassin
Non-Executive Directors
Mike Biggs
Sebastian James
Andrew Palmer
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 the setting of targets and payouts 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 Committee retains FIT Remuneration Consultants LLP (“FIT”) as its independent adviser. FIT is a signatory to the Remuneration
Consultants Group’s Code of Conduct. The Committee appointed FIT when preparing for the IPO and after considering the firm’s
experience in this sector.
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 any other services. The Committee is
satisfied that the advice FIT provides is objective and independent.
FIT’s total fees for remuneration related advice in 2015 were £117,406 exclusive of VAT. FIT charged its fees based on its
standard terms of business for providing advice.
Allen & Overy LLP, one of the Group’s legal advisers, also provided legal advice relating to the Group’s executive remuneration
arrangements. It also provided the Group with other legal services.
Statement of policy implementation in 2016
Executive Directors’ salaries in 2016
The salary increase awarded to the Executive Directors, effective 1 April 2016, is lower than the average increase awarded
to UK employees.
Director
Paul Geddes
John Reizenstein
Position
Chief Executive Officer
Chief Financial Officer
2016 base salary
£’000
2015 base salary
£’000
Annual change in base
salary
795
481
775
469
2.5%
2.5%
Annual Incentive Plan 2016
The maximum annual incentive awards which may be paid to Executive Directors have not changed since the IPO.
Director
Paul Geddes
John Reizenstein
Position
Chief Executive Officer
Chief Financial Officer
Maximum annual incentive award for
2016 (% base salary)
Deferred under the Deferred Annual
Incentive Plan (% bonus)
175%
150%
40%
40%
74
74 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
During 2015, the Committee reviewed the AIP performance measures' weightings and composition. It also reviewed the overall
framework's operation to make sure it is still fit for purpose. The review concluded that, whilst the framework successfully linked
Executive Directors' variable pay with the Group's performance, in order to further align the Executive Directors’ interests with
those of shareholders and the objectives of the business, the Committee would implement the following changes in 2016:
• To further align Executive Directors with shareholders, profit before tax will replace ongoing operating profit as the primary
financial measure and will account for 55% of the total AIP outcome, increased from 50%
• As a result of measuring profit before tax, the Committee decided it was no longer necessary to apply a specific weighting
to other profit & loss items not reflected in the definition of ongoing operating profit and the allocation of a specific weighting
to this element will, therefore, be removed. The Committee will instead consider this in determining the overall level of payouts
in its exercise of judgement
• The weighting allocated to the basket of customer measures will be increased from 20% to 25% in line with the Company’s
strategic objectives
Financial
Strategic
Personal
Measures
Weighting for 2016 Weighting for 2015
Profit before tax (2015: ongoing operating profit)
Other financial measures not reflected in the definition
of ongoing operating profit, primarily the performance
of the Run-off segment and restructuring costs
Based on a basket of customer measures, including Net
Promoter Score and complaints
Objectives for each Executive Director, including shared
objectives across the Executive Committee
55%
0%
25%
20%
50%
10%
20%
20%
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.
The list below sets out the gateway criteria for the AIP for 2016. There are more criteria than previously. This ensures the
Committee considers a broader range of criteria when judging the level of AIP payments.
Gateway criteria for the Annual Incentive Plan for 2016 – 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
• Additional customer context, for example, conduct, experience, brand and franchise health
• Capital strength and affordability
• Risk management within risk appetite
• The Group’s relative performance to that of its peers
• The wider economic environment
• Exceptional events, such as abnormal weather
• Any regulatory breaches and/or reputational damage to the Group
• Committee satisfaction that paying the bonus does not cause major reputational concerns
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 payouts 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 granted in 2016 will continue to be subject to performance against these performance conditions:
• 60% based on RoTE over a three-year performance period (2016, 2017 and 2018)
• 40% based on relative TSR performance against the constituents of the FTSE 350 (excluding investment trusts) over a
three-year performance period, starting on the date of grant. The starting and closing TSR will be averaged over
a three-month period
www.directlinegroup.com 75
75
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ remuneration report continued
For these purposes, we use the Group’s standard definition for RoTE, subject to such other adjustments as the Committee may
consider appropriate. To find out more about how we calculate RoTE, see page 175.
The Committee reviewed the performance targets and, in line with its commitment to ensure that awards to Executive Directors
would only be payable if significant value has been created for shareholders, decided that there should be no change to targets
for 2016 as they remain appropriately stretching following their increase in 2015.
Performance measure
Vesting for threshold
performance
Awards in 2015
and 2016
Awards in 2013
and 2014
Awards in 2015
and 2016
Awards in 2013
and 2014
Performance required for threshold vesting
Performance required for maximum vesting
RoTE
Relative TSR
20% of this element
of the award
20% of this element
of the award
Average annual
RoTE performance of
14.5%
Average annual
RoTE performance of
14.0%
Average annual
RoTE performance of
17.5%
Average annual
RoTE performance of
17.0%
Median
Upper quintile
For the TSR element, there is a straight-line interpolation between threshold and maximum performance, on a ranked basis. For
the RoTE element, 40% of the award will vest for RoTE of 15.5% for awards to be made in 2016 (which remains unchanged
from 2015). Otherwise, vesting is similar to TSR: a straight-line interpolation occurs from threshold to target, then from target to
maximum performance.
The LTIP awards will also vest only to the extent that the Committee is satisfied that the outcome of the TSR and RoTE performance
conditions reflects the Group’s underlying financial performance from the date of grant until vesting. When considering these
matters, the Committee will also deliberate on whether there have been any material risk failings.
Pension and benefits
A pension contribution of 25% of base salary will continue to be paid to both Executive Directors in 2016.
Benefits comprise providing a company car or car allowance, private medical insurance, life assurance, income protection
and health screening. Like all employees, the Executive Directors are also eligible for certain discounted Group products.
Non-Executive Directors’ fees
The current fees for the Chairman and Non-Executive Directors were set in 2012 and have not changed since.
Position
Board Chairman fee
Basic Non-Executive Director fee
Additional fees
Senior Independent Director fee
Chair of Audit, Board Risk and Remuneration Committees
Chair of CSR Committee
Member of Board Committee (Audit, Board Risk or Remuneration)
Member of Board Committee (CSR or Nomination)
Fees for 2016
£’000
400
70
30
30
10
10
5
No additional fees are paid for membership or chairmanship of the Investment Committee.
External directorships
The Company encourages Executive Directors to accept, subject to the Chairman's approval, an invitation to join another
company's board outside the Group in a non-executive capacity. This recognises that such wider experience is valuable.
Executive Directors can retain any remuneration from their non-executive appointment. Executive Directors are generally limited
to accepting one external directorship.
John Reizenstein is a trustee and Director of Farm Africa, for which he receives no fees. Otherwise, the Executive Directors do
not currently hold any external directorships.
76
76 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Implementing policy and pay outcomes relating to 2015 performance
Single figure table (audited)
Salary1
Benefits2
Annual bonus3
Long-term
incentives4,5,6,7
All employee
share plans8
Pension
Total
£’000
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
Paul Geddes
John Reizenstein
771
467
760
460
18
15
17
15
1,120
1,000
2,712
3,389
602
518
1,642
1,118
−
1
−
1
193
117
190
115
4,815
5,356
2,844
2,227
Notes:
1. The Company operates a flexible benefits policy and salary is reported before any personal elections are made.
2. Benefits include a company car or allowance; private medical and income protection insurance.
3.
Includes amounts earned for performance during the year, but deferred for three years under the Deferred Annual Incentive Plan (“DAIP”). For more information,
see page 83. These deferred awards are not subject to any conditions, except continuous employment. However, awards remain available for malus
and clawback.
4. The expected vesting outcome figures for the RBS Group LTIP awards granted in 2012 and reported in 2014 have been updated. These updates are based
on the actual vesting share price of £3.39806 on 9 March 2015, compared to the three-month average share price of £2.828 used in reporting this figure in
the 2014 remuneration report. This results in an adjusted reportable increase of approximately £408,958 for Paul Geddes and £92,016 for John Reizenstein,
with a corresponding increase to the single figure for 2014 reflected in the table above.
5. The expected vesting outcome figures for the RoTE portion of the awards granted under the Direct Line Group LTIP in 2012 and reported in 2014 have also been
updated. These updates are based on the actual vesting of the RoTE portion of the awards and a share price of £3.944 on 9 November 2015, compared to
the three-month average share price of £2.828 used in reporting this figure in the 2014 remuneration report. The revised figures reflect the impact of the share
consolidation on 30 June 2015 and actual number of dividends accrued on this portion of the award at vesting. This results in an adjusted reportable increase
of approximately £323,814 for Paul Geddes and £195,998 for John Reizenstein, with a corresponding increase of the single figure for 2014 reflected in the
table above.
6. The long-term incentive figures for 2015 include the estimated vesting outcome for the RoTE portion of the awards made under the Direct Line Group LTIP in
March and August 2013 as the performance period under this element is now complete. In line with the criteria set at the time of grant, this has been assessed
by referring to RoTE performance during 2013, 2014 and 2015 in respect of 56.4% of the shares under award (being a 94% vesting outcome of shares
relating to the RoTE element). For these purposes, an RoTE figure of 17.6% has been used, including the impact of the International division during 2015 until
the completion of its sale in May 2015. Had the RoTE figure of 18.5% from ongoing operations been used for the purposes of determining LTIP vesting, then full
vesting under the RoTE element would have been achieved. The corresponding values under long-term incentives, including the value of dividends accrued to
31 December 2015, are £1,947,016 for Paul Geddes and £1,178,450 for John Reizenstein based on a three-month average Company share price to
31 December 2015 of £3.97283. Any shares vesting under the Direct Line Group LTIP granted in 2013 will not be delivered until the end of the applicable
vesting periods in March and August 2016.
7. The long-term incentive figures for 2015 reflect the actual vesting under the TSR element of awards made under the Direct Line Group LTIP in November 2012.
In line with the criteria set at the time of grant, this has been assessed by referring to TSR performance to the end of the performance period of 15 October 2015.
A total of 40% of the shares under award (being the maximum number of shares relating to the TSR element) vested. The corresponding values under long-term
incentives, including the value of dividends on vesting, are £765,407 for Paul Geddes and £463,271 for John Reizenstein using the share price on
9 November 2015 of £3.944.
8.
Includes the value of matching shares under the SIP.
Each Executive Director has confirmed that they have not received any other items in the nature of remuneration, other than
those already disclosed in the single figure table.
www.directlinegroup.com 77
77
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ remuneration report continued
Annual Incentive Plan outcomes for 2015
The Committee established target performance levels at the start of the year. However, like last year, the Committee did not set
a formal threshold to maximum range for performance measures. Instead, the Committee believed it more appropriate to carefully
consider performance relative to AIP targets and to assess over or underperformance by judging overall corporate performance
at the year-end.
To be transparent with our shareholders, we are disclosing more information this year about bonus payout levels. As such, in the
table below, we have included the remuneration targets set at the beginning of the year and performance achieved under the
financial measures. We have also explained the performance achieved against the non-financial measures which remain
commercially sensitive to disclose.
The chart below illustrates the Committee’s assessment of the level of achievement under the AIP. The outcomes reflect strong
performance during the year, particularly in terms of the financial measures, as highlighted in the Group highlights and Chairman’s
statement on pages 2 to 3 and 10 to 11 respectively. Notwithstanding this success, the Committee felt that it was appropriate,
within the wider economic context and our continued ambitions for improvement, to moderate the achievement under the AIP by
4.4% for each Executive Director, from 87.4% to 83% for Paul Geddes and from 90.4% to 86% for John Reizenstein, as illustrated
in the chart below.
Measures
Weight
(as a % of
max award)
Target
Actual
performance
(£m)
performance
(£m)
Performance
Achievement against
Assessment
performance measures
Ongoing operating profit
50%
462.8
520.7
Maximum
Financial
Other financial measures not
reflected in the definition of
ongoing operating profit1
10%
-100.1
-91.5
Strategic
A basket of key
customer measures
20%
See narrative
Personal
Personal objectives
including shared
objectives amongst
all Executive
Committee members
Paul
Geddes
John
Reizenstein
20%
See narrative
20%
See narrative
Above
target
Above
target
Above
target
Above
target
0%
Vesting
Target
60%
Vesting
Maximum
100%
Vesting
100%
94%
75%
65%
80%
Director
Paul
Geddes
John
Reizenstein
Unadjusted achievement
under the 2015 AIP
Adjusted achievement
under the 2015 AIP
87.4% of maximum
83% of maximum
90.4% of maximum
86% of maximum
Note:
1. Profit and loss items excluded from ongoing operating profit, primarily the performance of the Run-off segment and restructuring costs and other one-off costs.
78
78 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Financial element (60% weighting)
While there is no pre-set scale around target, the Committee used a range of 90-110% of target as an initial reference point to
consider vesting levels for the financial measures. The Committee will consider the appropriate range each year and as such this
scale may not be used in subsequent years. Having considered the actual results against these reference points, the Committee
agreed that the level of performance warranted the level of payouts shown in the chart above.
Strategic element (20% weighting)
As described elsewhere in this Annual Report, during 2015 we have continued to invest in improved customer propositions and
on improving the customer experience and reducing complaints. This has contributed to an increase in Net Promoter Scores
across a number of measures, as well as a reduction in complaints. Overall, a strong performance on the basket of customer
measures considered by the Committee has led to an above target payout of 75% of the maximum available under this element.
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.
We anticipate including similar disclosures next year in respect of the 2016 AIP outcome which, consistent with market practice,
are not included on a prospective basis on the basis of commercial sensitivity.
Consequently, the annual incentive awards for Executive Directors for the financial year ended 31 December 2015
were as follows:
Paul Geddes, CEO
John Reizenstein, CFO
Maximum
(% of salary)
175%
150%
Target
(% of salary)
105%
90%
Actual
(% of salary)
145%
129%
Actual £’000
(including cash and
deferred elements)
1,120
602
Non-Executive Directors
Fees were the only remuneration paid to Non-Executive Directors in 2014 and 2015. 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 have been shown under Benefits below. The Non-Executive Directors receive no other benefits.
Director
Michael Biggs
Glyn Jones3
Jane Hanson
Sebastian James
Andrew Palmer4
Clare Thompson
Priscilla Vacassin5
Notes:
2015 Fees1
£’000
2015 Benefits2
£‘000
Total 2015
£’000
2014 Fees
£‘000
2014 Benefits
£‘000
Total 2014
£’000
400
42
115
85
144
100
113
4
−
22
−
−
−
−
404
42
137
85
144
100
113
400
115
119
28
125
104
110
4
−
24
−
−
−
−
404
115
143
28
125
104
110
1. Non-Executive Directors are not eligible to participate in any of the Group's bonus or share incentive schemes, or to join any Group pension scheme.
2. The values shown under benefits above comprise the value of travel and subsistence expenses reimbursed by the Company (including any potential gross-up for
tax and NIC due). Similar amounts of taxable benefits have also been identified in respect of the 2012 and 2013 financial years of £4,031 for Mike Biggs
and £35,516 for Jane Hanson which have not previously been included in the respective accounts but are noted here following HMRC’s clarification of the
Directors' permanent place of employment for tax purposes issued in 2015.
3. Glyn Jones stepped down from the Board on 13 May 2015.
4. Andrew Palmer was appointed as the Senior Independent Director with effect from 13 May 2015.
5. Priscilla Vacassin was appointed to the Nomination Committee with effect from 13 May 2015.
www.directlinegroup.com 79
79
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ remuneration report continued
Percentage change in Chief Executive Officer's pay for 2014 to 2015
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.
Chief Executive Officer
All UK employees
Notes:
Salary1
2%
3.6%
Benefits2
5%
11%
Bonus (including
deferred amount)3
12%
8%
1. Based on the change in average pay for UK employees employed in the year ended 31 December 2015 and the year ended 31 December 2014. Salaries
are not adjusted for number of working hours and the increase therefore partly reflects the increase in working hours for some employees during the year.
2. There were no changes in benefits provision between 2014 and 2015. The value increase shown above for all employees is mainly due to an increase in
the average value of matching shares provided to employees taking part in the BAYE plan over this period.
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.
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.
Distribution statement
This chart shows the overall pay expenditure across all Group employees compared with the total dividend value paid to
shareholders for 2014 and 2015.
% change:
66.0%
0
.
6
6
6
1
.
1
0
4
14y
15y
Dividend (£m)
Note:
% change:
-5.3%
1
.
5
4
4
3
.
1
2
4
% change:
-0.8%
2
.
2
1
4
7
.
8
0
4
14y
15y
14y
15y
Overall expenditure on pay
(including International division) (£m)
Overall expenditure on pay
(excluding International division) (£m)
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.
80
80 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Historical performance of Total Shareholder Return
This graph shows the Company’s TSR since the Company’s shares began trading on the London Stock Exchange in October
2012 against the FTSE 350 Index (excluding investment trusts) over the same period. This peer group is the same used for
measuring relative TSR under the LTIP.
Total Shareholder Return
300
260
220
180
140
100
16 October 2012
31 December 2012
31 December 2013
31 December 2014
31 December 2015
Direct Line Group
FTSE 350 (excluding investment trusts)
The table below shows historical levels of the Chief Executive Officer’s pay between 2012 and 2015. It also shows vesting
of annual and long-term incentive pay awards as a percentage of the maximum available opportunity.
Chief Executive Officer
2015
20142
2013
2012
Notes:
Single figure of
total remuneration
£'000
Annual bonus
payout
(% of maximum)
Long-term
incentive vesting
(% of maximum)1
4,815
5,356
2,536
1,908
83%
75%
63%
65%
96%
88%
55%
30%
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 2014 single figure has been revised to reflect the actual vesting of the 2014 awards under the 2012 RBS Group LTIP and actual vesting under the RoTE
element of the Direct Line Group LTIP granted in 2012. For 2015, the estimated vesting of the RoTE portion of the Direct Line Group LTIP granted in March and
August 2013 has also been included at a value of £1,947,016. The vesting under the RoTE element of these awards has been calculated with reference to an
adjusted 2015 RoTE of 17.6% as opposed to 18.5% in order to reflect the impact of the International division during 2015. Any shares vesting under the Direct
Line Group LTIP granted in 2013 will not be delivered until the end of the applicable vesting periods in March and August 2016. However, they have been
included in the single figure, as the performance period in respect of the RoTE portion has now been completed.
www.directlinegroup.com 81
81
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ remuneration report continued
Annual General Meeting voting outcomes
The table shows the percentage of shareholders voting for or against, and the percentage of votes withheld in relation to the
resolution to approve the Directors’ annual remuneration report, which was put to the 2015 AGM and the resolution to approve
the Directors’ remuneration policy, which was put to the 2014 AGM.
For
Against
Number
Percentage
Number
Percentage
Number of votes
withheld
(abstentions)
Percentage of votes
withheld
(abstentions)
1,108,103,256
96.2% 44,283,445
3.8%
9,502,728
1,064,002,114
97.5% 26,743,783
2.5%
1,945,618
0.8%
0.2%
Approval of Directors’
remuneration report (2015)
Approval of Directors’
remuneration policy (2014)
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.
The Committee is grateful for the strong vote in favour of the Directors’ annual remuneration report in 2015. The Committee
continues to communicate with investors on developments in the remuneration aspects of corporate governance generally and
changes to the Company’s executive pay arrangements in particular.
Shareholdings
This table sets out the share ownership guidelines and share ownership levels:
Position
Chief Executive Officer
Chief Financial Officer
Notes:
Share ownership
guideline1
(% of salary)
Value of shares held at
31 December 20152,3
(% of salary)
200%
200%
249%
280%
1. Executive Directors are expected to retain all the Ordinary Shares they obtain from any of the Company’s share incentive plans until they achieve a shareholding
level that is equal to 200% of base salary. This is calculated after any disposals necessary to pay personal taxes on acquiring such Ordinary Shares.
2. For these purposes, holding Ordinary Shares will be treated as including all vested but unexercised awards, valued on a basis that is net of applicable
personal taxes.
3. Shares held as at 31 December 2015 reflect the impact of the share consolidation on 30 June 2015 in which every 12 existing Ordinary Shares were
replaced by 11 new Ordinary Shares, meaning the aggregate number of Ordinary Shares in issue was reduced.
This table shows each Executive Director's total share interests.
Share plan interests at
31 December 2015
Beneficial share interests1
Share plan
awards
subject to
performance
conditions2
1,626,495
984,454
Share plan
awards not
subject to
performance
conditions3
271,453
183,541
Share plan
interests
vested but
unexercised
−
261,941
Share plan
interests
exercised or
released4,5
1,201,133
161,392
Shares held at
31 December
20156,7
474,255
183,496
Shares held at
31 December
2014 restated
for share
consolidation
248,849
89,231
Shares held at
31 December
2014
271,472
97,352
Director
Paul Geddes
John Reizenstein
Notes:
1. Shares held as at 31 December 2014 have been restated to reflect the impact of the share consolidation on 30 June 2015 in which every 12 existing Ordinary
Shares were replaced by 11 new Ordinary Shares, meaning the aggregate number of Ordinary Shares in issue was reduced. These figures have been provided
to facilitate a like-for-like comparison with shares held as at 31 December 2015.
2. This includes awards under the Direct Line Group LTIP. As described in the notes to the single figure table, 94% of awards made under the Direct Line Group LTIP
in March and August 2013 that are subject to the RoTE performance condition measured to 31 December 2015 are expected to vest. This has been calculated
with reference to an adjusted 2015 RoTE of 17.6% as opposed to 18.5% in order to reflect the impact of the International division during 2015. The
corresponding values under long-term incentives, including the value of dividends accrued to 31 December 2015, are £1,947,016 for Paul Geddes and
£1,178,450 for John Reizenstein based on a three-month average Company share price to 31 December 2015. These shares will be delivered to Executive
Directors in March and August 2016.
3.
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 page 85.
4. 20% of the shares awarded to Paul Geddes under the Direct Line Group DAIP in March 2013 vested during the financial year. This is consistent with the policy
at RBS Group. These vesting shares and related dividend accrual shares were exercised by Paul Geddes on 30 March 2015 (51,060 shares at £3.233949).
Additionally, under the RBS Group LTIP 2012, 717,300 shares vested to Paul Geddes and 161,392 shares vested to John Reizenstein on 9 March 2015
(share price £3.39806).
5. Paul Geddes exercised an award granted on 7 November 2012 under the Direct Line Group LTIP on 9 November 2015 as shown on page 84 (432,773
shares). The Direct Line Group DAIP and LTIP plan rules provide that all dividends accruing in the vesting period (or until exercise for awards made in 2012
and 2013) will be added on vesting. The figure of exercised shares accordingly includes all dividends that were accrued in respect of the 2012 LTIP awards.
6.
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.
7. Beneficial share interests include partnership shares John Reizenstein purchased under the SIP and free shares held by both Executive Directors under the SIP.
At 9 March 2016, the number of shares beneficially held by John Reizenstein has increased to 183,575. There was no change to the number of shares held
by Paul Geddes.
82
82 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
The table shows the Non-Executive Directors' beneficial interests in the Company’s shares.
Director
Mike Biggs
Jane Hanson
Glyn Jones3
Andrew Palmer
Clare Thompson
Priscilla Vacassin
Sebastian James
Notes:
Shares held at
31 December
20151,2,3
Shares held at
31 December 2014 restated
for share consolidation4
Shares held at
31 December 2014
−
26,190
70,159
10,475
35,220
35,220
−
−
26,190
61,921
10,475
30,960
30,960
−
−
28,571
67,551
11,428
33,775
33,775
−
1. There were no changes to the number of shares held by Directors between the year end and the date of this report.
2.
Includes holdings of connected persons, as defined in section 96B(2) of the Financial Services and Markets Act 2000.
3. Glyn Jones stepped down from the Board on 13 May 2015 and this represents his holding at that date.
4. Shares held as at 31 December 2015 reflect the impact of the share consolidation on 30 June 2015 in which every 12 existing Ordinary Shares were replaced
by 11 new Ordinary Shares, meaning the aggregate number of Ordinary Shares in issue was reduced.
Direct Line Group share awards
Direct Line Group Deferred Annual Incentive Plan awards made in 2015
This table details the awards made to Paul Geddes and John Reizenstein under the Direct Line Group DAIP relating to the bonus
in respect of 2014.
Three-day
average
share price for
grant of
awards
£
Face value of
award
£
No. of share
options as at
1 January
2015
No. of share
options
granted
during the
year1
No. of
share
options
vested
during the
year2
No. of share
options
adjusted for
share
consolidation3
No. of
dividend
shares
acquired at
vesting
No. of share
options
held at
31 December
2015
No. of share
options
exercised4
Vesting date
Grant date
Paul Geddes
28-Mar-13
26-Mar-14
25-Mar-15
2.0157 380,004
81,406
2.433667 333,999 137,241
3.3007 400,000
– 37,704
–
–
121,186
–
218,647 121,186 37,704
John Reizenstein
28-Mar-13
26-Mar-14
25-Mar-15
2.0157 137,999
2.433667 166,000
3.3007 207,200
68,462
68,210
–
–
62,774
62,774
136,672
–
–
–
–
3,143
11,437
10,099
24,679
5,706
5,685
5,232
16,623
7,359
–
–
7,359
–
–
–
–
51,060
34,562
1-Jun-13 to
28-Mar-16
– 125,804 26-Mar-17
– 111,087 25-Mar-18
51,060 271,453
62,756 28-Mar-16
62,525 26-Mar-17
57,542 25-Mar-18
–
–
–
– 182,823
Notes:
1. Awards are granted as nil-cost options.
2. The terms on which Paul Geddes’ 2012 bonus outcome was deferred meant that 60% of the outcome was deferred, with deferral split broadly evenly between
deferral into deferred cash and deferred shares, with phased vestings of the deferred amounts over the three-year deferral period.
3. Awards adjusted on 30 June 2015 as a result of the share consolidation in which every 12 existing Ordinary Shares were replaced by 11 new Ordinary Shares.
4. Exercised on 30 March 2015 at £3.233949, resulting in an aggregate gain of £165,125.
www.directlinegroup.com 83
83
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ remuneration report continued
Direct Line Group Long-Term Incentive Plan awards made in 2015
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
Three-day
average share
price for grant of
awards
£
Face value of
award
£
No. of
options
at
1 January
20151
No. of
options
granted
during
the year2
No. of
options
vested
during
the year3
No. of options
lapsed for
performance4
No. of options
adjusted
for share
consolidation5
No. of dividend
shares acquired
at vesting
No. of options
exercised
No. of
options
held at 31
December
2015
Vesting date
1.96
760,000
388,250
2.0157
760,000
377,040
2.1564
759,999
352,439
2.433667
759,998
312,285
2.9020
759,999
261,888
–
-–
–
–
–
3.3007
760,000
3.517
775,200
–
–
230,254
220,415
317,458
38,437
32,355
115,315
432,773
–
09-Nov-15
–-
–
–
–
–
–
–-
–-
–-
–-
–-
–-
31,420
29,370
26,024
21,824
19,188
–
–
–
–
–
–
–
--
--
--
--
--
--
345,620
28-Mar-16
323,069
28-Aug-16
286,261
26-Mar-17
240,064
29-Aug-17
211,066
25-Mar-18
220,415
26-Aug-18
1,691,902
450,669
317,458
38,437
160,181
115,315
432,773
1,626,495
1.96
460,000
234,993
2.0157
459,999
228,208
2.1564
459,999
213,318
2.433667
460,000
189,015
2.9020
459,999
158,511
–
–
–
–
–
3.3007
460,000
3.5170
469,200
–
–
139,364
133,409
192,145
23,265
19,583
69,796
–-
–-
– -
– -
–-
–-
–-
–-
–-
–-
–-
–-
19,018
17,777
15,752
13,210
11,614
–-
–
–
–
–
–
–
–
–
–
–
–
–
–
261,941
09-Nov-15
209,190
28-Mar-16
195,541
28-Aug-16
173,263
26-Mar-17
145,301
29-Aug-17
127,750
25-Mar-18
133,409
26-Aug-18
1,024,045
272,773
192,145
23,265
96,954
69,796
–
1,246,395
Grant date
Paul Geddes
07-Nov-12
28-Mar-13
28-Aug-13
26-Mar-14
29-Aug-14
25-Mar-15
26-Aug-15
John Reizenstein
07-Nov-12
28-Mar-13
28-Aug-13
26-Mar-14
29-Aug-14
25-Mar-15
26-Aug-15
Notes:
The Company’s share price on 31 December 2015 was £4.075 and the range of prices in the year was £2.903 to £4.143.
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 2015, 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 76.
3. The closing market price on the date of the vesting of the award was £3.944.
4. Awards under the LTIP vested at 89.2% of the maximum potential on 9 November 2015.
5. Awards lapsed on 30 June 2015 as a result of the share consolidation in which every 12 existing Ordinary Shares were replaced by 11 new Ordinary Shares.
The Company’s policy is to issue awards twice a year, after the Group announces its full and half-year results. The value of each
grant of awards is set at 50% of the normal annual policy level. This means the total combined face value of awards to each
Executive Director during the year equates to 200% of their base salary paid in the year.
84
84 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Direct Line Group 2012 Share Incentive Plan
During 2015, 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.
Director
John Reizenstein
Notes:
Matching shares
granted during the year
Matching shares
cancelled during
the year
240
–
Value of matching
shares granted¹
£
887
Balance of
matching shares at
31 December 20152
718
1. The accumulated market value of matching shares at the time of each award. Purchase of the matching shares takes place within 30 days of the contributions
being deducted from salary.
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.
At the time of the IPO, and under the same terms as other employees, Executive Directors received the opportunity to subscribe for
143 free Company shares, which vested in November 2015, three years from grant. Both Executive Directors subscribed for this
offer. They were also eligible to participate in the award of approximately £400 worth of free shares in March 2015. However,
both waived their eligibility to this award.
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.
The Board reviewed and approved this report on 29 February 2016.
Priscilla Vacassin
Chair of the Remuneration Committee
www.directlinegroup.com 85
85
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ remuneration report continued
Policy report
A resolution in respect of the Directors’ remuneration policy was approved at the Company’s AGM on 15 May 2014 by a
significant majority (97.5% in favour). No changes to the policy are proposed. For ease of reference, a copy of the policy
approved by shareholders is repeated below (subject only to minor referencing updates to assist with the reading of the policy).
Policy table
Element
Purpose and link to strategy
Operation
Base salary
• This is the core element
of pay that reflects the
individual's role and position
within the Group and is
payable for doing the
expected day-to-day job
• Ensuring we are competitive
in the market allows us to
attract, retain and motivate
high calibre executives with
the skill sets to achieve our
key aims while managing
costs
Annual Incentive Plan
(the “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
• Base salaries are reviewed annually and set in April of each year, although
the Committee may undertake an out-of-cycle review if it determines that this
is appropriate
• Salaries are typically reviewed against:
− 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 insurance peers and companies of a
similar size, particularly FTSE 31-100 companies being companies which are
considered to be reflective of the size and complexity of the Group; and
− 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 principles for setting base salary are similar to those applied to other
employees in the Group, although the specific benchmarking groups used
to review external market relativities may differ across employee groups
• Base salary is paid monthly
• For Executive Directors, at least 40% of the award is deferred into shares under
the Deferred Annual Incentive Plan (the “DAIP”), typically vesting three years
after grant (with deferred awards also capable of being settled in cash). The
remainder of the award is paid in cash following year-end
• The percentage deferred and the terms of deferral will be kept under review by
the Committee to ensure that levels are in line with regulatory requirements and
best practice and may be changed in future years but will not, in the view of the
Committee, be changed to be less onerous overall
• Malus and clawback provisions apply to both the cash and deferred elements
and are explained in more detail in the notes to the policy table
2012 Long-Term
Incentive Plan (the
“LTIP”)
• To motivate and incentivise
delivery of sustained
business performance over
the long term, aligning
Executives’ interests with
those of shareholders
• To aid long-term retention
of key executive talent
• 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
• Vested options will remain exercisable for a period of seven years
• Malus and clawback provisions apply to the LTIP and are explained in more
detail in the notes to the policy table
• Awards under the LTIP may be made at various times during the financial year.
While the Committee reserves the right to do otherwise, practice has been to
make awards twice in each financial year following the announcement of the
Group's annual and half-year results
86
86 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Maximum opportunity
• The Committee has determined that its
policy will be to only set base salaries
by reference to the factors set out in the
previous column for the duration of this
policy. In any event, no increase will be
made if it would take an Executive
Director’s salary above the median level
of salaries for relevant roles in the FTSE
100 as determined using data available
to the Committee at or shortly prior to
when any increase is considered
• Where salary increases are awarded,
the Committee will have regard to the
increase being awarded to employees
within the Group more generally, as
well as the other factors outlined in this
table under ‘Operation’
• Maximum and target bonus levels
for Executive Directors are set by
reference to practice at other insurance
and general market comparators
• The maximum bonus level potential
under the AIP is 175% of base salary
per annum. The current maximum bonus
level applying for each individual
Executive Director is shown in the
‘Statement of policy implementation
in 2016’ section of the annual
remuneration report
• The Plan allows for awards over shares
with an absolute maximum value of
200% of base salary per financial year
(although awards of up to 300% of
base salary are permitted in exceptional
circumstances in relation to the
recruitment or retention of an employee,
as determined by the Committee)
Performance measures
• Not applicable
• Performance over the financial year is assessed against performance measures which
the Committee considers to be appropriate
• These may be financial, non-financial (Group, divisional or business line) and individual. Each
year, at least 50% of the bonus is based on financial measures. The remainder of the bonus will
be based on a combination of non-financial and individual performance measures
• Targets are set at the beginning of each financial year by the Committee
• No more than 10% of the bonus is paid for threshold performance (30% for the individual
performance element). No more than 60% of the maximum opportunity pays out for target
performance. However, the Committee retains flexibility to amend the level of payout at different
levels of performance for future bonus cycles based on its assessment of the level of stretch inherent
in the targets that have been set and will disclose any such determinations appropriately
• Before any payment can be made, the Committee will perform an additional gateway
assessment to determine whether the amount of any bonus is appropriate in view of such facts
or circumstances as the Committee considers relevant. This assessment may result in
moderation (either positive or negative) of each AIP performance measure but subject to the
individual maximum bonus levels
• The AIP remains a discretionary arrangement and the Committee reserves discretion to adjust
the out-turn (from zero to the cap) should it consider that to be appropriate. In particular, the
Committee will operate this discretion as a gateway in respect of any risk concerns
• The Committee will determine the performance conditions for each award made under the LTIP,
with performance measured over a single 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 reference to the time of grant or financial year
• Awards vest based on performance against financial and/or share return measures, as
set by the Committee, to be aligned with the long-term strategic objectives of the Group
• For awards to be granted in 2016, vesting will continue to be determined based on two
measures: RoTE and relative Total Shareholder Return (“TSR”) performance against the FTSE
350 (excluding investment trusts). The Committee may apply different performance measures
and targets in future years
• Awards will be subject to a payment gateway such that the Committee must be satisfied that
•
there are no material risk failings, reputational concerns or regulatory issues
In addition, there is an underpin relating to the Committee’s view of the underlying financial
performance of the Group
• Fuller details of the performance conditions and targets for 2016 and prior-year awards are
set out in the annual remuneration report
• For both the TSR and RoTE elements, 20% of the award vests for threshold performance with
100% vesting for maximum performance. The Committee reserves the discretion to make
changes to these levels which it considers non-material
• The Committee reserves the right to lengthen (but not reduce) any performance period and/ or
to introduce a separate holding period
www.directlinegroup.com 87
87
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ remuneration report continued
Element
Purpose and link to strategy
Operation
Pension
• To remain competitive within
• Pension contributions are paid only in respect of base salary
the market place
• To encourage retirement
planning and retain
flexibility for individuals
• Executive Directors are eligible to participate in the defined contribution
pension arrangement or alternatively they may choose to receive a cash
allowance in lieu of pension
• This is in line with the approach taken for all Group employees
Benefits
• A comprehensive and
flexible benefits package is
offered, with the emphasis
on individuals being able
to choose the combination
of cash and benefits that
suits them
• Executive Directors receive a benefits package generally set by reference to
market practice in companies of a similar size and complexity, particularly
FTSE 31-100 companies. Benefits currently provided include a company car
or car allowance, private medical insurance, life insurance, health screening
and income protection
• The Committee may periodically amend the benefits available to employees.
The Executive Directors are eligible to receive such additional benefits on
similar terms to other senior executives
• In line with our approach to all employees, certain Group products are
offered to Executive Directors at a discount
• Executive Directors are also eligible to participate in any of the employee
share plans operated by the Company, in line with HMRC guidelines (where
relevant), on the same basis as for other eligible employees. Currently this
includes the Share Incentive Plan, which was also used to provide an award
of free shares to all employees (including Executive Directors) at the time of
the IPO
Share
ownership
guidelines
• To further align the interests
of Executive Directors with
those of shareholders
• Executive Directors are expected to retain all of the ordinary shares vesting
under any of the Company’s share incentive plans, after any disposals for
the payment of applicable taxes, until they have achieved the required level
of shareholding
Notes to the policy table
Stating maximum amounts for each element of remuneration
Where the table refers to the maximum amounts that may be paid in respect of any element of the policy (as required under
the Regulations) these will operate simply as caps and not be indicative of any aspiration.
Malus and clawback
Malus (being the forfeiture of unvested awards) and clawback (being the ability of the Company to claim repayment of paid
amounts) provisions apply to the AIP (cash and deferred element) and LTIP if, in the opinion of the Committee, any of the
following has occurred:
• There has been a material misstatement of the Company’s financial results which has led to an overpayment
• The assessment of performance targets is based on an error or inaccurate or misleading information or assumptions
• Circumstances warranting summary dismissal in the relevant period
• A material failure of risk management or any other act or omission that has had a sufficiently significant impact on the
reputation of the Company to justify such action
Amounts in respect of awards under both plans may be subject to clawback for up to three years post payment or vesting
as appropriate.
88
88 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Maximum opportunity
Performance measures
• Pension contributions for both Executive Directors are set at
• Not performance related
25% of base salary per annum
• The costs of benefits provided may fluctuate from year to year
• Not performance related
even if the level of provision has remained unchanged
• An annual limit of 10% of base salary per Executive Director
has been set for the duration of this policy. The Committee
will monitor the costs in practice and ensure that the overall
costs do not increase by more than the Committee considers
to be appropriate in all the circumstances
• In addition, 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
• The Executive Directors may be entitled to retain fees
received for any directorships held outside the Group
• 200% of salary for both Executive Directors
• Not applicable
• The Committee reserves the discretion to amend these levels
in future years
Exercise of discretion
In line with market practice, the Committee retains discretion in relation to the operation and administration of the AIP, DAIP
and LTIP. This discretion includes, but is not limited to:
• The timing of awards and payments
• The size of awards, within the overall limits disclosed in the policy table
• The determination of vesting
• The treatment of awards in the case of change of control or restructuring
• The treatment of leavers within the rules of the plan and the termination policy summary shown on pages 92 to 93
• Adjustments needed in certain circumstances (for example, rights issue, corporate restructuring or special interim dividend)
The Committee also retains the discretion to amend the performance measures, weightings and targets after they have been set
if events make it appropriate to do so. Any changes will be explained in future annual remuneration reports and, if appropriate,
be the subject of consultation with the Company’s major shareholders.
www.directlinegroup.com 89
89
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ remuneration report continued
Adjustment to 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 of awards (the date of
transfer of shares for awards made prior to 2014).
The terms of incentive plan awards may be adjusted in the event of a variation of the Company’s share capital, demerger or
a similar event that materially affects the price of the shares or otherwise in accordance with the plan rules.
Remuneration payments agreed prior to 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 in connection 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 the policy came into effect or (ii) at a time when the
relevant individual was not a Director of 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, the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of
the payment are ‘agreed’ at the time the award is granted.
Selection of performance measures
Annual Incentive Plan
The AIP performance measures have been selected by the Committee to incentivise Executive Directors to achieve financial
targets for the year as well as specific strategic and personal objectives. These measures are aligned with the key performance
indicators that we use as a business to monitor performance against our strategic priorities, as shown on pages 24 and 25 of
the Annual Report & Accounts.
The relevant targets are set at or following the start of each year to ensure that Executive Directors are appropriately focused
on the key objectives for the next 12 months.
Long-Term Incentive Plan
The ultimate goal of our strategy is to provide long-term sustainable returns for our shareholders.
For 2016, awards under the LTIP will therefore continue to be subject to performance against both RoTE and relative TSR targets,
which are important KPIs for the business. The Committee believes that this combination provides a balanced approach to the
measurement of Group performance over the longer term by using both a stated financial KPI that incentivises individuals to keep
growing the business in an efficient way and a measure based on relative shareholder return. This combination of measures
achieves an appropriate balance of absolute and relative returns.
Differences in remuneration policy from broader employee population
When determining Executive Directors’ remuneration, the Committee takes into account pay throughout the Group to ensure that
the arrangements in place remain appropriate.
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, although remuneration packages differ to take into account
appropriate factors in different areas of the business:
• AIP – approximately 3,200 employees participate in the AIP and 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 also receive part of their bonus in Company shares deferred for a period of three years
• LTIP – our strategic leaders participate in the LTIP currently based on the same performance conditions as those for Executive
Directors, although the Committee reserves the discretion to vary the performance conditions for awards made to employees
below the Board for future awards
• All employee share plans – the Committee considers it is important for all employees to have the opportunity to become
shareholders in the Company. The HMRC-approved Buy-As-You-Earn Share Incentive Plan in the UK and an International plan
mirroring the UK plan for Italy were both launched during 2013. At year-end, approximately 2,700 employees throughout
the Group had signed up to the UK plan.
90
90 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015 Remuneration policy for Non-Executive Directors
Element
Purpose and link to strategy Approach to setting fees and cap
Other items
Chairman and
Non-Executive
Directors’ fees
To enable the
Company to recruit
and retain Non-
Executive Directors of
the highest calibre, at
the appropriate cost
• Non-Executive Directors are paid a basic annual fee
plus reasonable travel expenses. Additional fees may
be paid to Non-Executive Directors who chair a Board
Committee, sit on a Board Committee and for the
Senior Independent Director. The level of fees for 2016
is shown in the annual remuneration section
• Fee levels for Non-Executive Directors are reviewed and
may be increased at appropriate intervals by the Board,
with affected individual Directors absenting themselves
from deliberations
• In setting the level of fees, the Company takes into
account the expected time commitment of the role and
fees at other companies of a similar size, sector and/or
complexity to the Group
• The fees paid to the Chairman are inclusive of all Board
and Committee membership fees and are determined
by the Remuneration Committee
• Subject to a Non-Executive Director aggregate fee 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
• The Non-Executive
Directors are not
entitled to receive any
compensation for loss
of office, other than
fees for their notice
period. They do not
participate in the
Group’s bonus,
employee share plans
or pension
arrangements and do
not receive
any benefits
Recruitment remuneration policy
The recruitment remuneration policy aims to give the Committee sufficient flexibility to secure the appointment and promotion
of high-calibre executives to strengthen the management team and secure the skill sets to deliver the Group’s strategic aims.
Principles for recruitment remuneration
• 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 within the policy table for fixed pay do not apply to new recruits, although
the Committee would not envisage exceeding these caps in practice
• 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
• 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 Group’s international assignment policy, as appropriate
Buy-out awards
• Where it is necessary to make a recruitment-related pay award to an external candidate, the Company will not pay more than
is necessary, in the view of the Committee, and will in all cases seek, in the first instance, to deliver any such awards under
the terms of the existing incentive pay structure
• 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 capped at the commercial value of the amount forfeited and will take account of 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 view of the Committee, equally reflected in some other way, for example
through a significant discount to the face value of the awards forfeited. It will only include guaranteed or non-prorated amounts
under the AIP where the Committee considers that it is necessary to secure the recruitment
www.directlinegroup.com 91
91
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ remuneration report continued
The elements of any package for a new recruit, including the maximum level of variable pay, but excluding buy-outs, and
the approach taken by the Committee in relation to setting each element of the package 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 if needed in order to facilitate, in exceptional
circumstances, the recruitment of an Executive Director. Awards granted under this provision will only be used for buy-out awards.
Any commitments made before promotion to the Board (except when made in connection with the appointment to the Board)
can continue to be honoured under the policy even if they are not consistent with the policy prevailing when the commitment
is fulfilled.
In exceptional circumstances, the initial notice period may be longer than the Company’s 12 month policy up to a maximum
of 24 months. However, this will reduce by one month for every month served, until it has reduced to 12 months in line with
the Company’s policy position.
The remuneration policy for the Chairman and Non-Executive Directors as set out earlier in this report will apply in relation to
any recruitments to those positions.
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
Paul Geddes
1 September 2012
12 months
John Reizenstein 1 September 2012
12 months
Base salary only for unexpired portion of notice period and
to be paid in a lump sum or monthly instalments, in which
case instalments are subject to mitigation if an alternative role
is found.
Base salary only for unexpired portion of notice period and
to be paid in a lump sum or monthly instalments, in which
case instalments are subject to mitigation if an alternative role
is found.
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 termination policy summary.
Termination policy summary
It is appropriate for the Committee to retain discretion to consider the termination terms of any Executive Director, having regard
to all the relevant facts and circumstances available to them at the time. A Director is deemed a ’good leaver‘ if the following
circumstances are met:
• Annual Incentive Plan and Long-Term Incentive Plan – death, injury, ill-health, redundancy, retirement, the sale of the
individual’s employing company or business out of the Group, or in such other circumstances as the Committee determines
• Deferred Annual Incentive Plan – for any reason other than summary dismissal or resignation unless, in the case of resignation
only, the Committee determines otherwise
The table overleaf sets out the general position although 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. Similarly, while the policy is generally to reduce AIP and LTIP awards on
a pro-rata basis, the Committee has reserved discretion to disapply such reduction if, in the circumstances, it considers that to
be appropriate taking into account the performance of the departing Executive and the circumstances of leaving.
92
92 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Incentives
If a leaver is a ‘bad leaver’, for example
leaving through resignation or summary
dismissal
If a leaver is deemed to be
a ‘good leaver’
Other events, for example change in
control or winding up of Company
Annual Incentive Plan
No awards made
Bonus paid at the normal time
and on a time pro-rata basis,
unless the Committee
determines otherwise.
Deferred Annual
Incentive Plan
All awards will lapse
Long-Term Incentive Plan
All awards will lapse
Bonus determined on such basis
as the Committee considers
appropriate and paid on a
time pro-rata basis, unless
the Committee determines
otherwise.
Awards will vest in full.
In the event of a demerger or
similar event, the Committee may
determine that awards
vest on the same basis.
Awards will vest subject
to the application of the
performance conditions
and, unless the Committee
determines otherwise, time
pro rating.
In the event of a demerger or
similar event, the Committee may
determine that awards
vest on the same basis.
Deferred shares typically vest
on the normal vesting date,
although the Committee
reserves discretion to accelerate
vesting. In the case of the
participant’s death or other
exceptional circumstances,
awards may vest immediately.
Awards will vest on the normal
vesting date subject to
performance and, unless
the Committee determines
otherwise, time pro rating.
In exceptional circumstances,
as determined by the Committee,
for example in the case of the
participant’s death, awards
may vest on cessation.
Service agreements for Executive Directors provide that Paul Geddes and John Reizenstein are not eligible to receive any
enhanced redundancy terms which may be offered by the Group from time to time. Their rights to a statutory redundancy
payment are not affected.
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 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 are required to submit
themselves for re-election at each AGM.
Terms and conditions of appointment of all of the Directors are available for inspection by any person at the Company’s
registered office and at the AGM.
The Chairman and Non-Executive Directors have notice periods of three months from either party, which do not apply in the
case of a Director not being re-elected by shareholders or retiring from office under the Articles of Association. Other than fees
for this notice period, the Chairman and Non-Executive Directors are not entitled to any compensation on exit.
External directorships
The Company encourages Executive Directors to accept, subject to the approval of the Chairman, 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.
www.directlinegroup.com 93
93
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ remuneration report continued
Consideration of employment conditions elsewhere in the Group
As explained elsewhere in the Directors’ remuneration report, the Committee reviews the overall pay and bonus decisions
in aggregate for the wider Group and therefore takes account of pay and conditions in the wider Group in determining the
Directors’ remuneration policy and the remuneration payable to Directors. Through the Chief Executive Officer, Paul Geddes,
and other senior management the Committee may receive input provided by employee groups within the Group, such as the
Employee Representative Body, as required.
In accordance with prevailing commercial practice, the Committee did not consult with employees in preparing the Directors’
remuneration policy.
Consideration of shareholders’ views
The Committee takes into account the approval levels of remuneration related matters at the AGM in determining whether the
current Directors’ remuneration policy remains appropriate.
The Committee, consistent with its approach of operating within the highest standards of corporate governance, takes significant
account of guidelines issued by the Investment Association and other shareholder bodies (such as the National Association of
Pension Funds) when setting the remuneration policy.
The Committee will also seek to build an active and productive dialogue with investors on developments in the remuneration
aspects of corporate governance generally and any changes to the Company’s executive pay arrangements in particular.
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
in the form of variable pay and is therefore dependent on performance against our strategic objectives.
The Committee has considered the level of remuneration that may be paid under different performance scenarios to ensure that
it would be appropriate in each situation in the context of the performance delivered and the value created for shareholders.
The following charts show the potential remuneration that may be earned by Executive Directors under three assumed
performance scenarios as follows:
CEO – Paul Geddes
(£’000)
Minimum
100% 1,011
On-target
Maximum
47%
25%
CFO – John Reizenstein
(£’000)
Minimum
100% 617
38%
15% 2,164
On-target
50%
35%
15% 1,242
£0m
£1m
Total fixed pay AIP
35%
£2m
LTIP
40% 3,991
Maximum
27%
31%
42%
2,300
42%
£3m
£4m
£0m
£1m
Total fixed pay AIP
£2m
LTIP
£3m
£4m
94
94 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015 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 2016
• Benefits measured as benefits paid in 2015 as set out in the single figure table on page 77, including the
value of matching shares under the SIP where relevant
• Pension measured as the defined contribution or cash allowance in lieu of Company contributions,
as a percentage of salary (25% of base salary for both Executive Directors)
On-target
Based on what the Director would receive if performance was on-target (excluding share price appreciation
and dividends):
• Fixed remuneration as above
• AIP – consists of the on-target bonus of 60% of maximum bonus opportunity
• LTIP – consists of the threshold level of vesting (20% vesting)
Maximum
Based on the maximum remuneration receivable (excluding share price appreciation and dividends):
• Fixed remuneration as above
• AIP – consists of the maximum bonus (175% of base salary for Paul Geddes, 150% for John Reizenstein)
• LTIP – consists of the face value of awards (200% of base salary)
www.directlinegroup.com 95
95
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ report
The Directors present their report for the financial year ended
31 December 2015.
You can find the forward-looking statements disclaimer
on page 176.
Strategic report
The Company’s Strategic report is on pages 1 to 45. It
includes the following information that would otherwise
need to be disclosed in this Directors’ report:
Subject
Use of financial instruments
Important events since
the financial year end
Likely future developments in
the business
Employee involvement
Pages
43 and 44
10 to 13
13 and 34 to 37
32 and 33
Corporate governance statement
The FCA’s Disclosure and Transparency Rules require a
corporate governance statement in the Directors’ report to
include certain information. You can find information that fulfils
the corporate governance statement’s requirements in this
Directors’ report; the Corporate Governance report; the
Committee reports; and the Directors’ remuneration report,
on pages 46 to 95. This information is incorporated in the
Directors’ report by reference.
Disclosure of information under Listing Rule 9.8.4R
Subject
Contracts of significance
Details of shareholder
dividend waivers
Significant shareholder
agreements
Page
98
97
97
Post-balance sheet events
There were no post-balance sheet events to report.
Dividends
The Group aims to generate long-term sustainable value
for shareholders, while balancing operational, regulatory,
rating agency and policyholder requirements. The Board has
a progressive dividend policy for the Company. This aims
to increase the dividend annually in real terms to reflect
the Company’s cash flow generation and long-term
earnings potential.
The Board recommends a final dividend of 9.2 pence per
share to shareholders. Subject to shareholder approval at the
Company’s 2016 AGM, this will become payable on 19
May 2016 to all holders of Ordinary Shares on the Register of
members at close of business on 11 March 2016. A second
special interim dividend has also been declared of 8.8 pence
per share and will have the same record and payment dates
as the final dividend for 2015.
The final dividend resolution provides that the Board may
cancel the dividend and therefore payment of the dividend at
any time prior to payment if it considers it necessary to do so
for regulatory capital purposes. Detailed explanatory notes can
be found in the Notice of AGM.
The Company paid a special interim dividend of 27.5 pence
per share in July 2015. This represented substantially all of
the net proceeds from the sale of the International division.
The Company paid an interim dividend of 4.6 pence per
share in September 2015.
Due to uncertainty about the timing of completion of the
International division sale (and related distribution), the Board
declared a second interim dividend (in lieu of a final dividend)
for 2014 of 8.8 pence per share. It also declared a second
special interim dividend of 4.0 pence per share for the 2014
financial year, which was paid in April 2015, at the same
time as the second interim dividend.
The special interim dividends are consistent with the Group’s
policy to distribute excess capital.
Including the special, interim and final dividends, the total
dividend for the 2015 financial year is 50.1 pence per share
(2014: 27.2 pence). Of this, 36.3 pence relates to special
interim dividends (2014: 14.0 pence).
Further information about dividends and capital management
can be found in the Finance review on pages 44 and 45,
and note 15 to the financial statements on page 143.
Directors
You can find the current Directors’ biographies on pages 48
to 49. All Directors will retire and be submitted for election
or re-election at the 2016 AGM except for Priscilla Vacassin,
who steps down from the Board on 1 March 2016. This is
in accordance with the UK Corporate Governance Code and
the Articles of Association of the Company, which govern the
appointing and replacing of Directors.
The Group expects that one-third of the annual dividend will
generally be paid in the third quarter as an interim dividend,
and two-thirds will be paid as a final dividend in the second
quarter of the following year. The Board may revise the
dividend policy from time to time.
The Directors listed on pages 48 and 49 were the Directors
of the Company throughout the year apart from Richard Ward,
who was appointed on 18 January 2016, and Glyn Jones,
who resigned as a Director on 13 May 2015 due to
increasing commitments elsewhere.
Additionally, if the Board believes the Group has capital
surplus to its view of its requirements, it is intended that such
excess capital will be returned to shareholders. The Company
may consider a special dividend and/or a repurchase of its
own shares to distribute surplus capital to shareholders.
The Company’s Articles of Association set out the Directors’
powers. You can obtain a copy of 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.
96
96 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015 Secretary
Roger Clifton is the Company Secretary of Direct Line Insurance
Group plc. He can be contacted at the Company’s Registered
Office, details of which are on the inside back cover.
Directors’ interests
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 70 to 95.
Directors’ indemnities
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, 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 third-
party indemnities as defined by section 234 of the Companies
Act 2006. No amount was paid under any of these
indemnities during the year.
The Company maintains directors’ and officers’ liability
insurance. This provides appropriate cover for legal actions
brought against its Directors.
The Company has also provided the directors of DLG Pension
Trustee Limited with qualifying pension scheme indemnities.
This is in accordance with section 235 of the Companies
Act 2006. DLG Pension Trustee Limited acts as trustee for
two of the Company’s occupational pension schemes.
Share capital
The Company has a premium listing on the London Stock
Exchange. As at 31 December 2015, its share capital
comprised 1,375,000,000 fully paid Ordinary Shares of
10 10/11 pence each.
On 29 June 2015, shareholders approved a share
consolidation. This resulted in issuing 11 new Ordinary Shares
of 10 10/11 pence each for every 12 Ordinary Shares of
10 pence each in issue at close of business on 29 June 2015.
Shareholders approved certain authorities at the Company’s
2015 AGM related to the Company’s share capital. As part
of the share consolidation approved at the General Meeting
on 29 June 2015, these authorities were refreshed and
adjusted to account for the share consolidation. Therefore,
the Directors now have authority to:
allot shares in the Company or grant rights to subscribe for,
or convert, any security into shares up to an aggregate
nominal amount of £50,000,000;
allot shares up to an aggregate nominal amount of
£100,000,000, for the purpose of a rights issue; and
make market purchases of up to 137,500,000 shares
in the Company, representing approximately 10% of
the Company’s issued share capital at the time.
To date, the Directors have not used these authorities.
Shareholders will be asked to renew them at the 2016 AGM
in line with the most recent institutional investors’ guidelines.
The Company has not held any shares in treasury during the
period under review.
You can find out more about the Company’s share capital
and shares under option at 31 December 2015 in notes 28
and 34 to the consolidated financial statements.
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.
Rights attaching to shares
All of the Company’s issued Ordinary Shares rank equally in
all respects. The Company’s Articles of Association set out the
rights and obligations attaching to the Company’s Ordinary
Shares. You can obtain a copy of this on the Company’s
website at www.directlinegroup.com .
All issued shares are fully paid and free from any restrictions
on their transfer, except where law requires, such as insider
trading rules. All employees must conform to the Company’s
share dealing rules. These rules restrict particular employees’
ability to deal in the Company’s shares at certain times, and
mean they need to obtain permission to deal before doing so.
Some of the Company’s employee share plans also include
restrictions on transfer of 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, excluding
any part of a day that is not a working day, before the time
fixed for the meeting. To be valid, all proxy appointments must
be filed at least 48 hours before the meeting’s time.
Where the Company has issued a notice under section 793
of the Companies Act 2006 which is in default for at least
14 days, the person(s) interested in those shares shall not
be entitled to attend or vote at any general meeting until the
default has been corrected or the shares sold.
There is no arrangement or understanding with any
shareholder, customer or supplier, or any other external party
that provides the right to appoint a Director or a member of
the Executive Committee, or any other special rights regarding
control of the Company.
Articles of Association
Unless expressly specified to the contrary in the Articles of
Association, they may only be amended by a special resolution
of the Company’s shareholders at a general meeting.
www.directlinegroup.com 97
97
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ report continued
Significant agreements affected by a change of control
A number of agreements may take effect, alter or terminate
upon a change of control of the Company. None of these
agreements are considered to be significant in terms of its
impact on the business of the Group as a whole.
All of the Company’s employee share incentive plans contain
provisions relating to a change of control. Outstanding awards
would typically vest and become exercisable. This is subject to
satisfying any performance conditions, and normally with an
additional time-based pro-rata reduction where performance
conditions apply, and approval from the Remuneration Committee.
Substantial shareholdings
In accordance with the provisions of chapter 5 of the FCA’s
Disclosure and Transparency Rules, the Company has been
notified of the following indirect interest in the Company’s voting
rights. The Company has not been notified of any direct interests.
Scope 1 – direct emissions including fuels used in office
buildings, accident repair centres and owned vehicles
Scope 2 – indirect emissions resulting from generating electricity
purchased for office buildings and accident repair centres
Total GHG emissions for continuing operations for 2015 were
22,611 tonnes (2014: 27,308 tonnes), as set out in the table
below. This primarily comprised emissions from purchased
electricity and natural gas, diesel fuel and refrigerant gas used.
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.
BlackRock, Inc.
31 December
2015
5.08%
9 March
2016
5.08%
Ecometrica has externally verified the GHG emissions data.
Verification statements can be found on the Group’s website
at www.directlinegroup.com .
You can find further information on the Group’s approach to
energy and the environment in the CSR section on page 32.
Greenhouse gas emissions
CO2e tonnes
Continuing operations
Total Group including
discontinued operations
Scope 1 direct
Scope 2 indirect
Total gross
emissions
Emissions per £
million of net
earned premium
2015
2014
2015
2014
7,643
14,968
7,784
19,524
7,645
15,498
7,787
20,972
22,611
27,308
23,143
28,759
7.7
9.1
8.8
8.7
Longer term viability and going concern basis
The statements required to be included in the Annual Report
following the UK Corporate Governance Code provisions
C.1.3 and C.2.2 can be found on pages 56 and 57,
and are incorporated here by reference.
Political donations
The Group made no political donations during the year
(2014: nil).
Employees with disabilities
The Group is committed to promoting diversity across every
area of the business. At recruitment, we adjust and enhance
our application and selection process and also guide and
provide additional training for interviewers, where necessary.
An element of our Diversity Network Alliance focuses on
matters important to employees with disabilities. It also
identifies areas where we can improve. To help people
continue working for us, we make reasonable adjustments to
their working environments and equipment, and roles and role
requirements. We also ensure that everyone can access the
same opportunities.
Greenhouse gas emissions
The Group has followed the 2013 UK Government
environmental reporting guidance for greenhouse gas
(“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. 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 included emissions from the International
division, until its sale in May 2015, under discontinued
operations in the table opposite. It has not included
emissions associated with its investment portfolio.
98
98 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015 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.
This confirmation is given and should be interpreted in
accordance with the provisions of section 418 of the
Companies Act 2006.
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.
Directors’ responsibility statement
The Directors are responsible for preparing the Annual Report
and financial statements in accordance with applicable law
and regulations.
Company law requires the Directors to prepare such financial
statements for each financial year. Under that law, the
Directors must prepare the Group financial statements in
accordance with International Financial Reporting Standards
(“IFRS”), as adopted by the EU and Article 4 of the
International Accounting Standard (“IAS”) regulation. They
have also chosen to prepare the Parent Company financial
statements under IFRS, as adopted by the EU. Under company
law, the Directors must not approve the accounts unless they
are satisfied that they give a true and fair view of the
Company’s state of affairs and profit or loss for that period.
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, the
Company’s financial position at any time, and enable them to
ensure the financial statements comply with the Companies Act
2006. Additionally, they are responsible for safeguarding the
Company’s assets and hence taking reasonable steps to prevent
and detect fraud and other irregularities. The Directors are
responsible for maintaining and ensuring the integrity of the
corporate and financial information included on the Company’s
website at www.directlinegroup.com . Legislation in the UK
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Each of the Directors, whose names and functions are listed on
pages 48 and 49, confirms that, to the best of their knowledge:
the financial statements, prepared in accordance with IFRS,
give a true and fair view of the assets, liabilities, financial
position, and profit or loss of the Company, and the
undertakings included in the consolidation taken as a
whole; and
the Strategic report (on pages 1 to 45) and Directors’
report (on pages 96 to 99) include a fair review of the
development and performance of the business, 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.
The Board reviewed and approved this report on
29 February 2016.
By order of the Board
In preparing these financial statements, IAS 1 requires
that Directors:
Roger C. Clifton
Company Secretary
Properly select and apply accounting policies
Present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information
Provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users
to understand the impact of particular transactions, other
events and conditions on the entity’s financial position
and financial performance
Assess the Company’s ability to continue as a going concern
www.directlinegroup.com 99
99
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Contents
Financial statements
Independent Auditor’s report
Consolidated financial statements
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated cash flow statement
Notes to the consolidated
financial statements
1. Accounting policies
2. Critical accounting estimates and judgements
3. Risk management
4. Segmental analysis
5. Discontinued operations and disposal group
6. Net earned premium
7.
Investment return
8. Other operating income
9. Net insurance claims
10. Commission expenses
11. Operating expenses
12. Finance costs
13. Tax charge
14. Current and deferred tax
15. Dividends
16. Earnings per share
17. Net assets per share and return on equity
18. Goodwill and other intangible assets
19. Property, plant and equipment
20. Investment property
21. Subsidiaries
22. Reinsurance assets
23. Deferred acquisition costs
24. Insurance and other receivables
25. Derivative financial instruments
26. Financial investments
27. Cash and cash equivalents and borrowings
28. Share capital
29. Other reserves
30. Subordinated liabilities
31. Insurance liabilities
32. Unearned premium reserve
33. Retirement benefit obligations
100
100 Direct Line Group Annual Report & Accounts 2015
157
159
160
160
161
162
163
164
165
165
166
167
167
168
169
169
169
169
169
169
170
170
170
170
171
171
171
171
34. Share-based payments
101
35. Trade and other payables including
insurance payables
36. Notes to the consolidated cash flow statement
37. Contingent liabilities
38. Commitments
39. Fair value
40. Related parties
Parent Company financial
statements
Parent Company balance sheet
Parent Company statement of comprehensive income
Parent Company statement of changes in equity
Parent Company cash flow statement
Notes to the Parent Company
financial statements
1. Accounting policies
2.
Investment in subsidiary undertakings
3. Assets held for sale
4. Other receivables
5. Current tax
6. Derivative financial instruments
7. Financial investments
8. Cash and cash equivalents
9. Share capital
10. Subordinated liabilities
11. Trade and other payables
12. Dividends
13. Cash generated from operations
14. Related parties
15. Share-based payments
16. Risk management
17. Directors and key management remuneration
106
107
108
109
110
111
118
121
133
136
138
138
139
139
139
139
141
141
142
143
143
144
145
147
147
148
148
148
149
149
149
150
150
151
151
152
154
155
Direct Line Group Annual Report & Accounts 2015
Independent Auditor’s report to the shareholders of Direct Line Insurance Group plc
Opinion on the financial statements of Direct Line
Insurance Group plc
In our opinion:
• the financial statements give a true and fair view of the state
of the Group’s and of the Parent Company’s affairs as at
31 December 2015 and of the Group’s profit for the year
then ended;
• the financial statements have been properly prepared in
accordance with International Financial Reporting Standards
(“IFRSs”) as adopted by the European Union; and
• the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and,
as regards the Group financial statements, Article 4 of
the International Accounting Standard (“IAS”) Regulation.
The financial statements comprise the consolidated income
statement, the consolidated 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 40 on the consolidated
financial statements, and the related notes 1 to 17 on the Parent
Company financial statements. The financial reporting framework
that has been applied in their preparation is applicable law
and IFRSs as adopted by the European Union.
Separate opinion in relation to IFRSs as issued by
the IASB
As explained in note 1 to the consolidated financial
statements, in addition to complying with its legal obligation
to apply IFRSs as adopted by the European Union, the
Group has also applied IFRSs as issued by the International
Accounting Standards Board (“IASB”).
In our opinion the Group financial statements comply with
IFRSs as issued by the IASB.
Independence
We are required to comply with the Financial Reporting
Council’s Ethical Standards for Auditors and we confirm
that we are independent of the Group and we have fulfilled
our other ethical responsibilities in accordance with those
standards. We also confirm we have not provided any of the
prohibited non-audit services referred to in those standards.
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 page 56 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 page 56 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 28 to 29 that describe those risks
and explain how they are being managed or mitigated.
• the Directors’ statement on page 56 about whether they
considered it appropriate to adopt the going concern basis
of accounting in preparing the financial statements 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;
• the Director’s explanation on pages 56 to 57 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.
We agreed with the Directors’ adoption of the going concern
basis of accounting and we did not identify any material
uncertainties. However, because not all future events or
conditions can be predicted, this statement is not a guarantee
as to the Group’s ability to continue as a going concern.
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.
www.directlinegroup.com 101
101
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Independent Auditor’s report to the members of Direct Line Insurance Group plc continued
Risk
How the scope of our audit responded to the risk
The methodology and assumptions used in setting
insurance reserves
Insurance reserves include the Group’s insurance liabilities
from continuing business totalling £4.5 billion, as detailed
in note 31.The determination of the value of the insurance
reserves requires significant judgement in the selection of key
assumptions and methodologies. The Group has indicated to
the market that assuming current claims trends continue, the
contribution from prior-year reserve releases is expected to
remain significant, albeit lower than in 2014. Management
exercises significant judgement in respect of the trends in
bodily injury claims frequency and severity, the speed of
recognition of emerging data and trends, the propensity for
large claims to settle as periodic payment orders (“PPOs”),
the likely outcome of the Government’s consultation on the
Ogden discount rate used by the courts to calculate claims
for long-term damages and other regulatory developments.
There were a number of weather events at the end of 2015
which caused severe flooding across the UK. Management has
exercised judgement in the determination of the full extent of the
claims. Therefore the scope of this risk was extended to include
the valuation of the additional provision for these events.
We have tested the design and implementation and operating
effectiveness of the key controls over the end-to-end reserving
process, including the controls over the inputs and outputs for the
actuarial best estimate (“ABE”) and the controls for setting of the
margin above ABE.
We also tested the completeness and accuracy of the
underlying data used in the actuarial calculations through
performing reconciliations on the data back to the financial
ledger and the actuarial data used by our Deloitte actuarial
specialists in performing their audit.
Having done this, we worked with those specialists to:
• consider the suitability of the methodology used in setting
insurance reserves against industry benchmarks;
• challenge management’s key assumptions and judgements
particularly in relation to the cost per claim for the floods
against industry benchmarks;
• assess whether the reserving methodology has been
applied consistently across periods;
• evaluate prior-year reserve releases and emerging trends
for consistency with management’s methodology; and
• challenge management’s identification of items to be included
in the margin above ABE, to perform sensitivity analysis on
the range of potential scenarios and assess the consistency
of the point within the range that the margin is set.
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.
We have tested the valuation of securitised credit instruments
where an observable market price could not be obtained by
engaging our pricing and valuation specialists to calculate
independent valuations using a discounted cash flow
approach. We have used our financial instrument specialists
to test the macro hedge arrangements, valuation of the related
financial instruments and the accounting treatment applied.
We have engaged our credit specialists to challenge the
methodology used in the assessment of credit risk within the
growing infrastructure debt portfolio.
In addition, we have checked that the Group’s disclosures
satisfy the requirements of IFRS 7 and IFRS 13. We have
reviewed the classification and accounting treatment of the
Group’s investment portfolio in line with the accounting
policies set out in note 1.12 to the financial statements.
The valuation of investments held at fair value, derivatives and
loan loss provisioning
The Group’s financial investments shown in note 26 represent
the largest number on the balance sheet, £5.6 billion. As the
Group’s investments portfolio has diversified, the risk associated
with valuation has increased over instruments where market
prices are not always readily available, such as securitised
credit assets or infrequently traded assets. These investments
are typically more illiquid, resulting in reduced availability of
observable inputs and therefore increased judgement in their
valuation. The valuation of the Group’s derivatives, held in
order to hedge interest rate risk and foreign exchange risk, is
also deemed to be complex, with small differences in interest
rate curves resulting in material valuation changes.
Management are required to assess financial assets for
indications of impairment. Where limited observable market
inputs are available, this requires management to exercise
increased judgement. The infrastructure debt portfolio has
increased by 330% to £330 million in the year and is held at
amortised cost. There are no readily observable market inputs
for this portfolio and so this has resulted in an increased risk of
material misstatement.
102
102 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Risk
How the scope of our audit responded to the risk
IT control environment
In May 2015, the Group essentially finished their planned
programme of transitioning IT infrastructure from RBS Group to
an independently hosted data centre. In addition, management
have a number of ongoing projects to assess and improve the
IT control environment. Due to the significant change in the
IT environment, there is an increased risk that the underlying
IT infrastructure controls supporting key financial reporting
processes might not adequately mitigate the risk of material
financial misstatement.
We have tested the design, implementation and operating
effectiveness of general IT controls around key IT processes on
the applications and the migrated infrastructure, with a focus
on access security, change management and operational
controls, and have understood the governance process over
the infrastructure migration itself. Our audit procedures also
included testing additional business controls and site visits to
the hosted UK data centre to test the physical access controls
and the operational offices in India. We have also reviewed
the scope of management’s ongoing project to improve the
IT environment and tailored our audit approach to take into
account the findings and changes implemented as at the time
of our audit.
Transformation projects
There is a risk that the transformation programme, which
includes outsourcing and offshoring, could impact the financial
reporting control environment, in particular where processes
and controls have changed operation and location. There is
also a risk that the change will cause management stretch
which could impact on the effectiveness of existing internal
controls. There is a risk that there may no longer be an
appropriate level of review or adequate segregation of duties.
We have tested the design and implementation and 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 focused on identifying that there remained an appropriate
level of review and segregation of duties in the process.
Reinsurance asset valuation
The valuation of the reinsurance asset, £1 billion in respect
of the ceded part of the insurance reserves, as detailed in
note 22, requires significant judgement to reflect the credit risk
exposure to long-term assets arising from periodic payment
orders. In addition, management refined their methodology for
calculating the reinsurance bad debt. There is also a risk that
reinsurance treaty terms and actuarial assumptions are not
correctly applied when performing reinsurance valuations.
We have tested the design and implementation and operating
effectiveness of the key controls over the reinsurance asset
measurement and valuation process. We reviewed a sample
of reinsurance contracts and assessed whether their terms
are correctly applied.
We have assessed the relevance and reliability of the data
used in the calculation by reviewing the data against
observable market inputs and other supporting documentation.
To test the credit risk exposure, we engaged our credit and
actuarial specialists in order to assess the reasonableness and
appropriateness of the reinsurance bad debt valuation
methodology and assumptions used. This included the
distribution of withdrawals within the transitional matrix which
estimates the probability of default at a point in time, the basis
for allocating cash flows across future periods, and the
selection of scenarios applied to calculate the renewed
recovery rates.
Revenue recognition
Due to the large number of policies underwritten by the
Group there is a risk that the revenue recorded in the financial
statements and the flow of premium information from the
underwriting systems to the financial reporting ledger is not
complete and accurate.
We have tested the design, implementation and operating
effectiveness of the key controls over revenue recognition,
focusing on the flow of information from the underwriting
systems to the financial reporting ledger. We have performed
substantive testing of the flow of data from system downloads
through to posting in the general ledger. In addition, we
performed substantive analytical testing procedures on
the gross and unearned premium balances.
www.directlinegroup.com 103
103
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Independent Auditor’s report to the members of Direct Line Insurance Group plc continued
Last year our report included a risk around IT migration,
which has been captured within the IT control environment risk
description. This is due to the migration programme finishing
early in the year but there still being a significant level of
change in the IT control environment during the year.
An overview of the scope of our audit
The scope of our Group audit was determined by obtaining
an understanding of the Group and its environment, including
Group-wide controls, and assessing the risks of material
misstatement at the Group level.
Due to the completion of the International disposal in 2015,
our Group audit scope has focused on the UK as this is now
the Group’s single trading location. In addition, we perform
site visits at the Group’s key outsourcers. Two entities in the UK
were subject to a full audit, and 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.
These four entities represent the principal business units and
account for 99% (2014: 98%) of the Group’s net assets, 92%
(2014: 99%) of the Group’s gross earned premium and 93%
(2014: 95%) of the Group’s profit before tax. They were also
selected to provide an appropriate basis for undertaking audit
work to address the risks of material misstatement identified above.
Our audit work was executed at levels of materiality
applicable to each individual entity which were lower than
Group materiality.
At the parent entity level we also tested the consolidation
process and carried out analytical procedures to confirm our
conclusion that there were no significant risks of material
misstatement of the aggregated financial information of the
remaining components not subject to audit or audit of specified
account balances. The Group audit team also performs the
audit of the UK entities, which account for 100% of the
Group’s net assets and 95% of the Group’s profit before tax.
The Group audit team was responsible for both the UK
location and Group audit.
Opinion on other matters prescribed by the Companies
Act 2006
In our opinion:
• the part of the Directors’ remuneration report to be audited
has been properly prepared in accordance with the
Companies Act 2006; and
• the information given in the Strategic report and the
Directors’ report for the financial year for which the
financial statements are prepared is consistent with the
financial statements.
The description of risks above should be read in conjunction
with the significant issues considered by the Audit Committee
discussed on page 59. These matters were addressed in the
context of our audit of the financial statements as a whole,
and in forming our opinion thereon, and we do not provide
a separate opinion on these matters.
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.
We have determined that the critical benchmark for the Group
was average profit before tax from ongoing operations. This
measure uses a three-year average of profit before tax,
excluding the impact of discontinued activities and transformation
costs to exclude the effect of year-on-year volatility. We
calculated materiality for the Group to be
£28 million (2014: £28 million), which is below 5.2% (2014:
6.5%) of average profit before tax from ongoing operations.
We also considered this measure to be suitable having
compared to other benchmarks: our materiality is 5.7% of
statutory profit before tax, 0.8% of gross earned premium and
below 1.4% of equity. Group materiality is used for setting audit
scope and the assessment of uncorrected misstatements.
Materialities are set for each significant component in line with
the components proportion of the chosen benchmark. This is
capped at the lower of 90% of Group materiality and the
component materiality calculated for a standalone audit. The
main UK insurance trading entity, which makes up 94% of
Group revenue and 66% of Group statutory profit before tax,
is scoped to a component materiality of £24.8 million (2014:
£25.1million). We determine performance materiality at a
level lower than materiality to reduce the probability that, in
aggregate, uncorrected and undetected misstatements exceed
materiality for the financial statements as a whole. The audit
testing for U K Insurance Limited is carried out to a performance
materiality of £17.4 million (2014: £17.6 million).
We agreed with the Audit Committee that we would report
to the Committee all audit differences in excess of £560,000
(2014: £560,000), 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.
104
104 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015 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
• adequate accounting records have not been kept by the
Parent Company, or returns adequate for our audit have
not been received from branches not visited by us; or
• the Parent Company financial statements are not in
agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
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.
Corporate governance statement
Under the Listing Rules we are also required to review the
part of the corporate governance statement relating to the
Company’s compliance with certain provisions of the UK
Corporate Governance Code. We have nothing to report
arising from our review.
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
• otherwise misleading.
In particular, we are required to consider whether we have
identified any inconsistencies between our knowledge
acquired during the audit and the Directors’ statement that
they consider the Annual Report is fair, balanced and
understandable and whether the Annual Report appropriately
discloses those matters that we communicated to the Audit
Committee which we consider should have been disclosed.
We confirm that we have not identified any such
inconsistencies or misleading statements.
Respective responsibilities of the Directors and
the 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.
This report is made solely to the Company’s members,
as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken
so that we might state to the Company’s members those
matters we are required to state to them in an auditor’s report
and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a
body, for our audit work, for this report, or for the opinions
we have formed.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts
and disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud or error.
This includes an assessment of: whether the accounting policies
are appropriate to the Group’s and the Parent Company’s
circumstances and have been consistently applied and
adequately disclosed; the reasonableness of significant
accounting estimates made by the Directors; and the overall
presentation of the financial statements. In addition, we read
all the financial and non-financial information in the Annual
Report to identify material inconsistencies with the audited
financial statements and to identify any information that is
apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course
of performing the audit. If we become aware of any apparent
material misstatements or inconsistencies we consider the
implications for our report.
David Rush FCA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
29 February 2016
www.directlinegroup.com 105
105
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Consolidated income statement
For the year ended 31 December 2015
Continuing operations
Gross earned premium
Reinsurance premium
Net earned premium
Investment return
Instalment income
Other operating income
Total income
Insurance claims
Insurance claims recoverable from reinsurers
Net insurance claims
Commission expenses
Operating expenses
Total expenses
Operating profit
Finance costs
Gain on disposal of subsidiary
Profit before tax
Tax charge
Profit from continuing operations, net of tax
Profit from discontinued operations, net of tax
Profit for the year attributable to owners of the Company
Earnings per share:
Continuing operations:
Basic (pence)
Diluted (pence)
Continuing and discontinued operations:
Basic (pence)
Diluted (pence)
Notes
2015
£m
2014
£m
6
6
6
7
8
9
9
9
10
11
12
21
13
5A
16
16
16
16
3,110.1
(189.2)
2,920.9
198.1
100.1
50.7
3,269.8
(1,829.3)
162.4
(1,666.9)
(319.3)
(738.5)
(1,057.8)
545.1
(37.6)
–
507.5
(108.3)
399.2
181.2
580.4
3,144.2
(157.5)
2,986.7
215.1
100.4
46.9
3,349.1
(1,778.6)
51.2
(1,727.4)
(354.0)
(776.0)
(1,130.0)
491.7
(37.2)
2.3
456.8
(97.5)
359.3
13.3
372.6
27.9
27.6
40.6
40.1
24.0
23.8
24.9
24.7
The attached notes on pages 111 to 163 form an integral part of these consolidated financial statements.
106
106
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Consolidated statement of comprehensive income
For the year ended 31 December 2015
Profit for the year
Other comprehensive (loss) / income
Items that will not be reclassified subsequently to the income statement:
Actuarial gain on defined benefit pension scheme
Tax relating to items that will not be reclassified
Items that may be reclassified subsequently to the income statement:
Exchange differences on translation of foreign operations
Cash flow hedges
Fair value (loss) / gain on AFS investments
Less: realised net gains on AFS investments included in income statement
Tax relating to items that may be reclassified
Other comprehensive (loss) / income for the year net of tax
Total comprehensive income for the year attributable to owners of the Company
Notes
33
14
29
29
29
2015
£m
580.4
6.7
(1.6)
5.1
14.4
(1.4)
(100.5)
(44.3)
34.6
(97.2)
(92.1)
488.3
2014
£m
372.6
2.8
(0.6)
2.2
(14.5)
1.3
97.2
(22.8)
(17.6)
43.6
45.8
418.4
The attached notes on pages 111 to 163 form an integral part of these consolidated financial statements.
107
www.directlinegroup.com 107
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Consolidated balance sheet
As at 31 December 2015
Assets
Goodwill and other intangible assets
Property, plant and equipment
Investment property
Reinsurance assets
Current tax assets
Deferred acquisition costs
Insurance and other receivables
Prepayments, accrued income and other assets
Derivative financial instruments
Retirement benefit asset
Financial investments
Cash and cash equivalents
Assets held for sale
Total assets
Equity
Liabilities
Subordinated liabilities
Insurance liabilities
Unearned premium reserve
Borrowings
Derivative financial instruments
Trade and other payables including insurance payables
Deferred tax liabilities
Current tax liabilities
Liabilities held for sale
Total liabilities
Total equity and liabilities
Notes
2015
£m
2014
£m
18
19
20
22
14
23
24
25
33
26
27
5C
30
31
32
27
25
35
14
14
5C
524.8
186.3
347.4
1,011.4
0.1
203.8
955.8
110.9
19.6
13.1
5,614.6
963.7
5.1
9,956.6
517.5
181.3
307.2
862.5
0.1
208.4
959.9
107.9
27.3
3.5
5,961.2
880.4
1,208.4
11,225.6
2,630.0
2,810.5
521.1
4,524.5
1,476.6
61.3
46.4
656.5
29.9
10.3
–
7,326.6
9,956.6
526.3
4,674.1
1,434.2
69.8
29.4
660.6
20.6
35.7
964.4
8,415.1
11,225.6
The attached notes on pages 111 to 163 form an integral part of these consolidated financial statements.
The financial statements were approved by the Board of Directors and authorised for issue on 29 February 2016. They were
signed on its behalf by:
John Reizenstein
Chief Financial Officer
108
108
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Consolidated statement of changes in equity
For the year ended 31 December 2015
Employee
trust
shares
£m
Capital
reserves
£m
Revaluation
reserve
£m
Non-
distributable
reserve
£m
Foreign
exchange
translation
reserve
£m
Retained
earnings
£m
Total
shareholders
equity
£m
Notes
15
29
34
14
15
29
34
Balance at 1 January 2014
Profit for the year
Other comprehensive income
Dividends
Transfer to non-distributable
reserve
Shares acquired by employee
trusts
Credit to equity for equity-settled
share-based payments
Shares distributed by employee
trusts
Tax on share-based payments
Balance at 31 December 2014
Profit for the year
Other comprehensive loss
Dividends
Transfer to non-distributable
reserve
Shares acquired by employee
trusts
Credit to equity for equity-settled
share-based payments
Shares distributed by employee
trusts
Tax on share-based payments
Balance at 31 December 2015
Share
capital
£m
150.0
–
–
–
(10.2) 1,450.0
–
–
–
–
–
–
58.8
–
56.8
–
–
–
–
–
(4.4)
–
–
–
–
–
–
150.0
–
–
–
1.0
–
–
–
(13.6) 1,450.0
–
–
–
–
–
–
–
–
–
–
(17.8)
–
–
–
–
–
–
150.0
11.0
–
–
–
(20.4) 1,450.0
–
–
–
–
–
115.6
–
(110.2)
–
–
–
–
–
–
5.4
92.8
–
–
–
32.1
–
–
–
–
124.9
–
–
–
28.0
–
–
–
–
152.9
0.1 1,048.5 2,790.0
372.6
45.8
(401.1)
372.6
2.2
(401.1)
–
(13.2)
–
–
–
–
(32.1)
–
–
(4.4)
6.6
6.6
–
–
(13.1)
–
13.0
–
(1.0)
1.0
–
1.0
996.7 2,810.5
580.4
580.4
(92.1)
5.1
(666.0)
(666.0)
–
–
–
(28.0)
–
–
(17.8)
12.1
12.1
–
–
(0.1)
(11.0)
2.9
892.2
–
2.9
2,630.0
The attached notes on pages 111 to 163 form an integral part of these consolidated financial statements.
109
www.directlinegroup.com 109
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Consolidated cash flow statement
For the year ended 31 December 2015
Net cash generated from / (used by) operating activities before investment of
insurance assets
Cash generated from investment of insurance assets
Net cash generated from operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Purchases of intangible assets
Purchases of assets held for sale
Proceeds on disposals of assets held for sale
Net cash flows from disposal / (acquisition) of subsidiaries
Net cash generated from / (used by) investing activities
Cash flows from financing activities
Dividends paid
Finance costs
Purchase of employee trust shares
Net cash used by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of foreign exchange rate changes
Cash and cash equivalents at the end of the year
Notes
36
36
15
27
2015
£m
42.1
503.1
545.2
(67.9)
(75.5)
–
7.1
327.1
190.8
(666.0)
(38.2)
(17.8)
(722.0)
14.0
898.2
(9.8)
902.4
2014
£m
(410.6)
1,121.1
710.5
(86.7)
(92.8)
(12.6)
0.8
(24.7)
(216.0)
(401.1)
(37.9)
(4.4)
(443.4)
51.1
853.2
(6.1)
898.2
The attached notes on pages 111 to 163 form an integral part of these consolidated financial statements.
110
110
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Notes to the consolidated financial statements
Corporate information
Direct Line Insurance Group plc is a public limited company
registered in England and Wales (company number
02280426). The address of the registered office is Churchill
Court, Westmoreland Road, Bromley, BR1 1DP, England.
1. Accounting policies
Basis of preparation
As required by the Companies Act 2006 and Article 4 of
the EU IAS Regulation, the consolidated financial statements
are prepared in accordance with IFRSs issued by the IASB
as adopted by the EU. The financial statements have been
prepared in accordance with and full compliance with IFRSs
as issued by the IASB.
The consolidated financial statements are prepared on
the historical cost basis except for AFS financial assets,
investment property and derivative financial instruments,
which are measured at fair value.
The Company’s financial statements and the Group’s
consolidated financial statements are presented in Sterling,
which is the functional currency of the Company.
The International segment was classified as a discontinued
operation and International assets and liabilities have been
presented as a disposal group.
Adoption of new and revised standards
The following amendments have been adopted in the year
and have not had a material impact on the Group’s
financial statements:
IFRS 2 (amended), ‘Share-Based Payment’ – The amendment
defines “performance condition” and “service condition”.
IFRS 3 (amended), ‘Business Combinations’ – The first
amendment deals with the accounting for contingent
consideration in a business combination and the second
amendment clarifies that joint arrangements, not just joint
ventures, are outside the scope of IFRS 3.
IFRS 8 (amended), ‘Operating Segments’ – The first
amendment clarifies that an entity must disclose the judgements
made by management in applying the aggregation criteria
and the second amendment clarifies when a reconciliation
of segment assets to total assets is required to be disclosed.
IFRS 13 (amended), ‘Fair Value Measurement’ – The
amendment clarifies that the portfolio exception in IFRS 13
can also be applied to other contracts within the scope of
IFRS 9 or IAS 39.
IAS 16 (amended), ‘Property, Plant and Equipment’ and IAS
38 (amended), ‘Intangible Assets’ – These amendments clarify
that an asset may be revalued by reference to observable data
either by adjusting the gross carrying amount of the asset to
market value or by determining the market value of the carrying
value and adjusting the gross carrying amount proportionately
so that the resulting carrying amount equals the market value.
In addition, they also clarify that accumulated depreciation
and amortisation is the difference between gross and carrying
amounts of the asset.
IAS 19 (amended), ‘Employee Benefits’ – The amendment
simplifies the accounting for employee contributions in respect
of defined benefit plans that are independent of the number
of years of service.
IAS 24 (amended), ‘Related Party Disclosures’ – The
amendment provides additional clarification as to when an
entity which provides managerial services is a related party.
IAS 40 (amended), ‘Investment Property’ – The amendment
clarifies that IFRS 3 should be used to assess whether a
transaction is the purchase of an asset or a business combination.
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 2015 and 31 December
2014. 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 2015 and
31 December 2014 to items considered material to the
consolidated financial statements.
A subsidiary acquired is included in the consolidated financial
statements from the date it is controlled by the Group until the
date the Group ceases to control it. On acquisition of a
subsidiary, its identifiable assets, liabilities and contingent
liabilities are included in the consolidated financial statements
at fair value.
All intercompany transactions, balances, income and expenses
between Group entities are eliminated on consolidation.
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. Monetary assets and
liabilities denominated in foreign currencies are translated into
the relevant functional currency at the foreign exchange rates
ruling at the balance sheet date. Foreign exchange differences
arising on the settlement of foreign currency transactions
and from the translation of monetary assets and liabilities are
reported in the income statement.
Non-monetary items denominated in foreign currencies
that are stated at fair value are translated into the relevant
functional currency at the foreign exchange rates ruling at the
dates the values are determined. Translation differences arising
on non-monetary items measured at fair value are recognised
in the income statement except for differences arising on AFS
non-monetary financial assets, which are recognised in other
comprehensive income.
www.directlinegroup.com
111
111
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
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.
1.3 Contract classification
Insurance contracts are those contracts where the Group
(the insurer) has accepted significant insurance risk from
another party (the policyholder) by agreeing to compensate
the policyholder if a specified uncertain future event
(the insured event) adversely affects the policyholder.
Once a contract has been classified as an insurance contract,
it remains an insurance contract for the remainder of its lifetime,
even if the insurance risk reduces significantly during this
period, unless all rights and obligations are extinguished.
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.
Premiums collected by intermediaries or other parties,
but not yet received, are assessed based on estimates from
underwriting or past experience, and are included in insurance
premiums. Insurance premiums exclude insurance premium
tax or equivalent local taxes and are shown gross of any
commission payable to intermediaries or other parties.
Cash back payments to policyholders under motor telematics
policies represent a reduction in earned premiums.
Investment return
Interest income on financial assets is determined using the
effective interest rate method. The effective interest rate
method is a way of calculating the amortised cost of a
financial asset (or group of financial assets) and of allocating
the interest income over the expected life of the asset.
Rental income from investment property is recognised in
the income statement on a straight-line basis over the period
of the contract. Any gains or losses arising from a change
in fair value are recognised in the income statement.
Instalment income
Instalment income comprises the interest income earned
on policyholder receivables, where outstanding premiums
are settled by a series of instalment payments. Interest is
earned using an effective interest rate method over the term
of the policy.
Other operating income
Vehicle replacement referral income
Vehicle replacement referral income comprises fees in respect
of referral income received when a customer or a non-fault
policyholder (claimant) of another insurer has been provided
with a hire vehicle from a preferred supplier.
Income is recognised immediately when the customer or
claimant is provided with the hire vehicle.
Revenue from vehicle recovery and repair services
Fees in respect of services for vehicle recovery are recognised
as the right to consideration, and accrue through the provision
of the service to the customer. The arrangements are generally
contractual and the cost of providing the service is incurred
as the service is rendered. The price is usually fixed and
always determinable.
The Group’s income also comprises vehicle repair services
provided to other third-party customers. Income in respect
of repairs to vehicles is recognised upon completion of the
service. The price is determined using market rates for the
services and materials used after discounts have been
deducted where applicable.
Other income
Commission fee income in respect of services is recognised
when a policy has been placed and incepted. Income is
stated excluding applicable sales taxes.
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
detail in note 2.1. Costs for both direct and indirect claims
handling expenses are also included.
Provisions are determined by management based on
experience of claims settled and on statistical models
which require certain assumptions to be made regarding
the incidence, timing and amount of claims and any specific
factors such as adverse weather conditions. When calculating
the total provision required, the historical development of
claims is analysed using statistical methodology to extrapolate,
within acceptable probability parameters, the value of
outstanding claims (gross and net) at the balance sheet date.
Also included in the estimation of outstanding claims are
factors such as the potential for judicial or legislative inflation.
In addition, an allowance is made for reinsurance assets
deemed not recoverable.
112
112
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
1.7 Deferred acquisition costs
Acquisition costs relating to new and renewing insurance
policies are matched with the earning of the premiums to
which they relate. A proportion of acquisition costs incurred
during the year is therefore deferred to the subsequent
accounting period to match the extent to which premiums
written during the year are unearned at the balance
sheet date.
The principal acquisition costs deferred are direct advertising
expenditure, administration costs, commission paid and costs
associated with telesales and underwriting staff.
1.8 Goodwill and other intangible assets
Acquired goodwill, being the excess of the cost of an
acquisition over the Group’s interest in the net fair value
of the identifiable assets, liabilities and contingent liabilities
of the subsidiary, associate or joint venture acquired, is
initially recognised at cost and subsequently at cost less
any accumulated impairment losses. Goodwill arising on
the acquisition of subsidiaries, associates and joint ventures
is included in the balance sheet category ‘goodwill and
other intangible assets’. The gain or loss on the disposal
of a subsidiary, associate or joint venture includes the
carrying value of any related goodwill.
Intangible assets that are acquired by the Group are stated
at cost less accumulated amortisation and impairment losses.
Amortisation is charged to the income statement over the
assets’ economic lives using methods that best reflect the
pattern of economic benefits and is included in operating
expenses. The estimated useful economic lives are as follows:
Software development costs
Up to 10 years
Expenditure on internally generated goodwill and brands is
written off as incurred. Direct costs relating to the development
of internal-use computer software and associated business
processes are capitalised once technical feasibility and
economic viability have been established. These costs include
payroll costs, the costs of materials and services, and directly
attributable overheads. Capitalisation of costs ceases when the
software is capable of operating as intended. During and after
development, accumulated costs are reviewed for impairment
against the projected benefits that the software is expected to
generate. Costs incurred prior to the establishment of technical
feasibility and economic viability are expensed as incurred,
as are all training costs and general overheads.
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
property, plant and equipment comprises major components
having different useful lives, they are accounted for separately.
Provisions for more recent claims make use of techniques
that incorporate expected loss ratios and average claims
cost (adjusted for inflation) and frequency methods. As claims
mature, the provisions are increasingly driven by methods
based on actual claims experience. The approach adopted
takes into account the nature, type and significance of the
business and the type of data available, with large claims
generally being assessed separately. The data used for
statistical modelling purposes is generated internally and
reconciled to the accounting data.
The calculation is particularly sensitive to the estimation of
the ultimate cost of claims for the particular classes of business
at gross and net levels and the estimation of future claims
handling costs. Actual claims experience may differ from the
historical pattern on which the actuarial best estimate is based
and the cost of settling individual claims may exceed that
assumed. As a result, the Group sets provisions at a margin
above the actuarial best estimate. This amount is recorded
within claims provisions.
A liability adequacy provision is made for unexpired risks
arising where the expected value of net claims and expenses
attributable to the unexpired periods of policies in force at the
balance sheet date exceeds the unearned premium reserve in
relation to such policies after the deduction of any acquisition
costs deferred and other prepaid amounts (for example,
reinsurance). The expected value is determined by reference
to recent experience and allowing for changes to the premium
rates. The provision for unexpired risks is calculated separately
by reference to classes of business that are managed together
after taking account of relevant investment returns.
1.6 Reinsurance
The Group has reinsurance treaties and other reinsurance
contracts that transfer significant insurance risk.
The Group cedes insurance risk by reinsurance in the normal
course of business, with the arrangement and retention limits
varying by product line. Outward reinsurance premiums are
generally accounted for in the same accounting period as
the premiums for the related direct business being reinsured.
Outward reinsurance recoveries are accounted for in the same
accounting period as the direct claims to which they relate.
Reinsurance assets include balances due from reinsurance
companies for ceded insurance liabilities. Amounts recoverable
from reinsurers are estimated in a consistent manner with the
outstanding claims provisions or settled claims associated with
the reinsured policies and in accordance with the relevant
reinsurance contract. Recoveries in respect of PPOs are
discounted for the time value of money.
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. This also includes
an assessment in respect of the ceded part of claims provisions
to reflect the counterparty 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.
113
www.directlinegroup.com 113
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
Depreciation is charged to the income statement on a
straight-line basis so as to write off the depreciable amount
of property, plant and equipment over their estimated useful
lives. The depreciable amount is the cost of an asset less its
residual value. Land is not depreciated. Estimated useful lives
are as follows:
Freehold and
leasehold buildings
50 years or the period of
the lease if shorter
Vehicles
3 years
Computer equipment
Up to 5 years
Other equipment, including
property adaptation costs
2 to 15 years
The gain or loss arising from the derecognition of an item of
property, plant and equipment is determined as the difference
between the disposal proceeds, if any, and the carrying
amount of the item.
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 (“CGU”) 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 CGU, discounted at a rate that reflects market interest
rates, adjusted for risks specific to the asset or CGU that have
not been reflected in the estimation of future cash flows.
If the recoverable amount of an intangible or a tangible asset
is less than its carrying value, an impairment loss is recognised
immediately in the income statement and the carrying value
of the asset is reduced by the amount of the impairment loss.
A reversal of an impairment loss on intangible assets or
property, plant and equipment is recognised as it arises
provided the increased carrying value does not exceed the
carrying amount that would have been determined had no
impairment loss been recognised. Impairment losses on
goodwill are not reversed.
1.11 Investment property
Investment property comprises freehold and leasehold
properties that are held to earn rentals or for capital
appreciation or both. Investment property is not depreciated,
but is stated at fair value based on valuations by independent
registered valuers. Fair value is based on current prices for
similar properties adjusted for the specific characteristics of
each property. Any gain or loss arising from a change in fair
value is recognised in the income statement.
Investment property is derecognised when it has been either
disposed of or permanently withdrawn from use and no future
economic benefit is expected from disposal. Any gains or
losses on the retirement or disposal of investment property are
recognised in the income statement in the year of retirement
or disposal.
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. The Group only holds AFS financial assets, HTM
financial assets and loans and receivables.
AFS
Financial assets that are not classified as HTM or loans and
receivables are classified as AFS. Financial assets can be
designated as AFS on initial recognition. AFS financial assets
are initially recognised at fair value plus directly related
transaction costs. They are subsequently measured at fair
value. Impairment losses and exchange differences resulting
from translating the amortised cost of foreign currency monetary
AFS financial assets are recognised in the income statement,
together with interest calculated using the effective interest rate
method. Other changes in the fair value of AFS financial assets
are reported in a separate component of shareholders’ equity
until disposal, when the cumulative gain or loss is recognised
in the income statement.
Regular way purchases of financial assets classified as loans
and receivables are recognised on settlement date; all other
regular way purchases are recognised on trade date.
A financial asset is regarded as quoted in an active market
if 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. The appropriate quoted market price for an asset held
is usually the current bid price. When current bid prices are
unavailable, the price of the most recent transaction provides
evidence of the current fair value as long as there has not been
a significant change in economic circumstances since the time
of the transaction. If conditions have changed since the time
of the transaction (for example, a change in the risk-free interest
rate following the most recent price quote for a corporate
bond), the fair value reflects the change in conditions by
reference to current prices or rates for similar financial
instruments, as appropriate.
The valuation methodology described above uses observable
market data.
If the market for a financial asset is not active, the Group
establishes the fair value by using a valuation technique.
Valuation techniques include using recent arm’s length market
transactions between knowledgeable and willing parties
(if available), reference to the current fair value of another
instrument that is substantially the same, discounted cash
flow analysis and option pricing models. If there is a valuation
technique commonly used by market participants to price
the instrument and that technique has been demonstrated to
provide reliable estimates of prices obtained in actual market
transactions, the Group uses that technique.
114
114
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
HTM
Non-derivative financial assets not designated as AFS or loans
and receivables with fixed or determinable payments and fixed
maturity where the intention and ability to hold them to maturity
exists are classified as HTM.
Subsequent to initial recognition, HTM financial assets are
measured at amortised cost using the effective interest rate
method less any impairment losses.
Loans and receivables
Non-derivative financial assets with fixed or determinable
repayments that are not quoted in an active market are
classified as loans and receivables, except those that are
classified as AFS or HTM. Loans and receivables are initially
recognised at fair value plus directly related transaction costs
and are subsequently measured at amortised cost using the
effective interest rate method less any impairment losses.
Insurance receivables comprise outstanding insurance premiums
where the policyholders have elected to pay in instalments, or
amounts due from third parties where they have collected or
are due to collect the money from the policyholder.
Receivables also include amounts due in respect of the
provision of legal services.
Impairment of financial assets
At each balance sheet date the Group assesses whether
there is any objective evidence that a financial asset or group
of financial assets classified as AFS, HTM or loans and
receivables is impaired. A financial asset or portfolio of
financial assets is impaired and an impairment loss incurred if
there is objective evidence that an event or events since initial
recognition of the asset have adversely affected the amount or
timing of future cash flows from the asset.
AFS
When a decline in the fair value of a financial asset classified
as AFS has been recognised directly in equity and there is
objective evidence that the asset is impaired, the cumulative
loss is removed from equity and recognised in the income
statement. The loss is measured as the difference between the
amortised cost of the financial asset and its current fair value.
Impairment losses on AFS equity instruments are not reversed
through profit or loss, but those on AFS debt instruments are
reversed, if there is an increase in fair value that is objectively
related to a subsequent event.
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.
Impairment losses are assessed individually where significant
or collectively for assets that are not individually significant.
Impairment losses are recognised in the income statement and
the carrying amount of the financial asset or group of financial
assets is reduced by establishing an allowance for the
impairment losses. If in a subsequent period the amount of the
impairment loss reduces and the reduction can be ascribed to
an event after the impairment was recognised, the previously
recognised loss is reversed by adjusting the allowance.
For amounts due from policyholders, the bad debt provision
is calculated based upon prior loss experience. For all
balances outstanding in excess of three months, a bad debt
provision is made. Where a policy is subsequently cancelled,
the outstanding debt that is overdue is charged to the income
statement and the bad debt provision is released back to the
income statement.
Derivatives and hedging
Derivative financial instruments are recognised initially, and
subsequently measured, at fair value. Derivative fair values
are determined from quoted prices in active markets where
available. Where there is no active market for an instrument,
fair value is derived from prices for the derivative’s components
using appropriate pricing or valuation models.
Gains and losses arising from changes in the fair value of a
derivative are recognised as they arise in the income statement
unless the derivative is the hedging instrument in a qualifying
hedge. The Group enters into a number of hedge relationships
for cash flow and fair value hedges.
Hedge relationships are formally documented at inception.
The documentation identifies the hedged item and the hedging
instrument and details the risk that is being hedged and the way
in which effectiveness will be assessed at inception and during
the period of the hedge. If the hedge is not highly effective in
offsetting changes in cash flows and fair values attributable to
the hedged risk, consistent with the documented risk
management strategy, or if the hedging instrument expires or is
sold, terminated or exercised, hedge accounting is discontinued.
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.
In a fair value hedge, the gain or loss on the hedging
instrument is recognised in the income statement. The gain
or loss on the hedged item attributable to the hedged risk is
recognised in the income statement and, where the hedged
item is measured at amortised cost, adjusts the carrying
amount of the hedged item.
Derecognition of financial assets
A financial asset is derecognised when the rights to receive
the cash flows from that asset have expired or when the Group
has transferred its rights to receive cash flows from the asset
and has transferred substantially all the risk and rewards of
ownership of the asset.
1.13 Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and
demand deposits with banks together with short-term highly
liquid investments that are readily convertible to known
amounts of cash and subject to insignificant risk of change
in value.
Borrowings, comprising bank overdrafts, are measured
at amortised cost using the effective interest rate method.
115
www.directlinegroup.com 115
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
1. Accounting policies continued
1.14 Financial liabilities
Financial liabilities are initially recognised at fair value net
of transaction costs incurred. Other than derivatives which
are recognised and measured at fair value, all other financial
liabilities are subsequently measured at amortised cost using
the effective interest rate method.
A financial liability is derecognised when the obligation
under the liability is discharged, cancelled or expires.
1.15 Subordinated liabilities
Subordinated liabilities comprise subordinated guaranteed
dated notes which are initially measured at the consideration
received less related transaction costs. Subsequently,
subordinated liabilities are measured at amortised cost using
the effective interest rate method.
1.16 Provisions
The Group recognises a provision for a present legal or
constructive obligation from a past event when it is more likely
than not that it will be required to transfer economic benefits to
settle the obligation and the amount can be reliably estimated.
The Group makes provision for all insurance industry levies,
such as the Financial Services Compensation Scheme and
Motor Insurance Bureau.
When the Group has an onerous contract, it recognises
the present obligation under the contract as a provision.
A contract is onerous when the unavoidable costs of
meeting the contractual obligations exceed the expected
future economic benefit. In respect of leasehold properties,
a provision is recognised when the Group has a detailed
formal plan to vacate the leasehold property, or significantly
reduce its level of occupancy, the plan has been
communicated to those affected and the future property
costs under the lease exceed future economic benefits.
Restructuring provisions are made, including redundancy costs,
when the Group has a constructive obligation to restructure.
An obligation exists when the Group has a detailed formal
plan and has communicated the plan to those affected.
1.17 Leases
Payments made under operating leases are charged to the
income statement on a straight-line basis over the term of
the lease.
1.18 Pensions and other post-retirement benefits
The Group provides post-retirement benefits in the form
of pensions and healthcare plans to eligible employees.
Contributions to the Group’s defined contribution pension
scheme are recognised in the income statement when payable.
The Group’s defined benefit pension scheme, as described in
note 33, 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.
Scheme assets are measured at their fair value. Any surplus
or deficit of scheme assets over liabilities is recognised in
the balance sheet as an asset (surplus) or liability (deficit).
The current service cost and any past service costs, together
with the net interest on net pension liability or asset, is charged
or credited to operating expenses. Actuarial gains and losses
are recognised in full in the period in which they occur outside
the income statement and presented in other comprehensive
income under ‘Items that will not be reclassified subsequently
to the income statement’.
1.19 Taxation
The tax charge or credit represents the sum of the tax currently
payable or receivable and deferred tax.
The current tax charge is based on the taxable profits for
the year as determined in accordance with the relevant tax
legislation, after any adjustments in respect of prior years.
Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense that
are taxable or deductible in other years and it further excludes
items that are never taxable or deductible.
Provision for taxation is calculated using tax rates that have
been enacted or substantively enacted by the balance sheet
date, and is allocated over profits before taxation and amounts
charged or credited to components of other comprehensive
income and equity, as appropriate.
Deferred taxation is accounted for in full using the balance
sheet liability method on all temporary differences between
the carrying amount of an asset or liability for accounting
purposes and its carrying amount for tax purposes.
Deferred tax liabilities are generally recognised for all taxable
temporary timing differences and deferred tax assets are
recognised to the extent that it is probable that taxable
profits will be available against which deductible temporary
differences can be utilised.
Deferred tax assets are reviewed at each balance sheet date
and reduced to the extent that it is probable that they will not
be recovered.
Deferred tax assets and liabilities are calculated at the tax rates
expected to apply when the assets are realised or liabilities
are settled based on laws and rates that have been enacted or
substantively enacted at the balance sheet date. Deferred tax
is charged or credited in the income statement, except when
it relates to items charged or credited to other comprehensive
income, in which case the deferred tax is also dealt with in
other comprehensive income.
Deferred tax assets and liabilities are offset when there is a
legally enforceable right to set off current tax assets against
current tax liabilities and when they relate to income taxes
levied by the same taxation authority and the Group intends to
settle its current assets and liabilities on a net basis.
116
116
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
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.
Vesting conditions include service conditions (requiring the
employee to complete a specified period of service) and
performance conditions (requiring the Group to meet specified
performance targets).
The fair value of options granted is estimated using valuation
techniques which incorporate exercise price, term, risk-free
interest rates, the current share price and its expected volatility.
The cost of employee services received in exchange for an
award of shares or share options granted is measured by
reference to the fair value of the shares or share options on the
date the award is granted and takes into account non-vesting
conditions and market performance conditions (conditions
related to the market price of the Company’s Ordinary Shares).
The cost is expensed on a straight-line basis over the vesting
period (the period during which all the specified vesting
conditions must be satisfied) with a corresponding increase in
equity in an equity-settled award, or a corresponding liability
in a cash-settled award. The cost is adjusted for vesting
conditions (other than market performance conditions) so as to
reflect the number of shares or share options that actually vest.
The cancellation of an award through failure to meet non-
vesting conditions triggers an immediate expense for any
unrecognised element of the cost of an award.
1.21 Capital instruments
The Group classifies a financial instrument that it issues as a
financial liability or an equity instrument in accordance with
the substance of the contractual arrangement. An instrument is
classified as a liability if it is a contractual obligation to deliver
cash or another financial asset, or to exchange financial assets
or financial liabilities on potentially unfavourable terms, or as
equity if it evidences a residual interest in the assets of the
Group after the deduction of liabilities.
The consideration for any Ordinary Share of the Company
purchased by the Group for the benefit of the employee trusts
is deducted from equity.
1.22 Dividends
Interim dividends on Ordinary Shares are recognised in equity
in the period in which they are paid. Final dividends on
Ordinary Shares are recognised when they have been
approved at the AGM.
1.23 Accounting developments
In July 2014, the IASB issued IFRS 9 ‘Financial Instruments’ that
will replace IAS 39 ‘Financial instruments: Recognition and
Measurement’ in its entirety. The classification and measurement
of financial assets and liabilities will be directly linked to the
nature of the instrument’s contractual cash flows and the business
model employed by the holder of the instrument.
The standard introduces a new expected loss model that is
a departure from the current incurred loss model. The model
requires a 12 month expected loss to be recognised for all
financial instruments when they first originate or are acquired.
In subsequent periods, if there is a significant increase in
credit risk of a financial instrument since it was originated
or acquired, the full lifetime expected credit loss would then
be recognised.
The standard has introduced greater flexibility in the type of
transactions eligible for hedge accounting and broadened the
type of instruments that qualify as hedging instruments. The
hedge effectiveness test has been replaced with the principle
of an ‘economic relationship’.
IFRS 9 ‘Financial Instruments’ has been adopted for use from
1 January 2018 by the EU, with an option for insurance
industry participants to either apply the standard from that
date or defer adoption until the IASB issues IFRS 4 (Phase 2)
’Insurance Contracts’ and it is adopted by the EU. This option
has been provided in order to avoid potential asset and
liability mismatches which could arise within the remit of
current IFRS until both standards are applied simultaneously.
The Group will make a decision as to the classification of
financial assets and liabilities once further certainty exists as
to the adoption of IFRS 4 (Phase 2). Accordingly, at this point
in time, the Group is not able to fully quantify the impact of
adopting IFRS 9 on its financial statements.
In May 2014 the IASB issued IFRS 15 ‘Revenue from
Contracts with Customers’ to establish a single comprehensive
model to use in accounting for revenue recognition and
measurement (insurance contracts are excluded from the scope
of IFRS 15). The standard provides guidance on when and
how combined contracts should be unbundled and when a
transaction price includes a variable consideration element.
The standard will require the Group to consider contracts with
customers to determine if changes are required to existing
accounting practices, but is not expected to have a material
impact on the Group’s financial statements.
The effective date of this new standard has been revised
to annual periods beginning on or after 1 January 2018,
although early adoption is permitted.
In January 2016 the IASB issued IFRS 16 ‘Leases’. There are
some changes to the guidance with the definition of a lease,
in particular, more detail is provided on determining whether
a contract conveys the right to use a particular asset; however,
in most areas companies will find that their arrangements under
the new guidance will not change. The standard provides a
single lessee accounting model, requiring lessees to recognise
assets and liabilities for all leases unless the lease term is
12 months or less or the underlying asset has a low value.
Lessors will continue to classify leases as operating or finance,
with the approach to lessor accounting substantially
unchanged. The standard will require the Group to consider
how some of the lease arrangements are currently treated
to determine if changes are required to existing
accounting practices.
IFRS 16 applies to annual reporting periods beginning on or
after 1 January 2019, although early adoption is permitted.
117
www.directlinegroup.com 117
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
2. Critical accounting estimates and judgements
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation
of its financial information. The Group’s principal accounting policies are set out on pages 111 to 117. Company law and IFRSs
require the Directors, in preparing the Group’s financial statements, to select suitable accounting policies, apply them consistently
and make judgements and estimates that are reasonable and prudent.
In the absence of an applicable standard or interpretation, IAS 8, ‘Accounting policies, Changes in Accounting Estimates
and Errors’, requires management to develop and apply an accounting policy that results in relevant and reliable information
in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB’s Framework for the
Preparation and Presentation of Financial Statements. The judgements and assumptions involved in the Group’s accounting
policies that are considered by the Board to be the most important to the portrayal of its financial condition are discussed
below. The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results.
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 2015 amounted to £3,602.6 million (2014: £3,898.6 million
with an additional £393.6 million included in liabilities held for sale).
Claims reserves are assessed separately for large and attritional claims, typically using standard actuarial methods of projection.
Key judgements in this assessment include the selection of specific methods as well as assumptions for claims frequency and
severity through the review of historical claims and emerging trends.
The corresponding reinsurance recoveries and impairment provision are calculated on an equivalent basis, using significant
judgement, as discussed in note 1.6. The reinsurance bad debt provision is mainly for expected recoveries against future PPO
payments. The methodology to calculate the impairment provision was refined in the year to more closely align to Solvency II
and to more accurately reflect potential future exposure to credit risk and the expected timeframe of cash flows associated with
recoveries against these claims.
The most common method of settling bodily injury claims is by a lump sum paid to the claimant and, in the cases where this
includes an element of indemnity for recurring costs such as loss of earnings or ongoing medical care, settlement normally occurs
using a standardised Ogden annuity factor at a discount rate of 2.5%. This is normally referred to as the Ogden discount rate.
Other estimates are also required for case management expenses, loss of pension, court protection fees, alterations to
accommodation and transportation fees.
In August 2012, the Ministry of Justice announced a review of the approach to setting the Ogden discount rate within the existing
legal framework. Following further consultation, in 2015 the Justice Secretary appointed a panel of three financial investment
experts who will provide testimony on potential changes to the discount rate on personal injury damages. We are awaiting the
outcome of their review.
The Group holds provisions for a reduction in the Ogden discount rate at 31 December 2015 to 1.5% (2014: 1.5%).
Details of sensitivity analysis to the assumed Ogden discount rate are shown in note 3.3.1.
The Group settles some large bodily injury claims as PPOs rather than lump sum payments.
The table below analyses the outstanding PPO claims provisions on a discounted and an undiscounted basis at 31 December 2015
and 31 December 2014. These represent the total cost of PPOs rather than any costs in excess of purely Ogden-based settlement.
At 31 December
Gross claims
Approved PPO claims provisions
Anticipated PPOs
Total
Reinsurance
Approved PPO claims provisions
Anticipated PPOs
Total
Net of reinsurance
Approved PPO claims provisions
Anticipated PPOs
Total
118
118
Direct Line Group Annual Report & Accounts 2015
Discounted
2015
£m
Undiscounted
2015
£m
Discounted
2014
£m
Undiscounted
2014
£m
452.3
538.3
990.6
(231.1)
(227.8)
(458.9)
221.2
310.5
531.7
1,315.7
1,660.8
2,976.5
422.6
651.0
1,073.6
1,245.7
1,963.2
3,208.9
(721.5)
(818.4)
(216.6)
(216.5)
(688.6)
(839.6)
(1,539.9)
(433.1)
(1,528.2)
594.2
842.4
1,436.6
206.0
434.5
640.5
557.1
1,123.6
1,680.7
Direct Line Group Annual Report & Accounts 2015
The provisions for PPOs have been categorised as either claims which have already settled as PPOs (approved PPO claims
provisions) or those expected to settle as PPOs in the future (anticipated PPOs). Anticipated PPOs consist of both existing
large loss case reserves including allowances for development and claims yet to be reported to the Group. Reinsurance
is applied at claim level and the net cash flows are discounted for the time value of money. The discount rate is consistent
with the long duration of the claims payments and the assumed future indexation of the claims payments.
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% (2014: 4.0%). The rate
of interest used for the calculation of present values is 4.0% (2014: 4.0%), which results in a real discount rate of 0.0%
(2014: 0.0%). Since lump sum payments are calculated using a real discount rate of 2.5% (2014: 2.5%) the PPOs reserved
cost is greater than that of lump sum settlements.
Details of sensitivity analysis to the discount rate applied to PPO claims are shown in note 3.3.1.
2.2 Impairment provisions – financial assets
The Group determines that AFS 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.
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
• offer on buyback of perpetual bonds below par value.
There was no impairment provision on AFS debt securities in the year ended 31 December 2015 (2014: £1.3 million release).
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.
HTM and loans and receivables
On a quarterly basis, the Group reviews whether there is any objective evidence that the financial instruments classified as HTM
or loans and receivables are impaired based on the following criteria:
• adverse movements in the credit rating of the borrower;
• actual, or imminent, default on interest or nominal; or
• offer on buyback or loan below par value.
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).
2.3 Fair value
Financial assets classified as AFS debt securities and derivative financial instruments are recognised in the financial statements
at fair value determined using observable market input. The fair value of AFS debt securities at 31 December 2015 amounted
to £5,226.6 million (2014: £5,830.3 million with an additional £706.9 million included in assets held for sale). The fair
value of derivative financial assets and liabilities amounted to £19.6 million (2014: £27.3 million) and £46.4 million
(2014: £29.4 million) respectively.
Freehold and long leasehold properties that are classified as investment properties are recognised in the financial statements
at fair value. The fair value at 31 December 2015 amounted to £347.4 million (2014: £307.2 million) and was determined
using a valuation model that includes inputs that are unobservable.
119
www.directlinegroup.com 119
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
2. Critical accounting estimates and judgements continued
Estimation of the fair value of assets and liabilities
In estimating the fair value of financial assets and investment properties, the methods and assumptions used by the Group
incorporate:
Financial assets and liabilities
For fixed maturity securities, fair values are generally based upon quoted market prices. Where market prices are not readily
available, fair values are estimated using values obtained from quoted market prices of comparable securities.
Investment property
Investment property is recorded at fair value, measured by independent valuers who hold recognised and relevant professional
qualifications. The valuation model is driven predominantly by unobservable inputs, as although in part the valuations are
compared with recent market transactions for similar properties, they are adjusted for the specific characteristics of each property.
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.
Level 2 financial assets and liabilities are measured using a valuation technique based on assumptions that are supported by
prices from observable current market transactions. These are assets for which pricing is obtained via pricing services, but where
prices have not been determined in an active market, or financial assets with fair values based on broker quotes, investments in
private equity funds with fair values obtained via fund managers or assets that are valued using the Group’s own models whereby
the majority of assumptions are market-observable.
Level 3 fair value measurements used for investment properties are those derived from a valuation technique that includes inputs
for the asset that are unobservable.
2.4 Deferred acquisition costs
The Group defers a proportion of acquisition costs incurred during the year to subsequent accounting periods. Management uses
estimation techniques to determine the level of costs to be deferred, by category of business. Judgement is used to determine the
types of cost that can be deferred and these are referred to in note 1.7. Total deferred acquisition costs at 31 December 2015
amounted to £203.8 million (2014: £208.4 million with an additional £111.1 million included in assets held for sale). During
2015, the Group reviewed these costs included in the calculation of deferred acquisition costs and considers them to be
appropriate, and has determined that they are recoverable.
2.5 Goodwill
The Group capitalises goodwill arising on the acquisition of businesses as discussed in note 1.8. The carrying value of goodwill
at 31 December 2015 was £211.0 million (2014: £211.0 million).
Goodwill is the excess of the cost of an acquired business over the fair value of its net assets. The determination of the fair value
of assets and liabilities of businesses acquired requires the exercise of management judgement; for example, those financial
assets and liabilities for which there are no quoted prices and those non-financial assets where valuations reflect estimates of
market conditions, such as property. Different fair values would result in changes to the goodwill arising and to the post-
acquisition performance. Goodwill is not amortised but is tested for impairment annually or more frequently if events or changes
in circumstances indicate that it might be impaired.
For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the Group’s CGUs or
groups of CGUs expected to benefit from the combination. Goodwill impairment testing involves the comparison of the carrying
value of a CGU or group of CGUs with its recoverable amount. The recoverable amount is the higher of the CGU’s fair value
and its value in use. Value in use is the present value of expected future cash flows from the CGU or group of CGUs. Fair value
is the amount obtainable from the sale of the CGU in an arm’s length transaction between knowledgeable, willing parties.
Impairment testing inherently involves a number of judgemental areas: 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 business; estimation of the fair value 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.
2.6 Property, plant and equipment
The Group does not revalue property, plant and equipment. However, it takes appropriate steps to consider whether the
aggregate value of property, plant and equipment exceeds the balance sheet carrying value of such items.
The Group is satisfied that the aggregate value of property, plant and equipment is not less than its carrying value.
120
120
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
3. Risk management
3.1 Enterprise Risk Management Strategy and Framework
The ERMF sets out, at a high level, our approach and processes for managing risks. Further information can be found in the
Risk management section of the Strategic report on page 26.
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. The assessment has been submitted to the PRA as part of the Group’s application for
IMAP. The SCR quantifies the insurance, market, credit, operational and liquidity risk that the regulated entities are undertaking.
The Board is closely involved in the SCR process and reviews, challenges and approves its assumptions and results.
3.3 Principal risks from insurance activities and use of financial instruments
The Risk management section of the Strategic report sets out all the risks assessed by the Group as principal risks. Detailed below
is the Group’s risk exposure arising from its insurance activities and use of financial instruments specifically in respect of insurance
risk, market risk and credit risk.
3.3.1 Insurance risk
The Group is exposed to insurance risk as a primary consequence of its business. Key insurance risks focus on 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.
The insurance risks that the Group faces include those referred to below:
Reserve risk
Reserve risk relates to both premiums and claims. This is the risk that reserves are understated arising from:
• the random nature of claims;
• data issues; and
• operational failures.
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.
Reserve risk is controlled through a range of processes:
• regular reviews of the claims, premiums and an assessment of the requirement for a liability adequacy provision for the main
classes of business by the internal actuarial team;
• 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
• regular assessment of the volatility in the reserves to help the Board set management best estimate reserves.
The Group’s reserves are particularly susceptible to potential retrospective changes in legislation and new court decisions, for
example, a change in the Ogden discount rate. This is the discount rate set by the relevant government bodies and used by
courts to calculate lump sum awards in bodily injury cases. The rate is currently 2.5% per annum but is under review by the
Ministry of Justice. The Group has calculated its estimated reserves based on an assumed Ogden discount rate of 1.5%, in
recognition of the uncertainty regarding the future rate.
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 discount rate.
121
www.directlinegroup.com 121
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
3. Risk management continued
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.
PPOs1
Impact of an increase in the discount rate used in the calculation of
present values of 100 basis points
Impact of a decrease in the discount rate used in the calculation of
present values of 100 basis points
Ogden2
Impact of an increase in the Ogden discount rate by 100 basis points
Impact of a decrease in the Ogden discount rate by 100 basis points
Notes:
Increase / (decrease)
in income statement
Increase / (decrease)
in total equity at
31 December
2015
£m
2014
£m
2015
£m
2014
£m
76.0
87.3
76.0
87.3
(109.4)
(121.8)
(109.4)
(121.8)
131.9
(190.0)
159.6
(224.0)
131.9
(190.0)
159.6
(224.0)
1. The sensitivities relating to an increase or decrease in the discount rate used for PPOs illustrate a movement in the time value of money from the assumed level
of 4.0%. An increase in the discount rate reflects a decrease in the time value of money and therefore the present value of future liabilities, which increases total
equity and would be reflected in the income statement.
2. The sensitivities relating to an increase or decrease in the Ogden discount rate illustrate a movement in the value from the current prescribed level of 2.5%.
3. These sensitivities reflect one-off impacts at 31 December excluding the impact of taxation and should not be interpreted as a prediction.
In addition, there is the risk that claims are reserved or paid inappropriately, including the timing of such activity. However,
there are claims management controls in place to mitigate this risk, as outlined below:
• Claims are managed utilising a range of IT system-driven controls coupled with manual processes outlined in detailed policies
and procedures to ensure claims are handled in an appropriate, timely and accurate manner.
• Each member of staff has a specified handling authority, with controls preventing them handling or paying claims outside
their authority, as well as controls to mitigate the risk of paying invalid claims. In addition, there are various outsourced claims
handling arrangements, all of which are monitored closely by management, with similar principles applying in terms of the
controls and procedures.
• Loss adjustors are used in certain circumstances to handle claims to conclusion. This involves liaison with the policyholder,
third parties, suppliers and the claims function.
• Specialist bodily injury claims teams are responsible for handling these types of losses with the nature of handling dependent
on the level and type of claim. Claims exceeding a certain threshold are referred to the technical and large loss teams who
also deal with all other claim types above defined limits or within specific criteria.
• A process is in place to deal with major weather and other catastrophic events, known as the ‘Surge Demand Plan’. A surge
is the collective name given to an incident which significantly increases the volume of claims reported to the Group’s claims
functions. The plan covers surge demand triggers, stages of incident, operational impact, communication and management
information monitoring of the plan.
122
122
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Underwriting risk
This is the risk that future claims experience on policies written is materially different from the results expected, resulting in
losses. The Group predominantly underwrites personal lines insurance including motor, residential property, roadside assistance,
creditor, travel and pet business. The Group also underwrites commercial risks primarily for low-to-medium risk trades within
the SME market. Contracts are typically issued on an annual basis which means that the Group’s liability usually extends for a
12 month period, after which the Group is entitled to decline to renew or can impose renewal terms by amending the premium
or other policy terms and conditions such as the excess as appropriate.
Underwriting risk includes catastrophe risk, the risk of loss, or of adverse change, in the value of the insurance liabilities resulting
from significant uncertainty of pricing and provisioning assumptions related to extreme or exceptional circumstances.
When underwriting policies, the Group is subject to concentration risk in a variety of forms, including:
• Geographic concentration risk – the Group purchases a catastrophe reinsurance programme to protect against a modelled
1 in 200-year loss. The retained deductible is £150 million at 31 December 2015 (2014: £150 million);
• Product concentration risk – the Group’s business is heavily concentrated in the UK general insurance market. However,
the Group offers a diversified portfolio of products and a variety of brands sold through a range of distribution channels to
its customers; and
• Sector concentration risk – the concentration of the Group to any given industry sector is monitored and analysed in respect
of commercial customers.
It is important to note that none of these risk categories is independent of the others and that giving due consideration to the
relationship between these risks is an important aspect of the effective management of insurance risk.
Distribution risk
This is the risk of material change in the volume of policies, written through a distribution channel, which may result in losses
or reduced profitability.
Pricing risk
This is the risk of economic loss arising from policies being incorrectly priced or accepted to achieve desired volume and profitability.
Reinsurance risk
This is the risk of inappropriate selection and / or placement of a reinsurance arrangement, with either individual or multiple
reinsurers which renders the transfer of insurance risk to the reinsurer(s) inappropriate and / or ineffective. Other risks include:
• Reinsurance concentration risk – reinsurance is purchased from a number of providers to ensure that a diverse range of
counterparties is contracted with, within the desired credit rating range;
• Reinsurance capacity being reduced and / or withdrawn;
• Underwriting risk appetite and reinsurance contract terms not being aligned;
• Reinsurance contract terms being inappropriate or ineffective resulting in classes or types of business not being
appropriately reinsured;
• Non-adherence to the reinsurance policy terms and conditions, in terms of both policy management and claims not being
handled within the reinsurance contract terms and conditions or paid on an ex-gratia basis resulting in reinsurance recoveries
not being made in full;
• Inappropriate or inaccurate management information and / or modelling being used to determine the value for money and
purchasing of reinsurance (including aggregate modelling); and
• Changes in the external legal, regulatory, social or economic environment altering the definition and application of reinsurance
policy wordings or the effectiveness or value for money of reinsurance.
The Group uses reinsurance to:
• protect the insurance results against low-frequency, high-severity losses through the transfer of catastrophe claims volatility
to reinsurers;
• protect the insurance results against unforeseen volumes of, or adverse trends in, large individual claims in order to reduce
volatility and to improve stability of earnings;
• reduce the Group’s capital requirements; and / or
• transfer risk that is not within the Group’s current risk retention strategy.
123
www.directlinegroup.com 123
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
3. Risk management continued
Using reinsurance, the Group cedes insurance risk to reinsurers but, in return, assumes back counterparty risk against which
a reinsurance bad debt provision is assessed. The financial security of the Group’s panel of reinsurers is therefore important
and both the quality and amount of the assumed counterparty risk are subject to an approval process whereby reinsurance is
only purchased from reinsurers that hold a credit rating of at least A- at the time cover is purchased. The Group’s leading
counterparty exposures represent the accumulated counterparty risk for all Group underwriting entities and are reviewed on
a monthly basis. The Group aims to contract with a diverse range of reinsurers on its contracts to mitigate the credit and / or
non-payment risks associated with its reinsurance exposures.
Certain reinsurance contracts have long durations as a result of bodily injury and PPO claims, and insurance reserves therefore
include provisions beyond the levels created for shorter-term reinsurance bad debt.
3.3.2 Market risk
Market risk is the risk of loss resulting from fluctuations in the level and in the volatility of market prices of assets, liabilities and
financial instruments.
The Group is mainly exposed to the following market risk factors:
• Spread risk;
• Interest rate risk;
• Property risk; and
• Foreign currency risk.
The Group has policies and limits approved by the Board for managing the market risk exposure. These set out the principles
that the business should adhere to for managing market risk and establishing the maximum limits the Group is willing to accept
having considered strategy, risk appetite and capital resources.
The Group monitors its market risk exposure on a monthly basis and has established an aggregate exposure limit consistent
with its risk objective to maintain capital adequacy. Interdependencies across risk types have also been considered within
the aggregate exposure limit. The allocation of the Group’s investments across asset classes has been approved at the
Investment Committee.
The strategic asset allocation within the investment portfolio is reviewed by the Investment Committee, which makes recommendations
to the Board for its investment strategy approval. The Investment Committee determines policy and controls, covering such areas
as risk, liquidity and performance. The Investment Committee meets at least three times a year to evaluate risk exposure, the current
strategy, associated policies and investment guidelines and to consider investment recommendations submitted to it. Oversight of
the implementation of decisions taken by the Investment Committee is via the 1st and 2nd Lines of Defence.
The investment management objectives are to:
• Maintain the safety of the portfolio’s principal both in economic terms and from a capital, accounting and reporting perspective;
• Maintain sufficient liquidity to provide cash requirements for operations, including in the event of a catastrophe; and
• Maximise the portfolio’s total return within the constraints of the other objectives and the limits defined by the investment
guidelines and capital allocation.
The Group has a property portfolio and an infrastructure debt portfolio in order to improve matching to the longer duration PPOs.
The Group uses its internal economic capital model to determine its capital requirements and market risk limits, and monitors its
market risk exposure based on a 99.5% value-at-risk measure. The Group also applies market risk stressed scenarios testing for
the economic impact of specific severe market conditions. The results of this analysis are used to enhance the understanding of
market risk. The asset liability matching and investment management minimum standard explicitly prohibits the use of derivatives
for speculative or gearing purposes. However, the Group is able to and does use derivatives for hedging its currency risk and
interest rate risk exposures.
Spread risk
This is the risk of loss from the sensitivity of the value of assets and investments to changes in the level or in the volatility of credit
spreads over the risk-free interest rate term structure. The level of spread is the difference between the risk-free rate and actual
rate paid on the asset, with larger spreads being associated with higher risk assets. The Group is exposed to spread risk through
its investments in bonds and securitised credit.
Interest rate risk
This is the risk of loss from all assets and liabilities for which the net asset value is sensitive to changes in the term structure of
interest rates or interest rate volatility. The Group’s interest rate risk arises mainly from its debt, floating interest rate investments
and assets and liabilities exposed to fixed interest rates.
124
124
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015 The fixed interest rate up to 27 April 2022 on the Group’s 30-year maturity £500 million of subordinated guaranteed dated
notes has been exchanged for a floating rate of interest (note 30).
The Group also invests in floating rate debt securities, whose investment income is influenced by the movement of the
short-term interest rate. A movement of the short-term interest rate will affect the expected return on these investments.
The market value of the Group’s financial investments with fixed coupons is affected by the movement of interest rates. For
the majority of investments in US Dollar corporate bonds, excluding £336.9 million of short duration high yield bonds (2014:
£297.4 million), the Group hedges the exposure of this portfolio to the US Dollar interest rate risk using swaps. These derivatives
reduce the duration of the portfolio to close to zero.
Property risk
This risk results from adverse price fluctuations on commercial property investments. At 31 December 2015, the value of these
property investments was £347.4 million (2014: £307.2 million). The property investments are located in the UK.
Foreign currency risk
The exposure to currency risk is generated by the Group’s investments in US Dollar corporate bonds and US Dollar securitised credit.
The Group maintains exposure to US Dollar securities through £1,876.3 million (2014: £1,892.3 million) of investments in US
Dollar corporate bonds and US Dollar securitised credit. The foreign currency exposure of these investments is hedged by foreign
currency forward contracts, maintaining a minimal unhedged currency exposure on these portfolios, as well as a low basis
currency risk on the hedging.
The Group was also exposed to currency risk through its investments in subsidiaries in Italy and Germany (that is, investments in
equity) until the disposal of the International business on 29 May 2015.
Sensitivity analysis
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 in the table could have an additional financial impact on
the Group.
Spread
Impact of a 100 basis points increase in spreads on financial
investments and derivatives1,2,4,5
Interest rate
Impact of a 100 basis points increase in interest rates on financial
investments and derivatives1,3,4,5
Investment property5
Impact of a 15% decrease in property markets
Notes:
Increase / (decrease)
in income statement
Increase / (decrease)
in total equity at
31 December
2015
£m
2014
£m
2015
£m
2014
£m
–
–
(160.1)
(163.5)
22.1
19.1
(120.0)
(122.8)
(52.1)
(46.1)
(52.1)
(46.1)
1. The income statement impact on financial investments is limited to floating rate instruments and interest rate derivatives used to hedge a portion of the portfolio.
The income statement is not impacted in relation to fixed rate instruments, in particular AFS debt securities, where the coupon return is not impacted by a change in
prevailing market rates, as the accounting treatment for AFS debt securities means that only the coupon received is processed through the income statement with
fair value movements being recognised through total equity.
2. The increase or decrease in total equity reflects a fair value movement in infrastructure debt and HTM debt securities that would not be recorded in the financial
statements under IFRSs as they are classified as loans and receivables and HTM respectively, which are carried at amortised cost. This result has been included
in the table above to provide a comprehensive analysis of the fair value impact of this sensitivity.
3. The sensitivities set out above reflect one-off impacts at 31 December with the exception of the income statement interest rate sensitivity on financial investments
and derivatives, which projects a movement in a full year’s interest charge as a result of the increase in the interest rate applied to these assets or liabilities on
those positions held at 31 December.
4. The subordinated liabilities and associated interest rate swap are excluded from the sensitivity analysis.
5. The sensitivities calculated above exclude the impact of assets in the disposal group at 31 December 2014.
6. The sensitivities set out above have not considered the impact of the general market changes on the value of the Group’s insurance liabilities or retirement
benefit obligations.
7. These sensitivities reflect one-off impacts at 31 December excluding the impact of taxation and should not be interpreted as a prediction.
125
www.directlinegroup.com 125
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
3. Risk management continued
The Group has a number of open interest rate and foreign exchange derivative positions. Collateral management arrangements
are in place for significant counterparty exposures. At 31 December 2015, the Group has pledged £12.3 million in cash
(2014: £17.3 million) to cover out of the money derivative positions. At 31 December 2015, counterparties have pledged
£19.7 million in UK Gilts (2014: £21.5 million in UK Gilts) to the Group to cover in the money derivative positions.
The terms and conditions of collateral pledged for both assets and liabilities are market standard. When securities are pledged
they are required to be readily convertible to cash, and as such no policy has been established for the disposal of assets not
readily convertible into cash.
3.3.3 Credit risk
This is the risk of loss resulting from fluctuations in the credit standing of issuers of securities, counterparties and any debtors
to which the Group is exposed. The Group is mainly exposed to the following credit risk factors:
• Counterparty default risk; and
• Concentration risk.
Counterparty default risk
This is the risk of loss from unexpected default, deterioration in the credit standing of the counterparties and debtors of the
Group. It is primarily managed by the 1st Line of Defence and monitored by the Credit Risk Forum. The main responsibility of
this forum is to ensure that all material aspects of counterparty risk within the Group are identified, monitored and measured.
The main sources of counterparty risk for the Group are:
• Investments – this arises from the investment of funds in a range of investment vehicles permitted by the investment policy; and
• Reinsurance recoveries – counterparty exposure to reinsurance counterparties arises in respect of reinsurance claims against
which a reinsurance bad debt provision is assessed. PPOs have the potential to increase the ultimate value of a claim and,
by their very nature, to significantly increase the length of time to reach final payment. This has increased reinsurance
counterparty risk in terms of both amount and longevity.
The following tables analyse the carrying value of financial and insurance assets that bear counterparty risk between those assets
that have not been impaired by age in relation to due date, and those that have been impaired.
At 31 December 2015
Neither
past due nor
impaired
£m
Past due
1 – 90 days
£m
Past due
more than
90 days
£m
Assets that
have been
impaired
£m
Carrying value in
the balance
sheet
£m
Reinsurance assets
Insurance and other receivables
Derivative assets
Debt securities
Deposits with credit institutions with maturities > three months
Infrastructure debt
Cash and cash equivalents
Total
1,011.4
917.3
19.6
5,240.1
44.9
329.6
963.7
8,526.6
–
32.4
–
–
–
–
–
32.4
–
6.1
–
–
–
–
–
6.1
–
–
–
–
–
–
–
–
1,011.4
955.8
19.6
5,240.1
44.9
329.6
963.7
8,565.1
At 31 December 2014
Neither
past due nor
impaired
£m
Past due
1 – 90 days
£m
Past due
more than
90 days
£m
Assets that
have been
impaired
£m
Carrying value in
the balance
sheet
£m
Reinsurance assets
Insurance and other receivables
Derivative assets
Debt securities
Deposits with credit institutions with maturities > three months
Infrastructure debt
Cash and cash equivalents
Total
862.5
907.3
27.3
5,830.3
54.7
76.2
880.4
8,638.7
–
52.0
–
–
–
–
–
52.0
–
0.6
–
–
–
–
–
0.6
–
–
–
–
–
–
–
–
862.5
959.9
27.3
5,830.3
54.7
76.2
880.4
8,691.3
126
126
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Within the analysis of debt securities above are bank debt securities at 31 December 2015 of £1,305.1 million
(2014: £1,328.3 million), that can be further analysed as: secured £86.4 million (2014: £104.1 million); unsecured
£1,059.6 million (2014: £1,058.3 million); and subordinated £159.1 million (2014: £165.9 million).
Concentration risk
This is the risk of exposure to increased losses associated with inadequately diversified portfolios of assets and / or obligations,
in particular:
• Large exposures to individual credits (either bond issuers or deposit-taking institutions);
• Large exposures to different credits where movements in values and ratings are closely correlated.
Concentration risk on investments arises through excessive exposure to particular industry sectors, groups of business undertakings
or similar activities. The Group may suffer significant losses in its investment portfolio as a result of over-exposure to particular
sectors engaged in similar activities or similar economic features that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic, political or other conditions.
The table below analyses the distribution of debt securities and infrastructure debt by geographical area.
At 31 December 2015
Australia
Austria
Belgium
Canada
Cayman Islands
China
Denmark
Finland
France
Germany
Hong Kong
Ireland
Italy
Japan
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Portugal
Singapore
South Korea
Spain
Sweden
Switzerland
UK
USA
Supranational
Total
Local
government
£m
Sovereign
£m
Securitised
credit
£m
Debt
securities
total
£m
Infrastructure
debt
£m
–
–
–
11.4
–
–
8.5
13.7
25.4
16.4
–
–
–
–
–
–
–
–
10.0
–
–
8.7
–
11.2
–
–
–
105.3
–
105.3
–
–
10.9
–
–
–
–
–
–
–
–
–
4.2
–
–
–
–
–
–
–
–
–
–
–
–
427.6
–
442.7
–
442.7
–
–
–
–
95.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
177.3
83.5
356.1
–
356.1
107.6
6.3
53.8
58.9
117.4
4.5
16.4
13.7
260.9
341.8
8.2
0.8
14.3
47.8
5.3
9.1
170.7
5.3
28.3
1.1
24.7
16.7
32.5
91.9
83.9
1,855.6
1,722.5
5,100.0
140.1
5,240.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
329.6
–
329.6
–
329.6
Corporate
£m
107.6
6.3
42.9
47.5
22.1
4.5
7.9
–
235.5
325.4
8.2
0.8
10.1
47.8
5.3
9.1
170.7
5.3
18.3
1.1
24.7
8.0
32.5
80.7
83.9
1,250.7
1,639.0
4,195.9
–
4,195.9
127
www.directlinegroup.com 127
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
3. Risk management continued
The table below analyses the distribution of debt securities and infrastructure debt by geographical area.
At 31 December 2014
Australia
Belgium
Canada
Cayman Islands
China
Denmark
Finland
France
Germany
Hong Kong
Italy
Japan
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Singapore
South Korea
Spain
Sweden
Switzerland
UAE
UK
USA
Supranational
Total
Local
government
£m
Sovereign
£m
Securitised
credit
£m
Debt
securities
total
£m
Infrastructure
debt
£m
–
–
34.3
–
–
–
14.3
23.4
5.0
–
–
–
–
–
–
–
10.1
–
7.6
–
13.0
–
7.0
–
6.0
120.7
–
120.7
–
3.6
–
–
–
–
–
–
–
–
–
–
–
5.7
–
–
–
–
–
–
–
–
–
984.5
–
993.8
–
993.8
–
–
–
218.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
69.4
134.2
422.4
–
422.4
120.2
37.4
95.1
238.1
6.1
25.1
14.3
298.5
315.3
8.5
15.5
46.9
6.8
18.3
154.4
3.6
34.5
25.5
15.1
30.6
86.1
82.6
7.0
2,388.7
1,579.8
5,654.0
176.3
5,830.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
76.2
–
76.2
–
76.2
Corporate
£m
120.2
33.8
60.8
19.3
6.1
25.1
–
275.1
310.3
8.5
15.5
46.9
6.8
12.6
154.4
3.6
24.4
25.5
7.5
30.6
73.1
82.6
–
1,334.8
1,439.6
4,117.1
–
4,117.1
128
128
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
The table below analyses the distribution of debt securities by industry sector classifications.
At 31 December
Basic materials
Communications
Consumer, cyclical
Consumer, non-cyclical
Diversified
Energy
Financial
Industrial
Mortgage and other asset backed securities
Sovereign, supranational and local government
Technology
Transport
Utilities
Total
£m
102.9
237.2
298.3
432.5
52.8
243.6
1,896.6
250.4
356.1
688.1
115.8
–
565.8
5,240.1
The table below analyses the distribution of infrastructure debt by industry sector classifications.
At 31 December
Social, of which:
Education
Healthcare
Other
Transport
Total
£m
132.3
98.1
58.8
40.4
329.6
2015
%
2%
4%
6%
8%
1%
5%
36%
5%
7%
13%
2%
–
11%
100%
2015
%
40%
30%
18%
12%
100%
£m
151.9
298.5
230.7
363.4
65.9
225.7
1,842.4
250.7
422.4
1,290.7
67.8
15.2
605.0
5,830.3
£m
34.0
–
22.6
19.6
76.2
2014
%
3%
5%
4%
6%
1%
4%
32%
4%
7%
22%
1%
0%
11%
100%
2014
%
44%
–
30%
26%
100%
The tables below analyse the credit quality of debt securities that are neither past due nor impaired.
At 31 December 2015
Corporate
Supranational
Local government
Sovereign
Securitised credit1
Total
At 31 December 2014
Corporate
Supranational
Local government
Sovereign
Securitised credit1
Total
Note:
AAA
£m
266.3
123.9
36.9
–
331.2
758.3
AAA
£m
235.2
166.9
42.6
–
339.4
784.1
AA+ to AA-
£m
A+ to A-
£m
BBB+ to BBB-
£m
BB+ and below
£m
604.5
16.2
59.0
438.5
24.9
1,143.1
1,976.2
–
9.4
–
–
1,985.6
1,019.2
–
–
4.2
–
1,023.4
329.7
–
–
–
–
329.7
Total
£m
4,195.9
140.1
105.3
442.7
356.1
5,240.1
AA+ to AA-
£m
A+ to A-
£m
BBB+ to BBB-
£m
BB+ and below
£m
Total
£m
556.6
9.4
62.8
988.1
83.0
1,699.9
2,096.5
–
15.3
–
–
2,111.8
935.2
–
–
5.7
–
940.9
293.6
–
–
–
–
293.6
4,117.1
176.3
120.7
993.8
422.4
5,830.3
1. Securitised credit consists of prime mortgage backed securities, collateralised loan obligations, securitised student loans and commercial mortgage backed
securities.
129
www.directlinegroup.com 129
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
3. Risk management continued
The tables below analyse the credit quality of financial and insurance assets that are neither past due nor impaired (excluding
debt securities analysed above). The tables include reinsurance exposure, after provision. Note 3.3.1 details the Group’s
approach to reinsurance counterparty risk management.
At 31 December 2015
Reinsurance assets
Insurance and other receivables1
Derivative assets
Deposits with credit institutions
with maturities > three months
Infrastructure debt
Cash and cash equivalents
Total
At 31 December 2014
Reinsurance assets
Insurance and other receivables1
Derivative assets
Deposits with credit institutions
with maturities > three months
Infrastructure debt
Cash and cash equivalents
Total
Note:
AAA
£m
AA+ to AA−
£m
A+ to A−
£m
BBB+ to BBB-
£m
BB+ and below
£m
–
–
–
–
–
831.9
831.9
778.2
12.4
0.1
5.0
–
–
795.7
225.7
23.2
0.4
34.9
86.1
60.8
431.1
3.2
25.8
19.1
5.0
227.8
71.0
351.9
–
0.4
–
–
15.7
–
16.1
AAA
£m
AA+ to AA−
£m
A+ to A−
£m
BBB+ to BBB-
£m
BB+ and below
£m
–
–
–
–
–
729.1
729.1
654.1
17.3
2.5
54.7
–
–
728.6
196.3
17.4
0.8
–
–
81.4
295.9
4.3
15.5
24.0
–
76.2
69.9
189.9
–
0.4
–
–
–
–
0.4
Not rated
£m
4.3
855.5
–
–
–
–
859.8
Not rated
£m
7.8
856.7
–
–
–
–
864.5
Total
£m
1,011.4
917.3
19.6
44.9
329.6
963.7
3,286.5
Total
£m
862.5
907.3
27.3
54.7
76.2
880.4
2,808.4
1. Includes receivables due from policyholders, agents, brokers and intermediaries which generally do not have a credit rating.
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.
IT continuity risk
This is the risk of loss of technology services due to data, systems or data centre failure and / or failure of a third party to
restore services.
Outsourcing risk
This is the risk of failing to implement a robust framework for the sourcing, appointment and ongoing contract management
of external suppliers, outsourced service providers and intragroup relationships.
The Group has in place agreed policies and standards to manage key controls relating to operational risk.
3.3.5 Liquidity risk
This is the risk of being unable to realise investments in order to settle financial obligations when they fall due.
The measurement and management of liquidity risk within the Group is undertaken within the limits and other policy parameters
of the Group’s liquidity risk appetite and is detailed within the liquidity risk minimum standard. Compliance is monitored in
respect of both the minimum standard and the regulatory requirements of local regulators.
In the event that one or more liquidity stresses or scenarios crystallises, or should any other event that may impact liquidity occur,
the Group ensures a rapid and controlled response to the event. In such an event, a liquidity crisis management team will be
formed to assess the nature and extent of the threat and to develop an appropriate response.
130
130
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
The tables below analyse the maturity of the Group’s derivative assets and liabilities.
At 31 December 2015
Derivative assets
At fair value through the income statement:
Foreign exchange contracts (forwards)
Interest rate swaps
Designated as hedging instruments:
Foreign exchange contracts (forwards)
Total
At 31 December 2015
Derivative liabilities
At fair value through the income statement:
Foreign exchange contracts (forwards)
Interest rate swaps
Designated as hedging instruments:
Foreign exchange contracts (forwards)
Total
At 31 December 2014
Derivative assets
At fair value through the income statement:
Foreign exchange contracts (forwards)
Interest rate swaps
Designated as hedging instruments:
Foreign exchange contracts (forwards)
Total
At 31 December 2014
Derivative liabilities
At fair value through the income statement:
Foreign exchange contracts (forwards)
Interest rate swaps
Interest rate futures1
Designated as hedging instruments:
Foreign exchange contracts (forwards)
Total
Note:
Notional amounts
Maturity and fair value
£m
27.1
678.4
5.0
710.5
Less than
1 year
£m
1 – 5 years
£m
Over
5 years
£m
0.4
1.1
0.3
1.8
–
0.2
–
0.2
–
17.6
–
17.6
Total
£m
0.4
18.9
0.3
19.6
Notional amounts
Maturity and fair value
Less than
1 year
£m
1 – 5 years
£m
Over
5 years
£m
£m
1,876.3
1,241.9
0.7
3,118.9
42.2
3.0
0.1
45.3
–
(0.5)
–
(0.5)
–
1.6
–
1.6
Total
£m
42.2
4.1
0.1
46.4
Notional amounts
Maturity and fair value
Less than
1 year
£m
1 – 5 years
£m
Over
5 years
£m
£m
54.4
696.6
435.6
1,186.6
0.3
0.9
1.9
3.1
–
1.2
0.5
1.7
–
22.5
–
22.5
Total
£m
0.3
24.6
2.4
27.3
Notional amounts
Maturity and fair value
Less than
1 year
£m
1 – 5 years
£m
Over
5 years
£m
£m
1,892.3
424.9
540.5
5.0
2,862.7
22.9
1.3
–
0.1
24.3
–
0.5
–
–
0.5
–
4.6
–
–
4.6
Total
£m
22.9
6.4
–
0.1
29.4
1. Interest rate futures are settled daily with variation margin and therefore have a fair value of £nil. The notional value is included in the above table to reflect the
fact that the Group has exposure to open positions.
131
www.directlinegroup.com 131
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
3. Risk management continued
The tables below analyse financial investments, cash and cash equivalents, insurance and financial liabilities by remaining
duration, in proportion to the cash flows expected to arise during that period, for each category.
At 31 December 2015
Debt securities
Deposits with credit institutions with
maturities in excess of three months
Infrastructure debt
Cash and cash equivalents
Total
At 31 December 2015
Subordinated liabilities
Insurance liabilities1
Borrowings
Trade and other payables including insurance
payables
Total
At 31 December 2014
Debt securities
Deposits with credit institutions with
maturities in excess of three months
Infrastructure debt
Cash and cash equivalents
Total
At 31 December 2014
Subordinated liabilities
Insurance liabilities1
Borrowings
Trade and other payables including insurance
payables
Total
Note:
Total
£m
Within
1 year
£m
1 – 3 years
£m
3 – 5 years
£m
5 – 10 years
£m
5,240.1
269.2
1,628.4
1,203.9
1,657.4
–
22.0
–
1,650.4
–
23.9
–
1,227.8
–
78.4
–
1,735.8
44.9
11.6
963.7
1,289.4
Within
1 year
£m
8.3
1,349.8
60.8
44.9
329.6
963.7
6,578.3
Total
£m
521.1
4,524.5
61.3
656.5
5,763.4
1 – 3 years
£m
–
1,043.3
0.5
3 – 5 years
£m
5 – 10 years
£m
–
564.2
–
0.2
564.4
512.8
575.1
–
0.3
1,088.2
652.9
2,071.8
3.0
1,046.8
Total
£m
Within
1 year
£m
1 – 3 years
£m
3 – 5 years
£m
5 – 10 years
£m
5,830.3
938.3
1,663.4
1,175.3
1,669.8
54.7
76.2
880.4
6,841.6
Total
£m
526.3
4,674.1
69.8
54.7
2.8
880.4
1,876.2
Within
1 year
£m
8.3
1,396.8
69.8
–
9.4
–
1,672.8
–
7.5
–
1,182.8
–
23.3
–
1,693.1
1 – 3 years
£m
–
1,181.6
–
3 – 5 years
£m
5 – 10 years
£m
–
651.2
–
–
651.2
518.0
530.5
–
–
1,048.5
660.6
5,930.8
659.4
2,134.3
1.2
1,182.8
Over
10 years
£m
481.2
–
193.7
–
674.9
Over
10 years
£m
–
992.1
–
0.1
992.2
Over
10 years
£m
383.5
–
33.2
–
416.7
Over
10 years
£m
–
914.0
–
–
914.0
1. Insurance liabilities exclude unearned premium reserves as there are no liquidity risks inherent in them.
132
132
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
3.4 Capital adequacy
Capital is managed in accordance with the Group’s capital management minimum standard, the objectives of which are to
manage capital efficiently and maintain an appropriate level of capitalisation and solvency. The Group determines the
appropriate level of capital on the basis of a number of criteria, including economic, regulatory and rating agency capital
requirements. The Group seeks to hold capital resources consistent with an ‘A’ range credit rating.
Prior to 1 January 2016, the regulated insurance entities of the Group carried out an assessment of the adequacy of their overall
financial resources in accordance with the PRA’s ICA methodology. The insurance capital requirement is calculated on an internal
model which is calibrated to a 99.5% confidence interval and considers business written to date and one year of future business.
Additionally, the model allows for the uncertainty around the run-off of this business.
From 1 January 2016, the Group’s regulatory capital position will be assessed against the Solvency II framework. Initially, the
Group (including its regulated insurance entities) will assess its SCR using the standard formula. Its principal underwriter UKI has
applied for its internal economic capital model to be approved as its internal model and approval is expected during 2016.
From that point, UKI will calculate its capital requirement using the internal model which, will form part of a Group-wide partial
internal model.
In 2015, the Group monitored its financial resources with reference to the requirements of the Insurance Group Directive and on
this basis at 31 December 2015 had a surplus of approximately £1.7 billion (2014: £1.9 billion). The Group’s capital
requirements and solvency position are produced and presented to the Board on a regular basis.
4. Segmental analysis
The Directors manage the Group primarily by product type and present the segmental analysis on that basis. The segments reflect
the management structure whereby a member of the Executive Committee is accountable to the Chief Executive Officer for each
of the operating segments:
Motor
This segment consists of personal motor insurance together with the associated legal protection cover. The Group sells motor
insurance through its own brands, Direct Line, Churchill and Privilege, and through partnership brands.
Home
This segment consists of home insurance together with associated legal protection cover. The Group sells home insurance through
its own brands, Direct Line, Churchill and Privilege, and through partnership brands.
Rescue and other personal lines
This segment consists of rescue products sold through the Group’s own brand, Green Flag, and other personal lines insurance,
including travel, pet and creditor sold through its own brands, Direct Line, Churchill and Privilege, and through partnership brands.
Commercial
This segment consists of commercial insurance for small and medium-size entities sold through NIG, Direct Line for Business,
Churchill for Business and through partnership brands.
Certain income and charges are not allocated to the specific operating segments above as they are considered by management
to be outside underlying business activities by virtue of their one-off incidence, size or nature. Such income and charges are
categorised as either run-off or restructuring and other one-off costs, described below.
Run-off
The segment consists of two principal lines, policies previously written through the personal lines broker channel and Tesco
business. These residual businesses are now in run-off.
Restructuring and other one-off costs
Restructuring costs are costs incurred in respect of the business activities which have a material effect on the nature and focus of
the Group’s operations. One-off costs are costs that are non-recurring in nature.
No inter-segment transactions occurred in the year ended 31 December 2015 (2014: £nil). If any transaction were to occur,
transfer prices between operating segments would be set on an arm’s length basis in a manner similar to transactions with third
parties. Segment income, expenses and results will include those transfers between business segments which will then be
eliminated on consolidation.
For each operating segment, there is no individual policyholder or customer that represents 10% or more of the Group’s total revenue.
133
www.directlinegroup.com 133
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
4. Segmental analysis continued
The table below analyses the Group’s revenue and results for continuing operations by reportable segment for the year ended
31 December 2015.
Gross written premium
Gross earned premium
Reinsurance premium ceded
Net earned premium
Investment return
Instalment income
Other operating income
Total income
Insurance claims
Insurance claims recoverable from reinsurers
Net insurance claims
Commission expenses
Operating expenses
Total expenses
Operating profit before restructuring and other
one-off costs
Restructuring and other one-off costs
Operating profit
Finance costs
Profit before tax
Underwriting profit / (loss)
Loss ratio
Commission ratio
Expense ratio
COR
Rescue and
other
personal lines
£m
Commercial
£m
394.1
388.0
(1.6)
386.4
3.8
1.7
12.6
404.5
(231.6)
–
(231.6)
(24.5)
(96.4)
(120.9)
485.3
483.0
(42.9)
440.1
31.5
5.4
3.7
480.7
(304.5)
28.7
(275.8)
(86.1)
(98.0)
(184.1)
Home
£m
866.3
880.3
(35.3)
845.0
20.5
23.3
0.5
889.3
(434.8)
(0.3)
(435.1)
(176.7)
(167.6)
(344.3)
Total
ongoing
£m
3,152.4
3,110.0
(189.2)
2,920.8
194.7
100.1
50.7
3,266.3
(1,927.6)
190.3
(1,737.3)
(319.2)
(689.1)
(1,008.3)
Motor
£m
1,406.7
1,358.7
(109.4)
1,249.3
138.9
69.7
33.9
1,491.8
(956.7)
161.9
(794.8)
(31.9)
(327.1)
(359.0)
Run-off
£m
0.1
0.1
–
0.1
3.4
–
–
3.5
98.3
(27.9)
70.4
(0.1)
(0.7)
(0.8)
338.0
109.9
52.0
20.8
520.7
73.1
Continuing
operations
£m
3,152.5
3,110.1
(189.2)
2,920.9
198.1
100.1
50.7
3,269.8
(1,829.3)
162.4
(1,666.9)
(319.3)
(689.8)
(1,009.1)
593.8
(48.7)
545.1
(37.6)
507.5
95.5
63.6%
2.6%
26.2%
92.4%
65.6
51.5%
20.9%
19.8%
92.2%
33.9
59.9%
6.4%
24.9%
91.2%
(19.8)
62.7%
19.6%
22.2%
104.5%
175.2
59.5%
10.9%
23.6%
94.0%
The table below analyses the Group’s assets and liabilities by reportable segment at 31 December 2015.
Goodwill
Other segment assets
Segment liabilities
Segment net assets
Motor
£m
126.4
6,303.4
(4,701.9)
1,727.9
Rescue and
other
personal lines
£m
28.7
177.9
(132.7)
73.9
Home
£m
45.8
872.2
(650.6)
267.4
Commercial
£m
10.1
1,573.9
(1,174.0)
410.0
Run-off
£m
–
818.2
(667.4)
150.8
Total
£m
211.0
9,745.6
(7,326.6)
2,630.0
134
134
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
The table below analyses the Group’s revenue and results for continuing operations by reportable segment for the year ended
31 December 2014.
Gross written premium
Gross earned premium
Reinsurance premium ceded
Net earned premium
Investment return
Instalment income
Other operating income
Total income
Insurance claims
Insurance claims recoverable from reinsurers
Net insurance claims
Commission expenses
Operating expenses
Total expenses
Operating profit before restructuring and other
one-off costs
Restructuring and other one-off costs
Operating profit
Finance costs
Gain on disposal of subsidiary
Profit before tax
Underwriting profit
Loss ratio
Commission ratio
Expense ratio
COR
Note:
Motor1
£m
1,342.0
1,372.6
(76.7)
1,295.9
144.8
69.6
32.9
1,543.2
(931.5)
63.4
(868.1)
(41.4)
(336.6)
(378.0)
Rescue and
other
personal lines
£m
371.8
370.5
(1.4)
369.1
6.1
1.5
10.8
387.5
(211.9)
–
(211.9)
(34.5)
(93.1)
(127.6)
Home
£m
898.6
920.4
(45.1)
875.3
25.7
24.0
0.7
925.7
(445.1)
0.8
(444.3)
(190.3)
(177.2)
(367.5)
Commercial
£m
Total
ongoing
£m
Run-off
£m
Continuing
operations
£m
487.0
3,099.4
(0.4) 3,099.0
481.1
(34.3)
446.8
34.0
5.3
2.5
488.6
(261.7)
6.4
(255.3)
(87.8)
(98.5)
(186.3)
3,144.6
(157.5)
2,987.1
210.6
100.4
46.9
3,345.0
(1,850.2)
70.6
(1,779.6)
(354.0)
(705.4)
(1,059.4)
–
(0.4) 3,144.2
(157.5)
(0.4) 2,986.7
215.1
4.5
100.4
–
46.9
–
4.1
3,349.1
71.6 (1,778.6)
(19.4)
51.2
52.2 (1,727.4)
–
(1.0)
(1.0)
(354.0)
(706.4)
(1,060.4)
297.1
113.9
48.0
47.0
506.0
55.3
561.3
(69.6)
491.7
(37.2)
2.3
456.8
49.8
67.0%
3.2%
26.0%
96.2%
63.5
50.8%
21.7%
20.2%
92.7%
29.6
57.4%
9.4%
25.2%
92.0%
5.2
57.1%
19.7%
22.0%
98.8%
148.1
59.6%
11.8%
23.6%
95.0%
1. The Group’s revenue and results for the year ended 31 December 2014 relating to the Tracker business, which was disposed of on 5 February 2014,
were recorded in the Motor segment (other operating income: £1.4 million and operating loss: £0.4 million).
The table below analyses the Group’s assets and liabilities by reportable segment at 31 December 2014.
Motor
£m
126.4
–
6,392.5
–
(4,796.8)
1,722.1
Home
£m
45.8
–
746.2
–
(559.9)
232.1
Rescue and
other
personal lines
£m
28.7
–
170.6
–
(128.0)
Commercial
£m
10.1
–
1,453.3
–
(1,090.5)
Run-off
£m
Disposal
group
£m
–
–
– 1,205.4
–
(964.4)
–
1,046.6
–
(875.5)
Total
£m
211.0
1,205.4
9,809.2
(964.4)
(7,450.7)
71.3
372.9
171.1
241.0
2,810.5
Goodwill
Disposal group – assets held for sale1
Other segment assets
Disposal group – liabilities held for sale1
Other segment liabilities
Segment net assets
Note:
1. Comprise the assets and liabilities of International.
All continuing operations are in the UK. The reportable segment net assets do not represent the Group’s view of the capital
requirements for its operating segments.
The segmental analysis of assets and liabilities is prepared using a combination of asset and liability balances directly attributable
to each operating segment and an apportionment of assets and liabilities managed at a Group wide level.
135
www.directlinegroup.com 135
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
5. Discontinued operations and disposal group
Following a strategic review of the International segment during 2014, the Board concluded that, although the operations in
Italy (represented by Direct Line Insurance S.p.A) and Germany (represented by Direct Line Versicherung AG) occupied strong
positions, a disposal would be likely to generate the most value to shareholders. On 25 September 2014, the Group entered
into a binding agreement with Mapfre International S.A., a wholly-owned subsidiary of Mapfre, S.A., for the sale of
International. Accordingly, the Group has treated this segment as discontinued operations and a disposal group.
The Group completed the disposal of its Italian and German subsidiaries on 29 May 2015, generating a gain on disposal
of £167.1 million.
A) Discontinued operations
The following table analyses performance relating to the discontinued operations for the period from 1 January to disposal on
29 May 2015 and the year ended 31 December 2014.
Gross written premium
Gross earned premium
Reinsurance premium ceded
Net earned premium
Investment return1
Instalment income
Other operating income
Total income
Insurance claims
Insurance claims recoverable from reinsurers
Net insurance claims
Commission expenses
Operating expenses
Total expenses
Operating profit from discontinued operations
Gain on disposal of discontinued operations
Profit before tax from discontinued operations
Tax charge
Profit after tax from discontinued operations
Underwriting loss
Loss ratio
Commission ratio
Expense ratio
COR
Note:
2015
£m
261.1
207.2
(78.8)
128.4
37.1
1.4
0.1
167.0
(156.2)
60.9
(95.3)
(28.0)
(10.2)
(38.2)
33.5
167.1
200.6
(19.4)
181.2
(5.1)
74.2%
21.8%
8.0%
104.0%
2014
£m
567.6
555.8
(226.0)
329.8
22.1
4.8
1.0
357.7
(404.2)
159.5
(244.7)
(63.0)
(29.0)
(92.0)
21.0
–
21.0
(7.7)
13.3
(6.9)
74.2%
19.1%
8.8%
102.1%
1. Realised net gains on AFS investments in 2015 included £29.9 million of gains reclassified through the income statement, on disposal of International
(2014: £nil).
The following table analyses the other comprehensive loss relating to discontinued operations, included in the consolidated statement
of comprehensive income for the period from 1 January to disposal on 29 May 2015 and year ended 31 December 2014.
Items that may be reclassified subsequently to income statement:
Exchange differences on the translation of foreign operations
Cash flow hedge
Fair value gain on AFS investments
Less: realised net gains on AFS investments included in income statement
Tax relating to items that may be reclassified
Other comprehensive loss for the year net of tax
2015
£m
14.4
(1.2)
0.6
(31.8)
10.1
(7.9)
2014
£m
(15.5)
–
26.1
(6.6)
(6.9)
(2.9)
136
136
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
The following table analyses the cash flows relating to the discontinued operations included in the consolidated cash flow
statement for the period 1 January to disposal on 29 May 2015 and the year ended 31 December 2014.
Net cash generated from operating activities
Net cash used by investing activities
Net cash generated from the disposal of discontinued operations1
Effect of foreign exchange rate changes
Net increase / (decrease) in cash and cash equivalents
Note:
2015
£m
19.1
(1.5)
327.1
(9.8)
334.9
2014
£m
12.6
(8.4)
–
(6.1)
(1.9)
1. The net cash generated from the disposal of discontinued operations comprises the net cash consideration of £422.5 million less the cash held by the German
and Italian subsidiaries at the point of sale of £95.4 million.
B) Disposal group
The following table analyses the gain on disposal of discontinued operations during the year including the assets and liabilities
held for sale in the disposal group immediately prior to the disposal on 29 May 2015.
Assets
Intangible assets
Property, plant and equipment
Reinsurance assets
Deferred tax assets
Current tax assets
Deferred acquisition costs
Insurance and other receivables
Prepayments and accrued income
Financial investments
Cash and cash equivalents
Total assets
Liabilities
Insurance liabilities
Unearned premium reserve
Trade and other payables including insurance payables
Deferred tax liabilities
Current tax liabilities
Total liabilities
Net assets
Cash consideration received1
Transaction costs
Net cash consideration
Net assets disposed
Currency translation reserve reclassified to the income statement
Gain on disposal of discontinued operations
Note:
29 May
2015
£m
31 December
2014
£m
5.6
5.9
183.0
9.2
1.4
111.1
91.1
3.6
706.9
87.6
1,205.4
553.4
326.2
82.0
0.8
2.0
964.4
5.4
5.2
171.0
41.9
–
105.5
152.3
3.1
665.5
95.4
1,245.3
504.5
355.0
125.3
32.0
4.0
1,020.8
224.5
438.1
(15.6)
422.5
(224.5)
(30.9)
167.1
1. The Group entered into a foreign currency hedge converting Euro into Sterling in September 2014 for the disposal proceeds. The foreign currency hedge gain of
£34.0 million and other sale-related consideration are included in cash consideration received.
137
www.directlinegroup.com 137
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
5. Discontinued operations and disposal group continued
C) Assets and liabilities held for sale
The following table analyses the assets and liabilities held for sale at 31 December 2015.
Assets held for sale:
Disposal group (note 5B)
Freehold property1
Total
Liabilities held for sale:
Disposal group (note 5B)
Total
Note:
2015
£m
2014
£m
–
5.1
5.1
–
–
1,205.4
3.0
1,208.4
964.4
964.4
1. The freehold property held at 31 December 2015 comprises the Pudsey sites which were transferred from property, plant and equipment to assets held for sale in
2015 with a carrying value of £22.1 million and impaired by £17.0 million to reflect the estimated realisable value. The freehold property held at 31 December
2014 with a value of £3.0 million comprised the formerly occupied Coombe Cross site in Croydon which was disposed of during 2015, realising proceeds of
£7.1 million and generating an impairment reversal of £4.1 million.
6. Net earned premium
Continuing operations
Gross earned premium:
Gross written premium
Movement in unearned premium reserve
Reinsurance premium:
Premium payable
Movement in reinsurance unearned premium reserve
Total
7. Investment return
Continuing operations
Investment income:
Interest income from debt securities
Cash and cash equivalent interest income
Rental income from investment property
Interest income from infrastructure debt
Net realised gains / (losses):
AFS debt securities
Derivatives
Investment property (note 20)
Net unrealised gains:
Impairments of AFS debt securities
Derivatives
Investment property (note 20)
Total
138
138
Direct Line Group Annual Report & Accounts 2015
2015
£m
2014
£m
3,152.5
(42.4)
3,110.1
3,099.0
45.2
3,144.2
(191.7)
2.5
(189.2)
2,920.9
(182.5)
25.0
(157.5)
2,986.7
2015
£m
2014
£m
140.1
6.7
17.9
4.4
169.1
12.4
(56.5)
–
(44.1)
–
48.9
24.2
73.1
198.1
154.0
5.2
16.2
0.1
175.5
16.2
(86.2)
2.3
(67.7)
1.3
79.6
26.4
107.3
215.1
Direct Line Group Annual Report & Accounts 2015
The table below analyses the realised and unrealised gains and losses on derivative instruments included in investment return.
Realised
Unrealised
Realised
Unrealised
2015
£m
2014
£m
2014
£m
2015
£m
(82.4)
44.9
(37.5)
(28.7)
9.7
(19.0)
(56.5)
Continuing operations
Derivative (losses) / gains
Foreign exchange forward contracts
Associated foreign exchange risk
Net (losses) / gains on foreign exchange forward contracts
Interest rate derivatives
Associated interest rate risk
Net (losses) / gains on interest rate derivatives
Total
8. Other operating income
Continuing operations
Vehicle replacement referral income
Revenue from vehicle recovery and repair services
Fee income from insurance intermediary services
Other income
Total
(19.1)
61.9
42.8
1.2
4.9
6.1
48.9
(59.3)
(7.4)
(66.7)
(20.4)
0.9
(19.5)
(86.2)
2015
£m
12.5
15.5
2.4
20.3
50.7
9. Net insurance claims
Continuing operations
Current accident year claims paid
Prior accident year claims paid
Decrease in insurance liabilities
Total
Gross
2015
£m
1,037.0
941.9
(149.6)
1,829.3
Reinsurance
2015
£m
–
(15.9)
(146.5)
(162.4)
Net
2015
£m
1,037.0
926.0
(296.1)
1,666.9
Gross
2014
£m
1,086.4
1,165.8
(473.6)
1,778.6
Reinsurance
2014
£m
–
(21.8)
(29.4)
(51.2)
(46.4)
115.9
69.5
(22.1)
32.2
10.1
79.6
2014
£m
15.8
18.0
2.1
11.0
46.9
Net
2014
£m
1,086.4
1,144.0
(503.0)
1,727.4
Claims handling expenses for the year ended 31 December 2015 of £200.4 million (2014: £226.3 million) have been
included in the claims figures above. Claims handling expenses can be further analysed for the year ended 31 December 2015
between ongoing operations of £195.6 million (2014: £222.3 million) and run-off of £4.8 million (2014: £4.0 million).
10. Commission expenses
Continuing operations
Commission expenses
Expenses incurred under profit participations
Total
11. Operating expenses
Continuing operations
Staff costs
Other operating expenses
Marketing
Amortisation and impairment of other intangible assets
Depreciation
Total
Staff costs attributable to claims handling activities are allocated to the cost of insurance claims.
2015
£m
253.2
66.1
319.3
2015
£m
273.3
249.2
117.9
67.4
30.7
738.5
2014
£m
263.3
90.7
354.0
2014
£m
263.6
299.5
123.9
66.4
22.6
776.0
139
www.directlinegroup.com 139
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
11. Operating expenses continued
The table below analyses restructuring and other one-off costs included in operating expenses.
Other operating expenses
Staff costs
Total
The table below analyses the number of people employed by the Group’s operations.
2015
£m
30.0
18.7
48.7
2014
£m
54.1
15.5
69.6
Continuing operations
Operations
Support
Total
At 31 December
Average for the year
2015
9,531
1,190
10,721
2014
9,618
1,271
10,889
2015
9,564
1,257
10,821
2014
9,959
1,278
11,237
The Group’s discontinued operations employed no employees at 31 December 2015 (2014: 1,267) and an average monthly
number of 1,279 people for the period until disposal on 29 May 2015 (2014: 1,275).
The aggregate remuneration of those employed by the Group’s operations comprised:
Continuing operations
Wages and salaries
Social security costs
Pension costs
Share-based payments
Total
2015
£m
335.4
37.8
23.4
12.1
408.7
2014
£m
344.0
37.7
23.9
6.6
412.2
The aggregate remuneration of those employed by the Group’s discontinued operations (note 5A) was £12.6 million in 2015
(2014: £32.9 million).
The table below analyses auditor’s remuneration in respect of the Group’s operations.
Continuing operations
Fees payable for the audit of:
The Company’s annual accounts
The Company’s subsidiaries
Total audit fees
Fees payable for non-audit services:
Audit-related assurance services
Taxation advisory services
Other services
Total non-audit services
Total
The audit fees in respect of the Group’s discontinued operations (note 5A) were £nil in 2015 (2014: £0.4 million).
Aggregate Directors’ emoluments
The table below analyses the total amount of Directors’ remuneration, all of which is in relation to continuing operations,
in accordance with Schedule 5 to the Accounting Regulations.
Salaries, fees, bonuses and benefits in kind
Gains on exercise of share options
Defined contribution pension scheme contributions
Total
2015
£m
3.5
4.9
0.1
8.5
Further information about the remuneration of individual Directors is provided in the Directors’ remuneration report.
140
140
Direct Line Group Annual Report & Accounts 2015
2015
£m
2014
£m
0.3
1.6
1.9
0.3
–
0.6
0.9
2.8
0.4
1.5
1.9
0.1
0.2
0.1
0.4
2.3
2014
£m
3.4
1.2
0.1
4.7
Direct Line Group Annual Report & Accounts 2015
At 31 December 2015, one Director (2014: one) had retirement benefits accruing under the defined contribution pension
scheme in respect of qualifying service.
During the year ended 31 December 2015, two Directors exercised share options (2014: two).
12. Finance costs
Continuing operations
Interest expense on subordinated liabilities1
Note:
2015
£m
37.6
2014
£m
37.2
1. As described in note 30, on 27 April 2012 the Group issued subordinated guaranteed dated notes with a nominal value of £500 million at a fixed rate of
9.25%. On the same date, the Group also entered into a 10-year hedge to exchange the fixed rate of interest on the notes for a floating rate of three-month LIBOR
plus a spread of 706 basis points, which increased to 707 basis points with effect from 29 July 2013.
13. Tax charge
Continuing operations
Current taxation:
Charge for the year
(Over) / under provision in respect of prior year
Deferred taxation (note 14):
Charge for the year
Under/ (over) provision in respect of prior year
Current taxation
Deferred taxation (note 14)
Tax charge for the year
2015
£m
103.5
(4.6)
98.9
6.4
3.0
9.4
98.9
9.4
108.3
The following table analyses the difference between the actual income tax charge and the expected income tax charge
computed by applying the standard rate of corporation tax of 20.25%1 (2014: 21.5%).
2014
£m
87.2
3.9
91.1
14.0
(7.6)
6.4
91.1
6.4
97.5
2014
£m
456.8
98.2
(0.5)
3.4
0.1
(3.7)
97.5
2015
£m
507.5
102.8
–
7.8
(0.7)
(1.6)
108.3
21.3%
21.3%
Continuing operations
Profit before tax
Expected tax charge
Effects of:
Realised gains on disposal of subsidiaries
Disallowable expenses
Effect of change in corporation taxation rate
Over provision in respect of prior year
Tax charge for the year
Effective income tax rate
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.
141
www.directlinegroup.com 141
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
14. Current and deferred tax
Current tax
.
Per balance sheet:
Current tax assets
Current tax liabilities
.
Deferred tax
Per balance sheet:
Deferred tax liabilities
2015
£m
0.1
(10.3)
2014
£m
0.1
(35.7)
2015
£m
2014
£m
(29.9)
(20.6)
The table below analyses the major deferred tax assets and liabilities recognised by the Group and movements thereon.
At 1 January 2014
Credit / (charge) to the income
statement on continuing
operations
Credit to the income statement
on discontinued operations
Charge to other comprehensive
income
Credit direct to equity
Other movements
Transfer to liabilities / assets held
for sale
At 31 December 2014
(Charge) / credit to the income
statement on continuing
operations
Charge to other comprehensive
income
Credit direct to equity
At 31 December 2015
Provisions
and other
temporary
differences
£m
Retirement
benefit
obligations
£m
Depreciation
in excess of
capital
allowances
£m
Non-
distributable
reserve
£m
Investment
properties
£m
Share-based
payments
£m
17.3
0.4
0.4
(18.5)
(1.5)
1.9
2.6
2.1
(7.4)
–
(0.8)
(8.4)
5.4
(2.1)
–
–
3.3
(0.5)
–
(0.6)
–
–
–
(0.7)
(0.1)
(1.6)
–
(2.4)
0.5
–
–
–
(0.1)
–
0.8
–
–
–
0.8
(6.5)
(3.3)
0.8
–
–
–
–
–
(25.0)
(3.9)
–
–
(28.9)
–
–
–
–
–
(4.8)
(3.6)
–
–
(8.4)
–
–
1.0
–
–
3.7
0.3
–
1.7
5.7
Total
£m
–
(6.4)
2.1
(8.0)
1.0
(0.9)
(8.4)
(20.6)
(9.4)
(1.6)
1.7
(29.9)
In addition, the Group has an unrecognised deferred tax asset at 31 December 2015 of £4.1 million (2014: £1.9 million) in
relation to capital losses.
142
142
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
15. Dividends
Amounts recognised as distributions to equity holders in the period:
2014 final dividend1 of 8.8 pence per share paid on 17 April 2015
2013 final dividend of 8.4 pence per share paid on 20 May 2014
2015 first interim dividend of 4.6 pence per share paid on 11 September 2015
2014 first interim dividend of 4.4 pence per share paid on 12 September 2014
2015 first special interim dividend of 27.5 pence per share paid on 24 July 2015
2014 first special interim dividend of 10.0 pence per share paid on 12 September 2014
2014 second special interim dividend of 4.0 pence per share paid on 17 April 2015
2013 second special interim dividend of 4.0 pence per share paid on 20 May 2014
Proposed dividends:
2015 final dividend of 9.2 pence per share
2014 final dividend1 of 8.8 pence per share
2015 second special interim dividend of 8.8 pence per share
2014 second special interim dividend of 4.0 pence per share
Note:
1. The Board paid an interim dividend in lieu of a final dividend.
2015
£m
2014
£m
131.6
–
63.0
–
411.5
–
59.9
–
666.0
126.5
–
121.0
–
–
125.7
–
65.8
–
149.7
–
59.9
401.1
–
132.0
–
60.0
The proposed final dividend for 2015 has not been included as a liability in these financial statements.
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).
16. Earnings per share
Earnings per share is calculated by dividing earnings attributable to the owners of the Company by the weighted average
number of Ordinary Shares during the period.
On 30 June 2015, the Group completed an 11 for 12 share consolidation which had the effect of reducing the number of
shares in issue from 1,500 million Ordinary Shares of 10 pence each to 1,375 million Ordinary Shares of 10 10/11 pence
each. The weighted average number of Ordinary Shares used in calculating basic and diluted earnings per share reflects this
share consolidation.
Basic
Basic earnings per share is calculated by dividing the earnings attributable to the owners of the Company by the weighted
average number of Ordinary Shares for the purposes of basic earnings per share during the period, excluding Ordinary Shares
held as employee trust shares.
Earnings attributable to owners of the Company arising from:
Continuing operations
Discontinued operations
Continuing and discontinued operations
Weighted average number of Ordinary Shares (millions)
Basic earnings per share (pence):
Continuing operations
Discontinued operations
Continuing and discontinued operations
2015
£m
2014
£m
399.2
181.2
580.4
359.3
13.3
372.6
1,431.2
1,495.0
27.9
12.7
40.6
24.0
0.9
24.9
143
www.directlinegroup.com 143
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
16. Earnings per share continued
Diluted
Diluted earnings per share is calculated by dividing the earnings attributable to the owners of the Company by the weighted
average number of Ordinary Shares during the period adjusted for dilutive potential Ordinary Shares. The Company has share
options and contingently issuable shares as categories of dilutive potential Ordinary Shares.
Earnings attributable to owners of the Company arising from:
Continuing operations
Discontinued operations
Continuing and discontinued operations
Weighted average number of Ordinary Shares (millions)
Effect of dilutive potential of share options and contingently issuable shares (millions)
Weighted average number of Ordinary Shares for the purpose of diluted earnings per share (millions)
Diluted earnings per share (pence):
Continuing operations
Discontinued operations
Continuing and discontinued operations
2015
£m
2014
£m
399.2
181.2
580.4
1,431.2
17.8
1,449.0
27.6
12.5
40.1
359.3
13.3
372.6
1,495.0
12.9
1,507.9
23.8
0.9
24.7
17. Net assets per share and return on equity
Net asset value per share is calculated as total shareholders’ equity divided by the number of Ordinary Shares at the end of
the period excluding shares held by employee share trusts.
Tangible net asset value per share is calculated as total shareholders’ equity less goodwill and other intangible assets divided
by the number of Ordinary Shares at the end of the period excluding shares held by employee share trusts.
The table below analyses net asset and tangible net asset value per share.
At 31 December
Net assets
Goodwill and other intangible assets
Disposal group – intangible assets
Tangible net assets
Number of Ordinary Shares (millions)
Shares held by employee share trusts (millions)
Closing number of Ordinary Shares (millions)
Net asset value per share (pence)
Tangible net asset value per share (pence)
Return on equity
The table below details the calculation of return on equity.
Earnings attributable to owners of the Company arising from:
Continuing operations
Discontinued operations
Continuing and discontinued operations
Opening shareholders’ equity
Closing shareholders’ equity
Average shareholders’ equity
Return on equity
144
144
Direct Line Group Annual Report & Accounts 2015
2015
£m
2,630.0
(524.8)
–
2,105.2
1,375.0
(6.3)
1,368.7
192.2
153.8
2014
£m
2,810.5
(517.5)
(5.6)
2,287.4
1,500.0
(6.4)
1,493.6
188.2
153.1
2015
£m
2014
£m
399.2
181.2
580.4
2,810.5
2,630.0
2,720.2
21.3%
359.3
13.3
372.6
2,790.0
2,810.5
2,800.2
13.3%
Direct Line Group Annual Report & Accounts 2015
18. Goodwill and other intangible assets
Cost
At 1 January 2014
Effect of foreign currency exchange adjustment
Additions
Disposal of subsidiary1
Disposals and write-off2
Transfer to assets held for sale
At 31 December 2014
Additions
Disposals and write-off2
At 31 December 2015
Accumulated amortisation and impairment
At 1 January 2014
Charge for the year relating to continuing operations
Charge for the year relating to discontinued operations
Effect of foreign currency exchange adjustment
Disposal of subsidiary1
Disposals and write-off2
Impairment losses
Transfer to assets held for sale
At 31 December 2014
Charge for the year relating to continuing operations
Disposals and write-off2
Impairment losses
At 31 December 2015
Carrying amount
At 31 December 2015
At 31 December 2014
Notes:
Goodwill
£m
342.8
–
–
(110.1)
–
(21.7)
211.0
–
–
211.0
131.8
–
–
–
(110.1)
–
–
(21.7)
–
–
–
–
–
Other
intangible
assets
£m
445.7
(2.6)
92.8
(1.6)
(67.2)
(38.6)
428.5
74.7
(8.0)
495.2
156.6
56.9
2.2
(2.2)
(0.9)
(67.2)
9.6
(33.0)
122.0
63.1
(8.0)
4.3
181.4
Total
£m
788.5
(2.6)
92.8
(111.7)
(67.2)
(60.3)
639.5
74.7
(8.0)
706.2
288.4
56.9
2.2
(2.2)
(111.0)
(67.2)
9.6
(54.7)
122.0
63.1
(8.0)
4.3
181.4
211.0
211.0
313.8
306.5
524.8
517.5
1. Disposal of subsidiary relates to the Tracker business.
2. Disposals and write-off include fully amortised intangible assets no longer utilised by the Group in its operating activities.
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.
The Group’s testing for goodwill impairment includes the comparison of the recoverable amount of each CGU to which goodwill
has been allocated with its carrying value and updated at each reporting date in the event of indications of impairment.
145
www.directlinegroup.com 145
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
18. Goodwill and other intangible assets continued
The table below analyses the goodwill of the Group by CGU.
Motor
Home
Rescue and other personal lines
Commercial
Total
2015
£m
126.4
45.8
28.7
10.1
211.0
2014
£m
126.4
45.8
28.7
10.1
211.0
There have been no impairments in goodwill for the year ended 31 December 2015 (2014: £nil).
The recoverable amount is the higher of the CGU fair value less the costs to sell and its value-in-use. Value-in-use is the present
value of expected future cash flows from the CGU. Fair value is the estimated amount that could be obtained from the sale of the
CGU in an arm’s length transaction between knowledgeable and willing parties.
The recoverable amounts of all CGUs were based on the value-in-use test, using the Group’s five-year strategic plan. The long-term
growth rates have been based on GDP rates adjusted for inflation. The risk discount rates incorporate observable market long-term
government bond yields and average industry betas adjusted for an appropriate risk premium based on independent analysis.
The table below details the recoverable amounts in excess of carrying value for the CGUs where goodwill is held.
CGU
Motor
Home
Rescue and other personal lines
Commercial
Note:
Assumptions
Sensitivity: Impact on
recoverable amount of a:
Terminal
growth
rate
%
3.0
3.0
3.0
3.0
Pre-tax
discount
rate
%
Recoverable
amount in excess
of carrying value
£m
1% decrease in
terminal growth
rate
£m
1% increase in
pre-tax discount
rate
£m
1% decrease
in forecast
pre-tax profit1
£m
11.6
11.6
11.6
11.6
816.6
764.6
603.7
46.9
(201.6)
(72.2)
(55.2)
(37.4)
(276.9)
(99.8)
(75.5)
(50.8)
(26.1)
(9.7)
(6.9)
(4.5)
1. Reflects a 1% decrease in the profit for each year of the five-year forecast.
146
146
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
19. Property, plant and equipment
Cost
At 1 January 2014
Additions
Disposals
Acquisition of subsidiary
Disposal of subsidiary
Effect of foreign currency exchange adjustment
Transfer to assets held for sale (note 5C)
At 31 December 2014
Additions
Disposals
Transfer to assets held for sale (note 5C)
At 31 December 2015
Accumulated depreciation and impairment
At 1 January 2014
Depreciation charge for the year relating to continuing operations
Depreciation charge for the year relating to discontinued operations
Disposals
Impairment losses
Disposal of subsidiary
Effect of foreign currency exchange adjustment
Transfer to assets held for sale (note 5C)
At 31 December 2014
Depreciation charge for the year relating to continuing operations
Disposals
Impairment losses
Transfer to assets held for sale (note 5C)
At 31 December 2015
Carrying amount
At 31 December 2015
At 31 December 2014
20. Investment property
At 1 January
Additions at cost
Increase in fair value during the year
Disposals
At 31 December
Note:
Freehold land
and buildings
£m
Other
equipment
£m
15.3
43.4
–
25.1
–
–
–
83.8
17.9
(0.1)
(22.6)
79.0
1.1
0.6
–
–
–
–
–
–
1.7
1.2
–
–
(0.5)
2.4
160.0
43.3
(16.6)
–
(3.5)
(1.7)
(27.2)
154.3
49.2
(15.7)
–
187.8
71.9
22.0
3.0
(16.3)
0.1
(2.9)
(1.4)
(21.3)
55.1
29.5
(11.3)
4.8
–
78.1
Total
£m
175.3
86.7
(16.6)
25.1
(3.5)
(1.7)
(27.2)
238.1
67.1
(15.8)
(22.6)
266.8
73.0
22.6
3.0
(16.3)
0.1
(2.9)
(1.4)
(21.3)
56.8
30.7
(11.3)
4.8
(0.5)
80.5
76.6
82.1
109.7
99.2
186.3
181.3
2015
£m
307.2
16.0
24.2
–
347.4
2014
£m
223.4
76.2
28.7
(21.1)
307.2
1. The cost included in carrying value at 31 December 2015 is £295.5 million (2014: £279.5 million).
The investment properties are measured at fair value derived from valuation work carried out at the balance sheet date by
independent property valuers.
The valuation conforms to international valuation standards. The fair value was determined using a methodology based on recent
market transactions for similar properties, which have been adjusted for the specific characteristics of each property within the
portfolio. This approach to valuation is consistent with the methodology used in the year ended 31 December 2014.
Lease agreements with tenants are drawn up in line with local practice and the Group has no exposure to leases that include
contingent rents.
147
www.directlinegroup.com 147
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
21. Subsidiaries
The principal subsidiary undertakings of the Group, over which it exercises 100% voting power, are shown below. Their capital
consists of Ordinary Shares which are unlisted. All subsidiaries (a full list of which is included in note 2 of the Parent Company
financial statements) are included in the Group’s consolidated financial information.
Name of subsidiary
DL Insurance Services Limited
U K Insurance Limited
Place of incorporation
and operation
United Kingdom
United Kingdom
Principal activity
Management services
General insurance
On 29 May 2015, the Group completed the sale of its International business comprising Direct Line Insurance S.p.A and Direct
Line Versicherung AG for a cash consideration of £438.1 million. Details of the fair value of assets and liabilities disposed of
and the gain on disposal are set out in note 5B.
The Group sold 100% of the share capital of Tracker Network (UK) Limited on 5 February 2014. The fair value of the identifiable
assets sold was £9.2 million (including cash and cash equivalents of £2.4 million) and the fair value of the identifiable liabilities
was £8.8 million. The total cash consideration received was £2.7 million, generating a profit on disposal of £2.3 million.
The Group did not dispose of any other subsidiaries in the years ended 31 December 2015 and 31 December 2014.
The Group acquired 100% of the share capital of 10-15 Livery Street, Birmingham UK Limited on 22 December 2014 for
total cash consideration of £26.1 million. The fair value of the identifiable assets acquired was £26.2 million (including cash
and cash equivalents of £1.1 million) and the fair value of identifiable liabilities was £0.1 million.
2015
£m
975.8
(53.9)
921.9
89.5
1,011.4
2015
£m
(66.4)
(5.0)
17.5
(53.9)
2015
£m
208.4
(4.6)
–
–
203.8
2014
£m
841.9
(66.4)
775.5
87.0
862.5
2014
£m
(53.2)
(14.1)
0.9
(66.4)
2014
£m
321.5
5.4
(7.4)
(111.1)
208.4
22. Reinsurance assets
Reinsurers’ share of general insurance liabilities
Impairment provision
Reinsurers’ unearned premium reserve
Total
Movements in reinsurance asset impairment provision
At 1 January
Additional provision
Release to income statement
At 31 December
23. Deferred acquisition costs
At 1 January
Net (decrease) / increase in the year
Effect of foreign currency exchange adjustment
Transfer to assets held for sale
At 31 December
148
148
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
24. Insurance and other receivables
Receivables arising from insurance and reinsurance contracts:
Due from policyholders
Impairment provision of policyholder receivables
Due from agents, brokers and intermediaries
Impairment provision of agent, broker and intermediary receivables
Other debtors
Total
25. Derivative financial instruments
Derivative assets
At fair value through the income statement
Designated as hedging instruments
Total
Derivative liabilities
At fair value through the income statement
Designated as hedging instruments
Total
2015
£m
2014
£m
800.1
(0.7)
60.0
(1.3)
97.7
955.8
2015
£m
19.3
0.3
19.6
46.3
0.1
46.4
790.7
(0.6)
53.7
(0.7)
116.8
959.9
2014
£m
24.9
2.4
27.3
29.3
0.1
29.4
Designated hedging instruments at 31 December 2015 and 31 December 2014 include hedging in relation to supplier payments.
At 31 December 2014, the Group also had a foreign currency hedge contract converting Euro to Sterling in respect of the proceeds
from the sale of the International business which ceased on completion of the sale.
26. Financial investments
AFS debt securities
Corporate
Supranational
Local government
Sovereign
Securitised credit
Total
HTM debt securities
Corporate
Total debt securities
Total debt securities
Fixed interest rate
Floating interest rate
Total
Loans and receivables
Deposits with credit institutions with maturities in excess of three months
Infrastructure debt1
Total
Note:
2015
£m
2014
£m
4,182.4
140.1
105.3
442.7
356.1
5,226.6
4,117.1
176.3
120.7
993.8
422.4
5,830.3
13.5
–
5,240.1
5,830.3
4,801.6
438.5
5,240.1
5,147.3
683.0
5,830.3
44.9
329.6
54.7
76.2
5,614.6
5,961.2
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).
149
www.directlinegroup.com 149
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
27. Cash and cash equivalents and borrowings
Cash at bank and in hand
Short-term deposits with credit institutions with maturities less than 3 months
Cash and cash equivalents
Bank overdrafts1
Cash and cash equivalents in assets held for sale (note 5B)
Cash and cash equivalents including bank overdrafts
Note:
2015
£m
131.8
831.9
963.7
(61.3)
–
902.4
2014
£m
151.3
729.1
880.4
(69.8)
87.6
898.2
1. Bank overdrafts represent short-term timing differences between transactions posted in the records of the Group and transactions flowing through the accounts at
the bank.
The effective interest rate on short-term deposits with credit institutions for the year ended 31 December 2015 was 0.56%
(2014: 0.61%) and average maturity was 10 days (2014: 10 days).
28. Share capital
Issued and fully paid: equity shares
Ordinary Shares of 10 pence each
Ordinary Shares of 10 10/11 pence each
2015
Number
Millions
2014
Number
Millions
2015
£m
2014
£m
–
1,375
1,500
–
–
150.0
150.0
–
At a General Meeting on 29 June 2015, shareholders approved a share consolidation which completed on 30 June 2015. As
a result of the share consolidation, shareholders held 11 new Ordinary Shares of 10 10/11 pence each issued by the Company
in exchange for every 12 Ordinary Shares of 10 pence each held immediately prior to the share consolidation, which were
cancelled by the Company.
Employee trust shares
The Group satisfies share-based payments under the Group’s share plans primarily through shares purchased in the market and
held by employee share trusts.
At 31 December 2015, 6,256,108 Ordinary Shares of 10 10/11 pence each (2014: 6,391,506 Ordinary Shares of 10
pence each) were owned by the employee share trusts with a cost of £20.4 million (2014: £13.6 million). These Ordinary
Shares are carried at cost and have a market value of £25.5 million (2014: £18.6 million).
150
150
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
29. Other reserves
Movements in the revaluation reserve for AFS investments
At 1 January
Revaluation during the year – gross
Revaluation during the year – tax
Realised gains – gross
Realised gains – tax
Realised gain on disposal of subsidiary – gross
Realised gain on disposal of subsidiary – tax
At 31 December
Movements in the non-distributable reserve
At 1 January
Transfer from retained earnings
At 31 December
2015
£m
115.6
(100.5)
22.0
(12.5)
2.5
(31.8)
10.1
2014
£m
58.8
97.2
(23.2)
(22.8)
5.6
–
–
5.4
115.6
2015
£m
124.9
28.0
152.9
2014
£m
92.8
32.1
124.9
The non-distributable reserve is a statutory claims equalisation reserve that is calculated in accordance with the rules of the PRA.
With the introduction of Solvency II on 1 January 2016 the requirement to maintain the reserve ceases and the non-distributable
reserve transfers into retained earnings.
30. Subordinated liabilities
Subordinated guaranteed dated notes
2015
£m
521.1
2014
£m
526.3
The subordinated guaranteed dated notes were issued on 27 April 2012 at a fixed rate of 9.25%. On the same date, the
Group also entered into a 10-year hedge to exchange the fixed rate of interest for a floating rate of three-month LIBOR plus
a spread of 706 basis points which was credit value adjusted to 707 basis points with effect from 29 July 2013.
The nominal £500 million notes have a redemption date of 27 April 2042. The Group has the option to repay the notes
on specific dates from 27 April 2022. If the notes are not repaid on that date, the rate of interest will be reset at a rate of the
six-month LIBOR plus 7.91%.
The notes are unsecured, subordinated obligations of the Group, and rank pari passu without any preference among themselves.
In the event of a winding-up or of bankruptcy, they are to be repaid only after the claims of all other senior creditors have been met.
The Group has the option to defer interest payments in certain circumstances on the notes but to date has not exercised this right.
151
www.directlinegroup.com 151
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
31. Insurance liabilities
Insurance liabilities
Gross insurance liabilities
2015
£m
2014
£m
4,524.5
4,674.1
Accident year
Estimate of ultimate
gross claims costs1:
At end of accident
year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Current estimate of
cumulative claims1
Cumulative payments
to date1
Gross liability
recognised in
balance sheet
2005 and prior
Claims handling
provision
Total
Note:
2006
£m
2007
£m
2008
£m
2009
£m
2010
£m
2011
£m
2012
£m
2013
£m
2014
£m
2015
£m
Total
£m
3,789.2 4,014.7 3,393.4 3,823.3 3,941.7 2,698.1 2,372.7 2,184.0 2,094.5 2,118.1
–
–
–
–
–
–
–
–
–
(117.6)
(153.0)
–
–
–
–
–
–
–
(256.0)
(32.6)
(10.7)
18.3
(18.2)
(11.0)
(13.5)
2.2
(33.2)
(117.1)
(99.1)
(50.3)
(105.5)
(57.7)
–
–
–
–
121.6
(37.0)
(14.0)
(101.5)
(38.8)
(80.8)
–
–
–
(163.3)
(118.9)
(49.3)
–
–
–
–
–
–
(44.7)
7.8
64.8
(5.4)
(12.1)
(24.4)
(18.8)
(14.4)
–
20.7
–
–
–
–
–
–
–
–
50.8
51.7
(36.7)
(16.7)
(55.5)
(45.7)
(29.9)
–
–
(99.3)
(94.6)
(89.3)
(60.9)
–
–
–
–
–
3,434.5 3,967.5 3,311.4 3,672.8 3,512.0 2,354.0 2,041.2 1,913.4 2,115.2 2,118.1
(3,291.0) (3,761.5) (3,170.8) (3,441.9) (3,246.0) (2,082.9) (1,751.3) (1,475.5) (1,350.1)
(912.4)
143.5
206.0
140.6
230.9
266.0
271.1
289.9
437.9
765.1 1,205.7 3,956.7
473.4
94.4
4,524.5
1. The claims development and cumulative payments to date by accident year in the above table have been re-presented to exclude the claims and payments in
respect of the International business sold on 29 May 2015.
152
152
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Net insurance liabilities
Accident year
Estimate of ultimate
net claims costs1:
At end of accident
year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Current estimate of
cumulative claims1
Cumulative payments
to date1
Net liability
recognised in
balance sheet
2005 and prior
Claims handling
provision
Total
Note:
2006
£m
2007
£m
2008
£m
2009
£m
2010
£m
2011
£m
2012
£m
2013
£m
2014
£m
2015
£m
Total
£m
3,743.4 3,970.3 3,334.7 3,790.6 3,902.0 2,644.4 2,271.8 2,093.9 1,971.0 1,926.7
–
–
–
–
–
–
–
–
–
(123.6)
(134.4)
–
–
–
–
–
–
–
(239.7)
(43.5)
(21.4)
18.2
(40.3)
(19.6)
(13.1)
3.6
(25.3)
(131.5)
(82.1)
(76.5)
(48.7)
–
–
–
–
–
(125.2)
(120.4)
(44.0)
(93.6)
(52.3)
–
–
–
–
(146.7)
(107.8)
(35.6)
–
–
–
–
–
–
(29.7)
–
–
–
–
–
–
–
–
(64.3)
(14.5)
32.9
(8.9)
(17.6)
(19.6)
(16.0)
(12.5)
–
52.0
15.9
(22.8)
(45.8)
(48.7)
(30.9)
(24.5)
–
–
70.0
(17.4)
(54.1)
(67.0)
(29.6)
(74.6)
–
–
–
3,362.3 3,849.8 3,229.9 3,617.9 3,466.5 2,305.6 1,981.7 1,835.9 1,941.3 1,926.7
(3,253.7) (3,696.4) (3,131.6) (3,408.6) (3,232.0) (2,059.6) (1,739.4) (1,466.7) (1,350.1)
(912.4)
108.6
153.4
98.3
209.3
234.5
246.0
242.3
369.2
591.2 1,014.3 3,267.1
241.1
94.4
3,602.6
1. The claims development and cumulative payments to date by accident year in the above table have been re-presented to exclude the claims and payments in
respect of the International business sold on 29 May 2015.
153
www.directlinegroup.com 153
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
31. Insurance liabilities continued
Movements in gross and net insurance liabilities
Claims reported
Incurred but not reported
Claims handling provision
At 1 January 2014
Cash paid for claims settled in the year
Increase / (decrease) in liabilities:
Arising from current-year claims
Arising from prior-year claims1
Effect of foreign currency exchange adjustment
Transfer to (liabilities) / assets held for sale (note 5C)
At 31 December 2014
Claims reported
Incurred but not reported
Claims handling provision
At 31 December 2014
Cash paid for claims settled in the year
Increase / (decrease) in liabilities:
Arising from current-year claims
Arising from prior-year claims
At 31 December 2015
Claims reported
Incurred but not reported
Claims handling provision
At 31 December 2015
Note:
Gross
£m
Reinsurance
£m
3,636.4
1,992.7
128.3
5,757.4
(2,671.6)
2,721.3
(538.5)
(41.1)
(553.4)
4,674.1
2,791.1
1,778.2
104.8
4,674.1
(1,978.9)
2,307.6
(478.3)
4,524.5
2,732.2
1,697.9
94.4
4,524.5
(467.5)
(449.8)
–
(917.3)
181.2
(288.3)
77.6
11.5
159.8
(775.5)
(315.3)
(460.2)
–
(775.5)
16.0
(191.4)
29.0
(921.9)
(375.0)
(546.9)
–
(921.9)
1. Decrease in net liabilities arising from prior-year claims in 2014 includes a £10.1 million reserve release for the discontinued International business.
Movement in prior-year net claims liabilities by operating segment
Motor
Home
Rescue and other personal lines
Commercial
Total ongoing
Run-off
Total
32. Unearned premium reserve
Movement in unearned premium reserve
At 1 January 2014
Net movement in the year
Effect of foreign currency exchange adjustment
Transfer to (liabilities) / assets held for sale (note 5C)
At 31 December 2014
Net movement in the year
At 31 December 2015
154
154
Direct Line Group Annual Report & Accounts 2015
2015
£m
(266.8)
(41.9)
(13.6)
(56.6)
(378.9)
(70.4)
(449.3)
Gross
£m
Reinsurance
£m
1,818.7
(33.4)
(24.9)
(326.2)
1,434.2
42.4
1,476.6
(93.7)
(18.6)
2.1
23.2
(87.0)
(2.5)
(89.5)
Net
£m
3,168.9
1,542.9
128.3
4,840.1
(2,490.4)
2,433.0
(460.9)
(29.6)
(393.6)
3,898.6
2,475.8
1,318.0
104.8
3,898.6
(1,962.9)
2,116.2
(449.3)
3,602.6
2,357.2
1,151.0
94.4
3,602.6
2014
£m
(278.4)
(49.8)
(15.7)
(53.7)
(397.6)
(53.2)
(450.8)
Net
£m
1,725.0
(52.0)
(22.8)
(303.0)
1,347.2
39.9
1,387.1
Direct Line Group Annual Report & Accounts 2015
33. Retirement benefit obligations
Defined contribution scheme
The pension charge for continuing operations in respect of the defined contribution scheme for the year ended 31 December 2015
was £23.5 million (2014: £23.9 million). The charge for discontinued operations was £0.9 million (2014: £1.8 million).
Defined benefit scheme
The Group’s defined benefit pension scheme was closed in 2003 although the Group remains the sponsoring employer for
obligations to current and deferred pensioners based on qualifying years’ service and final salaries. The defined benefit scheme is
legally separated from the Group with trustees who are required by law to act in the interests of the scheme and of all the relevant
stakeholders. The trustees of the pension scheme are responsible for the investment policy with regard to the assets of the scheme.
The weighted average duration of the defined benefit obligations at 31 December 2015 is 20 years (2014: 20 years) using
accounting assumptions.
The table below sets out the principal assumptions used in determining the defined benefit scheme obligations.
Rate of increase in pension payment
Rate of increase of deferred pensions
Discount rate
Inflation rate
2015
%
2.1
2.1
3.8
3.2
2014
%
2.1
2.1
3.4
3.1
No assumption has been made for salary growth as there are no obligations in the scheme that are linked to future increases
in salaries.
Post-retirement mortality assumptions
Life expectancy at age 60 now:
Males
Females
Life expectancy at age 60 in 20 years’ time:
Males
Females
The table below analyses the fair value of the scheme assets by type of asset.
Equities
Index-linked bonds
Government bonds
Corporate bonds
Liquidity fund
Other
Total
The majority of debt and equity instruments have quoted prices on active markets.
2015
2014
87.8
89.9
90.1
92.3
2015
£m
–
21.5
13.7
43.8
5.5
0.6
85.1
88.5
90.2
90.4
92.3
2014
£m
3.0
22.2
12.8
44.4
–
0.7
83.1
155
www.directlinegroup.com 155
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
33. Retirement benefit obligations continued
Movement in net pension surplus / (deficit)
At 1 January 2014
Income statement:
Net interest income / (cost)1
Statement of comprehensive income:
Actuarial gains arising from experience adjustments
Actuarial losses arising from changes in financial assumptions
Contributions by employer
Benefits paid
At 31 December 2014
Income statement:
Net interest income / (cost)1
Statement of comprehensive income:
Actuarial (losses) / gains arising from experience adjustments
Actuarial gains arising from changes in demographic assumptions
Actuarial gains arising from changes in financial assumptions
Contributions by employer
Benefits paid
At 31 December 2015
Note:
1. The net interest income / (cost) in the income statement has been included under other operating expenses.
The table below details the history of the scheme for the current and prior years.
Present value of defined benefit scheme obligations
Fair value of defined benefit scheme assets
Net surplus / (deficit)
Experience adjustment gains / (losses) on scheme liabilities
Experience adjustment (losses) / gains on scheme assets
2015
£m
(72.0)
85.1
13.1
1.2
(1.9)
2014
£m
(79.6)
83.1
3.5
1.0
12.9
Fair value of
defined benefit
scheme assets
£m
Present value of
defined benefit
scheme
obligations
£m
Net pension
surplus
/ (deficit)
£m
66.0
(68.0)
(2.0)
2.9
(3.0)
(0.1)
12.9
–
2.8
(1.5)
83.1
1.0
(11.1)
–
1.5
(79.6)
13.9
(11.1)
2.8
–
3.5
2.8
(2.7)
0.1
(1.9)
–
–
2.8
(1.7)
85.1
2013
£m
(68.0)
66.0
(2.0)
(0.2)
(1.3)
1.2
1.1
6.3
–
1.7
(72.0)
2012
£m
(61.2)
63.7
2.5
(0.1)
2.2
(0.7)
1.1
6.3
2.8
–
13.1
2011
£m
(54.1)
56.7
2.6
0.4
(2.6)
Sensitivity analysis
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 in the table could have an additional financial impact on the
Group. This sensitivity analysis has been selected to reflect the changes to discounted cash flows as a result of changes to the
discount rate, inflation rate and mortality assumptions. The methodology adopted involves actuarial techniques.
Discount rate
0.25% increase in discount rate
0.25% decrease in discount rate
Inflation rate
0.25% increase in inflation rate
0.25% decrease in inflation rate
Life expectancy
1 year increase in life expectancy
1 year decrease in life expectancy
Impact on pension cost
2015
£m
(0.2)
0.2
–
–
0.1
(0.1)
2014
£m
(0.2)
0.1
–
–
0.1
(0.1)
Impact on present value
of defined benefit
scheme obligations
2015
£m
2014
£m
(3.7)
3.7
1.7
(1.7)
2.0
(2.0)
(4.1)
4.1
2.1
(2.1)
1.8
(1.8)
The most recent funding valuation of the defined benefit scheme took place as at 1 October 2014. The Group agreed with the
trustees to make a contribution of £2.8 million in 2016 with further contributions of up to £1.5 million per annum in 2017 and
2018 to meet the scheme’s funding requirements.
156
156
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
34. Share-based payments
The Group operates equity-settled, share-based compensation plans in the form of an LTIP, a Restricted Shares Plan, a DAIP and
Direct Line Group Share Incentive Plans, including both the Free Share awards and a Buy-As-You-Earn Plan, details of which are
set out below. All awards are to be satisfied using market purchased shares.
Long-Term Incentive Plan
Executive Directors and certain members of senior management are eligible to participate in the LTIP with awards granted in
the form of nil-cost options. Under the plan, the shares vest at the end of a three-year period dependent upon the continued
employment by the Group and also the Group achieving predefined performance conditions associated with TSR and RoTE.
Awards were made in the year ended 31 December 2015 over 1.7 million Ordinary Shares with an estimated fair value of
£5.5 million at the March 2015 grant date (2014: 2.2 million Ordinary Shares with an estimated fair value of £4.3 million)
and 1.7 million Ordinary Shares with an estimated fair value of £5.9 million at the August 2015 grant date (2014: 2.0 million
Ordinary Shares with an estimated fair value of £4.7 million).
The estimated fair value of the LTIP share awards with market-based performance conditions was calculated using a Monte-Carlo
simulation model.
The table below details the inputs into the model.
Weighted average assumptions during the year:
Share price (pence)
Exercise price (pence)
Volatility of share price
Average comparator volatility
Expected life
Risk-free rate
2015
2014
339
0
20%
27%
3 years
0.8%
270
0
26%
30%
3 years
1.1%
Expected volatility was determined by considering the actual volatility of the Group’s share price since IPO and that of a group
of listed UK insurance companies.
Plan participants are entitled to receive additional shares in respect of dividends paid to shareholders over the vesting period.
Therefore no deduction has been made from the fair value of awards in respect of dividends.
Expected life was based on the contractual life of the awards and adjusted based on management’s best estimate, for the effects
of exercise restrictions and behavioural considerations.
Restricted Shares Plan
The purpose of the Restricted Shares Plan is to facilitate the wider participation in Group share based awards to eligible
employees. These awards can be granted at any time during the year, generally have no performance criteria, and vest over
periods ranging between one and three years from the date of the grant, subject to continued employment. During the year
awards were made over 15,705 Ordinary Shares (2014: 509,103 Ordinary Shares) with an estimated fair value of £0.1
million (2014: £1.4 million) using the market value at the date of grant.
Deferred Annual Incentive Plan
To incentivise delivery of performance over a one-year operating cycle, Executive Directors and certain members of senior
management are eligible for awards under the Annual Incentive Plan, of which at least 40% is granted in the form of a nil-cost
option under the DAIP with the remainder being settled in cash following year end.
In March 2015 awards were made over 1.0 million Ordinary Shares (2014: 1.1 million Ordinary Shares) under this plan
with an estimated fair value of £3.4 million (2014: £2.6 million) using the market value at the date of grant.
The awards outstanding at 31 December 2015 have no performance criteria attached, other than the requirement that the
employee remains in employment with the Group for three years from the date of grant.
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.
157
www.directlinegroup.com 157
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
34. Share-based payments continued
Direct Line Group Share Incentive Plans: Buy-As-You-Earn Plan
The Buy-As-You-Earn Plan entitles employees to purchase shares from pre-tax pay for between £10 and £150 per month
and receive one matching share for every two shares purchased.
In the year ended 31 December 2015, matching share awards were granted over 0.3 million Ordinary Shares
(2014: 0.3 million Ordinary Shares) with an estimated fair value of £1.1 million (2014: £0.8 million). The fair value
of each matching share award is estimated using the market value at the date of grant.
Under the plan, the shares vest at the end of a three-year period dependent upon the continued employment with the Group
together with continued ownership of the associated purchased shares up to the point of vesting.
The following table details the outstanding number of share awards in issue (all nil-cost awards).
At 1 January
Granted during the year1
Impact of share consolidation (see note 28)
Forfeited during the year
Exercised during the year
At 31 December
Exercisable at 31 December
Note:
Number of
share awards
millions
2015
Number of
share awards
millions
2014
16.4
6.8
(1.6)
(1.5)
(2.9)
17.2
1.6
11.4
6.1
–
(0.8)
(0.3)
16.4
0.3
1. In accordance with the rules of the LTIP and DAIP award plans, additional awards of 0.8 million shares were granted during the year ended 31 December 2015
(2014: nil) in respect of the equivalent dividend.
In respect of the outstanding options at 31 December 2015, the weighted average remaining contractual life is 1.44 years
(2014: 1.66 years). No share awards expired during the year (2014: nil).
The weighted average share price for awards exercised during the year ended 31 December 2015 was £3.95 (2014: £2.56).
The Group recognised total expenses in the year ended 31 December 2015 of £12.1 million (2014: £6.6 million) relating
to equity-settled share-based compensation plans.
Further information on share-based payments, in respect of Directors, is provided in the Directors’ remuneration report.
158
158
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
35. Trade and other payables including insurance payables
Due to agents, brokers and intermediaries
Due to reinsurers
Due to insurance companies
Trade creditors and accruals
Other creditors
Other taxes
Provisions
Deferred income
Total
Movement in provisions during the year
At 1 January 2015
Additional provision
Utilisation of provision
Released to income statement
At 31 December 2015
.
2015
£m
22.5
78.9
4.7
295.5
98.8
78.9
73.1
4.1
656.5
Other
£m
44.5
44.9
(45.0)
(7.5)
36.9
2014
£m
19.3
57.0
5.3
342.8
96.5
55.0
79.4
5.3
660.6
Total
£m
79.4
82.9
(80.0)
(9.2)
73.1
Regulatory levies
£m
Restructuring
£m
26.5
32.0
(31.3)
–
27.2
8.4
6.0
(3.7)
(1.7)
9.0
159
www.directlinegroup.com 159
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
36. Notes to the consolidated cash flow statement
Profit for the year
Adjustments for:
Investment return
Instalment income
Finance costs
Equity-settled share-based payment transactions
Tax charge
Depreciation and amortisation expenses
Impairment of property, plant and equipment, goodwill and intangible assets
Impairment movements on reinsurance contracts
Impairment movements on assets held for sale – freehold property
Profit on disposal of assets held for sale – disposal group
Loss on sale of property, plant and equipment
Profit on disposal of subsidiary
Operating cash flows before movements in working capital
Movements in working capital:
Net decrease in net insurance liabilities including reinsurance assets, unearned premium reserves
and deferred acquisition costs
Net increase in prepayments and accrued income and other assets
Net decrease in insurance and other receivables
Net increase / (decrease) in trade and other payables including insurance payables
Contribution to retirement benefit obligations
Cash generated from / (used by) operations
Taxes paid
Cash flow hedges
Net cash flow generated from / (used by) operating activities before investment of insurance assets
Interest received
Rental income received from investment property
Purchases of investment property
Proceeds on disposal of investment property
Proceeds on disposal / maturity of AFS debt securities
Net (increase) /decrease in financial investments: loans and receivables
Purchases of AFS debt securities
Purchase of HTM debt securities
Cash generated from investment of insurance assets
37. Contingent liabilities
The Group did not have any contingent liabilities at 31 December 2015 (2014: none).
2015
£m
580.4
(235.2)
(101.5)
37.6
12.1
127.7
95.3
9.1
(12.5)
12.9
(167.1)
4.7
–
363.5
(194.5)
(2.8)
(66.4)
52.3
(2.8)
149.3
(107.4)
0.2
42.1
318.7
17.9
(16.0)
–
3,549.3
(242.5)
(3,110.8)
(13.5)
503.1
2014
£m
372.6
(237.2)
(105.2)
37.2
6.6
105.2
84.8
9.6
13.2
9.6
–
0.3
(2.3)
294.4
(589.0)
(19.1)
59.2
(57.9)
(2.8)
(315.2)
(94.8)
(0.6)
(410.6)
358.5
16.2
(76.2)
21.1
3,141.0
304.8
(2,644.3)
–
1,121.1
160
160
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
38. Commitments
Operating lease commitments
The Group has entered into non-cancellable operating lease agreements for properties, vehicles and other assets.
Continuing operations
Lease payments under operating leases recognised as an expense in the year
2015
£m
18.4
2014
£m
25.6
The minimum lease payments under operating leases recognised as an expense for discontinued operations during the year
ended 31 December 2015 were £0.8 million (2014: £2.5 million).
The following table analyses the outstanding commitments for future minimum lease payments under non-cancellable operating
leases by the period in which they fall due.
Continuing operations
Within one year
In the second to fifth years inclusive
After five years
Total
2015
£m
16.2
51.7
161.9
229.8
2014
£m
17.1
55.1
178.5
250.7
There were no outstanding commitments in relation to the Group’s discontinued operations at 31 December 2015
(2014: £11.5 million).
Operating lease commitments where the Group is the lessor
The following table analyses future aggregate minimum lease payments receivable under non-cancellable operating leases in
respect of property leased to third-party tenants.
Continuing operations
Within one year
In the second to fifth years inclusive
After five years
Total
2015
£m
15.7
53.6
89.3
158.6
2014
£m
14.6
51.7
99.6
165.9
There were no commitments by third parties to make lease payments to the Group’s discontinued operations at 31 December
2015 (2014: £nil).
161
www.directlinegroup.com 161
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the consolidated financial statements continued
39. Fair value
The methodology adopted by the Group for fair value measurement of investment properties, financial assets and liabilities and
the basis for determining the fair value hierarchy are explained in note 2.3.
Comparison of carrying value to fair value of financial instruments
The following table compares the carrying value and the fair value of financial instruments (excluding the disposal group – note
5B). Differences arise where the measurement basis of the asset or liability is not fair value (e.g. assets and liabilities carried at
amortised cost).
Financial assets
Derivative assets (note 25)
AFS debt securities (note 26)
HTM debt securities (note 26)
Deposits with credit institutions > three months (note 26)
Infrastructure debt (note 26)
Financial liabilities
Subordinated liabilities (note 30)
Derivative liabilities (note 25)
Fair value
Carrying value
Fair value Carrying value
2015
£m
2015
£m
2014
£m
2014
£m
19.6
5,226.6
12.7
44.9
322.2
19.6
5,226.6
13.5
44.9
329.6
27.3
5,830.3
–
54.7
76.0
27.3
5,830.3
–
54.7
76.2
623.2
46.4
521.1
46.4
651.9
29.4
526.3
29.4
Fair values of the following assets and liabilities (including assets and liabilities held in the disposal group – note 5B) approximate
their carrying values:
• Insurance and other receivables
• Cash and cash equivalents
• Borrowings
• Trade and other payables including insurance payables (excluding provisions)
Fair value hierarchy analysis
The tables below analyse the Group’s assets and liabilities carried at fair value (excluding the disposal group – note 5C) by
reference to the Group’s fair value hierarchy (note 2.3).
At 31 December 2015
Investment property (note 20)
Derivative assets (note 25)
AFS debt securities (note 26)
Total assets
Derivative liabilities (note 25)
Total liabilities
At 31 December 2014
Investment property (note 20)
Derivative assets (note 25)
AFS debt securities (note 26)
Total assets
Derivative liabilities (note 25)
Total liabilities
Level 1
£m
–
–
442.7
442.7
–
–
Level 1
£m
–
–
985.6
985.6
–
–
Level 2
£m
–
19.6
4,783.9
4,803.5
46.4
46.4
Level 2
£m
–
27.3
4,844.7
4,872.0
29.4
29.4
Level 3
£m
347.4
–
–
347.4
–
–
Level 3
£m
307.2
–
–
307.2
–
–
Total
£m
347.4
19.6
5,226.6
5,593.6
46.4
46.4
Total
£m
307.2
27.3
5,830.3
6,164.8
29.4
29.4
The movements in assets classified as Level 3 in the fair value hierarchy are all within Investment property and are analysed
in note 20. There were no changes in the categorisation of assets between Levels 1, 2 and 3 during the year for assets and
liabilities held at 31 December 2014.
162
162
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
40. Related parties
Transactions between the Group’s subsidiary undertakings, which are related parties, have been eliminated on consolidation and
accordingly are not disclosed.
RBS Group was formerly a related party of the Group, as a result of its ownership of Ordinary Shares, up until the point of selling
its remaining shares on 27 February 2014. The RBS Group transactions and balances included below are for historical
transactions, prior to the date of sale when the related party relationship ceased.
Transactions with related parties
Sale of insurance contracts and other services
Purchase of services
2015
£m
–
–
2014
£m
0.3
19.7
Sale and purchase of products and services were conducted on an arm’s length basis.
Year end balances arising from sales and purchases of products and services to and from related parties
Total
Movement in amounts owed by and to related parties
At 1 January
Transactions in the year
Settled in the year
At 31 December
Compensation of key management
Short-term employee benefits
Post-employment benefits
Termination benefits
Share-based payments
Total
Amounts owed by related parties Amounts owed to related parties
2015
£m
0.2
2014
£m
0.2
2015
£m
–
2014
£m
25.4
Amounts owed by related parties Amounts owed to related parties
2015
£m
0.2
–
–
0.2
2014
£m
0.9
0.1
(0.8)
0.2
2015
£m
25.4
–
(25.4)
–
2015
£m
9.5
0.2
–
4.5
14.2
2014
£m
58.7
19.1
(52.4)
25.4
2014
£m
10.2
0.3
0.4
3.4
14.3
163
www.directlinegroup.com 163
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Parent Company balance sheet
As at 31 December 2015
Assets
Investment in subsidiary undertakings
Other receivables
Current tax assets
Derivative financial instruments
Financial investments
Cash and cash equivalents
Assets held for sale
Total assets
Equity
Liabilities
Subordinated liabilities
Derivative financial instruments
Trade and other payables
Current tax liabilities
Total liabilities
Total equity and liabilities
Notes
2015
£m
2014
£m
2
4
5
6
7
8
3
10
6
11
5
3,067.4
540.8
–
0.4
7.1
29.8
–
3,645.5
3,065.0
523.3
1.2
2.4
5.1
51.2
114.8
3,763.0
3,131.6
3,258.2
503.9
0.4
6.6
3.0
513.9
503.1
0.6
1.1
–
504.8
3,645.5
3,763.0
The attached notes on pages 167 to 171 form an integral part of these separate financial statements.
The financial statements were approved by the Board of Directors and authorised for issue on 29 February 2016. They were
signed on its behalf by:
John Reizenstein
Chief Financial Officer
Direct Line Insurance Group plc
Registration No. 02280426
164
164
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Parent Company statement of comprehensive income
For the year ended 31 December 2015
Profit for the year
Other comprehensive (loss) / income
Items that may be reclassified subsequently to income statement:
Cash flow hedges
Other comprehensive (loss) / income net of tax
Total comprehensive income for the year attributable to owners of the Company
Parent Company statement of changes in equity
For the year ended 31 December 2015
2015
£m
539.5
2014
£m
436.7
(1.2)
(1.2)
1.2
1.2
538.3
437.9
Balance at 1 January 2014
Total comprehensive income for the year
Dividends paid
Credit to equity for equity-settled share-based
payments
Shares distributed by employee trusts
Balance at 31 December 2014
Total comprehensive income for the year
Dividends paid
Credit to equity for equity-settled share-based
payments
Shares distributed by employee trusts
Balance at 31 December 2015
Share
capital
£m
150.0
–
–
–
–
150.0
–
–
–
–
150.0
1,450.0
–
–
–
–
1,450.0
–
–
–
–
1,450.0
3.9
–
–
6.6
(1.0)
9.5
–
–
12.1
(11.0)
10.6
Capital
reserves
£m
Share-based
payment
reserve
£m
Foreign
exchange
translation
reserve
£m
Retained
earnings
£m
Total
shareholder
equity
£m
3,215.8
437.9
(401.1)
6.6
(1.0)
3,258.2
538.3
(666.0)
– 1,611.9
436.7
(401.1)
1.2
–
–
–
–
–
1.2 1,647.5
539.5
(1.2)
(666.0)
–
The attached notes on pages 167 to 171 form an integral part of these separate financial statements.
–
–
–
–
–
1,521.0
12.1
(11.0)
3,131.6
165
www.directlinegroup.com 165
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Parent Company cash flow statement
For the year ended 31 December 2015
Net cash used by operating activities
Cash flows from investing activities
Interest received on loans to subsidiary undertakings
Dividends received from subsidiary undertakings
Net increase in loans advanced to subsidiary undertakings
Capital contribution to subsidiary undertakings
Disposal of investments in subsidiary undertakings
Disposal of assets held for sale
Purchase of AFS debt securities
Net cash generated from investing activities
Cash flows from financing activities
Dividends paid
Finance costs
Net cash used by financing activities
Net (decrease) / increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Notes
13
2
3
12
8
8
2015
£m
(3.1)
47.5
671.0
(21.8)
(225.0)
–
224.3
(2.0)
694.0
(666.0)
(46.3)
(712.3)
(21.4)
51.2
29.8
2014
£m
(0.1)
47.6
446.7
–
–
2.7
–
(5.1)
491.9
(401.1)
(46.3)
(447.4)
44.4
6.8
51.2
The attached notes on pages 167 to 171 form an integral part of these separate financial statements.
166
166
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Notes to the Parent Company financial statements
1. Accounting policies
1.1 Basis of preparation
Direct Line Insurance Group plc, registered in England and Wales (company number 02280426), is the ultimate parent
company of the Direct Line Group. The principal activity of the Company is managing its investments in subsidiaries, providing
loans to those subsidiaries, raising funds for the Group and the receipt and payment of dividends.
The Company’s financial statements are prepared in accordance with IFRSs as issued by the IASB and are presented in
accordance with the Companies Act 2006. In accordance with the exemption permitted under section 408 of the Companies
Act 2006, the Company’s income statement and related notes have not been presented in these separate financial statements.
The accounting policies that are used in the preparation of these separate financial statements are consistent with the accounting
policies used in the preparation of the consolidated financial statements of Direct Line Insurance Group plc as set out in those
financial statements.
The additional accounting policies that are specific to the separate financial statements of the Company are set out below.
1.2 Investment in subsidiaries
Investment in subsidiaries is stated at cost less any impairment.
1.3 Dividend income
Dividend income from investment in subsidiaries is recognised when the right to receive payment is established.
2. Investment in subsidiary undertakings
At 1 January
Additional investment in subsidiary undertakings
Disposal of subsidiary undertaking
Impairment of subsidiary undertakings
Transfer to assets held for sale
At 31 December
2015
£m
3,065.0
237.0
–
(234.6)
–
3,067.4
2014
£m
3,181.5
6.6
(4.0)
(4.3)
(114.8)
3,065.0
The Company sold 100% of the share capital of its subsidiary Tracker Network (UK) Limited on 5 February 2014. The carrying
value of the investment in Tracker was £4.0 million at the date of sale. The total cash consideration received was £2.7 million,
generating a loss on disposal of £1.3 million.
167
www.directlinegroup.com 167
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the Parent Company financial statements continued
2. Investment in subsidiary undertakings continued
The subsidiary undertakings of the Company are set out below. Their capital consists of Ordinary Shares which are unlisted.
In all cases, the Company owns 100% of the Ordinary Shares, either directly or through its ownership of other subsidiaries,
and exercises full control over their decision making.
Name of subsidiary
Directly held by the Company:
Direct Line Group Limited
DL Insurance Services Limited
Finsure Premium Finance Limited
Inter Group Insurance Services Limited
UK Assistance Accident Repair Centres Limited
UK Assistance Limited
U K Insurance Business Solutions Limited
U K Insurance Limited
Indirectly held by the Company:
10-15 Livery Street, Birmingham UK Limited
Churchill Insurance Company Limited
Direct Line Insurance Limited
DL Dormant 5 Limited
DL Dormant 6 Limited
DLG Legal Services Limited
DLG Pension Trustee Limited
DL Support Services India Private Limited
Farmweb Limited
Green Flag Group Limited
Green Flag Holdings Limited
Green Flag Limited
Intergroup Assistance Services Limited
National Breakdown Recovery Club Limited
Nationwide Breakdown Recovery Services Limited
The National Insurance Breakdown and Guarantee
Corporation Limited
UKI Life Assurance Services Limited
3. Assets held for sale
Investment in subsidiary undertaking
Place of incorporation
and operation
Principal activity
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Jersey
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
India
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Intermediate holding company
Management services
Dormant
Intermediate holding company
Motor vehicle repair services
Dormant
Insurance broking services
General insurance
Property rental company
General insurance
Dormant
Dormant
Dormant
Legal services
Dormant
Management services
Dormant
Intermediate holding company
Intermediate holding company
Breakdown recovery services
Dormant
Dormant
Dormant
United Kingdom
United Kingdom
Dormant
Dormant
2015
£m
–
2014
£m
114.8
On 29 May 2015, the Company completed the sale of its German subsidiary Direct Line Versicherung AG for a cash
consideration of £232.6 million, incurring transaction costs of £8.3 million and generating a profit on disposal of £109.5
million. The investment in subsidiary was transferred to assets held for sale on 25 September 2014 when the Company entered
into a binding agreement for the sale.
168
168
Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
4. Other receivables
Loans to subsidiary undertakings1
Receivables from subsidiary undertakings
Other debtors
Total
Current
Non-current
Total
Note:
2015
£m
540.8
–
–
540.8
40.8
500.0
540.8
2014
£m
518.9
2.9
1.5
523.3
23.3
500.0
523.3
1. Included in loans to subsidiary undertakings is a £500 million unsecured subordinated loan to U K Insurance Limited. The loan was advanced on 27 April 2012
at a fixed rate of 9.5% with a repayment date of 27 April 2042. There is an option to repay the loan on specific dates from 27 April 2022. If the loan is not
repaid on 27 April 2022, the rate of interest will be reset at a rate of the six-month LIBOR plus 8.16%.
5. Current tax
Corporate tax assets
Corporation tax liabilities
6. Derivative financial instruments
Derivative assets
Designated as hedging instruments:
Third parties
Subsidiary undertakings
Total
Derivative liabilities
Designated as hedging instruments:
Third parties
Subsidiary undertakings
Total
2015
£m
–
(3.0)
2014
£m
1.2
–
Notional amount
Fair value Notional amount
Fair value
2015
£m
2015
£m
2014
£m
2014
£m
4.6
0.7
5.3
0.7
4.6
5.3
0.3
0.1
0.4
0.1
0.3
0.4
435.6
–
435.6
–
8.3
8.3
2.4
–
2.4
–
0.6
0.6
Designated hedging instruments at 31 December 2015 and 31 December 2014 include foreign exchange hedge contracts
relating to supplier payments on behalf of its subsidiaries. At 31 December 2014, the Company also had a foreign currency
hedge contract converting Euro to Sterling in respect of the proceeds from the sale of the International business, which ceased on
completion of the sale.
7. Financial investments
AFS debt securities
8. Cash and cash equivalents
Cash at bank and in hand
Short-term deposits with credit institutions with maturities less than 3 months
Total
2015
£m
7.1
2015
£m
0.1
29.7
29.8
2014
£m
5.1
2014
£m
0.1
51.1
51.2
9. Share capital
Full details of the share capital of the Company are set out in note 28 to the consolidated financial statements.
169
www.directlinegroup.com 169
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Notes to the Parent Company financial statements continued
10. Subordinated liabilities
Subordinated guaranteed dated notes
2015
£m
503.9
2014
£m
503.1
The subordinated guaranteed dated notes were issued on 27 April 2012 at a fixed rate of 9.25%. The nominal £500.0 million
notes have a redemption date of 27 April 2042. The Company has the option to repay the notes on specific dates from 27 April
2022. If the notes are not repaid on 27 April 2022, the rate of interest will be reset at a rate of the six-month LIBOR plus 7.91%.
The notes are unsecured, subordinated obligations of the Company, and rank pari passu without any preference among
themselves. In the event of a winding up or of insolvency, they are to be repaid only after the claims of all other senior creditors
have been met.
The notes are guaranteed by U K Insurance Limited, a principal subsidiary of the Company.
The Company has the option, in certain circumstances, to defer interest payments on the notes but to date has not exercised
this right.
The aggregate fair value of subordinated guaranteed dated notes at 31 December 2015 was £623.2 million (2014:
£651.9 million).
11. Trade and other payables
Payables to subsidiary undertakings
Payables to third parties
Provision
Total
Movement in provision during the year
At 1 January 2015
Additional provision
Utilisation of provision
At 31 December 2015
2015
£m
3.8
–
2.8
6.6
2014
£m
1.0
0.1
–
1.1
Total
£m
–
8.3
(5.5)
2.8
12. Dividends
Full details of the dividends paid and proposed by the Company are set out in note 15 to the consolidated financial statements.
13. Cash generated from operations
Profit for the year
Adjustments for:
Impairment of investment in subsidiary undertakings
Investment return
Finance costs
Loss on disposal of subsidiary undertakings
Profit on disposal of assets held for sale
Tax charge / (credit)
Operating cash flows before movements in working capital
Movements in working capital:
Net (increase) / decrease in other receivables
Net increase in trade and other payables
Tax received
Cash used by operations
170
170
Direct Line Group Annual Report & Accounts 2015
2015
£m
539.5
234.6
(720.5)
47.1
–
(109.5)
3.0
(5.8)
(4.0)
5.5
1.2
(3.1)
2014
£m
436.7
4.3
(495.1)
46.9
1.3
–
(1.2)
(7.1)
4.8
0.6
1.6
(0.1)
Direct Line Group Annual Report & Accounts 2015
14. Related parties
Direct Line Insurance Group plc, which is incorporated in England and Wales, is the ultimate parent undertaking of the Direct Line
Group of companies.
Full details of related parties are set out in note 40 to the consolidated financial statements.
The following transactions were carried out with related parties:
Sales of services
Interest receivable from subsidiary undertakings
Dividend income from subsidiary undertakings
2015
£m
47.5
671.0
2014
£m
47.6
446.7
Interest income from loans to subsidiary undertakings was charged at rates ranging from 0.5% to 9.5% (2014: 0.5% to 9.5%).
Purchases of services
Management fees payable to subsidiary undertakings
Interest payable to subsidiary undertakings
Total
2015
£m
6.0
0.2
6.2
2014
£m
7.3
–
7.3
Interest charged on borrowings from related parties was at rates ranging from 0.5% to 0.6% (2014: 0.5% to 0.6%).
15. Share-based payments
Full details of share-based compensation plans are provided in note 34 to the consolidated financial statements.
16. Risk management
The risks faced by the Company, arising from its investment in subsidiaries, are considered to be the same as those in the
operations of the Group. Details of the key risks and the steps taken to manage them are disclosed in note 3 to the consolidated
financial statements. The Company also holds, on behalf of its subsidiaries, designated hedging instruments which relate to
foreign currency supplier payments.
17. Directors and key management remuneration
The Directors and key management of the Group and the Company are the same. The aggregate emoluments of the Directors
are set out in note 11 to the consolidated financial statements, the compensation for key management is set out in note 40 to the
consolidated financial statements and the remuneration and pension benefits payable in respect of the highest paid Director are
included in the Directors’ remuneration report in the Governance section of the Annual Report & Accounts.
171
www.directlinegroup.com 171
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Shareholder warning
Almost five thousand people contact the Financial Conduct
Authority (“FCA”) about share fraud each year – and victims
lose an average of £20,000.
Fraudsters use persuasive and high-pressure tactics to lure
investors into scams. They may offer to sell shares that prove to
be worthless or non-existent. Or they can offer to buy shares at
an inflated price in return for you paying upfront. They promise
high profits. However, if you buy or sell shares in this way,
you will probably lose your money.
How to avoid share fraud
• Remember that FCA-authorised firms are unlikely to contact
you out of the blue offering to buy or sell shares
• Do not converse with them. Note the name of the person
and firm contacting you, then end the call
• Check the Financial Services Register at www.fca.org.uk
to see if the person and firm contacting you are authorised
by the FCA
• Beware of fraudsters claiming to be from an authorised firm;
copying its website; or giving you false contact details
• If you want to call them back, use the firm’s contact details
listed on the Financial Services Register at www.fca.org.uk
• If the firm does not have contact details on the Register or
they tell you the details are out of date, call the FCA on
0800 111 6768
• Search the list of unauthorised firms to avoid at
www.fca.org.uk/consumers/scams
• Remember that if you buy or sell shares from an
unauthorised firm, you cannot access the Financial
Ombudsman Service or Financial Services Compensation
Scheme
• Get independent financial and professional advice before
handing over any money
• If it sounds too good to be true, it probably is
Report a scam
If fraudsters approach you, tell the FCA using the share fraud
reporting form at www.fca.org.uk/consumers/scams . You
can also find out more about investment scams on the same
web page.
You can call the FCA Consumer Helpline on
0800 111 6768.
If you have already paid money to share fraudsters,
contact Action Fraud on 0300 123 2040.
Additional information
Corporate website
The Group’s corporate website is www.directlinegroup.com .
It contains useful information for the Company’s investors and
shareholders. For example, it includes press releases, details
of forthcoming events, essential shareholder information, a
dividend history, a financial calendar, and details of the
Company’s AGM. You can also subscribe to email news alerts.
Market
The Company has a premium listing on the UK Listing
Authority’s Official List. The Company’s Ordinary Shares (EPIC:
DLG) are admitted to trading on the London Stock Exchange.
Share ownership
Share capital
You can find details of the Company’s share capital in note 28
to the consolidated financial statements.
Dividends
The Company pays its dividends in Sterling to shareholders
registered on its register of members at the relevant record date.
Shareholders can arrange to receive their cash dividend
payments in a bank or building society by completing a
dividend mandate form. This is available from the Company’s
registrar, Computershare Investor Services PLC (“Registrar”),
in the UK. You can find the Registrar’s contact details on
the inside back cover. Alternatively, shareholders can
access their shareholdings online and download a dividend
mandate form from the Investor Centre. You can find details
of this below.
Dividend Reinvestment Plan
The Company offers a Dividend Reinvestment Plan. This
enables shareholders to use their cash dividends to buy the
Company’s Ordinary Shares in the market. You can find
more details on the Company’s website.
Shareholder enquiries
Shareholders with queries about anything relating to their
shares can contact our Registrar.
Shareholders should notify the Registrar of any change in
shareholding details, such as their address, as soon as possible.
Shareholders can access their current shareholding details
online at www.investorcentre.co.uk/directline . Investor Centre
is a free-to-use, secure, self-service website that enables
shareholders to manage their holdings online. The website
allows shareholders to:
• Check their holdings
• Update their records, including address and direct
credit details
• Access all their securities in one portfolio by setting up
a personal account
• Vote online
• Register to receive electronic shareholder communications
The website requires shareholders to quote their Shareholder
Reference Number to access this information. Shareholders
can find this number on their share certificates.
172
172 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015 Dividend tax allowance
From April 2016 dividend tax credits will be replaced by an
annual £5,000 tax-free allowance across an individual’s entire
share portfolio. Above this amount, individuals will pay tax on
their dividend income at a rate dependent on their income tax
bracket and personal circumstances. The Company will
continue to provide registered shareholders with a confirmation
of the dividends paid and this should be included with any
other dividend income received when calculating and
reporting total dividend income received to HMRC. It is the
shareholder’s responsibility to include all dividend income
when calculating tax requirements.
This change was announced by the Chancellor of the
Exchequer, as part of the UK Government Budget, in July
2015. Draft legislation was published on 9 December 2015
and is intended to be enacted in the proposed UK Finance Bill
2016. If you have any tax queries, please contact your
financial adviser.
Financial calendar
2016
Date
1 March
10 March
11 March
4 May1
12 May
19 May
2 August1
11 August1
12 August1
9 September1
8 November1
Event
Preliminary Results 2015
‘Ex-dividend’ date for 2015 final and
second special interim dividends
Record date for 2015 final and
second special interim dividends
Trading update for the first quarter
of 2016
Annual General Meeting
Payment date for 2015 final and
second special interim dividends
Half Year Report 2016
‘Ex-dividend’ date for 2016
interim dividend
Record date for 2016 interim dividend
Payment date for 2016 interim dividend
Trading update for the third quarter
of 2016
Annual General Meeting
The 2016 AGM will be held on 12 May 2016 at the offices
of Allen & Overy LLP, One Bishops Square, London E1 6AD,
starting at 11.00 am. All shareholders will receive a separate
notice convening the AGM. This will explain the resolutions to
be put to the meeting.
Tips on protecting your shares
• Keep all your certificates in a safe place. Alternatively,
consider holding your shares in the UK’s electronic
registration and settlement system for equity, CREST, or
via a nominee
• Keep correspondence from the Registrar that shows your
shareholder reference number in a safe place, and shred
unwanted correspondence
• Inform the Registrar as soon as you change your address
• If you receive a letter from the Registrar regarding a change
of address and you have not recently moved, contact
them immediately
• Find out when your dividends are paid and contact the
Registrar if you do not receive them
• Consider having your dividends paid direct into your bank
account. You will need to complete a dividend mandate
form and send it to the Registrar. This reduces the risk of
cheques being stolen or lost in the post
• If you change your bank account, inform the Registrar of
your new account details immediately
• If you are buying or selling shares, only deal with brokers
registered in the UK or in your country of residence
• Be aware that the Company will never call you concerning
investments. If you receive such a call from a person saying
they represent the Group, please contact the Company
Secretary immediately, by calling +44 (0)1132 920 667
Electronic communications and voting
The Group produces various communications. Shareholders
can view these online, download them or receive paper
copies by contacting the Registrar.
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.
Dealing facilities
Shareholders can buy, sell or transfer their shares through a
stockbroker or a high street bank, or through the Registrar’s
share-dealing facility.
You can call or email the Registrar regarding its share-dealing
facility using this contact information:
• For telephone sales, call +44 (0)370 703 0084 between
8.30 am and 5.30 pm, Monday to Friday, excluding
public holidays
• For internet sales, go to
www.investorcentre.co.uk/directline . You will need your
Shareholder Reference Number, as shown on your share
certificate or your welcome letter from the Chairman
Note:
1. These dates are subject to change.
www.directlinegroup.com 173
173
www.directlinegroup.comStrategic reportGovernanceOther information
Glossary
Term
Definition and explanation
Actuarial best estimate
Adjusted diluted earnings
per share
Annual Incentive Plan
(“AIP”)
Available-for-sale (“AFS”)
investment
Buy-As-You-Earn
Capital
Claims frequency
Claims reserve (provision
for losses and loss-
adjustment expense)
Clawback
Combined operating ratio
(“COR”)
Commission
Commission ratio
Continuing operations
Current-year attritional
loss ratio
Deferred Annual Incentive
Plan (“DAIP”)
Discontinued operations
The probability-weighted average of all future claims and cost scenarios. It is calculated using
historical data, actuarial methods and judgement. A best estimate of reserves will therefore
normally be designed to include no margin for optimism or, conversely, caution.
Adjusted diluted earnings per share includes ongoing operations and excludes discontinued
operations, the Run-off segment, restructuring and other one-off costs and the gain on disposal
of subsidiary (using the UK standard tax rate of 20.25%; 2014: 21.5%). The comparative periods
include profit after tax for discontinued operations (at the UK standard tax rate), as these were
managed as part of ongoing operations.
This is designed to incentivise the performance of executives and employees over a one-year
operating cycle. It focuses on the short to medium-term elements of the Group’s strategic aims.
Financial assets that are classified as available-for-sale. Please refer to the accounting policy
note 1.12 on page 114.
The HM Revenue & Customs approved Buy-As-You-Earn Share Incentive Plan allows all employees
the opportunity to become shareholders in the Company.
The funds invested in the Group, including funds invested by shareholders and retained profits.
The number of claims divided by the number of policies per year.
Funds the Group sets aside to meet the estimated cost of claims payments and related expenses
that the Group considers it will ultimately need to pay.
The ability of the Company to claim repayment of paid amounts.
The sum of the loss, commission and expense ratios. The ratio measures the amount of claims costs,
commission and expenses compared to net earned premium generated. A ratio of less than 100%
indicates profitable business.
Payments to brokers, partners and PCWs for generating business.
The ratio of commission expense divided by net earned premium.
Continuing operations include all activities other than discontinued operations.
The loss ratio for the current accident year, excluding the movement of claims reserves relating to
previous accident years, and claims relating to major weather events in the Home division.
For Executive Directors, at least 40% of the AIP award is deferred into shares typically vesting
three years after grant. The remainder of the award is paid in cash following year-end.
The Group has sold its International division to Mapfre, S.A. See note 5 to the consolidated
financial statements on page 136.
The amount of the Group’s profit allocated to each Ordinary Share of the Company.
A forum that represents all employees, including in circumstances where there is a legal requirement
to consult employees.
The ratio of operating expenses divided by net earned premium.
The cost of servicing the Group’s external borrowings.
The independent body that regulates firms and financial advisers. It puts the customers’ interests
and market integrity at the core of financial service providers’ activities.
Earnings per share
Employee Representative
Body
Expense ratio
Finance costs
Financial Conduct Authority
(“FCA”)
Financial Reporting Council The UK’s independent regulator responsible for promoting high-quality corporate governance
Gross written premium
International Accounting
Standards Board (“IASB”)
Incurred but not reported
(“IBNR”)
In-force policies
Insurance liabilities
Investment income yield
and reporting to foster investment.
The total premiums from contracts that began during the period.
A not-for-profit public interest organisation that is overseen by a monitoring board of public authorities.
It develops IFRS. These standards aim to make worldwide markets transparent, accountable and
efficient.
Funds set aside to meet the cost of claims for accidents that have occurred, but have not yet been
reported to the Group.
The number of policies on a given date that are active and against which the Group will pay,
following a valid insurance claim.
This comprises insurance claims reserves and claims handling provision, which the Group maintains
to meet current and future claims.
The income earned from the investment portfolio, recognised through the income statement during
the period and divided by the average assets under management (“AUM”). This excludes unrealised
and realised gains and losses, impairments and fair-value adjustments. The average AUM is derived
from the period’s opening and closing balances.
174
174 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Term
Definition and explanation
Investment return
Investment return yield
Loss ratio
Long-Term Incentive Plan
(“LTIP”)
Malus
Net asset value
Net claims
Net earned premium
Ogden discount rate
Ongoing operations
Operating profit
Own Risk and Solvency
Assessment (“ORSA”)
Periodic payment order
(“PPO”)
Prudential Regulation
Authority (“PRA”)
RBS Group
Reinsurance
Reserves
Return on equity
Return on tangible equity
(“RoTE”)
Risk mix
Run-off
Solvency II
Total costs
Total Shareholder Return
(“TSR”)
Underwriting result
(profit or loss)
The income earned from the investment portfolio, including unrealised and realised gains and losses,
impairments and fair value adjustments.
The return earned from the investment portfolio, recognised through the income statement during
the period divided by the average AUM. This includes unrealised and realised gains and losses,
impairments and fair-value adjustments. The average AUM derives from the period’s opening
and closing balances.
Net insurance claims divided by net earned premium.
Awards made as nil-cost options or conditional share awards, which vest to the extent that
performance conditions are satisfied after a period of at least three years.
An arrangement that permits unvested remuneration awards to be forfeited, when the Company
considers it appropriate.
The net asset value of the Group is calculated by subtracting total liabilities from total assets.
The cost of claims incurred in the period less any claims costs recovered under reinsurance contracts.
It includes claims payments and movements in claims reserves.
The element of gross earned premium less reinsurance premium ceded for the period where
insurance cover has already been provided.
The discount rate set by the relevant government bodies, the Lord Chancellor and Scottish Ministers.
Bodily injury cases use them to calculate lump-sum awards.
Ongoing operations comprise Direct Line Group’s ongoing divisions: Motor, Home, Rescue and
other personal lines, and Commercial. It excludes discontinued operations, the Run-off segment,
and restructuring and other one-off costs.
The pre-tax profit that the Group’s activities generate, including insurance and investment activity,
but excluding finance costs.
A Solvency II requirement. It documents the Group’s insurance underwriting entities’ risks and
associated capital requirement, both now and projected over the business planning period. It is
forward looking, reflecting business strategy and risk appetite.
These are claims payments as awarded under the Courts Act 2003. PPOs are used to settle large
personal injury claims. They generally provide claimants who require long-term care with a lump-sum
award plus inflation-linked annual payments.
The PRA is a part of the Bank of England. It is responsible for regulating and supervising insurers
and financial institutions in the UK.
The Royal Bank of Scotland Group plc and its subsidiary companies.
Contractual arrangements where the Group transfers part or all of the accepted insurance risk to
another insurer.
Funds that have been set aside to meet outstanding insurance claims and IBNR.
Return on equity is calculated by dividing the profit attributable to the owners of the Company
by average ordinary shareholders’ equity for the period.
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.
Risk mix reflects the expected level of claims from the portfolio. It measures the estimated movement
based on risk models used in that period, and is revised when models are updated.
Where the Group no longer underwrites new business, but continues to meet its claims liabilities
under existing contracts.
The capital adequacy regime for the European insurance industry, which became effective on
1 January 2016. It establishes revised capital requirements and risk management standards. It
comprises three pillars: Pillar I, which sets out capital requirements for an insurer; Pillar II, which
focuses on systems of governance; and Pillar III, which deals with disclosure requirements.
Total costs comprise operating expenses and claims handling expenses.
Compares share price movement with reinvested dividends as a percentage of the share price at
the beginning of the period.
The profit or loss from operational activities, excluding investment performance. It is calculated as
net earned premium less net insurance claims and total expenses.
www.directlinegroup.com 175
175
www.directlinegroup.comStrategic reportGovernanceOther information
Forward-looking statements disclaimer
This Annual Report & Accounts has been prepared for, and
only for, the members of the Company as a body, and no
other persons. The Company, its Directors, employees, agents
or advisers do not accept responsibility to any other person to
whom this document is shown or into whose hands it may come,
and any such responsibility or liability is expressly disclaimed.
Certain information contained in this document, including any
information as to the Group’s strategy, plans or future financial
or operating performance, constitutes “forward-looking
statements”. These forward-looking statements may be
identified by the use of forward-looking terminology, including
the terms “aims”, “anticipates”, “aspire”, “believes”,
“continue”, “could”, “estimates”, “expects”, “guidance”,
“intends”, “may”, “mission”, “outlook”, “plans”, “predicts”,
“projects”, “seeks”, “should”, “strategy”, “targets” or “will” or,
in each case, their negative or other variations or comparable
terminology, or by discussions of strategy, plans, objectives,
goals, future events or intentions. These forward-looking
statements include all matters that are not historical facts. They
appear in a number of places throughout this document, and
include statements regarding the intentions, beliefs or current
expectations of the Directors concerning, among other things:
the Group’s results of operations, financial condition,
prospects, growth, strategies and the industry in which the
Group operates. Examples of forward-looking statements
include financial targets, which are contained in this document
specifically with respect to RoTE, risk-based capital coverage
ratio, the Group’s COR and investment income yield. By their
nature, all forward-looking statements involve risk and
uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future or are
beyond the Group’s control.
Forward-looking statements are not guarantees of future
performance. The Group’s actual results of operations,
financial condition and the development of the business sector
in which the Group operates may differ materially from those
suggested by the forward-looking statements contained in this
document, for example directly or indirectly as a result of, but
not limited to, UK domestic and global economic business
conditions, market-related risks such as fluctuations in interest
rates and exchange rates, the policies and actions of
regulatory authorities (including changes related to capital and
solvency requirements or the Ogden discount rate), the impact
of competition, currency changes, inflation and deflation, the
timing impact and other uncertainties of future acquisitions,
disposals, joint ventures or combinations within relevant
industries, as well as the impact of tax and other legislation
and other regulation in the jurisdictions in which the Group and
its affiliates operate. In addition, even if the Group’s actual
results of operations, financial condition and the development
of the business sector in which the Group operates are
consistent with the forward-looking statements contained in this
document, those results or developments may not be indicative
of results or developments in subsequent periods.
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.
Neither the content of Direct Line Group’s website nor the
content of any other website accessible from hyperlinks on
the Group’s website is incorporated into, or forms part of,
this document.
176
176 Direct Line Group Annual Report & Accounts 2015
Direct Line Group Annual Report & Accounts 2015
Principal banker
The Royal Bank of Scotland Group plc
280 Bishopsgate
London
EC2M 4RB
Telephone: +44 (0)131 556 8555
Website: www.rbs.com
Corporate brokers
Goldman Sachs International
Peterborough Court
133 Fleet Street
London
EC4A 2BB
Telephone: +44 (0)20 7774 1000
Website: www.goldmansachs.com
Morgan Stanley & Co International plc
25 Cabot Square
Canary Wharf
London
E14 4QA
Telephone: +44 (0)20 7425 8000
Website: www.morganstanley.com
RBC Europe Ltd
Riverbank House
2 Swan Lane
London
EC4R 3BF
Telephone: +44 (0)20 7653 4000
Website: www.rbccm.com
Contact information
Registered office
Direct Line Insurance Group plc
Churchill Court
Westmoreland Road
Bromley
BR1 1DP
Registered in England and Wales No. 02280426
Company Secretary: Roger C Clifton
Telephone: +44 (0)1132 920 667
Website: www.directlinegroup.com
Registrars
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol
BS99 6ZZ
Shareholder helpline: +44 (0)370 873 5880
Shareholder fax: +44 (0)370 703 6101
Telephone number for the hard of hearing:
+44 (0)370 702 0005
Website: www.computershare.com
Investor Centre
To find out more about Investor Centre, go to
www.investorcentre.co.uk/directline
Auditors
Deloitte LLP
Hill House
1 Little New Street
London
EC4A 3TR
Telephone: +44 (0)20 7936 3000
Website: www.deloitte.com
Legal advisers
Allen & Overy LLP
One Bishops Square
London
E1 6AD
Telephone: +44 (0)20 3088 0000
Website: www.allenovery.com
Slaughter and May
One Bunhill Row
London
EC1Y 8YY
Telephone: +44 (0) 20 7600 1200
Website: www.slaughterandmay.com
This report is printed on mixed source paper which is
FSC® certified (the standards for well-managed forests,
considering environmental, social and economic issues).
Designed and produced by Black Sun Plc
Printed by Pureprint Group
www.directlinegroup.com 177
D
i
r
e
c
t
L
i
n
e
I
n
s
u
r
a
n
c
e
G
r
o
u
p
p
l
c
A
n
n
u
a
l
R
e
p
o
r
t
&
A
c
c
o
u
n
t
s
2
0
1
5
Direct Line Insurance Group plc ©
Registered in England & Wales No. 02280426
Registered Office: Churchill Court, Westmoreland Road, Bromley, BR1 1DP