Annual Report & Accounts 2016
Building our brands
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Contents
Strategic report
2 Group highlights
4 Group at a glance
6 Market overview
8
Business model
10 Chairman’s statement
12 Chief Executive Officer’s review
14 Our strategy
24 Our key performance indicators
26 Risk management
30 Corporate social responsibility
34 Operating review
38 Finance review
Governance
48 Chairman’s introduction
50 Board of Directors
52 Executive Committee
53 Corporate governance report
64 Committee reports
82 Directors’ remuneration report
110 Directors’ report
Financial statements
114 Contents
115 Independent Auditor’s report
122 Consolidated
financial statements
127 Notes to the consolidated
financial statements
179 Parent Company
financial statements
182 Notes to the Parent Company
financial statements
Other information
187 Additional information
189 Glossary and appendices
195 Forward-looking
statements disclaimer
196 Contact information
For all the latest news
and announcements visit
www.directlinegroup.com
Building our brands
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. Our customers are
at the centre of everything we do, as we remain focused on
protecting an ever-changing Britain.
Building
a culture
of great
service
Find out more
on page 18
Building our technology and
data capabilities
Find out more on page 20
Building our brands
by offering more
Find out more on page 22
1
www.directlinegroup.com Group highlights
Providing stability for our
customers and shareholders
Profit before tax1
(£m)
Return on tangible equity2
(%)
Combined operating ratio2
Ongoing operations2 (%)
5
7.
0
5
8
.
6
5
4
0
.
3
5
3
5
.
8
1
8
.
6
1
Target
At least 15%
2
.
4
1
7
7.
9
0
.
4
9
1
0
.
.
2
5
2
9
2
,
3
14y
15y
16y
14y
15y
16y
14y
15y
16y
£353.0m
14.2%
97.7%
Gross written premium1
(£m)
Total costs2
Ongoing operations (£m)
Operating profit2
Ongoing operations (£m)
4
.
9
9
0
,
3
4
.
2
5
1
,
3
1
.
4
7
2
,
3
1
.
7
2
7.
2
2
2
,
9
3
7
.
3
2
9
7
.
4
8
8
7
.
0
2
5
0
.
6
0
5
5
.
3
0
4
14y
15y
16y
14y
15y
16y
14y
15y
16y
£3,274.1m
£923.7m
£403.5m
Basic earnings per share1
(pence)
Dividend per share3
(pence)
Adjusted diluted earnings
per share2 (pence)
9
7.
2
.
0
4
2
.
4
0
2
14y
15y
16y
20.4p
Notes:
5
7.
2
8
.
8
8
.
3
1
0
.
0
1
6
.
4
1
6
.
6
2
5
.
5
2
2
.
1
2
15y
16y
14y
15y
16y
0
.
4
1
2
.
3
1
14y
24.6p
21.2p
1. Results for the years ended 31 December 2015 and 31 December 2014 are based on continuing operations and exclude discontinued operations
2. See glossary on pages 189 and 190 and Alternative performance measures (“APM”) in Appendix A on page 191 and Appendix B – Proforma results on page
194 presents the Group’s results excluding the recent impact of the Ogden discount rate reduction
3. The Board is proposing a final dividend of 9.7 pence per share, making a total regular dividend for 2016 of 14.6 pence per share
2
Direct Line Group Annual Report & Accounts 2016
We had a successful 2016, absorbing a reduction in the discount rate
applicable to personal injury lump sum damages awards to minus 0.75%
and the Flood Re levy, while at the same time investing in the business
and making progress on implementing our strategy. Our investments in
our direct brands, competitiveness on price comparison websites and
partnership capabilities are bearing fruit.
Financial highlights
• Gross written premium for Ongoing operations1,2 up 3.9%
to £3,274.1m (2015: £3,152.4m), driven by growth in
Motor and Home own-brand in-force policies (up 4.3%)
Strategic and operational highlights
• Direct Line Motor and Home new business growth at the
highest annual level since IPO, demonstrating the success of
the investment in brand, proposition and customer service
• Total costs for Ongoing operations of £923.7m broadly
flat year on year before non-cash impairment charge of
£39.3m, after absorbing £24.1m Flood Re levy and
supporting growth in Motor and Home own brands
• Extended Home and Private Insurance partnership with
RBS for a further three years, and implemented faster and
easier sales journeys using cloud-based technology making
connectivity and future change easier
• Invested in innovation, including partnership with PSA
Peugeot Citroën for telematics extended for 4 more years,
introducer role developed with Tesla, and MOVE_UK
project brought into data collection stage
• Received approval from the Prudential Regulation Authority
(“PRA”) to use the Group’s Solvency II PIM
• 2016 results reflect the one-off impact of using the new
Ogden discount rate of minus 0.75%. Operating profit
from Ongoing operations of £403.5m (pre-Ogden
discount rate reduction3: £578.6m; 2015: £520.7m)
and profit before tax of £353.0m (pre-Ogden3: £570.3m;
2015: £507.5m). Return on tangible equity1,2 of 14.2%,
(pre-Ogden3: 20.2%; 2015: 18.5%)
• Combined operating ratio1 from Ongoing operations of
97.7% (pre-Ogden3: 91.8%; 2015: 94.0%), increased
as a result of the reduction in the Ogden discount rate,
partially offset by improved current-year underwriting
performance and favourable weather claims. Adjusted
for normal weather and before the Ogden discount
rate change, the combined operating ratio was 93.5%,
towards the lower end of the target range of 93% to 95%
• 5.4% increase in final dividend per share to 9.7 pence per
share, (2015: 9.2 pence). Total dividends per share for
2016, including special interim dividend of 10.0 pence
per share paid in September 2016 following the approval
of the Group’s partial internal model (“PIM”), of 24.6
pence per share (2015: 50.1 pence)
• The Group’s estimated Solvency II capital coverage ratio4
post dividend is 165%, above the middle of the Group’s
risk appetite range of 140% – 180% (pre-dividend: 174%)
Notes:
1. See glossary on pages 189 and 190
2. See appendix A – Alternative performance measures on page 191
for reconciliation to financial statement line items
3. See appendix B – Proforma results on page 194 for the Group’s results
excluding the recent impact of the Ogden discount rate reduction
4. Estimates based on the Group’s Solvency II PIM for 31 December 2016
3
www.directlinegroup.comStrategic reportGovernanceFinancial statements Group at a glance
Protecting our customers
We have multiple brands, products and distribution channels.
Each enables our customers to choose the right cover to protect
their cars, homes, holidays, businesses and pets.
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.
www.churchill.com
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.privilege.com
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.
www.directlineforbusiness.co.uk
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.
NIG is our specialist
commercial insurance
brand. We sell our
products through brokers,
including an in-house
intermediary that
arranges RBS1 and
NatWest commercial
insurance.
www.nig.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.
www.greenflag.com
Note:
1. The Royal Bank of Scotland Group plc, including National Westminster Bank plc
4
Direct Line Group Annual Report & Accounts 2016
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
six insured cars on the road in the UK,
representing 3.9 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 – RBS, NatWest
and Prudential.
Rescue and other
personal lines
We are one of the leading providers of
rescue and other personal lines insurance
in the UK2,3 with 7.9 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 are the
second largest travel and the third
largest pet insurer respectively3.
£1,539.1m
Gross written premium
£834.4m
Gross written premium
3.9m
In-force policies
3.4m
In-force policies
£400.8m
Gross written premium
7.9m
In-force policies
106.3%
Combined operating ratio
85.0%
Combined operating ratio
93.3%
Combined operating ratio
£149.1m
Operating profit
£166.7m
Operating profit
£45.9m
Operating profit
Commercial
We protect commercial businesses 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 business, landlord and van
products direct to customers and through price comparison
websites (“PCWs”).
£499.8m
Gross written premium
675k
In-force policies
98.7%
Combined operating
ratio
£41.8m
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
six months ending November 2016, 13,665 adults interviewed for motor insurance and 12,270 for home insurance
2. Mintel Vehicle Recovery – UK, September 2016
3. Mintel Pet Insurance – UK, August 2016 and Mintel Travel Insurance – UK, February 2016
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. Changes inside and outside the industry,
including technology and regulation, are shaping customers’ expectations.
It is vital that we continue to serve customers and manage claims to the
highest standards.
Digitalisation & technology
Innovative companies offer
partnership possibilities
New technology has the power to create feature-rich insurance
apps and systems that can analyse vast amounts of data. These
developments support the possibility of more tailored insurance
products, as underwriting techniques evolve. Such innovations
are being partly driven by InsureTech and FinTech companies,
who are creating opportunities for partnerships with established
insurers. However, given the amount of private and confidential
information being generated, cyber security remains an
increasing focus for the insurance industry.
£9.5bn
invested globally in FinTech
companies during 20151
Claims and premium inflation
Rising costs for insurers and customers
Customers’ motor premiums have been rising over the past
two years. Increasing claims costs have continued to push
premiums higher, with increases in Insurance Premium Tax
(“IPT”) also contributing. Despite sustained declines in the
number of claims in recent years, average motor claim
payouts rose again in 2016, with an increase of over
2.5% as personal injury claims have escalated2,3.
Notes:
1. KPMG – The Pulse of Fintech [Converted to GBP at 2015 12 month average – £1 = $1.52860]
2. Association of British Insurers (“ABI”) – Key facts 2015
3. ABI – Key Facts 2016
6
Direct Line Group Annual Report & Accounts 2016 Sharing economy and car automation
Changing habits offer opportunities and challenges
The new sharing economy is changing the way we live. Insurance products
must change to reflect this. For example, we will need more innovative products
than traditional buildings and contents insurance, as communal living and
short-term rentals grow in popularity. Change will also affect motor insurance,
where increasingly autonomous cars may lead to significant reductions in severe
crashes and injuries and change the profile of claims. In the long term, the
industry will need to consider how best to provide cover as risk shifts from the
driver to the vehicle.
1.8 million
connected cars
in the UK in 20161
Brand strength
Brand investment pays off for insurers
Insurance brands that are well known and valued by customers2 are
consistently amongst the most successful in the industry3. Brand strength
and visibility is an important factor in consumers’ insurance acquisition
process. Therefore, to generate new business, insurers must invest in their
brands to stay at the front of the public’s minds. Providing quality customer
service and offering something above and beyond the average insurer
reaps its benefits, with the market cost of acquiring new customers up to
five times the cost of retention4.
84% of consumers would use one insurer for all
of their insurance needs if quality customer
service and low prices were available5
The average bodily injury
claim cost following an
accident is6
£10,955
Regulation and legislation
The pace of change
remains rapid
Insurance regulation has continued to evolve over
the past year with a reduction in the personal injury
discount rate, Flood Re, the Enterprise Bill, Solvency
II, an Insurance Premium Tax increase and new
FCA renewal legislation being implemented.
The UK’s vote to leave the European Union adds
significant regulatory uncertainty. The Bank of
England’s decision to cut the base rate to 0.25%
has reduced insurers’ investment returns with
impacts on industry profitability.
£5.8bn one-off impact to
the industry due to
the personal injury
discount rate reduction7
Notes:
1. Statista – Number of connected cars in the United Kingdom (UK)
from 2014 to 2020
2. Hall & Partners
3. Deloitte Household and Motor Insurance Seminars 2016
4. Digital Market Magazine – How can the insurance industry retain
existing customers?
5. Consumer Intelligence – Digital Insurance World 2016
6. ABI – Key facts 2016
7. Willis Towers Watson
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 brands on page 4
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
Net 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 2016 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 wanting 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 rest 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 can 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 seek to offer customers a blend of brands, products and
services that best suit their needs.
Our disciplined approach
Our business has been in operation for over 30 years, giving
us a deep insight into the risks we underwrite. This insight
enables us to make our pricing more reflective of the risks we
underwrite. It also allows us to invest substantially in data and
increase efficiencies. Again, this means we are better able to
set accurate prices for the risks we underwrite.
Customers experience the value of their cover when they come
to claim. So we aim to settle claims as quickly and easily as
possible by engaging closely with our customers. This helps us
demonstrate why our products and services are valuable, and
to manage our claims costs.
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
to allow us to absorb any unexpected losses that might occur.
We maintain a buffer that significantly exceeds 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 our shareholders
remain a key focus in this
challenging market
environment. Cumulative
dividends represent
approximately 72% of
the share price at the initial
public offering.
Mike Biggs
Chairman
Dear shareholders,
In 2016, the Group delivered profit before tax of £353.0
million (2015: £507.5 million). Before the reduction in the
Ogden discount rate to minus 0.75%, profit before tax was
£570.3 million. We achieved this resilient result through our
continued focus on the value, service and brand propositions
offered to our customers, on operating efficiency and on
underwriting discipline in competitive markets.
Strategy
The Group’s mission is to make insurance much easier and
better value for our customers. The Board’s role is to support
and challenge the Group’s management to develop and
execute a strategy which is aligned with this mission, and
positions the business to take advantage of changes in
technology affecting vehicles, homes and how our customers
communicate with us, as well as delivering operating
efficiencies and targeting sustainable income streams.
The effective execution of our strategy requires a substantial
and continuing change agenda to improve our core systems,
digital offering and the agility of the organisation.
Dividends
We aim to increase the dividend annually in real terms, under
our progressive dividend policy (see page 110). This aim
reflects the potential of the Company’s cash-flow generation
and long-term earnings. We are recommending a final regular
dividend of 9.7 pence per share. If approved, the total regular
dividend of 14.6 pence per share will represent 5.8% growth
on 2015’s regular dividend (13.8 pence per share), which is
consistent with this policy.
In addition, we paid a special interim dividend of 10.0 pence
per share in September 2016. The Board’s ability to return
a dividend to shareholders is against the backdrop of a
challenging economic environment following the UK’s EU
membership referendum and the recent reduction in the
Ogden discount rate. Whilst the day-to-day operations remain
unaffected, the Group continues to monitor the consequences
of the devaluation of Sterling, inflation, uncertain financial
markets and the Ogden discount rate reduction.
Linking remuneration to performance
We remain committed to ensuring that executive pay is
aligned with the Company’s strategy of delivering long-term
shareholder value.
The Group achieved a return on tangible equity (“RoTE”)
of 14.2% for 2016. However, a decrease of 9.4%
(2015: an increase of 39.9%) in the share price over the
year to 369.4 pence (2015: 407.5 pence) at 31 December
2016, together with dividend payments, provided a total
shareholder return (“TSR”) of minus 1% for the year (2015:
46.9%), which is reflected in the long-term incentive plan
(“LTIP”) outcome for 2016. This follows three consecutive years
of outperformance versus the benchmark (FTSE 350 excluding
10
Direct Line Group Annual Report & Accounts 2016 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 53.
Effectiveness
The effectiveness of your Board’s and its Committees’
performance is considered annually in an effectiveness
review. See page 59.
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 61.
Remuneration
Your Remuneration Committee ensures a close correlation
between creating value for shareholders, and remunerating
Executive Directors and senior executives appropriately.
See pages 63 and 82.
Relationships with shareholders
Your Board maintains strong relationships and regular
interaction with our shareholders. Their continued support
for our strategic aims is important. See page 63.
investment trusts) meaning that shareholders, since the initial
public offering in 2012 (“IPO”), have received a TSR of 188%
compared to the FTSE350 (excluding investment trusts) of 48%.
Since the IPO, the Group has delivered good results each
year, enabling the Board to declare cumulative dividends,
including special interim dividends, equivalent to
approximately 72% of the IPO share price.
The Remuneration Committee has consulted our major
shareholders and other stakeholders, on our proposed
Directors‘ remuneration policy on which shareholders will
be given the opportunity to vote at the forthcoming AGM.
More information on awards and our proposed Directors’
remuneration policy is provided in the letter from the Chair
of the Remuneration Committee on page 82.
Solvency II
In June 2016, the Group received approval from the PRA
for the use of a Group PIM to calculate its solvency capital
requirements (“SCR”). At 31 December 2016, the Group
held a capital surplus of approximately £0.92 billion above
its SCR. This was equivalent to a Solvency II capital coverage
ratio of 165%, post-dividend and taking into account the
impact of the new Ogden discount rate. The Board considers
the appropriate Group risk appetite range to be 140% to
180% of its SCR, which should enable the Group to meet
its operational, regulatory and rating agency requirements.
IT Infrastructure
The Group has been making positive changes to its IT
infrastructure, including working towards the implementation
and integration of major IT systems which is inherently complex
and challenging. The Board’s ongoing areas of focus include
developing future capability, and continuing to monitor risks
associated with IT systems’ stability, cyber security, and the
internal control environment.
Regulation, conduct and culture
We maintain active relationships with our regulators through
constructive two way dialogue. Your Board promotes the
Group’s culture and oversees the Group’s conduct policy,
which aims to ensure that we achieve good customer outcomes
and that our employees behave with integrity. We also have
a Code of Business Conduct which sets out standards that
our employees are required to observe. We recognise that
opportunities always exist to improve the services offered to
our customers; and your Board has encouraged a range of
customer experience initiatives which are designed to deliver
increased levels of customer satisfaction.
Board and Committee membership changes
Succession planning remains a key area of focus for the
Board. In January 2016, Dr Richard Ward was appointed as
our Senior Independent Director. Following Priscilla Vacassin’s
retirement from the Board in March 2016, a number of
changes were made to the chairmanship and membership
of the Board’s Committees.
On 1 February 2017, I was delighted to welcome
Danuta Gray as a Non-Executive Director and Mike Holliday-
Williams as an Executive Director to the Board. Danuta brings
executive and non-executive experience from her previous
roles in a number of sectors, including financial services.
Mike’s appointment reflects the importance of the Personal
Lines business to the Group. Your Board will benefit from
closer interaction with the Personal Lines business and from
the expertise that Mike will bring to the Board. My introduction
to the Corporate Governance report and the Nomination
Committee report provide further information on these changes.
I would like to thank the entire Board for their significant
contribution, commitment and service; and look forward to
working with them in 2017 as the Group continues to build
on its strategic priorities.
Employees
I would also like to thank our employees for their hard work,
initiative and commitment to our mission. Their positive energy
and dedication in supporting our customers helped our
business progress in 2016, and has put us in a strong position
for the future.
Michael N Biggs
Chairman
11
www.directlinegroup.comStrategic reportGovernanceFinancial statements Chief Executive Officer’s review
Building on our success
The fact that our own brands
have grown shows that
customers like the many
changes we have made
in recent years. In particular,
the success of Direct Line
has encouraged us to keep
innovating for our customers.
Paul Geddes
Chief Executive Officer
What is your view on the Group’s financial
performance?
It was a strong year, maintaining our record of strong financial
performance and underwriting discipline since our IPO, but
also with an added ingredient: growth. This is particularly
gratifying because it shows that customers really like the new
propositions, the great value and the excellent service that our
brands are delivering, especially Direct Line.
The Group has hit nearly all its targets since
its IPO four years ago. To what do you attribute
this success?
We found the whole IPO process actually helped us get
really clear on our strategy and plans, and motivated the
whole team to deliver against them. In particular, the fact that
we have now given all of our colleagues three grants of free
shares helps everyone to care about the Company enough
to change it. We listen to colleagues’ ideas, for example,
through the employee representative bodies and through
our IdeasLab scheme, and continue to invest in their training
and development. All this has helped us to do hard things
like reducing our costs yet at the same time increase the
engagement of our colleagues and improve our service
to customers.
What do you believe will be the risks,
opportunities and challenges in 2017?
As 2016 has shown, no one can predict the future. Everything
from the unpredictability of the weather, combatting new types
of fraud such as cyber attacks, the uncertainties of Brexit and
the change to the Ogden discount rate means we all have to
remain vigilant.
However, as 2016 revealed, we can do well in uncertain
times. We hold our head, know what we’re trying to achieve,
and have experienced teams that are well prepared to tackle
whatever the world throws at us. We also have to keep pace
with what customers expect from technology. We expect
profound revolution with connected cars and homes; the risks
we cover; new sources of data; and new propositions for
customers. That’s exciting.
In terms of regulation, we’ve actively lobbied Government
to make whiplash claims more efficient for customers and
ourselves. If we reduce costs, we can be in a position to
pass on savings to customers, so we hope the Government
consultation will produce effective reform for the industry.
How do you feel the Group is progressing
towards its goal to make insurance much
easier and better value for our customers?
The fact our brands are growing is evidence that we’re
doing the right thing. In a market that people believed was
commoditised and only about cheap prices, growing the
Direct Line brand is the ultimate accolade. It shows customers
still value great products and service too.
Our TV advertising helps show where we believe our
propositions differentiate us from our competitors. Our people
have also received training on how to better understand and
empathise with customers to help meet their needs appropriately.
Alongside this, we have improved both the sales and claims
processes for our customers. Improving the digital journey
through mobile devices, allowing customers to use their
smartphones on more aspects of their claims and enabling
customers to amend their policies with no additional fees are
just a few ways we’re making Direct Line much easier and
better value for our customers.
12
Direct Line Group Annual Report & Accounts 2016 This year saw many success stories. What were
the highlights for you?
Apart from the great success of Direct Line, we made good
progress on our other brands too. Churchill equals Direct Line
for customer recognition, and it has been great to see how the
brand is so central to the British sense of identity. Launching a
“Bring Back Lollipoppers” campaign for schools also linked the
brand to improving road safety in a tangible way.
We have seen quite the opposite, and the fact that 88% of
our people complete the Dialogue survey means it represents
all the various views across our business.
The Dialogue approach enables over 900 teams to discuss
how they feel about the business, what’s working well and
tackle what’s not quite right. ‘Say it like it is’ is a core value
of ours; whether it’s through dialogue or through talking to our
employee representative body and other representative groups.
We have big ambitions for our Green Flag business, and we
think technology will continue changing what it means to be
good at rescue. So, we have introduced an exciting service
called “Green Flag Alert Me”, which tells drivers what’s going
on in their cars via an app. And alongside this, the Green Flag
app enables people to easily let us know they have broken
down, where they are, and track the Green Flag unit coming
to help them.
This year’s survey showed that we now also have a record
number of colleagues we can identify as “champions” –
people who are both fully engaged and committed to the
Group. They want to contribute to our success, something
which I’m able to see and feel when I visit our sites and talk
to individual teams. I believe it is our engaged colleagues
themselves who can drive the changes and efficiency
improvements in our business.
Direct Line for Business has also seen strong growth, with policy
numbers rising by 6.4% over the year. We have ambitions of
ensuring the Company can do more for businesses in the future.
What is the Group’s opinion on driverless cars?
We have an open-minded, optimistic attitude to new car
technology. However, there are two dangerous attitudes that I
sometimes hear in our industry. The first is that new technology
will remove the need for insurance because cars won’t have
accidents at all, or that drivers will not be held responsible for
any accidents. I think that, for now, this remains in the realms
of science fiction. It’s not the way legislation is shaped, it’s not
the current reality, and it won’t be for many years ahead.
However, a second and more dangerous view I hear is
that nothing will change. We believe technology will make
cars much safer and improve driver experiences. Usage,
ownership, prices, and how people choose to buy cars and
insurance will evolve. So, while I feel the market will remain
large, what it means to be an insurer can be expected to
change profoundly.
I believe we are thought leaders regarding what car
technology will mean. We talk to many groups, including
car manufacturers and technology companies. There are
also many strands to our work, such as developing the legal
framework for autonomous driving, through to becoming the
market leader for insuring safer cars. We are already giving
customers discounts, for example, if their cars have features
such as autonomous emergency braking.
Reducing accidents can only be a good thing. I lost my best
friend in an accident so I’m absolutely behind it. Technology
might change how our business is configured. The market may
get smaller, so we’ll need to win more of it. If we have the right
attitude; consider all the opportunities; and remain experts at
using data, helping our customers, and finding new partners,
I believe we can grow our market share.
What are your thoughts about 2016’s
employee engagement survey “Dialogue”?
I’m delighted that our efforts on engaging and motivating our
colleagues continue to pay off. There is a risk that engagement
can suffer in organisations like ours that are undergoing rapid
change, seeking to improve their efficiency and lower costs.
What do you feel unites and defines the
Group’s people?
We are unique in that we are small enough as a business
that every person can make a difference, but also big enough
that we can invest in our people and support their growth
and progress. This investment is crucial and we have been
developing our frontline teams, managers and professional
technical teams to ensure that we have the best people, trained
to the highest standards that can ‘Do the right thing’ for our
customers, investors and other external stakeholders.
Supporting this are internal initiatives such as our diversity
network alliance, external schemes such as the 2016 Women
in Finance charter, and several other associations that I am
proud we have joined. These are all helping us to chip away
at the ‘male, pale, stale’ image of insurance.
Every day, I see evidence of people bringing all of themselves
to work – I think this is because we are diverse, and value
the individuality and the unique strengths of each person.
This is backed up by our Dialogue results, where 90% of our
colleagues say that they feel they can be themselves at work.
This is important as it ensures we have the most talented
teams and truly represent the ever changing Britain we look
to protect. I believe this further helps our people genuinely
care about their actions, whether that’s in the way they treat
our customers, or how they help other parts of the Company to
be efficient and effective. Although there is even more we can
do in this area, diversity is something that unites and defines
us. Not only in the conventional sense, but also through striving
to have a powerful combination of people, with a rich diversity
of experience and thinking.
My thanks go to our people for their hard work and support
throughout the year. I am excited by their passion and by how
they work tirelessly to make insurance much easier and better
value for our customers.
Paul Geddes
Chief Executive Officer
13
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Our strategy
Focusing strategy to deliver now
and build for the future
Our mission is to make insurance much easier and better value for our
customers. Our strategy to achieve this is based on three strategic pillars:
great retailer, smart & efficient manufacturer and lead & disrupt the market.
We continue to invest in our key enablers to help grow and strengthen
these pillars, which we believe will help us with our ambitions of growing
sustainably and delivering at least a 15% RoTE.
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 2016 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 of their journey. This
includes increasing online servicing for customer policies
and claims, and evolving telephone sales and servicing by
investing in next-generation customer systems. We focus on
training our contact centre employees to understand and
respond better to our customer needs.
How we performed in 2016
The differentiation of our brands remained a key focus in
2016. For Direct Line we have built strong foundations since
our ‘reboot’ of the brand just over two years ago, introducing
a succession of effectively marketed product enhancements.
This year we added a three-hour emergency plumbing service
for our Home Plus customers. Our strong marketing and
branding is key to clearly articulating these enhancements to
our customers so they want to come directly to us. The success
of our marketing to drive Direct Line growth was recognised
when we won the Gold Institute of Practitioners in Advertising
award for marketing effectiveness.
The strength of our Direct Line brand is not limited to the
personal lines sector, with more small businesses looking
for reliable and easy to use direct insurance, Direct Line for
Business continued to grow strongly in the year, highlighting
the value of this brand asset.
Our effectiveness on PCWs via the Churchill and Privilege
brands has also increased, particularly in Home as we
improved the customer journey. This contributed to strong
new sales growth through this channel.
Our Churchill brand was strengthened with the launch of our
‘Lollipoppers’ campaign and we have recruited new Lollipop
men and women nationwide. We also relaunched our
Churchill Motor free rescue campaign, differentiating this brand
and leveraging our Rescue capabilities at the same time.
Our Green Flag brand continued to perform well. Green Flag’s
app was enhanced with Green Flag ‘Alert Me’ and ‘Rescue
Me’, providing the capability for rescue customers to monitor
the health of their car and to improve their rescue experience.
Our objectives for 2017
Continue to build the Direct Line brand presence, offering a
differentiated and valued service and proposition not available
on PCWs. Further leverage our ‘Direct’ capabilities with our
small to medium-sized enterprise (“SME”) commercial customers
and maintain our competitiveness on PCWs.
We aim to improve efficiency and effectiveness across the
organisation everyday. While we re-established our traditional
partnership capabilities, we intend to establish ourselves as
the UK insurance partner of choice for less traditional partners.
How we performed in 2016
Our underlying costs (excluding higher non-cash impairments
to intangible assets than in recent years) were stable compared
to 2015, having absorbed the £24m Flood Re levy and
still supporting 4.3% in-force policy growth in our Motor and
Home own brands. Excluding the impairment, H2 2016 costs
were lower than H2 2015, primarily due to lower claims
handling expenses.
In our Partnerships, we extended our Home and Private
Insurance arrangement with RBS for a further three years and
our Travel insurance contract with Nationwide Building Society
until the end of 2018.
We agreed an extension of our Home and Motor insurance
partnership with Prudential for a further two years. As part of
this, we will renew policies under the Prudential brand until
2019. We’ve also launched our first Affinity Partnership
scheme to offer access to Churchill-branded Home and Motor
policies to Prudential Group customers who do not currently
have such insurance with us. This partnership demonstrates our
ability to deliver tailored propositions to meet the needs of our
partners and their customers.
The Group increased the number of accident repair centres
it owns to 18 in 2016 strengthening its ability to control
indemnity spend and improve customer experience.
Our objectives for 2017
While we made good progress in establishing new partners in
2016, we continue to be on the lookout for more opportunities
where our flexibility and expertise can benefit all stakeholders.
We maintain a firm focus on improving the efficiency of the
business through cost efficiency programmes, while investing
in systems and capabilities to increase customer self-service.
We are investing to further strengthen our application and
claims fraud capabilities.
15
www.directlinegroup.comStrategic reportGovernanceFinancial statements Our strategy continued
Lead & disrupt
the market
Data &
technology
Harness the power of technology
and the 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, over time we
aim to 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 2016
The ongoing areas of focus include developing future
capability, and managing risks associated with IT systems’
stability and cyber security. Technology remains at the heart
of our operations and the focus is on upgrading our IT systems
and capabilities, aimed at improving the digital offering,
customer experience and operational efficiency. While
progress has been made in each of these three areas,
implementation and integration of a range of new IT systems
is inherently complex and challenging. We remained focused
on adopting the right capabilities and will take the time
necessary to do so.
We have made progress improving the performance of the
core infrastructure during the year, supporting our people in
performing their roles more effectively.
Our objectives for 2017
We will continue to look to improve the performance and cost
effectiveness of our existing IT systems and work on developing
and building new IT systems.
Maximise existing growth
opportunities while creating and
driving future areas of value
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 2016
We continued to build on our strong market position by
identifying and investing in market developments we believe
can contribute to future growth.
We have extended our partnership with PSA Finance UK (part
of Peugeot Citroën) for a further four years. The partnership
has found success by packaging insurance with car finance to
create innovative mobility solutions for consumers, particularly
young or inexperienced drivers through the use of telematics
in the Peugeot Just Add Fuel and Citroen SimplyDrive offers.
Extending the partnership allows us to create propositions
based on the technology being fitted to the car.
We are working with Tesla to understand the role advanced
technology and driving aids can play in enhancing road safety
and therefore insurance. In 2017, Tesla became an introducer
appointed representative to be able to refer customers to
Direct Line to insure their Tesla.
In 2016, we formed a partnership called MOVE_UK
with the UK government, technology providers and car
manufacturers to accelerate the development, market readiness
and deployment of Automated Driving Systems (“ADS”).
With ADS systems observing and recording in the background
while MOVE_UK vehicles are driven normally, this is a unique
opportunity to learn how ADS technology would respond in
real life situations.
In Commercial, we continued to be recognised for our leading
capabilities in eTrade and direct Commercial insurance, both
of which are expected to continue to grow.
Our objectives for 2017
New car technology centred on improving safety is emerging
at a fast pace and the Group aims to take a lead by
becoming the insurer of choice for the owners of the cars
equipped with such technology. We continue to look for new
partners and ways to help our customers benefit from these
new technologies.
In Commercial, we are looking to further leverage our strong
Direct Line brand and direct marketing capabilities to disrupt
the small commercial customer segment.
16
Direct Line Group Annual Report & Accounts 2016 Culture &
capability
Capital & risk
management
Build on our people’s potential
Our 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.
We aim to create excellent Group-wide employee engagement
by focusing on leadership and people management at all
levels. This has helped improve our employee engagement
metrics year on year.
How we performed in 2016
During the year we continued to invest in employees’
skills to improve effectiveness and customer experience.
We are committed to broadening the diversity of our talent
pool and this year signed up to the Women in Finance
Charter, seeking to increase the number of women in senior
roles in the organisation.
In addition, we launched a new graduate scheme and
apprentice recruitment drive to build a stronger organic
talent pool.
We also launched a major new training programme for our
people, designed to help flex their approaches to improve
engagement with customers. Not only has this strengthened
our front office staff skills, as they handle customers in often
difficult situations, but it has also strengthened the way our
people interact with one another.
This has in turn helped the engagement rate to continue
to improve through the year from an already improved level
in 2015.
Our objectives for 2017
We have a range of new initiatives to build on our
people strategy focused on developing a high performance
culture based on diversity, continuous training and a focus
on the customer.
Our risk and capital management policy seeks to maintain an
appropriate level of capital and solvency for the risk appetite
agreed by the Board to support our business, while aiming
to grow dividends annually in real terms.
How we performed in 2016
During 2016, we received approval from the PRA to use
the Group’s PIM, successfully concluding a multi-year project.
We have embedded this model at the centre of the risk
management framework and now use it to report our Solvency
II capital coverage.
We have used the PIM to establish a clear capital target range
which provides additional security over the regulatory SCR.
We were well prepared for the UK’s referendum on leaving
the European Union (“EU”) and have actively managed the
impacts from the subsequent volatile financial markets. We are
a UK-based business underwriting risk within the UK, and the
day-to-day operations remain largely unaffected. We continue
to monitor the consequences of the devaluation of Sterling and
uncertain financial markets.
Our objectives for 2017
We aim to further embed the use of our internal model within
the business and operational decision making. We recognise
the strategic value and competitive advantage strong risk
management can provide and continue to work to drive
ownership of risk management across the Group.
17
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Building
a culture of
great service
In order to constantly improve
our customer experience we
are investing in training and
development for our people.
Providing the tools
for success
The Connect programme
was designed to challenge the
mindset of our organisation
and help our people with the
skills they need to have real
conversations with customers.
The aim was to connect them
to the vital role they play in
supporting people through
what can be difficult times.
4,000+
colleagues trained
in “Connect” since
its launch in 2015
18
Direct Line Group Annual Report & Accounts 2016 Committed support
Because our people are our
biggest asset and have the
biggest impact on our
customers, we wanted this
cultural change to touch every
customer facing area of our
business. This includes contact
centres, accident repair centres,
offshore partners and suppliers.
This contributes to our aim of
creating an effortless journey
for our customers.
19
www.directlinegroup.com Preparing for the roads of the future
This year we kicked off a partnership called MOVE_UK with
Government, technology providers, and car manufacturers
to accelerate the development, market readiness and
deployment of Automated Driving Systems (ADS). Planning
for the future of our business is vital so that we continue to
provide customers with a service that fits their needs.
Testing tomorrow’s cars
The three-year project is one
of the first of its kind in the
UK and aims to develop a
new method for validating
ADS and a data resource
that will help us analyse
and prepare for the impact
of ADS on three-year
vehicle insurance.
20
Direct Line Group Annual Report & Accounts 2016 Building
our technology
and data
capabilities
Further advances of in-car
technology and driverless cars are
set to change British roads. As a
leading insurer we have a key role
to play in the development and,
in particular, the adoption of this
technology which has the potential
to improve road safety significantly.
Embracing new technology
With ADS observing and
recording in the background
while MOVE_UK vehicles are
driven normally, it’s a unique
opportunity to learn how ADS
technology would respond in
real life situations.
250+
data points monitored
in each car
21
www.directlinegroup.com Building
our brands
by offering
more
We take pride in investing
in our brand propositions
to give customers
increased certainty around
the service they can expect
from their insurance.
Support around the clock
We identified escape of water as a costly
problem for both homeowners and insurers
and one that requires a quick remedy –
a burst pipe can result in 30 gallons of
water escaping in as little as two minutes.
To tackle this, in 2016 we introduced our
commitment to providing an emergency
plumber within three hours of reporting an
uncontrollable leak for all Direct Line Home
Insurance Plus policyholders and those who
add ‘Home Emergency’ to their standard
Direct Line Home policy.
Direct Line committing to providing
a plumber within
3 hours
day or night was an industry first
22
Direct Line Group Annual Report & Accounts 2016 Available when our customers
need us
The commitment to a plumber
arriving in such a short time frame
is a first for the insurance industry.
For water leaks that can be
contained by turning off the water
supply, Direct Line will still ensure
an emergency plumber is sent to
the property at a time convenient
for the householder.
23
www.directlinegroup.com 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 82. For definitions, see the glossary on pages 189 and 190
Return on tangible equity1
(%)
Dividend per share2
(pence)
Basic earnings per share
(pence)
Combined operating ratio
(%)
5
.
8
1
8
.
6
1
2
.
4
1
Target
At least 15%
5
7.
2
8
.
8
8
.
3
1
0
.
4
1
2
.
3
1
0
.
0
1
6
.
4
1
0
.
5
9
0
.
4
9
7
7.
9
9
7.
2
0
.
4
2
4
.
0
2
14y
15y
16y
14y
15y
16y
14y
15y
16y
14y
15y
16y
14.2%
Definition
24.6p
20.4p
97.7%
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.
A measure of financial year
underwriting profitability. It is the sum
of the net claims, commissions and
expenses divided by net earned
premium. This excludes instalment and
other operating income, and investment
return. A combined operating ratio
(“COR”) of less than 100% indicates
profitable underwriting.
Aim
We aim to achieve at least a
15% RoTE.
Performance
We have a progressive dividend
policy and aim to increase the
dividend in real terms each year.
Additionally, we look to return
surplus capital to shareholders
when appropriate.
We have not set a target. However,
growing earnings per share is
considered an indicator of a healthy
business.
We aim to make an underwriting
profit. For 2017, we expect to achieve
a COR in the range of 93% to 95%
for Ongoing operations, assuming
a normal level of claims from major
weather events and no further change
to the Ogden discount rate.
See Finance review page 42
See Finance review page 42
See Finance review page 42
See Finance review page 39
Link to Directors’ remuneration
We base the Long-Term Incentive Plan
(“LTIP”) awards partly on RoTE over
a three-year performance period.
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 Group
after tax. We base part of the Annual
Incentive Plan (“AIP”) awards on profit
before tax and earnings per share is
closely linked to this.
We base part of the AIP awards on
profit before tax. COR is closely linked
to this.
Notes:
1. See glossary on pages 189 and 190 and APM in appendix A on page 191
2. See note 3 on page 2
24
Direct Line Group Annual Report & Accounts 2016
Total costs
(£m)
Capital coverage1
Total Group (%)
Net Promoter Score2
Direct Line brand (points)
Complaints
Principal underwriter3 (%)
7
7.
2
9
7
.
3
2
9
7
.
4
8
8
0
.
4
8
1
0
.
5
6
1
4
7.
4
1
1
.
9
2
1
3
.
8
1
1
8
.
0
1
1
5
3
.
0
3
3
.
0
6
2
.
0
14y
15y
16y
15y
16H1
16y
14y
15y
16y
14y
15y
16y
£923.7m
165.0%
129.1points
0.26%
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
We aim to reduce our expense
ratio during 2017, absorbing
our investment in future capability.
We also aim to deliver a lower
commission ratio in 2017,
normalised for major weather events.
Performance
A measure to show the level of
capital held compared to the level
that is required, accounting for the
risks we face.
Net Promoter Score (“NPS”) is an index
that measures the willingness of
customers to recommend products or
services to others. It is used to gauge
customers’ overall experience with a
product or service, and the customer’s
loyalty to a brand.
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 the
Board’s risk appetite range of 140%
to 180% of our SCR. We also aim to
maintain a rating in the ‘A’ range from
our credit rating agencies.
We aim to improve this to achieve
strong 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 page 40
See Finance review pages 45 and 46
Link to Directors’ remuneration
Costs are considered and form
part of the gateway measures for
the AIP awards.
Risk management within risk appetite,
which includes an assessment of
capital strength, and acts as a
gateway for the AIP awards and
underpin for LTIP awards.
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 2015, we
recognise we have more to do to
reduce these.
The AIP awards include a weighting
to a balance of customer metrics,
including NPS.
The AIP awards include a weighting
to a balance of customer metrics,
including complaints.
Notes:
1. Estimates based on the Group’s Solvency II partial internal model for 31 December 2016 and 30 June 2016. Solvency II capital coverage based on standard
formula for 31 December 2015
2. On an aggregated 12-months rolling basis, with 2013 rebased to 100
3. For the Group’s principal underwriter, U K Insurance Limited; it excludes discontinued operations
25
www.directlinegroup.comStrategic reportGovernanceFinancial statements Risk management
Managing our risks
Our business is risk. So to ensure our strategy’s success, we must manage
risk effectively and efficiently.
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 delivered 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 owning and
managing risks to achieve our business objectives on a
day-to-day basis. The Second Line of Defence is responsible
for providing proportionate oversight, and challenging risks,
events and management actions. Group Audit is the Third Line
of Defence, providing an independent and objective
view of the adequacy and effectiveness of the Group’s risk
management, governance and internal control framework.
The Group’s governance structure is set out in more detail
in the corporate governance section.
Risk appetite
Our risk appetite statements define the opportunities and
associated risks we are prepared to accept to achieve our
business objectives. The Group has recalibrated its risk
appetite range relating to the Solvency II internal model –
see the table below. To monitor whether the business remains
within risk appetite, we use key risk indicators (“KRIs”).
We derive the KRIs from the risk appetite statements which
are used to drive and monitor risk-aware decision-making.
These KRIs are qualitative and quantitative, and forward and
backward looking. We review our risk appetite statements and
KRIs annually, using outputs from the Internal Economic Capital
Model (“IECM”).
Our risk objectives and appetite
Risk objective
Risk appetite statement
Overarching risk objective
The Group recognises that its long-term sustainability depends 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, the Group’s 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.
1. Maintain capital adequacy
The Group seeks to hold own funds in the range of 140% to 180% of the internal model
SCR. The Group also seeks to maintain sufficient economic capital consistent with its
strategic aim of achieving a standalone credit rating in the ‘A’ range.
2. Stable and efficient access
to funding and liquidity
The Group aims to meet planned and unexpected cash outflow requirements, including those
requirements that arise following a one-in-200 years insurance, market or credit risk event.
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.
26
Direct Line Group Annual Report & Accounts 2016 Our Enterprise Risk Management Strategy
and Framework
This section 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 necessary
understanding of our risks and controls, as well as having
appropriate oversight to manage risks proactively. The ERMF
is aligned to the Three Lines of Defence model, and intends to
provide a coherent, robust, fit-for-purpose, end-to-end approach
for managing all material risks. Our policy framework is a
central part of the ERMF, and includes policies and minimum
standards. These inform the business about how it needs to
conduct activities to remain within its risk appetite.
The Board approves our strategy, risk appetite and policies,
and the Board Risk Committee (“BRC”) approves the ERMF.
Our risk culture
Our risk culture underpins our business and decision-making,
and helps us embed a robust approach to managing risk.
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 our activities. An annual assessment
of risk behaviours and attitudes (“ARBA”) is undertaken jointly
by the Risk function and Group Audit and considers a range
of factors influencing risk culture.
Group strategy
Risk appetite
Policy framework
Principal risks
Risk management
Identify
Assess
Manage
Monitor
Report
Reporting &
monitoring
Risk
profile
Principal risks and uncertainties
We assess robustly 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, accounting for customer, financial and reputational
impacts. We believe our risk profile remained broadly unchanged over the last year.
Owner
Management and mitigation examples
Chief Financial
Officer, Managing
Directors of
Personal Lines
and Commercial
Principal risks
Insurance risk
• Underwriting
• Reserve
• 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 136 to 139.
• 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 review 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
• We have set reserves using the latest data and trends. In
particular, the recent decision to reduce the Ogden discount
rate has been reflected in the estimate of reserves
27
www.directlinegroup.comStrategic reportGovernanceFinancial statements Risk management continued
Principal risks
Market risk
• Spread
• Interest rate
• Property
The risk of loss resulting from fluctuations
in the level and volatility of market prices
of assets, liabilities and financial
instruments. See pages 139 to 141.
Owner
Management and mitigation examples
Chief Financial
Officer
• We manage and control the risks in our investment
portfolio through:
− an investment strategy approved by the Board;
− diversifying the types of assets; limits on the amount of
illiquid investments; tightly controlling individual credit
exposures; and risk-reduction techniques, such as hedging
foreign currency exposures with forward contracts, and
hedging exposure to US interest rates with swap contracts
Credit risk
• Concentration
• Counterparty default
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 141 to 146.
Operational risk
• Information security
• IT and business continuity
• Outsourcing
• Financial reporting
• Model
• Partnership contractual obligations
• Change
• Technology and infrastructure
The risk of loss due to inadequate
or failed internal processes, people,
systems, or from external events.
Regulatory and conduct risk
• Compliance
• Conduct
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.
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
while focusing on developing future systems capability. With
significant change underway, we are continuing to monitor
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 the performance of outsourced and offshored
activities
Chief Risk Officer
and Managing
Director,
Personal Lines
• We maintain a constructive and open relationship with
our regulators
• We use specific risk management tools and resources
to help manage our exposure to regulatory risk
• Our risk-based monitoring is designed to ensure we use
our resources effectively
• We have a strong culture of considering customers’
perspectives; delivering the right outcomes for our customers
is central to how we operate
• Our robust customer conduct risk management is designed
to minimise our risk exposure
28
Direct Line Group Annual Report & Accounts 2016 Principal risks
Strategic risk
• Strategy implementation
• Strategy formulation
The risk of direct or indirect adverse
impact on the earnings, capital, or
value of our business, resulting from
the strategies not being optimally
chosen, implemented or adapted
to changing conditions.
Owner
Management and mitigation examples
Chief Executive
Officer
• We agree, monitor and manage performance against the
plan and targets
• We run an annual strategy and 5-year planning process
which considers our performance, competitor positioning
and strategic opportunities
• We identify and manage emerging risks using established
governance processes and forums
We consider brand, reputational and political risk within the drivers of other risk types, such as regulatory and conduct,
operational and strategic risks.
Emerging risks
Our definition of emerging risks 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. We report these to the Risk Management Committee
and BRC 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’ results;
UK economy
The UK could enter a prolonged period of reduced growth
following its referendum vote on EU membership, potentially
reducing insurance sales and the value of our investment
portfolio. Equally, the uncertainty surrounding the nature and
outcome of the Article 50 negotiations could have various
implications. In addition, whilst our operations are based
mainly in the UK, we have monitored and will continue to
monitor actual and potential implications including: changes
to the value of Sterling which impact claims and non-claims
supplier costs; volatility in currency exposures and hedging
costs; inflation; recruitment and retention of people; potential
changes to direct and indirect tax; and the impact on our
capital position.
and
• manage emerging risks proactively.
We consider our main emerging risks to be as follows:
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.
In addition to our partnership with the Government on
Automated Driving Systems – MOVE_UK, the Group continues
to consider new motor technologies as part of its pricing and
underwriting approach.
Changes to traditional insurance business models
New market entrants and changes in consumer expectations
could result in significant changes to the structure of the general
insurance market, and require us to update our business model.
Our strategy, aligned to our mission to make insurance much
easier and better value for our customers, is positioned to take
advantage of changes in technology and customer behaviours.
Climate change
Climate change could increase the frequency of severe
weather events in the UK, and particularly flooding claims
costs. We continue to monitor changes in claims experience
and consider weather trends as part of our pricing and
underwriting processes.
Potential future changes to the Ogden discount rate
The Ogden discount rate has recently been reduced to
minus 0.75%, with an imminent consultation announced to
consider the methodology for setting this discount rate and
therefore potentially leading to further changes to the rate itself.
We are monitoring the development of the consultation and
analysing the implications on claims costs and the solvency
capital requirement.
29
www.directlinegroup.comStrategic reportGovernanceFinancial statements Corporate social responsibility
Safer young drivers
While progressing our broad Corporate Social Responsibility strategy,
we have increased our focus on road safety as the area where we have
some of the clearest and strongest expertise in the UK. We are using our
position as Britain’s leading car insurer to try to inspire a generation of
safer young drivers and make a radical and measurable change to the
level of young driver deaths.
Helping to make our society safer
We recognise that our products, services and operations affect
our many stakeholders so we seek to make our society safer for
everyone. Our current focus is on road safety. We believe we
can responsibly use our expertise and experience to reduce
deaths and life changing injuries on Britain’s roads.
Safer young drivers
In December last year we launched Shotgun, a free
smartphone app that aims to reduce road deaths among
new young drivers.
In the UK, around half a million 17 to 25 year olds pass their
driving test each year. It is a significant rite of passage for
many young people, but it is also a time when young drivers
are at their most vulnerable. Our data shows that accident
rates among young drivers are, perhaps not surprisingly,
enormously higher during the first year of driving, with one
in five young drivers having some form of accident during this
time. Young drivers are also hugely over-represented in the
most serious accidents.
There are various reasons why young drivers crash; these
include over-confidence, a natural human urge to test personal
boundaries and take risks, and little experience of recognising
hidden hazards. Using road-safety data and our knowledge of
driver behaviour, we identified contextual speed (speed relative
to other safe road users) as a significant cause of fatal and
serious crashes involving young drivers. In particular, the first
1,000 miles for a new driver are critical; this is when the gap
between perceived and actual driving competence drives
much higher risk.
In response, we have set ourselves the ambitious goal of
cutting deaths in the first 1,000 miles to zero across the UK.
We will, of course, need to work with many other stakeholders
to achieve this goal.
Approach
Our Corporate Social Responsibility (“CSR”) strategy helps us
put society’s interests at the heart of our business. 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 72.
To help us understand, prioritise, and respond to the sometimes
competing needs of our different stakeholders across society,
we partner with several leading CSR organisations.
You can find more details of our approach on the Group’s
website at www.directlinegroup.com, including our CSR
Charter, policy framework, performance against last year’s
targets, and targets for 2017.
To find out more about our CSR Committee, see page 72
Proud to be here
30
Direct Line Group Annual Report & Accounts 2016 The biggest barrier to addressing this issue is that young drivers
often feel immune to the risks. Our goal of inspiring a generation
of safe and careful drivers sits at odds with many of the
motivations of new drivers. Young drivers, especially young men,
can be pro-risk and competitive. From our surveys, we found that
many 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 must change this perspective.
Shotgun acts as the wingman for newly qualified drivers and
was developed with their direct input. Through GPS technology
on a user’s smartphone, Shotgun uses the best of our telematics
capability to assess driving performance, evaluating
smoothness, contextual speed and a number of other factors
to generate a score for each journey taken. Each user builds
up a personal score which is a core indicator of accident risk.
In turn, this score earns app users a place on the Shotgun
leaderboard, gamifying the experience and allowing users
to compete with their peers. Shotgun re-frames what it takes
to be a good driver, and explodes the myth that everybody
else is driving fast. The app also gives users detailed
feedback, highlighting what they have done well, and how
they could improve their driving score next time. When users
hit pre-determined point thresholds, they unlock rewards.
This encourages drivers to use the app through 1,000 miles
and to improve their performance still further to earn ever more
valuable rewards.
We are working with various reward partners, including Boost
and Virgin Experience. Shotgun offers rewards which are
attractive to a 17 to 25 year old demographic. Our research
showed we needed a range of reward options that appealed
to different tastes and to both urban and more rural users.
To launch the app we used the same leading-edge thinking
that won Direct Line a coveted Institute of Practitioners in
Advertising Gold award for Effectiveness. The Shotgun launch
represented a departure from traditional advertising, in a bid
to engage the target audience using channels that are relevant.
This moves the topic of road safety into a more social space,
with a particular focus on personal platforms like Instagram,
You Tube and Snapchat. The strategy was to create content
in a range of formats, based on creative ideas that resonate
with the audience. These were seeded with carefully chosen
partners to build saliency and drive momentum. They are also
quite a bit edgier than our traditional marketing messages.
We put in place a communication plan for a diverse range
of audiences – young drivers, of course, were central but
also their parents as well as our own employees. Making sure
we capture all of these groups is critical. For our staff, our
approach has been to create awareness, build understanding
and drive engagement across the business. We want our
people to be proud of our shared belief that the know-how and
power of Direct Line can be a real force for good in the UK.
We also want our employees to become active advocates for
this initiative in their local communities right across the country.
From our research and testing, we know we can engage
with this vulnerable audience and change both their attitudes
to driving and materially improve their driving behaviour,
making a real change in their chances of being killed or
injured on the roads.
During 2017, we are focusing on delivering against this
objective. We will run a series of attitudinal research studies
to track our users’ attitude to driving. In addition, the Shotgun
app will give us a rich source of data allowing us to measure
improvements to driving performance over time.
Road safety partners
During 2016, we worked with various partners to highlight
a range of road safety issues.
PACTS
In November, we launched our third Road Safety Dashboard
with the Parliamentary Advisory Council for Transport Safety
(“PACTS”). This pioneering tool uses Department for Transport
statistics to produce an index that ranks the road safety record
of individual parliamentary constituencies. MPs tell us they find
the tool valuable. In July, we also ran an event in Parliament at
which 33 parliamentarians signed up to our pledge to improve
road safety awareness. We also sponsored the PACTS Annual
Westminster Transport Safety Lecture in the House of Commons
where policymakers and campaigners come together to share
ideas and best practice.
Department for Transport
We continue to engage proactively with the Department for
Transport on various topics, including telematics technology,
driverless cars and road safety policy.
Brake
We maintained our partnership with road safety charity,
Brake, to produce a series of survey reports on driver behaviour
and attitudes. We released the results to the media to raise
awareness of road safety issues and educate the public.
This year’s reports have covered ‘drink driving’, ‘eating and
drinking at the wheel’, ’texting while driving’, ‘winter driving’
and ‘speed awareness in urban areas’. Brake uses this
research for its wider campaigning, education, community and
professional engagement activities. We also sponsored Brake’s
Parliamentarian of the Year Awards, which recognise Members
of Parliament who have campaigned on road safety issues.
31
www.directlinegroup.comStrategic reportGovernanceFinancial statements Corporate social responsibility continued
Reduce, Reuse and Recycle
Proud to be here
We aim to manage our operations sustainably and have
progressed well in reducing our impact on the environment.
Emissions
You can find information on Group-wide greenhouse gas
(“GHG”) emissions in the chart below – and more details
of our emissions in the Directors’ report on page 112.
Energy use is the main cause of our emissions. In absolute
terms, we have reduced our emissions significantly after
rationalising and implementing an energy-savings plan
across our estate. This covered location management,
air-conditioning, heating and lighting, for instance. We are
targeting a 30% like-for-like reduction in the Group’s energy
use by 2020 against a 2013 baseline.
We communicate the details of a carbon management
programme through the Carbon Disclosure Project. Throughout
2016, 100% of the Group’s electricity was purchased on a
green tariff.
Waste
We have further improved our systems for managing waste
and increased the percentage of waste we recycle at our UK
Accident Repair Centres to 61% from 54% in 2015 and at our
office sites to 42% from 40% in 2015. These figures exclude
paper waste which is 100% recycled. Including paper, we
recycled 80% of waste at our UK Accident Repair Centres and
78% at our offices in 2016. All of our office waste is diverted
from landfill, including recycling.
Suppliers
Our Ethical Code for Suppliers sets out our approach to
managing CSR related matters across our supply chain. We
support the aims of the Modern Slavery Act 2015 and are
committed to ensuring that modern slavery is not present in our
supply chain. We have extended our Ethical Code to expressly
cover this commitment. In accordance with the Act, we publish
an annual statement on slavery and human trafficking on the
Group website at www.directlinegroup.com.
Our people strategy supports our business strategy, ensuring
we have capable, skilled and engaged people that can help
make insurance easier and better value for our customers.
We continue to focus on building pride in Direct Line Group,
encouraging and celebrating the strength of our workforce.
Various volunteer groups, such as our Employee Representative
Bodies and Local Co-ordination Teams, increase our
employees’ voice. Last year we invited employees to
participate in research to help shape their future way of
working. The research considered how the future working
environment, technology and culture could give our people
the tools they need to live and work at their best.
We also invested significantly in a new Graduate Programme.
The Programme offers opportunities equally to existing
employees and new applicants and will help further drive
the pipeline of qualified, bright young people coming into
our business.
Employee feedback remains an important gauge of how
our initiatives affect change. In 2016 our people managers
created over 900 action plans to improve their teams’
experience. Again this played a major part in significantly
improving our engagement score from 60% in 2015 to 73%.
The percentage of our employees who are proud to work for
the Group also increased from 80% in 2015 to 87%, while
81% tell others that the Group is a great place to work
(70% in 2015).
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 background or situation.
Our diversity and inclusion practices are in line with the
Universal Declaration of Human Rights. Our Ethical Code
for Suppliers requires that all our suppliers adhere to the
core International Labour Organisation standards.
Greenhouse gas
emissions1 (tonnes)
1
.
8
2
0
2
3
2
7,
,
3
2
1
1
6
,
2
2
5
1
3
,
9
1
14y
15y
16y
14.6%
Note:
1. This excludes discontinued operations, the Group’s former International division. Total Group emissions for 2014 and 2015 were 28,759 and 23,143, respectively
32
Direct Line Group Annual Report & Accounts 2016
Examples of activities include:
• 780 employees manning our call centres to take pledges
for appeals such as Stand Up to Cancer, Comic Relief and
Children in Need;
• supporting national appeals such as the World’s Biggest
Coffee Morning in aid of Macmillan and raising funds
during Movember for various men’s health charities; and
• organising quiz nights, fun runs, masquerade balls, festivals,
cake sales, sky dives, charity football matches and much
more to raise thousands of pounds for local causes.
We encourage all employees to volunteer individually or
as a team through our ‘One Day’ initiative.
Our Employee Opinion Survey revealed that 33% of staff
volunteered or fundraised in company time last year. Our target
for 2017 is to at least maintain this high level of engagement.
Matched giving and grants
In 2016, our employees donated £149,000 through our
payroll giving scheme and we donated a further £100,000
in matched giving. We also provided £68,250 in grants to
organisations for which our employees fundraise or volunteer.
In 2016, the Group signed up to the Women in Finance
Charter. The Charter is a commitment by HM Treasury and
signatory firms to work together to build a more balanced and
fairer industry. Our pledge to the Charter reinforces our other
initiatives such as our Diversity Network Alliance in promoting
diversity and inclusion in our business. The Group committed to
increase female representation in senior management to 30%
by the end of 2019.
You can find the ratio of female-to-male employees at
31 December 2016 in the charts below.
In 2016, the Group was proud to be named in the OUTstanding
Power Lists. We started working with OUTstanding, a professional
network of executives committed to diversity, alongside other
partner organisations to help shape our plans and bring new
ideas and thinking on diversity and inclusion.
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 are linked to our reputation in the community and we
therefore try to align our approach to giving more generally
with their interests.
Volunteering and fundraising
We know that participating in fundraising and volunteering
is linked to higher engagement levels amongst our people.
In order to encourage our people to participate, therefore,
we run a network of Community and Social Committees which
are made up of local volunteers. These receive central funding
and support from the Group to support Group-wide national
appeals and create a programme of events and activities
based on the interests of employees at their sites.
Gender diversity
of all employees
Gender diversity
of senior managers
Gender diversity
of Board of Directors
Male 5,768
Female 5,209
Male 112
Female 32
Male 7
Female 3
33
www.directlinegroup.comStrategic reportGovernanceFinancial statements Operating review
Personal Lines
Motor
Highlights
Britain’s leading personal motor insurer measured by
in-force policies
In-force policies increased by 4.5% with growth in own
brands in-force policies in each quarter
Gross written premium increased by 9.4% with own brands
increasing by 9.3%
COR increased by 13.9 percentage points to 106.3%
primarily reflecting the increase in reserves following the
reduction in the Ogden discount rate
Operating profit reduced to £149.1 million due to higher
non-cash intangible asset impairments and the reduction
in the Ogden discount rate
Performance highlights
In-force policies (thousands)
2016
3,873
2015
3,707
Gross written premium
£1,539.1m £1,406.7m
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
74.9%
3.2%
28.2%
106.3%
63.6%
2.6%
26.2%
92.4%
Operating profit
£149.1m
£338.0m
Performance
Motor in-force policies increased by 4.5% during 2016,
driven primarily by own brands. Overall, Motor gross written
premium increased by 9.4% in comparison to 2015.
The market experienced high levels of shopping during
2016. The Direct Line brand was able to use this environment
to continue to improve its competitive position, resulting in
strong new business growth. The comparatively high level of
persistency and attractive customer base allowed the Group
to reinvest some of that value back into propositions and price
competitiveness.
Motor average written premiums1 increased by 6.3% in
2016 compared with an average increase of 5.2% in 2015.
As demonstrated by the improving current-year loss ratio,
the Group was able to continue to write business at attractive
margins, as a result of successful pricing and a slightly
improved risk mix. Claims inflation remained at the top of the
Group’s long-term expectation of 3%-5%, driven by higher
damage costs.
The COR for the Motor division was 106.3% (2015: 92.4%),
including an 11.2 percentage points one-off increase due to
the recent reduction in the Ogden discount rate. Prior-year
reserve releases were significantly lower at £123.5 million
(2015: £266.8 million), including a £139.8 million charge
in respect of the recent Ogden discount rate change.
The expense ratio increased due to higher non-cash intangible
asset impairments of £39.3 million. The commission ratio
remained broadly stable compared to 2015.
The current-year attritional loss ratio improved by 0.9
percentage points to 84.1% (2015: 85.0%). Excluding the
impact of the recent reduction in the Ogden discount rate,
the current-year attritional loss ratio for Motor was 83.3% an
improvement of 1.7 percentage points compared to 2015.
Growth in average premiums, coupled with improving claims
trends in large bodily injury, were partially offset by higher
than expected damage inflation and the Group’s investment
in new business growth.
Operating profit was £149.1 million, lower than 2015
primarily as a result of a one-off charge due to the reduction
in the Ogden discount rate of £150.3 million and higher
intangible asset impairments of £39.3 million.
Regulatory
On 27 February 2017, the Lord Chancellor announced a
reduction in the Ogden discount rate to minus 0.75% with
effect from 20 March 2017, which has led to an increase
in the amount of claims reserves necessary to be held by the
Group, specifically those that are settled as lump sums by the
Courts. This follows a consultation process instigated by the
Ministry of Justice some years ago in connection with the rate
to be applied to personal injury lump sum damages awards
in settling such claims. The Group is committed to ensuring
claimants receive appropriate compensation and has made
appropriate provision in its claims reserves for the ruling, which
will apply to all open unsettled claims. The Lord Chancellor’s
announcement referred to a consultation to consider options
for reform concerning the discount rate and accordingly has
left open the possibility of further changes to the process by
which the rate is set, and therefore to the rate itself. The Group
welcomes the consultation to consider options for reform, with
a view to achieving a better and fairer framework for claimants
and defendants.
On 23 February 2017, the Government announced
measures to reduce the volume and cost of soft tissue damage
‘whiplash’ claims and stated its expectation that this will see
a reduction in motor insurance premiums by £40 on average.
The measures include a fixed tariff for payment of injuries up to
24 months in duration. Further measures detailed in the paper
are still being considered. The Government is keen to introduce
all changes to whiplash claims as a package in late 2018.
The Group has been calling for reform in this area for some
time and continues to work with Government and industry
bodies on how the reforms should be implemented.
Outlook
The market was highly competitive and faced a number
of significant government policy and regulatory changes
during 2016 and 2017. In the face of these challenges,
we demonstrated our resilience and appeal to customers by
growing our own brand policies while maintaining overall
margins, which has continued into early 2017. We do not
expect any material residual impact on 2017 Motor profit
as a result of adopting the reduction in the Ogden discount
rate to minus 0.75%.
Note:
1. Average incepted written premiums excluding IPT for total Motor for year ended 31 December 2016
34
34 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Operating review
Motor
Highlights
Britain’s leading personal motor insurer measured by
in-force policies
In-force policies increased by 4.5% with growth in own
brands in-force policies in each quarter
Gross written premium increased by 9.4% with own brands
increasing by 9.3%
COR increased by 13.9 percentage points to 106.3%
primarily reflecting the increase in reserves following the
reduction in the Ogden discount rate
Operating profit reduced to £149.1 million due to higher
non-cash intangible asset impairments and the reduction
in the Ogden discount rate
Performance highlights
In-force policies (thousands)
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
2016
3,873
74.9%
3.2%
28.2%
106.3%
2015
3,707
63.6%
2.6%
26.2%
92.4%
Gross written premium
£1,539.1m £1,406.7m
Operating profit
£149.1m
£338.0m
Performance
Motor in-force policies increased by 4.5% during 2016,
driven primarily by own brands. Overall, Motor gross written
premium increased by 9.4% in comparison to 2015.
The market experienced high levels of shopping during
2016. The Direct Line brand was able to use this environment
to continue to improve its competitive position, resulting in
strong new business growth. The comparatively high level of
persistency and attractive customer base allowed the Group
to reinvest some of that value back into propositions and price
competitiveness.
The expense ratio increased due to higher non-cash intangible
asset impairments of £39.3 million. The commission ratio
remained broadly stable compared to 2015.
The current-year attritional loss ratio improved by 0.9
percentage points to 84.1% (2015: 85.0%). Excluding the
impact of the recent reduction in the Ogden discount rate,
the current-year attritional loss ratio for Motor was 83.3% an
improvement of 1.7 percentage points compared to 2015.
Growth in average premiums, coupled with improving claims
trends in large bodily injury, were partially offset by higher
than expected damage inflation and the Group’s investment
in new business growth.
Operating profit was £149.1 million, lower than 2015
primarily as a result of a one-off charge due to the reduction
in the Ogden discount rate of £150.3 million and higher
intangible asset impairments of £39.3 million.
Regulatory
On 27 February 2017, the Lord Chancellor announced a
reduction in the Ogden discount rate to minus 0.75% with
effect from 20 March 2017, which has led to an increase
in the amount of claims reserves necessary to be held by the
Group, specifically those that are settled as lump sums by the
Courts. This follows a consultation process instigated by the
Ministry of Justice some years ago in connection with the rate
to be applied to personal injury lump sum damages awards
in settling such claims. The Group is committed to ensuring
claimants receive appropriate compensation and has made
appropriate provision in its claims reserves for the ruling, which
will apply to all open unsettled claims. The Lord Chancellor’s
announcement referred to a consultation to consider options
for reform concerning the discount rate and accordingly has
left open the possibility of further changes to the process by
which the rate is set, and therefore to the rate itself. The Group
welcomes the consultation to consider options for reform, with
a view to achieving a better and fairer framework for claimants
and defendants.
On 23 February 2017, the Government announced
measures to reduce the volume and cost of soft tissue damage
‘whiplash’ claims and stated its expectation that this will see
a reduction in motor insurance premiums by £40 on average.
The measures include a fixed tariff for payment of injuries up to
24 months in duration. Further measures detailed in the paper
are still being considered. The Government is keen to introduce
Motor average written premiums1 increased by 6.3% in
2016 compared with an average increase of 5.2% in 2015.
As demonstrated by the improving current-year loss ratio,
all changes to whiplash claims as a package in late 2018.
The Group has been calling for reform in this area for some
time and continues to work with Government and industry
the Group was able to continue to write business at attractive
bodies on how the reforms should be implemented.
margins, as a result of successful pricing and a slightly
improved risk mix. Claims inflation remained at the top of the
Group’s long-term expectation of 3%-5%, driven by higher
Outlook
damage costs.
The COR for the Motor division was 106.3% (2015: 92.4%),
including an 11.2 percentage points one-off increase due to
the recent reduction in the Ogden discount rate. Prior-year
reserve releases were significantly lower at £123.5 million
(2015: £266.8 million), including a £139.8 million charge
in respect of the recent Ogden discount rate change.
Note:
The market was highly competitive and faced a number
of significant government policy and regulatory changes
during 2016 and 2017. In the face of these challenges,
we demonstrated our resilience and appeal to customers by
growing our own brand policies while maintaining overall
margins, which has continued into early 2017. We do not
expect any material residual impact on 2017 Motor profit
as a result of adopting the reduction in the Ogden discount
rate to minus 0.75%.
Home
Highlights
Britain’s leading personal home insurer measured by
in-force policies
Own brands in-force policies increased by 2.3%;
overall reduction in in-force policies of 1.2% primarily
due to partnerships
Gross written premium was 3.7% lower primarily due
to partnerships, while own brands reduced by 0.9%
COR improved by 7.2 percentage points to 85.0%
Operating profit improved by 51.7 percentage points
to £166.7 million reflecting lower claims from major
weather events
Performance highlights
In-force policies (thousands)
2016
3,378
2015
3,418
Gross written premium
£834.4m
£866.3m
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
40.7%
22.6%
21.7%
85.0%
51.5%
20.9%
19.8%
92.2%
Operating profit
£166.7m
£109.9m
Performance
In-force policies for Home own brands increased by 2.3% to
1.8 million over 2016, while partner in-force policies reduced
by 4.7%. Gross written premium was 3.7% lower than for
2015 primarily due to partnerships which were 6.2% lower,
while own brands experienced a smaller reduction of 0.9%.
Following a prolonged period of significant deflation,
the home market showed signs of some stability during the
second half of 2016. Home‘s average written premium1
decreased by 3.9% in 2016 compared with 3.6% in 2015,
primarily due to changes to tenure and distribution channel
mix including higher sales through the PCW channel. Home
market new business premiums improved during the year
after years of premium deflation. New business pricing for
the Group’s Home own brands was sufficiently competitive
to allow the Home division to continue to grow own brands
through web and aggregator channels.
In Home, the COR improved by 7.2 percentage points
primarily as a result of a lower loss ratio, which was 10.8
percentage points lower than 2015. The impact of major
weather events in 2016 was approximately £18 million
(2015: £90 million) and was lower than the normal annual
level of claims costs expected from major weather events of
approximately £70 million. Prior-year reserve releases, which
included some favourable development from the storms in
late 2015, were higher than last year at £75.9 million
(2015: £41.9 million).
The current-year attritional loss ratio, excluding claims costs
from major weather events, was 2.0 percentage points higher
than 2015. This was predominantly driven by a greater
proportion of new business sales compared to 2015 and
an increase in claims inflation.
The expense ratio at 21.7% was 1.9 percentage points
higher than in 2015 primarily due to the Flood Re levy.
The commission ratio at 22.6% was 1.7 percentage points
higher than in 2015 as profit share due to partners was
higher as a result of the improved loss ratio performance.
Operating profit of £166.7 million improved by 51.7
percentage points benefitting from lower claims costs from
major weather events and higher than expected prior-year
reserve releases.
The Group‘s partnership with Nationwide Building Society
was due to terminate in June 2017. These plans are currently
being reviewed which may result in the migration moving to
the second half of 2017, whilst the Group works with
Nationwide to ensure a smooth transition for customers. If this
is the case, the Group will continue to earn premiums written in
the second half of 2017 through to the second half of 2018.
The Group continued with its planned digital and proposition
investment in the successful RBS Home and Private Insurance
relationship. This will enable the Group to offer RBS customers
tailored products consistent across distribution channels.
The Group agreed an extension of its Home and Motor
insurance partnership with Prudential for a further two years.
As part of this, policies will be renewed under the Prudential
brand until 2019. The Group also launched its first affinity
partnership scheme to offer access to Churchill-branded Home
and Motor policies for Prudential Group customers who do not
currently have such insurance with the Group. This partnership
demonstrates the Group’s ability to deliver tailored propositions
to meet the needs of partners and their customers.
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, became operational.
The Group has supported Flood Re’s formation and was
ready to cede chosen risks to Flood Re on its inception.
Outlook
The market remained competitive in 2016, although with
some signs of premium inflation on new business, following
several years of significant deflation.
There is evidence that claims inflation has been increasing
and has continued to run ahead of premium inflation. The
focus remains on balancing margin and volume with a view
to delivering sustainable long term value.
1. Average incepted written premiums excluding IPT for total Motor for year ended 31 December 2016
1. Average incepted written premiums excluding IPT for Home own brands for year ended 31 December 2016
Note:
34 Direct Line Group Annual Report & Accounts 2016
www.directlinegroup.com 35
35
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Operating review continued
Rescue and other personal lines
Highlights
In-force policies for Rescue reduced by 7.3% primarily
as a result of lower partner volumes
Gross written premium for Rescue and other personal lines
increased by 1.7% to £400.8 million primarily due to
Travel partnerships pricing
COR increased by 2.1 percentage points to 93.3%
Operating profit reduced by 11.7% to £45.9m
Performance highlights
The COR for Rescue and other personal lines was
2.1 percentage points higher than 2015 at 93.3%
(2015: 91.2%). The Rescue COR was 83.4% (2015: 82.3%)
with a higher loss ratio reflecting changes in business mix and
investment in the network. The commission ratio of 7.2% was
0.8 percentage points higher than 2015, reflecting higher
partner profit share, while the expense ratio was stable
compared to 2015.
Operating profit reduced by 11.7% to £45.9 million.
Within Rescue and other personal lines, Rescue operating
profit was similar to the prior year at £42.8 million
(2015: £42.2 million).
In-force policies (thousands)
Rescue1
Other personal lines
Total in-force policies
Gross written premium
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
2016
2015
3,646
4,234
7,880
3,932
4,356
8,288
£400.8m
£394.1m
61.6%
7.2%
24.5%
93.3%
59.9%
6.4%
24.9%
91.2%
The Group continues to support RBS with rescue and travel
products sold to packaged account customers. The provision
of these services beyond the current contract term is subject
to a market review, in which the Group is participating.
Outlook
Rescue continued to build its underlying capability to provide
an excellent customer experience. During 2016 strong
improvements in NPS underlined the progress being made
and Green Flag has a strong focus for 2017 to seek to further
enhance customer experience. The Group also continues to
roll-out improvements in Pet and Travel to enhance our service
while updating our customer propositions.
Operating profit
£45.9m
£52.0m
Performance
In-force policies for Rescue reduced by 7.3% to 3.6 million
in comparison to the prior year through lower partner volumes.
The reduction in in-force policies for other personal lines of
2.8% across 2016 primarily reflected lower packaged bank
account volumes.
Gross written premium for Rescue and other personal lines
grew by 1.7% compared with 2015. Rescue gross written
premium remained broadly stable compared with 2015.
Green Flag performed well supported by competitive
propositions. Gross written premium for other personal lines
grew by 3.0% compared to 2015.
Note:
1. Rescue in-force policies have been revised to exclude partner post-accident vehicle recoveries
36
36 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Operating review continued
Rescue and other personal lines
Highlights
In-force policies for Rescue reduced by 7.3% primarily
as a result of lower partner volumes
Gross written premium for Rescue and other personal lines
increased by 1.7% to £400.8 million primarily due to
Travel partnerships pricing
COR increased by 2.1 percentage points to 93.3%
Operating profit reduced by 11.7% to £45.9m
Performance highlights
The COR for Rescue and other personal lines was
2.1 percentage points higher than 2015 at 93.3%
(2015: 91.2%). The Rescue COR was 83.4% (2015: 82.3%)
with a higher loss ratio reflecting changes in business mix and
investment in the network. The commission ratio of 7.2% was
0.8 percentage points higher than 2015, reflecting higher
partner profit share, while the expense ratio was stable
compared to 2015.
Operating profit reduced by 11.7% to £45.9 million.
Within Rescue and other personal lines, Rescue operating
profit was similar to the prior year at £42.8 million
(2015: £42.2 million).
2016
2015
The Group continues to support RBS with rescue and travel
products sold to packaged account customers. The provision
of these services beyond the current contract term is subject
to a market review, in which the Group is participating.
Outlook
Rescue continued to build its underlying capability to provide
an excellent customer experience. During 2016 strong
improvements in NPS underlined the progress being made
and Green Flag has a strong focus for 2017 to seek to further
enhance customer experience. The Group also continues to
roll-out improvements in Pet and Travel to enhance our service
while updating our customer propositions.
In-force policies (thousands)
Rescue1
Other personal lines
Total in-force policies
Gross written premium
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
£400.8m
£394.1m
3,646
4,234
7,880
61.6%
7.2%
24.5%
93.3%
3,932
4,356
8,288
59.9%
6.4%
24.9%
91.2%
Operating profit
£45.9m
£52.0m
Performance
In-force policies for Rescue reduced by 7.3% to 3.6 million
in comparison to the prior year through lower partner volumes.
The reduction in in-force policies for other personal lines of
2.8% across 2016 primarily reflected lower packaged bank
account volumes.
Gross written premium for Rescue and other personal lines
grew by 1.7% compared with 2015. Rescue gross written
premium remained broadly stable compared with 2015.
Green Flag performed well supported by competitive
propositions. Gross written premium for other personal lines
grew by 3.0% compared to 2015.
Commercial
Highlights
Commercial in-force policies grew by 3.1% with Direct Line
for Business growth of 6.4%
Gross written premium increased by 3.0 percentage points
to £499.8 million. Direct Line for Business gross written
premium grew by 7.7 percentage points to £109.6 million
COR reduced by 5.8 percentage points and operating
profit increased by £21.0 million with both benefitting
from lower claims costs from major weather events
Performance highlights
In-force policies (thousands)
DL4B
NIG and other
Total in-force policies
Gross written premium
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Operating profit
2016
2015
433
242
675
407
248
655
£499.8m
£485.3m
55.3%
19.5%
23.9%
98.7%
£41.8m
62.7%
19.6%
22.2%
104.5%
£20.8m
Performance
Commercial in-force policy growth across 2016 was achieved
by increased sales through the Direct Line for Business and
NIG. By 31 December 2016, there were more than
433,000 Direct Line for Business in-force policies.
Commercial gross written premium increased by 3.0% to
£499.8 million compared to 2015, reflecting growth in
Commercial direct, particularly landlord and van products.
Gross written premium for NIG and other increased by 1.7%
compared to 2015 in part reflecting premium rate increases.
The Commercial market has remained competitive during
2016, in particular in the broker channel. Overall premium
rates have slightly lagged claims inflation albeit with variation
by class of business and channel. Commercial continued to
maintain its underwriting discipline and seek to balance the
retention of customers with premium rate inflation.
The Commercial COR of 98.7% was 5.8 percentage points
lower compared to 2015. This benefited from lower weather
related claims costs, which were offset by the impact of the
recent Ogden discount rate change.
Operating profit was therefore £41.8 million, an increase of
£21.0 million compared to 2015. The reduction due to the
recent change in the Ogden discount rate was £24.7 million,
of which £23.1 million relates to 2015 and prior accident
years. The current-year attritional loss ratio was 9.2 percentage
points lower than 2015 due to lower weather-related claims
costs and over 1 percentage point of underlying improvement
due to better pricing and risk selection.
Regulatory
The Insurance Act went live in August 2016 with changes
applied to all of our product wordings across Commercial
along with new processes in the claims area to ensure
alignment to the principles of the Act. 2017 will bring changes
from the Enterprise Act and the Commercial division is well
placed to support these changes.
Outlook
The Commercial division continued to develop both its direct
to customer and broker led operations. Direct Line for Business
continues to invest in its proposition to take advantage of the
growing direct Commercial insurance market. Meanwhile,
NIG is consolidating its position in the broker market with
a focus on delivering effortless trading to its broker partners
across both electronically and regionally traded business.
Note:
1. Rescue in-force policies have been revised to exclude partner post-accident vehicle recoveries
36 Direct Line Group Annual Report & Accounts 2016
www.directlinegroup.com 37
37
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Finance review
Strong profits and
growth in own brands
Ongoing operations1
In-force policies1 (thousands)
Gross written premium1
Net earned premium1
Underwriting profit
Investment return1
Instalment and other operating
income
Operating profit1 – Ongoing
Run-off1
Restructuring and other
one-off costs
Operating profit
Finance costs1
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 yield1,2
Investment return1,2
Basic earnings per share (pence)
Adjusted diluted earnings per
share1,2 (pence)
Return on tangible equity1,2
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)
2016
£m
2015
£m
15,806
3,274.1
3,000.6
70.1
168.1
16,068
3,152.4
2,920.8
175.2
194.7
165.3
403.5
26.6
(39.9)
390.2
(37.2)
353.0
(74.2)
–
278.8
293.0
60.9%
11.5%
25.3%
97.7%
2.5%
2.6%
20.4
21.2
14.2%
184.7
150.8
520.7
73.1
(48.7)
545.1
(37.6)
507.5
(108.3)
181.2
580.4
385.3
59.5%
10.9%
23.6%
94.0%
2.4%
2.9%
27.9
26.6
18.5%
192.2
147.4
153.8
4.9
9.7
14.6
10.0
–
24.6
4.6
9.2
13.8
27.5
8.8
50.1
John Reizenstein
Chief Financial Officer
Highlights
Gross written premium for Ongoing operations1,2 up 3.9%
to £3,274.1m (2015: £3,152.4m), driven by growth in
Motor and Home own brand in-force policies (up 4.3%)
2016 results reflect the one-off impact of using the new
Ogden discount rate of minus 0.75%. Operating profit
from Ongoing operations of £403.5m (pre-Ogden
discount rate reduction3: £578.6m; 2015: £520.7m) and
profit before tax of £353.0m (pre-Ogden3: £570.3m;
2015: £507.5m). Return on tangible equity1, 2 of 14.2%,
(pre-Ogden3: 20.2%; 2015: 18.5%)
Combined operating ratio1 from Ongoing operations of
97.7% (pre-Ogden3: 91.8%; 2015: 94.0%) increased
as a result of the reduction in the Ogden discount rate,
partially offset by improved current-year underwriting
performance and favourable weather claims. Adjusted
for normal weather and before the Ogden discount rate
change, the combined operating ratio was 93.5%,
towards the lower end of the target range of 93% to 95%
5.4% increase in final dividend per share to 9.7 pence per
share (2015: 9.2 pence). Total dividends per share for
2016, including special interim dividend of 10.0 pence
per share paid in September 2016 following the approval
of the Group’s partial internal model, of 24.6 pence per
share (2015: 50.1 pence)
The Group’s estimated Solvency II capital coverage ratio4
post-dividend is 165%, above the middle of the Group’s
risk appetite range of 140% – 180% (pre-dividend: 174%)
Notes:
1. See glossary on pages 189 and 190
2. See appendix A – Alternative performance measures on page 191
3. See appendix B – Proforma results on page 194 which presents the Group’s results excluding the recent impact of the Ogden discount rate reduction
4. Estimates based on the Group’s Solvency II partial internal model for 31 December 2016
38
38 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Finance review
Ongoing operations1
In-force policies1 (thousands)
Gross written premium1
Net earned premium1
Underwriting profit
Investment return1
Instalment and other operating
Operating profit1 – Ongoing
income
Run-off1
Restructuring and other
one-off costs
Operating profit
Finance costs1
Profit before tax
Tax
net of tax
Profit after tax
Profit from discontinued operations,
Highlights
Gross written premium for Ongoing operations1,2 up 3.9%
to £3,274.1m (2015: £3,152.4m), driven by growth in
Motor and Home own brand in-force policies (up 4.3%)
2016 results reflect the one-off impact of using the new
Of which is Ongoing operations
Ogden discount rate of minus 0.75%. Operating profit
from Ongoing operations of £403.5m (pre-Ogden
discount rate reduction3: £578.6m; 2015: £520.7m) and
profit before tax of £353.0m (pre-Ogden3: £570.3m;
2015: £507.5m). Return on tangible equity1, 2 of 14.2%,
(pre-Ogden3: 20.2%; 2015: 18.5%)
Key metrics
Loss ratio1
Commission ratio1
Expense ratio1
COR1
Combined operating ratio1 from Ongoing operations of
97.7% (pre-Ogden3: 91.8%; 2015: 94.0%) increased
as a result of the reduction in the Ogden discount rate,
partially offset by improved current-year underwriting
performance and favourable weather claims. Adjusted
Investment income yield1,2
Investment return1,2
Basic earnings per share (pence)
Adjusted diluted earnings per
share1,2 (pence)
for normal weather and before the Ogden discount rate
Return on tangible equity1,2
change, the combined operating ratio was 93.5%,
towards the lower end of the target range of 93% to 95%
Net asset value per share (pence)
5.4% increase in final dividend per share to 9.7 pence per
share (2015: 9.2 pence). Total dividends per share for
2016, including special interim dividend of 10.0 pence
per share paid in September 2016 following the approval
of the Group’s partial internal model, of 24.6 pence per
share (2015: 50.1 pence)
The Group’s estimated Solvency II capital coverage ratio4
post-dividend is 165%, above the middle of the Group’s
risk appetite range of 140% – 180% (pre-dividend: 174%)
Notes:
1. See glossary on pages 189 and 190
2. See appendix A – Alternative performance measures on page 191
Tangible net asset value
per share (pence)
Dividend per share
– interim (pence)
– final (pence)
– regular (pence)
– first special (pence)
– second special (pence)
– total (pence)
2016
£m
2015
£m
15,806
3,274.1
3,000.6
70.1
168.1
16,068
3,152.4
2,920.8
175.2
194.7
165.3
403.5
26.6
(39.9)
390.2
(37.2)
353.0
(74.2)
–
278.8
293.0
60.9%
11.5%
25.3%
97.7%
2.5%
2.6%
20.4
21.2
14.2%
184.7
4.9
9.7
14.6
10.0
–
24.6
150.8
520.7
73.1
(48.7)
545.1
(37.6)
507.5
(108.3)
181.2
580.4
385.3
59.5%
10.9%
23.6%
94.0%
2.4%
2.9%
27.9
26.6
18.5%
192.2
4.6
9.2
13.8
27.5
8.8
50.1
147.4
153.8
Performance
Operating profit – Ongoing operations
Gross written premium – Ongoing operations
Underwriting profit
Investment return
Instalment and other operating
income
Operating profit
2016
£m
70.1
168.1
165.3
403.5
2015
£m
175.2
194.7
150.8
520.7
In 2016, operating profit from Ongoing operations was
£403.5 million (pre-Ogden: £578.6 million; 2015: £520.7
million) primarily due to a lower underwriting result as the
Group has reflected an increase in its claims reserves for
the recent reduction in the Ogden discount rate, and lower
investment returns. The underwriting profit was £70.1 million,
(2015: £175.2 million), principally due to the recent
reduction in the Ogden discount rate, which led to lower
prior-year reserve releases from Ongoing operations of
£266.7 million (2015: £378.9 million). This was partially
offset by lower claims costs from major weather events.
Expenses include higher non-cash impairments than in
previous years of £39.3 million and the Flood Re levy of
£24.1 million. Investment return was lower primarily due
to a reduction in unrealised property gains.
In-force policies – Ongoing operations (thousands)
At 31 December
Own brands
Partnerships
Motor total
Own brands
Partnerships
Home total
Of which Nationwide and
Sainsbury’s
Rescue
Other personal lines
Rescue and other personal lines
Direct Line for Business
NIG and other
Commercial
Total ongoing
2016
3,642
231
3,873
1,759
1,619
3,378
719
3,646
4,234
7,880
433
242
2015
3,459
248
3,707
1,719
1,699
3,418
719
3,932
4,356
8,288
407
248
675
15,806
655
16,068
Total in-force policies for Ongoing operations during 2016
reduced by 1.6% to 15.8 million (31 December 2015:
16.1 million). The fall primarily related to partner volumes in
Home and Rescue and other personal lines. Motor in-force
policies grew by 4.5% and Commercial by 3.1% across the
period. Own brands in-force policies during 2016 grew by
4.3% including a 5.3% increase in Motor.
Own brands
Partnerships
Motor total
Own brands
Partnerships
Home total
Of which Nationwide and
Sainsbury’s
Rescue
Other personal lines
Rescue and other personal lines
Direct Line for Business
NIG and other
Commercial
Total Ongoing
2016
£m
1,428.7
110.4
1,539.1
404.7
429.7
834.4
215.5
163.1
237.7
400.8
109.6
390.2
499.8
2015
£m
1,307.5
99.2
1,406.7
408.4
457.9
866.3
221.2
163.3
230.8
394.1
101.8
383.5
485.3
3,274.1
3,152.4
Gross written premium of £3,274.1 million increased by
3.9% compared with 2015 (£3,152.4 million) primarily
relating to an increase in Motor own brands.
Underwriting profit – Ongoing operations
Underwriting profit (£ million)
Loss ratio
Commission ratio
Expense ratio
COR
2016
70.1
60.9%
11.5%
25.3%
97.7%
2015
175.2
59.5%
10.9%
23.6%
94.0%
The COR for Ongoing operations of 97.7% (2015: 94.0%),
was 3.7 percentage points higher year on year primarily as
a result of the recent Ogden discount rate reduction, partially
offset by lower weather losses. The loss ratio was 60.9%
(pre-Ogden: 55.0%; 2015: 59.5%) which was higher by
1.4 percentage points compared to 2015. The commission
ratio increased by 0.6 percentage points and the expense
ratio by 1.7 percentage points. Excluding the impact of the
recent reduction in the Ogden discount rate, the COR for
Ongoing operations improved to 91.8% in 2016.
At the start of the year, the Group set 2016 COR guidance
for Ongoing operations in the range of 93% to 95%. This
assumed a normal level of claims from major weather events.
On this basis and excluding the recent Ogden discount rate
reduction, the Group achieved a normalised COR of 93.5%
which is towards the lower end of the Group’s target range.
This also includes a non-cash intangible asset impairment
charge of £39.3 million.
Within the loss ratio, the current-year attritional loss ratio
improved by 0.2 percentage points to 69.2% (pre-Ogden:
68.8%; 2015: 69.4%) with improvements in Motor and
Commercial offset by a deterioration in Home and Rescue
and other personal lines.
3. See appendix B – Proforma results on page 194 which presents the Group’s results excluding the recent impact of the Ogden discount rate reduction
4. Estimates based on the Group’s Solvency II partial internal model for 31 December 2016
Notes:
1. Home claims from major weather events, including inland and coastal flooding, and storms
2. See definition in glossary on pages 189 and 190
38 Direct Line Group Annual Report & Accounts 2016
www.directlinegroup.com 39
39
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Finance review continued
The increase in the commission ratio of 0.6 percentage points
to 11.5% primarily reflected higher payments to partners,
particularly in Home, following lower claims costs as a result
of prior-year reserve releases and major weather events.
The Group’s expense ratio increased to 25.3%, predominantly
due to higher intangible asset impairments of £39.3 million
and the Flood Re levy of £24.1 million. Excluding the
impairment charge and Flood Re levy, the expense ratio would
have been 23.2%.
Loss ratio analysis by division – Ongoing
Notes
Motor
Rescue and other
personal lines
Home
Commercial1
Total
Ongoing
For the year ended 31 December 2016
Net insurance claims
Prior-year reserve releases
Major weather events
Attritional net insurance claims
Net earned premium
Loss ratio current-year attritional
Loss ratio – prior-year reserve releases
Loss ratio – major weather events – Home2
Loss ratio – reported
Commission ratio
Expense ratio
Combined operating ratio
For the year ended 31 December 2015
Net insurance claims
Prior-year reserve releases
Major weather events
Attritional net insurance claims
Net earned premium
Loss ratio current-year attritional
Loss ratio – prior-year reserve releases
Loss ratio – major weather events – Home2
Loss ratio – reported
Commission ratio
Expense ratio
Combined operating ratio
4
32
4
4
4
4
4
4
32
4
4
4
4
4
1,001.7
123.5
n/a
1,125.2
1,337.1
84.1%
(9.2%)
n/a
74.9%
3.2%
28.2%
106.3%
794.8
266.8
n/a
1,061.6
1,249.3
85.0%
(21.4%)
n/a
63.6%
2.6%
26.2%
92.4%
332.0
75.9
(18.0)
389.9
816.3
47.8%
(9.3%)
2.2%
40.7%
22.6%
21.7%
85.0%
435.1
41.9
(90.0)
387.0
845.0
45.8%
(5.0%)
10.7%
51.5%
20.9%
19.8%
92.2%
Total costs
Staff costs
Other operating expenses
Marketing
Amortisation and impairment
of other intangible assets
Depreciation
Total costs
Operating expenses
Claims handling expenses
Total costs
11
9
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. The Group’s current-year attritional loss ratio
improved by 0.2 percentage points to 69.2% in 2016 (2015:
69.4%) with improvements in Motor and Commercial partially
offset by a deterioration in Home and Rescue and other personal
lines. Excluding the impact of the recent reduction in the Ogden
discount rate, the current-year attritional loss ratio for Ongoing
operations improved to 68.8% in 2016.
By division, the COR improved in Home and Commercial,
mainly as a result of benign weather compared to 2015. The
COR deteriorated in Motor due to the recent Ogden discount
rate change and an intangible asset impairment charge of
£39.3 million.
Prior-year reserve releases for Motor were significantly lower at
£123.5 million (2015: £266.8 million), including a £139.8
million charge in respect of the recent Ogden discount rate
change. Home prior-year reserve releases increased to £75.9
million (2015: £41.9 million) due to some favourable
development from the storms in late 2015.
Notes:
1. Commercial attritional loss ratio includes weather costs
2. Home claims for major weather events, including inland and coastal flooding and storms
40
40 Direct Line Group Annual Report & Accounts 2016
Total costs for Ongoing operations were £923.7 million
for 2016, after non-cash intangible asset impairments of
£39.3 million and the Flood Re levy of £24.1 million
(2015: £884.7 million). The non-cash impairment charge
is in respect of intangible assets previously capitalised on the
balance sheet and primarily relates to ongoing IT projects
which aim to enhance the Group’s digital offering, customer
experience and operational efficiency.
243.0
17.5
n/a
260.5
394.4
66.0%
(4.4%)
n/a
61.6%
7.2%
24.5%
93.3%
231.6
13.6
n/a
245.2
386.4
63.5%
(3.6%)
n/a
59.9%
6.4%
24.9%
91.2%
Notes
250.5
49.8
n/a
300.3
452.8
66.3%
(11.0%)
n/a
55.3%
19.5%
23.9%
98.7%
275.8
56.6
n/a
332.4
440.1
75.5%
(12.8%)
n/a
62.7%
19.6%
22.2%
104.5%
2016
£m
406.5
277.8
112.6
96.7
30.1
923.7
759.3
164.4
923.7
1,827.2
266.7
(18.0)
2,075.9
3,000.6
69.2%
(8.9%)
0.6%
60.9%
11.5%
25.3%
97.7%
1,737.3
378.9
(90.0)
2,026.2
2,920.8
69.4%
(13.0%)
3.1%
59.5%
10.9%
23.6%
94.0%
2015
£m
407.5
261.3
117.8
67.4
30.7
884.7
689.1
195.6
884.7
Direct Line Group Annual Report & Accounts 2016
Finance review continued
The increase in the commission ratio of 0.6 percentage points
The Group’s expense ratio increased to 25.3%, predominantly
to 11.5% primarily reflected higher payments to partners,
due to higher intangible asset impairments of £39.3 million
particularly in Home, following lower claims costs as a result
and the Flood Re levy of £24.1 million. Excluding the
of prior-year reserve releases and major weather events.
impairment charge and Flood Re levy, the expense ratio would
Loss ratio analysis by division – Ongoing
have been 23.2%.
Notes
Motor
Home
personal lines
Commercial1
Ongoing
Rescue and other
Total
For the year ended 31 December 2016
Net insurance claims
Prior-year reserve releases
Major weather events
Attritional net insurance claims
Net earned premium
Loss ratio current-year attritional
Loss ratio – prior-year reserve releases
Loss ratio – major weather events – Home2
Loss ratio – reported
Commission ratio
Expense ratio
Combined operating ratio
For the year ended 31 December 2015
Net insurance claims
Prior-year reserve releases
Major weather events
Attritional net insurance claims
Net earned premium
Loss ratio current-year attritional
Loss ratio – prior-year reserve releases
Loss ratio – major weather events – Home2
Loss ratio – reported
Commission ratio
Expense ratio
Combined operating ratio
4
32
4
32
4
4
4
4
4
4
4
4
4
4
1,001.7
123.5
n/a
1,125.2
1,337.1
84.1%
(9.2%)
n/a
74.9%
3.2%
28.2%
106.3%
794.8
266.8
n/a
1,061.6
1,249.3
85.0%
(21.4%)
n/a
63.6%
2.6%
26.2%
92.4%
332.0
75.9
(18.0)
389.9
816.3
47.8%
(9.3%)
2.2%
40.7%
22.6%
21.7%
85.0%
435.1
41.9
(90.0)
387.0
845.0
45.8%
(5.0%)
10.7%
51.5%
20.9%
19.8%
92.2%
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. The Group’s current-year attritional loss ratio
improved by 0.2 percentage points to 69.2% in 2016 (2015:
69.4%) with improvements in Motor and Commercial partially
offset by a deterioration in Home and Rescue and other personal
lines. Excluding the impact of the recent reduction in the Ogden
discount rate, the current-year attritional loss ratio for Ongoing
operations improved to 68.8% in 2016.
By division, the COR improved in Home and Commercial,
Total costs
Other operating expenses
Staff costs
Marketing
Amortisation and impairment
of other intangible assets
Depreciation
Total costs
mainly as a result of benign weather compared to 2015. The
Operating expenses
COR deteriorated in Motor due to the recent Ogden discount
Claims handling expenses
11
9
rate change and an intangible asset impairment charge of
Total costs
£39.3 million.
Prior-year reserve releases for Motor were significantly lower at
£123.5 million (2015: £266.8 million), including a £139.8
million charge in respect of the recent Ogden discount rate
change. Home prior-year reserve releases increased to £75.9
million (2015: £41.9 million) due to some favourable
development from the storms in late 2015.
Notes:
1. Commercial attritional loss ratio includes weather costs
40 Direct Line Group Annual Report & Accounts 2016
Total costs for Ongoing operations were £923.7 million
for 2016, after non-cash intangible asset impairments of
£39.3 million and the Flood Re levy of £24.1 million
(2015: £884.7 million). The non-cash impairment charge
is in respect of intangible assets previously capitalised on the
balance sheet and primarily relates to ongoing IT projects
which aim to enhance the Group’s digital offering, customer
experience and operational efficiency.
243.0
17.5
n/a
260.5
394.4
66.0%
(4.4%)
n/a
61.6%
7.2%
24.5%
93.3%
231.6
13.6
n/a
245.2
386.4
63.5%
(3.6%)
n/a
59.9%
6.4%
24.9%
91.2%
Notes
250.5
1,827.2
49.8
n/a
300.3
452.8
66.3%
(11.0%)
n/a
55.3%
19.5%
23.9%
98.7%
275.8
56.6
n/a
332.4
440.1
75.5%
(12.8%)
n/a
62.7%
19.6%
22.2%
104.5%
2016
£m
406.5
277.8
112.6
96.7
30.1
923.7
759.3
164.4
923.7
266.7
(18.0)
2,075.9
3,000.6
69.2%
(8.9%)
0.6%
60.9%
11.5%
25.3%
97.7%
1,737.3
378.9
(90.0)
2,026.2
2,920.8
69.4%
(13.0%)
3.1%
59.5%
10.9%
23.6%
94.0%
2015
£m
407.5
261.3
117.8
67.4
30.7
884.7
689.1
195.6
884.7
Consequently, the Group’s expense ratio increased to 25.3%
(2015: 23.6%). Excluding the impairment charge and Flood
Re levy the expense ratio would have been 23.2%. The
reduction in claims handling expenses was largely due to
lower staff costs and other operating costs being allocated
to claims and a reduction in claims handling provision.
On 16 January 2017 the Financial Services Compensation
Scheme announced that it would raise a supplementary levy of
£63 million on general insurers to compensate policyholders
of the Enterprise and Gable insurance companies. The
Group’s share of the levy, approximately £5 million for 2017,
will be charged to operating expenses in Q1 2017.
Instalment and other operating income – Ongoing
operations
Investment yields
Investment income yield2
Investment return2
2016
2.5%
2.6%
2015
2.4%
2.9%
The investment income yield in 2016 was 2.5%, an increase
on the yield achieved in 2015. Actions to diversify the
portfolio including investment in commercial real estate loans,
subordinated financial debt and global credit, have helped
offset yield pressure from low UK interest rates. The Group
currently forecasts an investment income yield of 2.4% for
2017 on the basis of current market conditions given the
continuing low interest rate environment.
Operating profit – 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
2016
£m
107.1
14.1
19.3
24.8
58.2
2015
£m
100.1
12.5
15.5
22.7
50.7
165.3
150.8
Instalment and other operating income from Ongoing
operations of £165.3 million increased 9.6% on the prior
year (2015: £150.8 million). Instalment income increased
by £7.0 million compared to 2015, primarily as a result of
higher Motor volumes. Other operating income increased by
£7.5 million in 2016 to £58.2 million (2015: £50.7 million).
Investment return – Ongoing operations
Investment income
Net realised and unrealised gains
Investment return – Ongoing
2016
£m
164.5
3.6
168.1
2015
£m
165.6
29.1
194.7
The total investment return for Ongoing operations decreased
to £168.1 million compared to £194.7 million in 2015.
The decrease is primarily as a result of lower net realised and
unrealised gains. Investment income remained broadly stable,
at £164.5 million compared with 2015, despite lower
average assets under management (“AUM”) of £6,581.0
million (2015: £6,818.7 million) and a reduction of 25
basis points by the Bank of England in the UK base rate
during the year. These downward factors were partially
offset by portfolio actions.
Net realised and unrealised gains for Ongoing operations
of £3.6 million were significantly lower than the comparative
period (2015: £29.1 million) primarily due to lower
unrealised property gains, which were £4.1 million for the
year (2015: £24.2 million).
Motor
Home
Rescue and other personal lines
Commercial
Total Ongoing
2016
£m
149.1
166.7
45.9
41.8
403.5
2015
£m
338.0
109.9
52.0
20.8
520.7
All divisions were profitable in 2016, with Home and
Commercial reporting significant improvements in operating
profit compared to 2015. This was partially offset by a
decrease in Motor, due to the recent reduction in the Ogden
discount rate and a higher level of intangible asset
impairments, and in Rescue and other personal lines.
Reconciliation of operating profit
Operating profit – Ongoing
operations
Run-off
Restructuring and other one-off costs
Operating profit
Finance costs
Profit before tax
Tax
Profit from discontinued
operations, net of tax
Profit after tax
2016
£m
2015
£m
403.5
26.6
(39.9)
390.2
(37.2)
353.0
(74.2)
–
278.8
520.7
73.1
(48.7)
545.1
(37.6)
507.5
(108.3)
181.2
580.4
Run-off
The Run-off segment generated a profit of £26.6 million in
2016 (pre-Ogden: £68.8 million; 2015: £73.1 million).
The reduction in the result followed lower prior-year reserve
releases from large bodily injury claims in comparison to the
previous year, primarily as a result of the recent reduction in
the Ogden discount rate.
2. Home claims for major weather events, including inland and coastal flooding and storms
2. See glossary on pages 189 and 190
Notes:
1. Vehicle recovery includes post-accident and pay-on-use recovery. Repair services constitute the provision of non-insurance related repairs services
www.directlinegroup.com 41
41
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Finance review continued
Restructuring and other one-off costs
Restructuring and other one-off costs for 2016 of £39.9
million (2015: £48.7 million) primarily reflected the costs
associated with the exit of the Group’s Bristol property and
relocating to a smaller site. Over the four-year period 2015
to 2018, the Group expects cumulative restructuring and other
one-off costs to be substantially offset by the operating profit
from the Run-off segment.
Finance costs
Finance costs remained stable at £37.2 million
(2015: £37.6 million).
Taxation
The effective tax rate in 2016 was 21.0% (2015: 21.3%),
which was higher than the standard UK corporation tax rate
of 20.0% (2015: 20.25%), primarily due to disallowable
expenses. Based on current information, the Group expects
the effective tax rate to be broadly in line with the UK
standard tax rate.
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 from discontinued
operations of £181.2 million in 2015. Operating profit
for 2015 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 152.
Profit for the year and return on tangible equity
Profit for the year amounted to £278.8 million (pre-Ogden
£452.6 million; 2015: £580.4 million), following the one-off
gain on disposal of the Group’s International division in 2015
and lower underwriting profit as a result of the recent reduction
in the Ogden discount rate, partially offset by an improvement
in the underlying underwriting performance in 2016.
RoTE was 14.2% due to lower profit after tax as a result of
the reduction in the Ogden discount rate (pre-Ogden: 20.2%;
2015: 18.5%).
The Group reiterates its ongoing target of achieving at least a
15% RoTE. Following a review of the approach to the Group’s
Directors’ remuneration policy, the Remuneration Committee is
proposing that the level of RoTE required for the March 2017
long-term incentive plan awards to vest be increased from the
current range of 14.5% to 17.5% to a range of 15.0% to
18.0%. This will ensure that awards will only vest in full if
significant value has been delivered to shareholders.
Earnings per share
Basic earnings per share was 20.4 pence (2015: 27.9
pence) reflecting the decrease in profit after tax.
Adjusted diluted earnings per share1 from Ongoing operations
were 21.2 pence (2015: 26.6 pence) reflecting the decrease
in operating profit.
Note:
1. See glossary on page 189 and 190 and appendix A on page 191
42
42 Direct Line Group Annual Report & Accounts 2016
Dividends
The Board is proposing a final dividend of 9.7 pence per
share making a total regular dividend for 2016 of 14.6
pence per share. This represents 5.8% growth over the 2015
regular dividend and is in line with the Group’s aim to grow
the regular dividend annually in real terms, see page 110 for
the Group’s dividend policy. The final dividend will be paid
on 18 May 2017 to shareholders on the register on 17
March 2017. The ex-dividend date will be 16 March 2017.
Cash flow
Net cash generated from operating activities before investment
of insurance assets totalled £35.0 million (2015: £42.1
million). This reflected a decrease in cash generated from
operations to £117.1 million (2015: £149.3 million), offset
by lower taxes paid.
The net cash used by investing activities of £125.6 million
(2015: £190.8 million generated from investing activities)
the movement primarily reflects the proceeds on sale of
discontinued operations in 2015.
Dividends paid amounted to £450.6 million (2015: £666.0
million) resulting in net cash used by financing activities of
£528.4 million (2015: £722.0 million).
Overall, cash and cash equivalents increased by £208.4
million (2015: £14.0 million increase) across the year to
£1,110.8 million (31 December 2015: £902.4 million).
Net asset value
At 31 December
Net assets
Goodwill and intangible assets
Tangible net assets
Closing number of shares
Net asset value per share (pence)
Tangible net asset value per share
(pence)
2016
£m
2,521.5
(508.9)
2,012.6
1,365.1
184.7
2015
£m
2,630.0
(524.8)
2,105.2
1,368.7
192.2
147.4
153.8
The net asset value at 31 December 2016 was £2,521.5
million (31 December 2015: £2,630.0 million) with a
tangible net asset value of £2,012.6 million (31 December
2015: £2,105.2 million). The decrease since the beginning
of the year reflected the payment of dividends, offset by the
profit in 2016 and an increase in AFS investment reserve.
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 management risks
are reserving for insurance liabilities, and market risk
connected to the investment portfolio.
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.
Direct Line Group Annual Report & Accounts 2016 Finance review continued
Restructuring and other one-off costs
Dividends
Restructuring and other one-off costs for 2016 of £39.9
The Board is proposing a final dividend of 9.7 pence per
million (2015: £48.7 million) primarily reflected the costs
share making a total regular dividend for 2016 of 14.6
associated with the exit of the Group’s Bristol property and
pence per share. This represents 5.8% growth over the 2015
relocating to a smaller site. Over the four-year period 2015
regular dividend and is in line with the Group’s aim to grow
to 2018, the Group expects cumulative restructuring and other
the regular dividend annually in real terms, see page 110 for
one-off costs to be substantially offset by the operating profit
the Group’s dividend policy. The final dividend will be paid
on 18 May 2017 to shareholders on the register on 17
March 2017. The ex-dividend date will be 16 March 2017.
from the Run-off segment.
Finance costs
Finance costs remained stable at £37.2 million
(2015: £37.6 million).
Cash flow
Taxation
The effective tax rate in 2016 was 21.0% (2015: 21.3%),
which was higher than the standard UK corporation tax rate
of 20.0% (2015: 20.25%), primarily due to disallowable
expenses. Based on current information, the Group expects
the effective tax rate to be broadly in line with the UK
standard tax rate.
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
Net cash generated from operating activities before investment
of insurance assets totalled £35.0 million (2015: £42.1
million). This reflected a decrease in cash generated from
operations to £117.1 million (2015: £149.3 million), offset
by lower taxes paid.
The net cash used by investing activities of £125.6 million
(2015: £190.8 million generated from investing activities)
the movement primarily reflects the proceeds on sale of
discontinued operations in 2015.
Dividends paid amounted to £450.6 million (2015: £666.0
million) resulting in net cash used by financing activities of
£528.4 million (2015: £722.0 million).
treated as discontinued operations. The gain on disposal
Overall, cash and cash equivalents increased by £208.4
of £167.1 million is included in profit from discontinued
million (2015: £14.0 million increase) across the year to
operations of £181.2 million in 2015. Operating profit
£1,110.8 million (31 December 2015: £902.4 million).
for 2015 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 152.
Net asset value
At 31 December
Net assets
Profit for the year and return on tangible equity
Profit for the year amounted to £278.8 million (pre-Ogden
£452.6 million; 2015: £580.4 million), following the one-off
gain on disposal of the Group’s International division in 2015
Goodwill and intangible assets
Tangible net assets
Closing number of shares
Net asset value per share (pence)
and lower underwriting profit as a result of the recent reduction
Tangible net asset value per share
in the Ogden discount rate, partially offset by an improvement
(pence)
in the underlying underwriting performance in 2016.
2016
£m
2015
£m
2,521.5
2,630.0
(508.9)
(524.8)
2,012.6
1,365.1
184.7
2,105.2
1,368.7
192.2
147.4
153.8
RoTE was 14.2% due to lower profit after tax as a result of
the reduction in the Ogden discount rate (pre-Ogden: 20.2%;
2015: 18.5%).
The Group reiterates its ongoing target of achieving at least a
15% RoTE. Following a review of the approach to the Group’s
Directors’ remuneration policy, the Remuneration Committee is
proposing that the level of RoTE required for the March 2017
long-term incentive plan awards to vest be increased from the
current range of 14.5% to 17.5% to a range of 15.0% to
18.0%. This will ensure that awards will only vest in full if
significant value has been delivered to shareholders.
The net asset value at 31 December 2016 was £2,521.5
million (31 December 2015: £2,630.0 million) with a
tangible net asset value of £2,012.6 million (31 December
2015: £2,105.2 million). The decrease since the beginning
of the year reflected the payment of dividends, offset by the
profit in 2016 and an increase in AFS investment reserve.
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 management risks
are reserving for insurance liabilities, and market risk
connected to the investment portfolio.
Earnings per share
Basic earnings per share was 20.4 pence (2015: 27.9
pence) reflecting the decrease in profit after tax.
Reserving
Adjusted diluted earnings per share1 from Ongoing operations
were 21.2 pence (2015: 26.6 pence) reflecting the decrease
Financial management includes the central aspect of estimating
claims reserves. Uncertainty is an inherent part of insurance,
and requires judgement when assessing claims liabilities.
in operating profit.
Note:
1. See glossary on page 189 and 190 and appendix A on page 191
42 Direct Line Group Annual Report & Accounts 2016
The Group considers the class of business, the length of time
to notify a claim, the validity of the claim against a policy,
and the claim value. Claims reserves could settle 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 includes a prudent
margin that exceeds the internal actuarial best estimate. This
margin is made in reference to various actuarial scenario
assessments and reserve distribution percentiles, and considers
other short and long-term risks not reflected in the actuarial
inputs, as well as management’s view on the risks and
improvements in relation to the actuarial best estimate.
Following the Lord Chancellor’s announcement on 27
February 2017 of a reduction in the Ogden discount rate to
minus 0.75%, the Group has assessed its liabilities in light of
the reduction in the rate. The Ogden discount rate primarily
affects the value of large bodily injury claims in the Motor,
Commercial and Run-off divisions, and as a result also impacts
reinsurance recoveries and the propensity for claims to settle
as periodic payment orders (“PPO”). As a result, the Group
has made provision within its claims reserves for a reduction
in the Ogden discount rate to minus 0.75%. The impact of this
on the income statement for the year ended 31 December
2016 is shown in Appendix B on page 194 and has reduced
operating profit from Ongoing operations by £175.1 million
and profit before tax by £217.3 million.
The Group’s prior-year reserves releases were £290.1 million
(2015: £449.3 million) after £205.2 million of strengthening
due to the recent reduction in the Ogden discount rate.
Excluding the change in the Ogden discount rate, the releases
have arisen as a result of good experience in large bodily
injury claims and PPOs. Home prior-year reserve releases
increased to £75.9 million (2015: £41.9 million) with the
increase coming mainly from favourable development on the
December 2015 weather events.
Prior to the recent reduction in the Ogden discount rate, the
Group established claims reserves at an assumed Ogden
discount rate of 1.5%, compared with the rate then in force
of 2.5%. This differential resulted in lower current-year profits,
with a small and diminishing prior-year reserve release in the
Group’s reported profits as claims settled. The Group will now
hold claims reserves at the new Ogden discount rate pending
the outcome of the consultation and so the timing difference
between current and prior-year profit recognition will no longer
exist. The net impact of this change in approach on current-
year profit is expected to be small.
Following the Group’s normal actuarial review process, the
Group reduced its margin during 2016 due to improved
claims experience, particularly in large bodily injury claims,
not yet recognised in the actuarial best estimate. The Group
continues to hold a significant margin above the actuarial best
estimate and its overall reserving strength has been maintained
following the recent reduction in the Ogden discount rate.
Looking forward, the Group expects to continue to set its
initial management best estimate for future accident years
conservatively. Over time, the proportion of the Group’s
underwriting profit attributable to current year is expected
to increase, including due to targeted improvements in the
expense and commission ratio. Assuming current claims trends
continue, the contribution from prior-year reserve releases is
expected to remain significant, albeit it is expected to reduce
over time.
Claims reserves net of reinsurance
At 31 December
Motor
Home
Rescue and other personal lines
Commercial
Total Ongoing
Run-off
Total Group
2016
£m
2,084.2
298.1
72.8
607.0
3,062.1
326.2
3,388.3
2015
£m
2,125.9
387.7
79.3
627.3
3,220.2
382.4
3,602.6
For details relating to the sensitivity for changes in the assumed
Ogden discount rate and the discount rate used in relation to
periodical payment orders see note 3.3.1 of the consolidated
financial statements.
Reinsurance
The objectives of the Group’s reinsurance strategy are to
reduce the volatility of earnings, facilitate effective capital
management, and transfer risk outside the Group’s risk
appetite. This is achieved by transferring risk exposure through
various reinsurance programmes:
Catastrophe reinsurance to protect against an accumulation
of claims arising from a natural peril event. The retained
deductible is at £150 million, and cover is purchased
annually on 1 July, up to a modelled one-in-200 year loss
event of £1,250 million (2015: £1,350 million).
Motor reinsurance to protect against a single or an
accumulation of large claims which renews on 1 January.
The retained deductible is at an indexed level of £1 million
per claim, providing a substantial level of protection
against large motor bodily injury claims.
Commercial property risk reinsurance to protect against
large individual claims with a retained deductible of
£4 million which renews annually on 1 October.
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. The Audit Committee
provides oversight.
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.
www.directlinegroup.com 43
43
www.directlinegroup.comStrategic reportGovernanceFinancial statements
At 31 December 2016, total investment holdings of
£6,581.0 million were 3.5% lower than at 31 December
2015, reflecting dividends paid offset by operating cash
flows. Total debt securities were £4,724.5 million (31
December 2015: £5,194.4 million), of which 6.1% were
rated as ‘AAA’ and a further 63.8% were rated as ‘AA’ or
‘A’. The average duration at 31 December 2016 of total debt
securities was 2.3 years (31 December 2015: 2.3 years).
At 31 December 2016, total unrealised gains, net of tax,
on AFS investments were £92.1 million (31 December 2015:
£5.4 million).
Decisions were taken to exit securitised credit during
Q3 2016. In addition the Group sold two investment
properties in 2016.
In 2016, the Group delivered a robust investment result
against a background of increased financial market
uncertainties and further yield compression for much of the
year. Investment in three new mandates commenced, with
two fully funded to benchmark holdings (subordinated financial
debt and global credit). The commercial real estate loans
mandate is expected to be fully funded to its benchmark
holding by the end of 2017.
Investment risk is, in part, mitigated by the following
characteristics of 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 generally permit any debt securities
to be held below B–.
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. The
portfolio is weighted heavily towards social infrastructure
with 89% of the year-end portfolio invested in projects
across this sector (36% in healthcare, 48% in education
and 5% in other).
The investment property portfolio consists presently of 24
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.
Derivatives are permitted only for risk mitigation and
efficient portfolio management within the investment portfolio.
Derivatives used include interest rate swaps, for example to
hedge exposure to US Dollar interest rate movements, and
forward currency contracts to hedge assets denominated in
foreign currency back to Sterling. Separately, interest rate
swaps have also been used to change the interest rate liability
on the Group’s debt issuance to a floating rate basis.
Finance review continued
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 match PPO and non-PPO liabilities in an optimal manner
To deliver a suitable risk-adjusted investment return
commensurate with the Group’s risk appetite
Asset and liability management
The following table summarises the Group’s high level
approach to asset and liability management.
Liabilities
Assets
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
Characteristics
Inflation linked
or floating
Key rate
duration
matched
Floating
Fixed or floating
Property and
infrastructure debt
Investment-grade
credit, short-term high
yield and
subordinated
financial debt
Commercial real
estate loans and cash
Investment-grade
credit, cash and
government debt
securities
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
Benchmark
holding
2016
Actual
holding
2016
Benchmark
holding
2015
Actual
holding
2015
58.0%
59.1%
54.0%
59.5%
6.0%
4.0%
6.2%
1.3%
6.0%
4.0%
4.8%
0.2%
68.0%
−
8.0%
76.0%
6.0%
3.0%
66.6%
−
5.2%
71.8%
5.1%
1.2%
64.0%
5.0%
9.0%
78.0%
6.0%
3.0%
64.5%
5.2%
6.5%
76.2%
4.8%
−
9.0%
16.9%
7.0%
13.9%
6.0%
5.1%
100.0% 100.0% 100.0% 100.0%
6.0%
5.0%
44
44 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016 Finance review continued
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 match PPO and non-PPO liabilities in an optimal manner
At 31 December 2016, total investment holdings of
£6,581.0 million were 3.5% lower than at 31 December
2015, reflecting dividends paid offset by operating cash
flows. Total debt securities were £4,724.5 million (31
December 2015: £5,194.4 million), of which 6.1% were
rated as ‘AAA’ and a further 63.8% were rated as ‘AA’ or
‘A’. The average duration at 31 December 2016 of total debt
securities was 2.3 years (31 December 2015: 2.3 years).
To deliver a suitable risk-adjusted investment return
commensurate with the Group’s risk appetite
At 31 December 2016, total unrealised gains, net of tax,
on AFS investments were £92.1 million (31 December 2015:
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,
Property and
Inflation linked
for example PPOs
infrastructure debt
or floating
Short and medium
Investment-grade
Key rate
term all other
credit, short-term high
duration
claims
matched
Tier 2 sub-debt
Commercial real
Floating
(swapped fixed to
estate loans and cash
floating)
Surplus tangible
equity
Fixed or floating
yield and
subordinated
financial debt
Investment-grade
credit, cash and
government debt
securities
Asset allocation and benchmarks
The current strategic asset benchmarks for the Group are
detailed in the following table:
Benchmark
holding
2016
Actual
holding
2016
Benchmark
holding
2015
Actual
holding
2015
Investment-grade
58.0%
59.1%
54.0%
59.5%
At 31 December
credit
High yield
Investment-grade
private placements
Credit
Securitised credit
Sovereign
Infrastructure debt
Commercial real
estate loans
Cash and cash
equivalents
Total debt securities
76.0%
71.8%
78.0%
76.2%
6.0%
4.0%
6.2%
1.3%
6.0%
4.0%
4.8%
0.2%
68.0%
66.6%
64.0%
64.5%
−
−
8.0%
5.2%
6.0%
3.0%
5.1%
1.2%
5.0%
9.0%
6.0%
3.0%
5.2%
6.5%
4.8%
−
9.0%
16.9%
7.0%
13.9%
Investment property
6.0%
5.0%
6.0%
5.1%
Total
100.0% 100.0% 100.0% 100.0%
£5.4 million).
Decisions were taken to exit securitised credit during
Q3 2016. In addition the Group sold two investment
properties in 2016.
In 2016, the Group delivered a robust investment result
against a background of increased financial market
uncertainties and further yield compression for much of the
year. Investment in three new mandates commenced, with
two fully funded to benchmark holdings (subordinated financial
debt and global credit). The commercial real estate loans
mandate is expected to be fully funded to its benchmark
holding by the end of 2017.
Investment risk is, in part, mitigated by the following
characteristics of 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 generally permit any debt securities
to be held below B–.
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. The
portfolio is weighted heavily towards social infrastructure
with 89% of the year-end portfolio invested in projects
across this sector (36% in healthcare, 48% in education
and 5% in other).
The investment property portfolio consists presently of 24
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.
Derivatives are permitted only for risk mitigation and
efficient portfolio management within the investment portfolio.
Derivatives used include interest rate swaps, for example to
hedge exposure to US Dollar interest rate movements, and
forward currency contracts to hedge assets denominated in
foreign currency back to Sterling. Separately, interest rate
swaps have also been used to change the interest rate liability
on the Group’s debt issuance to a floating rate basis.
Investment holdings and yields – total Group
£m
Investment-grade credit2
High yield
Private placements
Credit
Securitised credit2,3
Sovereign2
Total debt securities
Infrastructure
Commercial real estate loans
Cash4
Investment property
Total Group
Capital management
Capital management policy
The Group seeks to manage its capital efficiently, maintaining
an appropriate level of capitalisation and solvency, while
aiming to grow its regular dividend annually in real terms.
As has been its practice, where the Board believes the Group
has capital which is expected to be surplus to the Group’s
requirements for a prolonged period, it would intend to return
the excess to shareholders.
In future, the Board has decided that in the normal course
of events it will consider whether or not it is appropriate to
pay a special dividend only once a year, alongside the full
year results. In doing this, the Group will harmonise its major
capital management decisions with its planning process and
its full-year earnings.
Solvency II
Solvency II is the new solvency framework implemented on
1 January 2016 as the capital adequacy regime for the
European insurance industry. It established a set of EU-wide
capital requirements and risk management standards with the
aim of increasing protection for policyholders. The Group is
regulated by the PRA on both a Group basis and, for the
Group’s principal underwriter, U K Insurance Limited (“UKI”),
on a solo basis.
At 1 January 2016, the Group (including UKI) assessed its
capital requirements using the standard formula. UKI had its
IECM approved for use by the PRA in June 2016, and this
now forms part of a Group-wide PIM, which has been in use
from the same date.
2016
2015
Allocation
3,888.3
409.9
85.1
4,383.3
–
341.2
4,724.5
337.0
79.7
1,110.8
329.0
6,581.0
Income
104.9
17.8
1.4
124.1
3.5
8.9
136.5
7.8
1.0
4.2
18.4
167.9
Yield
2.6%
4.8%
2.9%
2.8%
2.0%
2.3%
2.8%
2.4%
2.6%
0.4%
5.1%
2.5%
Allocation
4,060.0
327.4
13.5
4,400.9
350.8
442.7
5,194.4
329.6
–
947.3
347.4
6,818.7
Income1
108.7
12.6
0.1
121.4
6.0
12.7
140.1
4.4
–
6.7
17.9
169.1
Yield
2.7%
4.0%
2.0%
2.8%
1.6%
1.8%
2.6%
2.2%
–
0.8%
5.4%
2.4%
The Board has considered the risk appetite range of the Group
under its Solvency II PIM and considers that the appropriate
range, which should enable it to meet its operational,
regulatory and rating agency requirements, is 140% to 180%
of its SCR.
In its results, the Group has estimated its Solvency II own
funds, SCR and Solvency II capital coverage ratio as at
31 December 2016. The Group will formally submit its final
Solvency II Solvency Financial Condition Report (“SFCR”)
in May 2017 to the PRA, and expects to continue to update
the assumptions and implement model changes until then.
Therefore, the final estimates may differ from those presented
in this report.
Solvency ratio sensitivity analysis
The following table shows the Group’s solvency ratio
sensitivities estimated based on assessed impact of scenarios
as at 31 December 2016.
Scenario
Motor premium rate reduction of 10%
One-off catastrophe loss equivalent to the
1990 storm
One-off catastrophe loss based on extensive
flooding of the River Thames
100bps increase in credit spreads
100bps decrease in interest rates
Impact on
solvency ratio
(14 pts)
(9 pts)
(9 pts)
(8 pts)
(7 pts)
44 Direct Line Group Annual Report & Accounts 2016
www.directlinegroup.com 45
45
Notes:
1. Investment income for the year ended 31 December 2015 relates to continuing operations
2. Asset allocation at 31 December 2016 includes investment portfolio derivatives, which have been netted and have a mark-to-market liability value of £5.8 million
included in investment grade credit (31 December 2015: mark-to-market liability value of £45.7 million of which £40.4 million included in investment grade
credit and £5.3 million in securitised credit). This excludes derivatives that have been used to hedge interest on subordinated debt and operational cash flows
3. Securitised credit was disposed of during 2016
4. Net of bank overdrafts, includes cash at bank and in hand and money market funds with no notice period for withdrawal (31 December 2015: also included
money market funds with maturities greater than three months
www.directlinegroup.comStrategic reportGovernanceFinancial statements
31 December
2016
30 June
2016
Movement in own funds
Finance review continued
Capital position
At 31 December 2016, the Group held a Solvency II capital
surplus of approximately £0.92 billion above its regulatory
capital requirements. This was equivalent to an estimated capital
coverage ratio of 165%, post-dividend. Excluding the impact of
the recent reduction in the Ogden discount rate to minus 0.75%,
the capital coverage ratio would have been approximately
189% post-dividend. Other than the effects of the Ogden
discount rate change, which increased the SCR by £0.08
billion, the SCR remained largely stable in the second half of
2016, since the Group was approved to use its PIM. In the first
half of 2016, the Group’s SCR fell from £1.68 billion to £1.37
billion, largely as a result of the transition from the standard
formula to the PIM. The SCR calculation fully recognises the new
Ogden discount rate of minus 0.75%, but does not take into
account any implications of uncertainty around the future rate.
The Group’s capital coverage is as follows:
At
Solvency capital requirement
(£ billion)
Capital surplus above solvency
capital requirement (£ billion)
Capital coverage ratio post-
dividend
1.42
0.92
1.37
1.14
165%
184%
The following table splits the Group’s own funds by tier on a
Solvency II basis.
At
Tier 1 capital before foreseeable
dividends
Foreseeable dividends
Tier 1 capital
Tier 2 capital
Tier 3 capital
Own funds
31 December
2016
£bn
1.81
(0.13)
1.68
0.62
0.04
2.34
30 June
2016
£bn
2.04
(0.20)
1.84
0.60
0.07
2.51
Tier 1 capital after foreseeable dividends represents
approximately 72% of own funds and 118% of the Group’s
estimated SCR. Tier 2 capital relates solely to the Group’s
subordinated debt issued in 2012, which has a market value
of £0.62 billion. The Group also recognises a deferred
tax asset of £0.04 billion as Tier 3 capital. Therefore, the
Group’s Tier 2 and 3 capital is within the limits established
by Solvency II of up to 50% of the SCR in Tier 2 and 3
combined, and 15% for Tier 3 alone.
Note:
1. Total financial debt as a percentage of total capital employed
46
46 Direct Line Group Annual Report & Accounts 2016
(0.20)
(0.20)
1.84
0.60
0.07
2.51
2016
£bn
2.47
(0.09)
(0.19)
0.12
0.49
(0.12)
(0.34)
2.34
Reconciliation of IFRS shareholders’ equity to
Solvency II own funds
At
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
Tier 3 capital
Own funds
31 December
2016
£bn
2.52
(0.51)
30 June
2016
£bn
2.67
(0.54)
(0.04)
0.11
(0.16)
(0.13)
1.68
0.62
0.04
2.34
Own funds as at 1 January 2016
Change in risk margin from Group standard
formula basis to Group PIM at 1 January 2016
Ogden discount rate impact
Mark to market movement
Capital generation
Capital expenditure
Capital distribution
Own funds as at 31 December 2016
During 2016, the Group’s own funds reduced from £2.47
billion to £2.34 billion. The Group generated £0.49 billion
of Solvency II capital, excluding the effects of the Ogden
discount rate change, offset by £0.12 billion of capital
expenditure and capital distribution of £0.34 billion, including
the 2016 interim and final ordinary dividends and special
interim dividends. Mark to market gains, as lower interest rates
and credit spread tightening increased the value of the bond
portfolio, were offset by a change in the basis of the risk
margin calculation following approval of the Group’s PIM.
Leverage
At 31 December
Shareholders’ equity
Financial debt subordinated
guaranteed dated notes
Total capital employed
Financial-leverage ratio1
2016
£m
2015
£m
2,521.5
2,630.0
539.6
3,061.1
17.6%
521.1
3,151.1
16.5%
The Group’s leverage continues to be conservative. During
2016, the leverage increased from 16.5% to 17.6% due
primarily to the increase in value of the subordinated
guaranteed dated notes and a reduction in shareholders’
equity, following the reduction in the Ogden discount rate.
Direct Line Group Annual Report & Accounts 2016
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.
Outlook
The Group’s markets were highly competitive and faced
a number of significant government policy and regulatory
changes during 2016 and in early 2017. In the face of these
challenges, the Group demonstrated both its resilience and its
appeal to customers by growing its own brands policies while
maintaining overall margins, which has continued into early
2017. The Group does not expect any material residual
impact on 2017 profit as a result of adopting the reduction
in the Ogden discount rate to minus 0.75%.
The Group aims to reduce its expense ratio during 2017,
absorbing its investment in future capability. The Group also
aims to deliver a lower commission ratio during 2017,
normalised for major weather events: this will in part reflect
changes in its distribution channel mix. Over the longer term,
the Group aims to achieve further reductions in both the
expense and commission ratios.
For 2017, the Group targets achieving a COR in the range
of 93% to 95% for Ongoing operations, assuming a normal
annual level of claims from major weather events and no
further change to the Ogden discount rate. In addition, the
Group reiterates its ongoing target of achieving at least a
15% RoTE.
BStatement of the Directors in respect of the Strategic report
The Board reviewed and approved the Strategic report on pages 1 to 47 on 6 March 2017.
By order of the Board
Paul Geddes
Chief Executive Officer
6 March 2017
John Reizenstein
Chief Financial Officer
6 March 2017
www.directlinegroup.com 47
47
www.directlinegroup.comStrategic reportGovernanceFinancial statements
0
Chairman’s introduction
Corporate
Governance
The Board recognises the
importance of succession
planning and understands
the need to have leaders
who reflect the Group’s
culture and values.
Mike Biggs
Chairman
Dear shareholders and other
stakeholders
Our commitment to good corporate governance
On behalf of the Board, I am pleased to present the Corporate
Governance report for the year ended 31 December 2016.
A major focus of the Board and mine as Chairman continues
to be on maintaining high standards of corporate governance,
which we seek to achieve through the Group’s robust
governance arrangements.
The Corporate Governance report sets out the Direct Line
Group framework, which we believe enables effective decision
making and management of the risks in the markets in which
we operate. Matters Reserved for the Board and the role of
the Board’s Committees are core elements of this framework.
The Corporate Governance and Committee reports highlight
the areas of focus, challenge and supervision for the Board
and its Committees during 2016.
Succession planning and Board changes
Succession planning has been an area of focus for the Board
in 2016. The Board recognises the importance of succession
planning and understands the need to have leaders who reflect
the Group’s culture and values. Gender diversity is also
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.
considered an important matter by the Board and its
Nomination Committee. The Board has female representation
of 30% and the Board remains committed to improving this
position when the appropriate opportunity arises.
During 2016, the Nomination Committee reviewed the Board’s
expertise and experience and engaged an external consultant
in the search for new candidates. The Board’s Nomination
Committee oversaw the selection and appointment of Richard
Ward as Senior Independent Director. Following Priscilla
Vacassin’s retirement from the Board in March 2016, a number
of changes were made to the chairmanship and membership of
the Board’s Committees. I am pleased to report that Danuta Gray
was appointed as a Non-Executive Director and Mike Holliday-
Williams was appointed as an Executive Director on 1 February
2017. Having previously held executive and non-executive roles
in a number of sectors, including financial services, Danuta brings
vast experience to the Board whilst Mike’s appointment reflects
the importance of the Personal Lines business to the Group.
The Nomination Committee report on page 76 contains further
information on the Board’s approach to succession planning and
Board and Committee changes.
Effectiveness and Evaluation
As Chairman, my objective is to develop and lead an effective
Board for the benefit of our shareholders. In 2014 and 2015,
we evaluated the performance of the Board and its
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 is intolerant of any type of
discrimination, harassment
or victimisation.
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Direct Line Group Annual Report & Accounts 2016
Committees internally. During 2016, our Board evaluation
was externally facilitated by Professor Rob Goffee of London
Business School. The review focused on the Board’s role and
composition; the relevance, flow and quality of information,
and the Non-Executive Directors’ balance of knowledge, skills
and expertise. The findings have equipped us to continue to
improve the leadership of the Group. You can find further
details on page 59.
Executive Remuneration
The debate in the UK over Executive remuneration remains a
valid topic for discussion and continuous evaluation. The Group’s
remuneration policy remains aligned with our strategic priorities
and the interests of our shareholders. As required by legislation,
the policy will be put forward for adoption by shareholders at our
forthcoming AGM. Details of the consultation process undertaken
by the Remuneration Committee can be reviewed on page 80
and the revised remuneration policy proposed is detailed on
pages 100 to 109.
UK Corporate Governance Code
The Board is committed to the principles of the UK Corporate
Governance Code issued by the Financial Reporting Council
(the “Code”). I am pleased to report that we have complied
with all of the principles of the 2014 edition of the Code
which applied to the financial year under review. You can
find further explanation and details on pages 53 to 63.
Culture and values
The Board is responsible for securing the long-term success
of the Group. The Board aims to deliver this success by creating
an open culture that encourages the Group to make decisions
that are best for our stakeholders. I believe that the values and
the Code of Business Conduct set by the Board are central to
the Group’s culture. Our Code of Business Conduct governs the
way we treat our stakeholders, and our values determine our
behaviours. Together, these elements reflect the way we do
business with the objectives of delivering long-term sustainable
shareholder value and of ensuring our Group’s long-term success.
Our shareholders
Communication with shareholders is extremely important to us.
By maintaining dialogue with you, we aim to ensure that your
concerns are met and our objectives are understood. I would
like to thank you for your support and look forward to
discussing the Group’s progress with you at our forthcoming
AGM on 11 May 2017.
Yours sincerely
Michael N Biggs
Chairman
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 functions; leverage the
skills, knowledge and experience, irrespective of hierarchy,
to deliver the best possible results; develop relationships based
on 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 perform;
take responsibility for your personal development
and performance.
Say it like it is
Be real, authentic and true to yourself; have adult-to-adult
conversations with all audiences; listen, seek to understand
and respect diversity of views; be open, call out issues we
see; share information and keep things as simple as possible.
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 a ‘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.
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 will compete fairly and
honestly and in accordance
with all applicable
competition laws.
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.
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Board of Directors
Mike Biggs,
Chairman of the Board
(appointed April 2012)
N R
External appointments
Danuta is interim Chairman of Aldermore Group plc, a Non-Executive
Director and Chairman of the Remuneration Committee of PageGroup
plc, a Non-Executive Director and Chairman of the Remuneration
Committee of Old Mutual plc, a Non-Executive Director of PaddyPower
Betfair plc and a Non-Executive Member of the Defence Board of the
UK Ministry of Defence.
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.
Mike was previously Chairman of Resolution, then a FTSE 100 UK
life assurance business, and has acted as Chief Executive Officer and
Group Finance Director of Resolution plc. He was previously Group
Finance Director of Aviva plc. He is an Associate of the Institute of
Chartered Accountants in England and Wales.
External appointments
None.
Paul Geddes,
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.
External appointments
Paul is the Deputy Chairman of the Association of British Insurers Board
and a Non-Executive Director of Channel Four Television Corporation.
Danuta Gray,
Independent NED
(appointed February 2017)
R
Biography
Danuta was Chairman of Telefónica O2 in Ireland until December
2012, having previously been its Chief Executive from 2001 to
2010. During her nine year tenure as Chief Executive, she increased
the customer base from just under 1 million to over 1.7 million. Prior to
Telefónica O2, Danuta held various senior positions within BT Group
from 1984 to 2001.
Jane Hanson,
Independent NED
(appointed December 2011)
A
B C I
Biography
Jane is Chair of the Board Risk Committee. She has extensive
experience of risk management, corporate governance and internal
control. She also has wide experience in developing and monitoring
customer and conduct risk frameworks.
She spent her early career with KPMG, working in the financial sector,
later becoming responsible for delivering corporate governance,
internal audit and risk-management services in the north of England.
Jane has also held a number of executive roles, including Director of
Audit, and Risk and Governance Director at Aviva’s UK Life business.
She is a Fellow of the Institute of Chartered Accountants in England
and Wales.
External appointments
Jane is Chair of Reclaim Fund Ltd and an Independent Member of the
Fairness Committee at ReAssure Ltd. She has her own financial sector
consulting business and is also a magistrate.
Mike Holliday-Williams,
Managing Director, Personal Lines
(appointed February 2017)
Experience and qualifications
Mike is Managing Director, Personal Lines. He joined Direct Line
in 2014 and has over 10 years’ insurance industry experience. He
was previously Chief Executive Officer of RSA Group’s Scandinavian
businesses, Codan A/S and Trygg-Hansa, and before that UK
Managing Director of Personal Lines at RSA, responsible for the
MORETH>N, Partnerships and the Broker businesses. Before joining
RSA, Mike had many general management, marketing and customer
growth roles across several industries including 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.
External appointments
Mike is a member of the Association of British Insurers General
Insurance Council.
Key for Committee membership:
A
B
C
Audit Committee
Board Risk Committee
CSR Committee
I
N
R
Investment Committee
Nomination Committee
Remuneration Committee
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Sebastian James,
Independent NED
(appointed August 2014)
Clare Thompson,
Independent NED
(appointed September 2012)
C R
A
R
Biography
Sebastian is Chair of the Corporate Social Responsibility Committee.
He has extensive experience in retail and consumer practice at large
groups; and has a detailed understanding of the UK consumer markets,
products and brands. Sebastian was previously 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.
Biography
Clare is Chair of the Remuneration Committee. She has extensive
experience and knowledge of people and remuneration gained
from her roles at PwC. These included People Partner for Assurance
which focused on talent management and career development
planning, as well as involvement in the design and operation of
remuneration structures across PwC UK. She also has significant
financial and audit experience.
External appointments
Sebastian is Group Chief Executive of Dixons Carphone plc and
is also a trustee of the charities Save the Children and The DSG
International Foundation.
Clare was a partner at PwC from 1988 to 2011. During her 23
years as a partner, she held several senior and high-profile roles,
particularly in the insurance sector. She is a Fellow of the Institute
of Chartered Accountants in England and Wales.
Andrew Palmer,
Independent NED
(appointed March 2011)
A
B
I N R
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.
Dr Richard Ward,
Independent NED and SID
(appointed January 2016)
B N
Biography
Dr Richard Ward is Senior Independent Director. He 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, the second largest energy trading exchange,
re-branded ICE Futures, as both Chief Executive Officer and Vice-
Chairman. He has extensive insurance industry experience and insight
into prudential regulation.
Prior to the International Petroleum Exchange, 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.
External appointments
Richard is Executive Chairman of Cunningham Lindsey and
Non-Executive Chairman of Brit Syndicates Ltd. He also serves
as a member of the PRA Practitioner Panel, Bank of England.
Gender diversity of Board of Directors
Male 7
Female 3
Biography
Andrew is Chair of the Audit Committee and Investment Committee
and was Senior Independent Director until 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. 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 Non-Executive Director of Royal London Mutual Insurance
Society Limited and Royal London Asset Management Limited.
He is also a member of the Financial Reporting Review Panel of
the Financial Reporting Council, a Trustee of the Royal School of
Needlework and a Trustee and Treasurer of Cancer Research UK.
John Reizenstein,
Chief Financial Officer
(appointed December 2010)
Biography
John is Chief Financial Officer. He has extensive City and financial
services experience, spending more than 20 years in investment
banking with UBS and Goldman Sachs.
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.
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.
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Executive Committee
Paul Geddes chairs the Executive Committee. In addition to Paul Geddes, Mike Holliday-Williams and John Reizenstein, the committee comprises
the following:
Jonathan Greenwood,
Managing Director of Commercial
(joined 2000)
Humphrey Tomlinson,
General Counsel
(joined 2011)
Experience and qualifications
Jonathan has previously held roles at HBOS, MBNA and Pinnacle
and has over 30 years’ insurance and financial services industry
experience. He joined the Group 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.
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.
Simon Linares,
Group Human Resources Director
(joined 2014)
C
José Vazquez,
Chief Risk Officer
(joined 2012)
Experience and qualifications
Simon 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
José was previously Global Chief Risk Officer and Group Chief
Actuary at HSBC Insurance. Before joining HSBC, José worked for
Zurich Insurance, first in its London Market Operations, then as Chief
Actuary International Business Division (Asia, Latin America and Africa)
and lastly as Chief Actuary in the UK. José is a Mathematics graduate
from Brunel University and a Fellow of the Institute of Actuaries.
Steve Maddock,
Chief Operating Officer
(joined 2010)
Experience and qualifications
Steve was previously 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. He became Chief Operating Officer
in 2016, having previously been the Managing Director of Claims,
Business Services and Technology Services. Steve holds an MBA
from the University of Reading, and is Chairman of the Motor Insurers’
Bureau and Insurance Database Services Limited.
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Corporate governance report
This report explains the Board’s role and activities, and
how corporate governance operates throughout the Group.
The UK Corporate Governance Code
Direct Line Insurance Group plc (the “Company”) has complied
with all of the principles and provisions of the 2014 UK
Corporate Governance Code (the “Code”) throughout the
financial year.
The only exception is the recommendation contained in
Provision E.1.1 of the Code that the Senior Independent
Director (”SID”) should attend sufficient meetings with major
shareholders to listen to their views. Throughout 2016, the
Board received regular updates from the Company’s corporate
brokers on the views of its institutional shareholders and, in
addition, the Investor Relations team provided regular updates
to the Board. The Chairman, Chief Executive Officer (“CEO”)
and the Chief Financial Officer (“CFO”) met with key
shareholders following announcements of results and reported
shareholders’ views back to the Board. On this basis the
Board is satisfied that it understands the views of shareholders,
and major shareholders have been invited to meet with the
SID should they wish to do so. It is open to all shareholders to
raise any issues they wish with the Chairman, the SID and the
Chair of the Remuneration Committee. The Board has therefore
concluded that it has complied with the main and supporting
principles under section E.1 of the Code regarding dialogue
with shareholders.
Further details of how the Company applied the Code’s
principles and complied with its provisions can be found
on the following pages of this report and the Directors’
remuneration report:
Leadership – page 53
Effectiveness – page 56
Accountability – page 61
Remuneration – page 63
Relations with shareholders – page 63
For more information about the Code, visit the Financial
Reporting Council’s website at www.frc.org.uk
Leadership
The Board
The Board has a collective objective of promoting the long-term
success of the Company for its shareholders and provides
leadership of the Company. The main role of the Board is to
organise and direct the Group’s affairs in a way that is most
likely to help it succeed in the long-term for the benefit of
shareholders as a whole. The Board supervises the Group’s
operations, with the objectives of ensuring that they are
effectively managed, that prudent controls are in place,
and that risks are assessed and managed appropriately.
In addition, it also sets the Group’s strategy, and monitors
management’s performance and progress against the
strategic aims and objectives. The Board also develops and
promotes the collective vision of the Group’s purpose, culture,
values and behaviours.
Board composition
As at the date of this report, the Board comprised the
Chairman, who was independent when appointed to the
Board; the CEO; CFO; the Managing Director of Personal
Lines; and six independent Non-Executive Directors (“NEDs”),
including the SID. The current Directors served throughout
all of 2016, except for Richard Ward, who was appointed
on 18 January 2016 and Danuta Gray and Mike Holliday-
Williams who were appointed on 1 February 2017.
Priscilla Vacassin retired from the Board on 1 March 2016.
You can find the names of the current Directors of the
Company as at the date of this report and their biographical
information on pages 50 and 51.
Meetings
The Board held nine scheduled meetings in 2016.
The Company Secretary attended all Board meetings.
At its discretion, the Board invited senior executives and
external advisers to attend Board meetings, and to present
on business developments and governance matters.
The table below sets out attendance at the scheduled meetings
in 2016:
Chairman
Mike Biggs
Senior Independent Director
Richard Ward
Non-Executive Directors
Jane Hanson
Sebastian James
Andrew Palmer
Clare Thompson
Priscilla Vacassin1
Executive Directors
Paul Geddes
John Reizenstein
Note:
Scheduled
meetings1
Percentage
attendance
9 of 9
100%
9 of 9
100%
9 of 9
9 of 9
9 of 9
9 of 9
2 of 2
9 of 9
9 of 9
100%
100%
100%
100%
100%
100%
100%
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 Board also held seven additional meetings. The additional
meetings were ad hoc or Board sub-committee meetings,
including meetings to receive recommendations from the
Nomination Committee on Board and Committee changes,
and strategic matters. The Board also held an annual strategy
day in June 2016.
Structure of the Board
The diagrams on the following page summarise the
responsibilities of the Chairman, the CEO, the Board and the
Board Committees. The Board has established six Committees
to help discharge its responsibilities. Each Committee plays
a vital role in helping to ensure the Board operates efficiently
and considers matters appropriately. Further details on the roles
and responsibilities of the Board Committees, along with the
activities undertaken during the period, are contained in the
Committee reports on pages 64 to 81.
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Corporate governance report continued
Board
Mike Biggs, Chairman
Organises and directs the Group’s affairs in a way that is believed most likely to help it succeed in the long-term for the benefit of shareholders as a whole.
Supervises the Group’s operations, helping to ensure it is effectively managed, that prudent controls are in place, and that risks are assessed and managed
appropriately.
Sets the Group’s strategy, and monitors management’s performance and progress against the strategic aims and objectives.
Approves the terms of reference for the Board Committees and, where appropriate, reviews and agrees their recommendations.
Audit Committee
Andrew Palmer,
Chair
Maintains the
integrity of the
Group’s financial
statements.
Oversees and
challenges the
effectiveness of the
Group’s systems of
financial and other
controls.
Monitors the work
and effectiveness of
the Group’s internal
and external
auditors and
actuaries.
Board Risk Committee
Jane Hanson,
Chair
CSR Committee
Sebastian James,
Chair
Investment Committee
Andrew Palmer,
Chair
Nomination
Committee
Mike Biggs, Chair
Provides oversight
of how the Group
develops its
investment strategy.
Oversees the
management and
performance of the
Group’s investment
portfolio.
Oversees and
Provides oversight
advises the Board
on the Group’s
current and potential
future risk exposures,
and its strategic
approach to
managing risk.
Recommends risk
appetite and
tolerance levels to
the Board and
supports the Board
in promoting a risk-
aware culture across
the Group.
and advice on how
the Group conducts
its business
responsibly,
including matters
relating to
environmental,
employee
engagement and
wellbeing,
community
involvement, and
ethics.
Reviews the Board’s
structure, size,
composition, and
balance of skills,
experience,
independence and
expertise.
Leads the process
for Board
appointments and
makes
recommendations to
the Board.
Provides guidance
to management on
executive succession
planning.
Remuneration
Committee
Clare Thompson,
Chair
Sets and oversees
how the Group
implements its
remuneration policy.
Oversees the level
and structure of
remuneration
arrangements for
senior executives,
approves share
incentive plans, and
recommends them
to the Board and
shareholders.
More details can be
found on pages
64 to 67.
More details can be
found on pages
68 to 71.
More details can be
found on pages
72 to 73.
More details can be
found on pages
74 to 75.
More details can be
found on pages
76 to 78.
More details can be
found on pages
79 to 81.
The diagram below outlines the executive management structure.
Executive Committee
Paul Geddes, Chief Executive Officer
Sets performance targets.
Implements the Board-determined Group strategy and direction.
Monitors key objectives and commercial plans to help achieve the Group’s targets.
Evaluates new business initiatives and opportunities.
Considers reports on operational matters that are material to the Group or have cross business implications.
Managing Director
Commercial
Jon Greenwood
Managing
Director Personal
Lines
Mike Holliday-Williams
Chief Operating
Officer
Steve Maddock
Chief Risk Officer
Jose Vazquez
Chief Financial Officer
John Reizenstein
General Counsel
Humphrey Tomlinson
Group Human
Resources Director
Simon Linares
Biographical details of the Executive Directors and Executive Committee members are shown on pages 50 to 52.
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The Chief Executive Officer
The Board is ultimately responsible for the Company’s success. The Board has, however, authorised Paul Geddes, the CEO,
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.
Executive Committee
The Executive Committee is the principal management committee that helps the CEO manage the Group’s operations. It helps
him: set performance targets; implement the Board-determined Group strategy and direction; and monitor key objectives and
commercial plans to help achieve the Group’s targets. It also helps him evaluate new business initiatives and opportunities,
and considers reports on operational matters that are material to the Group or have cross business implications.
Non-Executive Directors
Each Director brings different skills, experience and knowledge to the Company, with the NEDs bringing additional independent
thought and judgement. All NEDs must be able to spend sufficient time in their roles to discharge their duties and responsibilities
effectively. The letters of appointment for the Chairman and NEDs 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 other NEDs depending
on business needs. The Nomination Committee reviews this time commitment, and each NED’s other commitments, annually.
An overview of the role and responsibilities of the Chairman, CEO, SID and the NEDs is set out in the table below:
Role
Chairman:
Chief Executive
Officer:
Senior Independent
Director:
Non-Executive
Directors:
Responsibilities
profiles for the Chairman, Mike Biggs, and
the CEO, Paul Geddes. These clearly define
their roles and responsibilities. This is to
ensure no one person has unlimited powers
of decision making.
} The Board has agreed individual role
Responsible for maintaining, developing and leading
an effective Board. Planning and managing the
Board’s business, presiding at Board meetings and
acting as figurehead for the Board.
Responsible for managing the Group, and delivering
the Group’s strategy and financial results. Certain
elements of his authority have been delegated to
Executive Committee members to help ensure that
senior executives are accountable and responsible
for managing their businesses and functions.
Acts as a sounding board for the Chairman and an intermediary for the other Directors when necessary.
Available to shareholders if they have any concerns they cannot resolve through normal channels. Leads
the Chairman’s performance evaluation annually.
Responsible for objectively and constructively challenging management. Use their wider business
experience to help develop the Group’s strategy. NEDs are initially appointed for a term of three years.
The Nomination Committee recommends potential new NEDs to the Board for appointment. The Board
then considers and approves each appointment. All Directors 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. Further details of NEDs letters of appointment are on page 108 of the
Directors’ remuneration report.
Information and support
All Directors can access assistance and advice from the Company Secretary. The Board is satisfied that it receives information
of appropriate quality and in a timely manner, to enable the Directors to discharge their duties. Directors may seek external
independent professional advice at the Company’s expense, if they need it to discharge their duties. The Company Secretary
attends all Board meetings and he or his nominated deputy attends all Board Committee meetings.
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Corporate governance report continued
Effectiveness
Matters Reserved for the Board
The Board recognises that to ensure the long-term success of the Company, certain specific matters should be reserved for the
consideration and decision of the Board either alone or following review and recommendation by its Committees. Other matters
are delegated by the Board to its Committees and to the Executive Directors. In addition to the Schedule of Matters Reserved,
each Board Committee has written terms of reference defining its role and the authority delegated to it by the Board. The
decisions specifically reserved for approval by the Board are set out in the Schedule of Matters Reserved for the Board, and are
summarised in the diagram below.
Strategy and management
Overall leadership of the Group and
setting the Company’s values and
standards.
Oversight of the Group’s operations.
The Group’s strategic aims and
objectives.
Annual operating and capital
expenditure budgets.
Material extension of the Group’s
activities into new business or
geographical areas.
Decisions to cease operation of any
material part of the Group’s business.
Contracts
Major capital projects, investments
and contracts that are either
materially strategic or above the
CEO’s delegated authority.
Financial reporting and
controls
Results announcements.
Dividend policy.
Accounting policies.
Reserving position.
Internal controls & risk
management
The internal controls and risk
management system, including the
Group’s Risk Appetite Statements.
Communication
Ensuring satisfactory dialogue with
shareholders.
Arrangements for Annual and other
General Meetings.
Matters Reserved
for the Board
Board membership and other
appointments
Appointment and removal of Directors,
SID, CEO, Company Secretary and
Chief Risk Officer.
Selection of the Chairman.
Succession planning for the Board and
senior executives.
Corporate governance
matters
The Group’s corporate governance
and regulatory compliance
frameworks.
Structure and capital
Changes to the Company’s capital
structure and debt securities structure.
Major changes to the Group’s
corporate structure, including material
acquisitions and disposals of shares.
Changes to the Company’s listing or
plc status.
Delegation of authority
Division of responsibilities between
the Chairman and Chief Executive.
Delegated levels of authority to
Executive Directors.
Establishment of Board Committees.
Remuneration
Chairman and NED remuneration.
Remuneration policy.
Introduction of new share incentive
plans or major changes to existing
plans, for approval by shareholders.
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56 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Board activities during 2016
The activities undertaken by the Board in 2016 to promote
the long-term success of the Company are focused on its role
as the leadership and decision forum for the Group.
Scheduled Board meeting discussions are focused on four
main themes:
Strategy & execution, including: setting the Group’s key
strategic targets and monitoring the Group’s performance
against those targets; reviewing customer experience and
monitoring the Group performance against external brand
metrics; reviewing and approving key projects aimed at
developing the business or rationalising costs; reviewing the
approach to mergers and acquisitions; and reviewing the
individual strategy of key business lines.
Financial performance and investor relations, including:
setting financial plans, annual budgets and key performance
indicators (“KPIs”), and monitoring the Group’s results against
them; considering the Group’s reserving position; approving
financial results for publication; agreeing the Group’s dividend
policy; and reviewing broker reports on the Group alongside
feedback from investor meetings.
Risk management, regulatory and other related
governance, including: reviewing and agreeing the Group’s
Policies; setting risk appetites; approving the Own Risk &
Solvency Assessment (“ORSA”); approving major changes
to the Group’s internal model and seeking to ensure that the
Group complies with all regulatory requirements.
Board & Board Committee governance, including: receiving
reports from the Board’s Committees; updating terms of
references for the Committees; and implementing an annual
review of Board and Committees’ effectiveness.
The co-ordination of the Board meeting content is managed
by the Chairman, supported by the CEO and Company
Secretary, primarily using a forward agenda planner.
In addition to routine business the Board considers and
discusses key issues that impact on the business as they arise.
The chart below details some of the specific topics discussed
during 2016:
February
Review of Group
strategy
Review of year-end
reserves
ORSA
Dividend policy
March
Review of Motor
strategy
Reviewed progress
of IMAP application
Discussed talent
management and
succession planning
June
Outputs from Board
strategy day
Review of Solvency II
Risk Appetite
Investor Relations
update
July
Compliance with
Market Abuse
Regulation
People strategy
update
Solvency II capital
generation
Half Year report
November
Preliminary financial
plan 2016-2020
December
Personal Lines
strategy update
Approval of
Strategic Plan
Motor reinsurance
renewal
January
Review of Group’s
response to recent
flooding
Consideration of
results of employee
opinion survey
2015 Board
Effectiveness Review
April
Review of
Commercial
strategy
Approval of
catastrophe
reinsurance
arrangements
Update on Group’s
investment portfolio
September
Update on
implementation of
the next generation
of customer systems
Update on CSR
initiative regarding
young drivers
(Shotgun)
Modern Slavery Act
The CEO and CFO spend a considerable amount of time
with the different business units ensuring that the Board’s aims
are being correctly disseminated throughout the Group, and
that colleagues’ views and opinions are reported back to the
Board. In addition the NEDs meet with key management
outside of the Board and Committee fora to get a wider view
of the Group’s activities.
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A similar programme has been put together for Mike Holliday-
Williams, MD Personal Lines, who has recently been
appointed as an Executive Director. This programme will focus
on his duties and responsibilities as a Director of the Company
and corporate governance matters.
The main Board training and development activities in the year
under review included:
Training on topics including: Solvency II matters; the
Group’s investment risk appetite; cyber risk and security;
PPOs, complaints handling; and marketing and branding.
NED visits to operational business units to meet the
management teams and better understand how the business
operates. These included visits to Claims, Fraud and Legal
Services teams in Leeds and Bromley, the Group’s UK
Assistance Accident and Repair Centres in Manchester,
to the offices of The Floow in Sheffield and the offices
of EXL (the Group’s principal offshore business processing
services provider).
Internal training workshops on: the Senior Insurance
Managers Regime; anti-bribery and corruption and
competition law; the Group’s IECM; and the application
of the pricing actuarial basis for Personal Lines Motor.
Regular updates from the Company Secretary on
corporate governance.
Quarterly industry and market updates from the Group’s
brokers and financial advisers.
Regular reports from the Investor Relations team regarding
institutional investors and analysts.
Corporate governance report continued
Board induction, resources and training
The Board is committed to training and developing all Directors
and employees. The Company Secretary is responsible for
helping the Chairman regularly review and organise training
for the Directors. The Company Secretary also maintains an
annual training agenda for the Board and its Committees.
In order for our Directors, particularly the NEDs, to discharge
their responsibilities, it is essential that they understand our
business. The diagram below illustrates the various ways
in which the Directors’ understanding and knowledge of the
business and the regulatory environment in which it operates
is enhanced.
Tailored
induction
Meeting
our people
Divisional
and functional
reviews
Investor
roadshow
feedback
Getting
to know
the business
Site visits
Deep dive
sessions and
management
presentations
Regular briefings
on governance,
legal and
regulatory
matters
Board
and Committee
meetings
Strategy
days
Richard Ward undertook a tailored induction programme
during 2016 which was disclosed in the 2015 Annual Report
and Accounts.
A tailored induction programme has been prepared for Danuta
Gray, a recently appointed NED. The programme will focus
on the Group’s businesses, strategic and transformational
priorities, regulatory and governance frameworks, capital and
financial management, and risk framework.
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Direct Line Group Annual Report & Accounts 2016
Board effectiveness review
In accordance with the principles and provisions of the Code, the Board’s intended practice is to conduct a thorough review of the
effectiveness of the performance of the Directors, the Board as a whole and its Committees on an annual basis, with the input of an
external facilitator at least once every three years. The 2016 Board effectiveness review was facilitated by an external consultant,
Professor Rob Goffee of London Business School, who is independent and has no other connection with the Company.
The 2016 process commenced with the Nomination Committee planning the scope of the evaluation. The Committee considered
a shortlist of external evaluators for approval by the Board. The selected evaluator discussed the process with the Chairman and
the Company Secretary and agreed the questions to be put to Board members and a number of executives who regularly attend
Board and/or Committee meetings.
All of the Company’s Executive and Non-Executive Directors, the Company Secretary and the other respondents completed
a questionnaire and then held one-to-one interviews with the facilitator. Professor Goffee discussed his report initially with the
Chairman and Company Secretary and presented it to the Board in January 2017.
The review focused on:
Role & organisation
Agenda
Corporate Governance
Non-Executive &
Executive Directors
Information
Group performance
Leadership & culture
The role of the Board, including Board and Committee structure and composition; the number
and frequency of meetings; and Directors’ responsibilities.
The relevance of agenda items; Directors’ ability to influence agenda content; and how much
time is allocated to strategic issues and corporate performance.
Corporate governance matters relating to: Director appointments; the operation of the Board;
and the guidance provided to Directors.
Directors’ expertise and experience; training; the behaviour of, and interaction between, the
Non-Executive and Executive Directors; Non-Executive Directors’ time commitment; and access
to key executives below Board level.
The flow of information, including: the quality and sufficiency of reports; access to external
advice; induction and understanding of the Group’s businesses; and volume and timeliness of
paper submission.
The Board’s contribution to the Group’s strategic direction; and the procedures for approving,
and monitoring the Group’s performance against, the approved strategic objectives.
The Board’s environment and culture, including: working relationships; succession planning;
and leadership of the Board, including Board meeting management.
The findings of the effectiveness review were discussed by the Board as a whole in January 2017.
Based on the responses to the questionnaire and resulting reports, the Directors are satisfied that the Board and its Committees
operated effectively in 2016. The Directors are also satisfied that they made significant progress in areas for potential
improvement identified in 2015.
Whilst the findings of Professor Goffee’s report were positive, the Board will focus during 2017 on a number of areas with
the objective of improving its, and its Committees’, effectiveness. These include: making better use of Non-Executive Directors’
expertise in the strategic planning cycle; refreshing the Board’s skills and experience through Board succession planning; and
enhancing the Board’s approach to monitoring major business initiatives.
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Corporate governance report continued
Governance framework and structure
The Board is responsible for ensuring there is an appropriate
system of governance in operation throughout the Group.
This includes a robust system of internal controls and a sound
risk management framework. The Board has established
a risk management model that separates the Group’s risk
management responsibilities into three lines of defence.
The Group’s governance framework is detailed in the
High Level Control and System of Governance Framework
document. The Board reviews this document annually.
The core elements of the Governance Framework are the:
Matters Reserved for the Board and the Board Committees’
Terms of Reference.
Regulatory Governance Map.
Risk Appetite Statements.
Enterprise Risk Management Strategy and Framework. This
sets out the Group’s approach to setting risk strategy and for
managing risks to the strategic objectives and day-to-day
operations of the business.
Executive Governance Framework, which outlines how
each business function is governed and details the authority
delegated to Executive Committee members.
Group Policies.
Minimum Standards, which interpret the Group Policies into
a set of operational requirements that can be implemented
throughout the Group.
The diagram below summarises the split of responsibilities for the different parts of the Group’s governance framework.
Board approves
High level governance framework,
Risk Appetite, Group Policies and
Regulatory Governance Map are
set by the Board, following review
by the Board Risk Committee.
Matters Reserved for
the Board and Board
Committees’
Terms of Reference
High Level Control and System of
Governance document
Regulatory
Governance Map
Risk Appetite
Board Risk
Committee approves
Enterprise Risk Management Strategy
and Framework is approved by the
Board Risk Committee, following
review by the Risk Management
Committee (a committee comprised
of Executives).
Risk Management
Committee approves
The Executive Governance
Framework is developed by
Executives and approved by
the Risk Management Committee.
Policy owner approves
Minimum standards are approved
by policy owners subject to
non-objection from the Risk
Management Committee.
Group Policies and
certain Minimum
Standards
ERM Strategy and Framework
Executive Governance Framework
Minimum Standards
Business unit and operational area implementation
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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 a 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 certain potential conflicts of interest
in this way. However, the Board still ensures that it will
appropriately deal with any actual conflict of interest or duty that
might arise. This usually would involve making sure a Director
does not participate in a relevant Board or Committee discussion
or decision.
To do this, the Company Secretary maintains a register of
conflicts, and any conflicts that the Board has authorised. The
Board reviews this register at each scheduled Board meeting.
Approach to diversity
The Board carefully considers the diversity of its members
from various perspectives. It also seeks to ensure that Directors
have the relevant knowledge, skills, experience and, where
necessary, independence to help the Group deliver its strategy.
The Company believes in the benefits of diversity. At the date
of this report, of the Board’s ten 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.
The Nomination Committee’s terms of reference state that it
should duly regard the benefits of diversity, including gender
diversity, when choosing Board candidates. You can find
more information about the Board’s diversity policy in the
Nomination Committee report on page 78.
The 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 report
on page 33.
During the year, the Group signed up to the Women in
Finance Charter. This Charter reflects the Government’s, as
well as the Group’s aspiration, to see gender balance at all
levels across financial services firms.
Nomination Committee
On behalf of the Board, the Nomination Committee assesses
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
demonstrated they were committed to the role. Andrew Palmer
has served on the Board since March 2011. At the
Chairman’s request, he has agreed to continue to serve as
a Director and a resolution for his re-election as a Director
will be proposed to the 2017 AGM. In accordance with
the Code, the extension of Mr Palmer’s term of appointment
beyond six years has been the subject of a particularly rigorous
review. The Board is satisfied that he remains independent,
that he continues to make a significant contribution to the
proceedings of the Board and its Committees and that the
extension of his term of appointment will provide valuable
continuity as work on refreshing the Board progresses.
The Nomination Committee’s work during the year led to
the appointment of Danuta Gray as an additional NED, and
Mike Holliday Williams, MD Personal Lines, as an Executive
Director, both with effect from 1 February 2017. You can
find out more about these activities and the Nomination
Committee’s work during the year on pages 76 to 78.
Accountability
An explanation of how the Board meets its responsibilities
under the Code is set out below, except for the following
matters, which are covered elsewhere in the Annual Report
& Accounts:
How the Company seeks to generate value over the 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 is set out in the Directors’ report
on pages 112 and 113.
The Board has delegated responsibility to the Audit
Committee to oversee the management of the relationship
with the Company’s External Auditor. You can find details
of the Audit Committee’s role, activities and relationship
with the External Auditor in the Committee report on pages
64 to 67.
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.
You can find an explanation from the Directors about their
responsibility for preparing the financial statements in the
Statement of Directors’ responsibilities on page 113. The
Company’s External Auditor explains its responsibilities
on page 121.
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The BRC 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.
Assessing principal risks
The Board is responsible for determining the nature and extent
of the risks that it is willing to take to achieve its strategic
objectives. 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 27 to 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 IECM. Each directorate’s
bottom-up risk identification and assessment supplements the
MRA. The MRA also plays a key role in developing the ORSA
and assessing the Group’s strategic plan.
Corporate governance report continued
The Directors confirm that they consider that the Annual Report
& Accounts, taken as a whole, is fair, balanced and
understandable, and provides the information that shareholders
and stakeholders need to assess the Group’s position and
performance, business model and strategy. In arriving at this
conclusion, the Board was supported by a number of processes,
including the following:
Management drafted the Annual Report & Accounts to
ensure consistency across sections, and a steering group
comprising a team of cross-functional senior management
provided overall governance and co-ordination.
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 of the Annual Report & Accounts.
The Audit Committee reviewed the substantially final
draft of the Annual Report & Accounts, before consideration
by the Board.
Risk management and internal control systems
The Board is responsible for the Group’s risk management
and internal control systems. 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 to 29.
The Board, with the assistance of the BRC and the Audit
Committee as appropriate, monitored the Company’s risk
management and internal control systems that have been in
place throughout the year under review, 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 intended 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 CEO approved. The system reported on
the controls’ nature and effectiveness, and other management
processes that manage these risks.
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Direct Line Group Annual Report & Accounts 2016 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 2016.
At the AGM, the CEO presents the Group’s financial results.
The Chairman then invites shareholders to ask questions about
the meeting’s business, before proposing the AGM’s formal
business. All Directors will be put forward for re-election at the
AGM. The Chairman, the Committee Chairs and the remaining
Directors and members of the Executive Committee are also
available to talk with shareholders at the end of the meeting.
The outcome of the resolutions put to the AGM, including poll
results detailing votes for, against and withheld, are published
on the Company’s website once the AGM has concluded.
Remuneration
The Board has delegated responsibility to the Remuneration
Committee for the remuneration arrangements of the Group’s
Executive Directors and Chairman. It recommends and
monitors the remuneration level and structure for senior
executives. You can find out more about this in the Directors’
remuneration report starting on page 82.
Relations with shareholders
Engagement with shareholders
The Board believes that engaging regularly with the
Company’s shareholders is vital to the Group’s business.
Communicating and engaging with investors means the Board
can stay up to date on opinions. It also gives the Company
the opportunity to answer questions and concerns.
During 2016, the Board received regular updates from the
Company’s corporate brokers on the views of its institutional
shareholders and, in addition, the Investor Relations team
provided regular updates to the Board. During the reporting
period, the Company Secretary wrote to the Company’s
major shareholders, to offer them opportunity to meet with
the Chairman and/or the SID.
As part of the development of a revised remuneration policy
for Executive Directors, to be put before shareholders at the
forthcoming AGM, the Chair of the Remuneration Committee
led a wide ranging consultation with key stakeholders. Further
details of this process can be reviewed on page 80 of this
document and the resultant remuneration policy proposed
is detailed on pages 100 to 109.
The Executive Directors meet frequently with investors and
inform the Board about shareholder views. 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 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.
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Committee reports
Audit Committee report
Andrew Palmer
Chair of the
Audit Committee
Areas of focus in the reporting period
Responsibilities of the Audit Committee
The Committee is responsible for overseeing and challenging
the effectiveness of the Group’s systems of financial and other
controls. The Committee monitors the work and effectiveness
of the Group’s internal and external auditors and actuaries.
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 reserves to the Board.
continually review the adequacy and effectiveness of the
Group’s internal financial controls and internal control
systems, and the monitoring procedures.
The Committee reviews and monitors the reserving
monitor and evaluate the Group Audit function’s
process. The Committee challenged the key reserving
assumptions and judgements, emerging trends,
movements, and analysis of uncertainties underlying the
Actuarial Best Estimate (“ABE”) and Management Best
Estimate (“MBE”) of technical provisions.
The Committee provides oversight of the accounting
estimates and judgements used in the preparation of the
financial statements. A particular area of focus for 2016
was the level of change and the impact on intangible
asset carrying values. Following the annual review of
the intangible assets, which was considered and
challenged by the Committee, an impairment of
intangible assets of £39.3 million was agreed.
As part of the Committee’s review of the Financial
Reporting Control Framework (“FRCF”) it looked at the
processes which are used to produce financial asset
valuations. In 2016 the Committee asked for details of
the processes that were followed to give it assurance
that the valuations were appropriate.
The PRA approved the Group to use its PIM in
June 2016. Following approval, the Group published
its Solvency II own funds assessment. In addition, under
Solvency II the Group is required to submit Quantitative
Reporting Templates to the PRA. The Solvency II
related information has been incorporated into the
Group’s FRCF and the Committee monitors the integrity
of the information.
During the year the Ministry of Justice published a
consultation regarding the assessment of soft tissue injury
for bodily injury claims. The Committee reviewed and
challenged management’s assessment of the impact of
the proposed new process on both claims experience
and operating costs.
In relation to Group Audit, members of the Committee
requested a presentation to explore, and provide an
opportunity to challenge, how the function is developing
its use of data analytics. In the light of a significant level
of change within the Group Audit plans, the Committee
also requested and received additional analysis to
evidence that an appropriate breadth and depth of
internal audit coverage was being maintained across
the Group.
performance.
monitor and manage the relationship with the External
Auditor, including agreeing the external audit fee, assessing
its effectiveness, independence and managing any tender
process for the audit services contract.
The Audit Committee’s main role and responsibilities are
set out in written terms of reference and are available at
www.directlinegroup.co.uk/termsofreference
Committee composition, skills and
experience and meetings in the year
The Committee comprises three independent NEDs: Andrew
Palmer, Jane Hanson and Clare Thompson. You can find their
biographical information on pages 50 and 51. In line with
the 2016 amendments to the Code, the Audit Committee as a
whole is deemed to have competence relevant to the insurance
and financial services sectors in which the Group operates.
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 during the period on
matters including PPOs, reserving processes and the Solvency II
balance sheet.
The Audit Committee held five scheduled meetings in 2016.
Two sub-committee meetings were also held to approve the
Group’s trading updates for the first and third quarters of 2016.
Three additional meetings were held to review drafts of the
Solvency II narrative reports and to review the Group’s Solvency
II balance sheet following receipt of internal model approval.
The table below shows attendance at the scheduled meetings:
Andrew Palmer (Chair)
Jane Hanson
Clare Thompson
Scheduled
meetings
Percentage
attendance
5 of 5
5 of 5
5 of 5
100%
100%
100%
The Chair reports on matters dealt with at each scheduled
Committee meeting to the subsequent scheduled Board meeting.
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64 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Committee reports
Audit Committee report
Responsibilities of the Audit Committee
The Committee is responsible for overseeing and challenging
the effectiveness of the Group’s systems of financial and other
controls. The Committee monitors the work and effectiveness
of the Group’s internal and external auditors and actuaries.
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 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.
Areas of focus in the reporting period
The Committee reviews and monitors the reserving
monitor and evaluate the Group Audit function’s
process. The Committee challenged the key reserving
performance.
assumptions and judgements, emerging trends,
movements, and analysis of uncertainties underlying the
Actuarial Best Estimate (“ABE”) and Management Best
Estimate (“MBE”) of technical provisions.
The Committee provides oversight of the accounting
estimates and judgements used in the preparation of the
financial statements. A particular area of focus for 2016
was the level of change and the impact on intangible
asset carrying values. Following the annual review of
the intangible assets, which was considered and
challenged by the Committee, an impairment of
intangible assets of £39.3 million was agreed.
As part of the Committee’s review of the Financial
Reporting Control Framework (“FRCF”) it looked at the
processes which are used to produce financial asset
monitor and manage the relationship with the External
Auditor, including agreeing the external audit fee, assessing
its effectiveness, independence and managing any tender
process for the audit services contract.
The Audit Committee’s main role and responsibilities are
set out in written terms of reference and are available at
www.directlinegroup.co.uk/termsofreference
Committee composition, skills and
experience and meetings in the year
The Committee comprises three independent NEDs: Andrew
Palmer, Jane Hanson and Clare Thompson. You can find their
biographical information on pages 50 and 51. In line with
the 2016 amendments to the Code, the Audit Committee as a
valuations. In 2016 the Committee asked for details of
whole is deemed to have competence relevant to the insurance
the processes that were followed to give it assurance
and financial services sectors in which the Group operates.
that the valuations were appropriate.
The PRA approved the Group to use its PIM in
June 2016. Following approval, the Group published
its Solvency II own funds assessment. In addition, under
Solvency II the Group is required to submit Quantitative
Reporting Templates to the PRA. The Solvency II
related information has been incorporated into the
Group’s FRCF and the Committee monitors the integrity
of the information.
During the year the Ministry of Justice published a
consultation regarding the assessment of soft tissue injury
for bodily injury claims. The Committee reviewed and
challenged management’s assessment of the impact of
the proposed new process on both claims experience
and operating costs.
In relation to Group Audit, members of the Committee
requested a presentation to explore, and provide an
opportunity to challenge, how the function is developing
its use of data analytics. In the light of a significant level
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 during the period on
matters including PPOs, reserving processes and the Solvency II
balance sheet.
The Audit Committee held five scheduled meetings in 2016.
Two sub-committee meetings were also held to approve the
Group’s trading updates for the first and third quarters of 2016.
Three additional meetings were held to review drafts of the
Solvency II narrative reports and to review the Group’s Solvency
II balance sheet following receipt of internal model approval.
The table below shows attendance at the scheduled meetings:
of change within the Group Audit plans, the Committee
Andrew Palmer (Chair)
also requested and received additional analysis to
evidence that an appropriate breadth and depth of
internal audit coverage was being maintained across
Jane Hanson
Clare Thompson
the Group.
The Chair reports on matters dealt with at each scheduled
Committee meeting to the subsequent scheduled Board meeting.
Scheduled
meetings
Percentage
attendance
5 of 5
5 of 5
5 of 5
100%
100%
100%
Case study: Periodic Payment
Orders
The Committee requested an in depth review of PPO
reserving methodology and in September 2016 the
Committee met to discuss a report by management. The
topics covered were: emerging experience; key judgements
and assumptions; industry benchmarking; regulation
and standards; and long-term financial projections. The
Committee focused its efforts on the recommendations of the
Group’s Chief Actuary in the ABE and in related reserve
margins proposed by the CFO.
The Committee reviewed trends in the claims experience
versus industry experience to assess the Group’s performance
in these complex cases. It concluded that the Group’s
experience was broadly consistent with the market and that
its claims handling approach to settling PPOs was
appropriately reflected in reserving. It challenged, and was
satisfied with, the data collection process and methods for
ensuring accuracy.
Recognising the need for significant expert judgement
in such long-term cash flow projections the Committee
challenged the assumptions, specifically: life expectations;
inflation assumptions; discounting; and reinsurance.
It discussed the sensitivities to alternative values and
approaches, and considered the long-term economic
assumptions including past data and the compatibility of
assumptions for International Financial Reporting Standards
(“IFRS”) and Solvency II.
It discussed the strength of the underlying assumptions with the
Group’s External Auditor and independent external actuaries
and concluded that, whilst the ABE appeared robust in the
face of significant uncertainties about the long-term future, they
were appropriate. It was satisfied that reserve margins held
specifically for PPOs were proportionate and justified because
not all risks could be captured in the actuarial analysis. The
members sought and were given assurance that the additional
costs of current and future PPOs from existing business cohorts
were being recognised.
The Committee requested a long-term projection of the
Group’s balance sheet under different assumed reinsurance
arrangements. This was presented by management and
showed how liabilities to PPOs would gradually accumulate
over time as expected and more slowly under lower
retention levels. The Committee was satisfied that the long-
term trend in the Group’s balance sheet was reasonable
and within risk appetite and that exposure to reinsurance
bad debts was being appropriately captured.
Main activities during the year
At every scheduled Committee meeting, the Committee
receives reports on financial reporting, reserves, internal
controls and Group Audit. You can find out more about this
in the following sections.
Financial reporting
The Committee monitors the integrity of the financial
statements of the Group, and any other formal announcement
relating to its financial performance. Solvency II related
information has been incorporated into the Group’s financial
reporting processes.
During the year, the Committee reviewed the preliminary
announcement of the Group’s 2015 financial results, the
2015 Annual Report & Accounts, and the 2016 Half Year
Report. The Committee then recommended them to the Board
for approval.
The review process focused on critical accounting policies
and practices, emphasising those requiring a major element
of judgement. The review also considered the going concern
assumptions and viability statement, valuation of assets and
impairment reviews, reserving provisions, unusual transactions,
clarity of disclosures and significant audit adjustments. This
included the Solvency II balance sheet and certain Quantitative
Reporting Templates.
The Committee also advised the Board whether the financial
statements, taken as a whole, were fair, balanced and
understandable and provided sufficient information to enable
the reader to assess the Group’s position and performance,
business model and strategy.
When considering the Annual Report & Accounts for 2016, 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, including the impact of the
reduction in the Ogden discount rate from 2.5% to minus
0.75% following the Lord Chancellor’s review of the discount
rate for personal injury claims. External consultants participate
independently in the annual review. Further information on
reserves is provided in this report.
Valuation of investments not held at fair value – The
Committee considered reports on the judgements applied to the
carrying value of the Group’s investments and the basis for the
valuation.
Change and IT – The Committee considered major change
projects and IT controls.
The Committee considered reports prepared by management
on the significant estimates and judgements that were material
to the financial statements and challenged the judgements
being made, in particular in relation to the non-cash intangible
asset impairment of £39.3 million. This relates to capitalised
software development costs for ongoing IT projects primarily
relating to the development of new systems. The Committee
also discussed these matters with the External Auditor.
64 Direct Line Group Annual Report & Accounts 2016
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Committee reports continued
Reserves
The Committee reviews and challenges the key assumptions
and judgements, emerging trends, movements, and analysis
of uncertainties underlying the ABE of technical provisions.
At the same time, the Committee considers and challenges
the appropriateness of the CFO’s proposals for management’s
best estimate of reserves. These are informed by actuarial
analysis, wider commercial and risk management insights,
and principles of consistency from period to period.
The 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 of reserves requiring
most judgement was carried out by PricewaterhouseCoopers
LLP for the Directors of the Company and its relevant affiliates1.
After reviewing the actuarial best estimate and management’s
best estimate of reserves, the Committee recommends them to
the Board.
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 FRCF is part of its wider internal controls system.
It addresses financial reporting risks. The Board delegates
supervision of the FRCF to the Audit Committee. The CFO
is responsible for the FRCF on a day-to-day basis.
During 2016, the Committee received regular reports on the
FRCF and the testing of it. Part of those reports focused on
control deficiencies and the mitigating actions taken.
The Committee considered the Group’s internal controls and
processes for identifying and responding to risks.
The Committee provides oversight of 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 CFO. Group Audit provides
the Committee with independent and objective reports on the
adequacy and effectiveness of the Group’s governance, risk
management and internal controls. The Committee approves
Group Audit’s annual plan 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.
Additional information
The Committee has unrestricted access to management and
external advisers to help discharge its duties. It is satisfied that
in 2016 it received sufficient, reliable and timely information
to perform its responsibilities effectively.
The CEO, CFO, Chief Risk Officer (“CRO”), 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 Chief
Operating Officer is also invited to attend appropriate sections
of Audit Committee meetings.
External audit
The Committee is responsible for overseeing the External
Auditor and agreeing the audit fee. This also involves
approving the scope of the External Auditor’s annual plan.
During the year, the Committee discussed the position on its
external audit services contract and examined a number of
options regarding the timing of tendering for the external audit,
including the mandatory rotation of the Group’s audit firm,
taking into account the Code and the reforms of the audit market
by the Competition and Markets Authority and the EU. This
included whether it was appropriate to tender the external audit
contract for the year ending 31 December 2018. The Company
has complied with the provisions of The Statutory Audit Services
for Large Companies Market Investigation (Mandatory Use of
Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014.
A number of factors were taken into account, including
anticipated business changes, regulatory developments such
as the implementation of Solvency II and the approval of the
Group’s use of its own Internal Model, the expected new
insurance accounting standard for implementation in 2021
and the appointment of a new audit partner by Deloitte LLP
(“Deloitte”) during 2016, following the normal audit partner
rotation process. The Committee concluded that it was not
appropriate to tender the external audit contract for the 2018
year end and, subject to continued effective performance
by Deloitte, would review the position again early in 2017.
At that point a decision will be made whether to tender the
external audit contract for the year ended 31 December 2019
or defer until a later date. The current audit partner is Colin
Rawlings who was appointed in advance of the 2016 audit.
Colin has had no interaction with the Financial Reporting
Council’s Corporate Reporting Review team.
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 as auditor of the Company depends on
continued satisfactory performance.
Note:
1. The relevant affiliates are U K Insurance Limited and Churchill Insurance Company Limited
66
66 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Committee reports continued
Reserves
Additional information
The Committee reviews and challenges the key assumptions
The Committee has unrestricted access to management and
and judgements, emerging trends, movements, and analysis
external advisers to help discharge its duties. It is satisfied that
of uncertainties underlying the ABE of technical provisions.
in 2016 it received sufficient, reliable and timely information
At the same time, the Committee considers and challenges
to perform its responsibilities effectively.
the appropriateness of the CFO’s proposals for management’s
best estimate of reserves. These are informed by actuarial
analysis, wider commercial and risk management insights,
and principles of consistency from period to period.
The CEO, CFO, Chief Risk Officer (“CRO”), 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
The Committee approves annual plans for reviews of reserves,
are also invited to attend meetings and meet privately with the
informed by emerging internal and external issues.
Audit Committee, in the absence of management. The Chief
Operating Officer is also invited to attend appropriate sections
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 of reserves requiring
most judgement was carried out by PricewaterhouseCoopers
LLP for the Directors of the Company and its relevant affiliates1.
After reviewing the actuarial best estimate and management’s
best estimate of reserves, the Committee recommends them to
the Board.
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 FRCF is part of its wider internal controls system.
It addresses financial reporting risks. The Board delegates
supervision of the FRCF to the Audit Committee. The CFO
is responsible for the FRCF on a day-to-day basis.
During 2016, the Committee received regular reports on the
FRCF and the testing of it. Part of those reports focused on
control deficiencies and the mitigating actions taken.
The Committee considered the Group’s internal controls and
processes for identifying and responding to risks.
of Audit Committee meetings.
External audit
The Committee is responsible for overseeing the External
Auditor and agreeing the audit fee. This also involves
approving the scope of the External Auditor’s annual plan.
During the year, the Committee discussed the position on its
external audit services contract and examined a number of
options regarding the timing of tendering for the external audit,
including the mandatory rotation of the Group’s audit firm,
taking into account the Code and the reforms of the audit market
by the Competition and Markets Authority and the EU. This
included whether it was appropriate to tender the external audit
contract for the year ending 31 December 2018. The Company
has complied with the provisions of The Statutory Audit Services
for Large Companies Market Investigation (Mandatory Use of
Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014.
A number of factors were taken into account, including
anticipated business changes, regulatory developments such
as the implementation of Solvency II and the approval of the
Group’s use of its own Internal Model, the expected new
insurance accounting standard for implementation in 2021
and the appointment of a new audit partner by Deloitte LLP
The Committee provides oversight of Group Audit’s work and
(“Deloitte”) during 2016, following the normal audit partner
seeks to ensure it adopts industry best practice appropriately.
rotation process. The Committee concluded that it was not
The Group Head of Audit’s primary reporting line is to the
appropriate to tender the external audit contract for the 2018
Chair of the Committee. The secondary reporting line, for
year end and, subject to continued effective performance
day-to-day administration, is to the CFO. Group Audit provides
by Deloitte, would review the position again early in 2017.
the Committee with independent and objective reports on the
At that point a decision will be made whether to tender the
adequacy and effectiveness of the Group’s governance, risk
external audit contract for the year ended 31 December 2019
management and internal controls. The Committee approves
or defer until a later date. The current audit partner is Colin
Group Audit’s annual plan and receives quarterly reports
Rawlings who was appointed in advance of the 2016 audit.
detailing internal audit activity, key findings, management
Colin has had no interaction with the Financial Reporting
responses, and proposed action plans. Group Audit also
Council’s Corporate Reporting Review team.
monitors that these actions are completed. The Committee
also approves the Group Audit Charter.
There are no contractual obligations restricting the Company’s
choice of external auditor and no auditor liability agreement
During the year, the Committee assessed whether the
has been entered into. Equally, any recommendation to
Group Audit function was effective and concluded that it was.
reappoint Deloitte as auditor of the Company depends on
This included the Committee satisfying itself that the Group
continued satisfactory performance.
Audit function has the appropriate resources.
Auditor independence and non-audit
services policy
The Group has an Independence of External Audit Minimum
Standard. This establishes parameters for preventing or mitigating
anything that compromises the External Auditor’s independence
or objectivity, by virtue of it providing the Group with non-audit
services. The Committee reviews and refreshes the standard
annually to make sure it remains appropriate. The standard is
compliant with the FRCs implementation of the EU Audit Regulation
and Directive in adopting the list of prohibited non-audit services
which cannot be provided to the Group.
Before each financial year, the Committee formally approves a
list of audit and non-audit services that the External Auditor will
provide. This is in accordance with the Minimum Standard.
Effectiveness of the external audit
process and reappointing Deloitte
as External Auditors
In 2016, the Committee assessed the External Auditor’s
effectiveness. This was in addition to regularly questioning the
External Auditor during its meetings. The Committee assessed
the External Auditor through: a detailed questionnaire
completed by key stakeholders; discussing matters with the
CFO; formally reviewing Deloitte’s independence; and
assessing whether it fulfilled the agreed audit plan.
The Committee, after taking into account all of the information
available, concluded that Deloitte had performed its
obligations effectively and appropriately as External Auditor
to the Group.
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 £0.4 million
to Deloitte for services unrelated to audit work. The following
is a breakdown of fees paid to Deloitte for the year ended
31 December 2016.
Audit fees1
Non-audit fees
Total fees for audit
and other services
Proportion
81.8%
18.2%
Fees
£m
1.8
0.4
2.2
The non-audit fee of £0.4 million related to audit assurance
services and services provided in reviewing the Company’s
remuneration policy, tax advisory services and an IT project.
The Committee reviewed how the Group applied its Minimum
Standard on audit and non-audit services in 2016. It is satisfied
that the Group has adequate procedures to ensure that the
External Auditors are independent and objective.
The Committee subsequently recommended to the Board
that the Group reappoint Deloitte as External Auditor.
The Group will put a resolution regarding this to shareholders
at the 2017 AGM.
The Audit Committee’s effectiveness
A formal and rigorous annual evaluation of the Committee’s
performance and effectiveness was undertaken during the
year. Professor Rob Goffee of London Business School
facilitated this effectiveness review, and prepared a report
based on responses from Committee members and other
stakeholders to a questionnaire and interview. After reviewing
and discussing the report, the Committee concluded that it was
operating effectively and has access to sufficient resources to
perform its duties.
The Board reviewed and approved this report on
6 March 2017.
Andrew Palmer
Chair of the Audit Committee
Note:
1. The relevant affiliates are U K Insurance Limited and Churchill Insurance Company Limited
66 Direct Line Group Annual Report & Accounts 2016
Note:
1. You can find further information in note 11 to the consolidated
financial statements.
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Committee reports continued
Board Risk Committee report
Jane Hanson
Chair of the Board
Risk Committee
Areas of focus in the reporting period
The Group received approval from the PRA for the use
of its Group PIM in June 2016, successfully concluding
a multi-year project. The case study on page 69 details
how the Committee provided oversight to enable the
Group to meet the challenges of complying with
Solvency II and obtain internal model approval.
The Committee reviewed an assessment of risk
behaviours and attitudes undertaken jointly by the
Risk function and Group Audit, which covered areas
including: tone from the top; decision making; and risk
management. The Committee challenged the outputs of
the assessment and ensured the appropriateness of the
actions identified. The Committee commended the
progress made to embed and to demonstrate positive
culture and behaviours in risk management.
With cyber security becoming an increasingly important
area of focus for companies, the Committee closely
monitored and challenged activities in relation to IT
risks, controls and resilience. The Committee reviewed
the outputs from system penetration testing and reviews
of risk management and information security, and
challenged the first and second lines of defence on
the adequacy of the remediation planning and the
assessment of the materiality of the issues raised.
The Committee was satisfied with progress made in the
continuing development of the IT control environment
and with the oversight of the IT risks and controls by the
second line of defence.
The Committee scrutinised the Pricing Control
Framework, and challenged the Group’s risk appetite
for pricing events. The Committee reviewed the outputs
of reviews undertaken by Group Audit and an external
consultancy firm regarding the effectiveness and
sustainability of controls within the Pricing function.
The Committee ensured that management undertook
sufficient root cause analysis and read across of the
pricing events. The small number of pricing issues
were non-material and not systemic and the Committee
was satisfied with the robustness of the control
environment within the Pricing function and the level
of management focus.
Responsibilities of the Board Risk
Committee
The Committee is responsible for oversight and challenge
of 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’s main responsibilities are to:
consider and recommend the Group’s risk appetite,
framework and tolerance to the Board for its approval.
review and approve the design and implementation of
the ERMF, 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 and Compliance function
operational plans and adequacy of resourcing.
review the governance of, and methodology and
assumptions used in, the Group’s Internal Economic
Capital Model, approve changes to the model and
validation thereof.
review and recommend the ORSA process and report
to the Board.
review the Group’s procedure for detecting internal
and external fraud.
The main role and responsibilities of the BRC are set
out in written terms of reference and are available at
www.directlinegroup.co.uk/termsofreference
Committee composition, skills and
experience and meetings in the year
The Committee comprises three independent NEDs:
Jane Hanson, Andrew Palmer and Richard Ward. You can
find their biographical information on pages 50 and 51.
The BRC held six scheduled meetings in 2016. Two
additional meetings were held to consider IT controls and
cyber risk; and a review of the Conduct Risk Management
Framework. Additionally, the Committee held a strategy day
which considered the Group’s approach to the management
of risk, the risk oversight model and the operation of the
Three Lines of Defence model. The table below shows
attendance at the scheduled meetings:
Jane Hanson (Chair)
Andrew Palmer
Richard Ward1,2
Clare Thompson1
Priscilla Vacassin1
Notes:
Scheduled
meetings
Percentage
attendance
6 of 6
6 of 6
3 of 4
1 of 1
1 of 1
100%
100%
75%
100%
100%
1. Attendance is expressed as the number of scheduled meetings attended
out of the number of such meetings possible or applicable to attend
2. Dr. Ward was unable to attend one meeting due to an overseas business
commitment that he had agreed before joining the Board
68
68 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Committee reports continued
Board Risk Committee report
Responsibilities of the Board Risk
Committee
The Committee is responsible for oversight and challenge
of 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’s main responsibilities are to:
consider and recommend the Group’s risk appetite,
framework and tolerance to the Board for its approval.
review and approve the design and implementation of
the ERMF, 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 and Compliance function
operational plans and adequacy of resourcing.
review the governance of, and methodology and
assumptions used in, the Group’s Internal Economic
Capital Model, approve changes to the model and
review and recommend the ORSA process and report
review the Group’s procedure for detecting internal
validation thereof.
to the Board.
and external fraud.
The main role and responsibilities of the BRC are set
out in written terms of reference and are available at
www.directlinegroup.co.uk/termsofreference
Committee composition, skills and
experience and meetings in the year
The Committee comprises three independent NEDs:
Jane Hanson, Andrew Palmer and Richard Ward. You can
find their biographical information on pages 50 and 51.
The BRC held six scheduled meetings in 2016. Two
additional meetings were held to consider IT controls and
cyber risk; and a review of the Conduct Risk Management
Framework. Additionally, the Committee held a strategy day
which considered the Group’s approach to the management
of risk, the risk oversight model and the operation of the
Three Lines of Defence model. The table below shows
attendance at the scheduled meetings:
Jane Hanson (Chair)
Andrew Palmer
Richard Ward1,2
Clare Thompson1
Priscilla Vacassin1
Notes:
Scheduled
meetings
Percentage
attendance
6 of 6
6 of 6
3 of 4
1 of 1
1 of 1
100%
100%
75%
100%
100%
1. Attendance is expressed as the number of scheduled meetings attended
out of the number of such meetings possible or applicable to attend
2. Dr. Ward was unable to attend one meeting due to an overseas business
commitment that he had agreed before joining the Board
Areas of focus in the reporting period
The Group received approval from the PRA for the use
of its Group PIM in June 2016, successfully concluding
a multi-year project. The case study on page 69 details
how the Committee provided oversight to enable the
Group to meet the challenges of complying with
Solvency II and obtain internal model approval.
The Committee reviewed an assessment of risk
behaviours and attitudes undertaken jointly by the
Risk function and Group Audit, which covered areas
including: tone from the top; decision making; and risk
management. The Committee challenged the outputs of
the assessment and ensured the appropriateness of the
actions identified. The Committee commended the
progress made to embed and to demonstrate positive
culture and behaviours in risk management.
With cyber security becoming an increasingly important
area of focus for companies, the Committee closely
monitored and challenged activities in relation to IT
risks, controls and resilience. The Committee reviewed
the outputs from system penetration testing and reviews
of risk management and information security, and
challenged the first and second lines of defence on
the adequacy of the remediation planning and the
assessment of the materiality of the issues raised.
The Committee was satisfied with progress made in the
continuing development of the IT control environment
and with the oversight of the IT risks and controls by the
second line of defence.
The Committee scrutinised the Pricing Control
Framework, and challenged the Group’s risk appetite
for pricing events. The Committee reviewed the outputs
of reviews undertaken by Group Audit and an external
consultancy firm regarding the effectiveness and
sustainability of controls within the Pricing function.
The Committee ensured that management undertook
sufficient root cause analysis and read across of the
pricing events. The small number of pricing issues
were non-material and not systemic and the Committee
was satisfied with the robustness of the control
environment within the Pricing function and the level
of management focus.
Case study: Solvency II
Having spent 2015 preparing for the implementation of
Solvency II, the Committee’s focus in 2016 was on providing
oversight of the process leading up to the Group’s approval
from the PRA for the use of its PIM and on the calculation
of the SCR using the Group’s IECM. During the year, the
Committee received detailed presentations from management
on the underlying assumptions around the IECM and
reviewed how the model had been constructed. The
Committee challenged both the Group’s Solvency II and
IECM submission, including:
IECM uses, particularly in relation to investment matters
and the setting of the Group’s capital risk appetite under
Solvency II.
The IECM change process and framework, particularly
in relation to the aggregation of model changes.
The IECM validation framework, scope and process,
including satisfying itself that independent validation was
focused on the most appropriate areas and there was
sufficient coverage in specific areas.
The Group’s SCR, including the key assumptions and
dependencies within the calculation methodology such
as diversification, expert judgements, parameterisation,
sensitivity testing and the selection of the catastrophe
model used in the IECM.
The method and governance for calculating the Standard
Formula, and the justification of this capital requirement
including a comparison to the IECM SCR.
The ongoing application of, and controls over, the
IECM including the annual exercise to compare the
IECM to the Material Risk Register.
Main activities during the year
Risk monitoring
At each scheduled meeting, the Committee received a report
from the CRO detailing the outputs of regular risk monitoring
and providing details of specific issues to the Committee.
The report was enhanced during the year to set out more
clearly the Group’s current risk profile, the areas of
management focus and the key activities being undertaken
by the second line of defence to drive forward the embedding
of risk management across the Group.
The Committee 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 monitored
the Group’s exposure against these appetites and the lower
level risk appetite statements, and assessed the drivers that
affect its risk appetite status. The Committee reviewed and
questioned the justification regarding the assessment of certain
risks and the robustness of management action plans to
address areas close to or outside tolerance. Having regard
to the extent of change being executed by management,
the Committee closely monitored change risk.
The Committee monitored the Group’s risk management and
internal control systems, and reviewed their effectiveness. This
covered all material risks, including financial, operational and
compliance; reviewing the net risk position after the operation
of controls; and considered the effectiveness of any associated
mitigating actions and compensating controls.
The Committee assessed the principal risks facing the Group,
which you can find listed on pages 27 to 29. The Committee
achieved this by reviewing and challenging the Group’s
Material Risk Register in the context of the Group’s risk
appetite and through consideration of the risk assessment
contained in the CRO’s report that was discussed at each
scheduled meeting.
On behalf of the Board, the Committee also monitored
the Group’s risk management systems, and reviewed their
effectiveness. The monitoring and review involved examining
an assessment of the control environment and material controls
at Group level, based on directorate-level risk and control self-
assessments. These assessments were subject to challenge
by the Risk and Group Audit functions.
Additionally, the Committee considered other subjects in more
detail at each scheduled meeting. These related to: compliance
and regulatory risk including oversight of the Group’s regulatory
relationships; operational risk; financial risk, Solvency II and
IECM; emerging risks and risk governance.
68 Direct Line Group Annual Report & Accounts 2016
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Committee reports continued
Customer
The Group puts the customer at the heart of its business,
by endeavouring to deliver on its commitments and ensure
that fairness is a natural outcome of what the Group does.
The Committee reviewed and challenged reports relating to
the Group’s conduct towards its customers, to try to ensure
appropriate customer outcomes, the meeting of reasonable
customer expectations and to determine that the Group was
operating within its defined conduct risk appetite, as set
by the Board.
Conduct 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
and challenged the effectiveness and level of embedding of
the Group’s Conduct Risk Management Framework and the
Group’s approach to complaints reporting under the Financial
Conduct Authority’s (“FCA”) new definitions. The Committee
also reviewed the Group’s Regulatory Governance Map and
received updates on regulatory interactions, particularly with
the FCA and the PRA.
The Committee monitored and challenged the outputs from
reviews of the effectiveness and level of embeddedness of the
Group’s Conduct Risk Management Framework, in particular
the findings of the reviews undertaken by the Risk function,
Group Audit and an external consultancy firm. Challenges
from the Committee included a need for more emphasis on
fostering good customer outcomes and greater ownership of
risk management by the first line of defence. The Committee
probed management on the activities undertaken and planned
in relation to culture, and commended the activity being
undertaken by the Customer Conduct Committee, which
included a rolling regular monthly assessment against each
of the FCA’s themes on culture. The Committee was satisfied
that the Group’s Conduct Risk Management Framework was
appropriate to enable the identification and escalation of
conduct risks facing the Group, and to subsequently manage
and mitigate those risks.
Additionally, the Committee reviewed and challenged the
outputs from conduct and compliance assurance reviews.
Following feedback from the Committee, the assurance plan
was revised to comprise a monitoring plan and a separate
thematic assurance plan. The Committee also requested that
the documentation underpinning the assurance reviews be
sufficiently robust from a governance and regulatory perspective.
The Committee received regular reports on the Group’s actions
to prevent financial crime, including reviewing of the Annual
Financial Crime Report and the Annual Anti-Bribery and
Corruption Report.
Operational risk
The Committee continues to oversee the development of
IT controls, including risks relating to IT systems’ stability, cyber
security and the internal control environment. The Committee
assessed the level of prevention, protection and detection in
relation to cyber risk and the residual risk for each of the
IT control areas, taking into account any compensating
controls and/or mitigating actions. The Committee questioned
the impact of system stability issues in relation to customer
and conduct metrics, including call abandonment rates.
The Committee also reviewed the proposed IT risk
appetite statements.
The Committee received regular updates on the Group’s
major change programmes, including the next generation
of customer systems for Personal Lines and Commercial.
The Committee monitored and examined the oversight and
challenge of major change initiatives by the Risk function
and reviewed the outputs of the assurance work undertaken
by the Risk function and Group Audit.
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. The Committee reviewed the
issues encountered with the Group’s third party suppliers, and
challenged the depth and coverage of the assurance approach
and whether the monitoring was appropriately robust in relation
to the suppliers.
Financial risk
At each meeting, the Committee monitored the Group’s
performance against capital risk appetite through the CRO’s
report. Committee members considered risks in the strategic
plan against risk appetite. During the year Committee
members also reviewed and challenged the ORSA report
and subsequently recommended the report for approval to the
Board. Questions on the ORSA included those in relation to
stress testing of the strategic plan, distribution risk, internal
model validation activity and contingent management actions.
The Committee reviewed and challenged the stress and
scenario testing plan, and examined the outputs of the reverse
stress tests undertaken in relation to climate change and
change risk.
Risk governance
Every year, the Committee reviews and approves the
ERMF, which includes the Group’s Policies and Minimum
Standards, and the Regulatory Governance Map as part of
the Group’s Solvency II requirements. The Committee reviewed
and challenged each Group Policy and the Regulatory
Governance Map and recommended them for approval by
the Board. The Committee also considered the results from the
annual Group assessment of the effectiveness of the internal
control environment undertaken by each business directorate,
as well as monitoring controls on an ongoing basis.
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70 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Committee reports continued
Customer
Operational risk
The Group puts the customer at the heart of its business,
The Committee continues to oversee the development of
by endeavouring to deliver on its commitments and ensure
IT controls, including risks relating to IT systems’ stability, cyber
that fairness is a natural outcome of what the Group does.
security and the internal control environment. The Committee
The Committee reviewed and challenged reports relating to
assessed the level of prevention, protection and detection in
the Group’s conduct towards its customers, to try to ensure
relation to cyber risk and the residual risk for each of the
appropriate customer outcomes, the meeting of reasonable
IT control areas, taking into account any compensating
customer expectations and to determine that the Group was
controls and/or mitigating actions. The Committee questioned
operating within its defined conduct risk appetite, as set
the impact of system stability issues in relation to customer
by the Board.
Conduct 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
and challenged the effectiveness and level of embedding of
the Group’s Conduct Risk Management Framework and the
Group’s approach to complaints reporting under the Financial
Conduct Authority’s (“FCA”) new definitions. The Committee
also reviewed the Group’s Regulatory Governance Map and
received updates on regulatory interactions, particularly with
the FCA and the PRA.
The Committee monitored and challenged the outputs from
reviews of the effectiveness and level of embeddedness of the
Group’s Conduct Risk Management Framework, in particular
the findings of the reviews undertaken by the Risk function,
Group Audit and an external consultancy firm. Challenges
from the Committee included a need for more emphasis on
fostering good customer outcomes and greater ownership of
risk management by the first line of defence. The Committee
probed management on the activities undertaken and planned
in relation to culture, and commended the activity being
undertaken by the Customer Conduct Committee, which
included a rolling regular monthly assessment against each
of the FCA’s themes on culture. The Committee was satisfied
that the Group’s Conduct Risk Management Framework was
appropriate to enable the identification and escalation of
conduct risks facing the Group, and to subsequently manage
and mitigate those risks.
Additionally, the Committee reviewed and challenged the
outputs from conduct and compliance assurance reviews.
Following feedback from the Committee, the assurance plan
was revised to comprise a monitoring plan and a separate
thematic assurance plan. The Committee also requested that
the documentation underpinning the assurance reviews be
sufficiently robust from a governance and regulatory perspective.
The Committee received regular reports on the Group’s actions
to prevent financial crime, including reviewing of the Annual
Financial Crime Report and the Annual Anti-Bribery and
Corruption Report.
and conduct metrics, including call abandonment rates.
The Committee also reviewed the proposed IT risk
appetite statements.
The Committee received regular updates on the Group’s
major change programmes, including the next generation
of customer systems for Personal Lines and Commercial.
The Committee monitored and examined the oversight and
challenge of major change initiatives by the Risk function
and reviewed the outputs of the assurance work undertaken
by the Risk function and Group Audit.
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. The Committee reviewed the
issues encountered with the Group’s third party suppliers, and
challenged the depth and coverage of the assurance approach
and whether the monitoring was appropriately robust in relation
to the suppliers.
Financial risk
At each meeting, the Committee monitored the Group’s
performance against capital risk appetite through the CRO’s
report. Committee members considered risks in the strategic
plan against risk appetite. During the year Committee
members also reviewed and challenged the ORSA report
and subsequently recommended the report for approval to the
Board. Questions on the ORSA included those in relation to
stress testing of the strategic plan, distribution risk, internal
model validation activity and contingent management actions.
The Committee reviewed and challenged the stress and
scenario testing plan, and examined the outputs of the reverse
stress tests undertaken in relation to climate change and
change risk.
Risk governance
Every year, the Committee reviews and approves the
ERMF, which includes the Group’s Policies and Minimum
Standards, and the Regulatory Governance Map as part of
the Group’s Solvency II requirements. The Committee reviewed
and challenged each Group Policy and the Regulatory
Governance Map and recommended them for approval by
the Board. The Committee also considered the results from the
annual Group assessment of the effectiveness of the internal
control environment undertaken by each business directorate,
as well as monitoring controls on an ongoing basis.
The Board Risk Committee’s
effectiveness
A formal and rigorous annual evaluation of the Committee’s
performance and effectiveness was undertaken during the
year. Professor Rob Goffee of London Business School
facilitated this effectiveness review, and prepared a report
based on responses from Committee members and other
stakeholders to a questionnaire and interview. After reviewing
and discussing the report, the Committee concluded that it
was operating effectively and has access to sufficient
resources to perform its duties.
The Board reviewed and approved this report on
6 March 2017.
Jane Hanson
Chair of the Board Risk Committee
The Committee considered, challenged and approved
the Annual Risk and Compliance operational plan. It also
reviewed the outputs of the assessment of risk behaviours
and attitudes across the Group, which is part of an ongoing
process to drive continued improvement in risk behaviours and
attitudes by providing feedback on current state, highlighting
areas of good practice and areas for focus.
Whistleblowing
The Committee reviews arrangements by which employees
may, in confidence, raise concerns about possible
improprieties in matters of financial reporting or other matters
(“Whistleblowing”). The Committee also reviews reports
relating to Whistleblowing to ensure arrangements are in
place for the proportionate and independent investigation
of such matters and for appropriate follow-up action.
Group Audit undertook an audit in the first quarter of 2016
which concluded that the Whistleblowing process was
adequately designed, operating effectively and met the new
regulatory requirements.
Remuneration
During the year, the Committee and the Remuneration
Committee 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 regulations regarding remuneration. This followed
published requirements, including how the Group would
assess the performance of individuals in control functions.
Additional information
To help discharge its duties, the Committee has unrestricted
access to management and external advisers. It is satisfied
that during 2016 it received sufficient, reliable and timely
information to perform its responsibilities effectively.
The CEO, CFO, CRO, Group Head of Audit, General
Counsel and a representative from the External Auditor
are invited to attend Committee meetings. In addition to
regular one-to-one meetings with the Chair, the CRO also
met privately with the Committee without management
being present.
The Committee also invites the Director of Group Regulatory
Risk and Compliance, Director of Financial Risk and Enterprise
Risk Director to appropriate sections of its meetings.
The Chair reports on matters dealt with at each Committee
meeting to the subsequent scheduled Board meeting.
70 Direct Line Group Annual Report & Accounts 2016
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Committee reports continued
Corporate Social Responsibility
Committee report
Sebastian James
Chair of the Corporate Social
Responsibility Committee
Areas of focus in the reporting period
Overall, the Committee was keen this year to ensure
that the Group’s CSR activity was as tightly focused
as possible on those areas where the Group could
be a real force for good, bring high levels of specific
expertise and have an authentic voice.
As a result, the Committee’s principal focus was
on “Shotgun”, the CSR initiative designed with the
ambitious goal of reducing young driver deaths in their
first 1,000 miles of driving to zero. The case study on
page 73 shows the scrutiny and interest of the
Committee in this initiative.
At the Committee’s request, the Group’s CSR Manager
and Head of Investments met with a number of the
Group’s external asset managers to understand their
attitudes towards responsible investment. All were able
to demonstrate clear evidence of their own CSR
credentials as well as their approach to incorporating
environmental, social and governance factors into their
investment processes.
The Committee reviewed the Group’s response to
the 2015 Modern Slavery Act and signed off the
Group policy and approach to this issue both within
the Company and with respect to outside suppliers.
The Committee agreed with management’s assessment
that the Group’s risk exposure to the requirements of
the Modern Slavery Act was currently considered to
be low but should be monitored on an ongoing basis.
The Committee noted management’s procedures to
mitigate the risk of a breach in the Group’s supply line.
The Committee was delighted to note the continued
strong performance in raising employee engagement
scores across the Group as measured by the annual
employee survey and continues to push for initiatives
to further increase engagement.
Responsibilities of the CSR Committee
The CSR Committee oversees and advises on how the
Group conducts its business responsibly. This includes matters
relating to environmental, social, governance and ethics.
The Committee also considers: diversity and inclusion in the
workplace; employee engagement and wellbeing; community
engagement activities; and environmental matters.
The Committee’s main responsibilities are:
approving the Group’s CSR strategy and reviewing
performance against the strategy.
reviewing the Group’s performance relating to CSR matters.
assessing the Group’s role in society and the Group’s
external positioning on CSR matters.
Committee composition, skills and
experience and meetings in the year
Sebastian James was appointed Chair of the CSR Committee
as of 1 March 2016. This appointment was part of the
changes to the Committees that were announced on 16
February 2016.
The Committee comprised two independent NEDs, Sebastian
James and Jane Hanson, Paul Geddes, CEO, and Simon
Linares, Group Human Resources Director. You can find their
biographical information on pages 50 to 52.
The CSR Committee held three scheduled meetings in 2016.
This table shows attendance at the scheduled meetings:
Sebastian James (Chair)
Paul Geddes
Jane Hanson
Simon Linares12
Angela Morrison12
Notes:
Scheduled
meetings
Percentage
attendance
3 of 3
3 of 3
3 of 3
2 of 2
1 of 1
100%
100%
100%
100%
100%
1. Attendance is expressed as the number of scheduled meetings attended
out of the number of such meetings possible or applicable to attend
2. Angela Morrison stepped down from the Committee prior to the meeting on
28 July 2016. Simon Linares was appointed to the Committee at the start of
the same meeting
The Head of Public Affairs and Sustainability, and CSR
Manager are invited to attend CSR Committee meetings.
As executive sponsors of the strands of the CSR strategy, the
Managing Director of Personal Lines, the Chief Operating
Officer and the Managing Director of Commercial attend
appropriate sections of Committee meetings.
The Chair reports on matters dealt with at each Committee
meeting to the subsequent scheduled Board meeting.
Main activities during the year
The Committee monitors the implementation of the CSR
strategy through regular updates on the different focus
areas and challenges the robustness of and progress against
the targets relating to each strand of the CSR strategy.
The Committee also receives a report on CSR developments
at each of its meetings.
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Direct Line Group Annual Report & Accounts 2016
Committee reports continued
Corporate Social Responsibility
Responsibilities of the CSR Committee
Committee report
expertise and have an authentic voice.
February 2016.
Areas of focus in the reporting period
Overall, the Committee was keen this year to ensure
that the Group’s CSR activity was as tightly focused
as possible on those areas where the Group could
be a real force for good, bring high levels of specific
As a result, the Committee’s principal focus was
on “Shotgun”, the CSR initiative designed with the
ambitious goal of reducing young driver deaths in their
first 1,000 miles of driving to zero. The case study on
page 73 shows the scrutiny and interest of the
Committee in this initiative.
At the Committee’s request, the Group’s CSR Manager
and Head of Investments met with a number of the
Group’s external asset managers to understand their
attitudes towards responsible investment. All were able
to demonstrate clear evidence of their own CSR
credentials as well as their approach to incorporating
environmental, social and governance factors into their
investment processes.
Group policy and approach to this issue both within
the Company and with respect to outside suppliers.
The Committee agreed with management’s assessment
that the Group’s risk exposure to the requirements of
the Modern Slavery Act was currently considered to
be low but should be monitored on an ongoing basis.
The Committee noted management’s procedures to
mitigate the risk of a breach in the Group’s supply line.
The Committee was delighted to note the continued
strong performance in raising employee engagement
scores across the Group as measured by the annual
employee survey and continues to push for initiatives
to further increase engagement.
The Committee reviewed the Group’s response to
the 2015 Modern Slavery Act and signed off the
Notes:
The CSR Committee oversees and advises on how the
Group conducts its business responsibly. This includes matters
relating to environmental, social, governance and ethics.
The Committee also considers: diversity and inclusion in the
workplace; employee engagement and wellbeing; community
engagement activities; and environmental matters.
The Committee’s main responsibilities are:
approving the Group’s CSR strategy and reviewing
performance against the strategy.
reviewing the Group’s performance relating to CSR matters.
assessing the Group’s role in society and the Group’s
external positioning on CSR matters.
Committee composition, skills and
experience and meetings in the year
Sebastian James was appointed Chair of the CSR Committee
as of 1 March 2016. This appointment was part of the
changes to the Committees that were announced on 16
The Committee comprised two independent NEDs, Sebastian
James and Jane Hanson, Paul Geddes, CEO, and Simon
Linares, Group Human Resources Director. You can find their
biographical information on pages 50 to 52.
The CSR Committee held three scheduled meetings in 2016.
This table shows attendance at the scheduled meetings:
Sebastian James (Chair)
Paul Geddes
Jane Hanson
Simon Linares12
Angela Morrison12
Scheduled
meetings
Percentage
attendance
3 of 3
3 of 3
3 of 3
2 of 2
1 of 1
100%
100%
100%
100%
100%
1. Attendance is expressed as the number of scheduled meetings attended
out of the number of such meetings possible or applicable to attend
2. Angela Morrison stepped down from the Committee prior to the meeting on
28 July 2016. Simon Linares was appointed to the Committee at the start of
the same meeting
The Head of Public Affairs and Sustainability, and CSR
Manager are invited to attend CSR Committee meetings.
As executive sponsors of the strands of the CSR strategy, the
Managing Director of Personal Lines, the Chief Operating
Officer and the Managing Director of Commercial attend
appropriate sections of Committee meetings.
The Chair reports on matters dealt with at each Committee
meeting to the subsequent scheduled Board meeting.
Main activities during the year
The Committee monitors the implementation of the CSR
strategy through regular updates on the different focus
areas and challenges the robustness of and progress against
the targets relating to each strand of the CSR strategy.
The Committee also receives a report on CSR developments
at each of its meetings.
Case study: Shotgun
The Committee’s principal focus in the reporting period was
on Shotgun, the CSR initiative developed by management
with the goal of reaching ‘no young driver deaths in their
first 1,000 miles of driving’. This is a goal across the UK
irrespective of whether the young driver is insured with the
Group or not.
The Committee scrutinised the development of the
initiative, the consumer research, the reward partners, the
communications campaign and the design and build of the
app. The Committee questioned the rationale for the name
‘Shotgun’, and probed management on the designs and
visual identity of the app. The Committee also requested
that management implement controls to help ensure that
the potential for negative behaviours was mitigated.
The Committee examined the communications brief,
particularly the advertising and use of social media.
The Committee was especially interested in maximising
the reach and power of the app, and in making sure that
the marketing was appropriate and powerful and made
use of all appropriate channels (focused on the digital
and social channels).
The Committee reviewed the evaluation framework and
provided feedback on the effectiveness measures, including
in relation to attitudes, behaviours and impacts. A key area
of the Committee’s focus was to challenge the robustness
of the development and testing to ensure the product was
launched successfully and functioning as intended.
CSR strategy
The Group’s CSR strategy focuses on four areas. A member
of the Executive Committee sponsors each area. They are:
Helping to make our society safer (Shotgun):
Mike Holliday-Williams, MD Personal Lines.
Proud to be here: Simon Linares, Group Human Resources
Director.
Being recognised as part of our communities:
Jon Greenwood, MD Commercial.
Reduce, Reuse and Recycle: Steve Maddock,
Chief Operating Officer.
You can find out more about the Group’s CSR approach
and priorities in the CSR report on pages 30 to 33.
Helping to make our society safer
During the year, the Committee received progress updates
at each meeting on Shotgun. The Committee also received
reports on the project to sponsor lollipop people for schools
(Lollipoppers). You can find further details on the Shotgun
manifesto in the CSR report on page 30.
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 2016 strategy. The KPIs for this element
are linked to the People Strategy and focus on employee
engagement and 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
Group’s main office locations. The Committee challenged
the main targets which related to volunteering, fund raising,
matched payroll giving and the Community Cashback scheme.
The ‘One Day’ volunteering initiative and Community Cashback
scheme continued to be considered the two areas with the
greatest potential for impact. These arrangements encourage
colleagues to take part and raise funds for local causes.
Reduce, Reuse and Recycle
This strand of the strategy considers energy use, waste
management and resource use within the Group’s operations
and environmental and social matters in the Group’s supply
chain. The Committee reviewed the key objectives related to
reducing greenhouse gas emissions, diverting waste from
landfill, and challenged the targets, including the new targets
for waste recycling across the Group’s accident and repair
centres. The Committee encouraged management to pursue
their proposed initiative relating to the use of reconditioned
automotive parts in order to reduce embedded energy usage,
waste and landfill.
CSR activities
The Committee was kept up to date with the Group’s external
positioning, including the Group’s stakeholders and its
approach to managing the external relationships, including
use of the corporate website and the AGM. The Committee
continues to challenge management’s approach to ensure that
it is strategic and continues to focus on initiatives with the
potential to add discernible value.
The Committee monitored the Group’s performance against
the targets set in relation to CSR KPIs.
The Committee reviewed the CSR-related feedback received
from proxy voting advisers following publication of the
Company’s 2015 Annual Report & Accounts and the Notice
of 2016 AGM and encouraged management to consider
addressing the relevant feedback.
The CSR Committee’s effectiveness
A formal and rigorous annual evaluation of the Committee’s
performance and effectiveness was undertaken during the
year. Professor Rob Goffee of London Business School
facilitated this effectiveness review, and prepared a report
based on responses from Committee members and other
stakeholders to a questionnaire and interview. After reviewing
and discussing the report, the Committee concluded that it was
operating effectively and has access to sufficient resources to
perform its duties.
The Board reviewed and approved this report on
6 March 2017.
Sebastian James
Chair of the CSR Committee
72 Direct Line Group Annual Report & Accounts 2016
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Committee reports continued
Investment Committee report
Andrew Palmer
Chair of the
Investment Committee
Areas of focus in the reporting period
A slowing global economy, a “lower for longer”
interest rate outlook and the EU Referendum shaped
the Committee’s concerns when it met in January 2016.
The case study on page 75 details how the Committee
met the challenge of ensuring: the Company was
prepared in advance of the EU Referendum vote; and
the investment portfolio was appropriately positioned
to respond to events after the vote to leave the EU.
The in-house Investment team undertook a material
change of outsource arrangements during the year,
moving custody, treasury banking, middle-office and
collateral activities to a new provider. The Committee
monitored delivery of key milestones and challenged
reasons for changes to project plans. The project was
executed successfully in 2016.
As part of management’s drive to deliver a cost-effective
investment operating model, the Committee has
scrutinised a proposal from management to bring
certain UK investment grade credit assets in house.
The Committee challenged whether the Investment team
was in a position to manage in-house a wider range
of holdings before approving this initiative.
With the compression in UK yields following the vote to
leave the EU, the Committee was concerned to ensure
investment discipline remained paramount within new
asset classes still being invested to full allocations and
investment income budgeting continued to be based on
conservative assumptions. The Committee received a
presentation from the external asset manager responsible
for the CRE loans portfolio and reviewed the assumptions
underpinning management’s projections of investment
income over 2017-20. In both cases, the Committee
was satisfied with responses received to questions
raised at respective presentations.
Following the implementation of Solvency II, the
Committee wanted to understand: (a) how well
management was planning for, and resourcing, the
additional reporting on assets and derivatives required
under Pillar III; and (b) whether there was sufficient
evidence of application of the Prudent Person Principle
(“PPP”) to investment activities. Following review the
Committee was satisfied that appropriate levels of
delegation to management had been put in place; and
that management were robustly reviewing investment and
risk against the PPP guidelines.
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74 Direct Line Group Annual Report & Accounts 2016
Responsibilities of the Investment
Committee
The Committee is responsible for the oversight of how
the Group develops its investment strategy. It also oversees
the management and performance of the Group’s
investment portfolio.
The 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.
consider and approve material changes to the risk
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.
monitor the results from investment activities, namely
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 BRC.
Committee composition, skills and
experience and meetings in the year
The Committee comprises two independent NEDs:
Andrew Palmer and Jane Hanson. You can find their
biographical information on pages 50 and 51.
Andrew Palmer was appointed Chair of the Committee as of
1 March 2016. This appointment was part of the changes to
the Committees that were announced on 16 February 2016.
The Investment Committee held four scheduled meetings
in 2016. The table below shows attendance at the
scheduled meetings:
Andrew Palmer (Chair)
Jane Hanson
Clare Thompson1
Note:
Scheduled
meetings
Percentage
attendance
4 of 4
4 of 4
1 of 1
100 %
100 %
100 %
1. Attendance is expressed as the number of scheduled meetings attended
out of the number of such meetings possible or applicable to attend
The CEO, CFO, CRO, Director of Investment Management
and Treasury, and Director of Financial Risk are invited to
attend Committee meetings.
The Chair reports on matters dealt with at each Committee
meeting to the subsequent scheduled Board meeting.
Direct Line Group Annual Report & Accounts 2016
Committee reports continued
Investment Committee report
Responsibilities of the Investment
Committee
The Committee is responsible for the oversight of how
the Group develops its investment strategy. It also oversees
the management and performance of the Group’s
investment portfolio.
The 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.
consider and approve material changes to the risk
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.
monitor the results from investment activities, namely
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 BRC.
Committee composition, skills and
experience and meetings in the year
The Committee comprises two independent NEDs:
Andrew Palmer and Jane Hanson. You can find their
biographical information on pages 50 and 51.
Andrew Palmer was appointed Chair of the Committee as of
1 March 2016. This appointment was part of the changes to
the Committees that were announced on 16 February 2016.
The Investment Committee held four scheduled meetings
in 2016. The table below shows attendance at the
scheduled meetings:
Scheduled
meetings
Percentage
attendance
4 of 4
4 of 4
1 of 1
100 %
100 %
100 %
Jane Hanson
Clare Thompson1
Note:
1. Attendance is expressed as the number of scheduled meetings attended
out of the number of such meetings possible or applicable to attend
The CEO, CFO, CRO, Director of Investment Management
and Treasury, and Director of Financial Risk are invited to
attend Committee meetings.
The Chair reports on matters dealt with at each Committee
meeting to the subsequent scheduled Board meeting.
Areas of focus in the reporting period
A slowing global economy, a “lower for longer”
interest rate outlook and the EU Referendum shaped
the Committee’s concerns when it met in January 2016.
The case study on page 75 details how the Committee
met the challenge of ensuring: the Company was
prepared in advance of the EU Referendum vote; and
the investment portfolio was appropriately positioned
to respond to events after the vote to leave the EU.
The in-house Investment team undertook a material
change of outsource arrangements during the year,
moving custody, treasury banking, middle-office and
collateral activities to a new provider. The Committee
monitored delivery of key milestones and challenged
reasons for changes to project plans. The project was
executed successfully in 2016.
As part of management’s drive to deliver a cost-effective
investment operating model, the Committee has
scrutinised a proposal from management to bring
certain UK investment grade credit assets in house.
The Committee challenged whether the Investment team
was in a position to manage in-house a wider range
of holdings before approving this initiative.
With the compression in UK yields following the vote to
leave the EU, the Committee was concerned to ensure
investment discipline remained paramount within new
asset classes still being invested to full allocations and
conservative assumptions. The Committee received a
presentation from the external asset manager responsible
for the CRE loans portfolio and reviewed the assumptions
underpinning management’s projections of investment
income over 2017-20. In both cases, the Committee
was satisfied with responses received to questions
raised at respective presentations.
Following the implementation of Solvency II, the
Committee wanted to understand: (a) how well
management was planning for, and resourcing, the
additional reporting on assets and derivatives required
under Pillar III; and (b) whether there was sufficient
evidence of application of the Prudent Person Principle
(“PPP”) to investment activities. Following review the
Committee was satisfied that appropriate levels of
delegation to management had been put in place; and
that management were robustly reviewing investment and
risk against the PPP guidelines.
74 Direct Line Group Annual Report & Accounts 2016
investment income budgeting continued to be based on
Andrew Palmer (Chair)
Case study: EU referendum
In preparation for the UK’s EU membership referendum, the
Committee met economists from a major financial institution
in April 2016 to obtain an independent third party view of
the likely economic consequences of a vote to either remain
in, or leave, the EU. In addition, the Committee requested
an update from management regarding preparations
in advance of the vote. The Committee concluded that
preparations, including plans to ensure access to liquidity
to meet customer payments, and to support collateral calls,
were well developed. In the period following the vote,
management updated both the Board and the Committee
on market conditions, and in particular the impact of
Sterling’s depreciation against both the US Dollar and
the Euro on collateral calls for open foreign exchange
forward positions.
Concerned that the leave vote could lead to a period
of recession in the UK, the Committee (at its meeting
in July 2016) requested management to carry out a
comprehensive study of all Sterling assets held in the
portfolio, in addition to considering any appropriate wider
stresses on the entire portfolio, and make recommendations
as necessary to position the portfolio for a recession. The
Committee reviewed the study conclusions at its subsequent
meeting, noting that the portfolio was very well diversified
and certain illiquid asset classes had been built defensively
from the outset, given the Company was a long-term investor
and thus expected to be subject to periods of market
turbulence from time to time. Management advised the
Committee of some minor sales within the portfolio designed
to provide some further defensive positioning, which was
in part, the result of examining a recessionary outlook.
Main activities during the year
At every scheduled meeting the Committee receives a market
update from the Director of Investment Management and
Treasury. This includes a report on the economic conditions
in the UK, United States of America and the Eurozone; an
update on commodity prices, credit markets and interest
rates; and anything appropriate for the Committee to know.
Investment strategy
The Investment strategy was materially changed in 2015.
Because of this, the Committee spent its time reviewing and
challenging the new investments. The Committee focused on
the three new asset mandates; two investing in global credit
and subordinated financial credit, and one investing in Sterling
CRE loans which was a new asset class in the Group’s
investment portfolio.
Risk framework and operating model
As reported in the Annual Report & Accounts 2015, the
Committee agreed to proposals to move custody and
middle-office services to a new provider. The Committee
ensured it received regular updates on the project, including
implementation and the benefits achieved since the transfer.
The final part of the transfer was completed successfully in
November 2016.
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 external asset managers on their
performance against benchmark.
Solvency II
The Committee examined progress on initiatives linked
to preparing for Solvency II, notably:
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
A formal and rigorous annual evaluation of the Committee’s
performance and effectiveness was undertaken during the
year. Professor Rob Goffee of London Business School
facilitated this effectiveness review, and prepared a report
based on responses from Committee members and other
stakeholders to a questionnaire and interview. After reviewing
and discussing the report, the Committee concluded that it was
operating effectively and has access to sufficient resources to
perform its duties.
The Board reviewed and approved this report on
6 March 2017.
Andrew Palmer
Chair of the Investment Committee
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Committee reports continued
Nomination Committee report
Mike Biggs
Chair of the
Nomination
Committee
Responsibilities of the Nomination
Committee
The Committee is responsible for leading the process for
Board appointments and making recommendations to the
Board. It keeps the Board's structure, size, composition, and
balance of skills, experience, independence and expertise
under review. It also provides guidance to management on
executive succession planning.
The Committee’s main responsibilities are:
considering and recommending to the Board matters
regarding appointment of Directors, membership and
chairmanship of Board Committees.
Areas of focus in the reporting period
succession planning for Directors and other senior
An active Nomination Committee is vital for promoting
effective Board and executive succession. During 2016,
the majority of the Committee’s time was devoted to
considering the composition of the Board. It ensured
that the recruitment process for Non-Executive Directors
identified the skills and experience that the Board needs
to be able to challenge and support senior management
in developing and executing the Group’s strategy. It
also reviewed executive succession planning, to ensure
that the Group’s future leadership will have the qualities
needed for the strategic and cultural development
of the business. The case study on page 77 details the
activities undertaken by the Committee during 2016
on succession planning for the Board and management.
As part of its focus on executive succession planning,
and to improve gender and other diversity in the
Group’s senior management, the Committee
encouraged management to develop its talent pipeline.
This is being achieved by the systematic assessment of
potential, bespoke personal coaching and development
plans for high-potential employees. The Committee also
encouraged the targeted recruitment of new senior
executives to strengthen leadership and capability in
disciplines including strategic development, change
management, IT, claims management, data, finance
and procurement.
During the reporting period, the Committee oversaw the
appointments to the Board of: Richard Ward as Senior
Independent Director; Danuta Gray as an independent
Non-Executive Director; and Mike Holliday-Williams,
MD Personal Lines, as an Executive Director. The
Committee recommended changes to the membership
of the Board’s Committees to make the best use of
Directors’ experience and expertise.
The Committee agreed the choice of Egon Zehnder
as search agent and the profile and criteria to be used
in the search which culminated in the appointment of
Danuta Gray. In view of the lead time for identifying
candidates and obtaining regulatory approval in
advance of their appointment, and with the aim of
ensuring continuity and stability in the Board’s
succession planning, the Committee has engaged
Egon Zehnder in a search for further Non-Executive
Director candidates.
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 Non-Executive Directors’ continued
independence.
considering and recommending to the Board the Directors’
annual re-election and reappointment at the end of their
term in office.
The Nomination Committee’s main role and responsibilities
are set out in written terms of reference and are available at
www.directlinegroup.co.uk/termsofreference
Committee composition, skills and
experience, and meetings in the year
The Committee comprises the Chairman, Mike Biggs, and
two independent Non-Executive Directors: Andrew Palmer and
Richard Ward. You can find their biographical information on
pages 50 to 51.
The Committee held three scheduled meetings in 2016.
It also held eight additional meetings to consider succession
planning and to deal with: the appointment of Richard Ward
as Senior Independent Director; membership of the Board’s
Committees; searching and appointing Danuta Gray as a
Non-Executive Director; appointing Mike Holliday-Williams
as an Executive Director; and appointing an external board
effectiveness facilitator.
This table shows attendance at the scheduled meetings:
Mike Biggs (Chair)
Andrew Palmer
Priscilla Vacassin1
Richard Ward1
Note:
Scheduled
meetings
Percentage
attendance
3 of 3
3 of 3
1 of 1
2 of 2
100%
100%
100%
100%
1. Attendance is expressed as the number of scheduled meetings attended
out of the number of such meetings possible or applicable to attend
The CEO and the Group Human Resources Director are
invited to attend Committee meetings.
The Chair reports on matters dealt with at each Committee
meeting to the subsequent scheduled Board meeting.
76
76 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Committee reports continued
Nomination Committee report
Responsibilities of the Nomination
Committee
The Committee is responsible for leading the process for
Board appointments and making recommendations to the
Board. It keeps the Board's structure, size, composition, and
balance of skills, experience, independence and expertise
under review. It also provides guidance to management on
executive succession planning.
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 Non-Executive Directors’ continued
considering and recommending to the Board the Directors’
annual re-election and reappointment at the end of their
independence.
term in office.
The Nomination Committee’s main role and responsibilities
are set out in written terms of reference and are available at
www.directlinegroup.co.uk/termsofreference
Committee composition, skills and
experience, and meetings in the year
The Committee comprises the Chairman, Mike Biggs, and
two independent Non-Executive Directors: Andrew Palmer and
Richard Ward. You can find their biographical information on
pages 50 to 51.
The Committee held three scheduled meetings in 2016.
It also held eight additional meetings to consider succession
planning and to deal with: the appointment of Richard Ward
as Senior Independent Director; membership of the Board’s
Committees; searching and appointing Danuta Gray as a
Non-Executive Director; appointing Mike Holliday-Williams
as an Executive Director; and appointing an external board
This table shows attendance at the scheduled meetings:
Mike Biggs (Chair)
Andrew Palmer
Priscilla Vacassin1
Richard Ward1
Note:
Scheduled
meetings
Percentage
attendance
3 of 3
3 of 3
1 of 1
2 of 2
100%
100%
100%
100%
1. Attendance is expressed as the number of scheduled meetings attended
out of the number of such meetings possible or applicable to attend
The CEO and the Group Human Resources Director are
invited to attend Committee meetings.
The Chair reports on matters dealt with at each Committee
meeting to the subsequent scheduled Board meeting.
Areas of focus in the reporting period
An active Nomination Committee is vital for promoting
effective Board and executive succession. During 2016,
the majority of the Committee’s time was devoted to
considering the composition of the Board. It ensured
that the recruitment process for Non-Executive Directors
identified the skills and experience that the Board needs
to be able to challenge and support senior management
in developing and executing the Group’s strategy. It
also reviewed executive succession planning, to ensure
that the Group’s future leadership will have the qualities
needed for the strategic and cultural development
of the business. The case study on page 77 details the
activities undertaken by the Committee during 2016
on succession planning for the Board and management.
As part of its focus on executive succession planning,
and to improve gender and other diversity in the
Group’s senior management, the Committee
encouraged management to develop its talent pipeline.
This is being achieved by the systematic assessment of
potential, bespoke personal coaching and development
plans for high-potential employees. The Committee also
encouraged the targeted recruitment of new senior
executives to strengthen leadership and capability in
disciplines including strategic development, change
management, IT, claims management, data, finance
and procurement.
appointments to the Board of: Richard Ward as Senior
Independent Director; Danuta Gray as an independent
Non-Executive Director; and Mike Holliday-Williams,
MD Personal Lines, as an Executive Director. The
Committee recommended changes to the membership
of the Board’s Committees to make the best use of
Directors’ experience and expertise.
The Committee agreed the choice of Egon Zehnder
as search agent and the profile and criteria to be used
in the search which culminated in the appointment of
Danuta Gray. In view of the lead time for identifying
candidates and obtaining regulatory approval in
advance of their appointment, and with the aim of
ensuring continuity and stability in the Board’s
succession planning, the Committee has engaged
Egon Zehnder in a search for further Non-Executive
Director candidates.
During the reporting period, the Committee oversaw the
effectiveness facilitator.
Case study: succession planning
Your Board needs a balance of experience, expertise and
diversity, to support the quality of the Board’s debate and
to be able to encourage and challenge senior management
to develop and execute a sustainable strategy. In addition
to its three scheduled formal meetings, the Committee
convened a further eight meetings throughout 2016 to
pursue its succession planning agenda. The Committee
oversaw the process of recruiting a new Non-Executive
Director following Priscilla Vacassin’s retirement from the
Board in March 2016. With the objective of staggering
Non-Executive Directors’ terms of appointment to ensure
continuity and stability, the Committee also launched a
search for a further two Non-Executive Directors in the last
quarter of the year. Since the year end, Danuta Gray has
been appointed as a Non-Executive Director and Mike
Holliday-Williams, MD Personal Lines, has been appointed
as an Executive Director.
The Committee has actively supported the management
team in generating and maintaining a pipeline of
potential future leaders who reflect the Group’s diversity
and cultural values and who contribute to and develop
the capability to evolve the business and drive good
outcomes for all our customers and stakeholders.
The Committee has encouraged management to identify
and develop high potential individuals, and create a
working environment in which our talented women can also
rise to senior management positions. The Committee will
monitor progress in achieving the targets committed to by
the Group in subscribing to the Women in Finance Charter.
Main activities during the year
Succession planning
The Committee places great importance on Board and executive
succession planning and monitors its progress as a standing
agenda item at each of its scheduled meetings. The Committee
guides management in executive succession planning.
Board 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 Non-Executive
Directors’ letters of appointment, terms of appointment and
time commitment.
Board changes
The Company appointed Richard Ward as Senior
Independent Director on 18 January 2016. Priscilla Vacassin
stepped down from the Board on 1 March 2016 and the
Committee recommended to the Board a number of changes
to the chairmanship and membership of the Board’s
Committees, which the Board subsequently approved and
were announced on 16 February 2016. The Committee also
recommended the appointment of Richard Ward as a member
of the BRC, which the Board subsequently approved.
Following a recommendation from the Committee, the Board
appointed Danuta Gray as a Non-Executive Director, and
Mike Holliday-Williams, Managing Director Personal Lines,
as an Executive Director on 1 February 2017. Following
a further recommendation from the Committee, the Board
approved the appointment of Danuta Gray as a member
of the Remuneration Committee on 6 March 2017.
Board appointment and reappointment process
The Committee oversaw the process to appoint Danuta Gray
as a Non-Executive Director. The Committee reviewed the
Board members’ expertise and experience. It then produced
a detailed brief and engaged external search consultants,
Egon Zehnder, to find suitable candidates. Egon Zehnder
is a signatory to the Voluntary Code of Conduct for executive
search firms. It is not connected in any way to the Company.
Egon Zehnder prepared a long list of candidates of appropriate
merit from diverse backgrounds. The Committee agreed a
shortlist and interviewed candidates. It then approached the PRA
and FCA for approval, and recommended appointing Danuta
Gray as a Non-Executive Director to the Board. The Committee
recommended the appointment of Mike Holliday-Williams to the
Board in recognition of his leadership of the Personal Lines
business and to leverage his expertise for the benefit of all of the
Group’s businesses.
As Danuta Gray and Mike Holliday-Williams were appointed
since the last AGM, they will submit themselves for election
at the Company’s 2017 AGM. Danuta Gray is considered
independent within the Code’s meaning.
Electing and re-electing Directors
Before recommending the proposed election and re-election
of Directors at the 2016 AGM, the Committee reviewed the
independence of Non-Executive Directors. It concluded that
Jane Hanson, Sebastian James, Andrew Palmer, Clare
Thompson and Richard Ward were all independent within
the Code’s meaning. Andrew Palmer has served on the Board
since March 2011, and his performance and independence
were subject to a particularly rigorous review by the Committee
pursuant to the requirements of the Code. The Board is satisfied
that he remains independent, continues to make a significant
contribution to the Board and its Committees, and provides
valuable continuity to the Board. Mike Biggs was independent
when appointed as Chairman. The Committee recommended
to the Board and shareholders to elect and re-elect all serving
Directors at the Company’s 2016 AGM.
76 Direct Line Group Annual Report & Accounts 2016
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Committee reports continued
Diversity
The Group celebrates the diversity of its workforce. It seeks
to recruit the best candidates for all positions throughout the
business. At the date of this report, three of the Group’s 10
Directors are women, which equates to 30% of the Board.
This exceeds the target set in Lord Davies’ Women on Boards
Review Five Year Summary published in October 2015,
to be achieved by 2020. The Board also acknowledges
the benefits of diversity.
You can find out more about the Group’s approach to
diversity in the CSR report on pages 32 and 33.
Board Effectiveness Review
In the three-year cycle recommended by the Code, 2016
was the year in which the Company should appoint
an external facilitator to run the Board and Committee
effectiveness review. The Nomination Committee scrutinised
a list of potential external facilitators drawn up by the
Company Secretary and recommended the appointment
of Professor Rob Goffee of London Business School, whose
field of expertise is organisational behaviour and leadership
development. The Board subsequently approved his
appointment as the external facilitator.
The Nomination Committee’s effectiveness
A formal and rigorous annual evaluation of the Committee’s
performance and effectiveness was undertaken during the
year. Professor Rob Goffee of London Business School
facilitated this effectiveness review, and prepared a report
based on responses from Committee members and other
stakeholders to a questionnaire and interview. After reviewing
and discussing the report, the Committee concluded that it
was operating effectively and has access to sufficient
resources to perform its duties.
The Board reviewed and approved this report on
6 March 2017.
Michael N Biggs
Chair of the Nomination Committee
78
78 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Committee reports continued
Diversity
The Group celebrates the diversity of its workforce. It seeks
to recruit the best candidates for all positions throughout the
business. At the date of this report, three of the Group’s 10
Directors are women, which equates to 30% of the Board.
This exceeds the target set in Lord Davies’ Women on Boards
Review Five Year Summary published in October 2015,
to be achieved by 2020. The Board also acknowledges
the benefits of diversity.
You can find out more about the Group’s approach to
diversity in the CSR report on pages 32 and 33.
Board Effectiveness Review
In the three-year cycle recommended by the Code, 2016
was the year in which the Company should appoint
an external facilitator to run the Board and Committee
effectiveness review. The Nomination Committee scrutinised
a list of potential external facilitators drawn up by the
Company Secretary and recommended the appointment
of Professor Rob Goffee of London Business School, whose
field of expertise is organisational behaviour and leadership
development. The Board subsequently approved his
appointment as the external facilitator.
The Nomination Committee’s effectiveness
A formal and rigorous annual evaluation of the Committee’s
performance and effectiveness was undertaken during the
year. Professor Rob Goffee of London Business School
facilitated this effectiveness review, and prepared a report
based on responses from Committee members and other
stakeholders to a questionnaire and interview. After reviewing
and discussing the report, the Committee concluded that it
was operating effectively and has access to sufficient
resources to perform its duties.
The Board reviewed and approved this report on
6 March 2017.
Michael N Biggs
Chair of the Nomination Committee
Remuneration Committee report
Clare Thompson
Chair of the
Remuneration
Committee
Areas of focus in the reporting period
The Directors’ remuneration policy was approved at the
Company’s 2014 AGM, and the Company is required
to submit a new remuneration policy for shareholder
approval at the 2017 AGM. The case study on
page 80 explains how the Committee: reviewed
the remuneration policy; challenged how Directors’
reward structures were aligned to the Group’s strategic
objectives; and participated in the consultation process
with major shareholders and governance agencies.
During the year the Committee agreed a customer
and people measure for the 2017 AIP. The Committee
considered the most appropriate mix of customer and
people targets, taking into account that the Company
had joined the HM Treasury initiative, Women in
Finance. This initiative connected certain aspects of
remuneration to appropriate targets. To ensure that the
targets were challenging, a member of the Committee
considered the supporting documentation and
underlying processes. The Committee then discussed
the targets before approving them.
Prior to any awards vesting under the LTIP and deferred
AIP schemes the Committee considered whether the
financial and risk underpins had been met. It received
confirmation from the Chair of the BRC that there had
been no material risk failings, regulatory or reputational
concerns. The Chair of the Audit Committee confirmed
that there had been no circumstances regarding the
adequacy and effectiveness of the Group’s internal
financial controls and internal control systems that
would affect the vesting. The Committee approved the
vesting of awards.
The Committee considered whether the performance
targets of RoTE and TSR remain appropriate and in line
with the Group’s strategic objectives. When considering
awards under the LTIP scheme the Committee
considered the appropriate targets to ensure that they
remain challenging in the context of the Group’s
planned performance.
The Committee reviewed the submission of the
Remuneration Policy Statement to the PRA, which was
a new Solvency II requirement. The statement contained
details of the remuneration policy that applied
throughout the Group as well as particular requirements
for Solvency II identified staff.
Responsibilities of the Remuneration
Committee
The Committee is responsible for setting and providing
oversight of how the Group implements its remuneration
policy. The Committee oversees the level and structure of
remuneration arrangements for senior executives. It also
approves share incentive plans, and recommends them to the
Board and shareholders. Where applicable, it also oversees
share plan changes that need shareholder approval.
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 and Solvency II
identified staff.
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
targets of any performance-related pay arrangements,
and liaising with the Board Risk and Audit Committees
where appropriate.
The Remuneration Committee’s main role and responsibilities
are set out in written terms of reference and are available at
www.directlinegroup.co.uk/termsofreference
Committee composition, skills and
experience and meetings in the year
The Committee comprised three independent NEDs in 2016:
Clare Thompson, Sebastian James and Andrew Palmer, and
the Chairman of the Board, Mike Biggs. Danuta Gray was
appointed a member of the Committee on 6 March 2017.
You can find their biographical information on pages 50
and 51.
The Remuneration Committee held five scheduled meetings
in 2016. Two sub-committee meetings were also held to
approve the LTIP vesting and grants. Two additional meetings
were held to discuss the remuneration policy. This table shows
attendance at the scheduled meetings:
Clare Thompson1 (Chair)
Mike Biggs
Sebastian James
Andrew Palmer
Priscilla Vacassin1
Note:
Scheduled
meetings
Percentage
attendance
3 of 3
5 of 5
5 of 5
5 of 5
2 of 2
100%
100%
100%
100%
100%
1. Attendance is expressed as the number of scheduled meetings attended
out of the number of such meetings possible or applicable to attend
The CEO, Group Human Resources Director and senior
representatives of the Human Resources function are invited to
attend Committee meetings. FIT Remuneration Consultants LLP
(“FIT”), who act as independent advisers to the Committee,
also attend Committee meetings. The Chair reports on matters
dealt with at each Committee meeting to the subsequent
scheduled Board meeting.
78 Direct Line Group Annual Report & Accounts 2016
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Committee reports continued
Case study: Directors’
remuneration policy
Review: Initially the Committee undertook a fundamental
review of remuneration arrangements for the strategic
leadership team (including Executive Directors and Executive
Committee members). The Committee was supported in the
review by management and FIT. The structure of the review
team was designed to minimise any conflicts of interest
when analysing current remuneration arrangements.
The review included interviews with members of the
Remuneration Committee and Executive Committee in order
to capture views on the current remuneration structures, test
the appropriateness of the remuneration arrangements and
to consider how they furthered the Group’s strategy and
long-term interests. A report was then produced by FIT on
their findings for the Committee’s strategy day.
Consider: At the strategy day the Committee reviewed the
current remuneration policy, and considered alternatives in
the light of the Group’s objectives, regulatory and market
landscape and highlighted areas in which it considered
changes could be made so that formal proposals could
be put forward to the Committee. The Committee also
considered areas which were not currently in the
remuneration policy and could be added.
The proposed changes to the Directors’ remuneration
policy were then considered against: the Group’s strategic
objectives; statutory and regulatory requirements; and
investors published guidance. Following the review the
Committee identified a number of changes to the
remuneration policy and wrote to major shareholders and
a number of governance agencies advising them of the
proposals and asking for their views on them.
Consult: The Committee continued to consider the proposals
in the light of subsequent guidance issued from August 2016
to 31 December 2016 by organisations such as the
Investment Association, the Executive Remuneration Working
Group, the General Counsel and Company Secretaries of
FTSE 100 companies (“GC100”) and Legal & General
Investment Management’s principles. The Committee
concluded its consultation with major shareholders, the investor
community and governance agencies in January 2017.
The proposals were generally well received and based
on the responses adjustments were made to the proposed
remuneration policy. You can find out more about the
Directors’ remuneration policy to be voted on by
shareholders at the 2017 AGM on pages 100 to 109.
Main activities during the year
Review of remuneration policy
As we approached the end of the first three-year cycle since
the introduction of the new remuneration reporting regulations,
the current Directors’ remuneration policy, that was approved
at the Company’s 2014 AGM, is due for review. The new
remuneration policy will be submitted to shareholders’ binding
vote at the 2017 AGM and will be expected to remain in
place for the next three years.
Annual incentive plan
During the year, the Committee monitored the operation of
the AIP. For the 2015 financial year, this involved reviewing
the Group’s financial performance and 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 BRC about whether the Group
had achieved the required performance within risk appetite.
The Committee concluded that no clawback of awards was
required in 2016.
For the 2016 financial year, the Committee approved the
performance metrics and monitored performance against
them. The Committee also discussed and challenged the
performance metrics for the 2017 AIP and, subsequently
approved the metrics. The Committee discussed proposed
new customer and people measures and was satisfied that
the proposed measures were sufficiently challenging. The
Committee scrutinised the new approach to performance
management that was introduced for 2016 and commended
management on simplifying the appraisal process.
Long-term incentives
During 2016, the Committee reviewed and approved the level
of vesting of the 2013 awards made under the Company’s
LTIP against the performance criteria. These awards had two
performance metrics based on RoTE and TSR. After assessing
performance against these metrics, the awards vested at a level
of 96.4%. Before vesting, the Committee considered the LTIP’s
financial and risk underpins. The Committee also determined
the quantum of awards made in 2016 under the LTIP in view
of business and individual performance.
Directors and other senior executives
During the year, the Committee reviewed and approved
the level and structure of the pay and incentives of the
Executive Directors and other senior executives. Additionally,
it reviewed remuneration for the strategic leadership team.
As part of this review, the Committee considered the Share
Ownership Guidelines for the Executive Directors and
Executive Committee members.
80
80 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Committee reports continued
Case study: Directors’
remuneration policy
Review: Initially the Committee undertook a fundamental
review of remuneration arrangements for the strategic
leadership team (including Executive Directors and Executive
Committee members). The Committee was supported in the
review by management and FIT. The structure of the review
team was designed to minimise any conflicts of interest
when analysing current remuneration arrangements.
The review included interviews with members of the
Remuneration Committee and Executive Committee in order
to capture views on the current remuneration structures, test
the appropriateness of the remuneration arrangements and
to consider how they furthered the Group’s strategy and
long-term interests. A report was then produced by FIT on
their findings for the Committee’s strategy day.
Consider: At the strategy day the Committee reviewed the
current remuneration policy, and considered alternatives in
the light of the Group’s objectives, regulatory and market
landscape and highlighted areas in which it considered
changes could be made so that formal proposals could
be put forward to the Committee. The Committee also
considered areas which were not currently in the
remuneration policy and could be added.
The proposed changes to the Directors’ remuneration
policy were then considered against: the Group’s strategic
objectives; statutory and regulatory requirements; and
investors published guidance. Following the review the
Committee identified a number of changes to the
remuneration policy and wrote to major shareholders and
a number of governance agencies advising them of the
proposals and asking for their views on them.
Main activities during the year
Review of remuneration policy
As we approached the end of the first three-year cycle since
the introduction of the new remuneration reporting regulations,
the current Directors’ remuneration policy, that was approved
at the Company’s 2014 AGM, is due for review. The new
remuneration policy will be submitted to shareholders’ binding
vote at the 2017 AGM and will be expected to remain in
place for the next three years.
Annual incentive plan
During the year, the Committee monitored the operation of
the AIP. For the 2015 financial year, this involved reviewing
the Group’s financial performance and 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 BRC about whether the Group
had achieved the required performance within risk appetite.
The Committee concluded that no clawback of awards was
required in 2016.
For the 2016 financial year, the Committee approved the
performance metrics and monitored performance against
them. The Committee also discussed and challenged the
performance metrics for the 2017 AIP and, subsequently
approved the metrics. The Committee discussed proposed
new customer and people measures and was satisfied that
the proposed measures were sufficiently challenging. The
Committee scrutinised the new approach to performance
management that was introduced for 2016 and commended
management on simplifying the appraisal process.
Long-term incentives
During 2016, the Committee reviewed and approved the level
of vesting of the 2013 awards made under the Company’s
LTIP against the performance criteria. These awards had two
Consult: The Committee continued to consider the proposals
performance metrics based on RoTE and TSR. After assessing
in the light of subsequent guidance issued from August 2016
performance against these metrics, the awards vested at a level
to 31 December 2016 by organisations such as the
of 96.4%. Before vesting, the Committee considered the LTIP’s
Investment Association, the Executive Remuneration Working
financial and risk underpins. The Committee also determined
Group, the General Counsel and Company Secretaries of
the quantum of awards made in 2016 under the LTIP in view
FTSE 100 companies (“GC100”) and Legal & General
Investment Management’s principles. The Committee
concluded its consultation with major shareholders, the investor
community and governance agencies in January 2017.
The proposals were generally well received and based
on the responses adjustments were made to the proposed
remuneration policy. You can find out more about the
Directors’ remuneration policy to be voted on by
shareholders at the 2017 AGM on pages 100 to 109.
of business and individual performance.
Directors and other senior executives
During the year, the Committee reviewed and approved
the level and structure of the pay and incentives of the
Executive Directors and other senior executives. Additionally,
it reviewed remuneration for the strategic leadership team.
As part of this review, the Committee considered the Share
Ownership Guidelines for the Executive Directors and
Executive Committee members.
The Remuneration Committee’s
effectiveness
A formal and rigorous annual evaluation of the Committee’s
performance and effectiveness was undertaken during the
year. Professor Rob Goffee of London Business School
facilitated this effectiveness review and prepared a report
based on responses from Committee members and other
stakeholders to a questionnaire and interview. After reviewing
and discussing the report, the Committee concluded it was
operating effectively and has access to sufficient resources
to perform its duties.
The Board reviewed and approved this report on
6 March 2017.
Clare Thompson
Chair of the Remuneration Committee
Solvency II identified staff
The Committee reviewed and approved the staff who, for the
purposes of Solvency II, were identified as Solvency II staff.
The Committee’s remit was extended to include oversight of the
remuneration of Solvency II identified staff. The Committee also
reviewed and approved a remuneration policy statement for
submission to the PRA. The Committee considered and examined
the current remuneration structure for control functions, which are
Corporate Actuarial, Compliance, Group Audit and Risk. The
Committee is satisfied that the remuneration arrangements for
control functions are appropriate but will continue to review
developments in this area.
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.
Regulatory developments in Remuneration
During the year, a joint meeting was held with the BRC to
review regulatory developments in relation to remuneration
and to ensure remuneration arrangements remain appropriate.
The Committees also examined the assurance processes in
connection with incentive arrangements. You can find out
more about this in the Board Risk Committee report on pages
68 to 71.
Additional information
The Committee also interacts with the Audit Committee and
BRC when considering setting targets and pay-outs. 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 is a member of the Committee. The Chair
of the Board Risk Committee attended Committee meetings
on three occasions.
80 Direct Line Group Annual Report & Accounts 2016
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Directors’ remuneration report
Dear shareholders
As the Chair of the Remuneration Committee (the “Committee”),
I am pleased to introduce our report on Directors’ remuneration
for the 2016 financial year, including our proposed Directors’
remuneration policy.
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 – detailing pay
outcomes for 2016 and covering how the Group
will implement its remuneration policy in 2017
Policy report for shareholder approval
Pages
84 to 86
87 to 99
100 to 109
The Directors’ remuneration policy for
shareholder approval at the 2017 AGM
Our Directors’ remuneration policy was approved at the
Company’s AGM on 13 May 2014 by a significant majority
of shareholders (97.5% voted in favour). In accordance with
the legislation, we must submit a new policy for shareholder
approval at the 2017 AGM. As stated in the 2015 Directors’
remuneration report, the Committee reviewed the current policy
during 2016. The Committee concluded that the policy had
supported the business effectively and operated well over the
last three years.
The policy provides a clear and simple framework for
remunerating the Company’s Directors, and aligning the
Executive Directors’ variable pay opportunity to the business
strategy and the Company’s demonstrable success.
Shareholders may be aware that the design of executive
pay arrangements for UK-listed companies continues to face
considerable external commentary. As part of the review the
Committee considered alternative approaches to remuneration
arrangements, particularly those outlined in the Executive
Remuneration Working Group’s final report. The Committee
considers that the existing arrangements work well, and that
the mix of Annual Incentive Plan (“AIP” or annual bonus) and
Long-Term Incentive Plan (“LTIP”) provides a balanced way
of incentivising executives to deliver for shareholders in the
short and longer terms. We consider the LTIP measures of
RoTE and relative TSR to be relatively simple to set, aligned
with wider strategy and reward consistent delivery for
shareholders. The Committee will closely monitor regulatory,
market and best practice developments over the coming years,
including any guidance from the PRA regarding the design
of pay arrangements.
The Committee therefore intends to continue with the current
policy which will remain largely unchanged. Reflecting
developments in best practice, the Committee has introduced
a ‘holding period’ for Executive Directors. LTIP awards granted
from August 2017 onwards will be subject to an additional
two-year holding period following the end of the three-year
performance period.
The LTIP rules will be amended to reflect the introduction of a
holding period.
Shareholder consultation
The Committee consulted with our key shareholders and the
major institutional voting agencies between October 2016
and January 2017. This engagement was well received and
we have had good feedback on our proposal.
New Executive Director
Following the year end, Mike Holliday-Williams, MD Personal
Lines, joined the Board. He did not receive an increase in his
salary as a result of being promoted to the Board (beyond
the average salary increase for employees across the rest
of the organisation explained below) and his AIP and LTIP
opportunity from 2017 onwards were set at the same level
as those of the CFO.
He initially joined the Group as an executive in 2014 and
has participated in the Company’s remuneration arrangements
on a similar basis to the Executive Directors since then.
He received an award on joining to buy-out shares forfeited
on leaving his previous employer with the last tranche (worth
c.£107,000 at grant) vesting in May 2017. The award
was not affected by his promotion to the Board.
Approach to pay in 2017
In addition to the proposed introduction of a post-vesting
holding period as described above, we set out below our
approach to pay for Executive Directors in 2017:
The salaries of all three Executive Directors will increase by
2% in April 2017. This is the same as the average salary
increase for employees across the rest of the organisation.
No change will be made to either the weighting or the
approach to assessment of the financial metric under the
AIP. Consistent with regulatory best practice, we measure
performance across a balanced scorecard of measures
to ensure that management maintain an appropriate focus
on continuing to deliver an excellent customer experience.
However, given the good progress that has been made on
the customer experience and the importance of the people
agenda, the strategic element will now encompass both
people and customer targets under the overall 25%
weighting assigned to this element.
We are not proposing any changes to the performance
conditions for the 2017 awards under the LTIP. However
we will be increasing the level of RoTE required for the
March 2017 awards to vest from the current range of
14.5% to 17.5% to a range of 15.0% to 18.0%. This will
ensure that awards to Executive Directors will only vest in
full if significant value has been delivered to shareholders.
Due to the level of uncertainty around the Ogden discount
rate review, the Remuneration Committee will further
consider the RoTE target to be applied to the August 2017
grant and the outcome of the Committee’s considerations
will be confirmed at grant in August 2017.
The Company continues to operate a Buy-As-You-Earn Share
Incentive Plan (“SIP”) which is available to all eligible staff as a
means of purchasing Company shares in an easy and tax
efficient manner.
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Awards under the LTIP granted in March and August 2014
are due to vest during 2017. This is subject to the
Committee’s satisfaction that the financial and risk
underpins have been met at the end of the vesting period.
The RoTE performance period for these awards ended
on 31 December 2016. The three-year average RoTE
performance for 2014, 2015 and 2016 was 16.2%
against a maximum target of 17.0%. Awards under the
RoTE element are due to vest at 76% of the maximum
potential, again reflecting the returns delivered to
shareholders. The Committee’s practice has not been to
moderate the LTIP outcome for exceptional events and,
therefore, the formulaic result was approved with no
adjustment. Consistent with the regulations, the TSR element
of the awards due to vest during 2017 will be reported
separately next year. We have included these RoTE vesting
outcomes plus the TSR vestings from the 2013 awards in
the single remuneration figure for the CEO and the CFO.
You can find details of this on pages 87 and 90.
Voting on the annual remuneration report
and the policy report
We will put the policy report and annual report on
remuneration to a vote of shareholders at the AGM on
11 May 2017.
I hope you will support the resolutions.
Clare Thompson
Chair of the Remuneration Committee
Pay outcomes for 2016
By focusing on the value, service and brand propositions
we offer to our customers, and maintaining underwriting
discipline, 2016 was another strong year for the Group.
Before the reduction in the Ogden discount rate announced
on 27 February 2017 (being two months following the year
end), PBT was £570.3m (up 12.4% on 2015). This would
have likely delivered a maximum payment of 55% of the
AIP linked to this measure. This post-year-end announcement
led to the Board adjusting the PBT, which reduced to
£353.0m as explained in the Chairman’s introduction to this
report and accounts.
In determining pay-out levels, the Committee carefully considered
performance in its assessment of over or underperformance of
the target. It applied overall judgement in light of the year-end
corporate performance and decided an out-turn of 10% (out
of the 55% available for PBT) was appropriate and should be
payable under this element. The Committee concluded that
given the strong profit progress absent the Ogden discount
rate change, a small level of vesting recognised both the
exceptional timing of this announcement and, therefore, the
impossibility of management taking any mitigating steps and
the need to align with the experience of shareholders.
The Committee understands that the Government is considering
a further review of the approach to setting the Ogden discount
rate which may or may not lead to a further change to the
Ogden discount rate. In these exceptional circumstances and,
given that the impact of the post-year-end announcement was
to reduce this element from paying out at the likely full 55%
to 10%, the Committee will keep the out-turn under the 2016
AIP assessment under review until the end of 2017. If, during
2017, in connection with the consultation the Ogden discount
rate is raised from minus 0.75%, the Committee will recalculate
the out-turn for this element and adjust it accordingly; the
impact of such a subsequent change in the Ogden discount
rate would be excluded from the 2017 AIP.
Accordingly, the incentive outcomes for our Executive Directors
were as follows:
We awarded bonuses of 43% of the maximum to the
Chief Executive Officer and to the Chief Financial Officer
for 2016. We have detailed the bonus determination
process for 2016 on pages 88 and 89.
Awards under the LTIP granted in March and August 2013
vested during 2016. They were subject to TSR performance
over the three-year vesting period, and RoTE performance
in 2013, 2014 and 2015. As disclosed last year, the
Group achieved an average RoTE of 17.6% over the three-
year performance period. This resulted in 94% of the
maximum potential vesting of the RoTE element (56.4% of
the total award). The TSR element comprises the other 40%
of the total award. For the March 2013 and August 2013
awards, the Company’s TSR was positioned above upper
quintile against its comparator group. This resulted in 100%
of the maximum potential vesting under the TSR element.
Overall, 96.4% of the total awards vested in March 2016
and August 2016. You can find details of this on page 90.
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Directors’ remuneration report continued
Executive remuneration snapshot
The information for 2017 in this section relates to the Chief Executive Officer (“CEO”), the Chief Financial Officer (“CFO”) and
the Managing Director of Personal Lines (“MD Personal Lines”). Information relating to pay decisions for 2016 relates to the
CEO and the CFO only.
Implementing the remuneration policy in 2017
Key elements
Base salary
Key operation features
(For more information, see the policy report on pages 100 to 109)
Reviewed annually with any increases taking effect on
1 April
The Committee considers a range of factors when
determining salaries, including pay increases throughout
the Group, individual performance and market data
Pensions
CEO and CFO contribution rate of 25% of salary
AIP
MD Personal Lines contribution rate of 15% of salary
Maximum opportunity level remains at 175% of salary
for the CEO and 150% for the CFO (with the MD
Personal Lines aligned at this level)
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
strategic 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, including assessing risk factors
Malus and clawback conditions apply
LTIP
Awards typically granted as nil-cost options
Awards typically granted every six months at half the
annual level
The Plan allows for awards with a maximum value
of 200% of base salary per financial year
Performance is measured over three years and
determined by RoTE and relative TSR measures
Awards vest subject to financial underpin and
payment gateway
Malus and clawback conditions apply
Implementation in 2017
2% salary increase for the CEO
to £810,492
2% salary increase for the CFO to
£490,518
2% salary increase for the MD Personal Lines
to £548,862
No change
No change to the weighting of measures
used for 2016. 55% of the bonus is based
on financial performance with 25% based on
strategic measures and 20% based on shared
strategic objectives
For 2017 the strategic measures will
encompass a broader range of measures
covering both customer and people targets
No change to maximum annual award
granted to the CEO, CFO and MD
Personal Lines
Nil-cost options will continue to be used for
the grants
The current 60% RoTE and 40% TSR mix
will continue to apply
Increase to the level of RoTE required for
the March 2017 awards to vest from the
current range of 14.5% to 17.5% to a
range of 15.0% to 18.0% (with the range
for the August 2017 awards to be confirmed
at grant)
Awards granted from August 2017 onwards
will be subject to an additional two-year
holding period following the end of the three-
year performance period
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2016 pay decisions reflect performance achieved during the year
Aligning performance and reward
The Committee has considered performance over 2016, as demonstrated by achieving key performance indicators on pages
24 and 25. As a result of this performance, the Remuneration Committee has approved the following incentive outcomes for the
Executive Directors.
Achievement under the Annual Incentive Plan
The actual amounts earned from the AIP this year reflect performance in 2016. 60% of this amount will be payable in
March 2017 and 40% will be deferred into shares for three years and generally be contingent on continued employment.
CEO
CFO
Maximum
(% of salary)
175%
150%
Target
(% of salary)
105%
90%
Actual
(% of salary)
75%
65%
Actual
(£’000)
£594
£308
Further details of performance against targets set is set out on pages 88 to 89.
Release of value under the Long-Term Incentive Plan
The March and August 2013 awards under the LTIP vested in March and August 2016. The total value of the awards vesting
at the end of the three-year performance period in March and August 2016, including shares vesting under the RoTE and
TSR elements, was £3,294,930 to the CEO and £1,994,284 to the CFO. This compares with an increase of approximately
£2 billion in the Company’s value plus £1.6 billion returned to shareholders as dividends over the period of March 2013 to
August 2016.
Release of value under the LTIP
(£)
Chief
Executive
Officer
Chief
Financial
Officer
Grant
47%
38%
15%
Grant
Vesting
Vesting
£0m
£0.5m
£1.0m
£1.5m
£2.0m
£2.5m
£3.0m
£3.5m
Shares under award Reinvested dividend Share price growth
Notes:
1. The headline vesting level was 96.4% and the above chart shows the impact of both dividend roll-up and share price appreciation
2. The difference in shares held at grant reflects the impact of the share consolidation on 30 June 2015 in which 12 existing Ordinary Shares
were replaced by 11 new Ordinary Shares, meaning the aggregate number of Ordinary Shares in issue was reduced
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Directors’ remuneration report continued
Executive Directors’ shareholdings at year end
The interests of shareholders and Executive Directors are closely aligned as they are required to hold Company shares at multiples of
salary levels and at the share ownership guidelines of 200% of salary. They continue to build on these shareholdings and hold above
these guidelines, as illustrated below. As at 31 December 2016, the number of shares beneficially held by the CEO and the CFO
represented 266% and 529% of their salaries, respectively.
Executive Directors’ 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
0.6m
0.7m
0.8m
Guideline 2015 2016
Note:
1. For the purposes of this chart, holdings include all vested but unexercised awards which are valued on a basis that is net of applicable
personal taxes
Executive Directors’ total pay
This chart illustrates the total remuneration components received in 2015 and 2016. This is explained further in the single figure
table on page 87.
Executive Directors’ total pay
(£’000)
6,000
5,000
4,000
3,000
2,000
1,000
0
31%
2015
2016
2015
2016
Chief Executive Officer
Chief Financial Officer
Salary
Pension and Benefits (including all employee share plans)
Annual bonus
LTIP
Salary: Salaries increased by 2.5% in 2016.
Annual bonus: The annual bonus amounts for 2016 were 43% of the maximum potential of 175% and 150% of salary for
the CEO and CFO respectively.
2013 LTIP awards: As disclosed in the 2015 remuneration report, the single figure of remuneration for 2015 included the
RoTE vesting outcomes of the March and August 2013 LTIP awards. This has now been updated to reflect the actual number
of dividends accrued on this portion of the award on vesting and the share price on the relevant vesting dates.
2014 LTIP awards: Similarly, the 2016 figures reflect the expected vesting outcome figure for the RoTE portion of the awards
granted under the LTIP in 2014 and expected to vest in March and August 2017 and the actual vesting under the TSR
element of awards granted under the LTIP in March and August 2013.
You can find more information on these outcomes in the implementation report.
Statutory Remuneration Report
Introduction
We have prepared this remuneration report in accordance with the requirements of the Companies Act 2006 and the Large and
Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended) (the “Regulations”). The report also
meets the relevant requirements of the Listing Rules of the Financial Conduct Authority, and describes how the Board has complied with
the principles and provisions of the UK Corporate Governance Code relating to remuneration matters. Remuneration tables subject to
audit in accordance with the relevant statutory requirements are contained in the annual remuneration report and stated to be audited.
Unless otherwise stated, the information within this Directors’ remuneration report is unaudited.
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Annual remuneration report
Remuneration Committee members and governance
The following list details members of the Remuneration Committee during 2016. You can find information about each member’s
attendance at meetings in the Remuneration Committee report on pages 79 to 81. You can find their biographies on pages
50 and 51.
Committee Chair
Clare Thompson1
Non-Executive Directors
Mike Biggs
Sebastian James
Andrew Palmer
Priscilla Vacassin2
Notes:
1. Appointed as Committee Chair with effect from 1 March 2016 having previously been a member of the Committee from September 2012 to September 2014
2. Committee Chair until she stepped down from the Board with effect from 1 March 2016
Advisers to the Committee
The Committee consults with the Chief Executive Officer, the Human Resources Director, and senior representatives of the HR,
Risk and Finance functions on matters relating to the appropriateness of all remuneration elements for Executive Directors and
Executive Committee members. The Chairman, Chief Executive Officer and the Human Resources Director are not present
when their remuneration is discussed. The Committee works closely with the Chairs of the Board Risk Committee and the Audit
Committee, including receiving reports from those Chairs regarding setting targets and pay-outs under incentive plans, and
whether it is appropriate to operate malus and clawback. The Chair of the Audit Committee is a member of the Remuneration
Committee; and the Chair of the Board Risk Committee attended Remuneration Committee meetings on three occasions.
The Remuneration and Board Risk Committees also hold a joint meeting at least annually to consider matters of common interest.
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 other services. The Committee
is satisfied that the advice FIT provides is objective and independent.
FIT’s total fees for remuneration related advice in 2016 were £162,171 exclusive of VAT. FIT charged its fees based on its
standard terms of business for providing advice.
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.
Implementing policy and pay outcomes relating to 2016 performance
Single figure table (Audited)
Salary1
Benefits2
Annual bonus3
Long-term
incentives4,5,6
All employee
share plans7
Pension
Total
£’000
2016
2015
2016
2015
2016
Paul Geddes
John Reizenstein
Notes:
790
478
771
467
19
10
18
15
594
308
2015
1,120
602
2016
2,466
1,492
2015
2016
2015
2016
2015
2,693
1,630
1
1
197
119
193
117
2016
4,066
2,408
2015
4,795
2,832
1. Salary – The Company operates a flexible benefits policy, and salary is reported before any personal elections are made
2. Benefits – Benefits include a company car or allowance; private medical and income protection insurance
3. Annual bonus – Includes amounts earned for performance during the year, but deferred for three years under the DAIP. For more information, see page 95.
These deferred awards are not subject to any conditions, except continuous employment. However, awards remain available for malus and clawback
4. 2013 LTIP awards RoTE – The expected vesting outcome figures for the RoTE portion of the awards granted under the LTIP in 2013 and reported in 2015 have been
updated. These updates are based on the actual vesting of the RoTE portion of the awards and a share price of £3.716 and £3.634 on 29 March 2016 and
30 August 2016 respectively, compared to the three-month average share price of £3.9728 used in reporting this figure in the 2015 remuneration report. The revised
figures reflect the actual number of dividends accrued on this portion of the award at vesting. This results in an adjusted reportable decrease of approximately £19,277
for Paul Geddes and £11,670 for John Reizenstein, with a corresponding decrease of the single figure for 2015 reflected in the table above
5. 2014 LTIP awards RoTE – the expected levels of vesting are set out on page 90. The corresponding values under long-term incentives, including the estimated
value of dividends accrued to 31 December 2016, are £1,098,472 for Paul Geddes and £664,864 for John Reizenstein, based on a three-month average
Company share price to 31 December 2016 of £3.55686. Any shares vesting under the LTIP granted in 2014 will not be delivered until the end of the
applicable vesting periods in March and August 2017
6. 2013 LTIP awards TSR – the level of vesting is set out on page 90. The corresponding values under long-term incentives, including the value of dividends on
vesting, are £1,367,191 for Paul Geddes and £827,504 for John Reizenstein, using the share prices on 29 March 2016 and 30 August 2016 of £3.716
and £3.634 respectively
7. SIP – Includes the value of matching shares under the SIP
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Directors’ remuneration report continued
Each Executive Director has confirmed they have not received any other items in the nature of remuneration, other than those
already disclosed in the single figure table.
AIP outcomes for 2016
The Committee established target performance levels at the start of the year. The Committee’s approach to setting and assessing
PBT targets under the AIP is to set a target level of profit performance and then, at the year end, to assess over or underperformance
by judging overall corporate performance both on an absolute and relative basis. While the Committee does not set a formal
threshold to maximum profit range against which performance is formulaically assessed the original intent was, following the year end,
to reset an indicative range against which performance could be assessed, as occurred in 2015. However, as the potential results
were then impacted by the Lord Chancellor announcing a plan to review the Ogden discount rate, the Committee felt that the position
was too uncertain to set a meaningful range for modelling and therefore awaited the outcome of the Ogden review. In determining
pay-out levels, the Committee carefully considered performance relative to the targets in its assessment of over or underperformance
of the target. It applied overall judgement in light of the year-end corporate performance and decided an out-turn of 10% (out of the
55% available for PBT) was appropriate and should be payable under this element.
In the table below, we have disclosed the target set for PBT performance. We have expanded our description of the
performance achieved against the non-financial measures to improve transparency for shareholders although some metrics
remain commercially sensitive.
The bar chart illustrates the Committee’s assessment of the level of achievement under the AIP. The outcomes reflect continuing
strong performance during the year as discussed in the Group highlights and Chairman’s statement on pages 2 to 3 and 10 to
11 respectively.
(Audited)
Measures
Weight
(as a % of
max award)
Target
performance
(£m)
Actual
performance
(£m)
Performance
Assessment
Achievement against
performance measures
0%
Vesting
Target
60%
Vesting
Maximum
100%
Vesting
Financial
Profit before tax
Strategic
A basket of measures of ten key customer metrics
Personal
Including objective shared among all
Executive Committee members
Paul Geddes
John Reizenstein
55%
25%
20%
20%
415.4
353.0
Below target
18%
See narrative
Above target
92%
See narrative
Below target
See narrative
Below target
50%
50%
Executive Director
Achievement under the 2016 AIP
Paul Geddes
John Reizenstein
43% of maximum
43% of maximum
The Committee also considered performance against the “gateway” criteria outlined on page 98 and determined that it was
appropriate to pay a bonus and that it was not necessary to reduce the payment in light of performance against these criteria.
Financial element (55% weighting)
As discussed above, there is no pre-set scale around the PBT target for the 2016 financial year and, in accordance with the
AIP terms, the Committee determined the appropriate pay-out for the performance achieved.
Throughout 2016 our PBT performance was positive, driven by our continued investment in brand differentiation, propositions
and trading capabilities, and we ended the year significantly ahead of target. Motor and Home Own Brands, Green Flag
and Direct Line for Business have all continued to grow within a competitive market. They are all significantly favourable to target
and grew year-on-year. Overall, before the reduction in the discount rate, profit before tax would have increased £62.8m to
£570.3m (2015: £507.5m) reflecting improved operating profits. This would most likely have achieved a maximum pay-out
for this element. Reported PBT for 2016, including impact of the reduction in the Ogden discount rate, is £353.0m. Given the
strong profit progress absent the Ogden rate change and the Group’s resilience as the Group already reserved at a more
conservative discount rate of 1.5% (compared to the actual 2.5% rate), shareholders have been protected to some extent from the
effects of the reduction to the Ogden discount rate. The Committee, having considered that the Group made strong profits before
the reduction and had a good capital position, determined that it was fair and reasonable that 10% (out of the 55% for PBT)
should be payable.
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The Committee understands that the Lord Chancellor, while announcing a discount rate of minus 0.75%, is launching a further
consultation regarding the approach to setting the Ogden discount rate which may or may not lead to a change to the Ogden
discount rate. In these exceptional circumstances, and given that the impact of the post-year-end announcement was to reduce
this element from paying out at the likely full 55% to 10%, the Committee will keep the out-turn under the 2016 AIP assessment
under review until the end of 2017. If, during 2017, in connection with the consultation, the Ogden discount rate is raised from
minus 0.75%, the Committee will recalculate the out-turn for this element and adjust it accordingly; the impact of such a
subsequent change in the Ogden discount rate would be excluded from the 2017 AIP.
Strategic element (25% weighting)
The Group’s strategy is to make insurance much easier and better value for our customers. It aims to deliver on its commitments
in this area and ensure that fairness is a natural outcome of what the Group does. Overall, performance on the customer agenda
against our ten key customer metrics remains very strong and, in 2016, we introduced new metrics to monitor and assess
conduct performance and complaints.
Through the year there was a strong focus on removing the reasons for customer problems with multiple initiatives delivering
tangible improvement. One such initiative was the roll-out of focused investment in customer training to our front-line staff across
Home and Motor Claims which has had a positive impact on NPS and NetEase scores. Our new approach to problem handling
and recording has driven an improved customer experience and reductions in reportable complaint volumes.
Persistency and retention remained strong with some of our brands consistently outperforming the market, and we have achieved
a good commercial and customer experience balance. The Committee considered that the Company has made good progress
over the past couple of years in improving the customer experience in the context that it is now becoming more challenging to
improve on or maintain an already strong performance. Having considered performance against targets and an assessment of
the quality of performance achieved, the Committee agreed that the level of out-turn of 92% under this element was appropriate
in order to reflect the continued strong performance in trading and customer satisfaction despite competitive market conditions.
Personal element (20% weighting)
This element relates to an objective that is shared with other Executive Committee members and set by the Committee. The
Committee considers the performance against this element together with the Executive’s personal performance and leadership
over the year.
The Group remains focused on improving its digital offering, customer experience and operational efficiency. A key focus of
management was the level of change the Group has been making to its IT infrastructure. It remains focused on adopting the
right capabilities and will take the time necessary seeking to do so. While progress has been made in each of the three areas,
implementation and integration of a range of new IT systems is inherently complex and challenging. The Group has made
progress improving the performance and security of the core infrastructure during the year, supporting its people in performing
their roles more reliably. However, the Committee noted that there was less progress on delivering against the Group’s IT plans
than had been envisaged. The team has reflected on the experience over the past year and will apply key learnings as it
continues on this change journey in 2017.
Taking performance against each Executive Directors’ individual performance and the above challenges into account, the
Committee determined that Paul Geddes and John Reizenstein should each receive awards of 50% respectively of the maximum
available under this element.
Consequently, the annual incentive awards for Executive Directors for the financial year ended 31 December 2016 were
as follows:
(Audited)
Paul Geddes, CEO
John Reizenstein, CFO
Maximum
(% of salary)
175%
150%
Target
(% of salary)
105%
90%
Actual
(% of salary)
75%
65%
Actual £’000
(including cash and
deferred elements)
594
308
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Directors’ remuneration report continued
LTIP outcomes for 2016 (Audited)
Directors’ remuneration report continued
The following summarises the outcome against performance targets set for the 2013 and 2014 LTIP awards:
Dec 2013
Dec 2012
LTIP outcomes for 2016 (Audited)
The following summarises the outcome against performance targets set for the 2013 and 2014 LTIP awards:
March 2013 award
Dec 2014
Dec 2016
Dec 2015
Dec 2017
RoTE test – average of 17.6% for 2013, 2014 and 2015 – 94.0% vesting
Relative TSR test – upper quintile – 100% vesting
August 2013 award
RoTE test – average of 17.6% for 2013, 2014 and 2015 – 94.0% vesting
Relative TSR test – upper quintile – 100% vesting
March 2014 award
RoTE test – average of 16.2% for 2014, 2015 and 2016 – 76.0% vesting
Relative TSR test – To be tested based on performance to 26 March 2017
August 2014 award
Year included
in single figure
2015 – updated
2016 – final
2015 – updated
2016 – final
2016 – estimated
2017
2017
2016 – estimated
RoTE test – average of 16.2% for 2014, 2015 and 2016 – 76.0% vesting
Awards under the LTIP granted in March and August 2013 vested during 2016. They were subject to TSR performance over the
three-year vesting period, and RoTE performance in 2013, 2014 and 2015. The Group achieved an average RoTE of 17.6%
Relative TSR test – To be tested based on performance to 29 August 2017
over the three-year performance period. This resulted in 94% of the maximum potential vesting of the RoTE element (56.4% of
the total award). The TSR element comprises the other 40% of the total award. For the March 2013 and August 2013 awards,
the Company’s TSR was positioned above upper quintile against its comparator group. This resulted in 100% of the maximum
Awards under the LTIP granted in March and August 2013 vested during 2016. They were subject to TSR performance over the
potential vesting under the TSR element. Overall, 96.4% of the total awards vested in March 2016 and August 2016 as the
three-year vesting period, and RoTE performance in 2013, 2014 and 2015. The Group achieved an average RoTE of 17.6%
Committee was satisfied that the financial and risk underpins were met at the end of the vesting period.
over the three-year performance period. This resulted in 94% of the maximum potential vesting of the RoTE element (56.4% of
Awards under the LTIP granted in March and August 2014 are due to vest during 2017. The RoTE performance period for these
the total award). The TSR element comprises the other 40% of the total award. For the March 2013 and August 2013 awards,
awards ended on 31 December 2016. This is subject to the Committee’s satisfaction that the financial and risk underpins have
the Company’s TSR was positioned above upper quintile against its comparator group. This resulted in 100% of the maximum
been met at the end of the vesting period. The three-year average RoTE performance for 2014, 2015 and 2016 was 16.2%
potential vesting under the TSR element. Overall, 96.4% of the total awards vested in March 2016 and August 2016 as the
against a maximum target of 17.0%. Awards under the RoTE element are due to vest at 76.0% of the maximum potential, again
Committee was satisfied that the financial and risk underpins were met at the end of the vesting period.
reflecting the returns delivered to shareholders. We have included these RoTE vesting outcomes plus the TSR vestings from the
Awards under the LTIP granted in March and August 2014 are due to vest during 2017. The RoTE performance period for these
2013 awards in the single remuneration figure for the CEO and the CFO. You can find details of this on page 87. Performance
awards ended on 31 December 2016. This is subject to the Committee’s satisfaction that the financial and risk underpins have
under the relative TSR measure will be assessed at the end of the vesting period in March and August as appropriate.
been met at the end of the vesting period. The three-year average RoTE performance for 2014, 2015 and 2016 was 16.2%
against a maximum target of 17.0%. Awards under the RoTE element are due to vest at 76.0% of the maximum potential, again
reflecting the returns delivered to shareholders. We have included these RoTE vesting outcomes plus the TSR vestings from the
2013 awards in the single remuneration figure for the CEO and the CFO. You can find details of this on page 87. Performance
under the relative TSR measure will be assessed at the end of the vesting period in March and August as appropriate.
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Direct Line Group Annual Report & Accounts 2016
Non-Executive Directors (Audited)
Fees were the only remuneration paid to Non-Executive Directors in 2015 and 2016. Non-Executive Directors may also claim for
reasonable travel and subsistence expenses, in accordance with the Group’s travel and expenses policy, and, where these are
classified as taxable by HMRC, they are shown under ‘Benefits’ below. The Non-Executive Directors receive no other benefits.
Director
Michael Biggs
Jane Hanson
Sebastian James3
Andrew Palmer4
Clare Thompson5
Priscilla Vacassin6
Richard Ward7
Notes:
2016 Fees1
£’000
2016 Benefits2
£‘000
Total 2016
£’000
2015 Fees
£‘000
2015 Benefits
£‘000
Total 2015
£’000
400
115
89
126
108
20
106
3
9
403
124
89
126
108
20
106
400
115
85
144
100
113
4
22
404
137
85
144
100
113
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 taxable travel and subsistence expenses reimbursed by the Company (including any potential
gross-up for tax and National Insurance Contributions due)
3. Sebastian James was appointed as Chair of the CSR Committee from 1 March 2016
4. Andrew Palmer was appointed as Chair of the Investment Committee from 1 March 2016 and was the Senior Independent Director during 2015 and until
18 January 2016
5. Clare Thompson was appointed as Chair of the Remuneration Committee with effect from 1 March 2016, and stepped down as Chair of the CSR Committee
and Investment Committee and as a member of the Board Risk Committee. She remained a member of the Audit Committee
6. Priscilla Vacassin stepped down from the Board on 1 March 2016
7. Richard Ward was appointed to the Board as the Senior Independent Director from 18 January 2016. He was appointed as a member of the Nomination
Committee with effect from 25 February 2016 and was appointed to the Board Risk Committee with effect from 9 May 2016
Percentage change in Chief Executive Officer’s pay for 2015 to 2016
The table below shows the Chief Executive’s year-on-year percentage change in salary, taxable benefits and bonus, compared
to the average pay for all other UK employees.
Chief Executive Officer
All employees (average)
Notes:
Salary1
2.5%
4.5%
Benefits2
3%
3%
Bonus (including
deferred amount)3
(47)%
(3)%
1. Based on the change in average pay for UK employees employed in the year ended 31 December 2016 and the year ended 31 December 2015. Salaries are
not adjusted for the number of working hours; therefore the increase partly reflects the increase in working hours for some employees during the year
2. There were no changes in benefits provision between 2015 and 2016
3. Includes average amounts earned under the AIP; and for employees other than the Chief Executive Officer, other variable incentive schemes, including monthly
and quarterly incentive schemes operated in certain parts of the Group
Distribution statement
This chart shows the overall pay expenditure across all Group employees compared with the total dividend value paid to
shareholders for 2015 and 2016. A special dividend payment was made in 2015 in relation to the sale of the International
division. The total dividend value paid to shareholders in 2015 has been calculated including and excluding this special
dividend for comparison.
% change:
-32.3%
0
.
6
6
6
6
.
0
5
4
% change:
77.1%
6
.
0
5
4
5
.
4
5
2
% change:
4.8%
2
.
8
2
4
7
.
8
0
4
15y
16y
15y
16y
15y
16y
Dividend (£m),
including 2015 special dividend
relating to the sale of the
International division
Note:
Dividend (£m),
excluding 2015 special dividend
relating to the sale of the
International division
Overall expenditure on pay (£m),
excluding the International division
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
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Directors’ remuneration report continued
Historical performance of TSR
This graph shows the Company’s TSR since its 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
31 December 2016
Direct Line Group
FTSE 350 (excluding investment trusts)
The table below shows historical levels of the Chief Executive Officer’s pay between 2012 and 2016. It also shows vesting of
annual and long-term incentive pay awards as a percentage of the maximum available opportunity.
Chief Executive Officer
20162
20153
2014
2013
2012
Notes:
Single figure of
total remuneration
£’000
Annual bonus
payout
(% of maximum)
Long-term
incentive vesting
(% of maximum)1
4,066
4,795
5,356
2,536
1,908
43%
83%
75%
63%
65%
86%
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 2016 single figure reflects the estimated vesting of the RoTE portion of the LTIP granted in March and August 2014. Any shares under the LTIP granted in
2014 will not be delivered until the end of the applicable vesting periods in March and August 2017. However they have been included in the single figure,
as the performance period in respect of the RoTE portion has now been completed
3. The 2015 single figure has been revised to reflect the actual vesting of the 2013 awards under the LTIP, a decrease of £19,277
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AGM voting outcomes
The table shows the percentage of shareholders voting for or against, and the percentage of votes withheld relating to the
resolution to approve the Directors’ annual remuneration report, which was put to the 2016 AGM; and the resolution to approve
the Directors’ remuneration policy, which was put to the 2014 AGM.
For
Against
Number
Percentage
Number
Percentage
Number of
votes withheld
(abstentions)
Percentage of
votes withheld
(abstentions)
Approval of Directors’
remuneration report (2016 AGM)
Approval of Directors’
remuneration policy (2014 AGM) 1,064,002,114
990,481,636
97.75% 22,775,906
2.25%
6,090,605
97.5% 26,743,783
2.5%
1,945,618
0.6%
0.2%
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 2016. The Committee
continues to communicate with investors on developments in the remuneration aspects of corporate governance generally, and,
in particular, changes to the Company’s executive pay arrangements.
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 20162
(% of salary)
200%
200%
266%
529%
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, holdings of Ordinary Shares will be treated as including all vested but unexercised awards, valued on a basis that is net of applicable
personal taxes
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Using shares
In receiving an award under the LTIP or DAIP, Executive Directors agree not to hedge their exposure to outstanding awards under
these plans or in respect of shares they are reporting to the Company as within their ownership for the purposes of any Share
Ownership Guidelines. They also agree not to pledge as collateral their participation under any of the plans or any shares which
they are required to hold in the Company for any purposes, including for Share Ownership Guidelines.
This table shows each Executive Director’s total share interests.
Share plan interests at
31 December 2016
Beneficial share interests
Share plan
awards
subject to
performance
conditions1
1,380,145
835,338
Share plan
awards not
subject to
performance
conditions2
356,293
184,986
Share plan
interests
vested but
unexercised
997
929,283
Share plan
interests
exercised or
released during
the year3
962,948
0
Total at
31 December
20164,5
572,468
195,602
Total at
31 December 2015
474,255
183,496
Director
Paul Geddes
John Reizenstein
Notes:
1. This relates to awards under the Direct Line Group LTIP. As described on page 90, 76.0% of awards made under the Direct Line Group LTIP in March and August
2014 that are subject to the RoTE performance condition measured to 31 December 2016 are expected to vest. These shares will be delivered to Executive
Directors in March and August 2017
2. Includes matching shares held under the SIP which are subject to forfeiture and deferred shares under the Direct Line Group DAIP. For more information, see pages 95 and
97
3. On 30 August 2016, Paul Geddes exercised a DAIP award granted on 28 March 2013 and LTIP awards granted on 28 March 2013 and 28 August 2013.
Following this exercise, 997 DAIP shares remain vested but unexercised
4. Includes holdings of connected persons, as defined in section 96B(2) of the Financial Services and Markets Act 2000, and free and partnership shares held under
the SIP which are not subject to forfeiture and considered beneficially owned
5. Beneficial share interests include partnership shares John Reizenstein purchased under the SIP and free shares held by the CEO and the CFO under the SIP.
At 6 March 2017, the number of shares beneficially held by John Reizenstein has increased to 195,733. There was no change to the number of shares held
by Paul Geddes
The table shows the Non-Executive Directors’ beneficial interests in the Company’s shares.
Director
Mike Biggs
Jane Hanson
Andrew Palmer
Clare Thompson
Priscilla Vacassin3
Sebastian James
Richard Ward4
Notes:
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. Priscilla Vacassin stepped down from the Board on 1 March 2016 and this represents her holding at that date
4. Richard Ward was appointed to the Board as the Senior Independent Director from 18 January 2016
Shares held at
31 December
20161,2
26,190
10,475
38,378
35,220
Shares held at
31 December
2015
26,190
10,475
35,220
35,220
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Direct Line Group share awards
Direct Line Group Deferred Annual Incentive Plan (“DAIP”) awards (Audited)
This table details the awards made to all Executive Directors under the Direct Line Group DAIP
Three-day
average
share price
for grant of
awards
£
Face value of
award
£
No. of share
options as at
1 January
2016
No. of share
options
granted
during the
year1
No. of
share
options
vested
during the
year2
No. of
dividend
shares
acquired at
vesting
No. of
dividend
shares added
post vesting
No. of share
options
exercised3
No. of share
options
held at
31 December
2016
Vesting date
2.0157 380,004
34,562
– 34,562
13,028
1,880
Grant date
Paul Geddes
28-Mar-13
26-Mar-14
25-Mar-15
29-Mar-16
2.433667 333,999 125,804
3.3007 400,000 111,087
3.752 447,996
–
–
–
–
– 119,402
–
271,453 119,402 34,562
John Reizenstein
28-Mar-13
26-Mar-14
25-Mar-15
29-Mar-16
2.0157 137,999
2.433667 166,000
3.3007 207,200
3.752 240,800
62,756
62,525
57,542
– 62,756
–
–
–
–
–
– 64,179
64,179 62,756
182,823
–
–
–
13,028
23,657
–
–
–
23,657
Mike Holliday-Williams4
25-Mar-15
29-Mar-16
3.3007 239,997
3.752 270,797
Notes:
1. Awards are granted as nil-cost options
66,651
–
– 72,174
72,174
66,651
–
–
–
–
–
–
48,473
997 1-Jun-13 to
28-Mar-16
– 125,804 26-Mar-17
– 111,087 25-Mar-18
– 119,402 29-Mar-19
48,473 357,290
89,828 28-Mar-16
62,525 26-Mar-17
57,542 25-Mar-18
64,179 29-Mar-19
–
–
–
–
– 247,074
66,651 25-Mar-18
72,174 29-Mar-19
–
–
– 138,825
–
–
–
1,880
3,415
–
–
–
3,415
–
–
–
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. Exercised on 30 August 2016 at £3.63, resulting in an aggregate gain of £175,957
4. Although not required in order to comply with statutory requirements, we have provided the detail for Mike Holliday-Williams for completeness
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Directors’ remuneration report continued
Direct Line Group LTIP awards (Audited)
This table details the Directors’ interests in the Company’s LTIP. For all LTIP awards, 20% of the awards granted would vest if the
minimum performance was achieved.
Three-day
average share
price for grant
of awards
£
Face value
of award
£
No. of
options at
1 January
20161
No. of
options
granted
during
the year2
No. of
options
vested
during
the year3
No. of options
lapsed for
performance4
No. of dividend
shares acquired
at vesting
No. of
dividend
shares added
post vesting5
No. of options
exercised
No. of
options
held at
31 December
2016
–
–
–
2.0157
760,000
345,620
2.1564
759,999
323,069
2.433667
759,998
286,261
2.9020
759,999
240,064
3.3007
760,000
211,066
3.517
775,200
220,415
–
–
–
–
–
–
–
3.752
775,197
3.6833
794,598
–
–
206,609
215,730
–
333,177
306,728
–
12,443
16,341
–
125,601
130,837
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
18,132
–
–
–
–
–
–
–
–
476,910
437,565
–
–
–
–
–
–
–
–
–
286,261
240,064
211,066
220,415
206,609
215,730
1,626,495
422,339
639,905
28,784
256,438
18,132
914,475
1,380,145
–
–
261,941
2.0157
459,999
209,190
2.1564
459,999
195,541
2.433667
460,000
173,263
2.9020
459,999
145,301
3.3007
460,000
127,750
3.5170
469,200
133,409
–
–
–
–
–
–
–
3.752
469,199
3.6833
480,899
–
–
125,053
130,562
–
201,659
185,650
–
7,531
9,891
–
76,020
79,190
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
24,020
10,975
–
–
–
–
–
–
–
1,246,395
255,615
387,309
17,422
155,210
34,995
2.9020
787,498
248,750
3.3007
393,747
109,351
3.5170
393,749
111,956
–
–
–
3.752
393,750
3.6833
403,572
–
–
104,944
109,568
470,057
214,512
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
285,961
288,654
264,840
173,263
145,301
127,750
133,409
125,053
130,562
1,674,793
248,750
109,351
111,956
104,944
109,568
684,569
Vesting date
09-Nov-15
28-Mar-16
28-Aug-16
26-Mar-17
29-Aug-17
25-Mar-18
26-Aug-18
29-Mar-19
30-Aug-19
09-Nov-15
28-Mar-16
28-Aug-16
26-Mar-17
29-Aug-17
25-Mar-18
26-Aug-18
29-Mar-19
30-Aug-19
29-Aug-17
25-Mar-18
26-Aug-18
29-Mar-19
30-Aug-19
Grant date
Paul Geddes
Options held
arising from
vesting in
previous periods
28-Mar-13
28-Aug-13
26-Mar-14
29-Aug-14
25-Mar-15
26-Aug-15
29-Mar-16
30-Aug-16
John Reizenstein
Options held
arising from
vesting in
previous periods
28-Mar-13
28-Aug-13
26-Mar-14
29-Aug-14
25-Mar-15
26-Aug-15
29-Mar-16
30-Aug-16
Mike Holliday-
Williams
29-Aug-14
25-Mar-15
26-Aug-15
29-Mar-16
30-Aug-16
Notes:
The Company’s share price on 31 December 2016 was £3.694, and the range of prices in the year was £3.333 to £4.096
1. These awards take the form of nil-cost options over the Company’s shares and are subject to performance conditions to be assessed by the Committee. Awards
granted before 2014 accrue dividend entitlements until the date of transfer of shares. Awards granted from 2014 accrue dividend entitlement from the grant date
to the date on which an award vests
2. The RoTE targets for awards granted in 2016, applying to 60% of the award, were 14.5% for 20% vesting, 15.5% for 40% vesting and 17.5% for full vesting.
A straight-line interpolation occurs from threshold to target, and then from target to maximum performance. The remaining 40% of each award is based on TSR
performance conditions, which are the same as noted on page 99
3. The closing market price on the dates of the vesting of the awards were £3.716 on 29 March 2016 and £3.634 on 30 August 2016
4. Awards under the LTIP vested at 96.4% of the maximum potential on 29 March 2016 and 30 August 2016
5. Dividends added post-vesting are shown to 31 December 2016, although these are not realised until exercise
6. Although not required in order to comply with statutory requirements we have provided the detail for Mike Holliday-Williams for completeness
The Company’s policy is to grant 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
the CEO and CFO during the year equates to 200% of their base salary paid in the year.
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Direct Line Group Restricted Shares Plan (“RSP”) Awards (Audited)
This table details the last tranche of the award made to Mike Holliday-Williams under the Direct Line Group RSP that is due to
vest this year. This award was made to the MD Personal Lines on recruitment in May 2014 as compensation for the forfeiture of
legacy awards granted by his previous employer. Executive Directors do not participate in the RSP and Mike Holliday-Williams
will not receive any subsequent grants under this plan.
Three-day
average share
price for grant of
awards
£
Face value of
award
£
No. of share
options as at
1 January 2016
No. of dividend
shares acquired
at vesting
No. of dividend
shares added
post vesting
No. of share
options
exercised
No. of share
options
held at
31 December
2016
Vesting date
2.430333
£106,667
40,231
–
–
–
40,231
1-May-17
Grant date
Mike Holliday-
Williams
27-May-14
Direct Line Group 2012 SIP (Audited)
During 2016, all employees, including Executive Directors, were eligible to invest from £10 to £150 a month from their pre-tax
pay into the SIP, and receive one matching share for every two shares they purchased. This table details the number of shares held
by John Reizenstein under the SIP. Paul Geddes does not participate in the plan.
Director
John Reizenstein
Note:
Matching shares
granted during
the year
Matching shares
cancelled during
the year
250
–
Value of matching
shares granted¹
£
903
Balance of
matching shares at
31 December 2016
741
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
Executive Directors were eligible to participate in the award of £265 worth of free Company shares in March 2016. However,
all Executive Directors 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.
Statement of policy implementation in 2017
Executive Directors’ salaries in 2017
The salary increase awarded to the Executive Directors, effective 1 April 2017, reflects the average increase awarded to
UK employees.
Director
Position
Paul Geddes
John Reizenstein
Mike Holliday-Williams
Chief Executive Officer
Chief Financial Officer
MD Personal Lines
2017 base salary
£’000
2016 base salary
£’000
Annual change
in base salary
810
491
549
795
481
538
2%
2%
2%
AIP 2017
The maximum annual incentive awards which may be paid to Executive Directors have not changed since the IPO.
Director
Position
Paul Geddes
John Reizenstein
Mike Holliday-Williams
Chief Executive Officer
Chief Financial Officer
MD Personal Lines
Maximum annual incentive award for
2017 (% base salary)
Deferred under the DAIP
(% bonus)
175%
150%
150%
40%
40%
40%
During 2016, 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 the framework successfully linked Executive
Directors’ variable pay with the Group’s performance and a scorecard ensured that management are incentivised both to deliver
superior financial returns and excellent customer service. Therefore, the AIP continues to provide the most appropriate incentive.
However, to further align the Executive Directors’ interests with those of shareholders and the objectives of the business in 2017,
the Committee decided to broaden the measures under the strategic element to encompass both customer and people targets
given the good progress that has been made on customer experience, the importance of the people agenda and the fact that the
Company has signed up to HM Treasury’s Women in Finance Charter. The overall weighting of 25% assigned to this element
has not changed. Please see pages 24 and 25 for a complete list of our key performance indicators and how these relate to
Executive Directors’ remuneration.
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Financial
Strategic
Strategic
Personal
Measures
Weighting for 2017 Weighting for 2016
Profit before tax
Based on a basket of customer measures only, including
Net Promoter Score and complaints
Based on a basket of:
customer measures, including Net Promoter Score and
complaints; and
people measures, including measures of gender diversity
and engagement
Objectives for each Executive Director, including shared
objectives across the Executive Committee
55%
0%
25%
20%
55%
25%
0%
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 2017.
Gateway criteria for the AIP for 2017 – outcomes for Executive Directors
Year-on-year changes in profit before tax
Quality and sustainability of earnings, referring to reserving, gross written premium, costs and loss ratio, and relevant
lead indicators
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 pay-outs and/or operate malus and clawback, the Committee
receives appropriate input from the Audit Committee and the Board Risk Committee through receiving reports from, and
discussion with, the Chairs of those Committees.
Performance conditions for LTIP awards
LTIP awards to be granted in 2017 will continue to be subject to performance against these performance conditions:
60% based on RoTE over a three-year performance period (2017, 2018 and 2019)
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
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 190.
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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 to increase the RoTE target range
as follows:
Performance
measure
RoTE
Relative TSR
Vesting for
threshold
performance
20% of this
element
of the award
20% of this
element
of the award
Performance required for threshold vesting
Performance required for maximum vesting
Awards in
March 2017
Awards in 2015
and 2016
Awards in
2014
Awards in
March 2017
Awards in 2015
and 2016
Awards in
2014
Average annual
RoTE
performance of
15.0%
Average annual
RoTE
performance of
14.5%
Average annual
RoTE
performance of
14.0%
Average annual
RoTE
performance of
18.0%
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, 20% of the award will vest for threshold RoTE and 40% for a ROTE of 16.0% for awards to be made in
March 2017. 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 consider 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 the CEO and CFO in 2017. Before his promotion to
the Board the MD Personal Lines received a pension contribution of 15% of base salary and the level of contribution has not
been changed following his appointment to the Board.
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 been changed since then.
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 2017
£’000
400
70
30
30
10
10
5
No additional fees are paid for membership or chairmanship of the Investment Committee.
External directorships
Paul Geddes was appointed as a non-Executive Director for Channel 4 on 5 December 2016 for which he receives an annual
fee of £22,177. Total fees received from Channel 4 in 2016 were £1,848. 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 further external directorships.
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Policy report
The following sets out our proposed Directors’ remuneration policy. This policy will be put forward for shareholder approval
at the 2017 AGM on 11 May 2017 and, if approved, will apply to payments made from that date. Until this time, the policy
approved on 13 May 2014 will continue to apply. The main changes in this policy from the 2014 policy have been
summarised in the Remuneration Committee Chair’s letter above and in the notes to the policy tables.
You can find further details regarding the policy’s operation for 2017 on page 103.
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. It is payable for
doing the expected
day-to-day job
Staying competitive in
the market allows us to
attract, retain and
motivate high-calibre
executives with the
skills to achieve our key
aims while managing
costs
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 typically reviewed annually and set in April of each year, although the Committee
may undertake an out-of-cycle review if it determines this to be appropriate
When reviewing base salaries, the Committee typically takes the following into account:
level of skill, experience and scope of responsibilities, individual and business performance,
economic climate, and market conditions;
the median market pay in the context of companies of a similar size, particularly FTSE 31-100
companies, as they are considered to reflect the size and complexity of the Group;
the practice of insurance peers such as Admiral Group, Aviva, esure Group, Hastings Group,
Legal & General, Old Mutual, Phoenix Group, Prudential, RSA Insurance Group, Standard Life
and companies of a similar size to DLG as appropriate; and
general base salary movements across the Group
The Committee does not follow market data strictly. However, it uses it as a reference point in
considering, in its judgement, the appropriate salary level, while regarding 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.
However, the specific benchmarking groups used to review external market relativities may differ
across employee groups
Base salary is typically paid monthly
For Executive Directors, at least 40% of the award is deferred into shares under the Deferred Annual
Incentive Plan (the “DAIP”). This typically vests three years after grant (with deferred awards also
capable of being settled in cash at the discretion of the Committee, for example, when it gives rise to
legal difficulties to settle in shares). The remainder of the award is paid in cash following the year end
The Committee will keep the percentage deferred and terms of deferral under review. This will ensure
levels are in line with regulatory requirements and best practice and may be changed in future years
but will not, in the Committee’s view, be changed to be less onerous overall
Malus and clawback provisions apply to the cash and deferred elements. These are explained in the
notes to the policy table
LTIP
Aligning executives’
interests with those of
shareholders to
motivate and
incentivise delivering
sustained business
performance over the
long term
To aid retaining
key executive talent
long term
Awards will typically be made in the form of nil-cost options or conditional share awards, which vest to
the extent performance conditions are satisfied over a period of at least three years. Under the Plan
rules, awards may also be settled in cash at the discretion of the Committee. This may be appropriate,
for example, if legal difficulties arise with settling in shares
Vested options will remain exercisable for up to the tenth anniversary of grant
Malus and clawback provisions apply to the LTIP. These are explained in the notes to the policy table
Awards under the LTIP may be made at various times during the financial year. While the Committee
reserves the right to do otherwise, the Committee’s practice has been to make awards twice in each
financial year, following the announcement of the Group’s annual and half-year results
For awards made after adopting the new policy at the 2017 AGM, Executive Directors will be subject
to an additional two-year holding period following the three-year vesting period, during which time
awards may not normally be exercised or released. During the additional holding period the awards
will continue to accrue dividends. Following the holding period awards will cease to accrue dividends
if not exercised
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Maximum opportunity
Performance measures
When determining salary
Not applicable
increases, the Committee will
consider the factors outlined in this
table under ‘Operation’. In any
event, no increase will be made if
it would take an Executive
Director’s salary above
£850,000 (the current median
level of salaries for CEOs in the
FTSE 100), as further increased
by UK RPI from the date of
approving this policy
Maximum and target bonus levels
for Executive Directors are set by
taking into account annual bonus
practice throughout the
organisation and referring to
practice at other insurance and
general market comparators
The maximum bonus opportunity
under the AIP is 175% of base
salary per annum. The current
maximum bonus opportunity
applying for each individual
Executive Director is shown in the
statement of implementation of
policy. This is in the 2016 section
of the annual remuneration report
Performance over the financial year is assessed against performance measures which the Committee
considers to be appropriate
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 may be based on
a combination of strategic, shared and individual performance measures
The Committee sets targets at the beginning of each financial year
No more than 10% of the bonus is paid for threshold performance (30% of the bonus 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 pay-out level at different levels
of performance for future bonus cycles. This is based on its assessment of the level of stretch inherent
in the set targets, and the Committee will disclose any such determinations appropriately
Before any payment can be made, the Committee will perform an additional gateway assessment
(including in respect of any risk concerns). This will determine whether the amount of any bonus is
appropriate in view of facts or circumstances which the Committee considers relevant. This assessment
may result in moderating (positively or negatively) each AIP performance measure, subject to the
individual maximum bonus levels
The AIP remains a discretionary arrangement. The Committee reserves discretion to adjust the out-turn
(from zero to the cap), should it consider it appropriate
The maximum LTIP award in
The Committee will determine the performance conditions for each award made under the LTIP,
normal circumstances is 200%
of salary
measuring performance over a period of at least three years with no provision to retest
Performance is measured against targets set at the beginning of the performance period, which may
Awards of up to 300% of
be set by referring to the time of grant or financial year
base salary are permitted in
exceptional circumstances,
relating to recruiting or retaining
an employee, as determined by
the Committee
Awards vest based on performance against financial and/or such other (including share return)
measures, as set by the Committee, to be aligned with the Group’s long-term strategic objectives
For awards to be granted in 2017, vesting will continue to be determined based on two measures:
RoTE and relative TSR performance against the FTSE 350 (excluding investment trusts). The Committee
may apply different performance measures and targets for future awards, provided not less than 50%
of the award shall be subject to one or more financial measures, and not less than 25% shall be
subject to a relative TSR measure
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
Additionally, there is a financial underpin relating to the Committee’s view of the Group’s underlying
financial performance for the TSR and RoTE (and any other) elements, 20% of the award vests for
threshold performance, with 100% vesting for maximum performance. The Committee reserves the right
in respect of future awards to lengthen (but not reduce) any performance period and/or amend the
terms of any holding period; however, there is no intention to reduce the length of the holding period
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Element
Purpose and link to strategy
Operation
Pension
To remain competitive within
Benefits
the market place
To encourage retirement
planning and retain flexibility
for individuals
A comprehensive and flexible
benefits package is offered,
emphasising individuals being
able to choose the combination
of cash and benefits that
suits them
Pension contributions are paid only in respect of base salary
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
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 some or all employees.
The Executive Directors are eligible to receive such additional benefits as the Committee
considers appropriate having regard to market norms
In line with our approach to all employees, certain Group products are offered to
Executive Directors at a discount
Executive Directors are eligible to participate in any of the employee share plans
operated by the Company, in line with HMRC guidelines (where relevant) and on the
same basis as other eligible employees. Currently, this includes the Share Incentive Plan
(“SIP”), which has been used to provide an award of free shares to all employees
(including Executive Directors), and permit employees to purchase shares with a
corresponding matching award
Where an Executive Director is required to relocate to perform their role, they may be
offered appropriate relocation benefits. The level of such benefits would be determined
based on the circumstances of the individual and typical market practice
Share
ownership
guidelines
To align the interests of
Executive Directors with those
of shareholders
Executive Directors are expected to retain all the ordinary shares vesting under any of
the Company’s share incentive plans, after any disposals for paying applicable taxes,
until they have achieved the required shareholding level; unless such earlier sale, in
exceptional circumstances, is permitted by the Chairman
Notes to the policy table
Malus and clawback
Malus (reducing or forfeiting unvested awards) and clawback (the Company’s ability to claim repayment of paid amounts)
provisions apply to the AIP (cash and deferred element) and LTIP if, in the Committee’s opinion, 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
An event during the relevant period which has, in the view of the Committee, sufficiently and significantly impacted the
Company’s reputation as to justify such action
Amounts in respect of awards under both plans (LTIP and DAIP) may be subject to clawback for up to three years post payment
or vesting (with such period lengthened if there is an investigation as to whether relevant circumstances exist) as appropriate.
Consistent with developments in the market generally, the provisions clarify that any recoupment is out of the post-tax amount,
except to the extent that the participant recovers tax from the relevant tax authority.
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Maximum opportunity
Performance measures
The maximum pension contributions is set at 25% of base salary
Not performance related
per annum
Not performance related
The costs of benefits provided may fluctuate from year to year, 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 (plus an additional amount of up to 100% of salary in
respect of relocation expenses). The Committee will monitor the costs
in practice and ensure the overall costs do not increase by more than
the Committee considers to be appropriate in all the circumstances
Additionally, the limit for any employee share plans in which the
Executive Directors participate will be in line with the caps permitted
by HMRC from time to time
The Executive Directors may be entitled to retain fees received for
any directorships held outside the Group
Similarly, while not benefits in the normal usage of that term,
certain other items such as hospitality or retirement gifts may also
be provided
200% of salary for all Executive Directors
The Committee reserves the discretion to amend these levels in
Not applicable
future years
Changes from 2014 policy
The main changes from the 2014 policy are summarised below. To aid the administration and clarity of its operation, other
minor changes have also been made to the policy:
For LTIP awards made after adopting the new policy at the 2017 AGM, Executive Directors will be subject to an additional
two-year holding period following the three-year vesting period, during which time awards may not normally be exercised
or released
Consistent with GC100 guidance, the cap to base salary has been re-expressed as a fixed monetary amount. Please note
that this is simply to align with reporting guidance and the cap does not represent any form of aspiration
Adding a cap on providing relocation benefits
Exercise of discretion
In line with market practice, the Committee retains discretion relating to operating and administering the AIP, DAIP and LTIP.
This discretion includes, but is not limited to:
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 shown on page 107; and
adjustments needed in certain circumstances, for example, a rights issue, corporate restructuring or special interim dividend.
While performance conditions will generally remain unchanged once set, the Committee has the usual discretions to amend the
measures, weightings and targets in exceptional circumstances (such as a major transaction) where the original conditions would
cease to operate as intended. Any such changes would be explained in the subsequent annual remuneration report and, if
appropriate, be the subject of consultation with the Company’s major shareholders. Consistent with best practice, the LTIP rules
also provide that any such amendment must not make, in the view of the Committee, the amended condition materially less
difficult to satisfy than the original condition was intended to be before such event occurred.
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Adjusting the number of shares under deferred bonus and LTIP
The number of shares subject to deferred bonus and LTIP awards may be increased to reflect the value of dividends that would
have been paid in respect of any dates falling between the grant of awards and the date of vesting (or, if later, the expiry of
any holding period) of awards (legacy awards made before 2014 accrue dividends to exercise).
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 before appointment to the Board
The Committee reserves the right to make any remuneration payments and payments for loss of office (including, where relevant,
exercising any discretions available to it connected with such payments) notwithstanding that they are not in line with the policy
set out above where the terms of the payment were agreed (i) before 13 May 2014 (the date the original shareholder approved
policy came into effect);(ii) provided the terms of the payment were consistent with any shareholder-approved Directors’
remuneration policy in force at the time they were agreed; (iii) at a time when the relevant individual was not a Director of the
Direct Line Insurance Group plc and, in the opinion of the Committee, the payment was not in consideration for the individual
becoming a Director of the Company. For these purposes, ‘payments’ include pension arrangements and the Committee
satisfying awards of variable remuneration. Relating to an award over shares, the terms of the payment are ‘agreed’ at the time
the award is granted.
Selecting performance measures
Annual Incentive Plan
The Committee has selected the AIP performance measures to incentivise Executive Directors to achieve financial targets for the
year, and specific strategic, shared and personal objectives. These measures are aligned with the key performance indicators
we use as a business to monitor performance against our strategic priorities, as shown on pages 24 and 25.
The relevant targets are set at or following the start of each year to ensure the Executive Directors focus appropriately on the
key objectives for the next twelve months.
Long-Term Incentive Plan
The goal of our strategy is to provide long-term sustainable returns for our shareholders. Therefore, for 2017 (as in prior years),
awards under the LTIP will continue to be subject to performance against RoTE (an important KPI to the business) and relative TSR
targets. The Committee believes this combination provides a balanced approach to measuring Group performance over the
longer term by using a stated financial KPI that incentivises individuals to keep growing the business efficiently, and a measure
based on relative shareholder return. This combination of measures appropriately balances absolute and relative returns.
As set out in the policy table, different performance measures may apply for awards granted in future years.
Differences in remuneration policy from broader employee population
To ensure that the arrangements in place remain appropriate, when determining Executive Directors’ remuneration, the Committee
accounts for pay throughout the Group.
The Group has one consistent reward policy for all levels of employees. Therefore, the same reward principles guide reward
decisions for all Group employees, including Executive Directors. However, remuneration packages differ to account for
appropriate factors in different areas of the business:
AIP – approximately 3,600 employees participate in the AIP. The corporate performance measures for all employees are
consistent with those used for Executive Directors, although the weighting attributable to those factors may differ. The Group’s
strategic leaders (approximately 60 employees) also receive part of their bonus in Company shares deferred for three years
Incentive awards – approximately 3,800 employees, excluding Executive Directors, participate in a function or team specific
incentive plan which assesses personal performance over a monthly period. These incentive awards may pay out monthly or
quarterly
LTIP – our strategic leaders participate in the LTIP, currently based on the same performance conditions as those for
Executive Directors
RSP – RSP awards are used on a limited basis across the Company to help recruit and retain critical staff, and for talent
management. Executive Directors do not receive grants under the RSP
All employee share plans – the Committee considers it important for all employees to have the opportunity to become
shareholders in the Company. The HMRC-approved SIP has operated since 2013, and, in addition, the Company has made
periodic awards of free shares. At year-end, approximately 3,000 employees throughout the Group had signed up to these
schemes with 9,500 holding free shares in the Company
Pension and benefits – depending on employee grade, the Company contributes between 9-25% to the defined contribution
pension scheme without any requirement for an employee contribution. Employees may also opt for a proportion or all of this
to be paid as cash rather than into the pension scheme
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104 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
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
an appropriate cost
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
employee benefits
Non-Executive Directors are paid a basic annual fee.
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
to reflect additional responsibilities, as appropriate.
The level of fees for 2017 is shown in the annual
remuneration section
The fees paid to the Chairman include all Board and
Committee membership fees, and are determined by
the Remuneration Committee
Non-Executive Directors may receive certain expenses,
including the reimbursement of travel expenses and
accommodation or similar which, consistent with general
market practice, will be grossed-up for any tax arising on
such expenses. It is the Committee’s view that expenses
(which are deemed to be benefits) are covered under the
aggregate cap set by the Articles of Association and that
this cap is not restricted to fees only
Similarly, while not benefits in the normal usage of that
term, certain other items such as hospitality or retirement
gifts may also be provided
Fee levels for Non-Executive Directors are reviewed and
may be increased at appropriate intervals by the Board,
with affected individual Directors absenting themselves
from deliberations
In setting the level of fees, the Company accounts for
the role’s expected time commitment, and fees at other
companies of a similar size, sector and/or complexity
to the Group
Fees (including expenses which are deemed to be
benefits) for Non-Executive Directors are subject to an
aggregate cap in the Articles of Association (currently
£2,000,000 per annum). The Company reserves the
right to change how the elements and weightings within
the overall fees are paid, and to pay a proportion of the
fees in shares within this limit
Recruitment remuneration policy
To strengthen the management team and secure the skills to deliver the Group’s strategic aims, the recruitment remuneration policy
aims to give the Committee sufficient flexibility to secure the appointment and promotion of high-calibre executives.
Principles for recruitment remuneration
1. In terms of the principles for setting a package for a new Executive Director, the starting point for the Committee will be to
look to the policy for Executive Directors as set out in the policy table, and structure a package in accordance with that policy.
Consistent with the Regulations, the caps contained in the policy table for fixed pay do not apply to new recruits, although the
Committee would not envisage exceeding these caps in practice
2. The Company would normally disclose clearly the terms of any recruitment package on announcing the appointment of any
new Executive Director
3. For an internal appointment, any variable pay element awarded in respect of the prior role may either continue on its original
terms or be adjusted to reflect the new appointment, as appropriate
4. For external and internal appointments (including a major change in role), the Committee may agree that the Company will
meet certain relocation expenses, legal and other fees involved in negotiating any recruitment, or pay expatriate benefits in
line with the policy table, as appropriate
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Buy-out awards
5. Where it is necessary to make a recruitment-related pay award to an external candidate, the Company will not pay more than
necessary, in the view of the Committee, and will in all cases seek to deliver any such awards under the terms of the existing
incentive pay structure
6. All such awards for external appointments, whether under the AIP, LTIP or otherwise, to compensate for awards forfeited on
leaving their previous employer will be determined taking into account the commercial value of the amount forfeited, and the
nature, time horizons and performance requirements of those awards. In particular, the Committee’s starting point will be to
ensure that any awards being forfeited which remain subject to outstanding performance requirements (other than where
substantially complete) are bought out with replacement requirements, and any awards with service requirements are bought
out with similar terms. However, exceptionally, the Committee may relax those obligations where it considers it to be in the
interests of shareholders and those factors are, in the Committee’s view, equally reflected in some other way, for example
through a significant discount to the face value of the awards forfeited
The elements of any package for a new recruit, including the maximum level of variable pay, but excluding buy-outs, will be
consistent with the Executive Directors’ remuneration policy described in this report, as modified by the above statement of principles
where appropriate. The Committee reserves the right to avail itself of the current Listing Rule 9.4.2 (being the rule which permits
exceptional recruitment awards on terms different from any shareholder approved ongoing plans) if needed to facilitate, in exceptional
circumstances, recruiting an Executive Director. Awards granted under this provision will only be used for buy-out awards.
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 relating 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
Mike Holliday-
Williams
30 January 2014
12 months
Base salary only for unexpired portion of notice period 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 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 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 the termination policy overleaf.
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Direct Line Group Annual Report & Accounts 2016
Termination policy
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:
AIP and LTIP – 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
DAIP – for any reason other than summary dismissal or resignation. However, the Committee may determine that, in the case
of resignation only, awards may be retained
The table below sets out the general position. However, it should be noted that the Committee, consistent with most other
companies, has reserved a broad discretion to determine whether an Executive Director should be categorised as a ‘good
leaver’, and that discretion forms part of the approved policy.
Incentives
If a leaver is a ‘bad leaver’,
for example leaving through
resignation or summary dismissal
Annual Incentive Plan
No awards made
Deferred Annual
Incentive Plan
All awards will lapse
Long-Term Incentive Plan
All unvested awards will lapse
During the holding period,
awards cease to be contingent
on employment and, therefore,
will not lapse (except on
dismissal for cause) but may
be subject to malus
If a leaver is deemed to be
a ‘good leaver’
Other events, for example,
change in control of Company
Bonus based on performance,
paid at the normal time and
on a time pro-rata basis, unless
the Committee determines
otherwise
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 (plus any
applicable holding period,
unless the Committee
determines otherwise) 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 immediately
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 applying the performance
conditions and, unless the
Committee determines otherwise,
time pro-rating. The Committee
may determine that such awards
shall not vest early and, instead,
be rolled over into replacement
awards granted on a similar basis,
but over shares in the acquirer or
another company or settled in cash
or other securities.
In the event of a demerger or
similar event, the Committee may
determine that awards vest on the
same basis
Service agreements for all Executive Directors provide that they are not eligible to receive any enhanced redundancy terms
which may be offered by the Group from time to time. Their rights to a statutory redundancy payment are not affected.
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 providing outplacement services. Any such fees would be disclosed as part of the detail of any
termination arrangements. The Committee reserves the right to make any other payments connected with a Director’s cessation
of office or employment, where the payments are made in good faith in discharge of an existing legal obligation (or by way of
damages for breach of such an obligation) or by way of a compromise or settlement of any claim arising connected with the
cessation of a Director’s office or employment.
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Directors’ remuneration report continued
Non-Executive Director letters of appointment
Non-Executive Directors are appointed for a three-year term which may be extended by mutual agreement. In common with the
Executive Directors, all Non-Executives are subject to annual re-election by shareholders.
The Directors may appoint additional members to join the Board during the year. Directors appointed in this way will be subject
to election by shareholders at the first AGM after their appointment. In subsequent years, the Directors must submit themselves for
re-election at each AGM.
Terms and conditions of appointment of all the Directors are available for anyone to inspect at the Company’s registered office
and 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 Chairman’s approval, an invitation to join the board
of another company outside the Group in a non-executive capacity, recognising the value of such wider experience. In these
circumstances, they are permitted to retain any remuneration from the non-executive appointment. Executive Directors are
generally limited to accepting one external directorship, but may accept more with the Chairman’s prior approval.
Considering 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 into account 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 from employee groups in 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.
Considering shareholders’ views
The Committee accounts for the approval levels of remuneration related matters at the AGM in determining whether the current
Directors’ remuneration policy remains appropriate.
When setting the remuneration policy, the Committee, consistent with its approach of operating within the highest standards of
corporate governance, takes significant account of guidelines issued by the leading shareholder and proxy agencies.
The Committee also seeks to build an active and productive dialogue with investors on developments in the remuneration aspects
of corporate governance generally, and particularly, any changes to the Company’s executive pay arrangements.
The Committee is satisfied that no element of the Directors’ remuneration policy conflicts with the Group’s approach to
environmental, social or corporate governance matters.
108
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Direct Line Group Annual Report & Accounts 2016
Performance scenarios
The Directors’ remuneration policy has been designed to ensure that a significant proportion of total remuneration is delivered
as variable pay and, therefore, depends on performance against our strategic objectives.
The Committee has considered the level of remuneration that may be paid under different performance scenarios to ensure 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 which Executive Directors may earn under three performance scenarios
(assuming the adoption of the proposed Policy) as set out below. These exclude share price appreciation and dividends which
could have a significant impact on the final outcome.
CEO – Paul Geddes
(£’000)
Minimum
100% 1,032
On-target
Maximum
47%
25%
CFO – John Reizenstein
(£’000)
Minimum
100% 624
38%
15% 2,207
On-target
49%
35%
16% 1,261
35%
40% 4,071
Maximum
27%
31%
42% 2,341
£0m
£1m
£2m
£3m
£4m
£0m
£1m
£2m
£3m
£4m
Total fixed pay Short term Incentives
Long term Incentives
Total fixed pay Short term Incentives
Long term Incentives
MD Personal Lines – Mike Holliday-Williams
(£’000)
Minimum
100% 647
On-target
48%
36%
16% 1,360
Maximum
25%
32%
43% 2,568
£0m
£1m
£2m
£3m
£4m
Total fixed pay Short term Incentives
Long term Incentives
The elements of remuneration included in each scenario are as follows:
Minimum
Consists of fixed remuneration only (that is, base salary, benefits and pension):
Base salary is the salary to be paid from 1 April 2017
Benefits measured as benefits paid in 2016 as set out in the single figure table on page 87, including
the value of matching shares under the SIP where relevant
Pension measured as the defined contribution or cash allowance in lieu of Company contributions,
as a percentage of salary (25% of base salary for the CEO and CFO, and 15% of salary for the MD
Personal Lines)
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 the CEO and 150% for the CFO and the
MD Personal Lines)
LTIP – consists of the face value of awards (200% of base salary for all Executive Directors)
The Board reviewed and approved this report on 6 March 2017.
Clare Thompson
Chair of the Remuneration Committee
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Directors’ report
The Directors present their report for the financial year ended
31 December 2016.
You can find the forward-looking statements disclaimer on
page 195.
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.
Strategic report
The Company’s Strategic report is on pages 1 to 47. It includes
the following information that would otherwise need to be
disclosed in this Directors’ report:
Subject
Use of financial instruments
Likely future developments
in the business
Employee involvement
Pages
44 and 45
34 to 37 and 47
13, 17 and 32 to 33
Corporate governance statement
The FCA’s Disclosure Guidance 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 48 to 109. This information is incorporated in the
Directors’ report by reference.
Disclosure of information under Listing Rule
9.8.4R
In accordance with Listing Rule 9.8.4C, the table below sets
out the location of the information required to be disclosed,
where applicable.
Subject
Interest capitalised by the Group
Unaudited financial information
Long-term incentive plan involving one
Director only
Directors’ waivers of emoluments
Directors’ waivers of future emoluments
Non pro-rata allotments for cash (issuer)
Non pro-rata allotments for cash (major
subsidiaries)
Listed company is a subsidiary of another
company
Contracts of significance involving a director
Contracts of significance involving a
controlling shareholder
Details of shareholder dividend waivers
Controlling shareholder agreements
Page
None
None
97
97
Not applicable
Not applicable
None
Not applicable
Not applicable
Not applicable
111
Not applicable
Post-balance sheet events
The Group has made an adjustment to its consolidated
financial statements following the announcement on
27 February 2017 by the Lord Chancellor of a reduction
in the Ogden discount rate to minus 0.75%.
Dividends
The Group aims to generate long-term sustainable value
for shareholders, while balancing operational, regulatory,
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.
Additionally, if the Board believes the Group has capital
surplus to its view of its solvency capital requirements,
it is intended that such excess capital will be returned to
shareholders alongside the full-year results. The Company
may consider a special dividend and/or a repurchase of
its own shares to distribute surplus capital to shareholders.
The Board recommends a final dividend of 9.7 pence per
share to shareholders. Subject to shareholder approval at
the Company’s 2017 AGM, this will become payable on
18 May 2017 to all holders of Ordinary Shares on the
Register of members at close of business on 17 March 2017.
The final dividend resolution provides that the Board may
cancel the dividend and, therefore, payment of the dividend
at any time before payment, if it considers it necessary to do
so for regulatory capital purposes. You can find detailed
explanations about this in the Notice of AGM.
You can find further details regarding dividends paid during
2015 and 2016 in the Finance review on page 38 and in
note 15 to the financial statements on page 159. You can
also find information on dividends and capital management in
the Finance review on page 45.
Directors
You can find the current Directors’ biographies on pages 50
to 51. All Directors will retire and be submitted for election
and re-election at the 2017 AGM. This is in accordance
with the UK Corporate Governance Code and the Articles of
Association of the Company, which govern appointing and
replacing Directors. The Directors listed on pages 50 and 51
were the Directors of the Company throughout the year apart
from Dr Richard Ward, who was appointed as a Director on
18 January 2016, Priscilla Vacassin, who resigned as a
Director on 1 March 2016 and Danuta Gray and Mike
Holliday-Williams who were appointed as Directors of the
Company on 1 February 2017.
The Company’s Articles of Association set out the Directors’
powers. You can view these on the Company’s website at
www.directlinegroup.com. The Directors’ powers are also
subject to relevant legislation and, in certain circumstances,
authority from the Company’s shareholders. You can find
details of the Directors’ remuneration, service contracts,
employment contracts and interests in the shares of the
Company in the Directors’ remuneration report on pages
82 to 109.
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,
110
110 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016 The Directors present their report for the financial year ended
rating agency and policyholder requirements. The Board
Directors’ report
31 December 2016.
page 195.
Strategic report
You can find the forward-looking statements disclaimer on
The Company’s Strategic report is on pages 1 to 47. It includes
the following information that would otherwise need to be
disclosed in this Directors’ report:
Subject
Use of financial instruments
Likely future developments
in the business
Employee involvement
Pages
44 and 45
34 to 37 and 47
13, 17 and 32 to 33
Corporate governance statement
The FCA’s Disclosure Guidance 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 48 to 109. This information is incorporated in the
Directors’ report by reference.
Disclosure of information under Listing Rule
In accordance with Listing Rule 9.8.4C, the table below sets
out the location of the information required to be disclosed,
9.8.4R
where applicable.
Subject
Interest capitalised by the Group
Unaudited financial information
Long-term incentive plan involving one
Director only
Directors’ waivers of emoluments
Directors’ waivers of future emoluments
Non pro-rata allotments for cash (issuer)
Non pro-rata allotments for cash (major
subsidiaries)
company
Listed company is a subsidiary of another
Not applicable
Contracts of significance involving a director
Not applicable
Contracts of significance involving a
Not applicable
controlling shareholder
Details of shareholder dividend waivers
111
Controlling shareholder agreements
Not applicable
Post-balance sheet events
The Group has made an adjustment to its consolidated
financial statements following the announcement on
27 February 2017 by the Lord Chancellor of a reduction
in the Ogden discount rate to minus 0.75%.
Dividends
The Group aims to generate long-term sustainable value
for shareholders, while balancing operational, regulatory,
110 Direct Line Group Annual Report & Accounts 2016
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 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.
Additionally, if the Board believes the Group has capital
surplus to its view of its solvency capital requirements,
it is intended that such excess capital will be returned to
shareholders alongside the full-year results. The Company
may consider a special dividend and/or a repurchase of
its own shares to distribute surplus capital to shareholders.
The Board recommends a final dividend of 9.7 pence per
share to shareholders. Subject to shareholder approval at
the Company’s 2017 AGM, this will become payable on
18 May 2017 to all holders of Ordinary Shares on the
Register of members at close of business on 17 March 2017.
The final dividend resolution provides that the Board may
cancel the dividend and, therefore, payment of the dividend
at any time before payment, if it considers it necessary to do
so for regulatory capital purposes. You can find detailed
explanations about this in the Notice of AGM.
You can find further details regarding dividends paid during
2015 and 2016 in the Finance review on page 38 and in
note 15 to the financial statements on page 159. You can
also find information on dividends and capital management in
the Finance review on page 45.
Page
None
None
97
97
Not applicable
Not applicable
Directors
You can find the current Directors’ biographies on pages 50
to 51. All Directors will retire and be submitted for election
and re-election at the 2017 AGM. This is in accordance
with the UK Corporate Governance Code and the Articles of
Association of the Company, which govern appointing and
replacing Directors. The Directors listed on pages 50 and 51
None
were the Directors of the Company throughout the year apart
from Dr Richard Ward, who was appointed as a Director on
18 January 2016, Priscilla Vacassin, who resigned as a
Director on 1 March 2016 and Danuta Gray and Mike
Holliday-Williams who were appointed as Directors of the
Company on 1 February 2017.
The Company’s Articles of Association set out the Directors’
powers. You can view these on the Company’s website at
www.directlinegroup.com. The Directors’ powers are also
subject to relevant legislation and, in certain circumstances,
authority from the Company’s shareholders. You can find
details of the Directors’ remuneration, service contracts,
employment contracts and interests in the shares of the
Company in the Directors’ remuneration report on pages
82 to 109.
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.
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 page 196.
Share capital
The Company has a premium listing on the London Stock
Exchange. As at 31 December 2016, the Company’s share
capital comprised 1,375,000,000 fully paid Ordinary Shares
of 10 10/11 pence each.
At the Company’s 2016 AGM, the Directors were
authorised to:
allot shares in the Company or grant rights to subscribe
for, or convert, any security into shares up to an aggregate
nominal amount of £50,000,000;
allot shares up to an aggregate nominal amount of
£100,000,000, for the purpose of a rights issue;
allot shares having a normal amount not exceeding in
aggregate £15,000,000 for cash without offering the
shares first to existing shareholders in proportion to their
holdings; and
make market purchases of up to 137,500,000 shares in
the Company, representing 10% of the Company’s issued
share capital at the time.
To date, the Directors have not used these authorities. At the
2017 AGM, shareholders will be asked to renew these
authorities and vote on some additional resolutions in relation
to the disapplication of pre-emption rights and the issue of
Solvency II Tier 1 Instruments 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 2016 in notes 29 and 35 to
the consolidated financial statements.
Under the Company’s Share Incentive Plan, Trustees hold
shares on behalf of employee participants. The Trustees will
only vote on those shares and receive dividends that a
participant beneficially owns, in accordance with the
participant’s wishes. An Employee Benefit Trust also operates.
The Trustee of this has discretion to vote on any shares it holds
as it sees fit, except any shares participants own beneficially;
in which case, the Trustee will only vote on such shares as per
the participant’s instructions.
The Trustee of this Trust has waived its right to dividends on
all shares within the Trust. You can find out more about the
number of shares held by the employee share plan trusts in
note 29 on page 166. The Company is only aware of the
dividend waivers and voting restrictions mentioned above.
Shareholder voting rights and restrictions
on transfer of shares
All 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.
Employees in the Company and Directors must conform with
the EU Market Abuse Regulation and the Company’s share
dealing rules. These rules restrict particular employees’ and
Directors’ ability to deal in the Company’s shares at certain
times, and require the employee or Director to obtain
permission to deal before doing so. Some of the Company’s
employee share plans also include restrictions on transferring
shares while the shares are held within the plans.
Each general meeting notice will specify the time for
determining a shareholder’s entitlement to attend and vote at
the meeting. This will not be more than 48 hours before the
time fixed for the meeting. To be valid, all proxy appointments
must be filed at least 48 hours before the time of the general
meeting. In calculating this time period, no account shall be
taken of any part of a day that is not a working day.
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,
which 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.
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 significant in terms of their impact
on the Group’s business as a whole.
All the Company’s employee share incentive plans contain
provisions relating to a change of control. Outstanding
awards would typically vest and become exercisable.
This is subject to satisfying any performance conditions, and
normally with an additional time-based pro-rata reduction
where performance conditions apply, and approval from
the Remuneration Committee.
www.directlinegroup.com 111
111
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Directors’ report continued
Substantial shareholdings
In accordance with the provisions of chapter 5 of the FCA’s
Disclosure Guidance and Transparency Rules, the Company
has been notified of the following indirect interests in the
Company’s voting rights. The Company has not been notified
of any direct interests. Information provided by the Company
pursuant to the FCA’s Disclosure Guidance and Transparency
Rules is publicly available via the regulatory information
services and on the Company’s website.
BlackRock, Inc.
31 December
2016
5.08%
15 March
2017
8.43%
Political donations
The Group made no political donations during the year
(2015: nil).
Employees with disabilities
The Group is committed to promoting diversity and inclusion
across every area of the business through initiatives such as
the Diversity Network Alliance. At recruitment, we adjust and
enhance our application and selection process, and guide and
provide additional training for interviewers, where necessary.
Our Diversity Network Alliance focuses on a number of strands
including employees with disabilities. It identifies areas where
we can improve and help people continue working for us.
We reasonably adjust employees’ working environments and
equipment, and roles and role requirements. We also ensure
that everyone can access the same opportunities.
Greenhouse gas emissions
In order to comply with the Companies Act 2006 (Strategic
and Directors’ Report) Regulations 2013, the Group has
followed the 2013 UK Government environmental reporting
guidance for GHG emissions; used the UK Government’s
greenhouse gas conversion factors; and adopted the financial
control approach to setting the organisational boundaries of
responsibilities for GHG emissions. In applying the GHG
Protocol Corporate Accounting and Reporting Standard
(revised edition) we have calculated emissions associated with
electricity consumption solely using the location-based scope 2
calculation method. GHG emissions are classified as direct
or indirect, and divided into scope 1 and scope 2 emissions.
Direct GHG emissions are those from sources that the Group
owns or controls. Indirect GHG emissions are those that are
a consequence of the Group’s activities, but occur at sources
owned or controlled by another organisation. The Group has
considered the six main GHGs, reported in tonnes of carbon
dioxide equivalent (“CO2e”), and set 2013 as the base year.
The Group has not included emissions from the International
division, which was sold in May 2015, nor has it included
emissions associated with its investment portfolio.
Scope 1 – direct emissions including fuels used in office
buildings, accident repair centres, and owned vehicles
Scope 2 – indirect emissions resulting from generating electricity
purchased for office buildings and accident repair centres
Total GHG emissions for continuing operations for 2016
were 19,315 tonnes (2015: 22,611 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 2016, this was 6.4 tonnes CO2e per £ million of net
earned premium for continuing operations (2015: 8.0 tonnes).
This is a measure of how efficiently insurance products are
provided. It allows us to compare our year-on-year
performance and performance against other insurance
companies. Ecometrica has externally verified the GHG
emissions data. You can find verification statements 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.
Year on Year
comparison
Direct Line Continuing
Operations Emissions
from:
Scope 1
Scope 2
Total
Intensity metric:
tonnes CO2e/
million GBP net
earned premium
Tonnes of CO2e
2013
(Baseline)
8,429
21,480
29,909
2015
2016
7,643
14,968
22,611
7,383
11,932
19,315
Percentage
change
(2013 to
2016)
-12%
-44%
-35%
8.5
8
6.4
-24%
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 45 and 46 describes the
Group’s capital management strategy, which covers how
it measures its regulatory and economic capital needs,
and deploys capital.
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. The note also covers
insurance, market, liquidity and credit risks which may affect
the Group’s financial position.
Having made due enquiries, the Directors reasonably expect
that the Company and the Group have adequate resources to
continue in operational existence for at least 12 months from
the date of approval of the financial statements. Accordingly,
the Directors have adopted the going concern basis in
preparing the financial statements.
112
112 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Directors’ report continued
The Group made no political donations during the year
energy and the environment in the CSR section on page 32.
Substantial shareholdings
In accordance with the provisions of chapter 5 of the FCA’s
Disclosure Guidance and Transparency Rules, the Company
has been notified of the following indirect interests in the
Company’s voting rights. The Company has not been notified
of any direct interests. Information provided by the Company
pursuant to the FCA’s Disclosure Guidance and Transparency
Rules is publicly available via the regulatory information
services and on the Company’s website.
31 December
2016
5.08%
15 March
2017
8.43%
BlackRock, Inc.
Political donations
(2015: nil).
Employees with disabilities
The Group is committed to promoting diversity and inclusion
across every area of the business through initiatives such as
the Diversity Network Alliance. At recruitment, we adjust and
enhance our application and selection process, and guide and
provide additional training for interviewers, where necessary.
Our Diversity Network Alliance focuses on a number of strands
including employees with disabilities. It identifies areas where
we can improve and help people continue working for us.
We reasonably adjust employees’ working environments and
equipment, and roles and role requirements. We also ensure
that everyone can access the same opportunities.
Greenhouse gas emissions
In order to comply with the Companies Act 2006 (Strategic
and Directors’ Report) Regulations 2013, the Group has
followed the 2013 UK Government environmental reporting
guidance for GHG emissions; used the UK Government’s
greenhouse gas conversion factors; and adopted the financial
control approach to setting the organisational boundaries of
responsibilities for GHG emissions. In applying the GHG
Protocol Corporate Accounting and Reporting Standard
(revised edition) we have calculated emissions associated with
electricity consumption solely using the location-based scope 2
calculation method. GHG emissions are classified as direct
or indirect, and divided into scope 1 and scope 2 emissions.
Direct GHG emissions are those from sources that the Group
owns or controls. Indirect GHG emissions are those that are
a consequence of the Group’s activities, but occur at sources
owned or controlled by another organisation. The Group has
considered the six main GHGs, reported in tonnes of carbon
Total GHG emissions for continuing operations for 2016
were 19,315 tonnes (2015: 22,611 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 2016, this was 6.4 tonnes CO2e per £ million of net
earned premium for continuing operations (2015: 8.0 tonnes).
This is a measure of how efficiently insurance products are
provided. It allows us to compare our year-on-year
performance and performance against other insurance
companies. Ecometrica has externally verified the GHG
emissions data. You can find verification statements on the
Group’s website at www.directlinegroup.com.
You can find further information on the Group’s approach to
Tonnes of CO2e
2013
(Baseline)
8,429
21,480
29,909
2015
2016
7,643
14,968
22,611
7,383
11,932
19,315
Percentage
change
(2013 to
2016)
-12%
-44%
-35%
Year on Year
comparison
Direct Line Continuing
Operations Emissions
from:
Scope 1
Scope 2
Total
Intensity metric:
tonnes CO2e/
million GBP net
earned premium
8.5
8
6.4
-24%
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 45 and 46 describes the
Group’s capital management strategy, which covers how
it measures its regulatory and economic capital needs,
and deploys capital.
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. The note also covers
insurance, market, liquidity and credit risks which may affect
the Group’s financial position.
dioxide equivalent (“CO2e”), and set 2013 as the base year.
Having made due enquiries, the Directors reasonably expect
The Group has not included emissions from the International
that the Company and the Group have adequate resources to
division, which was sold in May 2015, nor has it included
continue in operational existence for at least 12 months from
emissions associated with its investment portfolio.
the date of approval of the financial statements. Accordingly,
the Directors have adopted the going concern basis in
preparing the financial statements.
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
Viability statement
The Strategic report, on pages 1 to 47, sets out the Group’s
financial performance, business environment, outlook and
financial management strategies. It covers how the Group
measures its regulatory and economic capital needs, and
deploys capital. You can find discussion about the Group’s
principal risks and risk management on pages 26 to 29.
Note 3 to the consolidated financial statements starts on page
136 and sets out financial disclosures relating to the Group’s
principal risks. This covers insurance, market and credit risk;
and the Group’s approach to monitoring, managing and
mitigating exposures to these risks.
Every year, the Board considers a five-year strategic plan for
the Group. The plan makes certain assumptions in respect of
the competitive markets in which the Group operates, and the
delivery and implementation of the next generation of customer
systems. Appropriate aspects of the strategic plan are stress-tested
to understand and help set capital and other requirements.
When reviewing the strategic plan, the Board considered
the Group’s prospects over the five-year period that the plan
covered. This review included 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, in a strategic plan, uncertainty increases over
time and, therefore, future outcomes cannot be guaranteed or
accurately predicted.
Considering the Group’s current capital and trading position,
its principal risks, and the remaining four years of the strategic
plan, 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 who
are, or may become, policyholders or claimants in the period
to 31 December 2020.
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
reappointing Deloitte LLP in the Audit Committee report on
page 67.
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 IFRS, as adopted by the EU and Article 4 of
the International Accounting Standard (“IAS”) regulation. The
Directors 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.
In preparing these financial statements, IAS 1 requires that
Directors: 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; and
assess the Company’s ability to continue as a going concern.
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, the Directors 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
preparing and disseminating financial statements may differ
from legislation in other jurisdictions.
The Directors confirm that, to the best of their knowledge:
the financial statements, prepared in accordance with IFRS,
give a true and fair view of the assets, liabilities, financial
position, and profit or loss of the Company, and the
undertakings included in the consolidation taken as a whole;
and the Strategic report (on pages 1 to 47) and Directors’
report (on pages 110 to 113) include a fair review of the
business's development and performance; and the position
of the Company and the undertakings included in the
consolidation taken as a whole, together with a description
of the principal risks and uncertainties they face.
The Board reviewed and approved this report on
6 March 2017.
By order of the Board
Roger C. Clifton
Company Secretary
112 Direct Line Group Annual Report & Accounts 2016
www.directlinegroup.com 113
113
www.directlinegroup.comStrategic reportGovernanceFinancial statements
Contents
Financial statements
Independent Auditor’s report
31. Subordinated liabilities
115
32. Insurance liabilities
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. Assets held for sale
29. Share capital
30. Other reserves
122
123
124
125
126
127
134
136
149
152
154
154
155
155
155
155
157
157
158
159
159
160
161
163
163
164
164
164
164
165
165
166
166
166
167
33. Unearned premium reserve
34. Retirement benefit obligations
35. Share-based payments
36. Trade and other payables including
insurance payables
37. Notes to the consolidated cash flow statement
38. Contingent liabilities
39. Commitments
40. Fair value
41. Related parties
42. Post balance sheet event
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. Other receivables
4. Current and deferred tax
5. Derivative financial instruments
6. Financial investments
7. Cash and cash equivalents
8. Share capital and capital reserves
9. Subordinated liabilities
10. Trade and other payables
11. Dividends
12. Cash generated from operations
13. Related parties
14. Share-based payments
15. Risk management
16. Directors and key management remuneration
167
168
169
170
172
174
175
175
176
176
178
178
179
180
180
181
182
182
183
184
184
184
184
184
185
185
185
185
186
186
186
186
114
114 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
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 2016 and of the Group’s and Parent
Company’s profit for the year then ended;
the financial statements have been properly prepared in
accordance with 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 IAS Regulation.
The financial statements, including within the Annual Report
and Accounts, comprise:
the Consolidated Income Statement;
the Consolidated and Parent Company Statement of
Comprehensive Income;
the Consolidated and Parent Company Balance Sheets;
the Consolidated and Parent Company Cash Flow
Statements;
the Consolidated and Parent Company Statements of
Changes in Equity; and
the related notes 1 to 42 on the consolidated financial
statements, and the related notes 1 to 16 on the Parent
Company financial statements.
The financial reporting framework 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 EU, the Group has also
applied IFRSs as issued by the 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 pages 61 and 62 regarding the
appropriateness of the going concern basis of accounting
to the financial statements and the Directors’ statement on the
longer-term viability of the Group. We have nothing material
to add or draw attention to in relation to:
the Directors’ confirmation on pages 61 and 62 that they
have carried out a robust assessment of the principal risks
facing the Group, including those that would threaten its
business model, future performance, solvency or liquidity;
the disclosures on pages 27 to 28 that describe those risks
and explain how they are being managed or mitigated;
the Directors’ statement on page 112 to the financial
statements about whether they considered it appropriate to
adopt the going concern basis of accounting in preparing
them and their identification of any material uncertainties to
the Group’s ability to continue to do so over a period of at
least 12 months from the date of approval of the financial
statements; and
the Director’s explanation on pages 112 to 113 as to how
they have assessed the prospects of the Group, over what
period they have done so and why they consider that
period to be appropriate, and their statement as to whether
they have a reasonable expectation that the Group will be
able to continue in operation and meet its liabilities as they
fall due over the period of their assessment, including any
related disclosures drawing attention to any necessary
qualifications or assumptions.
We agreed with the Directors’ adoption of the going concern
basis of accounting and we did not identify any such 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.
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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
Insurance reserves valuation
Refer to page 65 (Audit Committee Report), page 129 (accounting policies) and page 168 (financial disclosures).
The Group’s insurance reserves total £4.7bn (2015: £4.5bn). The determination of the value of the insurance reserves
requires significant judgment in the selection of key methodologies and assumptions. Small changes in these methodologies
or assumptions can materially impact the valuation of these liabilities. We have identified the following two key areas of
focus for our audit:
1) The frequency and severity of excess bodily injury claims; and
2) The propensity, severity and discount rate assumptions for valuing PPOs.
1) We have identified the estimation of the ultimate number
of large bodily injury claims as being inherently uncertain.
Management also exercises significant judgement in assessing
the impact of market factors which could materially impact
the valuation of excess bodily injury claims and hence the
insurance reserves. On 27 February 2017 the Lord Chancellor
announced a reduction in the Ogden discount rate used to
value lump sum injury claim settlements from 2.5% to
minus 0.75%. This change in discount rate has a significant
impact on the valuation of large bodily injury claims, as
detailed on page 137.
We have gained a detailed understanding of the end to
end reserving process, including the process for adjusting
the reserves as a result of the change in the Ogden discount
rate and assessed the design and implementation of selected
controls. We have tested the operating effectiveness for
actuarial data reconciliations and key management review
controls over the reserving process. Our work included
attendance at the December Loss Ratio Committee and
January Reserve Review Committee.
We have tested the completeness and accuracy of the
underlying data used in the Company’s actuarial calculations
and the actuarial data used by our Deloitte actuarial specialists
in performing their audit through performing reconciliations on
the data back to the financial ledger.
Having done this, we worked with those specialists to:
challenge the suitability of the methodology and
assumptions used in estimating the ultimate number of large
bodily injury claims by comparing it to industry benchmarks;
challenge the approach to and the assumptions used in
adjusting reserves for the change in the Ogden discount rate;
assess whether the reserving methodology has been
applied consistently across periods;
evaluate prior year reserve releases and emerging trends
for consistency with management’s calculations.
Key observations:
We have determined that the estimate for the ultimate value
of large bodily claims to be within a reasonable range.
We observed that the frequency and severity assumptions
were set towards the prudent end of a reasonable range.
116
116 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Risk
How the scope of our audit responded to the risk
2) The Group is required to settle a proportion of large
bodily injury claims as PPOs rather than lump sum payments.
The valuation of PPOs has a material impact on the financial
statements, with these liabilities totalling £983m (2015: £991m)
on a discounted gross basis as detailed in note 2. PPO liabilities
are sensitive to the choice of the propensity, severity and discount
rate assumptions used. These assumptions require significant
management judgement which increases the susceptibility
of the balance to material misstatement.
We have assessed the design and implementation of
controls surrounding the propensity of a claim to become
a PPO, the discount rate used and the severity assumption
applied. In addition we tested the operating effectiveness
of a direct and precise business control, performed weekly,
over the completeness of the PPO listing; this is a key data
input which has a material impact on the PPO assumptions
and hence the valuation.
We have worked with our actuarial specialists to:
In addition, the Lord Chancellor’s announcement of a
reduction in the Ogden discount rate is likely to impact
the propensity of a claim becoming a PPO going forward
which increases the level of uncertainty in the setting of
this assumption at year end.
challenge management’s assumptions by performing market
benchmarking, sensitivity analysis and reviewing historical
trends to assess the reasonableness of long term future
expectations, including consideration of the change in the
Ogden discount rate;
assess whether the assumptions were consistent in the
period or, based on emerging market data, that the
assumptions needed to be reconsidered;
consider the suitability of the methodology and model used
in estimating the propensity, severity and discount rate; and
test the model of a sample of individual PPO’s through
re-performance using a Deloitte developed model.
Key observations:
We have determined that key assumptions used in the calculation
of the PPO claims reserve are within a reasonable range. We
observed that the investment yield component of the discount rate
was towards the optimistic end of a reasonable range, but that
the propensity and severity assumptions were set towards the
prudent end of a reasonable range.
www.directlinegroup.com 117
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www.directlinegroup.comStrategic reportGovernanceFinancial statements
Independent Auditor’s report to the members of Direct Line Insurance Group plc continued
Risk
Change and IT
How the scope of our audit responded to the risk
Refer to page 65 (Audit Committee Report), page 129 (accounting policies) and page 161 (financial disclosures).
A number of projects are ongoing across DLG aimed at
improving the customer experience and enhancing operational
efficiency. Certain costs relating to these projects are capitalised
on the balance sheet, with the carrying amount of intangible
assets at year-end totalling £298m (2015: £314m). We have
identified a key risk that costs relating to these projects are
incorrectly capitalised or that the impairment charge recognised
in the year of £39m (2015: £4m) has not been accurately
determined in line with IAS 36. Significant judgements and
estimates have been made in calculating the future economic
benefit of these assets, including the expected future cash flows
and the discount rate used.
In addition, we have identified a risk that the transformation
programme, which includes the outsourcing and offshoring of
finance and operations, could impact the financial reporting
control environment, in particular where processes and controls
have changed operation and location. There is a risk that these
changes will cause management stretch which could impact on
the effectiveness of existing financial reporting internal controls,
particularly in relation to adequate segregation of duties.
We have assessed the design and implementation and
tested the operating effectiveness of key controls over the
capitalisation of costs and the impairment of intangible
assets. These included senior management approval for
costs to be capitalised against projects having analysed the
detailed business plan and assessed feasibility. We have
tested the capitalisation criteria of key projects by assessing
the inputs and noting whether these are applicable expenses
in accordance with IAS 38. We have tested the impairment
charge by performing the following:
testing the completeness and accuracy of the data used
in the model;
testing the accuracy and mechanics of the model and
assessing whether this was compliant with IAS 38;
challenging management’s expected future cash flows
by performing benchmarking analysis and engaging
our IT consultants to assess the IT architecture; and
engaging our valuation specialists to assess the
appropriateness of the discount rate applied to the asset.
We have assessed the design and implementation and
tested the operating effectiveness of key business processes
that have been subject to change. For example, we have
tested the operating effectiveness of controls at a number
of outsourced locations, involving site visits by the audit
team. When testing the controls that had been impacted
by the transformation programme our testing focussed on
determining that there remained an appropriate level of
review and segregation of duties.
Key observations:
We completed our procedures on the impairment of
the intangibles and have not identified any additional
impairment. We have observed that the discount rate used
was in the middle of a reasonable range and that the
expected future cash flows were reasonable. In addition,
we completed our controls testing and did not identify any
significant control weaknesses.
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Direct Line Group Annual Report & Accounts 2016
Risk
How the scope of our audit responded to the risk
Investments not held at fair value
Refer to page 65 (Audit Committee Report), page 130 (accounting policies) and page 165 (financial disclosures).
We have identified a key risk for investments relating to the
valuation of loan portfolios that are not held at fair value totalling
£502m (2015: £388m) as detailed in note 40. During 2016
the Group has invested in a new commercial real estate loan
portfolio and has increased investment in its private placement
bond portfolio, with investment in infrastructure debt remaining
stable at £337m (2015: £330m). These debt instruments are
carried at amortised cost and represent a higher credit risk
relative to the majority of DLG’s investment portfolio. As a result,
there is a risk that the Group does not recognise an impairment
provision on these loans when required by IAS 39.
We have assessed the design and implementation and
tested the operating effectiveness of the key controls that
mitigate the risk over the valuation of investments not held
at fair value. Our work included attendance at the year-end
impairment review meeting in order to assess the operation
of a key management review control.
We have consulted with our credit and valuation specialists
to challenge the methodology used in the assessment of
credit risk within the investment portfolios that are held at
amortised cost against best practice. In addition we
performed the following:
independently calculated the fair value for a sample
of assets to identify any significant decreases in fair
value below book cost;
traced a sample of interest payments to bank during
the year to test for default or delinquency in interest
payments; and
challenged management on loans of interest where
indicators could point to issuer financial difficulty,
obtaining evidence to assess whether the position
taken by management is reasonable.
Key observations:
We completed our procedures and did not note any
indicators of material impairment within the loan portfolios.
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Independent Auditor’s report to the members of Direct Line Insurance Group plc continued
Last year our report included risks relating to the reinsurance
asset valuation and the Group’s IT control environment. From
performing our detailed risk assessment for the 2016 audit,
we concluded that these no longer represented key risks of
material misstatement. The reinsurance bad debt methodology
has remained consistent with prior year and is deemed
appropriate. Similarly, the IT infrastructure fully transitioned in
2015 to an independently hosted data centre. In addition, this
year we have not reported on our presumed risk over revenue
recognition. We concluded that this risk does not exhibit the
same level of complexity or management judgement as the
risks we have disclosed above.
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,
transformation costs and the impact of the Ogden discount rate
change to exclude the effect of year on year volatility. With the
exception of Ogden, this is consistent with the approach we
adopted last year. We determined materiality for the Group to
be £28m (2015: £28m), which is below 5.6% (2015: 5.9%)
of average profit before tax from Ongoing operations.
Our assessment of materiality was made prior to the
announcement of the change in the Ogden discount rate, the
impact of which has been disclosed in note 3 on page 137.
We have considered whether materiality should be revised
for both the Group audit and the audit of the insurance
subsidiaries and have concluded that the levels of materiality
remain appropriate as the scale and nature of the underlying
businesses have not changed. We have performed focused
procedures on the impact of the Ogden rate change as
reported in the significant risk section of this report.
We also considered this measure to be suitable having
compared to other benchmarks: our materiality equates to
7.9% (pre-Ogden change: 4.9%, 2015: 5.5%) of statutory
profit before tax, 0.9% (pre Ogden change: 0.9%, 2015:
0.9%) of gross earned premium and 1.1% (pre-Ogden
change: 1.0%, 2015: 1.1%) of equity.
Group materiality is used for setting audit scope and the
assessment of uncorrected misstatements. Materiality is set
for each significant component in line with the components
proportion of the chosen benchmark. This is capped at the
lower of 90% of Group materiality and the component
materiality determined for a standalone audit. The main UK
insurance trading entity, which makes up 100% of Group
gross earned premium and 89% of Group statutory profit
before tax, is scoped to a component materiality of £25.2m
(2015: £24.8m).
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. We have set Group
performance materiality at £19.6m (2015: £19.6m) and the
audit testing for U K Insurance Limited is carried out to a
performance materiality of £17.6m (2015: £17.4m).
Following us reassessing the levels at which we would report
to the Audit Committee, and as discussed and agreed with the
Committee, we report to them all audit differences in excess
of £1.4m (2015: £0.6m), as well as differences below that
threshold that, in our view, warranted reporting on qualitative
grounds. We also report to the Audit Committee on disclosure
matters that we identified when assessing the overall
presentation of the financial statements.
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.
Similarly to prior year, our Group audit scope has focused
on the UK as this is the Group’s single trading location. In
addition, we perform site visits at the Group’s key outsourcers.
This resulted in two entities being subject to a full scope audit,
a further two were subject to an audit of specified account
balances where the extent of our testing was based on our
assessment of the risks of material misstatement and of the
materiality of the Group’s operations.
These four entities represent the principal business units and
account for 99% (2015: 99%) of the Group’s net assets,
100% (2015: 92%) of the Group’s gross earned premium and
98% (2015: 93%) 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.
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 in scope UK entities.
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, based on the work undertaken in the course
of the audit:
the part of the Directors’ remuneration report to be audited
has been properly prepared in accordance with the
Companies Act 2006;
the information given in the Strategic report and the
Directors’ report for the financial year for which the
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120 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016 financial statements are prepared is consistent with the
financial statements; and
the Strategic Report and the Directors’ Report have been
prepared in accordance with applicable legal requirements.
Matters on which we are required to report
by exception
Adequacy of explanations received and
accounting records
Under the Companies Act 2006 we are required to report
to you if, in our opinion:
we have not received all the information and explanations
we require for our audit; or
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 Directors
and Auditor
As explained more fully in the Directors’ responsibilities
statement, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give
a true and fair view. Our responsibility is to audit and express
an opinion on the financial statements in accordance with
applicable law and International Standards on Auditing (UK
and Ireland). We also comply with International Standard on
Quality Control 1 (UK and Ireland). Our audit methodology
and tools aim to ensure that our quality control procedures are
effective, understood and applied. Our quality controls and
systems include our dedicated professional standards review
team and independent partner reviews.
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.
Colin Rawlings FCA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
6 March 2017
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Consolidated income statement
For the year ended 31 December 2016
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
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
2016
£m
2015
£m
6
6
6
7
8
9
9
9
10
11
12
13
5A
16
16
16
16
3,202.8
(202.2)
3,000.6
171.5
107.1
58.2
3,337.4
(2,179.0)
375.2
(1,803.8)
(344.0)
(799.4)
(1,143.4)
390.2
(37.2)
353.0
(74.2)
278.8
–
278.8
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
20.4
20.2
20.4
20.2
27.9
27.6
40.6
40.1
The attached notes on pages 127 to 178 form an integral part of these consolidated financial statements.
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Direct Line Group Annual Report & Accounts 2016
Consolidated statement of comprehensive income
For the year ended 31 December 2016
Profit for the year
Other comprehensive income / (loss)
Items that will not be reclassified subsequently to the income statement:
Actuarial (loss) / 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 gain / (loss) on AFS investments
Less: realised net gains on AFS investments included in income statement
Tax relating to items that may be reclassified
Other comprehensive income / (loss) for the year net of tax
Total comprehensive income for the year attributable to owners of the Company
Notes
2016
£m
278.8
2015
£m
580.4
34
14
30
30
30
(4.4)
0.7
(3.7)
0.1
1.4
119.6
(15.3)
(17.6)
88.2
84.5
363.3
6.7
(1.6)
5.1
14.4
(1.4)
(100.5)
(44.3)
34.6
(97.2)
(92.1)
488.3
The attached notes on pages 127 to 178 form an integral part of these consolidated financial statements.
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Consolidated balance sheet
As at 31 December 2016
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
Total liabilities
Total equity and liabilities
Notes
2016
£m
2015
£m
18
19
20
22
14
23
24
25
34
26
27
28
31
32
33
27
25
36
14
14
508.9
180.9
329.0
1,371.8
0.1
203.1
988.3
131.0
79.7
12.0
5,147.0
1,166.1
3.8
10,121.7
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
2,521.5
2,630.0
539.6
4,666.6
1,547.9
55.3
45.1
699.2
46.0
0.5
7,600.2
10,121.7
521.1
4,524.5
1,476.6
61.3
46.4
656.5
29.9
10.3
7,326.6
9,956.6
The attached notes on pages 127 to 178 form an integral part of these consolidated financial statements.
The financial statements were approved by the Board of Directors and authorised for issue on 6 March 2017. They were signed
on its behalf by:
John Reizenstein
Chief Financial Officer
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Direct Line Group Annual Report & Accounts 2016
Consolidated statement of changes in equity
For the year ended 31 December 2016
Share
capital
(Note 29)
£m
Employee
trust
shares
£m
Capital
reserves
(Note 30)
£m
Notes
AFS
revaluation
reserve
(Note 30)
£m
Non-
distributable
reserve
(Note 30)
£m
Foreign
exchange
translation
reserve
£m
Balance at 1 January 2015
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
Profit for the year
Other comprehensive income
Dividends
Transfer from 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 2016
15
30
35
15
30
35
150.0
–
–
–
(13.6) 1,450.0
–
–
–
–
–
–
115.6
–
(110.2)
–
–
–
–
–
–
–
(17.8)
–
11.0
–
–
–
–
–
–
150.0
–
–
–
(20.4) 1,450.0
–
–
–
–
–
–
–
–
–
–
(39.5)
–
–
–
–
–
–
–
–
–
5.4
–
86.7
–
–
–
–
–
–
150.0
25.6
–
–
–
(34.3) 1,450.0
–
–
92.1
124.9
–
–
–
28.0
–
–
–
–
152.9
–
–
–
(152.9)
–
–
–
–
–
Retained
earnings
£m
Total
shareholders’
equity
£m
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
(11.0)
2.9
–
2.9
892.2 2,630.0
278.8
278.8
84.5
(3.7)
(450.6)
(450.6)
152.9
–
–
(39.5)
16.8
16.8
(13.1)
–
13.0
–
–
–
–
–
–
(0.1)
–
1.5
–
–
–
–
–
–
1.4
(25.6)
1.5
862.3
–
1.5
2,521.5
The attached notes on pages 127 to 178 form an integral part of these consolidated financial statements.
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Consolidated cash flow statement
For the year ended 31 December 2016
Net cash generated from 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
Proceeds on disposals of assets held for sale
Net cash flows from disposal of subsidiaries
Net cash (used by) / generated from 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
37
37
15
27
2016
£m
35.0
827.4
862.4
(49.9)
(80.8)
5.1
–
(125.6)
(450.6)
(38.3)
(39.5)
(528.4)
208.4
902.4
–
1,110.8
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
The attached notes on pages 127 to 178 form an integral part of these consolidated financial statements.
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Direct Line Group Annual Report & Accounts 2016
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, BR11DP, England.
1. Accounting policies
Basis of preparation
As required by the Companies Act 2006 and Article 4 of the
EU IAS Regulation, the consolidated financial statements are
prepared in accordance with IFRSs issued by the IASB as
adopted by the EU. The Company’s financial statements have
been prepared in accordance with and full compliance with
IFRSs as issued by the IASB.
The 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 consolidated
financial statements are presented in Sterling, which is the
functional currency of the Company.
The International segment was classified as a discontinued
operation until disposed of in 2015.
Adoption of new and revised standards
The Group has adopted the following new amendments to
IFRSs and the IASs that became effective for the Group for
the first time during 2016, however these have had no impact
on the consolidated financial statements, performance and /
or disclosure.
Amendments to IFRS 10 ‘Consolidated Financial Statements’,
IFRS 12 ‘Disclosure of Interests in Other Entities’ and IAS 28
‘Investments in Associates and Joint Ventures’ – Investment
Entities: Applying the Consolidation Exception – the
amendments address issues that have arisen in applying
the investment entities exception under IFRS 10.
IFRS 11 (amended) ‘Joint Arrangements’ Accounting for
Acquisitions of Interests in Joint Operations – the amendments
require an entity to apply the principles of IFRS 3 ‘Business
Combinations’ when it acquires an interest in a joint operation
which constitutes a ‘business’ as defined by IFRS 3.
IAS 1 (amended) ‘Presentation of Financial Statements’
Disclosure Initiative – the amendments are intended to assist
entities in applying judgement when meeting the presentation
and disclosure requirements in IFRS, providing clarity to the
materiality requirement in IAS 1, that specific line items in
the income statement, other comprehensive income and
balance sheet may be disaggregated. The amendments clarify
that an entity’s share of the other comprehensive income of
associates and joint ventures accounted using the equity
method should be presented separately from those arising
from the Group. The amendment also addresses that entities
have flexibility as to the order in which they present the notes
to the financial statements.
IAS 16 (amended) ‘Property, Plant and Equipment’ and IAS 38
(amended) ‘Intangible Assets’ – Classification of Acceptable
Methods of Depreciation and Amortisation – the amendments
state that revenue-based amortisation models are explicitly
prohibited for property, plant and equipment and may only be
used in very limited circumstances to amortise intangible assets.
IAS 27 (amended) ‘Separate Financial Statements’, Equity
Method in Separate Financial Statements – the amendments
allow an entity to use the equity method for its investments
in subsidiaries, joint ventures and associates in its separate
financial statements.
Annual Improvements 2012-2014 Cycle – these improvements
include:
IFRS 5 (amended) ‘Non-Current Assets Held for Sale and
Discontinued Operations’ – assets are generally disposed of
either through sale or through a distribution to owners. The
amendment clarifies that changing from one disposal method
to another is a continuation of the original plan of disposal.
IFRS 7 (amended) ‘Financial Instruments: Disclosures’ –
provides additional guidance to clarify whether a servicing
contract that includes a fee can constitute continuing
involvement in a financial asset for the purpose of the
disclosures required in relation to transferred assets.
IAS 19 (amended) ‘Employee Benefits’ – a further amendment
has been made to IAS 19 to clarify that the high quality
corporate bonds used to estimate the discount rate for post-
employment benefits should be issued in the same currency
as the benefits to be paid.
1.1 Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and the entities that are controlled
by the Group at 31 December 2016 and 31 December
2015. Control exists when the Group is exposed, or has
rights, to variable returns from its involvement with the entity
and has the ability to affect those returns through its power
over the entity. In assessing if the Group controls another entity,
the existence and effect of the potential voting rights that are
currently exercisable or convertible are considered.
Where necessary, adjustments have been made to the
financial statements of subsidiaries to bring the accounting
policies used into line with those used by the Group.
The policies set out below have been applied consistently
throughout the years ended 31 December 2016 and
31 December 2015 to items considered material to the
consolidated financial statements.
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.
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Notes to the consolidated financial statements continued
1. Accounting policies continued
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.
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 the year or 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
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Direct Line Group Annual Report & Accounts 2016 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.
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 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 and this is taken as an
indication of a reinsurer’s difficulty in meeting its obligations
under the reinsurance contracts. This also includes an
assessment in respect of the ceded part of claims provisions
to reflect the counterparty default risk exposure to long-term
reinsurance assets particularly in relation to periodical
payments. Increases in this provision affect the Group by
reducing the carrying value of the asset and the impairment
loss is recognised in the income statement.
1.7 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, directly attributable 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
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1. Accounting policies continued
property, plant and equipment comprises major components
having different useful lives, they are accounted for separately.
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.
Purchases or sales of financial assets that require delivery
of assets within a time frame established by regulation or
convention in the market place are recognised on the date
that the Group commits to purchase or sell the asset.
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.
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.
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.
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Direct Line Group Annual Report & Accounts 2016 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.
Impairment of financial assets
Insurance receivables
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.
Insurance receivables
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.
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 fair value hedge relationships
and a small amount of cash flow 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 and borrowings
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.
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.
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Notes to the consolidated financial statements continued
1. Accounting policies continued
A financial liability is derecognised when the obligation under
the liability is discharged, cancelled or expires.
1.19 Taxation
The tax charge or credit represents the sum of the tax currently
payable or receivable and deferred tax.
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 34, was closed in 2003. Scheme liabilities are measured
on an actuarial basis, using the projected unit credit method,
and discounted at a rate that reflects the current rate of return
on a high-quality corporate bond of equivalent term and
currency to the scheme liabilities.
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’.
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 or equity, in which case the deferred tax is also dealt
with in other comprehensive income or directly in equity.
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.
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.
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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
New IFRSs and amendments that are issued, but not yet
effective for the 31 December 2016 reporting periods and
have not been early adopted by the Group are disclosed
below. The Group intends to adopt these standards, if
applicable, when they become effective, except for IFRS 9
as explained below.
In July 2014, the IASB issued the final version of IFRS 9
‘Financial Instruments’ that replaces IAS 39 ‘Financial
Instruments: Recognition and Measurement’ and all previous
versions of IFRS 9 which was endorsed by the EU in 2016.
IFRS 9 addresses the classification, measurement and
derecognition of financial assets and financial liabilities,
introduces new rules for hedge accounting and a new
impairment model for financial assets and is effective for
annual periods beginning on or after 1 January 2018.
In 2016 the Group conducted a high-level assessment of
the three aspects of IFRS 9 and based on current available
information expects no significant impact on its balance sheet
and equity, except for the impact of applying the expected loss
model for the first time and this impact is currently immaterial.
The Group plans to defer the application of IFRS 9 until the
effective date of the new insurance contracts standard IFRS 17
of 1 January 2021, applying the temporary exemption from
applying IFRS 9 as introduced by the amendments to IFRS 4
‘Insurance Contracts’, detailed below.
In September 2016, the IASB issued amendments to IFRS 4
to address issues arising from the different effective dates of
IFRS 9 and the upcoming new insurance contracts standard
(IFRS 17). The amendment to IFRS 4 is expected to be
endorsed by the EU before the effective date of IFRS 9.
The amendments introduce two alternative options, the overlay
approach and the temporary exemption from IFRS 9. The
overlay approach allows an entity applying IFRS 9 to reclassify
between the income statement and other comprehensive income
an amount that results in the income statement at the end of the
reporting period for the designated financial assets being the
same as if an entity had applied IAS 39 ‘Financial Instruments –
Recognition and Measurement’ to these designated financial
assets. The temporary exemption from IFRS 9 allows entities
to defer the implementation date of IFRS 9 for annual periods
beginning before 1 January 2021, if it has not applied any
version of IFRS 9 previously and its activities are predominantly
connected with insurance on its annual reporting date that
immediately precedes 1 April 2016.
During 2016 the Group performed an assessment of the
temporary exemption from IFRS 9 criteria and concluded
that the carrying amount of its liabilities connected with
insurance relative to the carrying amount of all its liabilities
as at 31 December 2015 is greater than 90% and therefore
satisfies the exemption criteria.
In 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. The standard provides guidance on when and
how combined contracts should be unbundled and when a
contract price includes a variable consideration element.
IFRS 15 was endorsed by the EU in 2016 and either a full
retrospective application or a modified retrospective application
is required for annual periods beginning on or after 1 January
2018. The Group expects to apply IFRS 15 fully retrospectively.
Insurance contracts are out of the scope of IFRS 15 and therefore
the Group does not expect the impact on other operating
income to be material.
In January 2016 the IASB issued IFRS 16 ‘Leases’ to replace
the existing standard IAS 17, which subject to endorsement
from the EU will be effective from 1 January 2019. IFRS 16
sets out the principles for recognition, measurement,
presentation and disclosure of leases and requires lessees to
account for all leases under a single on-balance sheet model
similar to the accounting for finance leases under IAS 17.
There are two exemptions for leases of a low value and for
leases of short-term nature of 12 months or less. At the start
of a lease, a lessee will recognise a liability for the lease
payments and an asset representing the right to use the asset
during the lease term. Lessees will be required to separately
recognise the interest expense on the lease liability and the
depreciation expense on the right-of-use asset. Lessor
accounting under IFRS 16 is substantially unchanged from
the current approach under IAS 17.
In 2017, the Group will assess the potential effect of IFRS 16
on its consolidated financial statements, the undiscounted value
of the Group’s lease obligations are disclosed in note 39.
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Notes to the consolidated financial statements continued
1. Accounting policies continued
The following amendments to IFRSs and IASs have been issued during 2016 that are expected to be endorsed by the EU
during 2017. The Group does not expect the amendments to have a material impact on the financial statements of the Group
in future periods.
The IASB amended IAS 12 ‘Income Taxes’ – Recognition of Deferred Tax Assets for Unrealised Losses to clarify the accounting
for deferred tax assets where an asset is measured at fair value and that fair value is below the asset’s tax base for accounting;
the amendment is effective from 1 January 2017.
Amendments to IAS 7 ‘Statement of Cash Flows’ was issued as part of the IASB’s Disclosure Initiative to require entities to explain
changes in their liabilities arising from financing activities; the amendment is effective from 1 January 2017.
The IASB amended IFRS 2 ‘Share-based Payments’ – Classification and Measurement of Share-based Payment Transactions, to
address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction;
the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and
accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from
cash-settled to equity-settled; the amendments are effective from 1 January 2018.
2. 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 127 to 134. 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 2016 amounted to £3,388.3 million (2015: £3,602.6 million).
Claims reserves are assessed separately for large and attritional claims, typically using standard actuarial methods of projection.
Key sources of estimation uncertainty include those arising from the selection of specific methods as well as assumptions for claims
frequency and severity through the review of historical claims and emerging trends.
The corresponding reinsurance recoveries and impairment provision are calculated on an equivalent basis, with similar estimation
uncertainty, as discussed in note 1.6. The reinsurance bad debt provision is mainly for expected recoveries against future
PPO payments.
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% in 2016 (2015: 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.
On 27 February 2017, the Ministry of Justice announced a new Ogden discount rate of minus 0.75% to become effective
from 20 March 2017 and a review of the framework under which the rate is set with consultation to start before Easter 2017.
The Group expects to fully participate in this consultation.
The Group will continue to exercise judgement around the Ogden rate used in its reserves allowing for the possibility for it to
change in the future. The Lord Chancellor’s statement bases the choice of the rate on a 3-year average of yields on index-linked
government securities which will be sensitive to future movements in these instruments. It is not yet clear how often the Lord
Chancellor plans to review the rate and the coming consultation is proposed to look at the wider framework for setting the rate
and compensation. The Group considers the risks to the rate in future as being significant but broadly balanced and therefore
provisions at the current proposed rate of minus 0.75% with no additional allowance for further movements. Details of the
sensitivity analysis to the assumed Ogden discount rate are shown in note 3.3.1.
The Group settles some large bodily injury claims as PPOs rather than lump sum payments.
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The table below analyses the outstanding PPO claims provisions on a discounted and an undiscounted basis at 31 December 2016
and 31 December 2015. These represent the total cost of PPOs rather than any costs in excess of purely Ogden-based settlement.
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
Discounted
2016
£m
Undiscounted
2016
£m
Discounted
2015
£m
Undiscounted
2015
£m
489.0
494.0
983.0
(248.6)
(263.1)
(511.7)
240.4
230.9
471.3
1,388.0
1,509.9
2,897.9
452.3
538.3
990.6
1,315.7
1,660.8
2,976.5
(754.4)
(875.4)
(231.1)
(227.8)
(721.5)
(818.4)
(1,629.8)
(458.9)
(1,539.9)
633.6
634.5
1,268.1
221.2
310.5
531.7
594.2
842.4
1,436.6
The provisions for PPOs have been categorised as either claims which have already been determined by the courts as PPOs
(approved PPO claims provisions) or those expected to settle as PPOs in the future (anticipated PPOs). The Group is subject to
estimation uncertainty on the propensity of large bodily claims to move from Ogden settled values to PPOs. The recent change in
the Ogden discount rate is expected to reduce PPO propensity and these effects are recognised in the Group’s separate Ogden
provisions. The estimates in the table above are based on historically observed propensity and therefore do not allow for any
future changes in PPO propensity. 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% (2015: 4.0%). The rate of
interest used for the calculation of present values is 4.0% (2015: 4.0%), which results in a real discount rate of 0.0% (2015:
0.0%). Prior to 20 March 2017 lump sum payments were calculated using a real discount rate of 2.5% (2015: 2.5%) meaning
that the PPOs reserved cost was greater than that of lump sum settlements. This will reverse when the new discount rate of minus
0.75% becomes effective.
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 financial assets are impaired when there is objective evidence that an event or events since initial
recognition of the assets have adversely affected the amount or timing of future cash flows from the asset. The determination
of which events could have adversely affected the amount or timing of future cash flows from the asset requires judgement. In
making this judgement, the Group evaluates, among other factors, the normal price volatility of the financial asset, the financial
health of the investee, industry and sector performance, changes in technology and operational and financing cash flow or
whether there has been a significant or prolonged decline in the fair value of the asset below its cost. Impairment may be
appropriate when there is evidence of deterioration in these factors.
On a quarterly basis, the Group reviews whether there is any objective evidence that a financial asset is impaired based on
the following criteria:
actual, or imminent, default on coupon interest or nominal;
adverse movements in the credit rating for the investee / borrower; or
price performance of a particular AFS debt security, or group of AFS debt securities, demonstrating an adverse trend compared
to the market as a whole.
There was no impairment of the Group’s financial assets in the year ended 31 December 2016 (2015: £nil).
Had all the declines in AFS asset values met the criteria above at 31 December 2016, the Group would suffer a loss of
£12.6 million (2015: £48.7 million), being the transfer of the total AFS reserve for unrealised losses to the income statement.
These movements represent mark-to-market movements and where there is no objective evidence of any loss events that could
affect future cash flows, no impairments are recorded for these movements.
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Notes to the consolidated financial statements continued
2. Critical accounting estimates and judgements continued
2.3 Fair value
The Group has made the judgement that level 1 of the Group’s fair value hierarchy set out in note 40 will include only sovereign
debt securities issued by members of the G1O group of countries within the Group’s AFS debt securities portfolio, with all other
financial assets and liabilities carried at fair value included in level 2 as they are not considered to be quoted in a deeply
liquid market.
The Group has also made the judgement that investment properties fall within level 3 of the Group’s fair value hierarchy (note 40)
as the valuation model is driven predominantly by unobservable inputs, as although in part the valuations are compared to recent
market transactions, they are adjusted for specific characteristics of each property including the size, location and condition by
reference to the benchmark property transactions.
2.4 Goodwill and other intangible assets
Goodwill impairment testing inherently involves estimation uncertainty in a number of areas including: the preparation of the
five-year strategic plan and the extrapolation of cash flow forecasts beyond the normal requirements of management reporting;
the assessment of the discount rate appropriate to the CGUs; estimation of market values of CGUs; and the valuation of the
separable assets of each business whose goodwill is being reviewed. Details of a sensitivity analysis on the recoverable amount
in excess of carrying value are shown in note 18.
Impairment testing of software development costs involves estimation uncertainty in a number of areas including: the projection of
the economic benefits associated with each asset; subsequent re-measurement of these benefits through the development cycle and
into use; and the projected ultimate cost of each asset at each point through the development cycle due to specification changes.
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 27.
3.2 Risk and capital management modelling
The Board has ultimate responsibility for ensuring that the Group has sufficient funds to meet its liabilities as they fall due.
The Group carries out detailed modelling of its assets, liabilities and the key risks to which these are exposed. This modelling
includes the Group’s own assessment of its SCR. In 2015, this SCR assessment was submitted to the PRA as part of the Group’s
application for IMAP for which approval was subsequently granted in June 2016. The SCR quantifies the insurance, market,
credit and operational risks that the regulated entities are undertaking.
The 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 Group is mainly exposed to the following Insurance risks:
Reserve risk
Reserve risk relates to both premiums and claims. This is the risk of understatement of reserves arising from:
the uncertain nature of claims;
data issues and changes to the claims reporting process;
operational failures;
failure to recognise claims trends in the market; and
changes in underwriting and business written so that past trends are not necessarily a predictor of the future.
Understatement of reserves may result in not being able to pay claims when they fall due. Alternatively, overstatement of reserves
can lead to a surplus of funds being retained resulting in opportunity cost for example lost investment return or insufficient resource
to pursue strategic projects and develop the business.
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;
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Direct Line Group Annual Report & Accounts 2016 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 uncertainty in the reserves to help the Board set management best estimate reserves.
The Group’s reserves are subject to the risk of retrospective changes in judicial conditions such as the change in the Ogden
discount rate announced on the 27 February 2017. This is the discount rate set by the Lord Chancellor and used by courts to
calculate lump sum awards in bodily injury cases. The rate has been 2.5% since 2001 and will change to minus 0.75% from
20 March 2017. The Group has calculated its estimated reserves based on the new rate which itself is uncertain depending
on the outcome of the Government’s proposed consultation on the framework for setting the rate and on the frequency and
timing of future changes.
Uncertainty in claims reserves estimation is larger for claims such as PPOs for which annually indexed payments are made
typically over the lifetime of the injured party. Claims reserves for PPOs are held on a discounted basis and are sensitive
to a change in the assumed real discount rate.
The table below provides a sensitivity analysis of the potential impact of a change in a single factor with all other assumptions
left unchanged. Other potential risks beyond the ones described could have an additional financial impact on the Group.
At 31 December
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 as at 31 December 2016
Impact of the Group reserving at a discount rate of 0% compared to minus 0.75% at
31 December 2016
Impact of the Group reserving at a discount rate of minus 1.5% compared to minus 0.75% at
31 December 2016
Ogden as at 31 December 2015
Impact of the Group reserving at a discount rate of 2.5% compared to 1.5% at 31 December 2015
Impact of the Group reserving at a discount rate of 0.5% compared to 1.5% at 31 December 2015
Increase / (decrease) in profit
before tax and equity3
2016
£m
2015
£m
68.2
(97.9)
76.0
(109.4)
102.1
(156.4)
–
–
–
–
131.9
(190.0)
Notes:
1. The sensitivities relating to an increase or decrease in the real discount rate used for PPOs illustrate a movement in the time value of money from the assumed level
of 0.0%.
2. As at 31 December 2016 the Group has reserved at a discount rate of minus 0.75% (2015: 1.5%). With effect from 20 March 2017, the Ogden discount rate
will be minus 0.75% (2015: 2.5%).
3. These sensitivities exclude the impact of taxation.
4. These sensitivities reflect one-off impacts at 31 December 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.
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Notes to the consolidated financial statements continued
3. Risk management continued
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.
Underwriting risk
This is the risk that future claims experience on business written is materially different from the results expected, resulting in
current year 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, underwriting 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
one in 200-year loss. The retained deductible is £150 million at 31 December 2016 (2015: £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 that material change in the volume of policies written, 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 – the concentration credit exposure to any given counterparty;
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 underwriting result against low-frequency, high-severity losses through the transfer of catastrophe claims volatility
to reinsurers;
protect the underwriting result 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 appetite.
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Using reinsurance, the Group cedes insurance risk to reinsurers but, in return, assumes counterparty default 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 default 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 are reviewed on a monthly basis by the Head of Reinsurance and Corporate Insurance. 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 Investment Committee 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.
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.
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 31).
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Notes to the consolidated financial statements continued
3. Risk management continued
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 £432.0 million of short duration high yield bonds
(2015: £336.9 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 is the risk of loss as a result of sensitivity of assets and financial investment to the level or volatility of market prices
of property. At 31 December 2016, the value of these property investments was £329.0 million (2015: £347.4 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 and Euro denominated corporate bonds.
The Group maintains exposure to US Dollar securities through £2,107.1 million (2015: £1,876.3 million) of investments in
US Dollar corporate bonds and Euro securities through £91.8 million (2015: £nil) of Euro corporate bonds. 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.
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
investments1,2,4.
Interest rate
Impact of a 100 basis points increase in interest rates on financial
investments and derivatives1,2,3,4.
Investment property
Impact of a 15% decrease in property markets
Notes:
Increase / (decrease)
in profit before tax
Increase / (decrease)
in total equity5 at
31 December
2016
£m
2015
£m
2016
£m
2015
£m
–
–
(183.1)
(183.5)
21.5
22.1
(101.5)
(119.9)
(49.4)
(52.1)
(49.4)
(52.1)
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 does not reflect any fair value movement in infrastructure debt, HTM debt securities and commercial real estate loans
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. It is estimated that a fair value reduction in these asset categories resulting from a 100 basis point increase in spreads would have been
£34.4 million (2015: £29.5 million) and a 100 basis point increase in interest rate would have been £4.8 million (2015:£0.1 million).
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. These sensitivities exclude the impact of taxation.
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. They reflect one off impacts at 31 December and should not be interpreted as a prediction.
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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 2016, the Group has pledged £23.7 million in cash
(2015: £12.3 million) and £3.4 million in UK Treasury Bills (2015; £nil) to cover initial margins and out-of-the-money derivative
positions. At 31 December 2016, counterparties have pledged £19.1 million in cash and £39.4 million in UK Gilts (2015:
£19.7 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 default on cash inflows and / or changes in market value 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 of the counterparties and debtors of Group undertakings. This risk is primarily
managed by the 1st Line of Defence and monitored by three forums: the Investment risk forum monitors credit spreads as
indicators of potential losses on investments incurred but not yet realised, the Credit risk forum monitors reinsurance and corporate
insurance counterparty default risk; and the NIG credit committee is responsible for monitoring broker credit risk. The main
responsibility of these fora is to ensure that all material aspects of counterparty default risk within the Group are identified,
monitored and measured.
The main sources of counterparty default 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 can increase reinsurance
counterparty default risk in terms of both amount and longevity.
141
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Notes to the consolidated financial statements continued
3. Risk management continued
The following tables analyse the carrying value of financial and insurance assets that bear counterparty default 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 2016
Reinsurance assets
Insurance and other receivables
Derivative assets
Debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents1
Total
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
1,371.8
937.8
79.7
4,730.3
337.0
79.7
1,166.1
8,702.4
–
38.0
–
–
–
–
–
38.0
–
12.5
–
–
–
–
–
12.5
–
–
–
–
–
–
–
–
1,371.8
988.3
79.7
4,730.3
337.0
79.7
1,166.1
8,752.9
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 equivalents1
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
Notes:
1. This represents money market funds with no notice period for withdrawal and cash at bank and in hand.
Within the analysis of debt securities above are bank debt securities at 31 December 2016 of £1,199.5 million
(2015: £1,305.1 million), that can be further analysed as: secured £62.2 million (2015: £86.4 million); unsecured
£973.8 million (2015: £1,059.6 million); and subordinated £163.5 million (2015: £159.1 million).
142
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Direct Line Group Annual Report & Accounts 2016
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, by geographical area (commercial real estate loans and infrastructure
debt are all within the UK).
At 31 December 2016
Australia
Belgium
Canada
Cayman Islands
Denmark
France
Germany
Hong Kong
Ireland
Italy
Japan
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Portugal
Singapore
South Korea
Spain
Sweden
Switzerland
UK
USA
Supranational
Total
Corporate
£m
100.2
59.7
33.3
17.5
15.6
226.2
277.0
11.8
2.1
25.9
42.9
6.2
11.8
166.2
7.0
27.6
1.1
25.6
8.4
38.0
74.2
92.1
1,093.3
1,905.1
–
4,268.8
Local
government
£m
Sovereign
£m
Supranational
£m
–
–
–
–
–
3.6
–
–
–
–
–
–
–
–
–
–
–
–
9.4
–
8.7
–
–
–
–
21.7
–
9.7
–
–
–
–
–
–
–
4.2
–
–
–
–
–
–
–
–
–
–
–
–
324.9
2.4
–
341.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
98.6
98.6
Debt
securities
total
£m
100.2
69.4
33.3
17.5
15.6
229.8
277.0
11.8
2.1
30.1
42.9
6.2
11.8
166.2
7.0
27.6
1.1
25.6
17.8
38.0
82.9
92.1
1,418.2
1,907.5
98.6
4,730.3
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Notes to the consolidated financial statements continued
3. Risk management continued
The table below analyses the distribution of debt securities by geographical area (infrastructure debt is all within the UK).
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
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
Local
government
£m
Sovereign
£m
Securitised
credit
£m
Supranational
£m
–
–
–
11.4
–
–
8.5
13.7
25.4
16.4
–
–
–
–
–
–
–
–
10.0
–
–
8.7
–
11.2
–
–
–
–
105.3
–
–
10.9
–
–
–
–
–
–
–
–
–
4.2
–
–
–
–
–
–
–
–
–
–
–
–
427.6
–
–
442.7
–
–
–
–
95.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
177.3
83.5
–
356.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
140.1
140.1
Debt
securities
total
£m
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
140.1
5,240.1
144
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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
132.6
234.1
349.1
520.7
57.3
310.8
1,776.9
215.3
–
461.5
137.6
10.1
524.3
4,730.3
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
145.5
96.0
57.6
37.9
337.0
2016
%
3%
5%
7%
11%
1%
7%
38%
4%
–
10%
3%
0%
11%
100%
2016
%
43%
29%
17%
11%
100%
£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
£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%
The tables below analyse the credit quality of debt securities that are neither past due nor impaired.
At 31 December 2016
Corporate
Supranational
Local government
Sovereign
Total
At 31 December 2015
Corporate
Supranational
Local government
Sovereign
Securitised credit1
Total
Note:
AAA
£m
AA+ to AA–
£m
A+ to A–
£m
BBB+ to BBB–
£m
BB+ and below
£m
192.3
94.0
–
2.4
288.7
524.1
4.6
21.7
334.6
885.0
2,135.9
–
–
–
2,135.9
1,006.6
–
–
4.2
1,010.8
409.9
–
–
–
409.9
Total
£m
4,268.8
98.6
21.7
341.2
4,730.3
AAA
£m
AA+ to AA–
£m
A+ to A–
£m
BBB+ to BBB–
£m
BB+ and below
£m
Total
£m
266.3
123.9
36.9
–
331.2
758.3
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
4,195.9
140.1
105.3
442.7
356.1
5,240.1
1. Securitised credit consisted of prime mortgage backed securities, collateralised loan obligations, securitised student loans and commercial mortgage backed
securities. Following a strategic decision, the Group decided to exit this asset class during August and September 2016.
145
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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 default risk management.
At 31 December 2016
Reinsurance assets
Insurance and other receivables1
Derivative assets
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents2
Total
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 equivalents2
Total
Notes:
AAA
£m
AA+ to AA−
£m
A+ to A−
£m
BBB+ to BBB–
£m
BB+ and below
£m
Not rated
£m
–
–
–
–
13.8
999.5
1,013.3
993.8
19.3
6.6
–
20.4
0.4
1,040.5
371.4
13.7
32.8
83.7
41.1
88.9
631.6
5.6
9.4
40.3
220.5
4.4
77.3
357.5
–
–
–
32.8
–
–
32.8
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
1.0
895.4
–
–
–
–
896.4
Not rated
£m
4.3
855.5
–
–
–
–
859.8
Total
£m
1,371.8
937.8
79.7
337.0
79.7
1,166.1
3,972.1
Total
£m
1,011.4
917.3
19.6
44.9
329.6
963.7
3,286.5
1. Includes receivables due from policyholders, agents, brokers and intermediaries which generally do not have a credit rating.
2. This represents money market funds with no notice period for withdrawal and cash at bank and in hand.
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 change portfolio resulting in conflicting priorities and failure to deliver strategic
outcomes to time, cost or quality.
Technology and infrastructure risk
This is the risk that the IT infrastructure is insufficient to deliver the Group’s strategy.
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. This includes both domestic and offshore
outsourcing activities.
Information Security Risk
This is the risk of loss, corruption to Group or customer data or intellectual property, resulting in lost reputation, regulatory censure,
supervision and fines or loss of competitive advantage.
The Group has in place agreed policies and standards to establish 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. As part of this process the
Investment and Treasury team are required to put in place a liquidity plan which must consider expected and stressed scenarios
for cash in-flows and out-flows that is reviewed at least annually by the Investment risk forum. Compliance is monitored in respect
of both the minimum standard and the regulatory requirements of the PRA.
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The tables below analyse the maturity of the Group’s derivative assets and liabilities.
At 31 December 2016
Derivative assets
At fair value through the income statement:
Foreign exchange contracts (forwards)
Designated as hedging instruments:
Foreign exchange contracts (forwards)
Interest rate swaps
Total
At 31 December 2016
Derivative liabilities
At fair value through the income statement:
Foreign exchange contracts (forwards)
Designated as hedging instruments:
Interest rate swaps
Total
At 31 December 2015
Derivative assets
At fair value through the income statement:
Foreign exchange contracts (forwards)
Designated as hedging instruments:
Foreign exchange contracts (forwards)
Interest rate swaps
Total
At 31 December 2015
Derivative liabilities
At fair value through the income statement:
Foreign exchange contracts (forwards)
Designated as hedging instruments:
Foreign exchange contracts (forwards)
Interest rate swaps
Total
Notional amounts
Maturity and fair value
Less than
1 year
£m
1 – 5 years
£m
Over
5 years
£m
£m
1,110.0
21.4
14.8
1,902.0
3,026.8
1.6
(1.1)
21.9
–
0.1
3.0
3.1
–
–
54.7
54.7
Total
£m
21.4
1.7
56.6
79.7
Notional amounts
Maturity and fair value
Less than
1 year
£m
1 – 5 years
£m
Over
5 years
£m
£m
2,589.6
43.5
634.8
3,224.4
1.1
44.6
–
–
–
–
0.5
0.5
Total
£m
43.5
1.6
45.1
Notional amounts
Maturity and fair value
Less than
1 year
£m
1 – 5 years
£m
Over
5 years
£m
£m
Total
£m
27.1
5.0
678.4
710.5
0.4
0.3
1.1
1.8
–
–
0.2
0.2
–
0.4
–
17.6
17.6
0.3
18.9
19.6
Notional amounts
Maturity and fair value
Less than
1 year
£m
1 – 5 years
£m
Over
5 years
£m
£m
Total
£m
1,876.3
42.2
–
–
42.2
0.7
1,241.9
3,118.9
0.1
3.0
45.3
–
(0.5)
(0.5)
–
1.6
1.6
0.1
4.1
46.4
147
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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 2016
Debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents1
Total
At 31 December 2016
Subordinated liabilities
Insurance liabilities2
Borrowings
Trade and other payables including insurance
payables
Total
At 31 December 2015
Debt securities
Deposits with credit institutions with
maturities in excess of three months
Infrastructure debt
Cash and cash equivalents1
Total
At 31 December 2015
Subordinated liabilities
Insurance liabilities2
Borrowings
Trade and other payables including insurance
payables
Total
Notes:
1 – 3 years
£m
3 – 5 years
£m
5 – 10 years
£m
Total
£m
4,730.3
337.0
79.7
1,166.1
6,313.1
Total
£m
539.6
4,666.6
55.3
699.2
5,960.7
Within
1 year
£m
588.3
13.1
1.3
1,166.1
1,768.8
Within
1 year
£m
8.3
1,283.6
55.3
1,001.0
24.6
32.6
–
1,058.2
1 – 3 years
£m
–
1,139.5
–
688.9
2,036.1
9.8
1,149.3
1,172.5
28.0
45.8
–
1,246.3
1,676.3
87.0
–
–
1,763.3
3 – 5 years
£m
5 – 10 years
£m
–
621.6
–
0.2
621.8
531.3
666.4
–
0.3
1,198.0
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
44.9
329.6
963.7
6,578.3
Total
£m
521.1
4,524.5
61.3
44.9
11.6
963.7
1,289.4
Within
1 year
£m
8.3
1,349.8
60.8
–
22.0
–
1,650.4
–
23.9
–
1,227.8
–
78.4
–
1,735.8
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
656.5
5,763.4
652.9
2,071.8
3.0
1,046.8
Over
10 years
£m
292.2
184.3
–
–
476.5
Over
10 years
£m
–
955.5
–
–
955.5
Over
10 years
£m
481.2
–
193.7
–
674.9
Over
10 years
£m
–
992.1
–
0.1
992.2
1. This represents money market funds with no notice period for withdrawal and cash at bank and in hand.
2. Insurance liabilities exclude unearned premium reserves as there are no liquidity risks inherent in them.
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3.4 Capital adequacy (unaudited)
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.
From 1 January 2016, the Group’s regulatory capital position has been assessed against the Solvency II framework. From 1 July
2016, the Group was approved to assess its SCR using a partial internal model, including a full internal economic capital model
for the UKI underwriting entity. The model is calibrated to a 99.5% confidence interval and consider business written to date and
one year of future business, in line with Solvency II requirements.
Using the Group’s partial internal model, there is a capital surplus of approximately £0.9 billion above a solvency capital
requirement of £1.4 billion at 31 December 2016. On 1 January 2016, this surplus was £0.6 billion above a solvency capital
requirement of £1.8 billion calculated using the standard formula approach. 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 where the Group has a constructive obligation to
restructure its activities. One-off costs were costs that were non-recurring in nature.
No inter-segment transactions occurred in the year ended 31 December 2016 (2015: £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.
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Notes to the consolidated financial statements continued
4. Segmental analysis continued
The table below analyses the Group’s revenue and results by reportable segment for the year ended 31 December 2016.
Gross written premium
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 before restructuring
Restructuring costs
Operating profit
Finance costs
Profit before tax
Underwriting (loss) / profit
Loss ratio
Commission ratio
Expense ratio
COR
Motor
£m
1,539.1
1,461.3
(124.2)
1,337.1
116.9
76.1
40.9
1,571.0
(1,297.3)
295.6
(1,001.7)
(42.9)
(377.3)
(420.2)
149.1
Rescue and
other
personal lines
£m
Commercial
£m
400.8
396.1
(1.7)
394.4
3.9
1.9
13.5
413.7
(243.0)
–
(243.0)
(28.4)
(96.4)
(124.8)
45.9
499.8
494.4
(41.6)
452.8
27.4
5.6
3.0
488.8
(297.7)
47.2
(250.5)
(88.3)
(108.2)
(196.5)
41.8
Home
£m
834.4
851.0
(34.7)
816.3
19.9
23.5
0.8
860.5
(332.1)
0.1
(332.0)
(184.4)
(177.4)
(361.8)
166.7
Total
Ongoing
£m
3,274.1
3,202.8
(202.2)
3,000.6
168.1
107.1
58.2
3,334.0
(2,170.1)
342.9
(1,827.2)
(344.0)
(759.3)
(1,103.3)
403.5
(84.8)
74.9%
3.2%
28.2%
106.3%
122.5
40.7%
22.6%
21.7%
85.0%
26.6
61.6%
7.2%
24.5%
93.3%
5.8
55.3%
19.5%
23.9%
98.7%
70.1
60.9%
11.5%
25.3%
97.7%
Run-off
£m
Total
£m
–
–
–
–
3.4
–
–
3.4
(8.9)
32.3
23.4
–
(0.2)
(0.2)
26.6
3,274.1
3,202.8
(202.2)
3,000.6
171.5
107.1
58.2
3,337.4
(2,179.0)
375.2
(1,803.8)
(344.0)
(759.5)
(1,103.5)
430.1
(39.9)
390.2
(37.2)
353.0
The table below analyses the Group’s assets and liabilities by reportable segment at 31 December 2016.
Goodwill
Other segment assets
Segment liabilities
Segment net assets
Motor
£m
126.7
6,748.9
(5,131.7)
1,743.9
Rescue and
other
personal lines
£m
28.7
160.4
(122.0)
67.1
Home
£m
45.8
660.5
(502.2)
204.1
Commercial
£m
10.1
1,587.4
(1,207.0)
390.5
Run-off
£m
–
753.2
(637.3)
115.9
Total
£m
211.3
9,910.4
(7,600.2)
2,521.5
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.
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The table below analyses the Group’s revenue and results for continuing operations by reportable segment for the year ended
31 December 2015. Discontinued operations are detailed in note 5.
Gross written premium
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 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
Total
Ongoing
£m
Run-off
£m
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)
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)
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
3,152.4
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)
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)
Continuing
operations
£m
3,152.5
3,110.1
(189.2)
2,920.9
198.1
100.1
50.7
0.1
0.1
–
0.1
3.4
–
–
3.5
3,269.8
98.3 (1,829.3)
(27.9)
162.4
70.4 (1,666.9)
(0.1)
(0.7)
(0.8)
(319.3)
(689.8)
(1,009.1)
338.0
109.9
52.0
20.8
520.7
73.1
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
Other segment liabilities
Segment net assets
Motor
£m
126.4
6,303.4
(4,701.9)
1,727.9
Home
£m
45.8
872.2
(650.6)
267.4
Rescue and
other
personal lines
£m
Commercial
£m
Run-off
£m
Total
£m
28.7
177.9
(132.7)
10.1
1,573.9
(1,174.0)
–
818.2
(667.4)
211.0
9,745.6
(7,326.6)
73.9
410.0
150.8
2,630.0
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.
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Notes to the consolidated financial statements continued
5. Discontinued operations and disposal group
The Group completed the disposal of its Italian and German subsidiaries (represented by Direct Line Insurance S.p.A and
Direct Line Versicherung AG respectively) on 29 May 2015, which was treated as discontinued operations, 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.
Gross written premium
Gross earned premium
Reinsurance premium
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%
1. Realised net gains on AFS investments in 2015 included £29.9 million of gains reclassified through the income statement, on disposal of International.
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.
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)
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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.
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 in cash and cash equivalents
Note:
2015
£m
19.1
(1.5)
327.1
(9.8)
334.9
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
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.
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Notes to the consolidated financial statements continued
6. Net earned premium
Gross earned premium:
Gross written premium
Movement in unearned premium reserve
Reinsurance premium:
Premium payable
Movement in reinsurance unearned premium reserve
Total
Note:
1. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations.
7. Investment return
Investment income:
Interest income from debt securities
Cash and cash equivalent interest income
Interest income from infrastructure debt
Interest income from commercial real estate loans
Interest income
Rental income from investment property
Net realised gains / (losses):
AFS debt securities
Derivatives
Investment property (note 20)
Net unrealised gains:
Derivatives
Investment property (note 20)
Total
Note:
2016
£m
20151
£m
3,274.1
(71.3)
3,202.8
(206.2)
4.0
(202.2)
3,000.6
3,152.5
(42.4)
3,110.1
(191.7)
2.5
(189.2)
2,920.9
2016
£m
20151
£m
136.5
4.2
7.8
1.0
149.5
18.4
167.9
15.3
(282.3)
1.3
(265.7)
265.2
4.1
269.3
171.5
140.1
6.7
4.4
–
151.2
17.9
169.1
12.4
(56.5)
–
(44.1)
48.9
24.2
73.1
198.1
1. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations.
The table below analyses the realised and unrealised gains and losses on derivative instruments included in investment return.
Derivative (losses) / gains:
Foreign exchange forward contracts2
Associated foreign exchange risk
Net (losses) / gains on foreign exchange forward contracts
Interest rate swaps2
Associated interest rate risk on hedged items
Net (losses) / gains on interest rate derivatives
Total
Notes:
Realised
Unrealised
Realised
Unrealised
2016
£m
2016
£m
20151
£m
20151
£m
(425.7)
151.0
(274.7)
(16.9)
9.3
(7.6)
(282.3)
19.1
253.0
272.1
20.7
(27.6)
(6.9)
265.2
(82.4)
44.9
(37.5)
(28.7)
9.7
(19.0)
(56.5)
(19.1)
61.9
42.8
1.2
4.9
6.1
48.9
1. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations.
2. Foreign exchange forward contracts are at fair value through the income statement and interest rate swaps are designated as hedging instruments.
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8. Other operating income
Vehicle replacement referral income
Revenue from vehicle recovery and repair services
Other income2
Total
Notes:
2016
£m
14.1
19.3
24.8
58.2
20151
£m
12.5
15.5
22.7
50.7
1. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations.
2. Other income includes legal services revenue, salvage income and fee income from insurance intermediary services.
9. Net insurance claims
Current accident year claims paid
Prior accident year claims paid
Increase / (decrease) in insurance liabilities
Total
Note:
Gross
2016
£m
1,131.7
905.2
142.1
2,179.0
Reinsurance
2016
£m
–
(18.8)
(356.4)
(375.2)
Net
2016
£m
1,131.7
886.4
(214.3)
1,803.8
Gross
20151
£m
1,037.0
941.9
(149.6)
1,829.3
Reinsurance
20151
£m
–
(15.9)
(146.5)
Net
20151
£m
1,037.0
926.0
(296.1)
(162.4)
1,666.9
1. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations.
The table below analyses the claims handling expenses included in the net insurance claims.
Ongoing operations
Run-off
Total
Note:
1. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations.
10. Commission expenses
Commission expenses
Expenses incurred under profit participations
Total
Note:
1. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations.
11. Operating expenses
2016
£m
164.4
1.2
165.6
20151
£m
195.6
4.8
200.4
2016
£m
246.8
97.2
344.0
20151
£m
253.2
66.1
319.3
Staff costs1
Other operating expenses1,2,3
Marketing
Amortisation and impairment of other intangible assets
Depreciation
Total
Notes:
Total Ongoing
Restructuring
costs
Run-off
Total Group
2016
£m
269.0
250.9
112.6
96.7
30.1
759.3
2016
£m
16.0
23.9
–
–
–
39.9
2016
£m
–
0.2
–
–
–
0.2
2016
£m
285.0
275.0
112.6
96.7
30.1
799.4
1. Staff costs and other operating expenses attributable to claims handling activities are allocated to the cost of insurance claims.
2. Other operating expenses include IT costs, insurance levies, professional fees and property costs.
3. A property site in Bristol comprising of freehold property and fixtures and fittings was transferred from freehold property to assets held for sale in 2016. The
property with a carrying value of £23.5 million was remeasured on transfer to its fair value of £3.8 million resulting in a charge to other operating expenses in
Restructuring of £19.7 million.
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Notes to the consolidated financial statements continued
11. Operating expenses continued
Staff costs2
Other operating expenses2,3,4
Marketing
Amortisation and impairment of other intangible assets
Depreciation
Total
Notes:
Total Ongoing
Restructuring
and other
one-off costs
Run-off
Total Group
20151
£m
254.2
219.0
117.8
67.4
30.7
689.1
20151
£m
18.7
30.0
–
–
–
48.7
20151
£m
0.4
0.2
0.1
–
–
0.7
20151
£m
273.3
249.2
117.9
67.4
30.7
738.5
1. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations.
2. Staff costs and other operating expenses attributable to claims handling activities are allocated to the cost of insurance claims.
3. Other operating expenses include IT costs, insurance levies, professional fees and property costs.
4. The Pudsey sites were transferred from property, plant and equipment to assets held for sales in 2015. The sites with a carrying value of £22.1 million were
remeasured on transfer to their fair value of £5.1 million resulting in a charge to other operating expenses in Restructuring of £17.0 million.
The table below analyses the number of people employed by the Group’s operations.
Operations
Support
Total
Notes:
At 31 December
Average for the year
2016
9,692
1,285
10,977
2015
2016
20151
9,531
1,190
10,721
9,546
1,353
10,899
9,564
1,257
10,821
1. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations.
2. The increase in 2016 headcount relates to the acquisition of additional UK accident repair centres and recruitment of additional DLG Legal Services Limited
employees.
The aggregate remuneration of those employed by the Group’s operations comprised:
Wages and salaries
Social security costs
Pension costs
Share-based payments
Total
Note:
1. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations.
The table below analyses auditor’s remuneration in respect of the Group’s 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
Other services
Total non-audit services
Total
Note:
1. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations.
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2016
£m
348.1
38.9
24.4
16.8
428.2
20151
£m
335.4
37.8
23.4
12.1
408.7
2016
£m
20151
£m
0.3
1.5
1.8
0.2
0.2
0.4
2.2
0.3
1.6
1.9
0.3
0.6
0.9
2.8
Direct Line Group Annual Report & Accounts 2016
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
2016
£m
3.1
3.5
–
6.6
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.
At 31 December 2016, one Director (2015: one) had retirement benefits accruing under the defined contribution pension
scheme in respect of qualifying service. During the year ended 31 December 2016, one Director exercised share options
(2015: two).
12. Finance costs
Interest expense on subordinated liabilities
Net interest received on designated hedging instrument2
Unrealised (gain) / loss on designated hedging instrument2
Unrealised loss / (gain) on associated interest rate risk on hedged item2
Amortisation of arrangement costs and discount on issue of subordinated liabilities
Total
2016
£m
46.3
(8.0)
(19.6)
17.8
0.7
37.2
20151
£m
46.3
(8.0)
4.5
(5.9)
0.7
37.6
Notes:
1. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations.
2. As described in note 31, 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 designated hedging instrument 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
Current taxation:
Charge for the year
Over provision in respect of prior year2
Deferred taxation (note 14):
(Credit) / charge for the year
Under provision in respect of prior year
Current taxation
Deferred taxation (note 14)
Tax charge for the year
Notes:
2016
£m
84.4
(7.7)
76.7
(5.1)
2.6
(2.5)
76.7
(2.5)
74.2
20151
£m
103.5
(4.6)
98.9
6.4
3.0
9.4
98.9
9.4
108.3
1. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations.
2. The prior year current tax credit for the year ended 31 December 2016 includes £5.6 million relating to retrospective claims for research and development
tax relief.
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Notes to the consolidated financial statements continued
13. Tax charge continued
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 20.0%1 (2015: 20.25%).
Profit before tax
Expected tax charge
Effects of:
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
Notes:
2016
£m
353.0
70.6
9.7
(1.0)
(5.1)
74.2
21.0%
20152
£m
507.5
102.8
7.8
(0.7)
(1.6)
108.3
21.3%
1. In the Finance Act 2013 the UK Government enacted a reduction in the UK corporation tax rate from 21% 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. The Finance Act 2016 then enacted a
further reduction to 17% effective from the 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.
2. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations.
14. Current and deferred tax
.
Per balance sheet:
Current tax assets
Current tax liabilities
Deferred tax liabilities
2016
£m
0.1
(0.5)
(46.0)
The table below analyses the major deferred tax assets and liabilities recognised by the Group and movements thereon.
Provisions
and other
temporary
differences
£m
Retirement
benefit
obligations
£m
Depreciation
in excess of
capital
allowances
£m
Non-
distributable
reserve1
£m
Investment
properties
£m
Share-based
payments
£m
AFS
revaluation
reserve
£m
5.4
(0.7)
0.8
(25.0)
(4.8)
(2.1)
(0.1)
–
–
3.3
(1.6)
–
(2.4)
–
–
–
(3.9)
(3.6)
–
–
–
–
0.8
(28.9)
(8.4)
3.7
0.3
–
1.7
5.7
(0.7)
(0.4)
(1.8)
5.5
0.2
(0.3)
–
–
–
–
–
–
–
–
2.6
0.7
–
(2.1)
–
–
(1.0)
–
–
(23.4)
–
–
(8.2)
–
(1.3)
4.1
(18.0)
–
(18.0)
At 1 January 2015
(Charge) / credit to the income
statement on continuing operations
Charge to other comprehensive
income
Credit direct to equity
At 31 December 2015
(Charge) / credit to the income
statement on continuing operations
Charge to other comprehensive
income
Credit direct to equity
At 31 December 2016
Note:
2015
£m
0.1
(10.3)
(29.9)
Total
£m
(20.6)
(9.4)
(1.6)
1.7
(29.9)
2.5
(17.3)
(1.3)
(46.0)
1. The non-distributable reserve was a statutory claims equalisation reserve calculated in accordance with the rules of the PRA. With the introduction of Solvency II on
1 January 2016, the requirement to maintain this reserve ceased and the balance at 31 December 2015 was released to retained earnings. The taxation of this
release is spread over six years from the change in regulation. This is provided for in deferred tax above as it represents the future unwind of previously claimed
tax deductions for transfers into this reserve.
In addition, the Group has an unrecognised deferred tax asset at 31 December 2016 of £7.5 million (2015: £4.1 million)
in relation to capital losses of which £4.1 million (2015: £1.0 million) relates to realised losses and £3.4 million
(2015: £3.1 million) relates to unrealised losses.
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15. Dividends
Amounts recognised as distributions to equity holders in the period:
2015 final dividend of 9.2p per share paid on 19 May 2016
2014 final dividend1 of 8.8 pence per share paid on 17 April 2015
2016 first interim dividend of 4.9 pence per share paid on 9 September 2016
2015 first interim dividend of 4.6 pence per share paid on 11 September 2015
2016 first special interim dividend of 10.0 pence per share paid on 9 September 2016
2015 first special interim dividend of 27.5 pence per share paid on 24 July 2015
2015 second special interim dividend of 8.8p per share paid on 19 May 2016
2014 second special interim dividend of 4.0 pence per share paid on 17 April 2015
Proposed dividends:
2016 final dividend of 9.7 pence per share
2015 final dividend of 9.2 pence per share
2015 second special interim dividend of 8.8 pence per share
Note:
1. The Board paid an interim dividend in lieu of a final dividend.
2016
£m
2015
£m
126.0
–
67.1
–
136.9
–
120.6
–
450.6
133.4
–
–
–
131.6
–
63.0
–
411.5
–
59.9
666.0
–
126.5
121.0
The proposed final dividend for 2016 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 on the
Long Term Incentive Plan, Deferred Annual Incentive Plan and Restrictive Share Plan awards, which reduced the total dividend
paid for the year ended 31 December 2016 by £1.8 million (2015: £1.7 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 year.
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 new Ordinary Shares of 10 10/11 pence
each. The weighted average number of Ordinary Shares used in calculating basic and diluted earnings per share for the year
ended 31 December 2015 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
Total Group
Weighted average number of Ordinary Shares (millions)
Basic earnings per share (pence):
Continuing operations
Discontinued operations
Total Group
2016
£m
2015
£m
278.8
–
278.8
399.2
181.2
580.4
1,368.7
1,431.2
20.4
–
20.4
27.9
12.7
40.6
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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
Total Group
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
Total Group
2016
£m
2015
£m
278.8
–
278.8
1,368.7
13.1
1,381.8
20.2
–
20.2
399.2
181.2
580.4
1,431.2
17.8
1,449.0
27.6
12.5
40.1
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
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
Total Group
Opening shareholders’ equity
Closing shareholders’ equity
Average shareholders’ equity
Return on equity
160
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Direct Line Group Annual Report & Accounts 2016
2016
£m
2,521.5
(508.9)
2,012.6
1,375.0
(9.9)
1,365.1
184.7
147.4
2015
£m
2,630.0
(524.8)
2,105.2
1,375.0
(6.3)
1,368.7
192.2
153.8
2016
£m
2015
£m
278.8
–
278.8
2,630.0
2,521.5
2,575.8
10.8%
399.2
181.2
580.4
2,810.5
2,630.0
2,720.2
21.3%
Direct Line Group Annual Report & Accounts 2016
18. Goodwill and other intangible assets
Cost
At 1 January 2015
Acquisitions and additions
Disposals and write-off1
At 31 December 2015
Acquisitions and additions
Disposals and write-off1
At 31 December 2016
Accumulated amortisation and impairment
At 1 January 2015
Charge for the year relating to continuing operations
Disposals and write-off1
Impairment losses
At 31 December 2015
Charge for the year
Disposals and write-off1
Impairment losses2
At 31 December 2016
Carrying amount
At 31 December 2016
At 31 December 2015
Notes:
Goodwill
£m
211.0
–
–
211.0
0.3
–
211.3
–
–
–
–
–
–
–
–
–
Other
intangible
assets
£m
428.5
74.7
(8.0)
495.2
80.5
(5.8)
569.9
122.0
63.1
(8.0)
4.3
181.4
57.4
(5.8)
39.3
272.3
Total
£m
639.5
74.7
(8.0)
706.2
80.8
(5.8)
781.2
122.0
63.1
(8.0)
4.3
181.4
57.4
(5.8)
39.3
272.3
211.3
211.0
297.6
313.8
508.9
524.8
1. Disposals and write-off include fully amortised intangible assets no longer utilised by the Group in its operating activities.
2. The impairment losses relate to capitalised software development costs for ongoing IT projects primarily relating to development of new systems. The impairment
losses result from a review of the projected benefits and the charge which reduced the carrying value of impaired assets to £nil, is reflected in the Motor segment.
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 addition to
goodwill in the year ended 31 December 2016 of £0.3m arose on acquisition of two accident repair centres with a combined
purchase price of £3.6 million which was allocated to Motor.
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.
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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
2016
£m
126.7
45.8
28.7
10.1
211.3
2015
£m
126.4
45.8
28.7
10.1
211.0
There have been no impairments in goodwill for the year ended 31 December 2016 (2015: £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
686.0
667.9
611.6
374.1
(189.9)
(66.6)
(56.6)
(62.1)
(260.5)
(68.2)
(76.9)
(84.5)
(24.8)
(9.0)
(6.9)
(7.6)
1. Reflects a 1% decrease in the profit for each year of the five-year plan.
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19. Property, plant and equipment
Cost
At 1 January 2015
Additions
Disposals
Transfer to assets held for sale (note 28)
At 31 December 2015
Additions
Disposals
Transfer to assets held for sale (note 28)
At 31 December 2016
Accumulated depreciation and impairment
At 1 January 2015
Depreciation charge for the year relating to continuing operations
Disposals
Impairment losses
Transfer to assets held for sale (note 28)
At 31 December 2015
Depreciation charge for the year
Disposals
Transfer to assets held for sale (note 28)
At 31 December 2016
Carrying amount
At 31 December 2016
At 31 December 2015
Freehold land
and buildings
£m
Other
equipment
£m
83.8
17.9
(0.1)
(22.6)
79.0
18.8
–
(18.0)
79.8
1.7
1.2
–
–
(0.5)
2.4
1.0
–
(0.3)
3.1
154.3
49.2
(15.7)
–
187.8
31.1
(14.3)
(8.3)
196.3
55.1
29.5
(11.3)
4.8
–
78.1
29.1
(12.6)
(2.5)
92.1
Total
£m
238.1
67.1
(15.8)
(22.6)
266.8
49.9
(14.3)
(26.3)
276.1
56.8
30.7
(11.3)
4.8
(0.5)
80.5
30.1
(12.6)
(2.8)
95.2
76.7
76.6
104.2
109.7
180.9
186.3
The Group is satisfied that the aggregate value of property, plant and equipment is not less than its carrying value.
20. Investment property
At 1 January
Additions at cost
Increase in fair value during the year
Disposals
At 31 December
Note:
2016
£m
347.4
1.4
5.4
(25.2)
329.0
2015
£m
307.2
16.0
24.2
–
347.4
1. The cost included in carrying value at 31 December 2016 is £275.3 million (2015: £295.5 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 2015.
Lease agreements with tenants are drawn up in line with local practice and the Group has no exposure to leases that include
contingent rents.
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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 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 did not dispose of any other subsidiaries in the years ended 31 December 2016 and 31 December 2015.
2016
£m
1,329.0
(50.7)
1,278.3
93.5
1,371.8
2015
£m
975.8
(53.9)
921.9
89.5
1,011.4
2016
£m
(53.9)
(4.2)
7.4
(50.7)
2016
£m
203.8
(0.7)
203.1
2015
£m
(66.4)
(5.0)
17.5
(53.9)
2015
£m
208.4
(4.6)
203.8
2016
£m
2015
£m
820.8
(0.3)
66.4
(1.0)
102.4
988.3
800.1
(0.7)
60.0
(1.3)
97.7
955.8
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 in the year
At 31 December
24. Insurance and other receivables
Receivables arising from insurance 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
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25. Derivative financial instruments
Derivative assets
At fair value through the income statement:
Foreign exchange contracts (forwards)
Designated as hedging instruments:
Foreign exchange contracts (forwards)1
Interest rate swaps
Total
Derivative liabilities
At fair value through the income statement:
Foreign exchange contracts (forwards)
Designated as hedging instruments:
Foreign exchange contracts (forwards)1
Interest rate swaps
Total
Note:
1. Cash flow hedges in relation to supplier payments.
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 rate1
Floating interest rate
Total
Loans and receivables
Deposits with credit institutions with maturities in excess of three months
Infrastructure debt
Commercial real estate loans
Total
Note:
2016
£m
2015
£m
21.4
1.7
56.6
79.7
0.4
0.3
18.9
19.6
43.5
42.2
–
1.6
45.1
0.1
4.1
46.4
2016
£m
2015
£m
4,183.7
98.6
21.7
341.2
–
4,645.2
4,182.4
140.1
105.3
442.7
356.1
5,226.6
85.1
4,730.3
13.5
5,240.1
4,709.6
20.7
4,730.3
–
337.0
79.7
5,147.0
4,801.6
438.5
5,240.1
44.9
329.6
–
5,614.6
1. The Group swaps a fixed interest rate for a floating rate of interest on its US Dollar, Euro and a small amount of its Sterling corporate debt securities by entering
into interest rate derivatives. The hedged amount at 31 December 2016 was £1,593.6 million (2015: £1,283.3 million).
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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 institutions1
Cash and cash equivalents
Bank overdrafts2
Cash and bank overdrafts3
2016
£m
166.6
999.5
1,166.1
(55.3)
1,110.8
2015
£m
131.8
831.9
963.7
(61.3)
902.4
Notes:
1. This represents money market funds with no notice period for withdrawal.
2. Bank overdrafts represent short-term timing differences between transactions posted in the records of the Group transactions flowing through the accounts
at the bank.
3. Cash and bank overdrafts is included for the purposes of the consolidated cash flow statement.
The effective interest rate on short-term deposits with credit institutions for the year ended 31 December 2016 was 0.45%
(2015: 0.56%) and average maturity was 10 days (2015: 10 days).
28. Assets held for sale
Freehold property held for sale1
Note:
2016
£m
3.8
2015
£m
5.1
1. The freehold property held for sale at 31 December 2016 is a site in Bristol which was transferred from property, plant and equipment to AFS in 2016 with a
carrying value of £23.5 million and impaired by £19.7 million to reflect the costs of remediation and estimated realisable value. The freehold property held for
sale at 31 December 2015 comprising the sites at Pudsey were sold in the year releasing the carrying value.
29. Share capital
Issued and fully paid: equity shares
Ordinary Shares of 10 10/11 pence each
2016
Number
Millions
2015
Number
Millions
2016
£m
2015
£m
1,375
1,375
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 2016, 9,946,340 Ordinary Shares (2015: 6,256,108 Ordinary Shares) were owned by the employee
share trusts with a cost of £34.3 million (2015: £20.4 million). These Ordinary Shares are carried at cost and have a market
value of £36.7 million (2015: £25.5 million).
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Direct Line Group Annual Report & Accounts 2016
30. 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 (to) / from retained earnings
At 31 December
2016
£m
5.4
119.6
(20.2)
(15.3)
2.6
–
–
92.1
2016
£m
152.9
(152.9)
–
2015
£m
115.6
(100.5)
22.0
(12.5)
2.5
(31.8)
10.1
5.4
2015
£m
124.9
28.0
152.9
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 ceased and the non-distributable
reserve transferred into retained earnings. A new model to calculate the Group’s capital requirements under Solvency II was
agreed with the PRA in June 2016.
Capital reserves
Capital contribution reserve1
Capital reduction reserve2
Total
Notes:
1. Arose on the cancellation of a debt payable to a shareholder.
2. Arose on the reduction of nominal value of each share in issue with a corresponding transfer to capital reduction reserve.
31. Subordinated liabilities
Subordinated guaranteed dated notes
2016
£m
100.0
1,350.0
1,450.0
2015
£m
100.0
1,350.0
1,450.0
2016
£m
539.6
2015
£m
521.1
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 designated hedging instrument 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 notes, with a nominal value of £500 million, 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.
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Notes to the consolidated financial statements continued
32. Insurance liabilities
Insurance liabilities
Gross insurance liabilities
2016
£m
2015
£m
4,666.6
4,524.5
Accident year
Estimate of ultimate
gross claims costs:
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 claims
Cumulative payments
to date
Gross liability
recognised in
balance sheet
2006 and prior
Claims handling
provision
Total
2007
£m
2008
£m
2009
£m
2010
£m
2011
£m
2012
£m
2013
£m
2014
£m
2015
£m
2016
£m
Total
£m
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 2,157.7
(117.6)
(153.0)
(21.0)
(163.3)
(118.9)
(49.3)
(9.9)
(30.0)
20.7
(38.4)
(117.1)
(99.1)
(50.3)
(105.5)
(57.7)
(25.9)
(99.3)
(94.6)
(89.3)
(60.9)
(21.2)
121.6
(37.0)
(14.0)
(101.5)
(38.8)
(80.8)
(27.3)
50.8
51.7
(36.7)
(16.7)
(55.5)
(45.7)
(29.9)
(16.2)
(44.7)
7.8
64.8
(5.4)
(12.1)
(24.4)
(18.8)
(14.4)
0.5
3,968.0 3,295.2 3,645.5 3,486.1 2,332.8 2,031.3 1,892.4 2,076.8 2,088.1 2,157.7
(3,770.5) (3,178.8) (3,463.0) (3,279.1) (2,134.6) (1,813.0) (1,552.7) (1,451.3) (1,360.7) (1,019.4)
197.5
116.4
182.5
207.0
198.2
218.3
339.7
625.5
727.4 1,138.3 3,950.8
636.5
79.3
4,666.6
Net insurance liabilities
Accident year
Estimate of ultimate
net claims costs:
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 claims
Cumulative payments
to date
Net liability
recognised in
balance sheet
2006 and prior
Claims handling
provision
Total
2007
£m
2008
£m
2009
£m
2010
£m
2011
£m
2012
£m
2013
£m
2014
£m
2015
£m
2016
£m
Total
£m
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 1,922.2
(123.6)
(134.4)
(27.8)
(146.7)
(107.8)
(35.6)
(11.6)
(67.0)
(29.7)
(42.0)
(131.5)
(82.1)
(76.5)
(48.7)
(37.3)
(125.2)
(120.4)
(44.0)
(93.6)
(52.3)
(43.9)
70.0
(17.4)
(54.1)
(67.0)
(29.6)
(74.6)
(38.2)
52.0
15.9
(22.8)
(45.8)
(48.7)
(30.9)
(24.5)
(16.2)
(64.3)
(14.5)
32.9
(8.9)
(17.6)
(19.6)
(16.0)
(12.5)
(7.5)
3,842.3 3,213.7 3,579.7 3,422.6 2,268.3 1,970.1 1,808.1 1,899.3 1,859.7 1,922.2
(3,705.2) (3,139.0) (3,429.8) (3,264.4) (2,111.2) (1,800.7) (1,537.1) (1,449.7) (1,358.7) (1,019.4)
137.1
74.7
149.9
158.2
157.1
169.4
271.0
449.6
501.0
902.8 2,970.8
338.2
79.3
3,388.3
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Movements in gross and net insurance liabilities
Gross
£m
Reinsurance
£m
Claims reported
Incurred but not reported
Claims handling provision
At 1 January 2015
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
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 2016
Claims reported
Incurred but not reported
Claims handling provision
At 31 December 2016
Movement in prior-year net claims liabilities by operating segment
Motor
Home
Rescue and other personal lines
Commercial
Total Ongoing
Run-off
Total
33. Unearned premium reserve
Movement in unearned premium reserve
At 1 January 2015
Net movement in the year
At 31 December 2015
Net movement in the year
At 31 December 2016
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
(2,036.9)
2,329.3
(150.3)
4,666.6
2,584.5
2,002.8
79.3
4,666.6
(315.3)
(460.2)
–
(775.5)
16.0
(191.4)
29.0
(921.9)
(375.0)
(546.9)
–
(921.9)
18.8
(235.4)
(139.8)
(1,278.3)
(388.3)
(890.0)
–
(1,278.3)
2016
£m
(123.5)
(75.9)
(17.5)
(49.8)
(266.7)
(23.4)
(290.1)
Net
£m
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
(2,018.1)
2,093.9
(290.1)
3,388.3
2,196.2
1,112.8
79.3
3,388.3
2015
£m
(266.8)
(41.9)
(13.6)
(56.6)
(378.9)
(70.4)
(449.3)
Gross
£m
Reinsurance
£m
1,434.2
42.4
1,476.6
71.3
1,547.9
(87.0)
(2.5)
(89.5)
(4.0)
(93.5)
Net
£m
1,347.2
39.9
1,387.1
67.3
1,454.4
169
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Notes to the consolidated financial statements continued
34. Retirement benefit obligations
Defined contribution scheme
The pension charge in respect of the defined contribution scheme for the year ended 31 December 2016 was £24.9 million
(2015: £23.5 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 2016 is 20 years (2015: 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
2016
%
2.2
2.2
2.7
3.3
2015
%
2.1
2.1
3.8
3.2
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.
Index-linked bonds
Government bonds
Corporate bonds
Liquidity fund1
Other
Total
Note:
2016
2015
88.1
90.1
90.3
92.5
2016
£m
28.6
16.9
–
56.3
0.7
102.5
87.8
89.9
90.1
92.3
2015
£m
21.5
13.7
43.8
5.5
0.6
85.1
1. The liquidity fund is an investment in an open ended fund incorporated in the Republic of Ireland which targets capital stability and income in the UK. It is invested
in short-term fixed income and variable rate securities (such as Treasury Bills) listed or traded on one or more recognised exchange.
The majority of debt and equity instruments held directly or through the liquidity fund have quoted prices on active markets.
170
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Movement in net pension surplus
At 1 January 2015
Income statement:
Net interest income / (cost)1
Statement of comprehensive income:
Actuarial 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
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 2016
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 gains / (losses) on scheme assets
2016
£m
(90.5)
102.5
12.0
1.2
13.7
2015
£m
(72.0)
85.1
13.1
1.2
(1.9)
2014
£m
(79.6)
83.1
3.5
1.0
12.9
2013
£m
(68.0)
66.0
(2.0)
(0.2)
(1.3)
Fair value of
defined benefit
scheme assets
£m
Present value of
defined benefit
scheme
obligations
£m
83.1
(79.6)
2.8
(2.7)
(1.9)
–
–
2.8
(1.7)
85.1
1.2
1.1
6.3
–
1.7
(72.0)
Net pension
surplus
£m
3.5
0.1
(0.7)
1.1
6.3
2.8
–
13.1
3.2
(2.7)
0.5
13.7
–
2.8
(2.3)
102.5
1.2
(19.3)
–
2.3
(90.5)
14.9
(19.3)
2.8
–
12.0
2012
£m
(61.2)
63.7
2.5
(0.1)
2.2
171
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Notes to the consolidated financial statements continued
34. Retirement benefit obligations continued
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
2016
£m
(0.2)
0.1
–
–
0.1
(0.1)
2015
£m
(0.2)
0.2
–
–
0.1
(0.1)
Impact on present value
of defined benefit
scheme obligations
2016
£m
2015
£m
(4.7)
4.7
2.3
(2.3)
2.7
(2.7)
(3.7)
3.7
1.7
(1.7)
2.0
(2.0)
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. As a result of the latest funding update no contribution is expected to be
payable in 2017.
35. 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 2016 over 3.3 million Ordinary Shares with an estimated fair value of
£12.4 million at the 2016 grant dates (2015: 3.4 million Ordinary Shares with an estimated fair value of £11.4 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
2016
2015
368
0
18%
29%
3 years
0.3%
339
0
20%
27%
3 years
0.8%
Expected volatility was determined by considering the actual volatility of the Group’s share price since its initial public offering
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.
172
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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 0.3 million Ordinary Shares (2015: 0.0 million Ordinary Shares) with an estimated fair value of
£0.9 million (2015: £0.1 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. During the year awards were made over
1.0 million Ordinary Shares (2015: 1.0 million Ordinary Shares) under this plan with an estimated fair value of £3.7 million
(2015: £3.4 million) using the market value at the date of grant.
The awards outstanding at 31 December 2016 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 2016, the Group offered all eligible UK employees a Free Share award granting 71 Ordinary Shares (2015: 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 0.8 million Ordinary Shares
(2015: 1.3 million) with an estimated fair value of £2.8 million (2015: £4.2 million) using the market value at the date of grant.
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 2016, matching share awards were granted over 0.4 million Ordinary Shares
(2015: 0.3 million Ordinary Shares) with an estimated fair value of £1.3 million (2015: £1.1 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.
Movement in total share awards
At 1 January
Granted during the year1
Impact of share consolidation (see note 29)
Forfeited during the year
Exercised during the year
At 31 December
Exercisable at 31 December
Note:
Number of
share awards
millions
2016
Number of
share awards
millions
2015
17.2
7.7
–
(0.8)
(6.0)
18.1
2.6
16.4
6.8
(1.6)
(1.5)
(2.9)
17.2
1.6
1. In accordance with the rules of the LTIP and DAIP award plans, additional awards of 1.9 million shares were granted during the year ended 31 December 2016
(2015: 0.8 million) in respect of the equivalent dividend.
In respect of the outstanding options at 31 December 2016, the weighted average remaining contractual life is 1.39 years
(2015: 1.44 years). No share awards expired during the year (2015: nil).
The weighted average share price for awards exercised during the year ended 31 December 2016 was £3.68 (2015: £3.95).
The Group recognised total expenses in the year ended 31 December 2016 of £16.8 million (2015: £12.1 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.
173
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Notes to the consolidated financial statements continued
36. 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 2016
Additional provision
Utilisation of provision
Released to income statement
At 31 December 2016
.
2016
£m
15.5
84.1
4.4
334.7
98.4
93.0
64.8
4.3
699.2
Other
£m
36.9
27.2
(29.3)
(8.3)
26.5
2015
£m
22.5
78.9
4.7
295.5
98.8
78.9
73.1
4.1
656.5
Total
£m
73.1
71.4
(67.6)
(12.1)
64.8
Regulatory levies
£m
Restructuring
£m
27.2
34.4
(33.4)
–
28.2
9.0
9.8
(4.9)
(3.8)
10.1
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37. Notes to the consolidated cash flow statement
Profit for the year
Adjustments for:
Investment return
Instalment income
Finance costs
Defined benefit pension scheme – net interest income
Equity-settled share-based payment charge
Tax charge
Depreciation and amortisation charges
Impairment of property, plant and equipment, goodwill and intangible assets
Impairment provision movements on reinsurance contracts
Impairment charge on assets held for sale – freehold property
Gain on disposal of discontinued operations
Loss on sale of property, plant and equipment
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 increase in insurance and other receivables
Net increase in trade and other payables including insurance payables
Contribution to defined benefit pension scheme
Cash generated from operations
Taxes paid
Cash flow hedges
Net cash generated from 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 decrease in financial investments: loans and receivables to credit institutions
Advances made for Infrastructure debt and commercial real estate loans
Repayments of infrastructure debt
Purchases of AFS debt securities
Purchase of HTM debt securities / commercial real estate loans
Cash generated from investment of insurance assets
38. Contingent liabilities
The Group did not have any contingent liabilities at 31 December 2016 (2015: none).
2016
£m
278.8
(171.5)
(107.1)
37.2
(0.5)
16.8
74.2
87.5
39.3
(3.2)
19.7
–
1.7
272.9
(143.1)
(20.1)
(32.5)
42.7
(2.8)
117.1
(83.3)
1.2
35.0
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
294.6
18.4
(1.4)
25.2
2,489.9
44.9
(97.7)
11.0
(1,886.5)
(71.0)
827.4
318.7
17.9
(16.0)
–
3,549.3
9.8
(268.9)
16.6
(3,110.8)
(13.5)
503.1
175
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Notes to the consolidated financial statements continued
39. Commitments
Operating lease commitments where the Group is the lessee
The Group has entered into non-cancellable operating lease agreements for properties, vehicles and other assets.
Lease payments under operating leases recognised as an expense in the year
2016
£m
18.3
2015
£m
18.4
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.
Within one year
In the second to fifth years inclusive
After five years
Total
2016
£m
17.4
54.2
159.7
231.3
2015
£m
16.8
53.2
162.0
232.0
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.
Within one year
In the second to fifth years inclusive
After five years
Total
40. Fair value
2016
£m
16.3
53.0
78.9
148.2
2015
£m
15.7
53.6
89.3
158.6
Fair value hierarchy
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 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, HTM debt securities, infrastructure debt and commercial real
estate loans are those derived from a valuation technique that includes inputs for the asset that are unobservable.
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Comparison of carrying value to fair value of financial instruments and assets carried at fair value
The following table compares the carrying value and the fair value of financial instruments and other assets where the Group
discloses a fair value.
At 31 December 2016
Assets held at fair value:
Investment property (note 20)
Derivative assets (note 25)
AFS debt securities (note 26)
Other financial assets:
HTM debt securities (note 26)
Infrastructure debt (note 26)
Commercial real estate loans (note 26)
Total assets
Liabilities held at fair value:
Derivative liabilities (note 25)
Other financial liabilities:
Subordinated liabilities (note 31)
Total liabilities
Carrying value
£m
Level 1
£m
Level 2
£m
Level 3
£m
Fair Value
£m
329.0
79.7
4,645.2
85.1
337.0
79.7
5,555.7
45.1
539.6
584.7
–
–
341.2
–
–
–
341.2
–
–
–
–
79.7
4,304.0
13.6
–
–
4,397.3
45.1
625.0
670.1
329.0
–
–
74.6
339.2
79.8
822.6
–
–
–
329.0
79.7
4,645.2
88.2
339.2
79.8
5,561.1
45.1
625.0
670.1
At 31 December 2015
Assets held at fair value:
Investment property (note 20)
Derivative assets (note 25)
AFS debt securities (note 26)
Other financial assets:
HTM debt securities (note 26)
Deposits with credit institutions > three months (note 26)
Infrastructure debt (note 26)
Total assets
Liabilities held at fair value:
Derivative liabilities (note 25)
Other financial liabilities:
Subordinated liabilities (note 31)
Total liabilities
Carrying value
£m
Level 1
£m
Level 2
£m
Level 3
£m
Fair Value
£m
347.4
19.6
5,226.6
13.5
44.9
329.6
5,981.6
46.4
521.1
567.5
–
–
442.7
–
–
–
442.7
–
–
–
–
19.6
4,783.9
–
–
–
4,803.5
46.4
623.2
669.6
347.4
–
–
12.7
44.9
322.2
727.2
–
–
–
347.4
19.6
5,226.6
12.7
44.9
322.2
5,973.4
46.4
623.2
669.6
Differences arise between carrying value and fair value where the measurement basis of the asset or liability is not fair value (e.g.
assets and liabilities carried at amortised cost). Fair values of the following assets and liabilities approximate their carrying values:
Insurance and other receivables;
Cash and cash equivalents;
Borrowings; and
Trade and other payables including insurance payables (excluding provisions)
The movements in assets held at fair value and 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 2015.
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Notes to the consolidated financial statements continued
41. Related parties
Transactions between the Group’s subsidiary undertakings, which are related parties, have been eliminated on consolidation and
accordingly are not disclosed.
There were no sales and purchases of products and services to or from related parties in the year ended 31 December 2016
(2015: £nil).
Year end balances arising from sales and purchases of products and services to and from related parties
Total1
Note:
Amounts owed by related parties Amounts owed to related parties
2016
£m
0.2
2015
£m
0.2
2016
£m
–
2015
£m
–
1. This balance relates to an amount recoverable from RBS Group plc, the Group’s former parent company.
Movement in amounts owed by and to related parties
Amounts owed by related parties Amounts owed to related parties
At 1 January
Settled in the year
At 31 December
Compensation of key management
Short-term employee benefits
Post-employment benefits
Termination benefits
Share-based payments
Total
2016
£m
0.2
–
0.2
2015
£m
0.2
–
0.2
2016
£m
–
–
–
2016
£m
8.4
–
0.1
7.6
16.1
2015
£m
25.4
(25.4)
–
2015
£m
9.5
0.2
–
4.5
14.2
42. Post balance sheet events
The 2016 results reflect a one-off Ogden discount rate reduction to minus 0.75% impacting operating profit and profit before tax
resulting from an announcement made by the Ministry of Justice on 27 February 2017.
178
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Direct Line Group Annual Report & Accounts 2016
Parent Company balance sheet
As at 31 December 2016
Assets
Investment in subsidiary undertakings
Other receivables
Current tax assets
Derivative financial instruments
Financial investments
Cash and cash equivalents
Total assets
Equity
Liabilities
Subordinated liabilities
Derivative financial instruments
Trade and other payables
Deferred tax liabilities
Current tax liabilities
Total liabilities
Total equity and liabilities
Notes
2016
£m
2015
£m
2
3
4
5
6
7
9
5
10
4
4
3,084.3
571.4
0.8
1.7
134.8
157.5
3,950.5
3,067.4
540.8
–
0.4
7.1
29.8
3,645.5
3,437.5
3,131.6
504.5
1.7
6.4
0.4
–
513.0
503.9
0.4
6.6
–
3.0
513.9
3,950.5
3,645.5
The attached notes on pages 182 to 186 form an integral part of these separate financial statements.
The financial statements were approved by the Board of Directors and authorised for issue on 6 March 2017. They were signed
on its behalf by:
John Reizenstein
Chief Financial Officer
Direct Line Insurance Group plc
Registration No. 02280426
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Parent Company statement of comprehensive income
For the year ended 31 December 2016
Profit for the year
Other comprehensive income / (loss)
Items that may be reclassified subsequently to income statement:
Cash flow hedges
Fair value gain on AFS investments
Tax relating to items that may be reclassified
Other comprehensive income / (loss) 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 2016
Balance at 1 January 2015
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
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 2016
Note:
1. There are no non-distributable reserves within retained earnings.
Capital
reserves
£m
Share-based
payment
reserve
£m
Revaluation
reserve
£m
Share
capital
£m
150.0
–
–
–
–
1,450.0
–
–
–
–
150.0
–
–
1,450.0
–
–
–
–
–
–
150.0
1,450.0
9.5
–
–
12.1
(11.0)
10.6
–
–
16.8
(25.6)
1.8
–
–
–
–
–
–
0.4
–
–
–
0.4
2016
£m
764.9
2015
£m
539.5
–
0.5
(0.1)
0.4
(1.2)
–
–
(1.2)
765.3
538.3
Foreign
exchange
translation
reserve
£m
Retained
earnings1
£m
1.2 1,647.5
539.5
(1.2)
(666.0)
–
–
–
–
–
– 1,521.0
764.9
–
(450.6)
–
Total
shareholder
equity
£m
3,258.2
538.3
(666.0)
12.1
(11.0)
3,131.6
765.3
(450.6)
–
–
–
–
16.8
(25.6)
– 1,835.3
3,437.5
The attached notes on pages 182 to 186 form an integral part of these separate financial statements.
180
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Direct Line Group Annual Report & Accounts 2016
Parent Company cash flow statement
For the year ended 31 December 2016
Net cash used by operating activities
Cash flows from investing activities
Interest received on loans to subsidiary undertakings
Interest received on AFS debt securities
Dividends received from subsidiary undertakings
Net increase in loans advanced to subsidiary undertakings
Capital contribution to subsidiary undertakings
Disposal of assets held for sale
Proceeds on disposal / maturity of AFS debt securities
Purchase of AFS debt securities
Net cash generated from investing activities
Cash flows from financing activities
Dividends paid
Purchase of employee trust shares
Finance costs
Net cash used by financing activities
Net increase / (decrease) 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
12
11
7
7
2016
£m
(5.1)
47.6
4.7
780.6
(28.8)
(16.9)
–
5.0
(136.9)
655.3
(450.6)
(25.6)
(46.3)
(522.5)
127.7
29.8
157.5
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
The attached notes on pages 182 to 186 form an integral part of these separate financial statements.
181
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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
Impairment of subsidiary undertakings
At 31 December
2016
£m
3,067.4
16.9
–
3,084.3
2015
£m
3,065.0
237.0
(234.6)
3,067.4
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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 Limited1
DL Insurance Services Limited1
Finsure Premium Finance Limited1
Inter Group Insurance Services Limited1
UK Assistance Accident Repair Centres Limited1
UK Assistance Limited1
U K Insurance Business Solutions Limited1
U K Insurance Limited2,3
Indirectly held by the Company:
10-15 Livery Street, Birmingham UK Limited4
Churchill Insurance Company Limited1
Direct Line Insurance Limited1
DLG Legal Services Limited5
DLG Pension Trustee Limited1
DL Support Services India Private Limited6
Farmweb Limited1
Green Flag Group Limited2
Green Flag Holdings Limited1
Green Flag Limited2
Intergroup Assistance Services Limited1
National Breakdown Recovery Club Limited1
Nationwide Breakdown Recovery Services Limited1
The National Insurance and Guarantee
Corporation Limited1
UKI Life Assurance Services Limited1
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
India
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Intermediate holding company
Management services
Non-trading company
Non-trading company
Motor vehicle repair services
Dormant
Insurance broking services
General insurance
Non-trading company
General insurance
Dormant
Legal services
Dormant
Support and operational services
Non-trading company
Intermediate holding company
Intermediate holding company
Breakdown recovery services
Non-trading company
Dormant
Dormant
United Kingdom
United Kingdom
Dormant
Dormant
Notes:
1. Registered office at: Churchill Court, Westmoreland Road, Bromley, BR1 1DP.
2. Registered office at: The Wharf, Neville Street, Leeds, LS1 4A2.
3. U K Insurance Limited has a branch, as defined in section 1046 (3) of the Companies Act 2006 in the Republic of South Africa.
4. Registered office at: 22 Greenville Street, St Helier, JE4 8PX, Jersey.
5. Registered office at: 42 The Headrow, Leeds, LS1 8HZ.
6. Registered office at: 4 Aradhana Enclave, Sector 13, Rama Krishna Puram, New Delhi, South West Delhi, Delhi, 110066, India.
Two dormant subsidiaries, DL Dormant 5 Limited and DL Dormant 6 Limited were dissolved in the year.
3. Other receivables
Loans to subsidiary undertakings1
Other debtors
Total
Current
Non-current
Total
Note:
2016
£m
569.6
1.8
571.4
71.4
500.0
571.4
2015
£m
540.8
–
540.8
40.8
500.0
540.8
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%. All loans are neither past due nor impaired.
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Notes to the Parent Company financial statements continued
4. Current and deferred tax
Per balance sheet:
Current tax assets
Current tax liabilities
Deferred tax liabilities1
Note:
2016
£m
0.8
–
(0.4)
2015
£m
–
(3.0)
–
1. In the year ended 31 December 2016, deferred tax liabilities of £0.1 million arose on the AFS revaluation reserve and £0.3 million on other temporary timing
differences. Both of these amounts were charged to the statement of comprehensive income. There was no deferred tax asset or liability at 31 December 2015 or
movement in the year ended 31 December 2015.
5. 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
Note:
Notional amount
Fair value Notional amount
Fair value
2016
£m
14.8
–
14.8
–
14.8
14.8
2016
£m
2015
£m
2015
£m
1.7
–
1.7
–
1.7
1.7
4.6
0.7
5.3
0.7
4.6
5.3
0.3
0.1
0.4
0.1
0.3
0.4
1. The derivative assets and derivative liabilities are both classified as Level 2 within the Group’s fair value hierarchy set out in note 40 of the consolidated
financial statements.
6. Financial investments
AFS debt securities1
Note:
2016
£m
134.8
2015
£m
7.1
1. The AFS debt securities which are fixed interest UK Sovereign debt are classified as level 1 within the Group’s fair value hierarchy set out in note 40 of the
consolidated financial statements.
7. Cash and cash equivalents
Cash at bank and in hand
Short-term deposits with credit institutions1
Total
Note:
1. This represents money market funds with no notice period for withdrawal.
2016
£m
0.2
157.3
157.5
2015
£m
0.1
29.7
29.8
8. Share capital and capital reserves
Full details of the share capital and capital reserves of the Company are set out in notes 29 and 30 to the consolidated financial
statements.
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Direct Line Group Annual Report & Accounts 2016
9. Subordinated liabilities
Subordinated guaranteed dated notes
2016
£m
504.5
2015
£m
503.9
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 2016 was £625.0 million (2015:
£623.2 million).
10. Trade and other payables
Payables to subsidiary undertakings
Payables to third parties
Provision
Total
Movement in provision during the year
At 1 January 2016
Utilisation of provision
Released to statement of comprehensive income
At 31 December 2016
2016
£m
4.7
1.7
–
6.4
2015
£m
3.8
–
2.8
6.6
Total
£m
2.8
(1.8)
(1.0)
–
11. Dividends
Full details of the dividends paid and proposed by the Company are set out in note 15 to the consolidated financial statements.
12. Cash generated from operations
Profit for the year
Adjustments for:
Impairment of investment in subsidiary undertakings
Investment return
Finance costs
Equity-settled share-based payment charge
Gain on disposal of assets held for sale
Tax (credit) / charge
Operating cash flows before movements in working capital
Movements in working capital:
Increase in other debtors
Net (decrease) / increase in trade and other payables
Tax (paid) / received
Cash flow hedges
Cash used by operating activities
2016
£m
764.9
–
(829.4)
46.9
16.8
–
(0.5)
(1.3)
(1.8)
(0.2)
(3.0)
1.2
(5.1)
2015
£m
539.5
234.6
(720.5)
47.1
–
(109.5)
3.0
(5.8)
(4.0)
5.5
1.2
–
(3.1)
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Notes to the Parent Company financial statements continued
13. 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.
The following transactions were carried out with related parties:
Sales of services
Interest receivable from subsidiary undertakings
Dividend income from subsidiary undertakings
2016
£m
47.9
780.6
2015
£m
47.5
671.0
Interest income from loans to subsidiary undertakings was charged at rates ranging from 0.4% to 9.5% (2015: 0.5% to 9.5%).
Purchases of services
Management fees payable to subsidiary undertakings
Interest payable to subsidiary undertakings
2016
£m
18.1
–
2015
£m
6.0
0.2
Interest charged on borrowings from related parties in the year ended 31 December 2016 was nil (2015: 0.5% to 0.6%).
14. Share-based payments
Full details of share-based compensation plans are provided in note 35 to the consolidated financial statements.
15. 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.
16. 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 41 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.
186
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Direct Line Group Annual Report & Accounts 2016
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.
To access information, the website requires shareholders
to quote their Shareholder Reference Number. Shareholders
can find this number on their share certificates.
Shareholder warning
Almost five thousand people contact the FCA about share
fraud each year – and victims lose an average of £20,000.
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 29 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 account 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 page
196. 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; and
register to receive electronic shareholder communications.
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 unexpectedly 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
To see if the person and firm contacting you are authorised
by the FCA, check the Financial Services Register at
www.fca.org.uk
Beware of fraudsters claiming to be from an authorised firm;
copying its website; or giving you false contact details
If you want to phone the caller 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,
call Action Fraud on 0300 123 2040.
www.directlinegroup.com 187
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Dividend tax allowance
From April 2016, dividend tax credits were 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. The rate of this tax depends on
their income tax bracket and personal circumstances. The
Company will continue providing registered shareholders with
a confirmation of the dividends paid. Shareholders should
include this with any other dividend income they receive when
calculating and reporting total dividend income received to
HMRC. The shareholder is responsible for including all
dividend income when calculating tax requirements. If you
have any tax queries, please contact your financial adviser.
Financial calendar
2017
Date
Event
07 March
16 March
17 March
03 May1
11 May
18 May
01 August1
10 August1
11 August1
08 September1
07 November1
Preliminary Results 2016
‘Ex-dividend’ date for 2016 final dividend
Record date for 2016 final dividend
Trading update for the first quarter
of 2017
Annual General Meeting
Payment date for 2016 final dividend
Half Year Report 2017
‘Ex-dividend’ date for 2017 interim
dividend
Record date for 2017 interim dividend
Payment date for 2017 interim dividend
Trading update for the third quarter of
2017
Annual General Meeting
The 2017 AGM will be held on 11 May 2017 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.
Additional information continued
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, called 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 electronically, like the Annual
Report & Accounts and Notice of Meeting.
Dealing facilities
Shareholders who wish to buy, sell or transfer their shares may
do so 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
8.00 am and 4.30 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
188
188 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Glossary and appendices
Term
Definition and explanation
Actuarial best estimate
Adjusted diluted earnings
per share
Adjusted profit after tax
Annual Incentive Plan
(“AIP”)
Available-for-sale (“AFS”)
investment
Buy-As-You-Earn
Capital
Capital coverage ratio
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
Earnings per share
Employee Representative
Body
Expense ratio
Finance costs
Financial Conduct
Authority (“FCA”)
Financial Reporting
Council
Gross written premium
International Accounting
Standards Board (“IASB”)
Incurred but not reported
(“IBNR”)
In-force policies
Insurance liabilities
Investment income yield
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
include no margin for optimism or, conversely, caution.
Adjusted diluted earnings per share is calculated by dividing the adjusted profit after tax of ongoing
operations by the weighted average number of Ordinary Shares during the period adjusted for
dilutive potential Ordinary Shares (see page 192 alternative performance measures).
Profit after tax is adjusted to exclude discontinued operations, the Run-off segment and restructuring
and other one-off costs, and is stated after charging tax (using the UK standard tax rate of 20.0%;
2015: 20.25%).
This incentivises 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 130.
The HM Revenue & Customs approved Buy-As-You-Earn Share Incentive Plan gives 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 ratio of Solvency II own funds to the solvency capital requirement.
The number of claims divided by the number of policies per year.
Funds the Group sets aside to meet the estimated cost of paying claims, 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 underwriting.
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 152.
The amount of the Group’s profit allocated to each Ordinary Share of the Company.
A forum that represents all employees, including when 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.
The UK’s independent regulator responsible for promoting high-quality corporate governance 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: standards that 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. This includes an element of uplift on the value of claims reported where the
Group has determined that the value currently held in reserves is not sufficient to meet the estimated
ultimate costs if the claim is referred to as incurred but not enough reported (“IBNER”).
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 AUM. This excludes unrealised and realised gains and
losses, impairments, and fair-value adjustments. The average AUM derives from the period’s
opening and closing balances for the total Group.
www.directlinegroup.com 189
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Glossary and appendices continued
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 and business 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 (see page 193 alternative performance measures).
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 a lump-sum award plus inflation-linked annual
payments to claimants who require long-term care.
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 2016 is adjusted profit after tax from Ongoing operations, divided
by the Group’s average shareholders’ equity, less goodwill and other intangible assets. 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 20.0%; 2015: 20.25%). 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 (see page 192 alternative
performance measures).
Risk and business mix measures the premium impact of channel, tenure and underlying risk mix. It
reflects the risk models used in the period, the outputs of which are 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 return and other operating income.
It is calculated as net earned premium less net insurance claims and total expenses.
190
190 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
Appendix A – Alternative performance measures
The Group has identified Alternative Performance Measures (“APMs”) in accordance with the European Securities and Markets
Authority’s published Guidelines. The Group uses APMs to improve comparability of information between reporting periods and
reporting segments, by adjusting for either uncontrollable or one-off costs which impact on IFRS measures, to aid the user of the
Annual Report in understanding the activity taking place across the Group. These APMs are contained within the main narrative
sections of this document, outside of the financial statements and notes, and may not necessarily have standardised meanings for
ease of comparability across peer organisations.
Further information is presented below, defined in the glossary on pages 189 and 190 and reconciled to the most directly
reconcilable line items in the financial statements and notes. Note 4 on page 150 of the consolidated financial statements
presents a reconciliation of the Group’s business activities on a segmental basis to the statutory income statement including
Ongoing operations of the Group.
Equivalent
IFRS measure Adjustment to reconcile primary statements and where calculated
Rationale for adjustments
Diluted
earnings
per share
Loss ratio
Adjusted diluted earnings per share is defined in the
glossary on page 189 and is reconciled on page 192.
Current-year attritional loss ratio is defined in the glossary
on page 189 and is reconciled to loss ratio on page 40.
This is a representation of the underlying earnings
over the number of shares in issue adjusted for
potential dilutions from the exercise of options.
Express claims performance in the current
accident year in relation to net earned premium.
Group APM
Adjusted diluted
earnings per
share
Current-year
attritional loss
ratio
COR
Operating
profit
COR is defined in the glossary on page 189. The
constituent parts: Operating profit – Ongoing operations is
discussed below; and Net earned premium (note 4).
Investment
income yield
Investment
income
Investment income yield is defined in the glossary on page
189 and is reconciled on page 193.
Investment
return yield
Investment
return
Investment return yield is defined in the glossary on page
190 and is reconciled on page 193.
Loss ratio
Operating
profit –
Ongoing
operations
Net
insurance
claims
Operating
profit
Loss ratio is defined in the glossary on page 190 and is
reconciled in note 4.
Operating profit – Ongoing operations is defined as
operating profit (see glossary on page 190) less operating
profit from run-off segment plus restructuring and one-off costs
(see note 4) and is reconciled on page 192.
Profit after tax
from Ongoing
operations
Profit after
tax
Profit after tax – Ongoing profit (as above) less Finance
costs and Tax at standard rate and is reconciled on page
192.
RoTE
Return on
Equity
RoTE is defined in the glossary on page 190 and is
reconciled on page 192.
Tangible equity Equity
Tangible equity is defined as Equity less intangible assets
within the Balance Sheet and is reconciled on page 192.
Tangible net
asset per share
Net assets
per share
Tangible net asset per share is defined as Tangible equity
(as above) expressed as a value per share and is reconciled
in note 17 on page 160
Total costs –
ongoing
operations
Operating
expenses
Total costs – Ongoing operations is defined as Operating
expenses adjusted to remove restructuring and one-off costs
and operating expenses charged to the run-off segment
(reconciled in note 11) plus claims handling expenses
incurred in net insurance claims on Ongoing operations
(note 9). This is reconciled on page 40.
This is a measure of underwriting profitability
whereby a ratio of less than 100% represents an
underwriting profit and a ratio of more than
100% represents an underwriting loss and
excludes non-insurance income.
Expresses a relationship between the investment
income and the associated opening and closing
assets net of any associated liabilities.
Expresses a relationship between the investment
income and the associated opening and closing
assets net of any associated liabilities.
Expenses claims performance in relation to net
earned premium.
This measure shows the underlying performance
(before tax and finance costs)
of the business activities without the impact
of business that is in run-off and non-repeating
restructuring and one-off expenses.
This measure shows the underlying performance
(after tax and finance costs)
of the business activities without the impact
of business that is in run-off and non-repeating
restructuring and one-off expenses.
This shows underlying performance against
a measure of equity that is more able to be
compared with other companies.
This shows the equity excluding intangible assets
for comparability with companies who have not
acquired businesses or capitalised intangible
assets.
This shows the equity excluding intangible assets
per share for comparability with companies who
have not acquired businesses or capitalised
intangible assets.
This represents the total value of operating
expenses included those allocated to the
insurance claims line as claims handling
expenses.
www.directlinegroup.com 191
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Glossary and appendices continued
Glossary and appendices continued
Appendix A – Alternative performance measures continued
Appendix A – Alternative performance measures continued
Additionally, the current-year attritional loss ratio within the analysis by division section and total costs have also been identified
Additionally, the current-year attritional loss ratio within the analysis by division section and total costs have also been identified
as alternative performance measures, similarly reconciled to the financial statements and notes, on page 40, and defined
as alternative performance measures, similarly reconciled to the financial statements and notes, on page 40, and defined
in the glossary.
in the glossary.
Return on tangible equity1
Return on tangible equity1
At
At
Operating profit
Operating profit
Add back: restructuring and other one-off costs
Add back: restructuring and other one-off costs
Exclude: operating profit from run-off
Exclude: operating profit from run-off
Operating profit from Ongoing operations
Operating profit from Ongoing operations
Finance costs
Finance costs
Profit before tax – Ongoing operations
Profit before tax – Ongoing operations
Tax charge (using the UK standard tax rate of 20.0% and 20.25% respectively)
Tax charge (using the UK standard tax rate of 20.0% and 20.25% respectively)
Adjusted profit after tax – Ongoing operations
Adjusted profit after tax – Ongoing operations
Note2
Note2
4
4
4
4
4
4
4
4
12
12
Opening shareholders’ equity
Opening shareholders’ equity
Opening goodwill and other intangible assets
Opening goodwill and other intangible assets
Opening disposal group equity
Opening disposal group equity
Opening shareholders’ tangible equity
Opening shareholders’ tangible equity
Closing shareholders’ equity
Closing shareholders’ equity
Closing goodwill and other intangible assets
Closing goodwill and other intangible assets
Closing shareholders’ tangible equity
Closing shareholders’ tangible equity
Average shareholders’ tangible equity3
Average shareholders’ tangible equity3
Return on tangible equity
Return on tangible equity
Adjusted diluted earnings per share1
Adjusted diluted earnings per share1
2016
2016
£m
£m
390.2
390.2
39.9
39.9
(26.6)
(26.6)
403.5
403.5
(37.2)
(37.2)
366.3
366.3
(73.3)
(73.3)
293.0
293.0
2,630.0
2,630.0
(524.8)
(524.8)
–
–
2,105.2
2,105.2
2,521.5
2,521.5
(508.9)
(508.9)
2,012.6
2,012.6
2,058.9
2,058.9
14.2%
14.2%
2015
2015
£m
£m
545.1
545.1
48.7
48.7
(73.1)
(73.1)
520.7
520.7
(37.6)
(37.6)
483.1
483.1
(97.8)
(97.8)
385.3
385.3
2,810.5
2,810.5
(517.5)
(517.5)
(241.0)
(241.0)
2,052.0
2,052.0
2,630.0
2,630.0
(524.8)
(524.8)
2,105.2
2,105.2
2,078.6
2,078.6
18.5%
18.5%
At
At
Adjusted profit after tax – Ongoing operations
Adjusted profit after tax – Ongoing operations
Weighted average number of Ordinary Shares for the purpose of diluted earnings
Weighted average number of Ordinary Shares for the purpose of diluted earnings
per share (millions)
per share (millions)
Adjusted diluted earnings per share (pence)
Adjusted diluted earnings per share (pence)
Note
Note
16
16
2016
2016
£m
£m
293.0
293.0
2015
2015
£m
£m
385.3
385.3
1,381.8
1,381.8
21.2
21.2
1,449.0
1,449.0
26.6
26.6
Notes:
Notes:
1. See glossary on pages 189 and 190 for definitions
1. See glossary on pages 189 and 190 for definitions
2. See notes to the condensed consolidated financial statements
2. See notes to the condensed consolidated financial statements
3. Mean average of opening and closing balances
3. Mean average of opening and closing balances
192 Direct Line Group Annual Report & Accounts 2016
192 Direct Line Group Annual Report & Accounts 2016
192
Direct Line Group Annual Report & Accounts 2016
Appendix A – Alternative performance measures continued
Additionally, the current-year attritional loss ratio within the analysis by division section and total costs have also been identified
as alternative performance measures, similarly reconciled to the financial statements and notes, on page 40, and defined
Glossary and appendices continued
in the glossary.
Return on tangible equity1
At
Operating profit
Add back: restructuring and other one-off costs
Exclude: operating profit from run-off
Operating profit from Ongoing operations
Finance costs
Profit before tax – Ongoing operations
Opening shareholders’ equity
Opening goodwill and other intangible assets
Opening disposal group equity
Opening shareholders’ tangible equity
Closing shareholders’ equity
Closing goodwill and other intangible assets
Closing shareholders’ tangible equity
Average shareholders’ tangible equity3
Return on tangible equity
Adjusted diluted earnings per share1
At
Adjusted profit after tax – Ongoing operations
per share (millions)
Adjusted diluted earnings per share (pence)
Tax charge (using the UK standard tax rate of 20.0% and 20.25% respectively)
Adjusted profit after tax – Ongoing operations
Weighted average number of Ordinary Shares for the purpose of diluted earnings
Note2
4
4
4
4
12
2016
£m
390.2
39.9
(26.6)
403.5
(37.2)
366.3
(73.3)
293.0
2015
£m
545.1
48.7
(73.1)
520.7
(37.6)
483.1
(97.8)
385.3
2,630.0
2,810.5
(524.8)
–
2,105.2
2,521.5
2,012.6
2,058.9
14.2%
(517.5)
(241.0)
2,052.0
2,630.0
2,105.2
2,078.6
18.5%
(508.9)
(524.8)
Note
2016
£m
293.0
2015
£m
385.3
16
1,381.8
1,449.0
21.2
26.6
Investment yields
At
Investment income
Investment return
Opening investment property
Opening financial investments
Opening cash and cash equivalents
Opening borrowings
Opening derivatives liability2
Opening investment holdings
Closing investment property
Closing financial investments
Closing cash and cash equivalents
Closing borrowings
Closing derivatives liability2
Closing investment holdings
Average investment holdings
Investment income yield
Investment return yield
Note
7
7
20
26
27
27
2016
£m
167.9
171.5
347.4
5,614.6
963.7
(61.3)
(45.7)
6,818.7
329.0
5,147.0
1,166.1
(55.3)
(5.8)
6,581.0
6,699.9
2.5%
2.6%
20151
£m
169.1
198.1
307.2
5,961.2
880.4
(69.8)
(27.8)
7,051.2
347.4
5,614.6
963.7
(61.3)
(45.7)
6,818.7
6,935.0
2.4%
2.9%
Notes:
1. See glossary on pages 189 and 190 for definitions
2. See notes to the condensed consolidated financial statements
3. Mean average of opening and closing balances
192 Direct Line Group Annual Report & Accounts 2016
Notes:
1. Results for the year ended 31 December 2015 are based on continuing operations and exclude discontinued operations
2. See note 2 on page 45
www.directlinegroup.com 193
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Glossary and appendices continued
Glossary and appendices continued
Appendix B – Proforma results
Appendix B – Proforma results
The table below presents the Group’s results on a proforma basis for 2016 in order to exclude the impact on the income
The table below presents the Group’s results on a proforma basis for 2016 in order to exclude the impact on the income
statement of the recent reduction in the Ogden discount rate to minus 0.75%, as management believe that this provides a clearer
statement of the recent reduction in the Ogden discount rate to minus 0.75%, as management believe that this provides a clearer
comparison to 2015.
comparison to 2015.
Ongoing operations:
Ongoing operations:
In-force policies (thousands)
In-force policies (thousands)
Gross written premium
Gross written premium
Net earned premium
Net earned premium
Underwriting profit
Underwriting profit
Instalment and other operating income
Instalment and other operating income
Investment return
Investment return
Operating profit – Ongoing operations
Operating profit – Ongoing operations
Run-off
Run-off
Restructuring and other one-off costs
Restructuring and other one-off costs
Operating profit
Operating profit
Finance costs
Finance costs
Profit before tax
Profit before tax
Tax
Tax
Profit from discontinued operations, net of tax
Profit from discontinued operations, net of tax
Profit after tax
Profit after tax
Of which Ongoing operations
Of which Ongoing operations
Key metrics – Ongoing operations
Key metrics – Ongoing operations
Loss ratio1 prior to the reduction in Ogden discount rate
Loss ratio1 prior to the reduction in Ogden discount rate
Loss ratio1 due reduction in Ogden discount rate
Loss ratio1 due reduction in Ogden discount rate
Commission ratio1
Commission ratio1
Expense ratio1 including Flood Re levy
Expense ratio1 including Flood Re levy
COR1
COR1
Adjusted diluted earnings per share (pence) 2
Adjusted diluted earnings per share (pence) 2
Return on tangible equity2
Return on tangible equity2
Key metrics
Key metrics
Investment income yield1
Investment income yield1
Investment return1
Investment return1
Basic earnings per share (pence) 1
Basic earnings per share (pence) 1
Return on equity
Return on equity
Dividend per share – interim (pence)
Dividend per share – interim (pence)
– final interim (pence)
– final interim (pence)
– regular (pence)
– regular (pence)
– second special interim (pence)
– second special interim (pence)
– total (pence)
– total (pence)
Net asset value per share (pence)
Net asset value per share (pence)
Tangible net asset value per share (pence)
Tangible net asset value per share (pence)
– first special interim3 (pence)
– first special interim3 (pence)
FY
FY
2016
2016
£m
£m
15,806
15,806
3,274.1
3,274.1
3,000.6
3,000.6
70.1
70.1
165.3
165.3
168.1
168.1
403.5
403.5
26.6
26.6
(39.9)
(39.9)
390.2
390.2
(37.2)
(37.2)
353.0
353.0
(74.2)
(74.2)
–
–
278.8
278.8
293.0
293.0
55.0%
55.0%
5.9%
5.9%
11.5%
11.5%
25.3%
25.3%
97.7%
97.7%
21.2
21.2
14.2%
14.2%
2.5%
2.5%
2.6%
2.6%
20.4
20.4
10.8%
10.8%
4.9
4.9
9.7
9.7
14.6
14.6
10.0
10.0
–
–
24.6
24.6
184.7
184.7
147.4
147.4
Proforma
Proforma
FY 2016
FY 2016
£m
£m
15,806
15,806
3,274.1
3,274.1
3,000.6
3,000.6
245.2
245.2
165.3
165.3
168.1
168.1
578.6
578.6
68.8
68.8
(39.9)
(39.9)
607.5
607.5
(37.2)
(37.2)
570.3
570.3
(117.7)
(117.7)
–
–
452.6
452.6
433.1
433.1
55.0%
55.0%
–
–
11.5%
11.5%
25.3%
25.3%
91.8%
91.8%
31.3
31.3
20.2%
20.2%
2.5%
2.5%
2.6%
2.6%
33.1
33.1
17.0%
17.0%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
197.4
197.4
160.2
160.2
FY
FY
2016
2016
165%
165%
FY
FY
2016
2016
189%
189%
FY
FY
2015
2015
£m
£m
16,068
16,068
3,152.4
3,152.4
2,920.8
2,920.8
175.2
175.2
150.8
150.8
194.7
194.7
520.7
520.7
73.1
73.1
(48.7)
(48.7)
545.1
545.1
(37.6)
(37.6)
507.5
507.5
(108.3)
(108.3)
181.2
181.2
580.4
580.4
385.3
385.3
59.5%
59.5%
–
–
10.9%
10.9%
23.6%
23.6%
94.0%
94.0%
26.6
26.6
18.5%
18.5%
2.4%
2.4%
2.9%
2.9%
27.9
27.9
21.3%
21.3%
4.6
4.6
9.2
9.2
13.8
13.8
27.5
27.5
8.8
8.8
50.1
50.1
192.2
192.2
153.8
153.8
HY
HY
2016
2016
184%
184%
Capital coverage2,4 – estimated
Capital coverage2,4 – estimated
Notes:
1. A reduction in the ratio represents an improvement and positive change as a proportion of net earned premium, while an increase in the ratio represents
Notes:
1. A reduction in the ratio represents an improvement and positive change as a proportion of net earned premium, while an increase in the ratio represents
a deterioration and negative change
a deterioration and negative change
statement line items
statement line items
2. See glossary on pages 189 and 190 for definitions and appendix A – Alternative performance measures on pages 192 and 193 for reconciliation to financial
2. See glossary on pages 189 and 190 for definitions and appendix A – Alternative performance measures on pages 192 and 193 for reconciliation to financial
3. The special interim dividend paid on 24 July 2015 of 27.5 pence per share, following the sale of the Group’s former Italian and German operations
3. The special interim dividend paid on 24 July 2015 of 27.5 pence per share, following the sale of the Group’s former Italian and German operations
4. Estimates based on the Group’s Solvency II PIM for 31 December 2016
4. Estimates based on the Group’s Solvency II PIM for 31 December 2016
194 Direct Line Group Annual Report & Accounts 2016
194 Direct Line Group Annual Report & Accounts 2016
194
Direct Line Group Annual Report & Accounts 2016
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 and guidance which are contained in
this document specifically with respect to the return on tangible
equity; solvency capital coverage ratio; the Group’s combined
operating ratio; prior-year reserve releases; cost reduction;
investment income yield; net realised and unrealised gains;
results from the Run-off segment; restructuring and other one-off
costs; and risk appetite range. 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 in this document;
for example directly or indirectly as a result of, but not limited
to, UK domestic and global economic business conditions,
the result of the UK’s withdrawal from the European Union;
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. Additionally, 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 in this document,
those results or developments may not indicate results or
developments in subsequent periods.
The forward-looking statements in this document reflect
knowledge and information available as of the date this
document was prepared. 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 an
applicable law or regulation requires them to do so. 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.
www.directlinegroup.com 195
195
www.directlinegroup.comStrategic reportGovernanceFinancial statements
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 (trading as ‘RBC Capital Markets’)
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
196
196 Direct Line Group Annual Report & Accounts 2016
Direct Line Group Annual Report & Accounts 2016
This report is printed on mixed source paper which is
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Direct Line Insurance Group plc ©
Registered in England & Wales No. 02280426
Registered Office: Churchill Court, Westmoreland Road, Bromley, BR1 1DP