De'Longhi S.p.A. Annual Report 2018

FY2018 Annual Report · De'Longhi S.p.A.

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Annual Report
&Accounts2018

Contents

Other information
189 Additional information
191 Glossary and appendices
195 Forward-looking statements

disclaimer

196 Contact information

Governance
60 Chairman’s introduction
Board of Directors
62
65
Executive Committee
66 Corporate Governance report
76 Committee reports
88
118 Directors’ report

Directors’ remuneration report

Financial statements
122 Contents
123 Independent Auditor’s report
131 Consolidated financial statements
136 Notes to the consolidated
financial statements

182 Parent Company financial statements
184 Notes to the Parent Company

financial statements

Chairman’s statement
Chief Executive Officer’s review

Strategic report
Group highlights
1
Our Group
2
Our brands
4
Our segments
6
8 Our routes to market
10 Our investment case
12
15
18 Market overview
19
Strategy
22 Our business model
24 Our key performance indicators
26
38 Operating review
44 Risk management
Responsibility
50
People and culture
56

Finance review

ESG – our approach

Information on our environmental, social and governance (“ESG”) related
activities is structured according to the five pillars of our approach to responsibility.
These pillars, activities in the year relating to responsibility, and where to find
ESG related information are set out in the Responsibility section. This also
contains information on how we satisfy the requirements of the Non-Financial
Reporting Directive.

Read more on pages 50 – 51

For more information
please visit
www.directlinegroup.co.uk/en/
investors/esg.html

Group highlights

Our performance reflects
our focus on satisfying customers
with the aim of delivering
sustainable, profitable growth

Profit before tax

Return on

£582.6m

(2017: £539.0m)

tangible equity1
21.5%

(2017: 23.0%)2

Combined
operating ratio1,3
91.7%

(2017: 90.8%)2

Solvency

capital ratio1,4
170%

(2017: 165%)

Operating profit1

£601.7m

(2017: £642.8m)2

Dividend
per share5
29.3p

(2017: 35.4p)

Notes:
1. See glossary on pages 191 to 192 for definitions and Appendix A – Alternative performance measures

on pages 193 and 194 for reconciliation to financial statement line items.

2. Results for the year ended 31 December 2018 are based on total Group operations including restructuring
costs and the Run-off segment. Comparative data has been re-presented accordingly to include restructuring
costs and Run-off profits within the Motor segment. The adjusted profit after tax reported in 2017 was
£462.9 million and the return on tangible equity was 21.7%.

3. A reduction in the ratio represents an improvement as a proportion of net earned premium,

while an increase in the ratio represents a deterioration. See glossary on page 191 for definitions.
4. Estimates based on the Group’s solvency II partial internal model. The 2017 comparative has been
updated to reflect the amounts in the Group Solvency and Financial Condition Report for the year
ended 31 December 2017.

5. See page 32 for the dividend policy.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

One Group

We give people the
protection they need to do
the things they love in life.

Whether that be driving their car, enjoying
their home and possessions, exploring the
world, caring for their pets or building
their businesses.

Our strength lies in the diversity of our
propositions, offering a range of products,
powerful brands and multiple routes to market,
underpinned by a determination always to aim
higher for our customers, people, shareholders
and wider stakeholders.

WWW.DIRECTLINEGROUP.CO.UK

Eight brands

Direct Line stands for speed, simplicity and a
common-sense human touch. We sell products direct
to customers by phone and online.

Direct Line customers want a premium product with
exceptional customer care that is tailored to their
needs at a competitive price.

Churchill is one of Britain’s most recognisable
brands, providing car, home, business, pet and travel
insurance. Our products are available by phone and
online, including price comparison websites.

Churchill customers are looking for a dependable
partner which is reliable, trustworthy, and will
spend time making sure they are happy.

Direct Line for Business understands that our
customers’ businesses are their livelihoods, so the
right type of cover is vital. Our policies cover a
range of trades, from start-ups, to growing businesses,
from renting out a property to working as a single
tradesman. We sell products direct via phone
and online.

Green Flag is our roadside rescue and recovery
service. It is a standalone and optional product offered
alongside motor insurance across all of our brands.

Green Flag customers receive an award-winning
breakdown service at a much cheaper price than
its two biggest rivals.

Privilege targets customers who mainly buy through
price comparison websites.

Privilege customers want a quick and efficient service
at the best price.

NIG is our commercial insurance brand dedicated
to the broker market and is focused on a number
of specialisms including small and medium-sized
enterprises, agriculture and real estate.

DLG Partnerships is the Group’s partnerships arm.
It specialises in providing personal insurance, and
roadside rescue and recovery products to some
well-known brands.

DLG Auto Services is the Group’s UK network
of bodyshops, repairing around 90,000 accident
damaged vehicles every year, and supports our
seven day repair proposition for Direct Line customers.

Find more details on our website

WWW.DIRECTLINEGROUP.CO.UK

Four segments

Motor

Home

Rescue and other
personal lines

Commercial

We are Britain’s leading
personal motor insurer
measured by in-force
policies1, mainly represented
through our well-known
brands Direct Line, Churchill
and Privilege, and also
through our partners.

We are one of Britain’s
leading personal home
insurers 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.

We protect commercial
businesses through our
brands, NIG, Direct Line for
Business and Churchill. NIG
sells its products exclusively
through brokers operating
across the UK.

We are one of the leading
providers of rescue and other
personal lines insurance in
the UK2,3, with 7.5 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 offer
customers protection for their
holidays and pets and are
the third largest travel and
the third largest pet insurer3.
We also offer insurance
packages tailored for mid-to
high-net worth customers.

Gross written
premium

£1,671.2m

£606.9m

£422.8m

£511.0m

Operating
profit

£415.2m

£83.1m

£43.4m

£60.0m

Find more details on pages 38 – 43

Notes:
1. Includes Direct Line, Churchill, Privilege and partner brands: RBS, NatWest, Prudential and Sainsbury’s © GfK Financial Research Survey six months ending

January 2018, 14,063 adults interviewed for motor insurance and 12,214 for home insurance.

2. Mintel Vehicle Recovery – UK, September 2018.
3. Mintel Pet Insurance – UK, August 2018 and Mintel Travel Insurance – UK, February 2019.

WWW.DIRECTLINEGROUP.CO.UK

Three routes
to market

Every customer is unique and we want our products
to reach customers wherever they shop. But we don’t
stop there. We also want to give them choices about
their insurance and we offer our products through the
three main routes to market:

Direct
We give our customers a
reason to come direct with
our strong brands and great
propositions, because we
want to deliver excellent
value for our customers
and shareholders.

Price
comparison
websites
Strong brands and
propositions are important
but so are great prices. We
are investing in the latest
generation IT to improve
our speed to market and
pricing capabilities.

Partnerships
We partner with big brands
to offer insurance to their
customers and look for
ways to be innovative to
give people choice about
how they insure the things
they love.

1 million

710,000

173,000

Own brand
policies added
since 2014

Policies sold
through price
comparison
websites1

Motor partnerships
customers drove
their new car
away with our
complimentary
insurance2

Note:
1. Number of new policies sold through Churchill and Privilege for Motor and Home in 2018.
2. www.directlinegroup.co.uk/en/brands/dlg-partnerships.html

Find more details on page 19

WWW.DIRECTLINEGROUP.CO.UK

Six years
of returns

Creating shareholder value through customer focus

We have a track record of delivering strong returns to shareholders having
distributed £2.5 billion in dividends over the past six years. This together with
our share price performance has delivered an attractive total shareholder return.

Total shareholder return (%)

300

250

200

150

100

DLG

FTSE 350
(excluding investment trusts)

16 Oct 2012

31 Dec 2012

31 Dec 2013

31 Dec 2014

31 Dec 2015

31 Dec 2016

31 Dec 2017

31 Dec 2018

Our successful customer focused strategy, built around our ‘rocket’
(see page 19), also enables us to invest in future capabilities with
the aim of sustaining our strong performance.

Medium-term financial targets

Combined
operating
ratio 93% – 95%

Return on
tangible equity
of at least 15%

Grow our
regular dividend
in line with
business
growth

Maintain
solvency capital
around the
middle of the
140% – 180%
solvency II
target range

2018 results

91.7% 21.5% 21.0p

170%

Find more details on pages 24 – 25

WWW.DIRECTLINEGROUP.CO.UK

CHAIRMAN’S STATEMENT

Delivering sustainable
returns

In 2018, the Group delivered profit before tax of
£582.6 million (2017: £539.0 million). The Group’s
diversified product and channel portfolio, disciplined
underwriting and our engaged employees have helped
us to achieve this commendable result.

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 66

Effectiveness
The effectiveness
of your Board’s
and its Committees’
performance is
considered annually
in an effectiveness
review.

See page 70

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 page 74

Remuneration
Your Remuneration
Committee ensures
a close correlation
between creating
value for shareholders,
and remunerating
Executive Directors
and senior executives
appropriately.

See pages 75 and 88

Relations with
shareholders
and stakeholders
Your Board maintains
strong relationships
and regular interaction
with shareholders.
Their continued support
for the strategic aims is
important. Your Board
also has regard
to the interests of
other stakeholders.

See pages 66 and 75

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

CEO succession
Following a rigorous search process, the Group was delighted
to announce, on 26 February 2019, that Penny James, Chief
Financial Officer (“CFO”) had been selected to succeed Paul
Geddes as Chief Executive Officer (“CEO”) with effect from the
conclusion of the Annual General Meeting (“AGM”) on 9 May
2019. Paul will step down as a member of the Board and will
leave the Group at the end of July 2019.

Penny joined the Board on 1 November 2017 and
succeeded John Reizenstein as CFO on 1 March 2018.
Penny’s deep understanding of our sector, combined with
outstanding leadership skills, financial and risk expertise and
deep strategic thinking, gives the Board confidence that Penny
is ideally suited to leading the delivery of the Group’s short-term
strategic imperatives, including technological and business
transformation, and the development of the next stage of
our strategy.

This year marks the 10th anniversary of Paul’s appointment
as CEO. In that time Paul has made a huge contribution to
the Group and the Company is deeply indebted to him for his
strong leadership. During his tenure, Paul has been leading the
management team which successfully separated the business
from the Royal Bank of Scotland Group, floated it on the
London Stock Exchange and turned it into a successful
FTSE 100 company. The Board thanks Paul for his
enormous contribution and wishes him well for the future.

Strategy
The Group aims to make insurance much easier and better
value for our customers. The Board supports and challenges
the Group’s management to develop and execute a strategy
which is aligned to this aim. Our strategy looks to position us
as a multi-brand, multi-product and multi-channel business, to
enable us to meet our customers’ needs now and in the future,
regardless of their channel preference.

Supporting this strategy is a substantial and ongoing change
and investment agenda. We look to continue to invest in our
direct offering, as we believe it enables us to deliver the best
value for our customers and our shareholders, through our
differentiated brands and propositions and simple customer
journeys. Our investments in technology and digitisation are
intended to improve competitiveness, agility and efficiency. This
also supports our ambition to grow our profitable share of the
price comparison websites market, particularly by moving us
towards best-in-class pricing. By leveraging our manufacturing
strengths and investments in digital capabilities, we are
continuing to support our aim of winning new partnerships.

Dividends and capital management
The Group’s solvency capital ratio prior to all proposed
dividends was 194%, resulting from good capital generation
from the business and lower capital requirements due in part to
increasing the level of reinsurance purchased by the Group in
recent years. This was partially offset by higher unrealised mark

Note:
1. Further information can be found on page 32.

to market losses due to credit spread widening and continued
capital expenditure as the Group invests with the aim of
improving its capabilities and efficiency.

The Group aims to grow the dividend in line with business
growth. Accordingly, the Board has recommended a final
dividend of 14.0 pence per share (2017: 13.6 pence),
an increase of 0.4 pence per share. If approved, the total
regular dividend of 21.0 pence per share will represent 2.9%
growth on 2017’s regular dividend (20.4 pence per share).
This reflects the Board’s continued confidence in the Group’s
earnings and the progress the business continued to make.

The Board also resolved to pay a special interim dividend
of 8.3 pence per share. After both dividends, the solvency
capital ratio will be 170% as at 31 December 20181.

The Board has taken into account the high level of political
and economic uncertainty, including in relation to the UK’s exit
from the EU (“Brexit”) and considers it appropriate for the time
being to maintain a prudent solvency capital ratio towards the
upper end of the solvency capital ratio risk appetite range of
140% to 180%. The Board will keep this position under review
as it monitors developments in the political and economic
environment. In normal circumstances, the Board expects the
Group to operate around the middle of its solvency capital
ratio risk appetite range.

Brexit
Brexit, when the UK is due to leave the EU, is scheduled
to take place on 29 March 2019. Although the Group is
predominantly a UK business, it does, for example, have
exposure to financial markets and it imports goods and services
in order to fulfil insurance claims, including from the EU. The
Group has been monitoring events carefully and proactively
taken steps to mitigate the likely impact on the Group to the
extent we consider it to be appropriate and proportionate to
do so, given the considerable uncertainties; however, in the
event of a disruptive Brexit the Group will not be immune. We
have more information on this in the Risk section, on page 48.

ESG practices
The Board subscribes to the principle that a business model
that is sustainable in the long term will be better able to drive
value for its shareholders and other stakeholders, contributing
to the development of a sustainable economy. The Group has
strong values and is customer focused to ensure it is continuing
to meet customer needs. The Board is proud of the high level
engagement of its people, whose wellbeing is one of the pillars
in our approach to ESG, reflected in our support for Mind and
the Scottish Association for Mental Health as well as numerous
wellbeing initiatives across the Group. Our investment portfolio
has started to be weighted towards ‘green bonds’ and
investments which attract higher ESG ratings. Each of our UK
offices seeks to act constructively with the local community and
we encourage our people to allocate at least a day each year
out of their working lives to support charitable or community
initiatives. Our people donated nearly 4,800 hours of company
time to volunteer within their communities during 2018.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSCHAIRMAN’S STATEMENT CONTINUED

Board and Committee membership changes
Further to the announcement of the new CEO you will recall from
my statement last year that John Reizenstein and Andrew Palmer
stepped down from the Board at the conclusion of the AGM in
May 2018.

Three Non-Executive Directors (“NEDs”) joined the Board in
2018: Mark Gregory and Gregor Stewart were appointed on
1 March; and Fiona McBain joined us on 1 September. The
Board is already benefiting from their skills and experiences.

Clare Thompson, independent NED, has decided to step down
from the Board at the conclusion of the 2019 AGM. Having
served as a Director since 2012, Clare has made an immense
contribution to the Group. Her experience and wisdom have
been invaluable in helping the Board and senior management
to deliver excellent results for shareholders and customers. She
leaves the Board with our thanks and best wishes for the future.

The Chairs of three Board Committees also changed during
2018. Gregor and Mark were appointed as Chair of the
Audit Committee and Investment Committee respectively
replacing Andrew Palmer. Danuta Gray also replaced
Clare Thompson as Chair of the Remuneration Committee.

I would like to thank each member of the Board for their
significant contribution, commitment and service, and look
forward to working with them in 2019 as the Group
continues to strive to build on its success to date.

Employees
The Group’s employees are fundamental to the Group’s
success and sustainability and to ensuring a high level of
service to our customers. I would like to thank each of them
for their hard work, initiative and commitment to our mission.
Their positive energy, embodiment of the Group’s values
and unwavering dedication to our customers have helped
our businesses progress over the successful years since
the IPO, and have put us in a strong position for the future.

MICHAEL N BIGGS
CHAIRMAN

Linking remuneration to performance
We remain committed to ensuring that executive pay is
aligned with the Company’s strategy of targeting sustainable
shareholder and customer value. This is primarily achieved by
the Annual Incentive Plan (“AIP”) and Long Term Incentive Plan
(“LTIP”) being aligned to performance measures shareholders
consider important. This is underpinned by the delivery of a
significant proportion of remuneration through shares and
shareholding requirements.

The Group achieved a return on tangible equity (“RoTE”) of
21.5% for 2018. A decrease of 16.5% (2017: an increase of
3.3%) in the share price over the year to 318.7 pence (2017:
381.7 pence) at 31 December 2018, together with dividend
payments, provided a total shareholder return (“TSR”) of minus
7.7% for the year (2017: 8.1%). This compares favourably to
the FTSE 350 which had an overall return of minus 9.5% at
31 December 2018 as financial markets reacted to global
trade tensions and Brexit. Over the past five years, shareholders
have received a TSR of 87% compared to the FTSE 350
(excluding investment trusts) of 22%. The Group has continued
to deliver good results each year, which has enabled the
Board to declare cumulative dividends, including special
dividends, equivalent to approximately 106% of the Initial
Public Offering (“IPO”) share price. More information on the
Group’s remuneration policy and share awards are disclosed
in the Directors’ remuneration report on pages 88 – 117.

IT infrastructure
The Board continues to provide oversight of the ambitious
programme of activity to upgrade and better integrate the
major IT systems within the Group’s technology infrastructure,
aimed at improving the Group’s digital offering, customer
experience and operational efficiency. Good progress has
been made in this area and 2019 is set to be an important
year for the Group in terms of the delivery of the new platform.

Customer, culture and conduct
Meeting the needs of our customers is central to the Group’s
strategy and sustainability. The Board recognises that opportunities
will arise to improve further the services offered to customers, and
along with its investment in IT capability to improve the efficiency
and effectiveness of the business, it has also encouraged a
range of customer experience initiatives which are designed
to deliver increased levels of customer satisfaction.

The Group maintains active relationships with its insurance
regulators through constructive dialogue. The Board promotes
an open and collaborative culture, and provides oversight of the
Group’s conduct with customers. It oversees the Group’s culture
and the conduct policy, which aims to ensure that fair customer
outcomes are achieved and that employees behave with
integrity. The Group also has an Employee Code of Conduct
which sets out standards to which our employees are required
to adhere.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

CHIEF EXECUTIVE OFFICER’S REVIEW

Focusing on our
customer-centric mission

I am pleased to announce a strong set of results driven
by our resilient business model which performed well
in a highly competitive market.

I am pleased to report another strong set of results in a
highly competitive market driven by the Group’s resilient
and customer-centric business model. We continued to make
significant operational progress in 2018 and we head into
a pivotal year of delivery in 2019, with the aim of delivering
a springboard from which to grow the contribution from
current-year profitability. We maintained good cost discipline
in 2018 and are determined to leverage our investment in the
business to step change our efficiency. The new technology
and greater efficiency are, in turn, designed to support our
ambition to innovate more rapidly and find new ways to
serve our customers as their demands evolve. Financially,
we continued to see the benefits of improving the efficiency
of our balance sheet, which has contributed to another
attractive dividend, while continuing to invest in the
business and maintaining a prudent solvency margin.

Trusted brands and direct growth
Once again, the growth we achieved across Direct Line, Direct
Line for Business and Green Flag demonstrated that by giving
customers a reason to come to us direct, they will. Since 2014,
our own brand in-force policies have grown by over one
million, to over seven million policies.

In Direct Line we launched another two new unique
propositions – in Home and Motor. Our new Motor
proposition removed one of our customers’ greatest frustrations
and protected their no claim discount on no-fault claims.
We now offer a combination of nine Direct Line propositions
that our customers cannot get anywhere else in the market.

Direct Line for Business achieved its 11th consecutive
year of premium growth. This time last year, we launched
a more personalised approach for our business customers,
from start-ups to growing businesses. Starting with Hair and
Beauty and followed by Bed & Breakfast in 2017, this year
we ramped up our delivery by releasing cover for over 500
new trades, taking us to 75% of our target trades on the new
platform. A national marketing campaign was launched in
the year and the early campaign metrics have been positive.
This has driven higher volumes to the website and there has
been a 100% increase in brand searches. Work is underway
to re-launch two of our biggest products on our new system,
Van and Tradesman in 2019. This continues to demonstrate
our increased ability to work in an agile way and to launch
new, innovative products quickly to meet the ever-changing
needs of our customers.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSCHIEF EXECUTIVE OFFICER’S REVIEW CONTINUED

And finally Green Flag, our challenger brand in the Rescue
market, continued to display great growth potential and
demonstrated this again by achieving another period of
double digit percentage growth in policy count and premiums.
Our Rescue network dealt with over 640,000 breakdowns
in 2018, which is one every 49 seconds. There has been
great progress in Rescue in 2018, launching a five-year
transformational plan and the team have relocated to a Centre
of Excellence, bringing together multi-skilled teams to recognise
efficiencies and offer greater flexibility. The Rescue Me app,
which is rated 4.8 in the Apple App store, was rebuilt
using in-house digital capabilities and was used in over
35,000 claims.

Moving towards best in class in the price
comparison website market
We see a real opportunity in strengthening our capabilities on
price comparison websites. We increased our focus in 2018
and created a new trading hub in Motor and Home to support
this. We made some tactical pricing changes driven by improved
anti-fraud capabilities and this helped increase Churchill and
Privilege Motor new business volumes by 18%. We believe
there is an opportunity to strengthen margins in this channel.

Investing in technology
Whilst we have already made significant progress in delivering
our Direct Line for Business systems, most of our transformational
work has been going on behind the scenes on our core
personal lines technology, as we continued our ambitious
programme to build our latest generation IT capabilities.

These systems, which started to go into testing at the end
of 2018, are designed to make insurance much easier for
our customers by introducing more self-service and customer
focused innovations. In addition they are designed also to
enable a step change in our ability to use internal and external
data more effectively to improve our pricing accuracy and
improve our competitiveness. Our new pricing engine is
designed to make it much easier and quicker to develop, test
and deploy new models. This is intended to allow us to tailor
our models better to the price comparison website channel and
improve our speed to market. We are also in the process of
testing our new digital Travel platform. 2019 is an important
year in starting to deliver these systems which we see as a
key enabler in transforming our business.

We continue to make good progress on our alternative
pricing project which we expect to give us new capability by
applying new data science methods and machine learning.
We believe this approach will enable us to deepen our
competitive footprint with more granular and flexible pricing
capabilities. Testing is progressing well and we are aiming
to launch in Q2 2019 under a new brand.

Improving our efficiency
In order to be able to give our customers the best value for
money, we recognise it is imperative to operate efficiently.
Over the past five years, we’ve made significant strides
in reducing our costs, such as through improved marketing
efficiency, where we reduced marketing spend by over 30%
whilst returning our direct own brands to growth, and reducing
our number of sites by nearly a half and annual rental costs by
around 40%.

Over the past two years we have been expanding our
robotic process automation capability and are now managing
concurrently 28 processes and approximately 500,000
automated transactions each quarter. But we don’t intend to
stop there and have already identified a strong pipeline of
processes to add to our existing portfolio and which has the
potential to increase our transaction volume capability by a
further 500,000 in 2019.

The actions we’ve taken supported the reduction in the operating
expense ratio and we aim to continue to transform our business
and improve our efficiency and long-term competitiveness.

Leveraging our scale via partnerships
In Home, we leveraged our capabilities in digital and data to
streamline the customer experience. Our improved capabilities
in digital are helping us have conversations with potential
new partners.

In Travel, we are building a new system that is designed to
enable customers to self-serve and interact with us day or night,
offering greater support and helping us renew our partnerships
with RBS Group and Nationwide.

In Motor, our new partnership with Volkswagen Insurance
Service (Great Britain) Limited is going well. We provide
both annual insurance cover and complimentary ‘5 day
driveaway’ cover for customers buying new and used cars
from Volkswagen, Volkswagen Commercial Vehicles, SEAT,
Audi and ŠKODA dealers.

Investing in our talented people
The success of the business is due to the commitment and
dedication of our people who use their expertise to serve our
customers. We rightly celebrate our diversity and are united
in our customer focus. This focus is reflected in our unique
propositions and the fact that on average we manage one
claim every single minute of every single hour, every day of
the year. The freezing weather earlier in the year hit many
drivers, households and businesses hard, and the way our
people helped our customers get their lives back on track
during this difficult period demonstrated the value of our
insurance cover and gives customers a reason to keep coming
back to us. Nearly 10,000 of our people now own shares in
our company which gives them a real sense of ownership and
investment in our future success. Our engagement scores

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

increased again in 2018 and I’m proud that this year
we came third in the Sunday Times list of the 25 Best Big
Companies to Work For in 20191. This is a huge achievement
and is testament to the value we place in our people.

Business performance
We ended 2018 having delivered a sixth successive year of
strong financial performance and a return on tangible equity of
21.5% (2017: 23.0%), well ahead of our target of at least a
15% return on tangible equity.

Our direct own brands gross written premium increased
by 1.8% whereas total gross written premium was lower as
expected due to the exits from Nationwide and Sainsbury’s
Home partnerships. We achieved an operating profit of
£601.7 million (2017: £642.8 million). The reduction in
operating profit was primarily due to lower prior-year reserve
releases and investment return. Both years benefited from
reserve releases relating to the Ogden discount rate. In respect
of 2018, we have now assumed a higher Ogden discount
rate of 0%, following Royal Assent of the Civil Liability Act
2018 which contributed £55 million to operating profit (2017:
£49 million) of which £51 million related to the prior years.

Weather returned to normal levels in 2018 after a benign
2017 and this offset the non-repeat in 2018 of the £57 million
non-cash impairment charge incurred in 2017 in relation to IT
projects. Normalised for weather and adjusted for the assumed
Ogden discount rate change, the combined operating ratio
was approximately 93.5%, towards the lower end of our
medium-term target range of 93% to 95%.

Overall, our current-year combined operating ratio was stable,
demonstrating the value in the Group’s diversified product base
and channel portfolio, as well as lower operating expenses.

Regulation
The Group has continued to operate within a highly dynamic
and evolving regulatory landscape, where there are a number
of reviews and initiatives, including those that have been
announced by the UK Government, the FCA and the PRA.

In 2018 both the FCA and PRA have been focused on Brexit
preparations and the implementation of the Senior Managers
and Certification Regime. The PRA’s focus continues to be
on the pillars of its financial risk framework, namely reserving,
pricing, reinsurance and investments. The FCA has also been
focused on pricing practices including the launch of its market
study. The Group is supportive of the FCA’s market study.
At this early stage however, the outcomes are not yet known.

The insurance market is very competitive with high levels of
switching and lots of introductory discounts which leads to most
people shopping around for the best deal. For those customers
who don’t shop around it is crucial that insurers have active
pricing processes for all their long-term customers. We have
had these measures in place for several years and increasing
numbers of long-standing customers have seen their renewal
premium either frozen or reduced as a result. We worked
closely with the Association of British Insurers on their pricing
principles and actions on premiums which we hope will embed
best practice across the whole industry.

Outlook
The Group targets a combined operating ratio of 93% to 95%
for 2019 and over the medium term, normalised for weather.
Over time, the Group expects to increase the contribution from
current-year underwriting as the contribution from prior-year
reserve releases reduces. The latter is predominantly as a result
of increasing the level of reinsurance purchased by the Group
in recent years which has reduced the risk profile of the Group.

The targeted improvement in current-year underwriting
profitability is supported by the significant investment the
Group is making in building future capability. This aims to
improve the current-year loss ratio by delivering additional
pricing sophistication and supporting multiple initiatives to
combat fraud. In addition, the Group is targeting to improve
efficiency through self-service and digitalisation. These
improvements are targeted to emerge over a number of
years. In 2019, the Group expects to make further progress in
reducing operating costs and is targeting operating expenses
below £700 million. We reiterate our ongoing target of
achieving at least a 15% return on tangible equity.

As I prepare to hand over the reins to Penny not only do
I look back over the last ten years with great pride, I also
look to the future with great excitement for our customers,
people and shareholders. Over the next 12 months, as we
begin the roll-out of our new core personal lines IT applications,
we plan to increase our flexibility to deal with changing
business requirements, offer more self-service and deliver more
straight-through processing. This combined with our leading
brands and great people will help Direct Line Group with
its mission to make insurance much easier and better value
for its customers.

PAUL GEDDES
CHIEF EXECUTIVE OFFICER

1. www.b.co.uk/the-lists/big-companies/

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSMARKET OVERVIEW

New customer
expectations

The pace of technological change and new regulatory requirements demands
an agile response, combined with smart investment choices, to deliver what
our customers want.

Development

Impact

Action

Digital
technology

Digital innovation allows insurers to
interact with consumers in new, more
effective ways.

Data

Insurers are gaining greater data insight
as devices become ever-more connected.

Our latest generation IT capabilities went into testing at the
end of 2018. These are designed to allow us to provide more
targeted products with improved customer journeys, by delivering
greater pricing agility with increased data flows, more product
flexibility and increased self-service, amongst other benefits.

We are driving performance through advanced analytics, for
instance by creating better understanding of rescue claims in our
Green Flag business.

Artificial
Intelligence,
Machine
Learning
and Robotics

Security

New systems enable customers to
access quicker self-service at lower
cost and pricing to become fairer
and more accurate.

We are exploring the use of new approaches across our value
chain, including the use of machine learning techniques in
pricing and the use of robotics across our business, which
is currently delivering 500,000 transactions a quarter.

Digitalisation and technology bring
a risk to information security.

We have invested in a range of cloud-enabling security measures
and have been working closely with a range of peer groups to
tackle security risks affecting the entire industry.

In-Car
Technology

Sophisticated technology is changing
vehicles, including the advent of
electric and autonomous cars.

We remain partners in leading in-car technology projects
StreetWise and MOVE_UK, helping us to gain insight into the
development of autonomous vehicles and the impact on liability
and claims.

Claims

Customers

Partnerships

Claims inflation has returned to long-term
expected trends.

We have once again added to our accident and repair centre
network, helping us to manage costs.

Customers are increasingly looking for
unique insurance products, tailored to
their needs.

Partnerships enable us to leverage
unique distribution and/or access data
to streamline the customer experience
and create competitive advantage in
our pricing and underwriting.

We have launched a combination of nine new Direct Line
propositions unique in the insurance market.

Direct Line for Business has extended its proposition to target
over 500 small and micro trades.

We continued to grow the number of home insurance policies
through our partnership with RBS Group, and renewed our
Travel agreements with Nationwide and RBS Group for
another five years.

We also signed a five-year deal with Volkswagen Insurance
Service (Great Britain) Limited, providing motor insurance
using five Volkswagen Group brands.

Civil
Liability
Act

Pricing

The Act will introduce new measures
to reform the soft-tissue whiplash injury
compensation system and introduce a
new framework for setting the Ogden
discount rate.

The Financial Conduct Authority
has launched a General Insurance
Pricing Practices Market Study.

We are working with the Government to help design the
new online portal for whiplash claims that will come into
force in 2020.

We have signed up to the Association of British Insurers’
guiding principles and action points to help with how renewal
premiums are dealt with, building on our review of long-term
and potentially vulnerable customers. Increasing numbers of
long-standing customers have seen their renewal premium
either frozen or reduced.

y
g
o
o
n
h
c
e
T

t
e
k
r
a
M

n
o
i
t
a
u
g
e
R

Find out more about our Strategy
on pages 19 – 21

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

STRATEGY

A strategy targeting
sustainable growth

Our strategy looks to position us as a multi-brand, multi-product and multi-channel
business to enable us to meet our customers’ needs now and in the future,
regardless of how and where they buy our products. Supporting this strategy
is a substantial and ongoing change and investment agenda.

Make
insurance
much
easier and
better
value for our
customers

Our strategic pillars

Our key enablers

Our multi-channel
approach

Great retailer
We have compelling brands and
multiple customer propositions and deliver
a strong customer experience which we
constantly evolve to meet the needs of
our customers.

Smart and efficient
manufacturer
Our scale and data allow us the
efficiency and flexibility to deliver better
customer and claims service and better
risk insights.

Lead and disrupt
By embracing the future, we aim to
shape it and launch new products and
services which anticipate consumer trends
so that we continue our tradition of
disruptive change.

Data and technology
We aim to harness the power of
technology and the scale of our data
to make things easier for our customers
and our people.

Culture and capability
We invest in our people to help them
realise their potential because it leads
to better customer experience and more
sustainable business performance.

Capital and risk
management
We maintain an appropriate level
of capital and solvency to manage
our customers’ pool of risks while
understanding, monitoring and managing
our own existing and emerging risks
within carefully defined parameters.

Direct
The growth in Direct Line and Green Flag
demonstrates that if you give customers a
reason to come direct then they will, as
we strive to deliver excellent value for
our customers and our shareholders.

Price comparison websites
Strong brands and propositions are
important but so are great prices. We
are improving our effectiveness on price
comparison websites through our work
on pricing and in dealing with fraud,
supported by our investment in latest
generation IT systems.

Partnerships
We are leveraging our manufacturing
strength through our digital capabilities
to seek to develop innovative and
profitable partnerships.

Read about our progress in 2018
on pages 20 – 21

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSSTRATEGY CONTINUED

Strategy in action
Strategy in action

As a forward-looking and proactive business, we are constantly evolving our
offer to meet our customers’ needs and taking advantage of significant advances
in technology. In 2018 we continued to improve our competitiveness, agility
and efficiency across the business.

Connecting with our customers
Our people are committed to doing their very best for our customers and our
business every day. We are particularly proud of how our people step up to
the challenge to get our customers’ lives back on track during severe weather
periods such as the freezing weather we saw in Q1 2018. One of our values is
to aim higher and we actively encourage everyone to push themselves and learn
new strengths. We know that customers have differing needs when it comes to
buying insurance, which is why we use our frontline experience to develop new
propositions based on customer feedback.

It is also why we introduced a training programme called CONNECT,
which has been accredited by the Institute of Customer Service, for our people
in a customer facing role. This training helps to ensure that our customers
receive a personalised service which matches their expectations and needs.
The programme enables our people to learn about the different approaches
customers may take and gives them the skills to respond with empathy, whilst
also taking responsibility and accountability. This is important for our customers
who are dealing with difficult situations such as illness or bereavement and
vulnerable customers who need additional help to ensure that their cover is
the right cover for them. Based on the CONNECT training, our people who
successfully demonstrate high levels of customer service receive a certificate of
accreditation from the Institute of Customer Service. The impact is clear from
customer benchmarking studies which measure the willingness of customers
to recommend products or services, adding to our ability to maintain strong
customer retention rates.

Bristol
Our new Bristol office, The Core,
has created a new and dynamic
environment for our people to serve
our customers. It has given our
people a variety of new workspaces
to support collaboration and flexible
working, all in a fully refurbished
building half the size of our
previous site.

Environmental considerations were
central to the design. LED lighting,
new chillers, heating, ventilation
and an air conditioning system have
made the site more energy efficient.
Run costs are now 55% lower than
they were in 2016. The Core is
the latest example of how we are
looking to shape our technology
and workspaces for the future,
while meeting our environmental
objectives. We are proud it has
reduced our carbon emissions in
our Bristol office by 62%.

Latest generation
IT systems
We continue to build our latest
generation IT capabilities designed
to enable much more customer
self-service and straight-through
processing and to give our customers
easier and quicker service at a lower
cost whilst improving the efficiency
and flexibility of the business.

Over the next few years we also
plan to wind down and then
remove our existing mainframe,
while growing our use of the cloud.
This is planned to give us flexibility
in the future to deal with changing
business requirements and changes
in technology.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Green Flag
We believe our challenger brand has great growth
potential and demonstrated this again by achieving another
period of double digit growth in policy count and premiums.
Our marketing targets the two-thirds of major competitors’
customers who renew without much thought and aims to
‘wake them up’ by dramatising how we match the best things
about their service whilst saving half their renewal premium.

We know that service matters a lot in this market – customers
won’t sacrifice it for price. We’ve brought in new leadership
and brought the business together – not only in reporting lines
but also physically to create rescue ‘centres of excellence’ to
deliver this great service. We will be using many of the same
agile techniques that have proved successful in delivering fast
and affordable change for Direct Line for Business.
640,000
breakdowns responded to in 2018
– that’s 1 every 49 seconds

Price comparison websites
This year a working group has focused on establishing
a price comparison website hub aiming to drive
capability across the Group by assessing customer
needs throughout the entire price comparison website
sales journey. A dedicated team, using digital resource
and data analytics, is seeking to build greater expertise
and agility in real time, enabling better insight on
pricing and the opportunity for swifter decision-making.
This is important for a sales platform that operates on
very different market dynamics compared to selling
direct. By working across product lines the working
group has instilled a price comparison
website- focused philosophy to
safeguard against functional
thinking that can otherwise
restrict effectiveness.

Accident repair
centres
We continued to expand our
network of accident repair centres
and now have 20 sites across
the UK, giving us more capability
to deliver our seven day repair
proposition for Direct Line customers.
This year alone, we repaired over
85,000 vehicles, building on our
excellent record of customer service.
By investing in the latest technology
we are preparing the business for
the future by better understanding
how technology will affect the
design and manufacture of cars.

Our high operating efficiency has
also allowed us to deliver excellent
cost control while meeting our
environmental targets through
lowering emissions and
increased recycling of parts.

85,000+
vehicles repaired

Renewal pricing principles
The lack of barriers to shopping around for insurance brings substantial benefits
to consumers who benefit from cheaper prices. However, we recognise that
whilst shopping around can bring benefits to those who do it, it does create
differences between new customer premiums and subsequent renewal premiums.

The Group has taken several steps to tackle this issue in recent years. In 2016
we backed the Association of British Insurers’ and the British Insurance Brokers’
Association’s Code of Good Practice to ensure that our people were trained
to identify potential vulnerable consumers. We believe that renewal premiums
should not become excessive over time so we put in place checks and balances
for our long-standing customers. Increasing numbers of long-standing customers
have seen their renewal premium either frozen or reduced as a result. This year
we welcomed the Association of British Insurers’ principles which are intended
to help embed best practice across the industry.

Find out more in our
Market overview on page 18

In-car technology
The automotive industry is undergoing dramatic change with improvements
in in-car technology and the advent of electric, connected and autonomous
vehicles. We are embracing these changes and the opportunities they may
present for us to evolve our products. We are maintaining our industry-leading
position through our partnerships with MOVE_UK in Greenwich and our
participation in StreetWise, which aims to put driverless cars on the streets of
Croydon in 2019. We also continue to work with motor manufacturers such
as Volkswagen, Peugeot, Citroën and Tesla, evolving our products to match
their customers’ needs.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOUR BUSINESS MODEL

Creating value for our
stakeholders

Our multi-brand, multi-product and multi-channel business offers different
propositions to maximise choice for customers. We believe this approach
enables us to provide good value for customers and sustainable returns for
our shareholders.

Our core strengths

Our diverse proposition

Customer focus
Customers are at the heart of everything we do.
Our brands, products and distribution channels aim
to make insurance much easier and better value for
our customers.

Talented people
We invest in our people, encouraging everyone
to aim higher. Our talented people constantly strive
to improve and innovate to exceed the current and
future expectations of our customers.

Brand power
Our well-known and trusted brands offer customers
decades of experience, knowledge and service.
The scale of being Britain’s leading motor insurer
and one of its leading home insurers1 gives us a
platform for product development.

Data and technology
Continuing our history of disrupting the insurance
market, we are harnessing the power of technology
and data to make life easier for both our customers
and our people.

Capital and financial strength
Our cash-generative business model underpinned
by proven underwriting discipline, claims excellence
and cost control helps us to meet our customers’
needs whilst targeting sustainable returns for
our shareholders.

Note:
1. Measured by in-force policies (see page 7).

We reach diverse customers by offering
a range of products through many routes
to market.

Eight brands

so that our customers can choose
the proposition that suits them

Four segments

representing a range of products and services

Multiple channels

so that customers can choose
how they wish to engage with us

Direct

Price comparison websites

Partnerships

Reinvest
in the business

Find out more on pages 19 – 21

Find out more on pages 4 – 9

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

How we generate returns

Sustainable value

We target sustainable returns for our shareholders
through a combination of investing in future
capabilities, improving efficiency and careful
risk management.

Pricing
We seek to ensure our prices reflect the risks being
underwritten by using data and actuarial techniques.

Claims
Our new propositions, such as Fast Response
(see page 41) and our expanded network of
accident repair centres delivering our seven day
repair proposition (see page 21), not only get
customers’ lives back on track quickly but also
aim to deliver high operating efficiency resulting
in excellent claims cost control.

Cost control
Once again, we reduced our expense ratio during
2018, absorbing our investment in future capability.
We aim to continue to make progress against our
strategic initiatives with a focus on cost and efficiency.

Investments
As we gather premiums and provide for future claims
payments we use these assets to invest in a diversified
investment portfolio.

Risk framework
The Board has an established risk management
model that separates responsibility into ’Three
Lines of Defence’ (see page 44 for more details).

Our objectives are to create value for all our
stakeholders, putting our customers first and
investing in our people, to support the communities
we live and work in, and to generate sustainable
profits for our shareholders.

Customers

Employees

Net Promoter Score

Engagement

145.6pts

81%

Communities

Shareholders

Percentage of staff
who fundraised
or volunteered on
the Group’s time

Dividend per share

28%

29.3p

Dividends

Premiums

Net
claims

Costs

Investment and
other income

Profit

Find out more on pages 26 – 37

Find out more on pages 24 – 25

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

OUR KEY PERFORMANCE INDICATORS

Delivering strong performance

These key performance indicators assess our performance
against our strategy.

Return on
tangible equity1,2
(%)

0
.
3
2

5
.
1
2

5
.
8
8 1
.
6
1

2
.
4
1

Dividend

per share (pence)

Basic earnings
per share (pence)

Combined

operating ratio2 (%)

Solvency

capital ratio3 (%)

Employee

engagement (%)

Net promoter

score4

Direct Line Brand (points)

Customer

complaints5

Principal underwriter6 (%)

5
.
3
3

8
.
1
3

9
.
7
2

0
.
4
2

4
.
0
2

1
.
0
5

3
.
6
3

8
3
1

2
.
7
2

0
.
4
1

2
3
1

4
.
5
3

0
.
5
1

4
0
2

3
.
9
2

3
.
8

0
1
2

6
.
4
2

0
.
0
1

6
4
1

0
.
5
9

6
.
9
5

0
.
4
9

5
.
9
5

7
.
7
9

9
.
0
6

8
.
0
9

0
.
6
5

7
.
1
9

8
.
1
6

8
1
1

6
3
2

9
0
1

6
3
2

5
1
1

3
5
2

1
9

7
5
2

6.5
4
3
2

n The return generated on the
o

i
t
i

n
i
f
e
D

capital that shareholders have
in the business. This is calculated
by dividing adjusted earnings
by average tangible equity.

m We aim to achieve at least
A

a 15% RoTE per annum over
the long term.

The amount of cash paid to
shareholders from the Group’s
retained profits. (See page 26
for dividend breakdown).

This is calculated by dividing
the earnings attributable to
shareholders by the weighted
average number of Ordinary
Shares in issue.

We aim to grow the regular
dividend in line with business
growth. Additionally, we look to
return any capital to shareholders
which is expected to be surplus
to our requirements for a
prolonged period.

We have not set a target.
However, growing earnings
per share is considered an
indicator of a healthy business.

A measure of financial
year underwriting profitability.
A Combined operating ratio
(“COR”) of less than 100%
indicates profitable underwriting.
In addition to net claims,
expense and commission
ratios measure the cost of doing
business and the COR is the
sum of these costs divided by
net earned premium, excluding
instalment and other operating
income and investment return.

We aim to make an
underwriting profit. For 2019,
we expect to achieve a COR
in the range of 93% to 95%
normalised for weather.

See Finance review
page 31

See Finance review
page 32

See Finance review
page 31

See Finance review
page 29

See Finance review

page 32

See People and culture page

e
c
n
a
m
r
o
f
r
e
P

i
t

n We base the LTIP awards partly
o
on RoTE over a three-year
performance period.

a
r
e
n
u
m
e
r

’
s
r
o
t
c
e
r
i
D
o

k
n
i
L

We base LTIP awards partly on
relative total shareholder return
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 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.

See page 90

See page 89

See pages 89 and 96

See pages 89 and 90

See pages 89 and 98

See pages 89 and 97

Notes:
1. See glossary on pages 191 to 192 and alternative performance measures in Appendix A on pages 193 to 194.
2. Results for the year ended 31 December 2018 are based on total Group operations including restructuring costs and the Run-off segment. Comparative data

for 2017 has been re-presented accordingly to include restructuring costs and Run-off segment profits within the Motor segment.

3. Estimates based on the Group’s solvency II partial internal model for 2016 to 2018. Solvency capital coverage based on the standard formula for

31 December 2015.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

A risk-based measure expressing

the level of capital resources held

as a percentage of the level of

capital that is required under

solvency II.

Engagement is about being

proud to work for Direct Line

Group and helping us to

succeed. It means that

employees are not just

happy or satisfied, but

doing something to help us

achieve our company goals.

Net promoter score (“NPS”)

is an index that measures the

willingness of customers to

The number of complaints

we received during the year

as a proportion of the average

recommend products or services

number of in-force policies.

to others. It is used to gauge

customers’ overall experience

with a product or service, and

customers’ loyalty to a brand.

We target a solvency capital

ratio in the range of 140%

To make the Group best for

employees and best for our

The launch of our customer

experience strategy, along with

to 180%.

customers. We gauge employee

a new transactional feedback

This measure indicates the

level of customer service we

provide. We aim to improve

engagement through our

employee opinion survey and

we aim to improve this year

have increased our overall

brand score.

tool and improved propositions

this over time.

on year.

Customer claims experience

programmes and improved

propositions have contributed

to an increase in our overall

brand score.

While the proportion of

complaints received reduced

compared to 2017 we

recognise we have more

to do to reduce these.

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.

The AIP awards include

a weighting to a balance

of employee metrics,

including engagement.

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.

Return on

Dividend

tangible equity1,2

per share (pence)

Basic earnings

per share (pence)

Combined

operating ratio2 (%)

Solvency
capital ratio3 (%)

Employee

engagement (%)

(%)

Changes to our KPIs in 2018
Our metrics are reviewed annually and updated as appropriate
to ensure they remain an effective measure of delivery against our
objectives. For 2018, the review of these metrics resulted in the
following changes:

– Combined operating ratio has been split into its loss ratio,

commission ratio and expense ratio elements to give greater
clarity of its composition

– Employee engagement has been added in recognition of the
importance of our people in meeting our strategic objectives

– A five-year view, where possible, was chosen to demonstrate our

track record of performance

Key for combined operating ratio

Expense ratio

Commission ratio

Loss ratio

Key for dividend per share

Ordinary

Special

Net promoter

score4
Direct Line Brand (points)

Customer
complaints5

Principal underwriter6 (%)

0
.
5
6
1

0
.
0
7
1

0
.
6
4
1

0
.
0
6

0
.
5
4

0
.
1
8

0
.
8
7

0
.
3
7

1
.
9
2
1

3
.
8
1
1

8
.
0
1
1

0
.
4
4
1

6
.
5
4
1

7
2
.
1

9
8
.
0

8
7
.
0

7
7
.
0

A risk-based measure expressing
the level of capital resources held
as a percentage of the level of
capital that is required under
solvency II.

Engagement is about being
proud to work for Direct Line
Group and helping us to
succeed. It means that
employees are not just
happy or satisfied, but
doing something to help us
achieve our company goals.

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
customers’ loyalty to a brand.

The number of complaints
we received during the year
as a proportion of the average
number of in-force policies.

m We aim to achieve at least

a 15% RoTE per annum over

the long term.

We aim to grow the regular

dividend in line with business

growth. Additionally, we look to

We have not set a target.

However, growing earnings

per share is considered an

return any capital to shareholders

indicator of a healthy business.

which is expected to be surplus

to our requirements for a

prolonged period.

We target a solvency capital
ratio in the range of 140%
to 180%.

To make the Group best for
employees and best for our
customers. We gauge employee
engagement through our
employee opinion survey and
we aim to improve this year
on year.

The launch of our customer
experience strategy, along with
a new transactional feedback
tool and improved propositions
have increased our overall
brand score.

This measure indicates the
level of customer service we
provide. We aim to improve
this over time.

’

See Finance review

page 31

See Finance review

page 32

See Finance review

page 31

See Finance review

page 29

See Finance review
page 32

See People and culture page
56

Customer claims experience
programmes and improved
propositions have contributed
to an increase in our overall
brand score.

While the proportion of
complaints received reduced
compared to 2017 we
recognise we have more
to do to reduce these.

n We base the LTIP awards partly

on RoTE over a three-year

performance period.

We base LTIP awards partly on

relative total shareholder return

performance, which includes

This is a broad measure of

We base part of the AIP awards

earnings and reflects the results

on profit before tax. COR is

of the Group after tax. We base

closely linked to this.

dividends. Directors also receive

part of the AIP awards on profit

dividends on their beneficial

shareholdings and accrue

these on unvested LTIP awards.

before tax and earnings per

share is closely linked to this.

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.

The AIP awards include
a weighting to a balance
of employee metrics,
including engagement.

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.

See page 90

See page 89

See pages 89 and 96

See pages 89 and 90

See pages 89 and 98

See pages 89 and 97

4. On an aggregated 12-month rolling basis, with 2013 rebased to 100.
5. FCA complaints reporting requirements have changed for periods after 29 June 2016. Before 29 June 2016, only complaints resolved after two business days

were classed as FCA reportable. From July 2016 all complaints resolved are classed as FCA reportable.

6. For the Group’s principal underwriter, U K Insurance Limited.

WWW.DIRECTLINEGROUP.CO.UK

n 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

retained profits. (See page 26

for dividend breakdown).

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.

A Combined operating ratio

(“COR”) of less than 100%

indicates profitable underwriting.

In addition to net claims,

expense and commission

ratios measure the cost of doing

business and the COR is the

sum of these costs divided by

net earned premium, excluding

instalment and other operating

income and investment return.

We aim to make an

underwriting profit. For 2019,

we expect to achieve a COR

in the range of 93% to 95%

normalised for weather.

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

FINANCE REVIEW

Strong results
in a competitive
market

FY
2018
£m

FY
20172
£m

In-force policies (thousands)

15,032

15,714

Of which: direct own brands
(thousands)

7,132

6,909

Gross written premium

Of which: direct own brands

Net earned premium

3,211.9
2,223.0
3,089.5

3,392.1
2,184.1
3,135.0

Underwriting profit
Instalment and other operating
income
Investment return
Operating profit
Finance costs
Profit before tax
Tax
Profit after tax
Key metrics
Current-year attritional loss ratio3
Loss ratio3
Commission ratio3
Expense ratio3
Combined operating ratio3
Return on tangible equity4
Investment income yield4
Net investment income yield4
Investment return yield4
Basic earnings per share (pence)
Diluted earnings per share (pence)
Return on equity
Dividend per share5
– interim (pence)
– final (pence)
– total ordinary (pence)
– special (pence)
– total (pence)

Net asset value per share (pence)
Tangible net asset value per
share (pence)
Solvency capital ratio6 post-
dividends

255.1

288.1

192.0
154.6
601.7
(19.1)
582.6
(108.9)
473.7

72.5%
61.8%
6.5%
23.4%
91.7%
21.5%
2.5%
2.0%
2.4%
33.5
33.1
17.3%

7.0
14.0
21.0
8.3
29.3

179.3
175.4
642.8
(103.8)
539.0
(105.0)
434.0

69.4%
56.0%
9.1%
25.7%
90.8%
23.0%
2.5%
2.1%
2.6%
31.8
31.5
16.6%

6.8
13.6
20.4
15.0
35.4

31 Dec
2018

188.6

31 Dec
2017

198.9

147.0

164.4

170%

165%

Notes:
1. Exit from Sainbury’s in respect of new business.
2. Results for the year ended 31 December 2018 are based on total Group

operations including restructuring costs and the Run-off segment. Comparative
data has been re-presented accordingly to include restructuring costs and
Run-off profits within the Motor segment.

3. A reduction in the ratio represents an improvement as a proportion of net
earned premium, while an increase in the ratio represents a deterioration.

4. See glossary on pages 191 and 192 for definitions and Appendix A –

Alternative performance measures on pages 193 and 194 for reconciliation
to financial statement line items.

5. The Group’s dividend policy states its expectation 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.

6. Estimates based on the Group’s solvency II partial internal model.

Financial highlights
– Direct own brands premium up 1.8% compared to 2017,

driven by growth across all segments. Total Group premium
reduced by 5.3% year on year, as a result of the exit from
Nationwide and Sainsbury’s1 Home partnerships.

– Operating profit decreased by £41.1 million compared
to 2017, primarily due to reductions in prior-year reserve
releases and investment return as expected. Operating profit
included a £55 million benefit from moving to an assumed
0% Ogden discount rate (2017: £49 million benefit
relating to Ogden).

– Demonstrating the value in the Group’s diversified product
base, current-year underwriting profitability was stable
despite a reversal of the benign motor conditions in 2017.
The expense ratio reduced to 23.4%.

– Profit before tax increased by 8.1% to £582.6 million

(2017: £539.0 million) as the decrease in operating profit
was more than offset by the non-repeat of finance costs in
relation to the debt repurchased in 2017.

– Final ordinary dividend of 14.0 pence per share, an
increase of 2.9% on 2017. Special dividend of 8.3
pence per share. Total dividends of 29.3 pence per
share (2017: total dividends of 35.4 pence per share
including a special dividend of 15.0 pence per share).

– Strong capital position with solvency capital ratio of
170% (after proposed dividends) reflecting prudence
given current political and economic uncertainties.

– Reiteration of financial targets for 2019 and over the

medium term of achieving a combined operating ratio in
the range of 93% to 95% normalised for weather. In 2019,
targeting operating expenses below £700 million.
Reiteration of ongoing target of achieving at least
a 15% return on tangible equity.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Instalment and other operating income increased to £192.0
million (2017: £179.3 million) and included a £9.6 million
gain on sale of a property in Bristol.

Investment return decreased to £154.6 million (2017:
£175.4 million) primarily due to a £7.9 million reduction
year on year in investment income as a result of lower assets
under management and a £12.9 million reduction year on
year in realised and unrealised gains.

In-force policies and gross written premium

In-force policies (thousands)

Own brands
Partnerships
Motor

Own brands
Partnerships (excluding Nationwide
and Sainsbury’s)
Partnerships (Nationwide
and Sainsbury’s)
Home

Rescue
Travel
Pet
Other personal lines
Rescue and other personal lines
Of which: Green Flag direct

Direct Line for Business
NIG and other
Commercial
Total in-force policies

Of which: direct own brands

31 Dec
2018

3,950
144
4,094

31 Dec
2017

3,845
174
4,019

1,789

1,794

803

823

59
2,651

3,491
3,759
156
126
7,532
894

499
256
755
15,032
7,132

631
3,248

3,591
3,853
162
133
7,739
802

468
240
708
15,714
6,909

Total in-force policies reduced to 15.0 million (31 December
2017: 15.7 million), primarily due to lower partner volumes in
Home, following the exit from the Nationwide and Sainsbury’s
partnerships, and reductions in Rescue and other personal lines,
as a result of lower packaged bank account volumes. Own
brands in-force policies grew to 7.1 million (31 December
2017: 6.9 million) with growth in Motor, Green Flag and
Direct Line for Business, which partly offset the overall reduction.

Performance
Operating profit

Underwriting profit
Instalment and
other operating income
Investment return
Total operating profit

Of which:
Current-year operating profit
Prior-year reserve releases

FY
2018
£m

FY
2017
£m

255.1

288.1

192.0
154.6
601.7

197.3
404.4

179.3
175.4
642.8

207.4
435.4

Operating profit decreased by £41.1 million to £601.7
million (2017: £642.8 million) mainly due to a reduction
in the underwriting profit and investment return, partly offset
by an increase in instalment and other operating income.
Overall, current-year operating profit was lower, with a
stable current-year combined operating ratio offset by
a lower investment return.

Underwriting profit decreased to £255.1 million (2017:
£288.1 million) predominantly due to lower prior-year reserve
releases of £31.0 million. Increased weather-related claims of
£75 million, mainly associated with the major freeze event in
Q1 2018 (2017: £13 million weather-related claims), were
mostly offset by the non-repeat in 2018 of the £56.9 million
impairment charge in 2017 in relation to IT projects.

The current-year attritional loss ratio increased by 3.1
percentage points to 72.5% (2017: 69.4%) as the Group
experienced a reversal of the benign motor conditions in 2017
and a reduction in partnership business in Home. This was
offset by a 2.6 percentage point reduction in the commission
ratio as a result of both lower commission and profit share
payments to Home partners, as a result of the exit of the
Nationwide and Sainsbury’s partnerships and changes to
other partnership commissions arrangements. The current-year
combined operating ratio was stable.

Effect of Ogden discount rate changes

Motor
£m

Commercial
£m

Prior year
Current year
Total

47.9
2.7
50.6

3.5
0.7
4.2

FY 2018
Total
£m

51.4
3.4
54.8

Motor
£m

49.0
–
49.0

FY 2017
Total
£m

49.0
–
49.0

Following Royal Assent of the Civil Liability Act 2018, which
introduced a new framework for setting the personal injury
discount rate, the Group reviewed the Ogden discount rate for
reserves for large bodily injury claims and selected an assumed
rate of 0% for reserving purposes. This has resulted in a release
of £54.8 million in 2018 and this release was split across the
Motor and Commercial segments. Given the Group’s lower
reinsurance retention in recent years, the majority of the reserve
release related to prior years. In 2017, the Motor segment
benefited from a reserve release of £49.0 million resulting
from a lower than expected increase in claims costs following
the change in the Ogden discount rate to minus 0.75%.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

FINANCE REVIEW CONTINUED

Gross written premium

Own brands
Partnerships
Motor

Own brands
Partnerships (excluding Nationwide
and Sainsbury’s)
Partnerships (Nationwide and
Sainsbury’s)
Home

Rescue
Travel
Pet
Other personal lines
Rescue and other personal lines
Of which: Green Flag direct

Direct Line for Business
NIG and other
Commercial
Total gross written premium

Of which: direct own brands

FY
2018
£m

1,608.8
62.4
1,671.2

FY
2017
£m

1,590.9
79.5
1,670.4

412.6

409.7

181.7

195.6

12.6
606.9

163.4
143.9
72.4
43.1
422.8
69.6

193.8
799.1

161.3
143.4
74.8
41.6
421.1
60.9

132.0
379.0
511.0
3,211.9
2,223.0

122.6
378.9
501.5
3,392.1
2,184.1

The Group’s combined operating ratio of 91.7% (2017:
90.8%) increased by 0.9 percentage points primarily due to
a higher loss ratio which was partly offset by improvements in
commission and expense ratios. Weather returned to close to
normal levels in 2018 after a benign 2017 and this offset the
non-repeat in 2018 of the £56.9 million non-cash impairment
charge incurred in 2017. Normalised for weather and
adjusted for the Ogden discount rate change, the combined
operating ratio was approximately 93.5%, towards the lower
end of the Group’s medium-term target of 93% to 95%.

The loss ratio was 5.8 percentage points higher at 61.8%
(2017: 56.0%) and reflected lower prior-year reserve releases,
increases in Home and Commercial loss ratios due to the
major freeze event in Q1 2018 and a reversal of benign
motor conditions in 2017.

The expense ratio improved by 2.3 percentage points to
23.4% (2017: 25.7%), as the Group continued to reduce
its operating expenses (0.5 percentage points excluding
the impact of impairments in 2017). The reduction in the
commission ratio of 2.6 percentage points primarily reflected
both lower commissions and profit share payments to Home
partners, as a result of the exit of the Nationwide and
Sainsbury’s partnerships, and changes to other partnership
commissions arrangements. The remaining premium from
these partnerships was substantially earned in 2018 and
consequently the commission ratio is expected to reduce again
in 2019 albeit at a significantly slower rate. In subsequent
years the direction of the commission ratio will be dependent
on the Group’s partnership activities.

Gross written premium of £3,211.9 million (2017: £3,392.1
million) decreased by 5.3% primarily due to the exit from the
Nationwide and Sainsbury’s partnerships in Home. Direct own
brands gross written premium of £2,223.0 million (2017:
£2,184.1 million) grew by 1.8%.

Underwriting profit and combined operating
ratio

Underwriting profit (£ million)
Loss ratio
Commission ratio
Expense ratio
COR

FY
2018

255.1
61.8%
6.5%
23.4%
91.7%

FY1
2017

288.1
56.0%
9.1%
25.7%
90.8%

Note:
1. Results for the year ended 31 December 2018 are based on total Group

operations including restructuring costs and the Run-off segment. Comparative
data has been re-presented accordingly to include restructuring costs and
Run-off segment profits within the Motor segment.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Ratio analysis by division

For the year ended 31 December 2018
Net earned premium
Net insurance claims
Prior-year reserve releases
Major weather events
Attritional net insurance claims
Loss ratio – current-year attritional
Loss ratio – prior-year reserve releases
Loss ratio – major weather events1
Loss ratio – reported
Commission ratio
Expense ratio
COR
Current-year COR
For the year ended 31 December 20172
Net earned premium
Net insurance claims
Prior-year reserve releases
Major weather events
Attritional net insurance claims
Loss ratio – current-year attritional
Loss ratio – prior-year reserve releases
Loss ratio – major weather events1
Loss ratio – reported
Commission ratio
Expense ratio
COR
Current-year COR

Notes

4
4
33

4
4
4
4

4
4
33

4
4
4
4

Motor
£m

1,541.8
980.0
276.3
n/a
1,256.3
81.5%
(17.9%)
n/a
63.6%
2.0%
23.3%
88.9%
106.8%

1,470.6
852.9
318.6
n/a
1,171.5
79.7%
(21.7%)
n/a
58.0%
2.5%
29.3%
89.8%
111.5%

Rescue and other
personal lines
£m

Home
£m

Commercial
£m

Total
Group
£m

667.8
413.3
32.6
(65.0)
380.9
57.0%
(4.9%)
9.7%
61.8%
9.4%
22.4%
93.6%
98.5%

790.5
400.5
23.7
(13.0)
411.2
52.0%
(3.0%)
1.6%
50.6%
17.7%
21.1%
89.4%
92.4%

414.7
277.2
16.1
n/a
293.3
70.7%
(3.9%)
n/a
66.8%
4.6%
23.8%
95.2%
99.1%

417.6
273.3
6.8
n/a
280.1
67.1%
(1.7%)
n/a
65.4%
5.5%
23.4%
94.3%
96.0%

465.2
241.3
79.4
(10.0)
310.7
66.8%
(17.1%)
2.1%
51.8%
18.9%
24.8%
95.5%
112.6%

456.3
227.5
86.3
n/a
313.8
68.8%
(18.9%)
n/a
49.9%
19.1%
24.4%
93.4%
112.3%

3,089.5
1,911.8
404.4
(75.0)
2,241.2
72.5%
(13.1%)
2.4%
61.8%
6.5%
23.4%
91.7%
104.8%

3,135.0
1,754.2
435.4
(13.0)
2,176.6
69.4%
(13.9%)
0.4%
56.0%
9.1%
25.7%
90.8%
104.7%

Notes:
1. Home and Commercial claims for major weather events, including inland and coastal flooding and storms.
2. Results for the year ended 31 December 2018 are based on total Group operations including restructuring costs and the Run-off segment. Comparative data has

been re-presented accordingly to include restructuring costs and Run-off segment profits within the Motor segment.

The movement in the current-year attritional loss ratio is an indicator of underlying accident year performance as it excludes
prior-year reserve releases and claims costs from major weather events. The Group’s current-year attritional loss ratio of 72.5%
increased by 3.1 percentage points compared to 2017 primarily due to a change in business mix and a reversal of benign
conditions experienced in 2017 in Motor.

Prior-year reserve releases continued to be significant at £404.4 million (2017: £435.4 million), were equivalent to 13.1%
of net earned premium (2017: 13.9%) and were concentrated towards more recent accident years. Reserve releases in 2018
included a £51.4 million Ogden rate-related prior-year reserve release (2017: £49.0 million release). Assuming current claims
trends continue, prior-year reserve releases are expected to reduce further in future years, although they are expected to remain
a significant contribution to profits.

The Group’s current-year combined operating ratio remained broadly steady at 104.8% (2017: 104.7%) as increases in
attritional loss ratios were offset by reductions in commission and expense ratios.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

Instalment and other operating income increased by £12.7
million, with increased instalment income of £3.5 million due to
higher Motor gross written premium partly offset by a reduction
in Home due to the exit from Nationwide and Sainsbury’s
partnerships. Other operating income increased by £9.2
million, primarily relating to a one-off gain on disposal of
the Bristol property of £9.6 million.

Investment return

Note

Investment income
Hedging to a sterling
floating rate basis
Net investment income
Net realised and unrealised
gains excluding hedging
Total investment return

Investment yields

Investment income yield1
Net investment income yield1
Investment return yield1

FY
2018
£m

FY
2017
£m

159.2

167.1

(30.8)
128.4

26.2
154.6

FY
2018

2.5%
2.0%
2.4%

(27.0)
140.1

35.3
175.4

FY
2017

2.5%
2.1%
2.6%

Note:
1. See glossary on pages 190 and 191 for definitions and Appendix A –

Alternative performance measures on pages 193 and 194 for reconciliation
to financial statement line items.

Total investment return decreased by £20.8 million to £154.6
million (2017: £175.4 million). This was due to a reduction
in investment income primarily as a result of lower assets under
management, and a reduction in realised and unrealised gains
excluding hedging which was predominantly driven by a
reduction in investment property valuations (2018: £12.7
million, 2017: £21.6 million) and debt security disposals.

The investment income yield for 2018 remained stable at 2.5%
(2017: 2.5%). The net investment income yield was lower at
2.0% (2017: 2.1%) as a result of increased hedging costs.

FINANCE REVIEW CONTINUED

Operating expenses

Staff costs1
Other operating expenses1,2
Marketing
Amortisation and impairment of
other intangible assets3
Depreciation
Total operating expenses

FY
2018
£m

269.9
253.3
121.2

46.7
31.1
722.2

FY
2017
£m

280.1
273.6
113.7

111.0
27.9
806.3

Notes:
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. Amortisation and impairment of other intangible assets includes a £1.5 million

impairment charge for year ended 31 December 2018 (2017: £56.9
million), which relates to capitalised software development costs for ongoing
IT projects primarily relating to development of new systems.

Operating expenses reduced by £84.1 million to £722.2
million (2017: £806.3 million) resulting in an expense ratio of
23.4% (2017: 25.7%). Excluding an impairment of intangible
assets of £56.9 million in 2017, operating expenses reduced
by 3.6% as reductions in staff costs and other operating
expenses were partially offset by an increase in marketing
spend in Motor and Commercial to drive brand awareness.
The Group continued to invest in its significant IT programme
and operational efficiency improvements while supporting
business growth and investment in future capability.

The Group will apply IFRS 16 ‘Leases’ from 1 January 2019.
If the Group had applied this standard in 2018, the impact
would have been a reduction in operating expenses of
approximately £5 million and an increase in finance costs
of approximately £7 million.

In 2019, the Group expects to make further progress in
reducing operating costs and is targeting operating expenses
below £700 million.

Instalment and other operating income

Instalment income
Other operating income:
Vehicle replacement
referral income
Revenue from vehicle
recovery and repair
services
Legal services income
Other income

Other operating income
Total instalment and other
operating income

Note

7
7
7
7

FY
2018
£m

FY
2017
£m

119.9

116.4

17.2

16.9

11.7
11.2
32.0
72.1

11.3
11.0
23.7
62.9

192.0

179.3

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Reconciliation of operating profit

Motor
Home
Rescue and other personal lines
Commercial
Operating profit
Finance costs
Profit before tax
Tax
Profit after tax

FY
2018
£m

415.2
83.1
43.4
60.0
601.7
(19.1)
582.6
(108.9)
473.7

FY1
2017
£m

396.4
128.8
43.6
74.0
642.8
(103.8)
539.0
(105.0)
434.0

Note:
1. Results for the year ended 31 December 2018 are based on total Group

Operating profit by segment
All divisions were profitable in 2018 with Motor increasing
profits by £18.8 million compared to 2017. Home reported
reduced operating profits primarily due to the major freeze
event in Q1 2018. Commercial also experienced higher
weather costs in 2018 although attritional claims performance
improved. Rescue and other personal lines reported slightly
lower profits. Rescue operating profit of £40.2 million (2017:
£43.5 million) is included in the Rescue and other personal
lines result.

Finance costs
Finance costs reduced to £19.1 million (2017: £103.8
million), with 2017 including costs and interest associated
with the repurchase of £250 million nominal value of the
subordinated debt in December 2017.

Effective corporation tax rate
The effective tax rate for 2018 was 18.7% (2017: 19.5%),
which was lower than the standard UK corporation tax rate of
19.0% (2017: 19.25%) driven primarily by tax relief for the
Tier 1 coupon payments offset by disallowable expenses.

Profit for the year and return on
tangible equity1
Profit for the year was £473.7 million (2017: £434.0 million)
as the decrease in operating profit was more than offset by the
non-repeat of finance costs in relation to the debt repurchase
in 2017.

Return on tangible equity decreased to 21.5% (2017: 23.0%)
due primarily to a £31.5 million decrease in adjusted profit
after tax to £457.1 million (2017: £488.6 million). Profit after
tax in 2018 was adjusted for coupon payments in respect of
Tier 1 notes, while profit after tax in 2017 was adjusted to add
back finance costs for the one-off subordinated debt buy-back.

Earnings per share
Basic earnings per share increased by 5.3% to 33.5 pence
(2017: 31.8 pence). Diluted earnings per share increased by
5.1% to 33.1 pence (2017: 31.5 pence) mainly reflecting an
increase in profit after tax.

Cash flow
The Group’s cash and cash equivalents decreased by £212.1
million during the year (2017: £193.7 million increase), to
£1,092.4 million (31 December 2017: £1,304.5 million).

Operating activities before investment of insurance assets
generated a cash inflow of £4.2 million (2017: £204.0
million generated). The decrease primarily reflected a reduction
in insurance liabilities and trade payables partially offset by
a reduction in insurance and other receivables.

Investment of insurance assets generated a cash inflow
of £468.1 million (2017: inflow of £341.9 million).
The increased inflow of £126.2 million is primarily due
to the proceeds on disposal of financial investments.

Investing activities generated a cash outflow of £141.8 million
(2017: outflow of £95.3 million) primarily due to an increase
in the purchase of intangible assets, which was partially offset
by lower tangible asset purchases and proceeds from the asset
held for sale.

Financing activities generated a cash outflow of £542.6
million (2017: outflow of £256.9 million). The increased
outflow primarily reflected an increase in dividends and
appropriations paid in the year.

Net asset value

At 31 December
Net assets1
Goodwill and other
intangible assets
Tangible net assets
Closing number of Ordinary
Shares (millions)
Net asset value per
share (pence)
Tangible net asset value per
share (pence)

Note

16
16

2018
£m

2017
£m

2,573.1

2,715.1

(566.8)
2,006.3

(471.1)
2,244.0

1,364.6

1,365.1

188.6

198.9

147.0

164.4

The net assets at 31 December 2018 decreased to £2,573.1
million (31 December 2017: £2,715.1 million) and tangible
net assets decreased to £2,006.3 million (31 December
2017: £2,244.0 million). These decreases mainly reflected
the payment of the 2017 final and special dividends, a
reduction in the available-for-sale reserves due to rising market
yields and an increase in expenditure on intangible assets as
the Group continued to invest in the business, partially offset
by the 2018 retained profit.

Note:
1. See glossary on pages 191 and 192 for definitions and Appendix A –

Alternative performance measures on pages 193 and 194 for reconciliation
to financial statement line items.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
FINANCE REVIEW CONTINUED

Balance sheet management

Capital management and
dividend policy
The Group aims to manage its capital efficiently and
generate long-term sustainable value for shareholders,
while balancing operational, regulatory, rating agency
and policyholder requirements.

The Group aims to grow its regular dividend in line with
business growth.

Where the Board believes that the Group has capital which
is expected to be surplus to the Group’s requirements for a
prolonged period, it would intend to return any surplus to
shareholders. In normal circumstances, the Board expects that
a solvency capital ratio around the middle of its risk appetite
range of 140% to 180% of the Group’s solvency capital
requirement (“SCR”) would be appropriate and it will
therefore take this into account when considering the
potential for special distributions.

In the normal course of events the Board will consider whether
or not it is appropriate to distribute any surplus capital to
shareholders once a year, alongside the full year results.

The Group expects that one-third of the annual dividend will
generally be paid in the third quarter as an interim dividend,
and two-thirds will be paid as a final dividend in the second
quarter of the following year. The Board may revise the
dividend policy from time to time. The Company may consider
a special dividend and/or a repurchase of its own shares to
distribute surplus capital to shareholders.

The Board has recommended a final dividend of 14.0 pence
per share (2017: 13.6 pence), an increase of 0.4 pence per
share (2.9%), in line with business growth. This reflects the
Board’s continued confidence in the Group’s earnings and
the progress the business continued to make.

The Board has also declared a special dividend of 8.3 pence
per share. After both dividends the solvency capital ratio will
be 170% as at 31 December 2018.

The Board has taken into account the high level of political
and economic uncertainty, including in relation to Brexit,
and considers it appropriate for the time being to maintain
a prudent solvency capital ratio towards the upper end of the
solvency capital ratio risk appetite range of 140% to 180%.
The Board will keep this position under review as it monitors
developments in the political and economic environment.
In normal circumstances, the Board expects the Group to
operate around the middle of its solvency capital ratio risk
appetite range.

The final dividend and special dividend will be paid on 16
May 2019 to shareholders on the register on 5 April 2019.
The ex-dividend date will be 4 April 2019.

Capital analysis
The Group is regulated under solvency II requirements by
the PRA on both a Group basis and for the Group’s principal
underwriter, U K Insurance Limited. In its results, the Group has
estimated its solvency II own funds, SCR and solvency capital
ratio as at 31 December 2018.

Capital position
At 31 December 2018, the Group held a solvency II capital
surplus of approximately £0.89 billion above its regulatory
capital requirements, which was equivalent to an estimated
solvency capital ratio of 170%, post the proposed final and
special dividends.

The Group’s SCR and solvency capital ratio are as follows:

At 31 December

2018

20171

Solvency capital requirement
(£ billion)
Capital surplus above solvency
capital requirement (£ billion)
Solvency capital ratio post-dividend

1.26

1.39

0.89
170%

0.91
165%

Movement in capital surplus

Capital surplus at 1 January
Capital generation excluding market
movements
Market movements
Capital generation
Change in solvency capital
requirement
Surplus generation
Capital expenditure
Management capital action
Capital distribution – ordinary
dividends2
Capital distribution – special
dividends2
Net surplus movement
Capital surplus at 31 December

2018
£bn

0.91

0.47
(0.06)
0.41

0.13
0.54
(0.15)
–

20171
£bn

0.91

0.54
–
0.54

0.01
0.55
(0.10)
0.03

(0.30)

(0.28)

(0.11)
(0.02)
0.89

(0.20)
–
0.91

Notes:
1. The 2017 comparative period has been updated to reflect the amounts in the
Solvency and Financial Condition Report for the year ended 31 December
2017, published on 2 May 2018.

2. Foreseeable dividends included above are adjusted to exclude the expected

dividend waivers in relation to shares held by the employee share trusts, which
are held to meet obligations arising on the various share option awards.

During 2018, the Group’s own funds decreased from £2.30
billion to £2.15 billion. The Group generated £0.41 billion of
solvency II capital offset by £0.15 billion of capital expenditure
and capital distribution of £0.41 billion for the 2018 dividend.
The increased capital expenditure reflects the significant
investment the Group is making in building future capability
including the development of the latest generation core
personal lines IT systems. In 2019, the level of expenditure is
expected to be approximately £175 million, reducing to less
than £150 million in 2020. Thereafter, expenditure levels are
expected to reduce further.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Own funds
The following table splits the Group’s own funds by tier on a
solvency II basis.

At 31 December

Tier 1 capital before foreseeable
dividends
Foreseeable dividends
Tier 1 capital – unrestricted
Tier 1 capital – restricted
Tier 1 capital
Tier 2 capital – subordinated debt
Tier 3 capital – deferred tax
Total own funds

2018
£bn

1.76
(0.31)
1.45
0.35
1.80
0.26
0.09
2.15

20171
£bn

2.04
(0.39)
1.65
0.35
2.00
0.26
0.04
2.30

Note:
1. The 2017 comparative period has been updated to reflect the amounts in the
Solvency and Financial Condition Report for the year ended 31 December
2017, published on 2 May 2018.

Tier 1 capital after foreseeable dividends represents 84% of
own funds and 143% of the estimated SCR. Tier 2 capital
relates solely to the Group’s £0.26 billion subordinated debt.
The amount of Tier 2 and Tier 3 capital permitted under the
solvency II regulations is 50% of the Group’s SCR and of Tier 3
alone it is less than 15%. Therefore, the Group currently has no
ineligible capital. The requirement that Tier 1 restricted capital
should not exceed 20% of total Tier 1 capital, when satisfying
the requirement that eligible Tier 1 items should be at least 50%
of SCR, is not applicable to the Group.

The special dividend will be payable from surplus capital
generated from continuing operations of the Group.

Change in solvency capital requirement

Solvency capital requirement at 1 January
Model and parameter changes
Exposure changes
Solvency capital requirement at 31 December

2018
£bn

1.39
(0.07)
(0.06)
1.26

The Group’s SCR has reduced by £0.13 billion in the year.
Model and parameter changes reduced the SCR by £0.07
billion. Exposure changes, as a result of the exited Home
partnerships, a reduction in solvency II technical provisions
including an assumed change in the Ogden discount rate to
0%, and lower assets under management, led to a reduction
in the SCR of £0.06 billion.

Scenario and sensitivity analysis
The following table shows the impact on the Group’s estimated
solvency capital ratio in the event of the following scenarios as
at 31 December 2018. The impact on the Group’s solvency
capital ratio arises from movements in both the Group’s
solvency capital requirement and own funds.

Scenario

Motor small bodily injury
deterioration equivalent to accident
years 2008 and 2009

One-off catastrophe loss equivalent
to the 1990 storm
One-off catastrophe loss based
on extensive flooding of the
River Thames
Change in reserving basis for
PPOs to use a real discount rate
of minus 1%1
100bps increase in credit spreads2
100bps decrease in interest rates
with no change in the PPO real
discount rate

Impact on solvency capital ratio

31 Dec
2018

31 Dec
2017

(7pts)

(8pts)

(7pts)

(9pts)

(8pts)

(9pts)

(10pts)
(11pts)

(13pts)
(11pts)

(1pt)

(3pts)

Notes:
1. The PPO real discount rate used is an actuarial judgement which is reviewed
annually based on the economic outlook for wage inflation relative to the
European Insurance and Occupational Pensions Authority discount rate curve.
2. These sensitivities only include the assessed impact of the above scenarios in

relation to AFS investments.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

FINANCE REVIEW CONTINUED

Reconciliation of IFRS shareholders’ equity
to solvency II own funds

At 31 December

Total shareholders’ equity
Goodwill and intangible assets
Change in valuation of technical
provisions
Other asset and liability adjustments
Foreseeable dividends
Tier 1 capital – unrestricted
Tier 1 capital – restricted
Tier 1 capital
Tier 2 capital – subordinated debt
Tier 3 capital – deferred tax
Total own funds

2018
£bn

2.57
(0.57)

(0.15)
(0.09)
(0.31)
1.45
0.35
1.80
0.26
0.09
2.15

20171
£bn

2.72
(0.47)

(0.13)
(0.08)
(0.39)
1.65
0.35
2.00
0.26
0.04
2.30

Note:
1. The 2017 comparative period has been updated to reflect the amounts in the
Solvency and Financial Condition Report for the year ended 31 December
2017, published on 2 May 2018.

Leverage
The Group’s financial leverage increased by 0.7 percentage
points, but remained conservative at 19.1% (2017: 18.4%).
The increase was primarily due to the reduction in shareholders’
equity. While the Tier 1 notes issued during 2017 are presented
as equity in the balance sheet, the Group considers this to be
part of its total leverage.

At 31 December

Shareholders’ equity
Tier 1 notes
Financial debt – subordinated debt
Total capital employed
Financial-leverage ratio1

2018
£m

2,573.1
346.5
259.5
3,179.1
19.1%

2017
£m

2,715.1
346.5
264.7
3,326.3
18.4%

Note:
1. Total IFRS financial debt and Tier 1 notes as a percentage of total IFRS capital

employed.

Credit ratings
Standard & Poor’s and Moody’s Investors Service provide
insurance financial-strength ratings for U K Insurance Limited,
the Group’s principal underwriter. U K Insurance Limited is
currently rated ‘A’ (strong) with a stable outlook by Standard &
Poor’s, and ‘A2’ (good) with a positive outlook by Moody’s.

Reserving
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 costs. 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 across 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. The possibility of annuity
payments for injured parties also increases 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
prudence margin that exceeds the internal actuarial best
estimate. This margin is set by reference to various actuarial
scenario assessments and reserve distribution percentiles.
It also considers other short and long-term risks not reflected
in the actuarial inputs, as well as management’s view on
the uncertainties in relation to the actuarial best estimate.

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 calculations
have reference to a standardised annuity factor at a discount
rate normally referred to as the Ogden discount rate. The
Ogden discount rate was 2.5% from 2001 until 2017, when
it was changed to minus 0.75% based on a 3-year average of
yields on index-linked government securities, in line with case
law that claimants were entitled to invest their lump sum in a
way which was very low or even zero risk. The Civil Liability
Act 2018 changes this approach and instead requires the
Government to reset the Ogden discount rate by reference
to low risk rather than very low or zero risk investments. The
process is due to conclude in 2019, but there is considerable
uncertainty about its outcome and the date from which a new
rate will apply.

The Group will continue to exercise judgement around the
Ogden discount rate used in its reserves. Risks and uncertainties
here are significant but the move to introduce additional asset
classes into the assumed claimant portfolio points towards a
higher rate than minus 0.75%. The Group has therefore made
a judgement that it is likely that the Ogden discount rate will
change and has selected an estimate of 0% to value its lump
sum bodily injury reserves. An allowance for further movements
in the Ogden rate is made within the Group’s solvency II
balance sheet and capital requirements. Details of the IFRS
sensitivity analysis to the assumed Ogden discount rate are
shown overleaf.

The Group’s prior-year reserve releases were £404.4 million
(2017: £435.4 million) with good experience in large bodily
injury claims being a key contributor.

Looking forward, the Group expects to continue setting its
initial management best estimate conservatively. Assuming
current claims trends continue, the contribution from prior-year
reserve releases will reduce over time, although it is expected
to remain significant.

Claims reserves net of reinsurance

At 31 December

Motor
Home
Rescue and other personal lines
Commercial
Total

2018
£m

20171
£m

1,946.4
323.8
89.1
541.4
2,900.7

2,187.3
293.3
85.6
578.3
3,144.5

Note:
1. Results for the year ended 31 December 2018 are based on total Group

operations including restructuring costs and the Run-off segment. Comparative
data has been re-presented accordingly to include Run-off segment profits
within the Motor segment.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Sensitivity analysis – the discount rate used in relation to PPOs and changes in the assumed
Ogden discount rate
The table below provides a sensitivity analysis of the potential net impact of a change in a single factor (the discount rate used
for periodic payment orders (“PPOs”) and separately the Ogden discount rate) 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
PPOs3
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
Ogden discount rate4
Impact of the Group reserving at a discount rate of 1% compared to 0% (2017: 0% compared to
minus 0.75%)
Impact of the Group reserving at a discount rate of minus 1% compared to 0% (2017: minus 1.5%
compared to minus 0.75%)

Increase/(decrease) in
profit before tax 1,2

2018
£m

50.7
(70.1)

2017
£m

54.6
(75.1)

56.2

68.4

(76.3)

(102.9)

Notes:
1. These sensitivities are net of reinsurance and exclude the impact of taxation.
2. These sensitivities reflect one-off impacts at 31 December and should not be interpreted as predictions.
3. 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% for reserving. The PPO sensitivity has been calculated as the direct impact of the change in the real discount rate with all other factors remaining unchanged.

4. Ogden discount rate sensitivity has been calculated as the direct impact of a permanent change in the discount rate with all other factors remaining unchanged.

The Group will consider the statutory discount rate when setting its reserves but not necessarily provide on this basis, as is the case at the year ended 31 December
2018. This is intended to ensure that reserves are appropriate for current and potential future developments.

The sensitivity above is calculated on the basis of a permanent
change in the rate used for the actuarial best estimate reserves
as at 31 December 2018. It does not take into account a
change in the Ogden discount rate setting regime, nor any
second order impacts such as those on the Group’s PPO
assumptions or reinsurance bad debt assumptions.

– Motor reinsurance to protect against a single claim 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. This programme was
renewed on 1 January 2019.

– Commercial property risk reinsurance to protect against large
individual claims with a retained deductible of £4.0 million
which renews annually on 1 July.

Investment portfolio
The investment strategy aims to deliver several objectives,
which are summarised below:

– to ensure there is sufficient liquidity available within the
investment portfolio to meet stressed liquidity scenarios

– 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

The reduction in sensitivity to a change in the Ogden discount
rate since 31 December 2017 primarily reflects the overall
reduction in bodily injury exposures. The reduction in exposure
is due to continued positive prior-year development of claims
reserves for large bodily injury claims, and a higher proportion
of reserves benefiting from a lower reinsurance retention.

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 perils event. The retained
deductible is 14.88% of gross earned premium (£126.5
million at 31 December 2018) and cover is placed annually
on 1 July up to a modelled 1-in-200 year loss event of
128.88% of gross earned premium (£1,095.5 million at
31 December 2018). At the last renewal, 1 July 2018,
approximately 60% of the reinsurance programme was
placed on a fixed price basis (reinsurers’ rate on line) as
the second year of a three-year contract.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

FINANCE REVIEW CONTINUED

Asset and liability management
The following table summarises the Group’s high-level approach to asset and liability management.

Liabilities

Assets

Characteristics

More than 10 years, for example PPOs

Property and infrastructure debt

Inflation linked or floating

Short and medium term − all other claims

Investment-grade credit, short-term high yield
and subordinated financial debt

Key rate duration matched

Tier 1 equity

Investment-grade credit

Tier 2 sub-debt (swapped fixed to floating) Commercial real estate loans and cash

Fixed

Floating

Surplus − tangible equity

Investment-grade credit, cash and government
debt securities

Fixed or floating

Asset allocation and benchmarks
The current strategic asset benchmarks for the Group are detailed in the following table:

At 31 December

Investment-grade credit
High-yield
Investment-grade private placements
Credit
Sovereign
Total debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents
Investment property
Total

Benchmark holding
2018

Actual holding
2018

Benchmark holding
2017

Actual holding
2017

65.0%
6.0%
3.0%
74.0%
5.0%
79.0%
5.0%
4.0%
7.0%
5.0%
100.0%

2018

58.5%
6.4%
1.6%
66.5%
2.6%
69.1%
4.7%
3.3%
17.7%
5.2%
100.0%

58.1%
5.8%
1.5%
65.4%
3.4%
68.8%
4.7%
2.5%
19.4%
4.6%
100.0%

60.0%
6.0%
4.0%
70.0%
8.0%
78.0%
5.0%
3.0%
9.0%
5.0%
100.0%

2017

Investment holdings and yields – total Group

Investment-grade credit1
High-yield
Investment-grade private placements
Credit
Sovereign
Total debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents2
Investment property
Total Group

Allocation (£m)

Income (£m)

Yield (%)

Allocation (£m)

Income (£m)

Yield (%)

3,606.6
393.9
101.0
4,101.5
156.9
4,258.4
289.6
201.6
1,092.4
322.1
6,164.1

99.6
18.8
2.8
121.2
2.8
124.0
6.9
6.2
6.2
15.9
159.2

2.7%
4.8%
2.7%
2.9%
1.5%
2.8%
2.3%
3.7%
0.5%
5.1%
2.5%

3,893.1
388.6
103.6
4,385.3
224.8
4,610.1
316.4
169.0
1,304.5
309.3
6,709.3

109.2
19.7
2.4
131.3
6.2
137.5
6.8
3.7
2.9
16.2
167.1

2.8%
4.9%
2.6%
3.0%
2.2%
3.0%
2.1%
3.0%
0.2%
5.1%
2.5%

Notes:
1. Asset allocation at 31 December 2018 includes investment portfolio derivatives, which have been included and have a mark-to-market asset value of £11.8 million
included in investment grade credit (31 December 2017: mark-to-market asset value of £55.1 million). This excludes non-investment derivatives that have been
used to hedge interest on subordinated debt and operational cash flows.

2. Net of bank overdrafts: includes cash at bank and in hand and money market funds with no notice period for withdrawal.

At 31 December 2018, total investment holdings of £6,164.1 million were 8.1% lower than at the start of the year reflecting
primarily the cash paid in 2018 for dividends and a decline in fair value of debt securities. Total debt securities were £4,258.4
million (31 December 2017: £4,610.1 million), of which 4.6% were rated as ‘AAA’ and a further 59.3% were rated as ‘AA’
or ‘A’. The average duration at 31 December 2018 of total debt securities was 2.5 years (31 December 2017: 2.3 years).

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Total taxes borne

At 31 December

Current-year corporation tax charge
Irrecoverable VAT incurred on overheads
Irrecoverable VAT embedded within
claims spend
Employer’s national insurance contribution
Other taxes
Total

Total taxes collected

At 31 December

Insurance premium tax collected
VAT collected
Employees’ PAYE and national insurance
contribution
Total

2018
£m

114.4
90.2

197.2
39.2
8.7
449.7

2018
£m

400.6
12.2

99.2
512.0

PENNY JAMES
CHIEF FINANCIAL OFFICER

Tax management
The Board recognises that the Group has an important
responsibility to manage its tax position effectively. The
Board has delegated day-to-day management of taxes to
the Chief Financial Officer and oversight is provided by
the Audit Committee.

These arrangements are intended to ensure that the Group:
complies with applicable laws and regulations; meets its
obligations as a contributor and a collector of taxes on behalf
of the tax authorities; and manages its tax affairs efficiently,
claiming reliefs and other incentives where appropriate.

Tax authorities
The Group has open and cooperative relationships with the tax
authorities with whom it deals in the countries where the Group
operates, namely the UK, the Republic of Ireland, South Africa
and India.

Tax policy and governance
The Group’s tax policy has been reviewed and approved by
the Audit Committee. The Group Tax team supports the Chief
Financial Officer in ensuring the policy is adhered to at an
operational level.

For more information please see our published Group Tax
policy on the Group’s website at www.directlinegroup.co.uk/
en/who-we-are/governance/other-policies.html

Total tax contribution
The Group’s direct and indirect tax contribution to the UK
Exchequer is significantly higher than the UK corporation tax
that the Group pays on its profits. The Group collects taxes
relating to employees and customers on behalf of the UK
Exchequer and other national governments. It also incurs a
significant amount of irrecoverable value added tax relating
to overheads and claims.

During 2018 the sum of taxes either paid or collected
across the Group was £961.7 million. The composition of
this between the various taxes borne and collected by the
Group is shown below.

Total taxes borne by tax type (£m)

Total taxes collected by tax type (£m)

£449.7m

Corporation Tax £114.4m
Irrecoverable VAT £287.4m
Employer’s national insurance
contribution £39.2m
Other taxes £8.7m

£512.0m

Insurance premium tax
collected £400.6m
VAT collected £12.2m
Employees’ PAYE and NIC £99.2m

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

OPERATING REVIEW

Motor

– Own brand in-force policies increased
by 2.7% with overall growth in in-force
policies of 1.9%, up to 4.1 million
– Own brand growth in gross written
premium of £17.9 million, overall
gross written premium broadly stable

– Operating profit of £415.2 million

was £18.8 million higher than prior
year primarily due to a non-repeat of
2017’s intangible asset impairment
of £56.9 million

Gross written premium by channel1

68.2%
Direct

3.7%
Partnerships

28.1%
Price
comparison
websites

In-force policies (‘000s)

4,094

(2017: 4,019)

Gross written premium

£1,671.2m

(2017: £1,670.4m)

Operating profit

£415.2m

(2017: £396.4m)

Combined
operating ratio

88.9%

(2017: 89.8%)

In-force policies (thousands)
Of which own brands

Gross written premium
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Operating profit

2018

2017

4,094
3,950
£1,671.2m
63.6%
2.0%
23.3%
88.9%
£415.2m

4,019
3,845
£1,670.4m
58.0%
2.5%
29.3%
89.8%
£396.4m

Overview
In 2018, the Group grew its Motor policy count at target
margins, in an increasingly competitive market, demonstrating
the value that customers place on our brands and propositions.

Whilst the current-year attritional loss ratio was up by 1.8
percentage points, the current-year combined operating ratio
was broadly stable (excluding the effect of the £56.9 million
impairment of intangible assets in 2017), and operating profit
was up 4.7%.

The Group continued its progress with its customer-focused
initiatives launched in the year. The Group’s Direct Line brand
remained attractive as it continued to enhance the propositions
and services customers value. The brand launched a new
proposition in the first quarter: a ‘No Blame’ proposition
which protects customers from losing their no claim discount for
a range of common non-fault claims. A new Motor partnership
was signed in 2018 with Volkswagen Insurance Service
(Great Britain) Limited.

Performance
The Motor division grew in-force policies by 1.9% to 4.1
million and gross written premium was broadly stable at
£1,671.2 million. The growth in in-force policies was across
both direct and price comparison website channels, driven
by growth in Direct Line and Churchill which showed the
value of our multi-brand strategy. While new business
volumes fell slightly, retention remained strong year on
year across all channels.

Motor average premium2 fell by 1.0% in 2018. Motor
risk-adjusted prices increased by 0.6% in 2018 while risk
mix reduced average premiums by 1.5%. The change in risk
mix primarily reflected the attractiveness of the Group’s free
Motor legal protection cover to lower average premium
Churchill aggregator customers.

Note:
1. By original channel.
2. Average incepted written premium excluding insurance premium tax for total

Motor for the year ended 31 December 2018.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Keeping No Claim Discount
for our customers

16,618 customers have benefited
from Direct Line’s ‘No Blame’
proposition which provides that a
policyholder’s No Claim Discount is
not affected if their car is damaged
in any of these circumstances:

– Potholes or poor road maintenance
– Fire and/or theft of/or from the car
– Hit whilst parked
– Flood
– If you hit or were hit by a wild

or domestic animal

– Hit by object or debris
(excluding vehicles)

This ensures that our customers are not
being punished for something that is not
their fault and are able to keep their
hard earned no claims discount intact.
Just another way that we are making
insurance much easier and better value
for our customers.

Our customers said:

I felt valued and
that you were
on my side

16,618
Customers
benefited from
‘No Blame’
proposition

This promise
is truly
differentiating

The current-year attritional loss ratio in Motor increased by
1.8 percentage points to 81.5% (2017: 79.7%) following
a reversal of benign conditions experienced in 2017. The
Group observed higher claims frequency in 2018 following an
unusually low frequency year in 2017. The Group’s long-term
view of claims inflation remains within the range of 3% to 5%.

In total, prior-year reserve releases were £42.3 million lower
year on year at £276.3 million, and included £47.9 million
relating to the change in the assumed Ogden discount rate
(2017: £49.0 million release). Bodily injury claims reserves
continued to develop favourably.

Motor’s reported combined operating ratio improved by
0.9 percentage points to 88.9% (2017: 89.8%). This was
primarily as a result of the improvement in the expense ratio,
following the non-repeat in 2018 of 2017’s impairment of
intangible assets.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOPERATING REVIEW CONTINUED

Home

– Total in-force policies and gross written

premium 18.4% and 24.1% lower,
respectively, in 2018 following exit of
Nationwide and Sainsbury’s1 partnerships

– Own brands in-force policies were

broadly stable year-on-year and gross
written premium on own brands
increased by 0.7%

– Total operating profit was £45.7 million

lower than in 2017, reflecting Q1 2018’s
freeze event

Gross written premium by channel2

32.0%
Partnerships

54.2%
Direct

13.8%
Price comparison
websites

In-force policies (‘000s)

2,651

(2017: 3,248)

Gross written premium

£606.9m

(2017: £799.1m)

Operating profit

£83.1m

(2017: £128.8m)

Combined
operating ratio

93.6%

(2017: 89.4%)

In-force policies (thousands)
Of which own brands

Gross written premium
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Operating profit

2018

2,651
1,789
£606.9m
61.8%
9.4%
22.4%
93.6%
£83.1m

2017

3,248
1,794
£799.1m
50.6%
17.7%
21.1%
89.4%
£128.8m

Overview
In 2018, the Group maintained underwriting discipline
in a competitive market. The Group maintained strong
retention rates, demonstrating the appeal of our brands and
propositions. The shift in distribution of Home’s business from
partners to price comparison websites continued in 2018.
Against this backdrop, the Group remained competitive
across all channels.

Focusing on propositions that differentiate Home’s products,
2018 saw the launch of Direct Line’s ‘Fast Response’. This
proposition sees the Group agreeing an action plan with
customers within 24 hours of major water damage.

Performance
In-force policies for Home’s own brands were broadly
stable compared with 2017 at 1.8 million policies, while
partnerships volumes reduced by 40.7% predominantly due
to the exit from the Nationwide and Sainsbury’s partnerships.
Excluding Nationwide and Sainsbury’s, partnership volumes
reduced by 2.4% in 2018.

Gross written premium was 24.1% lower than 2017,
predominantly due to the reduction in partnerships. Own
brands gross written premium rose by 0.7% with increases
across all brands. New business volumes were lower during
the second half of 2018 as shopping levels slowed following
the anniversary of the introduction of the new rules requiring the
previous year’s premium to be included on renewal documents.
Retention in Home own brands continued to be strong.

Home own brands average written premium3 increased slightly
by 0.4% compared with 2017, with a 3.5% price increase
offset by a reduced risk mix.

Note:
1. The exit from Sainsbury’s is in respect of new business.
2. By original channel.
3. Average incepted written premium excluding insurance premium tax for

Home own brands for year ended 31 December 2018.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Providing an action plan within
24 hours for our customers

Fast Response was designed to enable
our home insurance customers to get
their home back on track, following
damage caused by a severe water
leak, with minimal disruption to their
daily lives.

Our proposition provides for us to be
there within 24 hours of the incident
to make the important decisions on
the repair that will get our customers’
homes back to normal. Once a claim
has been reported, our suppliers
arrange an appointment with
customers within 24 hours,
including over weekends.

Our technician will leave the customer
with clear next steps on when they will
be contacted and what action they are
recommending. During the first visit
claims evidence is also captured on
video and reported back to the office
to speed up the process, all contributing
to a fast response.

Our customers said:

The company is
being supportive
at the worst time

24 hour
response,
including weekends

Immediate
assistance is
a great feature
of the policy

The current-year attritional loss ratio, excluding major weather
event claims, increased by 5.0 percentage points to 57.0%,
reflecting changes in business mix, and was more than offset
by lower commissions from partnerships. Claims inflation,
excluding the impact of major weather events, remained within
the Group’s long-term expectation of 3% to 5%. Subsidence
claims, including those associated with the dry summer
weather in the UK, were not materially above normal
annual expectations.

The commission ratio of 9.4% was 8.3 percentage points
lower than for 2017, reflecting lower commission and profit
share payments to partners resulting from the exit from the
Nationwide and Sainsbury’s partnerships and changes to
other partnership commission arrangements.

Home’s combined operating ratio increased by 4.2
percentage points to 93.6% (2017: 89.4%) with higher loss
and expense ratios, in part offset by an improved commission
ratio. The loss ratio was 11.2 percentage points higher at
61.8% compared to 2017 primarily as a result of the major
weather events in Q1 2018. The impact of weather in Q1
was approximately £65 million (2017: £13 million), and
no additional major weather events were experienced for the
remainder of the year. Normalised for weather, the combined
operating ratio was approximately 2.0 percentage points
better than last year at 92% (2017: approximately 94%).

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOPERATING REVIEW CONTINUED

Rescue and other
personal lines

– Total gross written premium remained broadly

stable as growth in Green Flag Rescue and some
premium inflation in Travel were offset by lower
partnership and packaged account volumes
– The Group’s direct Rescue brand, Green Flag,
grew in-force policies by 11.5% and gross
written premium by 14.3% in the year

– During 2018 the Group successfully renewed
two major Travel partnerships with RBS Group
and Nationwide for a further five years

In-force policies (thousands)
Of which: own brands

Gross written premium
Of which: Rescue

Travel
Pet
Other personal lines

Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Operating profit

2018

2017

7,532
894
£422.8m
£163.4m
£143.9m
£72.4m
£43.1m
66.8%
4.6%
23.8%
95.2%
£43.4m

7,739
802
£421.1m
£161.3m
£143.4m
£74.8m
£41.6m
65.4%
5.5%
23.4%
94.3%
£43.6m

Overview
The Rescue and other personal lines segment consists of Rescue
products which are sold through the Green Flag brand and
other personal lines insurance, including Travel and Pet, which
are sold through own brands and partnership arrangements.

Green Flag continued to position itself as the market disrupter,
with the launch of a new advertising campaign in the year.
Travel claims inflation remained in line with medium to long-term
expectations during 2018. Less volatile currency movements
drove lower claims inflation and this was reflected in lower
premium inflation than in previous years. Brexit uncertainty
remains a risk, however, with the impact on customers and
claims with the possible withdrawal of the European Health

Insurance Card scheme potentially leading to customers’ greater
reliance on travel insurance.

Performance
Rescue and other personal lines in-force policies fell by 2.7%
to 7.5 million. Gross written premium for Rescue and other
personal lines increased by 0.4% compared with 2017. Green
Flag continued to grow its higher margin direct business during
2018, increasing in-force policies by 11.5% to over 894,000
as 2018’s extreme weather events reminded potential customers
of the benefits of having breakdown cover. Gross written
premiums grew by 14.3% to £69.6 million which was driven
by higher volumes and a shift towards higher levels of cover
which attracted higher average premiums.

In-force policies for the Group’s linked rescue channel reduced
to 1.9 million, driven by the end of the Churchill ‘Free Rescue’
campaign in July, where Churchill Motor customers received a
year’s Rescue cover when they purchased their policy. Rescue
partnerships in-force policies and gross written premiums,
where margins tend to be lower than for direct, reduced,
driven by a partnership exit and a reduction in packaged
bank account volumes.

Other personal lines in-force policies reduced by 2.6% to
4.0 million primarily due to lower packaged bank account
volumes. The rate of reduction of Pet in-force policies slowed
considerably in 2018 and insurance packages tailored for
mid-to high-net worth Home and Motor customers saw strong
growth. Gross written premium remained broadly stable as a
slight growth in Travel offset a reduction in Pet.

The combined operating ratio for Rescue and other personal
lines increased by 0.9 percentage points to 95.2% (2017:
94.3%) primarily due to an increase in the loss ratio partially
offset by a lower commission ratio. During the year, Rescue
experienced a higher average claims cost due to a mix of
recoveries, weather conditions and a restructuring of the
Group’s third-party recovery network. As a result, Rescue’s
combined operating ratio increased to 85.0% (2017: 82.8%).
Other personal lines combined operating ratio was stable
as improved performance in Pet and Travel was offset by
weather-related and large claims in Home products
for mid-to high-net worth customers.

Common sense to the
rescue for our customers

The Rescue Me service on the Green Flag app is
making a stressful situation a little less hassle for
our customers. Using the app customers can:

– Request a rescue which will pinpoint their
location so they don’t have to worry about
providing directions

– Track their technician so they know when they will

be arriving

– Receive updates on the progress of their breakdown

With data driving every customer experience we are
implementing technology to deliver the high level of
service that customers expect from their breakdown
provider. Our challenger status is reaffirmed in our
most recent pledge to provide customers with 50%
off their RAC or AA renewal quote.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Commercial

– Total gross written premium increased by 1.9%

with direct own brands increasing by 7.7%

a national marketing campaign to increase awareness of its
offering amongst its target market.

– Strong performance in Direct Line for Business,

with new propositions rolled out on its innovative
technology platform targeting small businesses
– NIG premium stable year on year as it focused
on delivering its strategy and improving margins

In-force policies (thousands)
Of which: own brands

Gross written premium
Of which: DL4B
NIG and other

Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Operating profit

2018

2017

755
499
£511.0m
£132.0m
£379.0m
51.8%
18.9%
24.8%
95.5%
£60.0m

708
468
£501.5m
£122.6m
£378.9m
49.9%
19.1%
24.4%
93.4%
£74.0m

Overview
The Commercial broker market continued to consolidate in
2018. Customers continued to seek cover that was flexibly
tailored to their individual needs and demonstrated knowledge
about their trade in the direct market. Against this backdrop,
Commercial maintained underwriting discipline and grew its
policy count.

Direct Line for Business continued to roll out a range of
innovative propositions for small and micro businesses,
including the launch of its Office, Professionals and Retail
insurance products. Direct Line for Business also launched

In NIG, the focus continued to be on profitability and delivering
on its service proposition to be ‘Effortless to Trade With’.

Performance
Commercial in-force policies increased by 6.6% compared
with 2017 to 755,000. This reflected strong growth in both
Direct Line for Business and NIG and other. Gross written
premium increased by 1.9% to £511.0 million.

Direct Line for Business grew in-force policies by 6.6% as
it grew in its traditionally strong areas of van and landlord,
supplemented by growth in the small and micro business
products on its new platform. Gross written premium
increased by 7.7% to £132.0 million with increases
across all product lines.

NIG and other in-force policies grew by 6.7%. Gross written
premium remained steady at £379.0 million as the business
continued to focus on improving margins and delivering on
its strategy.

The current-year attritional loss ratio in Commercial improved by
2.0 percentage points to 66.8% as risk selection over volume
remained the priority. Prior-year reserve releases were £6.9
million lower at £79.4 million.

The combined operating ratio for Commercial increased by
2.1 percentage points to 95.5% (2017: 93.4%), primarily due
to a 1.9 percentage points increase in the loss ratio as a result
of the major weather events in Q1 2018 and the reduction in
prior-year reserve releases, partially offset by an improvement
in the current-year attritional claims ratio. The impact of weather
events in 2018 was approximately £10 million.

Commission and expense ratios remained broadly stable
compared to 2017 despite increased pressure on commissions
due to broker consolidation.

Flexible insurance that
keeps up with our small
business customers

In 2016 Direct Line for Business launched a new end-to-end
business transformation programme to create a proposition that
enables small business owners to buy insurance direct and with
confidence. The proposition targets a number of trades, ranging from
hairdressers and dog walkers to IT consultants and cake makers, and
allows them to create a flexible policy that is unique to their business.

– An intuitive online tool asks small and medium-sized enterprise

owners four or five questions about their business that are used to
personalise the rest of their journey according to their trade and
individual circumstances

– Each cover option gets broken down in the policy, showing

individual prices and giving business owners full transparency
when buying their policy

– No mid-term amendment admin fees means that customers have
the flexibility to make changes to their policy, whether they are
increasing their workforce, moving to new premises or working
from multiple locations, giving them peace of mind that they have
an insurance policy flexible enough to keep up with their world.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
RISK MANAGEMENT

Managing our risks

We have a comprehensive risk management framework in place to ensure we
have a strong understanding of the risks we run in the course of our business;
and appropriate controls are in place with the aim of ensuring we remain
within risk appetite.
Managing risk in line with
our strategy
Management, with oversight and challenge from the Board, is
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 risk. The delivery of a strategic
plan will, by its very nature, result in risks and therefore
understanding and managing those risks appropriately is
a key aspect of the strategic planning process. The Group’s
risk strategy is aligned with the Group strategy and supports
business decision-making through the proactive identification,
assessment and management of risks. The Group’s risk strategy
is consistent with our overall long-term ambition of sustainable
growth and at least a 15% RoTE per annum delivered while
remaining within our risk appetite.

and implementation of the Enterprise Risk Management
Strategy and Framework (“risk management framework”),
and for providing proportionate oversight of, and challenge
to, the business’s handling of 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 risks we are prepared
to accept to achieve our business objectives. The processes
for setting risk appetite, particularly the cascade, assessment,
mitigation and reporting of risk exposures against risk appetite,
are documented in the Group’s policies and underlying
minimum standards. To monitor whether the business
remains within risk appetite, we use key risk indicators,
among other information.

Our risk governance framework
The Board sets and monitors adherence to the risk strategy,
risk appetite and risk framework, and has established a risk
management model that separates responsibilities into
‘Three Lines of Defence’.

Our First Line of Defence is management who are
responsible for owning and managing risks to achieve our
business objectives on a day-to-day basis. The Second Line of
Defence is the Risk function which is responsible for the design

Risk objective

Risk appetite statement

We derive the key risk indicators from the risk appetite
statements which are used to drive and monitor risk-aware
decision-making.

These key risk indicators are qualitative and quantitative, and
forward and backward-looking. We review our risk appetite
statements and key risk indicators annually.

Overarching risk objective

Maintain capital adequacy

The Group recognises that its long-term sustainability is dependent on having sufficient
economic capital to meet its liabilities as they fall due, thus protecting its reputation and
the integrity of its relationship with policyholders and other stakeholders.
As part of this, its appetite is for general insurance risk, focusing on personal lines retail
and small and medium-sized enterprise insurance in the UK. The Group has appetite for
non-insurance risks, as appropriate, to enable and assist it to undertake its primary activity
of insurance.

The Group seeks to hold capital resources in the range of 140% to 180% of the internal
model solvency capital requirement. The Group also seeks to maintain sufficient economic
capital consistent with its strategic aim of maintaining a credit rating in the ‘A’ range.

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 1-in-200 years insurance, market or credit risk event.

Maintain stakeholder
confidence

The Group has no appetite for material risks resulting in reputational damage, regulatory or
legal censure, poor customer outcomes, 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.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Our Enterprise Risk Management
Strategy and Framework
This section sets out, at a high level, our approach to setting
risk strategy and the risk management framework 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 risk management framework – see diagram.

The risk management framework enables us to manage the
business with the necessary understanding of our risks and
controls, while also having the appropriate levels of oversight
to ensure risks are managed proactively. The risk management
framework is aligned to the Three Lines of Defence model, and
provides a comprehensive approach for managing our risks.
Our Policy Framework is a central part of the risk management
framework, and includes policies and minimum standards
which provide the context and risk appetite boundaries
within which the business conducts its activities.

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 is
undertaken jointly by the Risk function and Group Audit
and considers a range of factors influencing risk culture.
This process is overseen by the Board Risk Committee
on behalf of the Board.

Group strategy

Risk appetite

Policy framework

Principal risks

Risk management

Identify

Assess

Manage

Monitor

Report

Reporting &
monitoring

Risk
profile

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSRISK MANAGEMENT CONTINUED

Principal risks and uncertainties
We carefully assess the principal risks facing us. Principal risks are defined as having a residual risk impact of £40 million or
more on a 1-in-200 years basis, taking into account customer, financial and reputational impacts.

Principal risks

Management and mitigation examples

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.

Key drivers of the outlook for insurance risk across
our business plan include reserve, underwriting,
distribution, pricing and reinsurance risks.

See pages 146 to 148

The risk of loss resulting from fluctuations in the
level and in the volatility of market prices of assets,
liabilities and financial instruments.

Key drivers of market risk are the sensitivity of the
values of our assets and investments to changes in
credit spreads, and our exposure losses as a result
of changes in interest rate term structure or volatility.

See pages 148 to 151

– We set our reserves using the latest internal and external data

and trends

– Third-party experts review the majority of our reserves

– Underwriting guidelines are set for all transacted business,

and pricing refined by analysing comprehensive data

– Catastrophe and motor excess of loss reinsurance limits our

exposure to events and large losses

– We invest in enhanced external data to analyse and

mitigate exposures

– 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

– We have an investment strategy approved by the Board

– We diversify asset classes including by country of risk, and
by investing in US dollar assets to broaden the pool of
available assets

– We set limits on exposure to individual asset classes and the

amount of illiquid investments

– We carry out an annual matching exercise on our assets and
liabilities, which reduces the net impact of interest rate risk as
shown in interest rate sensitivities

– To limit exposure to credit spread risk, we tightly control

individual asset exposures as shown in spread risk sensitivities

– We use risk-reduction techniques, such as hedging foreign
currency exposures with forward contracts, and hedging
exposure to US interest rates with swap contracts

The risk of loss resulting from default in cash
inflows and/or changes in market value of issuers
of securities, counterparties and any debtors to
which the Group is exposed.

This includes the risks associated with inadequately
diversified portfolios of assets and/or obligations.

See pages 151 to 155

– 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. For liabilities with a relatively long period of time to
settlement, this rating will be at least A+

– We have well-defined criteria to determine which customers

are offered and granted credit

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DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Principal risks

Management and mitigation examples

The risk of loss due to inadequate or failed
internal processes or systems, human error
or from external events.

The principal risks within this category are
information security, partnership contractual
obligations, change, outsourcing and
technology and infrastructure risks.

See page 156

The risks arising out of changes to laws, regulatory
rules, policy or interpretation, or to supervisory
expectations or approach, that have an adverse
operational and financial impact as a result of
reputational damage, regulatory or legal censure,
fines or prosecutions, and any other type of
non-budgeted operational risk losses, associated
with the Group’s conduct and activities.

– We have appropriate operational processes and systems,

including detection systems for fraudulent claims and
appropriate processes which seek to enable
operational resilience

– We are continuing to work to improve performance and

stability 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, and resilience, cyber security, and the internal
control environment

– Our risk management framework is designed to enable us
to capture risk information in a robust and consistent way

– We monitor how risks are managed in the performance

of outsourced and off-shored activities

– 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

– We have a strong culture of delivering on our commitments

to our customers

– Our conduct risk management framework is designed
to deliver fair outcomes to customers and minimise our
risk exposure

– We carry out planned risk-based monitoring of customer
processes as well as more targeted thematic reviews
which consider strategic or regulatory projects

The risk of direct or indirect impact on the earnings,
capital, or value of the business as a result of the
strategies not being optimally chosen, implemented
or adapted to changing conditions.

– We agree, monitor and manage performance against the

Board-approved plan and targets

– The Board leads an annual strategy and planning process
which considers our performance, competitor positioning
and strategic opportunities

– We identify and manage emerging risks using established

governance processes and forums

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WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

RISK MANAGEMENT CONTINUED

Potential effects of Brexit
The UK is scheduled to exit from the EU on 29 March 2019.
At the date of this report there is considerable uncertainty as to
how and even whether there will be a Brexit, or at least as to
when it will take effect and on what terms. Accordingly there is
corresponding uncertainty as to the effect of Brexit on the Group.

If Brexit takes place smoothly, for example involving a transition
period during which work would take place at the government
level to agree a future trading agreement between the UK and
the EU, and accordingly without significant disruption to the UK
economy and to business generally, then any adverse impact on
the Group (if any) would also not be expected to be significant,
at least until the end of the transition period and the future trading
arrangements between the UK and the EU being clarified. If,
however, the UK were to leave the EU in such a way as to
involve or lead to significant disruption, as has been conjectured
in the event of a ‘hard’ no deal Brexit at the end of March,
then the impact on the Group could correspondingly also
be disruptive and potentially material.

Following the EU referendum result in 2016, which saw
the UK vote to leave the EU, the Group established a Brexit
Working Group comprising representatives from across the
Group. It was identified that there was a risk that the UK could
enter a prolonged period of reduced growth due to Brexit,
potentially reducing insurance sales and the value of our
investment portfolio. Whilst our operations are based mainly
in the UK, Brexit-related issues which could impact adversely
on the Group could include: changes to the value of sterling
which impact claims and non-claims supplier costs; inflation;
impacts on credit spreads which in turn could impact on the
Group’s investments and capital; recruitment and retention of
people; impacts on the speed of delivery and cost of goods
and services required by the business including for fulfilling
insurance claims made by customers, for example because of
delays at borders caused by increased border regulations and
by additional costs caused by increased tariffs and devaluation
of sterling; availability of reinsurers authorised to write business
in the UK; data transfers; the removal of the European Health
Insurance Card (“EHIC”) leading to greater reliance on travel
insurance; travel disruption; increased use of Green Cards
(internationally recognised certificates that act as proof of
insurance, including in the EU); potential changes to direct and
indirect tax; and the regulatory impact on our capital position.

The Group has proactively considered a variety of possible
implications of a disruptive ‘hard’ Brexit, including of a
financial and operational nature; for example:

The impact on the Group’s investment portfolio and in
particular credit spreads relating to its debt securities and
therefore Group solvency: A sensitivity analysis relating to
its credit spread is provided in note 3.3.2 to the financial
statements (on page 151). The Group has also considered
Brexit in its Investment Committee, and further information is
provided on the work of the Investment Committee on page
87. A disruptive Brexit could impact adversely on the Group’s

investments and therefore capital and the solvency capital ratio
and the appropriateness of paying dividends.

Procurement and supply chain: In particular as part of the
Group’s ability to deal with claims made under insurance
policies, the Group needs to acquire a wide range of goods
and services. A significant amount and spread of goods, for
example such as car parts, are sourced from within the EU.
The Group has been in discussion with principal suppliers
who have taken some steps to increase stocks within the UK
in the event of a ‘hard’ Brexit leading to disruption at borders.
However, the Group’s ability to deal with claims in its normal
ordinary course of business manner could be adversely
impacted and there could be delays and extra costs.

The Group has a small amount of business in the Republic
of Ireland, servicing a small Irish part of a UK partner’s wider
business. The Group is well advanced in establishing a formal
third-country branch in the Republic of Ireland in order to be
able to continue with this business post a ‘hard’ Brexit, and
expects the branch to be authorised for business by the Central
Bank of Ireland by the current deadline of 29 March 2019,
should that become necessary.

The Group has also been focusing on Brexit from a potential
crisis management perspective, with the objective of maintaining
operational resilience in the event of a disruptive Brexit and with
a view to being able to react better to events as they unfold.

Emerging risks
Our definition of emerging risks is new or developing risks
which are often difficult to quantify; they are also usually
highly uncertain and external to the Group. Emerging risks
are identified by management and the latest information is
maintained within an Emerging Risk Register. Each emerging
risk is owned by a business subject matter expert and members
of the Second Line of Defence provide challenge and oversight
of activity taking place. We report emerging risks to the Board
Risk Committee for review and challenge. Our emerging risks
processes aim to:

– identify emerging risks on a timely basis;

– manage emerging risks proactively;

– mitigate the impact of emerging risks which could affect the

delivery of the strategic plan; and

– reduce the uncertainty and volatility of our business’s results.

We consider our main emerging risks to be:

Climate change
Climate change poses a range of financial risks to the Group.
These can be divided into three categories:

– Physical risks include many weather-related risks arising
directly from climate change. These include changes in
the frequency and severity of events, floods, storms, freeze,
subsidence or wildfire. The Group’s use of catastrophe
reinsurance mitigates against many of the worst potential
impacts and the Group regularly reassesses its use of

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Viability statement
In accordance with provision C.2.2 of the 2016 UK Corporate
Governance Code, the Directors have assessed the prospects
of the Group for a period longer than the minimum 12 months
required by the going concern statement.

The Strategic report, on pages 1 to 59, 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 in this section. Note 3 to
the consolidated financial statements starts on page 146 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 the strategic plan and an
Own Risk and Solvency Assessment (“ORSA”) 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 new 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 period that the plan covered and
the conclusions of the ORSA, based on the Group’s anticipated
activities as set out in the strategic plan. This review included
reviews of solvency, liquidity, assessment of principal risks,
and risk management over a three-year period, with a further
two years of indicative planning. The first year following
approval of the strategic plan has greater certainty, so it was
used to set detailed budgets across the Group. Outcomes for
the subsequent years in the plan 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.

Based on the results of these reviews, 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 2022.

external catastrophe models to ensure they fully capture
climate-related risk.

– Transitional risks arise from efforts to mitigate or adapt to

climate change. These include the strategic and operational
risks from the transition towards electric-powered vehicles.
Whilst insuring electric vehicles does not fundamentally
change the business model, the business seeks to develop
the new processes, skills and technical knowledge required
to keep pace with these changes in technology.

– Liability risks arise when parties, who have suffered losses

from climate change, seek to recover from those they believe
may have been responsible. There is some potential exposure
to liability risk through commercial liability insurance.
However, Pollution and Professional Indemnity covers,
which carry the highest risk, are almost fully reinsured.

There are also potential physical, transition and liability
risks arising through the investment portfolio. During 2018 a
significant new initiative was approved to strengthen further
the Group’s investment strategy with regard to environmental,
social and governance issues. More information can be found
in the Investment Committee’s report on page 87.

Technological developments change
consumer needs for insurance
New car technologies, such as crash-prevention aids, car
sharing and driverless cars, could significantly affect the size
and nature of the insurance market and the role of insurers. The
Group continues to build strong collaborative relationships with
key manufacturers, and has established an ‘In-Car Technology’
programme to help manage the response to developing
car technology.

Furthermore, the Group’s strategic pillars of being a great
retailer, smart and efficient manufacturer and leading disrupter,
as well as our aim of multi-channel success, help position us
to take advantage of changes in technology and customer
behaviours, through the development of new capabilities,
new partnership capabilities, and by enabling us to have
the flexibility to adapt/react to these changes.

Fairness and pricing practices
The FCA is conducting a market study into Fair Pricing in
Financial Services and the Competition and Markets Authority
has announced plans to take forward a ‘package of reforms’ to
address the ‘loyalty penalty’ for long-standing home insurance
customers, but has concluded that it will not be conducting its
own market study at this time.

The Group remains up-to-date with developments from the
FCA and the Competition and Markets Authority work on
pricing practices and will keep the review in focus throughout
2019 as well as seeking to ensure that the Group continues
to maintain fair pricing principles.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSRESPONSIBILITY

ESG – our approach

We aim to drive sustainable outcomes for our stakeholders and in order to
deliver this we have developed a five pillar strategy which resonates with our
collaborative culture and values. Our approach to environmental, social and
governance matters is delivered through our five pillars and the table below
shows where information can be found in this annual report and accounts.

Pillars

Our customers
Making insurance
much easier and
better value

Our society
Playing an active role
in issues that affect
our society

Our planet
Reducing, reusing
and recycling to build
a sustainable future

Initiatives

Tailored brands p.5

Autonomous vehicles p.21

Recycling coffee cups p.55

Routes to market p.9 & 19

Young drivers p.54 & 85

Environmental Champions p.55

Renewal pricing principles
p.18 & 21

Road safety p.53 & 85

Women in Finance p.58

Customer focus p.22, 52 & 81

Propositions p.39, 41, 42 & 43

Supporting charities p.53, 54,
85 & 86

Investment in green bonds
p.54 & 87

Travel free weeks p.55

Disclosures

Net promoter score p.25 & 52

Paying tax p.37 & 54

Emissions p.20, 55, 85 & 120

Customer complaints p.25 & 52

Recycling p.55

Waste p.55

Non-financial KPIs p.25

Climate change p.48, 49 & 55

Policies

Connect training p.20

Prompt payment code p.54

Upgrading our buildings p.20

Customer approach p.61

Ethical investment p.54 & 87

Data protection p.81

Diverting 100% of office
waste p.55

Commitment to 100% electricity
from renewable sources p.55

Our stakeholders
The Board believes that adopting a business model that is sustainable in the long term and based
on high ESG standards is important for promoting the success of the Company. In discussing and
approving the Group’s strategic and financial plan, the Board considers the potential impact on all
stakeholders in the business, including employees, customers, suppliers, the communities with which
we interact and the environment, as well as the shareholders for whom we aim to continue generating
returns on investment. You can find more detail about the stakeholder matters discussed by the Board
when considering the strategic plan on page 66.

Our culture as a business flows from the beliefs underpinning the five pillars of our approach to
Responsibility, which are set out in this section.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Our people
Investing in our
talented people,
encouraging everyone
to aim higher

Our governance
Creating a long-term
business that
serves all of our
stakeholders

Diversity and inclusion p.58

Culture and values p.60 & 61

Employee Representative
Body p.56 & 61

Board (leadership and
diversity) p.66, 67 & 73

Employee ideas forum p.57

Risk governance p.44 & 45

Mental health/wellbeing p.59

ESG p.85 & 86

Women in Finance Charter p.58

Strategic planning p.68

Values p.60

Employee surveys p.17 & 56

Remuneration p.61 & 88

Gender pay gap p.58 & 59

Board effectiveness p.70

Living wage p.58

Auditor fees p.79

Committee structures
p.68 & 69

Diversity and inclusion
p.73 & 85

UK Corporate Governance
Code p.66

Annual Incentive Plan p.58

Stakeholder interests p.66

Employee share ownership
p.16 & 58

Development and training
p.20 & 59

Parental leave and flexible
working p.57

Whistleblowing p.82

Modern Slavery Act p.86

Anti-bribery and corruption
policy p.82

Risk governance p.82

Code of business conduct p.61

Non-financial information statement
This diagram sets out where stakeholders can find information in
our Strategic report that relates to non-financial matters, as required
under the new regulations1 on reporting non-financial information.

Our business model, pages 22 & 23

Principal risks and impact on business activity pages 44 to 49

ESG Oversight

Board
The Direct Line Group Board oversees all of
the Group’s ESG activity. It has delegated
particular aspects of this supervision to
its Committees.

The Remuneration Committee determines
remuneration for senior management
and reviews workforce remuneration.

The Corporate Social Responsibility
Committee focuses on the Group’s
responsibility for the environment, the
community and the wellbeing and
engagement of its people.

The Investment Committee considers the
strategy for incorporating ESG factors into
the Group’s investment management.

The Board Risk Committee oversees
all aspects of financial, regulatory and
operational risk, including the long-term risk
to the Group of climate change.

The Audit Committee focuses on sustainability
in the Group’s financial disclosures.

The Nomination Committee monitors
developments in governance and investor ESG
expectations, as well as being responsible for
Board succession planning.

More information about the activities of each of
the Committees can be found in the Committees’
reports on pages 76 to 87.

1. The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting)

Regulations 2016, SI 2016 No 1245.

Further information on our ESG pillars, strategy
and full disclosure can be found online at
www.directlinegroup.co.uk/en/investors/esg.html

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

RESPONSIBILITY CONTINUED

Long-term sustainability
for our stakeholders

Under the leadership of our Board, responsibility is at the heart of how we think
about our business. Our five pillar ESG strategy ensures that we target delivering
long-term sustainability for our customers, our people and our shareholders and
that we consider the impact we have on our society and our planet.

Our approach to responsibility is structured around five pillars:

Our
customers

Our
society

Our
planet

Our
people

Our
governance

Making insurance much
easier and better value

Playing an active role
in issues that affect
our society

Reducing, reusing and
recycling to build a
sustainable future

Investing in our talented
people, encouraging
everyone to aim higher

Creating a long-term

business that serves all
of our stakeholders

See page 52

See pages 53 – 54

See page 55

See pages 56 – 59

See pages 60 – 121

Our customers
Customers are at the heart of everything we do, and as such
our work in pursuit of making insurance much easier and better
value for our customers is highlighted throughout this report.
You can read about our brands, products and channels on
the following pages. Our latest customer propositions can be
found on pages 39 and pages 41 to 43 and our strategy in
action on pages 20 and 21 outlines how we are delivering
outcomes for our customers.

We’ve built a reputation for delivering for our customers by
regularly developing new and different ways to make our
products easier and better value for our customers. Propositions
such as our Churchill Vandalism Promise, Direct Line’s Fair
Claim Commitment or Fast Response are ways of making
insurance easier and we’ve used training to help our people
have far more empathetic and powerful conversations with
our customers.

We recognise that our customers are always raising their
expectations and one of our values is to “aim higher”. The
relationship between NPS and customer retention shows
there’s a direct link between customer experience and our
success as a business and that’s why this year we launched
an initiative designed to help us identify, meet and exceed
customer expectations when we make decisions and
choices about how we run our business.

See Motor on page 38

See Rescue and other
personal lines on page 42

See Home on page 40

See Commercial on page 43

One claim every single minute of
every single hour, every day of
the year

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Our society
Brake and PACTS
We continue to engage with important partners in the
road safety debate, including road safety charity Brake, the
Parliamentary Advisory Council for Transport Safety (“PACTS”)
and the Department for Transport.

We remain a committed partner to the road safety charity Brake,
campaigning throughout the year to make our streets safer.

Working with politicians, our partnership has raised the
profile of local campaigns leading to meaningful change in
constituencies throughout the UK. Highlights this year have
included the introduction of 20 mph zones near schools,
reducing the speed limit on major A roads and tackling
speeding on rural roads through greater law enforcement.

We celebrated the successes at Brake’s annual parliamentary
reception with hundreds of Brake supporters, volunteers
and parliamentarians.

Sprintathon
422 of our people took part in a Sprintathon this year, where
they ran 100m sprints to cover the marathon distance of 26.2
miles. Our aim was to complete a marathon in the shortest
possible time and, more importantly, raise money for Stand Up
to Cancer.

An astounding £60,000 was raised for Cancer Research UK,
who carry out work that accelerates new cancer treatments
and tests for UK patients, and patients across the world, to
ultimately save more lives.

Our people pulled together to get involved in this great cause
and it was an engaging and rewarding group experience
where each individual effort combined to fight cancer. This
was a fun and collaborative way to really live our value of
‘Working Together’. The marathon was completed in under
two hours and there’s not many people in the world who
can say they achieved that!

Steve Maddock, our Chief Operating Officer, and Judith
Cummins MP, who was awarded Brake and Direct Line
Group’s Parliamentarian of the Year Award and who
campaigned for tougher sentences for dangerous drivers.

422
of our people
took part

£60,000
raised for Cancer
Research UK

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
RESPONSIBILITY CONTINUED

Shotgun
As Britain’s leading personal motor insurer we want, for both
our customers and society, to keep Britain’s roads safe. This
is particularly true for young drivers where inexperience often
leads to more accidents.

The facts are stark:

– The part of the brain that helps assess risk is not fully

developed until we reach our mid 20s

– 17 to 19 year olds are involved in 9% of all fatal and

serious crashes, despite representing just 1.5% of all drivers

Financial responsibility
Responsible investing
As the Group’s investment strategy evolves, it is constantly
looking for ways to enhance its investment practices with
regard to ESG issues.

To date, the Group’s investment strategy has reflected the
following initiatives:

– Approximately 95% of externally managed assets are run
by managers who are currently signatories to the United
Nations-supported Principles for Responsible Investment

– One in four 18 to 24 year olds crash within two years of

– Almost 90% of the investments in the infrastructure debt

passing their driving test

That’s why we developed our driving app called Shotgun with
the aim of cutting the number of young driver deaths to zero in
the first 1,000 miles after passing their test, even if they insure
their car with someone else.

Shotgun’s real-time feedback after every journey has already
led to driver improvement on important safety metrics such as
speeding, braking and smoothness.

There is clearly demand for Shotgun, which rewards drivers
for good driving. With over 27,000 downloads since launch,
we’ve analysed 3.6 million car journeys covering 32.8 million
miles, helping young drivers to be safer on our roads.

One Day
We give every colleague the opportunity to do a full day
each year out of the office either individually or as a team,
to volunteer for a charity or a community group day.

Our One Day initiative is hugely popular, giving everyone
the time to support causes they are personally dedicated to.

This year several of our people supported our national charity
Mind, by taking part in a Retail Challenge, where teams
competed against each other to raise the most money for
the Mind shop they worked in.

One of Direct Line Group’s teams competing in
Mind’s Retail Challenge.

portfolio are in schools, hospitals and other social
infrastructure assets

– The commercial property portfolio invests only in assets with

an energy efficiency level of D or higher (or with apportioned
funds to achieve this level), exceeding the government
minimum requirement of an E rating

During 2018 a significant new initiative was approved to
strengthen further the Group’s ESG credentials:

– In the first half of 2019, the majority of investment grade
bond mandates will transition to be managed against
ESG weighted indexes

– Investment guideline amendments now instruct the portfolio
managers to prefer investment in green bonds where they
offer a similar risk-reward profile to other issues

The Investment Committee’s section of the Annual Report can
be found on page 87.

Tax
As part of our contribution to society we believe that it is
important to pay the appropriate amount of tax and manage
our tax obligations responsibly. For the first time, this year we
are publishing the Group’s total tax contribution of £961.7
million, which includes the Group’s direct and indirect tax
contribution as well as amounts collected on behalf of the
UK Exchequer. See the full tax contribution note and tax
strategy on page 37.

Suppliers
The Prompt Payment Code sets out standards for payment
practices for the benefit of suppliers. The Group is committed
to maintaining the highest possible standards of integrity with
suppliers and partners and is a long-standing signatory of the
Prompt Payment Code. During the financial year, the Group
remained committed to prompt payment terms to ensure fair
payment practices.

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. 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.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Our planet
Environmental credentials
Our ‘Reduce, Reuse, Recycle’ strategy guides the Group in
meeting its environmental objectives. Simple changes have
proven successful:

– Targeting a 30% reduction in energy consumption by 2020

against a 2013 baseline

– Introducing ‘travel free weeks’ reducing our CO2 emissions
– Diverting 100% of office waste from landfill

– Maintaining our commitment to source 100% of our

electricity from renewable sources

This year we have taken further steps to build a sustainable future.

Recycling coffee cups
The popularity of coffee presents a recycling challenge for a
company our size.

That’s why we have partnered with a company called Simply
Cups, which works with companies to help them separate
the plastic film that can make recycling difficult. We have
successfully introduced a pilot in our Bromley office where
dedicated recycling points are encouraging our people to
use them throughout the building. Simply Cups collects our
cups and sends them to a specialist processor which enables
us to recycle 20,000 cups per month.

Environmental Champions
To further entrench the importance of sustainability across the
Group we have appointed 10 ‘Environmental Champions’
in our core sites. Working with the Institute for Environmental
Management they have received accredited training, increasing
their awareness of how sustainability issues affect the workplace.
They are using this knowledge to discuss a range of
environmental issues and drive change across the Group.

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 120.

In absolute terms, we have reduced our emissions significantly
after rationalising and implementing an energy-savings plan
across our estate over the last six years, resulting in a 46%
reduction in GHG emissions.

We communicate the details of a carbon management
programme through the Carbon Disclosure Project and
this year achieved a rating of ‘B’.

Waste
We remain focused on improving our waste management
systems. In 2018, 98% of total waste produced across
the Group was recycled or recovered for energy use.
This compares with 72% last year.

Climate change
The Group’s use of catastrophe reinsurance mitigates against
many of the worst potential physical risks from climate change,
and the Group regularly reassesses its use of catastrophe
models with the objective of ensuring they fully capture
climate-related risks.

Efforts to mitigate against climate change are driving a
de-carbonisation of the economy, including a transition
towards electric vehicles. While this does not fundamentally
change the business model, the Group continues to develop
the new processes, skills and technical knowledge required
to keep pace with changes in vehicle technology.

The Group has reviewed its investment strategy, deciding that a
greater weighting should be given towards issuers with stronger
ESG credentials (including climate change). More information
can be found in the Investment Committee’s section of the
Annual Report on page 87.

Greenhouse gas
emissions (tonnes)

8
0
3
,
7
2

1
1
6
,
2
2

5
1
3
,
9
1

9
9
3
,
7
1

9
1
2
,
6
1

Our Head Office in Bromley is successfully recycling
20,000 coffee cups per month.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSPEOPLE AND CULTURE

Our people

We are nothing without our people. We employ thousands of people
throughout the UK who use their skills and expertise to help make insurance
much easier and better value for our customers.

We know that to remain a successful business we must reflect
the customers we serve on a daily basis. We are proud of
our diversity and actively encourage people to celebrate the
different personalities that make up the Group. It is central to
our values and our identity.

We have an open culture of dialogue between management
and staff at all levels. This is underpinned by an Employee
Representative Body (“ERB”) which is made up of colleagues
elected by their peers to represent their views at divisional
and company-wide level. As of October 2018 our gross
staff turnover rate was 16.5%.

It is one of the reasons why we have such an engaged and
motivated workforce, with 90% of employees taking part in
our employee opinion survey this year.

Yet again we saw positive results, with an increase in our full
engagement score from 78% to 81% – 36 percentage points
higher than when we first ran the survey in 2014.

The percentage of employees who are proud to work for the
Group also increased from 91% in 2017 to 92%, while 87%
tell others that the Group is a great place to work (85% in 2017).

92%
of employees are proud
to work for the Group

When we receive
damaged cars
I prepare, paint
and polish
vehicles to the
manufacturer’s
standard. We
have a great
working
environment here,
being part of a
team that cares
for its customers
and employees.

JASON HODGSON
PAINT TECHNICIAN, DLG AUTO
SERVICES, WELWYN GARDEN CITY

I’m shaping the way we deliver our
future recruitment programme. The
fantastic technology we can use for
video interviews will really move us
into the digital era.

CHRISTINE SWIFT
RECRUITMENT TEAM MANAGER, LEEDS

I love how customer
focused the business
is. It is very open
to feedback,
encouraging
everyone to put
forward ideas
to improve the
customer journey.

DIPIKA BAJWA
CUSTOMER SERVICE
ADVISOR, LEEDS

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Best Companies results
We came third in the ‘Best Big Companies to Work For’ award
in the prestigious Sunday Times list 2019. This has come from
a collective belief that having a great team of highly engaged
people pulling in the same direction will deliver better results for
customers, and in turn, great results for shareholders. For more
information see www.b.co.uk/the-lists/big-companies.

– Shared parental leave and pay mirrors our maternity and

adoption benefits; our employees can ask to split their leave
into shorter periods with periods of work in between, to help
settle back in as easily as possible

– Up to 12 weeks’ full pay as part of a phased return to work
following a period of maternity/adoption/shared parental
leave for all employees

My life
We understand that work doesn’t always come first. We’re all
human beings with our own families, people we care for, other
responsibilities and dreams to follow. We launched a new set
of policies, designed to be simple and flexible, to help our
people focus on what matters to them.

– Employees with at least one year’s service receive full pay
during the first 20 weeks of maternity and adoption leave

I help monitor
and oversee
the risk
management
decisions the
business needs
to take. I love
the breadth of
what we do
as a team,
we’re always
thinking
differently.

LAURA BROMFIELD
INSURANCE RISK
MANAGER, BROMLEY

– Two weeks’ paid paternity leave for all employees

– Up to four weeks’ unpaid parental leave each year is also

available to all parents, carers and grandparents

– A period of paid compassionate leave can be agreed

for anyone

– Paid time off and/or flexible working arrangements can be

agreed during IVF investigations and treatment

– Up to 12 months unpaid lifestyle break for anyone wishing

to pursue something that really matters to them

We know that successful businesses are the ones that offer
greater flexibility and take meaningful steps to help people
achieve this. We are proud of being one of the first 10
companies to back a campaign calling for large firms
to publish policies on their external websites.

Idea Lab
The Group runs Idea Lab, rewarding employees who generate
solutions to improve our customers’ experience and make the
business more efficient. This has empowered people to think
differently and share their creativity.

Some of the highlights include:

– Giving our drivers tool kits when returning vehicles to

customers in case any further minor damage arises on the
delivery which can be instantly fixed

– Improving efficiency with extra vehicle checks for our

Green Flag business

– Using dedicated social media pages to alert customers to

fraud trends

This year we celebrated
three years of success
with over 5,900 ideas.

£3.25 million
Saved for the
business

£137,000
Awarded to our people

£27,300
Donated to charity

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSPEOPLE AND CULTURE CONTINUED

Diversity and inclusion
Building a diverse and inclusive culture takes multiple
initiatives to work together. We remain focused on bringing
in new methods to improve our performance, ensuring that all
employees take ownership in communicating the importance
of inclusive behaviour.

To challenge ourselves, we took the step this year to sign an
industry-wide pledge that sets out expected minimum standards
of inclusive behaviour. It commits us to speak up and call out
inappropriate or discriminatory behaviour, even when it is
uncomfortable to do so.

Diversity
The Group is proud of its Diversity Network Alliance (“DNA”),
the employee network which champions diversity and inclusion
in our business.

We are building inclusive leadership programmes for all
managers to assist them in managing their teams. Senior
leadership teams are also setting specific diversity commitments
aligned to their function’s needs, including, but not limited to,
recruitment and performance decisions.

This year our recruitment team has received training on removing
gender-biased language when advertising for roles, including
how to use tools which identify gender specific wording.

Pay
In April the Group reviewed its pay structure and introduced
a new company-wide minimum base salary of £18,000 for
full-time colleagues, 6% higher than the Living Wage and
18% higher than the National Minimum Wage.

As of April 2018, our median gender pay gap was 15.4%
compared to the financial services industry average of 22%.

Annual Incentive Plan
The Group’s AIP ensures that all our people are judged on
the basis of delivering against our Customer Experience and
People agendas. We know that a good customer experience
means that people are more likely to recommend us to others.
This is why the Group’s Customer Experience agenda is
focused on making it easy for customers when they take
out cover, need to make a claim or require complaints to be
resolved swiftly. We are only able to deliver this due to our
people, which is why we place a sharp focus on diversity and
inclusion and regularly engage with our people throughout the
year. The AIP therefore ensures a strong link between pay and
the Group’s performance on these specific metrics.

Employee share incentive scheme
All colleagues are able to benefit from an attractive Buy As You
Earn scheme. Our people are rewarded with a top up share
for every two they purchase, incentivising people to benefit
from the Group’s success.

Colleagues have also benefited from free share awards.
In March 2018 colleagues received a £500 free share
award to celebrate the Group’s anniversary of its launch on
the London Stock Exchange; this is in addition to three separate
share awards made in previous years. These schemes are
equivalent to an Employee Stock Purchase Plan and Employee
Stock Ownership Plan in the US.

Women in Finance Charter
The Group made significant progress against the Women
in Finance Charter commitment of 30% females in senior
leadership positions by 2019, and in 2018 we achieved
28%. This improvement has come from a combination of
external hires (utilising methods such as gender balanced
shortlists), and internal promotions, which will continue by
utilising the Group’s new cross functional talent mobility forum.

Hampton Alexander Review
The Hampton Alexander Review set targets for FTSE 350
companies to have at least 33% women on their Board and
in leadership positions by 2020. The Group is ranked 13th
in the FTSE 100 for female Board representation, with 42% of
the Board being female. This exceeds the target ahead of time.
Within the FTSE 350 Non-Life Insurance sector, we are ranked
1st for female Board representation and 4th for combined
Executive Committee and direct reports to the Board.

Gender diversity of all employees

5,967
(2017: 5,718)
Male

5,262
(2017: 5,090)
Female

Gender diversity of senior managers

99
(2017: 102)
Male

39
(2017: 34)
Female

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Mental health and wellbeing
Stress, depression and mental health issues are unfortunately
increasingly common in the UK. Mental health is central to the
Group’s Wellbeing Strategy. We give our people immediate
access to free and confidential support, with professional,
independent and impartial information and counselling. Staff
can also talk to our external provider about any issue including
stress, work issues, finances, family or personal crises or
anything else that is on their mind.

There are a number of steps we have put in place to help us all
feel comfortable discussing mental health and raise awareness:

– Our #ThisIsMe campaign has encouraged open and honest
discussion about challenges some of our people face daily

– Ran successful lunchtime sessions, exercise classes, holistic
treatments and mindfulness sessions during Mental Health
Awareness Week

– Ran our first Mental Health First Aider’s conference allowing

650 colleagues to come together and collaborate with
renowned mental health campaigners

Find out more at https://www.directlinegroup.co.uk/en/
responsibility/people/mental-health-and-wellbeing.html

– Our Mental Health First Aider’s programme, training over
135 mental health first aiders, meaning we now have
at least one on every floor, in every site. This has been
supported by training our people managers on mental
health and resilience through our ‘Engage’ programme

– Formed a partnership with the charity Mind in England

and their partner charity the Scottish Association for Mental
Health with the ambition of raising £100,000, which has
the potential to fund 13,000 people in a time of need via
Mind’s national helpline

– Became a gold partner of This Can Happen, a charity
focused specifically on tackling mental health issues in
the workplace

– Backed the ‘Where’s Your Head At?’ campaign calling
for mental health provision in the workplace to be put on
an equal footing with physical first aid

Graduate and apprenticeship
programmes
Our graduate programme continues to develop the next
generation of leaders. We currently have over 100 graduates
placed across the business, gaining first hand experience in
areas such as Underwriting, Risk, Claims and customer facing
roles. Regular rotation gives them deep insight into the Group’s
overall business strategy and changing consumer needs.

We also have 285 apprentices gaining technical expertise
across various functions including Pricing, Auto Services and
Human Resources. Their development is supported by the
opportunity to study for vocational qualifications, allowing
our apprentices to become established in the business.

Gender diversity of Board of Directors

7
(2017: 7)
Male

5
(2017: 4)
Female

Age range of employees

264
(2017: 244)
61 & over

1,323
(2017: 1,244)
51 – 60

1,787
(2017: 1,674)
25 & under

7,855
(2017: 7,646)
26 – 50

Statement of the Directors in
respect of the Strategic report
The Board reviewed and approved the Strategic report
on pages 1 to 59 on 4 March 2019.

By order of the Board
PAUL GEDDES
CHIEF EXECUTIVE OFFICER
4 March 2019

PENNY JAMES
CHIEF FINANCIAL OFFICER
4 March 2019

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSCHAIRMAN’S INTRODUCTION

Our Governance

Strong and robust corporate governance is
integral to the creation of long-term value for
our shareholders and stakeholders.

Our values

Do the
right thing

Aim
higher

Work
together

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.

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.

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

Say it
like it is

Bring all of
yourself to work

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.

Be real, authentic and true to yourself; have open
and honest conversations with all audiences in an
adult-to-adult manner; 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.

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.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Dear shareholders and
other stakeholders,
On behalf of the Board, I am pleased to present the Corporate
Governance report for the year ended 31 December 2018.

Our commitment to good
corporate governance
Your Board is committed to putting strong and robust corporate
governance at the heart of everything we do. This report
explains how your Board has dealt with ensuring that we have
effective corporate governance in place to help support the
creation of long-term value for our shareholders and stakeholders.

UK Corporate Governance Code 2018
The Board welcomes the new UK Corporate Governance
Code and the Guidance on Board Effectiveness which were
published by the Financial Reporting Council (“FRC”) in July
2018 and apply to our 2019 financial year. We seek to
ensure that our governance framework remains aligned with
best practice and we will report against the new Code in
next year’s Annual Report.

The Board has arrangements in place to comply with
the new Code. For example, in 2018, the Board gave
detailed consideration to its workforce engagement
mechanisms and agreed that attendance at the Group’s
national Employee Representative Body (“ERB”) meetings by
NEDs on a rotational basis would enable them to participate
effectively in the workforce dialogue and would enable ERB
members to benefit from exchanges of views with a variety of
NEDs in person.

Succession planning and Board changes
Following the announcement on 1 August 2018, that
Paul Geddes will step down as CEO in the summer of
2019, the Board launched a search for his successor.

The Nomination Committee conducted a thorough interview
and assessment programme, which is described in more detail
on page 83, culminating in its recommendation to the Board
that Penny James be appointed as the Group’s new CEO.
The Board agreed to appoint Penny as CEO with effect from
the conclusion of the AGM on 9 May 2019, at which point
Paul Geddes will step down from the Board.

After serving as a NED for more than six years, Clare
Thompson has also decided to step down from the Board
at the conclusion of the 2019 AGM.

The Nomination Committee led the recruitment of Gregor
Stewart and Mark Gregory, who joined the Board as NEDs
on 1 March 2018, and Fiona McBain, who was appointed
as a NED with effect from 1 September 2018. The selection
processes were informed by the Nomination Committee’s
annual review of the Board’s balance of skills, experience
and expertise.

The Nomination Committee reviews succession plans both
for the Board and at executive level each year. The Board
recognises the benefit of recruiting leaders who live the
Group’s culture and values and represent a diversity of gender,
ethnicity, cognitive strengths and socio-economic, educational
and professional backgrounds. The Board has female
representation of 42% and the Board remains committed to
the principle that diversity is a key enabler of its effectiveness.

Further information on our diversity policy, our approach to
succession planning and Board appointments can be found
on pages 83 and 84.

Executive remuneration
The Group’s remuneration policy was approved at the 2017
AGM with 98.29% of votes cast and is expected to remain in
place for three years. The resolution approving the Directors’
remuneration report at the 2018 AGM was passed with
76.58% of votes cast. Whilst the majority of our major
institutional shareholders voted in favour of the resolution,
we understand some of our shareholders objected to the
CFO’s base salary compared to that of her predecessor. I have
engaged with a number of our shareholders during the year to
discuss executive remuneration (in addition to Board succession
planning, diversity, data security, climate change and strategic
continuity) and to reassure them that good governance is a
matter of the highest priority for the Board. Further details
on the work of the Remuneration Committee can be found
in the Directors’ remuneration report on pages 88 to 91.

Effectiveness and evaluation
As Chairman, my principal objective is to guide and
develop an effective Board for the benefit of our shareholders,
whilst having regard to the interests of our other stakeholders.
This year, the Board and its Committees again carried out
their effectiveness review in-house with the assistance of
the Company Secretary. Suggestions for further improving
effectiveness were raised during the review process and
taken into consideration by the Board. Further details can
be found on page 71.

Culture and values
The Board recognises the importance of its role in setting the
tone of the Group’s culture and embedding it throughout the
Group. The Board aims to create an open and collaborative
culture that encourages the Group to make decisions that are
best for our shareholders, whilst having regard to the interests
of our other stakeholders. I believe that the values and the
Code of Business Conduct set by the Board are central to
the Group’s culture and contribute to the Group’s objectives
of long-term success and sustainable shareholder value.

Communication with our shareholders and other stakeholders
is extremely important to us. By maintaining dialogue with you,
we aim to ensure that your views are considered 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 9 May 2019.

Yours sincerely,

MICHAEL N BIGGS
CHAIRMAN

Our Code of Business Conduct
Your Board maintains strong relationships and regular
interaction with our shareholders and other stakeholders.
Their continued support for our strategic aims is important.
Visit www.directlinegroup.co.uk for more information.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSBOARD OF DIRECTORS

MIKE BIGGS
CHAIRMAN OF THE BOARD

Appointed
April 2012

Appointed
August 2009

PAUL GEDDES
CHIEF EXECUTIVE OFFICER

Biography
Mike is Chairman of the Nomination Committee. He has over 40 years’
experience of the UK and international financial services sectors.

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.

Current external appointments
Mike is Chairman of Close Brothers Group plc.

Biography
Paul is the CEO and will be succeeded by Penny James with effect from the
conclusion of the Annual General Meeting on 9 May 2019. He has served as
CEO for close to 10 years and led the Group’s transformation, its separation
from RBS Group, its initial public offering and its entry into the FTSE 100.

After joining RBS Group in 2004 as Managing Director responsible for
products and marketing, Paul became the CEO of RBS Group’s mainland
UK retail banking business. Before joining RBS Group, he held various
senior multi-channel retailing roles in the Great Universal Stores and
Kingfisher groups. Paul started his career in marketing, with UK and
European roles at Procter & Gamble.

Current external appointments
Paul is a member of the ABI Board and a NED of Channel Four
Television Corporation.

Appointed
February 2017

DANUTA GRAY
INDEPENDENT NED

Appointed
March 2018

MARK GREGORY
INDEPENDENT NED

Biography
Danuta is Chair of the Remuneration Committee. She has extensive
experience and knowledge of the telecommunications and financial services
sectors. Danuta was Chairman of Telefónica O2 in Ireland until December
2012, having previously been its Chief Executive from 2001 to 2010.
Prior to Telefónica O2, Danuta held various senior positions within BT
Group from 1984 to 2001.

Current external appointments
Danuta is Chair Designate and a NED of St. Modwen Properties plc. She
is also Senior Independent Director (“SID”) of Aldermore Group plc and a
Non-Executive Member of the Defence Board of the UK Ministry of Defence.

Biography
Mark is Chair of the Investment Committee. He has extensive experience
and knowledge of the financial services sector, particularly in life and
general insurance. Additionally, he has detailed understanding of the
retail sector and customer service.

Mark was Group CFO and Executive Director at Legal & General until
August 2017. During his 18-year career at Legal & General, he held a
variety of senior roles including CEO of the Savings business, Managing
Director of the With-Profits business, and Resources & International Director.
Before joining Legal & General, Mark held senior financial and business
development roles at ASDA and Kingfisher. Mark is an Associate of the
Institute of Chartered Accountants in England and Wales.

Current external appointments
Mark is the Chief Executive Officer of Merian Global Investors Limited.

Key for Committee membership

Audit Committee

Board Risk Committee

CSR Committee

Investment Committee

Nomination Committee

Remuneration Committee

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

JANE HANSON
INDEPENDENT NED

SEBASTIAN JAMES
INDEPENDENT NED

Appointed
December 2011

Appointed
August 2014

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 of developing and monitoring customer and conduct risk
frameworks and overseeing IT and transformation programmes.

Jane spent her early career with KPMG, working in the financial sector,
becoming responsible for delivering corporate governance, internal audit
and risk-management services in the north of England. She has also held
a number of executive roles, including Director of Audit, and Risk and
Governance Director at Aviva plc. She is a Fellow of the Institute of
Chartered Accountants in England and Wales.

Current external appointments
Jane is Chair of Reclaim Fund Ltd and an Independent Member of the
Fairness Committee at ReAssure Ltd. She is the Honorary Treasurer and a
Trustee of the Disasters Emergency Committee and has her own financial
sector consulting business. Jane is also a magistrate.

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 Group Chief Executive of Dixons Carphone plc from August
2014 to April 2018. Before that, he was CEO of Synergy Insurance Services
Limited and subsequently gained wide retail experience as Strategy Director
responsible for developing and implementing the turnaround strategy
at Mothercare.

Current external appointments
Sebastian is Senior Vice President of Walgreens Boots Alliance and President
and Managing Director of Boots. He is also a trustee of the charity Save
the Children.

MIKE HOLLIDAY-WILLIAMS
MANAGING DIRECTOR,
PERSONAL LINES

PENNY JAMES
CHIEF FINANCIAL OFFICER AND
CHIEF EXECUTIVE OFFICER-DESIGNATE

Appointed
February 2017

Appointed
November 2017

Biography
Mike is Managing Director, Personal Lines. He joined Direct Line in 2014
and has over 10 years’ insurance industry experience. Under his leadership,
the Personal Lines division has delivered strong growth, improved profitability
and strengthened its competitive position.

Mike was previously CEO 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 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.

Biography
Penny is the CFO and CEO-designate. She will succeed Paul Geddes as
CEO from the conclusion of the AGM on 9 May 2019. She has extensive
financial services experience, having been Group Chief Risk Officer and
Executive Director at Prudential plc, where she was responsible for leading
risk oversight globally.

Before this Penny was Director of Group Finance at Prudential. She had
previously been Group CFO at Omega Insurance Holdings Limited and CFO,
UK General Insurance, at Zurich Financial Services. Penny was a NED of
Admiral Group plc from January 2015 to September 2017. Penny is an
Associate of the Institute of Chartered Accountants in England and Wales.

Current external appointments
Mike is a member of the ABI General Insurance Council.

Current external appointments
None.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSBOARD OF DIRECTORS CONTINUED

FIONA McBAIN
INDEPENDENT NED

GREGOR STEWART
INDEPENDENT NED

Appointed
September 2018

Appointed
March 2018

Biography
Fiona has over 30 years’ experience in retail financial services, in the
industry and as an auditor, in the UK and the USA. She served as CEO of
Scottish Friendly Group for 11 years, before which she was Scottish Friendly
Group’s Finance Director.

Biography
Gregor is Chair of the Audit Committee. He has wide-ranging experience
of financial services, including significant finance, audit, risk management
and distribution experience gained in the insurance and investment
management sectors.

Fiona is also an Associate Member of the Institute of Chartered Accountants
in England & Wales, qualifying as an accountant early on in her career at
Arthur Young (currently known as EY).

Current external appointments
Fiona is Chairman of Scottish Mortgage Investment Trust plc and
Non-Executive Director of Dixons Carphone plc.

Gregor worked with EY for 23 years, including 10 years as a partner in the
financial services practice. Following this, he was Finance Director for the
Insurance division of Lloyds Banking Group plc, which included Scottish
Widows, from 2009 to 2012. Gregor is a member of the Institute of
Chartered Accountants of Scotland.

Current external appointments
Gregor is Deputy Chairman of Alliance Trust PLC, Chairman of Intrinsic
Financial Services Limited and is a NED of FNZ Group. He is also Honorary
Treasurer of the charity International Alert.

CLARE THOMPSON
INDEPENDENT NED

Appointed
September 2012

Appointed
January 2016

DR RICHARD WARD
INDEPENDENT NED AND SID

Biography
Clare has extensive financial and audit experience in financial services.
She was a partner at PwC from 1988 to 2011, during which time she
held several senior positions, particularly in the insurance sector. Her
roles included People Partner for Assurance, in which she oversaw talent
management, career development and the design of remuneration structures
for PwC UK. Clare is a Fellow of the Institute of Chartered Accountants in
England and Wales.

Current external appointments
Clare is Senior Independent Director of the British United Provident
Association (“BUPA”).

Biography
Richard is the SID. He was Non-Executive Chairman of Brit Syndicates Limited
and Executive Chairman of Cunningham Lindsey from 2014 to 2018. Prior to
this, he was Chief Executive of Lloyd’s of London from 2006 to 2013. He was
also a NED of Partnership Assurance Group plc, now part of Just Group plc,
between 2013 and 2016 and was Chairman of the Remuneration Committee
from 2014 to 2016. Richard previously worked for over 10 years at the
London-based International Petroleum Exchange, the second largest energy
trading exchange, re-branded ICE Futures, as both CEO 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 a research scientist for the Science and
Engineering Research Council.

Current external appointments
Richard is Executive Chairman of the Specialty division at the Ardonagh
Group. Richard serves as a member of the PRA Practitioner Panel, Bank
of England.

Key for Committee membership

Audit Committee

Board Risk Committee

CSR Committee

Investment Committee

Nomination Committee

Remuneration Committee

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

EXECUTIVE COMMITTEE

Paul Geddes chairs the Executive Committee. In addition to Paul Geddes, Mike Holliday-Williams and Penny James, the Committee
comprises the following:

JONATHAN
GREENWOOD
MANAGING DIRECTOR,
COMMERCIAL

STEVE
MADDOCK
CHIEF OPERATING
OFFICER

Joined
2000

Joined
2010

Experience and qualifications
Jonathan has over 30 years’ experience of the insurance industry. He is
responsible for delivering the Commercial strategy, developing customer
propositions, enhancing the Commercial brands and delivering efficiencies
within the Commercial businesses.

Jonathan was previously Managing Director of the Group’s household
and life businesses. He joined the Group as Product and Pricing Director
for UK Partnerships. Before joining the Group, Jonathan held roles at
HBOS, MBNA and Pinnacle.

Experience and qualifications
Steve has nearly 30 years’ experience of the insurance industry. He is
responsible for leading the Group’s Claims, Information Technology,
Information Security, Procurement and Business Services functions.

Steve’s previous roles include Director of Strategic and Technical Claims at
RSA, Director of Claims and Customer Service at Capita, and Director of
Operations at AMP. Steve is also Chairman of the Motor Insurers’ Bureau.

SIMON LINARES
GROUP HUMAN
RESOURCES
DIRECTOR

Joined
2011

Joined
2014

HUMPHREY TOMLINSON
GENERAL COUNSEL

Experience and qualifications
Simon is responsible for leading the Group’s HR function, Internal &
External Communications and Public Affairs. He is also responsible for
delivering the Group’s People and Corporate Social Responsibility
(“CSR”) strategies. Simon is a Fellow of the Chartered Institute of
Personnel and Development.

Simon has spent the majority of his career as a leader in customer-centric
businesses. Before moving into HR, Simon held several commercial business
roles in the fast-moving consumer goods and financial services sectors.
Simon is also a trustee of the KidsOut UK charity.

Experience and qualifications
Humphrey has over 25 years’ experience as a solicitor. He is responsible
for the Group Legal function and oversees a range of areas of legal advice
and services.

Humphrey’s 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 the Group, Humphrey was Group Legal Director at RSA and prior to
that he was a corporate lawyer with the City law firm, Ashurst Morris Crisp.

JOSÉ VAZQUEZ
CHIEF RISK OFFICER

Joined
2012

Experience and qualifications
José has over 25 years’ experience of the insurance industry. He is
responsible for the Group’s Risk Management and Compliance function
and is a Fellow of the Institute of Actuaries.

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.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSCORPORATE GOVERNANCE REPORT

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
The UK Corporate Governance Code 2016 (the “Code”)
applied to the financial year ended 31 December 2018.
Direct Line Insurance Group plc (the “Company”) complied
with all of the principles and, except as explained below,
all provisions of the Code throughout the financial year up
to the date of this report. The Company has applied the UK
Corporate Governance Code 2018 since 1 January 2019,
and will report against this new Code next year.

The only exception is the recommendation contained in
Provision E.1.1 of the Code that the SID should attend sufficient
meetings with the major shareholders to listen to their views.
Throughout 2018, 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, CEO
and 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 66

– Effectiveness – page 70

– Accountability – page 74

– Remuneration – page 75

– Relations with shareholders – page 75

For more information about the Code, visit the FRC’s website at
www.frc.org.uk.

Leadership
The Board
The Board understands the views of the Company’s
shareholders and has regard to a range of other key
stakeholders and their interests and other relevant matters in
Board discussions and decision-making. The example below
demonstrates how the Board recognises that stakeholders’
interests are integral to the promotion of the Company’s
long-term success.

The Board’s specific duties are set out in the Schedule of
Matters Reserved for the Board, which contains items reserved
for the Board to consider and approve, relating to strategy
and management, material contracts, financial reporting

Stakeholder interests: the strategic plan

In discussing and approving its strategic and financial plan,
the Board carefully considers the potential impact on all of the
Group’s stakeholders, and other relevant matters, whilst seeking
to ensure that the plan promotes the success of the Company
for the benefit of its members as a whole. Specific matters
discussed by the Board include:

– investments in capability to be made during the plan period
to make insurance easier and better value for our customers,
supporting the longer-term success of the Group and
enabling it to respond to long-term trends in the markets
in which it operates;

– engaging with our people to improve our diversity, inclusion,
wellbeing and development, providing them with a more
productive work environment and the support they need
through our flexible working and wellbeing strategies;

– the Group’s Code of Business Conduct which supports

the Board’s commitment to the highest possible standards
of integrity in business relationships with our suppliers
and partners;

– the Group’s ESG philosophy that long-term sustainability
is good for all our stakeholders, as part of which our
Responsibility strategy supports positive relations with

our communities, an appropriate approach to the
environment, our partnership with Brake on road safety
and our emphasis on mental health; and

– the importance of maintaining the strong and positive
reputation of our brands and the significant investment
being made to improve customer journeys, through which the
Group demonstrates its high standards of business conduct.

Our Chairman, Mike Biggs, and NED, Danuta Gray.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

and controls, internal controls and risk management, Board
membership and succession planning, corporate governance,
structure and capital, and delegation of authority.

In addition to the Schedule of Matters Reserved to the Board,
each Board Committee has written terms of reference defining
its role and responsibilities. Further details regarding the role
and activities of the Board and Board Committees can be
found on pages 68 and 76 to 87.

Board composition
As at the date of this report, the Board comprised the
Chairman, who was independent when appointed to the
Board; three Executive Directors; and eight independent NEDs,
including the SID. The current Directors served throughout all
of 2018, except for Mark Gregory and Gregor Stewart who
were appointed on 1 March 2018 and Fiona McBain who
was appointed on 1 September 2018; Andrew Palmer and
John Reizenstein also served during the year, retiring from the
Board at the conclusion of the AGM on 10 May 2018.

Biographical details of the Directors of the Company as at the
date of this report are set out on pages 62 to 64.

Meetings
The Board and Board Committees held a number of scheduled
meetings in 2018 at which senior executives, external advisers
and independent advisers were invited to attend and present
on business developments and governance matters. The
Company Secretary attended all Board meetings and he, or
his nominated deputy, attended all Board Committee meetings.
The table below sets out attendance at the scheduled meetings
in 20181. Additional Board and Committee meetings were
convened during the year to discuss ad hoc business
development, governance and regulatory matters.

Meetings attendance

Board

Audit
Committee

Board Risk
Committee

CSR

Committee

Investment
Committee

Nomination
Committee

Remuneration
Committee

Chairman
Mike Biggs
Senior Independent Director
Richard Ward
Non-Executive Directors
Danuta Gray
Mark Gregory
Jane Hanson
Sebastian James
Fiona McBain
Andrew Palmer2
Gregor Stewart2
Clare Thompson
Executive Directors
Paul Geddes
Penny James
Mike Holliday-Williams
John Reizenstein
Executive Committee Member
Simon Linares

9 of 9

9 of 9
7 of 7
9 of 9
9 of 9
3 of 3
4 of 4
6 of 7
9 of 9

9 of 9
9 of 9
9 of 9
4 of 4

–

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3 of 3
5 of 5
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2 of 2
3 of 3
5 of 5

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–

5 of 5

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5 of 5
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2 of 2
3 of 3
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–
–
–
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–

–
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3 of 3
3 of 3
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3 of 3
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–

–

3 of 3

4 of 4

3 of 3

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–
2 of 2
4 of 4
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2 of 2
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–

–
2 of 2
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2 of 2

3 of 3
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2 of 2
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4 of 4
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4 of 4
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1 of 2
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4 of 4

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–

–
–
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–

3 of 3

–

Notes:
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.
2. Due to other prior commitments, Andrew Palmer was unable to attend the February 2018 Remuneration Committee meeting and Gregor Stewart was unable to

attend the April 2018 Board meeting. Papers were circulated to all Directors before the meetings and those unable to attend could raise issues and give comments
to the Chairman in advance of the meetings.

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CORPORATE GOVERNANCE REPORT CONTINUED

Structure of the Board, Board Committees and executive management
The diagrams on pages 68 and 69 summarise the role of the Board, its Committees and the responsibilities of the Chairman,
the SID, the NEDs, the CEO and the Executive Committee. The Board and Board Committees have unrestricted access to
management and external advisers to help discharge their responsibilities. The Board and Board Committees are satisfied that,
in 2018, sufficient, reliable and timely information was received to perform their responsibilities effectively. Each Committee
plays a vital role in helping the Board to operate efficiently and consider matters appropriately.

Board

Board Committees

Leadership
The Board has clear divisions of responsibility
and seeks the long-term success of the Group.

Shareholder benefit
The Board organises and directs the Group’s
affairs in a way that it believes will help the
Group succeed for the benefit of its members
as a whole, whilst having regard to its
stakeholders generally.

More information on how the Board has
regard for the Group’s wider stakeholders
can be found on page 66.

Operations
The Board supervises the Group’s operations,
with a view to ensuring they are effectively
managed, that effective controls are in
place, and that risks are assessed and
managed appropriately.

Financial performance
The Board sets the financial plans, annual
budgets and key performance indicators and
monitors the Group’s results against them.

Strategy
The Board oversees the development
of the Group’s strategy, and monitors
management’s performance and progress
against the strategic aims and objectives.

Culture
The Board develops and promotes the
collective vision of the Group’s purpose,
culture, values and behaviours.

Information & support
The Board accesses assistance and advice
from the Company Secretary. The Board may
seek external independent professional
advice at the Company’s expense, if
required, to discharge its duties.

The Audit Committee:
– Monitors 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

The Board Risk Committee:
– Provides oversight and advice to the Board in relation to
current and potential future risk exposures of the Group
and the future risk strategy, including determination of
risk appetite and tolerance

– Responsible for reviewing and approving various formal
reporting requirements and promoting a risk awareness
culture within the Group

The Remuneration Committee:
– 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

The Nomination Committee:
– Reviews the Board’s structure, size, composition, and

balance of skills, experience, independence, and knowledge
of the Company

– Leads the process for Board appointments and makes

recommendations to the Board

– Provides guidance to management on executive

succession planning

The CSR Committee:
– Provides oversight and advice on how the Group conducts

its business responsibly, including matters relating to
environmental, employee engagement and wellbeing,
community involvement, ethics and diversity

The Investment Committee:
– Provides oversight of the Group’s investment strategy

– Oversees the management and performance of the Group’s

investment portfolio

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Board and executive management roles
Each Director brings different skills, experience and knowledge to the Company, with the NEDs contributing additional
independent thought and judgement. Depending on business needs, the NEDs and the Chairman commit at least three
days a month and three days a week respectively to discharging their duties effectively in accordance with their letters
of appointment.

The Chairman:
– Guides, develops and leads

the Board

– Plans and manages the

Board’s business

– Ensures the Directors

receive accurate, timely
and clear information

– Has an individual role profile
agreed by the Board, as does
the CEO. These profiles clearly
define their respective roles and
responsibilities and ensure that
no one person has unlimited
powers of decision-making

The SID:
– Acts as a sounding board
for the Chairman and an
intermediary for the other
Directors when necessary

– Is available to shareholders
if they have any concerns
they cannot resolve through
normal channels

– Leads the Chairman’s

performance evaluation annually

The NEDs:
– Challenge management in

an objective and constructive
manner

– Use their wider business

experience to help develop
the Group’s strategy

The CEO
As authorised by the Board, the CEO manages the Group’s day-to-day operations and delivers its strategy. The CEO
delegates certain elements of his authority to Executive Committee members to help ensure that senior executives are
accountable and responsible for managing their businesses and functions.

The Executive Committee
The Executive Committee is the principal management committee that helps the CEO manage the Group’s operations.
It helps the CEO:

– Set performance targets

– Implement Group strategy

– Monitor key objectives and commercial plans to help achieve the Group’s targets

– Evaluate new business initiatives and opportunities

Managing
Director
Commercial

Managing
Director
Personal
Lines

Chief
Operating
Officer

Chief Risk
Officer

Chief
Financial
Officer

General
Counsel

Group
Human
Resources
Director

Biographical details of the Executive Directors and Executive Committee members are shown on pages 62 to 65.

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STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSCORPORATE GOVERNANCE REPORT CONTINUED

Effectiveness
Board meetings & activity in 2018

Jan

Feb

March

April

May

June

July

August

September

October

November

December

Board meetings
The activities undertaken by the Board in 2018 were intended
to help promote the long-term success of the Company.
Scheduled Board meetings (set out on the timeline above)
focused on four main themes in 2018:

Strategy & execution, including: approving and overseeing
the Group’s key strategic targets and monitoring the Group’s
performance against those targets; reviewing customer
experience and trends and monitoring the Group’s
performance against external brand metrics; reviewing and
approving key projects aimed at developing the business or
rationalising costs; considering growth opportunities; and
reviewing the individual strategy of key business lines.

Financial performance and investor relations, including:
setting financial plans, annual budgets and key performance
indicators, and monitoring the Group’s results against them;
considering the Group’s reserving position; approving the
solvency II narrative reports; approving financial results for
publication; approving main reinsurance arrangements and
motor reinsurance renewal; and reviewing broker reports on
the Group, alongside feedback from investor meetings.

Risk management, regulatory and other related governance,
including: considering the impact of the Ogden discount
rate; reviewing and agreeing the Group’s Policies; setting risk
appetites; approving the ORSA; approving major changes to
the Group’s partial internal model and seeking to ensure that
the Group complies with its regulatory requirements; reviewing
the Group’s solvency position and forecast; and agreeing the
Group’s ESG approach.

Board & Board Committee governance, including:
receiving reports from the Board’s Committees; updating
terms of reference for the Committees; implementing an
annual review of the Board’s and Board Committees’
effectiveness; and conducting an annual review of the
Group’s governance framework.

The co-ordination of the Board meeting content is
managed by the Chairman, and supported by the CEO
and Company Secretary.

In addition to routine business, the Board considers and
discusses key issues that impact on the business as they arise.
The CEO and CFO spend a considerable amount of time with
the different business areas ensuring that the Board’s aims are
being correctly disseminated throughout the Group, and that
our peoples views and opinions are reported back to the Board.

The NEDs meet with key management outside the Board and
Committee fora to obtain a wider view of the Group’s activities
and attend meetings of the Group’s ERB to engage with staff and
report their views back to the Board.

Strategy day
The Board sets aside time each year outside the annual
Board calendar to hold a strategy day giving the Directors the
opportunity to focus solely on strategic matters. In June 2018,
the Board held a session offsite to set and monitor progress
against the Group’s strategy and to discuss the strategic
challenges and opportunities the Group faces in the future,
including advances in motor and connected home technology.

Board training
The Board is committed to the training and development of
Directors to improve their knowledge about the business and
the regulatory environment in which it operates. The Company
Secretary is responsible for helping the Chairman identify
and organise training for the Directors which is tailored to
individual needs.

The Company Secretary maintained the training agenda for
the Board and its Committees during the year. Training topics
during the year included anti-bribery and corruption, growth
initiative strategy updates, cyber training, competition law, the
forthcoming changes in accounting rules, the IT transformation
programme, Green Flag and Capital Model training.

In addition, a series of deep dives into the Group’s business
areas took place during the year to deepen each Director’s
knowledge of the business and provide oversight at Board
and Committee level.

Board inductions
All new Directors appointed to the Board undertake an
induction programme aimed at ensuring they develop an
understanding and awareness of our businesses, people and
processes, and of their roles and responsibilities as Directors
of the Company. The programmes are tailored to suit each
Director and include:

– provision of relevant current and historical information about

the Company and the Group;

– visits to operations around the Group;

– induction briefings from Group functions; and

– one-to-one meetings with Board members, senior

management and the Company’s advisers.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Key for Board meetings & activity in 2018

Board meetings

Strategy day

Board training

Induction

Business unit visits by Board members

Jan

Feb

March

April

May

June

July

August

September

October

November

December

Penny James, who joined the Board as CFO-designate in
November 2017, completed her induction programme before
succeeding John Reizenstein as CFO on 1 March 2018.

strategy, the quality of the information received by the Board
to monitor the progress of the Group’s major technology
transformation programmes and the Group’s culture.

The Committee questionnaire focused on the clarity of each
Committee’s role and scope, its composition, the resources
available to it, the balance between challenging and
supporting management and the quality and timeliness
of information supplied to each Committee.

Outcome of the effectiveness
review
The Chairman discussed the outcome of the effectiveness
review with the NEDs and the CEO, providing them with
feedback on their individual performance and contributions.
The Board and each of its Committees received and debated
their own reports resulting from this exercise. Feedback on the
Chairman’s performance was provided by the SID, with input
from his fellow NEDs.

Based on the responses to the questionnaire and resulting
reports, the Directors are satisfied that the Board and each
of its Committees operated effectively in 2018. The Directors
are also satisfied that they made significant progress in areas
identified for potential improvement in 2017.

Whilst the findings of the 2018 effectiveness review were
positive, the Board and each of its Committees will focus
during 2019 on opportunities for fine-tuning with the
objective of further improving effectiveness.

Mark Gregory, Gregor Stewart and Fiona McBain, who
were appointed as NEDs during the year, each had bespoke
induction programmes which included sessions on the Group’s
strategy, operational businesses, financial performance, capital
management, risk management, regulatory landscape and
governance framework.

Business unit visits
During 2018, NED visits to operational business units in
Bromley, London, Bristol, Leeds, Doncaster and Farnham were
arranged to meet the management teams and better understand
how the business operates. In September, the Board visited the
Group’s Bristol site to interact with our people in the HR, Legal
Services, Customer Operations and Experience, Business
Solutions and Direct Line for Business teams.

Board and Committee
effectiveness review
In accordance with the principles and provisions of the Code,
the Board’s 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.
In 2018, the Board chose to conduct its effectiveness review
in-house as an independent Board effectiveness review had
taken place in 2016.

The Company Secretary designed and co-ordinated the
process. This involved agreeing a structured questionnaire with
the Chairman, SID and the Chairs of the Board’s Committees,
distributing it to and interviewing the Directors and relevant
executives and advisers and preparing reports. The Board
and each of its Committees reviewed and discussed the
relevant reports.

Respondents were asked whether matters identified
as particular strengths in previous years, including the
Board’s leadership and culture, the openness of debate,
the productiveness of proceedings, the quality of information
flow to the Board and the relationship between the Board
and management, remained positive. Interviews also covered
the extent to which the Board’s 2018 strategy day had helped
the Board to debate and establish the Group’s medium-term

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CORPORATE GOVERNANCE REPORT CONTINUED

– High Level Control and System of Governance

Framework document;

– Risk appetite statements, which are described on page 44;

– Enterprise Risk Management Strategy and Framework, which

is described on page 45;

– Group policies, which address specific risk areas and inform
the business how it needs to conduct its activities to remain
within risk appetite; and

– Minimum Standards, which interpret the Group policies into
a set of operational requirements that can be implemented
throughout the Group.

Governance framework
and structure
The Board oversees the 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. An explanation of these responsibilities can be
found on page 44.

The Group’s governance framework is detailed in the Group’s
High Level Control and System of Governance Framework
document. This document details how the Group meets
solvency II and PRA requirements to identify Key Functions
and to have and maintain a Responsibilities Map in respect of
the PRA and FCA Senior Managers and Certification Regime
requirements. The Board reviews these documents annually.

The core elements of the governance framework are the:

– Matters Reserved to the Board and the Board Committees’

Terms of Reference;

The diagram below summarises the split of responsibilities for the different parts of the Group’s governance framework.

The Board approves
the High Level Control and
System of Governance Framework,
overarching risk appetite statements
and Group policies following review
by the Board Risk Committee.

Matters Reserved
to the Board
and Board
Committees’
Terms of
Reference

High Level Control and System
of Governance Framework Document

Overarching risk appetite
statements

Group policies

The Board Risk Committee
approves
the risk management framework and the
policy risk appetite statements, following
review by the Risk Management Committee
(a committee comprised of executives).

Policy owner approves
Minimum standards subject to non-objection
from the Risk Management Committee.

Enterprise Risk
Management Strategy
& Framework

Policy risk appetite
statements

Minimum Standards

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Further information regarding the Group’s approach to
diversity including the process for Board appointments and
reappointments can be found on pages 83 and 84 of the
Nomination Committee report.

Senior management
gender diversity
The Board remains committed to ensuring that high-performing
women from within the business and from a variety of
backgrounds, who have the requisite skills, are given the
opportunity to progress their career internally.

The Group is a signatory to the Women in Finance Charter
which aspires to see gender balance at all levels across
financial services firms. The Group is committed to seeking
to increase female representation at senior management level
to 30% by the end of 2019. As at 31 December 2018,
women represented 28% of the Group’s senior management
population. The charts on pages 58 and 59 provide a
clearer picture of the diversity of the Board, senior
managers and employees.

The Board continues to support Group-wide diversity initiatives,
including succession planning programmes, to broaden and
strengthen female talent at middle management level. Other
key 2018 gender diversity initiatives included: the promotion of
flexible working; a partnership with the EveryWoman network
which helps organisations enhance the potential of female
talent; and mentoring schemes and associated development
programmes for high-potential female candidates.

Additional 2018
diversity initiatives
The Board acknowledges that diversity includes but is not limited
to gender and aims to increase demographic and philosophical
differences at Board level and throughout the Group.

The Board advocates the importance of cultural and ethnic
diversity and aims to increase the ethnic diversity across the
Group including at Board and senior management level. The
Board and senior management continue to support the DNA
network which champions diversity and inclusion within our
organisation through strands relating to generational divide,
unconscious bias, belief, Black, Asian and minority ethnics,
gender, sexual orientation, disability, working families
and neuro-diversity.

The Board has oversight of diversity initiatives carried out
through the remit of the CSR Committee, which received regular
updates on the ‘build an inclusive culture’ strand of our CSR
strategy during 2018. Further details on diversity initiatives
can be found in the People and culture report on page 58
and in the CSR Committee report on page 85.

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 deals 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 and executive management are committed to
ensuring that diversity is promoted across all areas of the
Group and that everyone is treated fairly, irrespective of
their racial or ethnic origin, gender, age, disability, belief
or sexual orientation, religion, or educational or professional
background. There is a Board approved diversity policy
and progress has been made in embedding principles
and practices to promote diversity across the Group and to
champion the benefits of a diverse and inclusive workforce.

The principles and practices set by the Board and the progress
made in broadening the diversity of the Board include:

1. Maintaining at least 30% female representation
on the Board
The Board aims to maintain female representation of at least 30%
and remains committed to seeking to improve further its position
on diversity when appropriate opportunities arise. The Board will
continue to appoint the most appropriate candidates based
on knowledge, skills, experience and, where necessary,
independence. As at the date of this report, female representation
on the Board was 42% which exceeds the target set in Lord
Davies’ Women on Boards Review Five Year Summary to be
achieved by 2020 and remains on target with the Hampton-
Alexander Review’s recommendations for a minimum of 33%
of women’s representation on boards by 2020.

2. Only engaging executive search firms who have signed
up to the Voluntary Code of Conduct for Executive Search
Firms on gender diversity and best practice
In its search for candidates, the Board aims to only engage
with executive search firms who are signatories to the Voluntary
Code of Conduct for Executive Search Firms as recommended
by Lord Davies. During the year, the Nomination Committee
worked closely with Egon Zehnder which culminated in the
appointment of Fiona McBain, Mark Gregory and Gregor
Stewart. Egon Zehnder is a signatory to the Voluntary Code
and has no other connection to the Company.

The search process for the replacement CEO, which began
in 2018 and culminated in the appointment of Penny James
with effect from 9 May 2019, involved engaging MWM
Consulting, which is also a signatory to the Voluntary
Code and has no other connection to the Company.

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STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSCORPORATE GOVERNANCE REPORT CONTINUED

Nomination Committee
On behalf of the Board, the Nomination Committee assesses
the NEDs’ independence, skills, knowledge and experience
annually. The Board concluded that every current NED
was independent, continued to contribute effectively, and
demonstrated they were committed to the role. The Board
is also satisfied that the Chairman’s external appointment as
Chairman of Close Brothers Group plc set out on page 62
does not restrict him from carrying out his duties effectively.

Jane Hanson and Mike Biggs have served on the Board since
December 2011 and April 2012 respectively. At the Board’s
request, they have agreed to continue serving as NEDs and
resolutions for their re-election as Directors will be proposed
to the 2019 AGM. The Board is satisfied that Jane and Mike
remain independent in judgement and character, continue to
make a significant contribution to the proceedings of the
Board and its Committees and that the extension of their
terms of appointment will provide valuable continuity as
work on refreshing the Board progresses.

You can find out more about these activities and the Nomination
Committee’s work during the year on pages 83 to 84.

Accountability
An explanation of how the Board complies with the Code
in relation to accountability 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 22 and
23, and the strategy for delivering Company objectives is
on pages 19 to 21; and

– how the Board has assessed the Group’s longer-term viability
and the adoption of the going concern basis in the financial
statements is on pages 49 and 121.

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 78 to 79.

Responsibility for preparing
the Annual Report & Accounts
The Board’s objective is to give shareholders a fair, balanced
and understandable assessment of the Company’s position
and prospects and business model and strategy. The Board
is also responsible for maintaining adequate accounting
records and seeks to ensure 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 121. The
Company’s External Auditor explains its responsibilities
on page 129.

The Directors confirm that they consider that the Annual
Report & Accounts, taken as a whole, are fair, balanced
and understandable and provide the information that
shareholders need to assess the Group’s position and
performance, business model and strategy. In arriving
at this conclusion, the Board was supported by a number
of processes, including the following:

– management drafted the Annual Report & Accounts to ensure
consistency across sections, and a steering group comprising
a team of cross-functional senior management provided
overall governance and co-ordination;

– a verification process, to ensure the content was

factually accurate;

– members of the Executive Committee reviewed drafts of

the Annual Report & Accounts;

– the Company’s Disclosure Committee reviewed an advanced

draft of the Annual Report & Accounts; and

– 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 oversees 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 frameworks for risk management and internal control
were in place for the financial year under review and up to
the date of this report. They are regularly reviewed by the
Board and comply with the Financial Reporting Council’s
updated guidance on Risk Management, Internal Controls
and Related Financial and Business Reporting.

The Group operates a Three Lines of Defence model. You
can find out more about this in the Risk management section
on page 44.

The Board, with the assistance of the Board Risk Committee
and the Audit Committee as appropriate, monitored the
Company’s risk management and internal control systems
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 programme of activity to upgrade and better
integrate the major IT systems within the Group’s technology
infrastructure, including focusing on developing future capability
for both customers and our people and monitoring 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 appropriate 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 process included
reporting on the nature and effectiveness of the controls, and
other management processes that manage these risks.

The Board Risk Committee regularly reviews significant risks
and how they might affect the Group’s financial position;
comparisons to agreed risk appetites; and what the
Group does to manage risks outside its appetite.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

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 determines the nature and extent of the risks that it is
willing to take to achieve its strategic objectives. The Directors
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
46 and 47.

This confirmation is based on the Board Risk Committee’s
twice-yearly review and challenge of the Group’s Material
Risk Assessment and the Board’s review and approval of
the Group’s risk appetite statements. The Risk Assessment
identifies risks quantified as having a residual risk impact of
£40 million or more based on a 1-in-200 years likelihood.
The quantifications are produced through stress and scenario
analysis, and the capital model. Each directorate’s bottom-up
risk identification and assessment supplements the Risk
Assessment. The Risk Assessment also plays a key role in
developing the ORSA and assessing the Group’s strategic plan.

Remuneration
The Board has delegated responsibility to the Remuneration
Committee for the remuneration arrangements of the Group’s
Executive Directors and Chairman. It recommends and monitors
the remuneration level and structure for senior executives. You
can find out more about this in the Directors’ remuneration
report starting on page 88.

Relations with shareholders
The Board believes that engaging regularly with the
Company’s shareholders is vital to the Group’s success.
Communicating and engaging with investors means the Board
can express clearly its strategy and performance and receive
regular feedback from investors. It also gives the Company
the opportunity to respond to questions and suggestions.

During 2018, the Board received regular updates from
the Executive Directors, the Investor Relations team and the
Company’s corporate brokers on the views of its shareholders
and other investors.

The Chairman, SID and NEDs are available to attend meetings
with major shareholders at their request. In 2018, the Chairman
met some of the Company’s major shareholders and discussed
corporate governance topics including executive remuneration.

It is open to all shareholders to raise any issues they wish
with the Chair of the Remuneration Committee. As part of the
development of the revised remuneration policy for Executive
Directors which was approved by shareholders at the Group’s
2017 AGM, the Chair of the Remuneration Committee led a
wide-ranging consultation through engagement with proxy
advisers, regulators and shareholders on corporate governance
matters including executive remuneration.

During 2018, the CEO and the CFO met with key shareholders
following announcements of results and reported shareholders’
views back to the Board.

The Investor Relations team helps the Directors to communicate
with investors. The Directors, in conjunction with senior
management and the Investor Relations team, participated
in varied forms of engagement, including investor meetings,
seminars and conferences throughout the year. Management
hosted analysts at its Bristol offices in October 2018 to bring
to life the Group’s various customer-centric and agile ways
of working.

The CEO and CFO hosted conference calls for the Group’s
quarterly results and presentations for its 2017 full year results
in February 2018 and its 2018 half year results in August
2018. In addition, the CEO and CFO provided a short video
summarising the key messages of the Group’s 2017 full year
results which is available on the Company’s website.

We communicate with our debt investors through regular
announcements and the debt investor section of our website
which contains bond information, credit ratings and materials
relating to the Group’s year-end reports, and information about
our long-term debt maturity profile so investors can see the
related future refinancing needs of the Group.

The Directors, in conjunction with senior management and the
Investor Relations team, met with debt investors in the course
of the Group’s normal investor conferences and roadshows
throughout 2018. In addition to this, the CFO hosted a
meeting with debt investors in September 2018.

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 2018.

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 who wish to continue to serve will be put
forward for election or 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 Articles of Association of the Company and the letters
of appointment of the NEDs and the Chairman are available
for inspection at the Company’s registered office and AGM.

The outcome of the resolutions put to the AGM, including poll
results detailing votes for, against and withheld, are published
on the London Stock Exchange’s and the Company’s websites
once the AGM has concluded.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSCOMMITTEE REPORTS

Audit
Committee report

Membership, attendance and responsibilities of
the Committee can be found on pages 67 and 68.

GREGOR STEWART
CHAIR OF THE AUDIT
COMMITTEE

Areas of focus in the reporting period
– The Committee reviewed how, International Financial

Reporting Standard (“IFRS”) IFRS 17 ‘Insurance
Contracts’, which relates to recognition, measurement,
presentation and disclosure of insurance contracts, is
expected to apply to the Group for annual reporting
periods beginning on or after 1 January 2022. It is
expected to have a significant impact on accounting
for insurance contracts. The Committee received training
dedicated to the key aspects of IFRS 17 and the likely
areas of impact on the Group.

– The Group initiated a change programme to transition
to IFRS 9 and IFRS 17. As part of the programme the
Group’s ledger system will be upgraded. The change
programme will review finance processes to deliver
operational benefits alongside the transition to IFRS 17.

– The Board delegated oversight of the changes

to the financial reporting system to the Committee.
Throughout 2018 the Committee received updates on
the programme and the implications of the new IFRSs
on the financial statements.

– The impact of the change in the methodology for setting
the Ogden discount rate on reserves following the Civil
Liability Act 2018 receiving Royal Assent and the related
sensitivity analysis were considered by the Committee.

Committee skills and experience
Gregor Stewart was appointed Chair of the Committee in May
2018. In line with the Code, all members of the Committee are
independent, and 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, with the
exception of Gregor Stewart who is a member of the Institute
of Chartered Accountants of Scotland. They also have recent
and relevant financial experience across a number of different
insurance businesses, 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 IFRS 17 and solvency II technical provisions.

Main activities during the year
At each scheduled Committee meeting, the Committee received
reports on financial reporting, reserves, internal controls and
Group Audit, except at the December 2018 meeting where
the focus was on pre-year-end financial matters. You can find
out more about this in the following sections.

Financial reporting
The Committee considered the integrity of the Group
financial statements and all external announcements relating
to its financial performance. In 2018, this included the
Group’s 2017 Annual Report & Accounts, the Solvency and
Financial Condition Report and its 2018 Half Year Report.

The Committee followed a review process before
recommending the reports to the Board which focused on
the choice and application of significant accounting policies,
emphasising those requiring a major element of estimation
or judgement. The review also considered the going concern
assumptions and viability statement in the Annual Report &
Accounts, valuation of assets and impairment reviews, reserving
provisions, non-recurring period-specific transactions and clarity
of disclosures.

The Committee reviewed and concluded that the Annual
Report & Accounts taken as a whole was 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 2018 Annual Report & Accounts,
the Committee focused on the significant judgements and
issues which could be material to the financial statements.
These included the matters set out in the table on page 77.

The Committee challenged the judgements being made
and also discussed these matters with the External Auditor.

Reserves
The Committee reviews and challenges the key assumptions
and judgements, emerging trends, movements and analysis
of uncertainties underlying the estimate of reserves. These
assumptions and judgements are informed by actuarial
analysis, wider commercial and risk management insights,
and principles of consistency from period to period. After
reviewing the reserves, the Committee recommends them
to the Board.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Significant issues

Matter considered

Description

Insurance
reserves valuation

The Committee reviewed the level of reserves of the Group. As part
of its review, the Committee considered the estimate of reserves, taking
into account certain trends and risks as well as management judgement
where higher confidence, knowledge and experience can be applied.
The Committee also obtained insight from an independent actuarial
review of the reserves. Further information on reserves is provided
on pages 76 and 77.

Ogden discount rate

The Committee considered the process, estimates and judgements
made in recommending the new Ogden discount rate. The Civil
Liability Act 2018 received Royal Assent on 20 December 2018.
The Act details how the UK Government will set the rate used in the
assessment of damages for large bodily injury claims. The Actuarial
Director considered the new discount rate setting process, after looking
at information published by the UK Government on the factors which
would be considered when the new rate was set. The Actuarial
Director proposed that the rate used by the Group in assessing
the level of reserves be changed from minus 0.75% to 0%.

Valuation of
investments not
held at fair value

Valuation of
intangible assets

The Committee considered reports on the estimates and judgements
applied to the carrying value of the Group’s investments that are not
held at fair value and the basis for the valuation. These assets are
principally comprised of infrastructure loans, commercial real estate
loans and private placement bonds held within the investment portfolio.
Information was provided to the Committee on a regular basis to
support the value recognised in the accounts.

The Committee considered the valuation of intangible assets.
These mainly related to investment in the Group’s IT systems and
capabilities in respect of projects which are aimed at improving
the digital offering, customer experience and operational efficiency.
Reports were presented to the Committee covering the assumptions
and judgements made in arriving at a valuation of these assets.

Action

In 2018, the Committee
reviewed and challenged the
level of reserves. In addition,
it monitored developing trends
in risks that could materially
impact them. On an ongoing
basis it received updates from
the Actuarial Director on how
estimates of reserves matched
the claims paid.

The Audit Committee
approved the Actuarial
Director’s proposal to change
the rate used in assessing the
level of reserves. In addition,
the Committee reviewed
the implementation process.
The application of the new
reserving rate led to a release
of £55 million reserves.
The Committee continues to
monitor the factors that impact
the Ogden discount rate and
a new rate will be set in
accordance with the Act
by the middle of 2019.

In 2018, the Committee
considered major accounting
estimates and judgements
in respect of assets held at
fair value and was satisfied
with the carrying value of
investments and the basis
for their valuation.

In 2018, the Committee
considered major accounting
estimates and judgements in
respect of the valuation of
intangible assets and was
satisfied that the assets
did not warrant any
further impairment.

The Committee also considered an appropriate
balance between internal and external actuarial review.
An external actuarial review of the reserves was carried out
by PricewaterhouseCoopers LLP (“PwC”) for the Directors of the
Company. The appointment of consultants to provide actuarial
reviews of reserves is subject to approval by the Committee.

Internal control and Group Audit
During the year, the Committee reviewed the adequacy
and effectiveness of the Group’s internal control systems.
The Group’s financial reporting control framework is part of the
wider internal controls system. It addresses financial reporting
risks. The Board delegates supervision of the framework to the
Committee while the CFO is responsible for the framework’s
operation on a day-to-day basis. During 2018, the Committee
received regular reports on control deficiencies, compensating
controls and the mitigating actions taken by management.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSCOMMITTEE REPORTS CONTINUED
AUDIT COMMITTEE REPORT CONTINUED

The Committee oversees Group Audit’s work and seeks
to ensure industry best practice is adopted 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 the most significant actions are completed.
The Committee approves the Group Audit Charter, which
is reviewed annually.

External audit
Deloitte LLP (“Deloitte”) has served as the Company’s Auditor
since 2000. Before listing, the Group was audited by Deloitte
as a division of RBS Group. The Committee is responsible for
overseeing the External Auditor and agreeing the audit fee,
as well as approving the scope of the External Auditor’s
annual plan.

The current audit partner is Mr Colin Rawlings, FCA, who
was first appointed for the 2016 audit. The Committee has
reviewed the latest public report on Deloitte, issued by the FRC
Audit Quality Review Team, and has discussed the findings
with Mr Rawlings and made enquiries as to how those findings
relevant to the Group have been addressed.

During 2018, following a tender process, the Committee
appointed PwC to carry out an external quality assessment
of Group Audit in accordance with guidelines issued by
the Chartered Institute of Internal Auditors. The scope of
the assessment was to assess Group Audit against the CIIA
requirements, including the Effective Internal Audit in Financial
Services Code in the Financial Sector and best practice.
The assessment concluded that the function has achieved the
highest rating of compliance with CIIA standards and the CIIA
Financial Services Code. A number of recommendations were
made by PwC to support the function in continuing to evolve
and keep pace with the future challenges and expectations it
faces both internally and externally. The Committee endorsed
the report and recommendations for continuing improvement
and the findings have been incorporated into an action plan.
In addition, the Committee concluded that the function had
appropriate resources.

Additional information
The Committee has unrestricted access to management and
external advisers to help discharge its duties. It is satisfied that
in 2018 it received sufficient, reliable and timely information
to perform its responsibilities effectively.

The Actuarial Director, external actuarial advisers, External
Auditor and Group Head of Audit meet privately with the
Audit Committee, in the absence of management.

The Chair reports on matters dealt with at each Committee
meeting to the subsequent Board meeting.

The Financial Reporting Council’s Audit Quality Review team
reviewed the audit of the 2017 financial statements of the
Group’s principal subsidiary as part of their 2018 annual
inspection of audit firms. The inspection covered selected
aspects of the audit and focused on identifying areas where
improvements were required. The Committee received a full
copy of the report and noted that there were no areas for
improvement identified. In addition, the AQR team identified
areas of good practice within the audit areas they reviewed.
Having considered the report and discussed it with the audit
partner, the Committee was satisfied that there was nothing
noted which might have a bearing on the audit appointment.

External Auditor tenure
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.
This took into account the reforms of the audit market by the
Competition and Markets Authority and the EU, under which
Deloitte can continue as the Company’s External Auditor until
31 December 2023. The Committee considered whether it
was appropriate to tender the external audit contract for the
year ending 31 December 2020 and concluded it was not
appropriate. The Committee also confirmed that it will continue
to comply with the regulations governing auditor rotation.

When considering the timing of the external audit tender,
the Committee took into account the Group’s ongoing change
programmes including the implementation of a new general
ledger, the use of consultants employed by auditing firms in
connection with those programmes, audit partner rotation,
the impact of IFRS 17 and the best interests of shareholders.
Following an assessment of all the factors, the Committee
decided that it was not appropriate to tender the external
audit contract at this time. The Committee will review the
position on an annual basis, but currently anticipates tendering
the audit contract after the implementation of IFRS 17 for the
2023 year end to ensure the broadest choice of firms.

There are no contractual obligations restricting the Group’s
choice of External Auditor.

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.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Auditor independence and non-audit services policy
The Group has a Minimum Standard in relation to Independence
of External Auditors. This establishes parameters for preventing
or mitigating anything that compromises the External Auditor’s
independence or objectivity. The Minimum Standard includes
a formal process for the approval of non-audit services by the
External Auditor.

Effectiveness of the external audit process and
re-appointing Deloitte as External Auditor
In 2018, 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:

(i) a detailed questionnaire completed by key stakeholders;

During the year the Committee reviewed the non-audit services
that could be provided by the External Auditor. It was agreed
that, in order to protect the independence of the External
Auditor, generally on an on going basis non-audit services
should not be provided unless there is a strong, clear and
understandable business reason. The Committee is satisfied
that the Group has adequate procedures to ensure that the
External Auditors are independent and objective.

During the year, the Committee approved fees of £0.7 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 2018.

Audit fees1
Audit-related assurance services
Other assurance services
Non-audit fees
Total fees for audit and other services

Fees
£m

1.9
0.1
0.1
0.6
2.7

Proportion

70%
4%
4%
22%
100%

Note:
1. Further information is disclosed in note 10 to the consolidated

financial statements.

The non-audit fee of £0.6 million related primarily to
assurance activities on IT projects in relation to the
development of new systems.

(ii) discussing matters with the CFO;

(iii) formally reviewing the External Auditor’s independence;

(iv) assessing whether the agreed audit plan was fulfilled; and

(v) consideration of the FRC’s review of the audit of the

Group’s principal subsidiary.

After taking into account all of the information available,
the Committee concluded that Deloitte had performed its
obligations effectively and appropriately as External Auditor
to the Group.

The Committee recommended to the Board that the Group
re-appoint Deloitte as External Auditor. The Group will put a
resolution regarding this to shareholders at the 2019 AGM.

The Board reviewed and approved this report on 4 March 2019.

GREGOR STEWART
CHAIR OF THE AUDIT COMMITTEE

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

COMMITTEE REPORTS CONTINUED

Board Risk
Committee report

Membership, attendance and responsibilities of
the Committee can be found on pages 67 and 68.

JANE HANSON
CHAIR OF THE BOARD
RISK COMMITTEE

Areas of focus in the reporting period
– As the Group continues with its IT transformation

programme, the Committee reviewed progress against
the plans at each meeting. In 2018, the Committee
received and challenged reports from management
on the programme plans and considered how these
would achieve the planned benefits for customers.
The Committee probed and challenged all aspects
of the programme including the governance, key risks
and assumptions and progress reporting. The Committee
obtained objective views from the Risk and Group Audit
functions on the programme’s progress at each meeting
and commissioned a series of external specialist reviews
to obtain assurance on the approach being taken.

– In March 2018, members of the Committee and

management participated in a strategy session, which
considered macro risks and the role of the Committee.
The session reviewed developments in areas such as the
global economy and the impacts of US and UK fiscal
policy, Brexit and the potential impacts on the insurance
market. Committee members considered market and
regulatory developments, as well as the development
and measurement of risk culture, taking into account
the Group’s ongoing initiatives in these areas. In light
of these discussions, the Committee considered its own
role with the aim of ensuring continued alignment with
the key risks facing the Group.

– The Committee considered medium to long-term risks to
the Group to gain assurance that management is taking
timely actions to manage risks. The Committee received
reports from management on the emerging risks the
Group faces and evaluated how the Group could be
affected by potential developments. During the year,
the Committee reviewed all key risks in the Emerging
Risk Register, focusing particularly on political and
economic risks, and considered the impacts of
autonomous technology on the motor market. The
Committee considered climate change and its impact
both on the Group’s current book of business and the
Group’s longer-term strategy.

– The Committee considered risks relating to the Group’s
conduct towards its customers. During the year the
Committee reviewed the key themes and topics from
the Group’s Customer Conduct Committee, which
were focused on complaints improvement, vulnerable
customers, and improved oversight of offshore and
supplier performance. The Committee undertook a
deep dive into pricing rating factors including the
pricing principles and policies currently in place.
This area will be closely monitored giving
consideration to appropriate regulatory expectations.

Main activities during the year

Risk monitoring and oversight
At each scheduled meeting, the Committee received a
report from the Chief Risk Officer which provided an overview
and assessment of the Group’s risk profile. It detailed the key
activities undertaken by the Risk function to further embed risk
management across the Group, provided outputs of regular risk
monitoring and details of specific risk issues. The Committee
also received details of the Group’s current and forward-
looking solvency position. 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 risk appetite statements and the lower level risk appetite
statements, considered key risk indicators and assessed the key
drivers that affected status against risk appetite. The Committee
reviewed and questioned the justification of the assessment of
certain risks and the robustness of management action plans to
address areas close to or outside tolerance. During the year,
the oversight of change risk was a central focus for the
Committee, which challenged management on progress
of both the portfolio and individual programmes.

Risk management and controls
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. The Committee reviewed the residual risk position
after the operation of controls and considered the effectiveness
of any associated mitigating actions and compensating
controls. The monitoring and review by the Committee involved
examining an assessment of the control environment and
material controls at Group level, based on divisional risk
and control self-assessments. These assessments had been
subject to challenge by the Risk and Group Audit functions.

Material Risk Register
The Committee assessed the principal risks facing the Group,
which are listed on pages 46 and 47. 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 Chief Risk Officer’s report that was discussed at each
scheduled meeting.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

The Committee reviewed regular updates on regulatory
developments and interactions, particularly in relation to
the FCA and PRA. The Committee also reviewed the actions
being undertaken to ensure compliance with the SM&CR,
which included a comprehensive review of the Group’s High
Level Control and System of Governance Framework document
and updating the detailed management responsibilities map.
The regime, which came into effect on 10 December 2018,
now covers employees who are considered to be performing
functions which are of specific importance to the sound and
prudent management of the firm. The Committee considered
regular reports on the Group’s actions to prevent financial
crime, including reviewing the annual Financial Crime Report.

The Committee has closely monitored developments from
the FCA and the Competition and Markets Authority’s work
on pricing practices and will remain apprised of the review
throughout 2019 as well as of the actions which are being
undertaken with the aim of ensuring that the Group continues
to maintain fair pricing principles. These actions broadly
fall into three categories: governance and accountability;
oversight (including data and management information);
and vulnerable customers.

Operational risk
The Committee continued to review and challenge IT controls,
including those relating to IT systems’ stability, cyber security
and technology resilience. The Committee assessed the level
of prevention, protection and detection controls 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 challenged the progress
made in relation to technology risk, in particular to ensure
that plans were in place to ensure the Group took action
where IT hardware was due to reach the end of its useful
life or would no longer be supported. The Committee also
reviewed IT risk appetite statements to gain assurance that
these were appropriate and in line with the overarching
Group risk appetite.

The Committee received regular updates on the Group’s
multi-year transformation programmes. The Committee received
detailed updates following external reviews of the programmes
and challenged management on the progress which had been
made so far, as well as on the plans going forward. The
Committee continued to monitor and examine the oversight
and challenge of the 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 also considered operational risks and controls
in respect of third-party suppliers, operational resilience and
offshoring, with the aim of ensuring that these risks were being
managed appropriately by management and actions taken
where necessary.

Assessment of risk behaviours and attitudes
The Committee reviewed the annual Assessment of Risk
Behaviours and Attitudes undertaken jointly by the Risk
and Group Audit functions, which covered areas including:
tone from the top; decision-making; and risk management
framework. The Committee discussed the outputs of the
assessment, as well as areas for further improvement, seeking
to ensure the appropriateness of the actions identified. The
Committee also considered the activities of the Risk function in
driving a good risk culture across the Group through mechanisms
such as training and its internal communications strategy.

Additionally, the Committee considered other subjects in more
detail at each scheduled meeting. These included: compliance
and regulatory risk including oversight of the Group’s regulatory
relationships; operational risk; financial risk, solvency II and
capital model; and risk governance.

Customer and conduct
The Group aims to make insurance much easier and better
value for its customers by delivering on its commitments, fixing
things when they go wrong and ensuring that fairness is a
natural outcome of what the Group does. In order to help
achieve these aims, the Customer Conduct Committee reviews,
challenges and oversees customer and conduct matters across
the Group. The purpose of the Customer Conduct Committee
is to help ensure that the desired outcomes are achieved for
the Group’s customers. The Customer Conduct Committee’s
findings and any recommendations for improvement are
provided to the Committee and Board on a regular basis.

The Committee reviewed and challenged reports relating to the
Group’s conduct towards its customers, seeking assurance that
customer outcomes were fair and appropriate and to determine
that the Group was operating within its defined conduct risk
appetite, as set by the Board.

The Committee undertook a deep dive which focused on rating
factors, governance and pricing practices. The Committee
challenged management in order to gain assurance that the
pricing principles and policies in place were fit for purpose
and remained fair to customers. The Committee will monitor
closely any changes to regulators’ expectations.

Compliance and regulatory risk
During the year, the Committee considered the Group’s
compliance with regulatory requirements including conduct
and financial crime. The Committee approved the annual
Compliance Plan which sets out the compliance activities which
will be undertaken in the coming year with the objectives of: (i)
ensuring compliance; (ii) maintaining an open and co-operative
relationship with regulators; and (iii) ensuring the Board and
employees understand their regulatory responsibilities.

The Committee continued to monitor and challenge the
Group’s plans for compliance with the EU General Data
Protection Regulation which came into force on 25 May 2018.
Following its introduction, the Committee received assurance
that the programme had successfully implemented the
strategy for compliance and that activity to further enhance
the programme would be built into the existing compliance
strategy. The Committee reviewed and challenged the outputs
from conduct and compliance assurance reviews, including
in relation to solvency II compliance.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAnti-bribery and corruption
Annually, the Committee considers an anti-bribery and
corruption report, which includes an annual risk assessment
of the level of anti-bribery and corruption risk to the Group.
Following review and challenge, the Committee was satisfied
that the Group’s policies and procedures on anti-bribery and
corruption were fit for purpose and that anti-bribery and
corruption risks were managed appropriately.

In addition to monthly one-to-one meetings with the Chair,
the Chief Risk Officer also met privately with the Committee
without management being present.

The Chair reports on matters dealt with at each Committee
meeting to the subsequent Board meeting.

The Board reviewed and approved this report on 4 March 2019.

JANE HANSON
CHAIR OF THE BOARD RISK COMMITTEE

COMMITTEE REPORTS CONTINUED
BOARD RISK COMMITTEE REPORT CONTINUED

Financial risk
At each meeting, the Committee monitored the Group’s
performance against its capital risk appetite through the Chief
Risk Officer’s report. Committee members considered financial
risks in the strategic plan against risk appetite. Committee
members also reviewed and challenged the ORSA process
and key content before the report was submitted for approval
to the Board. Committee challenges on elements of the ORSA
during the year included those in relation to stress testing of the
strategic plan, pricing and underwriting risk, internal model
validation activity and the appropriateness of contingent
management actions.

The Committee reviewed and challenged the stress and
scenario testing plan prioritising the importance of certain
scenarios. The Committee also examined the outputs of the
budget stress tests and the associated management actions,
where necessary, required to keep the Group within capital
risk appetite.

Throughout the year the Committee received reports on the
internal model, including independent validation results and
the internal model owners’ report. This outlined the scope of the
capital model, key outputs, risk drivers, significant parameters,
expert judgements and key assumptions. The Committee
challenged management on the assumptions in relation to
the reinsurance decision-making process in the context of the
Group’s risk appetite as a result of reviewing the internal model
owners’ report.

Risk governance
Every year, the Committee reviews and approves the Enterprise
Risk Management Framework, which includes details of the
Group’s Policies and Minimum Standards. The Committee
reviewed and challenged each Group Policy as part of the
Group’s solvency II requirements and recommended them for
approval by the Board. The Committee also considered the
results of the annual Group assessment of the effectiveness of
the internal control environment undertaken by each business
division, as well as monitoring controls on an ongoing basis.

The Committee considered, challenged and approved the
Annual Risk and Compliance operational plan and the
adequacy and objectivity of the Risk function’s resources.

Whistleblowing
The Committee reviewed the arrangements by which
employees may, in confidence, raise concerns about possible
improprieties in matters of financial reporting or other matters
(“whistleblowing”). The Committee also reviewed reports
relating to whistleblowing including individual cases, anonymised
to ensure arrangements are in place for the proportionate and
independent investigation of such matters and for appropriate
follow-up action. The Committee probed management and was
satisfied that the whistleblowing process met the necessary
standards and that it was adequately designed, operated
effectively and adhered to regulatory requirements.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Nomination
Committee report

Membership, attendance and responsibilities of
the Committee can be found on pages 67 and 68.

MICHAEL BIGGS
CHAIR OF THE
NOMINATION COMMITTEE

Areas of focus in the reporting period
– During 2018, the majority of the Committee’s time

was devoted to monitoring and recommending changes
to the composition of the Board and its Committees.
The Committee led the recruitment of three independent
NEDs and reviewed 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.

– Following the announcement that Paul Geddes will be
stepping down as CEO of the Group in the summer of
2019, the Committee launched an internal and external
search for his successor.

– With the aim of improving gender and other diversity
in the Group’s senior management, the Committee
continued to encourage management to grow its
talent pipeline, both by developing existing employees
and by hiring new talent. This is being achieved
by the systematic assessment of potential, bespoke
personal coaching and development plans for
high-potential employees.

Main activities during the year

CEO succession
At the time of the announcement that Paul Geddes would step
down as CEO in the summer of 2019, the Committee revisited
the succession plan for the Board and launched the process
of identifying his successor, which included refreshing the role
profiles, taking into account the Group’s medium and long-term
strategic and cultural leadership requirements, and the selection
and appointment of external executive search specialists.

The Committee appointed MWM Consulting, which is a
signatory to the Volutary Code of Conduct for Executive Search
Firms, to lead the search and engaged Egon Zehnder and YSC
Consulting to assist with the evaluation of the candidates. The
appointed specialists have no other connection to the Company.
The Committee considered a diverse long list prepared by
MWM and, having agreed a shortlist, interviewed a number
of internal and external candidates. Following a thorough
interview and assessment programme and having obtained
regulatory approval, the Committee recommended Penny
James as its preferred candidate. The Board accepted the
recommendation and agreed to appoint Penny as Chief
Executive from the conclusion of the AGM on 9 May 2019.
The decision was announced on 26 February 2019.
The Company has launched the search for a new CFO.

Board composition
During the year, the Committee: considered the Board’s skills
and experience; reviewed the structure, size and composition
of the Board; reviewed the membership and chairmanship
of the Board’s Committees; and reviewed NEDs’ letters of
appointment, terms of appointment and time commitment.

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 Committee guides management in executive succession
planning. Further information on how the Group develops
our talent pipeline can be found on page 73.

Board and Committee changes
On 1 March 2018, Mark Gregory and Gregor Stewart joined
the Board as NEDs and Penny James assumed responsibility as
Chief Financial Officer. John Reizenstein and Andrew Palmer
retired from the Board following the conclusion of the 2018
AGM and, on 1 September 2018, Fiona McBain joined
the Board as a NED.

The Committee monitors the membership of the Board’s
Committees to ensure that each Committee has a suitable
balance of skills as well as taking into consideration the
length of service of the members.

Following the conclusion of the 2018 AGM, it was agreed that
Gregor Stewart be appointed as Chair of the Audit Committee
and a member of the Risk Committee. Mark Gregory was
appointed Chair of the Investment Committee and a member
of the Audit Committee and Penny James was appointed as
a member of the Investment Committee. Danuta Gray was
appointed Chair of the Remuneration Committee in place of
Clare Thompson. Clare remained a member of the Committee.

Board appointment process
The Committee is responsible for reviewing and recommending
to the Board any changes as necessary. During the year,
the Committee oversaw the formal, rigorous and transparent
process which resulted in the appointments of Mark Gregory,
Gregor Stewart and Fiona McBain as NEDs.

For each of their appointments, the Committee produced a
detailed brief setting out the required skills and experience
of preferred candidates which included significant financial
services, coupled with audit or risk, experience. The brief was
shared with executive search agencies and the Committee
agreed to engage Egon Zehnder, which is a signatory to the
Voluntary Code of Conduct for Executive Search Firms, and has
no other connection to the Company, to conduct the searches.

WWW.DIRECTLINEGROUP.CO.UK

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSCOMMITTEE REPORTS CONTINUED
NOMINATION COMMITTEE REPORT CONTINUED

In March 2018, the Board adopted a Diversity Policy which
sets out the Board’s approach to diversity and is available
on the Company’s website. This policy, which is annually
reviewed and monitored by the Committee, is presented to
any executive search firm during the selection and appointment
process for Board positions. Further information on the Board
Diversity Policy and the Group’s diversity initiatives can be
found in the Corporate Governance report on page 73.

The Board supports the targets set in the Hampton-Alexander
Review. As at the date of this report, female representation
on the Board was 42% (2017: 36%). The Board remains
committed to progressing women into senior roles and aims
to increase female representation at executive level through
associated development programmes for high-potential females.

The Board also supports the recommendations set out in the
Parker Review. It is the Board’s ambition to increase cultural
and ethnic diversity on the Board by 2021.

The Board reviewed and approved this report on 4 March 2019.

MICHAEL N BIGGS
CHAIR OF THE NOMINATION COMMITTEE

Egon Zehnder prepared a list of candidates of appropriate
merit from diverse backgrounds for each of the positions.
The Committee agreed a shortlist for the roles and a series
of interviews took place. Once the preferred candidates
had been identified and had given their consent to act as
Directors, and following regulatory approval, the Committee
recommended the appointment of Mark Gregory, Gregor
Stewart and Fiona McBain to the Board subject to
regulatory approval.

Electing and re-electing Directors
Before recommending the proposed election or re-election
of Directors at the 2018 AGM, the Committee reviewed the
independence of NEDs and concluded that all NEDs met the
criteria for independence set out in the Code. Mike Biggs was
independent when he was appointed as Chairman.

Jane Hanson and Mike Biggs have served on the Board for
longer than six years and, in accordance with the Code, the
extension of their terms of appointment has been the subject
of a particularly rigorous review by the Committee. Mike Biggs,
as Chairman of the Board and Chair of the Committee, was
not involved in his own review.

The Board is satisfied that Jane and Mike remain independent
in judgement and character, that they continue to make a
significant contribution to the Board and its Committees,
and that they provide valuable continuity to the Board. The
Committee recommended to the Board and shareholders that
all serving Directors be submitted for election or re-election at
the Company’s 2018 AGM, with the exception of Andrew
Palmer and John Reizenstein, who had decided to step
down at the conclusion of the AGM.

As announced on 5 March 2019, Clare Thompson has decided,
after serving as a NED for over six years, to step down from
the Board at the conclusion of the AGM on 9 May 2019
and, accordingly, will not be submitting herself for re-election.

Diversity
The Board believes that an effective board with a broad
strategic perspective embraces a diversity of gender, race,
skills, experience, as well as regional, socio-economic,
educational and professional background, among other
differences. In its search for candidates, the Board aims only
to engage with executive search firms which are signatories
to the Voluntary Code of Conduct for Executive Search Firms.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Corporate Social
Responsibility
Committee report

Membership, attendance and responsibilities of
the Committee can be found on pages 67 and 68.

SEBASTIAN JAMES
CHAIR OF THE CSR COMMITTEE

Shape the future
During 2018, the Committee monitored the ‘shape the
future’ strategy, which aims to influence the future road safety
framework through strategic partnerships. The Committee
supports the Group’s three-year programme with the road safety
charity, Brake, to produce a series of topical survey reports
on driver behaviour and attitudes, and the Group’s work with
the Parliamentary Advisory Council for Transport Safety to
investigate whether the lack of seat belt use is leading to
road casualties.

Build an inclusive culture
Throughout 2018, the Committee reviewed management’s
initiative to build an inclusive culture through diversity and
inclusion. The Committee supported management’s plans to
focus on wellbeing and mental health. Priority areas during
2018 included: extending the roll-out of mental health training to
all people managers; providing access to resilience workshops
and webinars for all employees; and introducing Mental Health
First Aiders on every floor of every site to be points of contact for
employees who are experiencing a mental health issue or
emotional distress.

During the year, management updated the Committee on
key statistics in relation to the Group’s gender pay gap, and
on the work being undertaken to increase the number of women
in senior roles. This included the introduction of a progression
focused support programme for high-potential females, new
recruitment methods for attracting and retaining female talent and
the launch of the ‘Thrive’ initiative, a support community aimed at
inspiring the Group’s female colleagues. Further details on diversity
can be found in the Corporate Governance report on page 73.

The Committee recognises the importance of maintaining the
highest standards of ethical conduct and behaviour in our business
practice and in the workplace. The Committee examined the
content and effectiveness of the Group’s Code of Business
Conduct to ensure that it reflected the Group’s position in
relation to CSR and diversity and inclusion.

Areas of focus in the reporting period
– The Committee focused on Shotgun, the Group’s CSR

initiative, aimed at reducing young driver accidents, and
noted encouraging evidence that use of the Shotgun app
was having a measurable positive influence on young
drivers’ driving behaviours.

– During the year, management introduced a new initiative
to realign Group charitable giving with a single cause:
mental health. The Committee supported management in
its collaboration with MIND and its partner charity, the
Scottish Association for Mental Health.

– The Committee was delighted to see increases in

employee engagement scores across the Group, as
measured by the annual employee survey and the 2019
Sunday Times list of the 25 Best Big Companies to
Work For, in which the Group achieved third place.

– The Group’s target for reducing energy usage is 30%
by 2020 against a baseline established in 2013. The
Committee noted that, in 2018, the Group’s energy
usage had decreased by 2% compared to 2017,
bringing the total reduction against the 2013
baseline to 20%.

Main activities during the year
The Committee monitors the implementation of the Group’s CSR
strategy through regular updates on the different focus areas
and challenges the robustness of, and progress against, targets
relating to each strand of the CSR strategy. The Committee also
ensures that best practice and thinking across the market are
considered as part of the Group’s own CSR approach.

The Group launched a new CSR strategy for 2018 which
focused on two overarching goals: ‘Protecting Britain’s road
users’ and ‘Reflecting an ever-changing Britain’. Information
on the key strategies for these goals is set out below.

Stop deaths now
During the year, the Committee received regular progress
updates on Shotgun. The Committee was pleased that, since
its inception in 2015, there had been more than 27,000
downloads of the Shotgun app and 79% of users had
experienced an improvement in their overall driving scores.
You can find further details on Shotgun in the Responsibility
Report on page 54.

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STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSCOMMITTEE REPORTS CONTINUED
CORPORATE SOCIAL RESPONSIBILITY REPORT CONTINUED

Support our community
The ‘One Day’ volunteering initiative, which gives employees
paid leave to volunteer in their local community, continued to
be an area with great impact. The Committee was pleased to
hear that 28% of the Group’s employees engaged in some
form of volunteering or fundraising activity in Company time
during 2018.

The Committee also reviewed the Group’s policy on
compliance with the Modern Slavery Act 2015 and how
third-party suppliers complied with the Act’s requirements.

The CSR 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 and supported the key 2018 objectives relating to the
replacement of relevant plant and equipment at office locations
with more energy-efficient equipment, the optimisation of the
Building Energy Management System, the introduction of a
scheme in the Group’s Bromley office to recycle coffee cups
and the implementation of further energy saving opportunities
in the Group’s auto repair centres.

Additional CSR activities
The Committee reviewed and challenged management on
key CSR developments and emerging risks throughout 2018.
The Committee also monitored and scrutinised the extent
and effectiveness of the Group’s external reporting of CSR
performance, including through preparation for CSR-related
questions at the 2018 AGM and engagement with proxy
voting advisers regarding CSR-related feedback. The
Committee continues to monitor management’s evaluation of
CSR matters in the context of ESG reporting to ensure that the
Group’s external CSR position is consistent and appropriate.

The Committee continues to challenge management’s approach
to CSR initiatives to ensure that it is both authentic and strategic,
and that management continues to focus on initiatives with real
potential to improve lives.

The Board reviewed and approved this report on 4 March 2019.

SEBASTIAN JAMES
CHAIR OF THE CSR COMMITTEE

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Investment
Committee report

Membership, attendance and responsibilities of
the Committee can be found on pages 67 and 68.

MARK GREGORY
CHAIR OF THE INVESTMENT
COMMITTEE

Areas of focus in the reporting period
– Throughout the year, the Committee kept under review
the economic and financial implications of the UK
leaving the EU. The implications of an orderly transition
and ‘no deal’ exit were considered.

– The positioning and asset holdings in the investment
portfolio and the need to balance risk and reward
were considered in light of the potential Brexit outcomes.

– An investment framework which included an ESG lens
for the Group’s investment grade credit portfolios was
developed and adopted.

Main activities during the year

Brexit
One of the principal risks considered by the Committee during
2018 was the economic and financial market implications
of the UK leaving the EU. For planning purposes, in view of
uncertainty about the progress of negotiations with the EU, the
implications of both an orderly transition and a ‘no deal’ exit
had to be considered.

Against this background, the Committee considered papers
and reports which examined current portfolio diversification,
portfolio positioning (duration, liquidity) and the possible
range of changes in asset valuations that could be experienced
under the orderly transition and ‘no deal’ exit scenarios. The
Committee also debated the benefits of hedging strategies
to mitigate changes in asset valuations in addition to the
investment portfolio’s existing defensive orientation.

The Committee’s view was that the positioning and asset
holdings within the investment portfolio were proportionate to
the need to balance risk and reward. The Committee noted
the likelihood of higher cash balances at the end of 2018,
reflecting existing defensive positioning within the portfolio
and a decision taken in November to not reinvest sterling
bond maturities in the short term while monitoring market
reactions to the development of a Brexit solution. The
Committee’s conclusions were reported to the Board during
its discussions on the wider implications of Brexit on the
business operations and capital position of the Group.

Sustainable investing
At the April and July meetings of the Committee, a framework
for including an ESG lens into investment decision-making for
the investment grade credit portfolios was debated and agreed.

The Group’s future investing framework will incorporate a focus
on ESG-weighted indices which will tilt the composition of the
portfolio towards higher holdings and weightings of issuers with
strong ESG scores. Investment managers will be encouraged to
invest more in ‘green’ bonds where such bonds are available
and of comparable credit quality. Limited negative screening
will be applied and investments will not be made in companies
which carry out activities which the Committee does not
consider appropriate.

During the first half of 2019, the changes are expected to
be reflected in investment decision-making across all relevant
credit portfolios.

Market developments
At each scheduled meeting, the Committee received a
market update from the Director of Investment Management
and Treasury. The updates covered: economic conditions in
the UK, the US and the Eurozone; market levels for key asset
classes (notably credit); the outlook for interest rates and
inflation; and developing issues viewed as appropriate to
be brought to the attention of the Committee. The impact on
assets of developments in international trading relations and
the weakness of the retail sector were of particular note
during 2018. The Committee also monitored the continuing
development of interest rate policies set by the Bank of England
and the US Federal Reserve and the impact on the hedged
yields of US Dollar credit assets held in the portfolio.

Suitability of investment strategy
An annual asset and liability management study and a
stressed liquidity analysis were presented to the Committee,
informing strategic benchmark allocations and providing part
of the context for the addition of new asset classes or exiting
a present holding. The Committee approved a small reduction
in US credit exposure, a reduction in overall access to liquidity
required over a three-month horizon and increases in exposure
to commercial real estate loans and Euro credit.

Monitoring investment activity and performance
The Committee received a comprehensive report at
each scheduled meeting covering: the financial results from
investment activity; aggregate portfolio positioning against
strategic benchmarks; performance of each individual portfolio
against benchmark; adherence to operational controls;
performance of suppliers; and compliance with an agreed
framework of risk limits. The Committee invited the managers
responsible for the commercial real estate loans portfolio
and the infrastructure debt portfolio to present updates on
their respective portfolios. The Committee also examined a
proposal by management to reduce investment fees through
the appointment of a core external asset manager, under whom
a number of investment mandates would be consolidated. The
Committee met the recommended manager to determine the
adequacy of their skills and resources to meet the expanded
role towards the end of the year. The Committee was also
updated on the change in categorisation of money market
funds (used by the Group for cash investments) as the funds
move to comply with EU money market reform regulation.

The Board reviewed and approved this report on 4 March 2019.

MARK GREGORY
CHAIR OF THE INVESTMENT COMMITTEE

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STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSDIRECTORS’ REMUNERATION REPORT

Dear shareholders,
I am pleased to introduce my first Directors’ Remuneration
Report as Chair of the Remuneration Committee (“the Committee”),
for the 2018 financial year. I would like to thank Clare Thompson
for her stewardship of the Committee over the last few years.

At Direct Line Group we believe that Directors should be paid
fairly for the job they do and the results that they generate.
I see the Committee’s objectives as:

– Rewarding Directors for results that are generated within the

risk appetite set by the Board.

– Setting an appropriate framework for remuneration for the
Board with sufficient flexibility so that the Group can attract
and retain the best people for the organisation.

– Having oversight of remuneration policies throughout the
Group and ensuring all our employees are paid fairly.

In this letter I introduce the items that I think are important or
new in the Directors’ Remuneration Report. The report is set out
in the following sections:

Section

Remuneration at a glance – summarising
the remuneration arrangements for
Executive Directors
Annual report on remuneration – detailing pay
outcomes for 2018 and covering how the
Group will implement remuneration in 2019
Summary of policy approved at the
2017 AGM

Page

92 to 93

94 to 113

114 to 117

The Remuneration Policy which covers the 2018 report
was approved, by a substantial vote in favour of the policy
at the AGM in May 2017. Consistent with the regulations,
the Directors’ Remuneration Policy is next due to be submitted
to the Company’s AGM for approval in 2020.

The Remuneration Committee
is committed to aligning
Executive Directors’ pay to the
Group’s business strategy and
demonstrable success and the
interests of our shareholders.

Pay outcomes for 2018

All-employee pay in 2018
We could not be successful without the hard work and
dedication of our talented people, at all levels of the
organisation. It is important to us that we ensure all our
people are rewarded fairly and have an interest in the
success of the Group.

In 2018 we focused our pay budget specifically on those in
lower paid roles, ensuring that all employees with satisfactory
performance received a pay increase of at least £650. We
also increased minimum salaries across the Group to £17,000
or £18,000 (depending on contracted hours), which were
adopted for all roles except apprenticeship schemes. This
meant that the average pay increase for employees below
Senior Leadership was around 3.2%, but was around 5%
for our lowest paid frontline roles. Our minimum salaries
were positioned approximately 6% above the Living Wage
Foundation rate for non-London roles, and approximately
18% higher than the Government’s National Wage at the time.

We want our employees to have ownership of the Group
and its success, and in 2018 we issued our fourth all-employee
free share award since our IPO. Outside our Senior Leadership,
86% of our people own shares in the Company, thus ensuring
alignment at all levels between the work they do and the
success in which we share.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Annual Incentive Plan
The Group’s diversified product and channel portfolio,
disciplined underwriting and our engaged employees have
helped us to achieve a commendable profit before tax result
of £583 million. For the purpose of the financial element of
the Annual Incentive Plan, the profit before tax target excluded
the budgeted reserve release related to the expected Ogden
discount rate change. The actual profit before tax consequently
differed from the statutory IFRS basis by excluding the actual
Ogden discount rate related releases made in 2018. The
out-turn was slightly ahead of the target leading to a pay-out
of 64% of maximum for this element.

Performance across the People measures was particularly
strong for the year and the Committee awarded a maximum
out-turn for this element. The Customer measures were assessed
as being on target. The Committee is pleased to report this
year that management have made significant progress on
the technology transformation agenda on which the Personal
objective was measured, and awarded an out-turn of 70%
for this element. Full details on the outcomes for the year are
included on pages 96 – 99.

We therefore awarded bonuses of 68% of the maximum to
the Executive Directors. In line with the Remuneration Policy,
40% of any AIP award is automatically deferred into a
Deferred Annual Incentive Plan award.

Review of the impact of the Ogden discount
rate change on the 2016 AIP out-turn
You may recall that, at the time of the approval of the 2016
AIP out-turn, the Government had just announced a change
in the Ogden discount rate which materially impacted the
financial results for 2016. To align the 2016 AIP out-turn
with shareholders, the Committee significantly reduced the AIP
out-turn from an anticipated maximum pay-out for the financial
element (based on the indicative range used by the Committee
for its assessment) to 10% out of the 55% of total bonus
opportunity attributable, an approach more conservative than
many of the Group’s competitors. The government, at the same
time, announced that a review of the rate setting mechanism
would be undertaken. Given these exceptional circumstances,
the Committee agreed to keep its assessment of the 2016 AIP
outcome under review to enable the Committee to recalculate
the out-turn for the 2016 financial year if the Ogden discount
rate was raised or the mechanism for setting it was changed.

On 20 December 2018 the Civil Liability Act passed into law
which confirmed the new process for the setting of the Ogden
discount rate. Following the introduction of the new rate setting
process, the Group considered the Ogden discount rate it uses
to calculate its liabilities which led to an increase from minus
0.75% to 0% (pending the Government publishing the final
rate which will be set by the middle of 2019 at the latest).

The application of this new discount rate led to a reserve
release of £55 million which, together with an earlier
associated release in 2017 of £49 million, totalled £104
million of the £217 million originally charged in 2016 as
a result of the Ogden rate change.

Following the commitment made by the Committee (and
disclosed in the 2016 Remuneration Report), the Committee
considered the impact of the Ogden-related reserve releases
made since February 2017 in terms of the impact on the 2016
AIP out-turn. Had they been attributed to the 2016 financial
year, this would have resulted in a maximum pay-out for the
financial element of the AIP and a potential increase to 2016
bonuses of up to 45% of maximum. The Committee reviewed
this result in the context of balancing the desire to ensure the
outcome was fair to participants while being appropriately
aligned with the shareholder experience. In striking this balance
it concluded that it was appropriate to make an overall increase
of 20% to the bonus payment for 2016 (below the 45%
formulaic calculation).

This led to additional payments in March 2019 for Paul
Geddes, Mike Holliday-Williams and John Reizenstein for the
2016 AIP. All payments have been made in accordance with
the normal policy with 40% deferred into the Group’s shares
which will vest on the third anniversary of award (March 2022).

Finally, the Committee noted that the Ogden rate change in
February 2017 was exceptional in that there had not been
a change for over 10 years. Now that the new rate setting
mechanism has been implemented, the Committee considers
that the impact of future Ogden discount rate changes to be
part of the normal management of reserves and so it is unlikely
in the normal course of events that special allowance will be
made in the AIP out-turn for a change in Ogden discount rate.

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STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSDIRECTORS’ REMUNERATION REPORT CONTINUED

Long Term Incentive Plan
The LTIP has two performance measures: RoTE (60% of the
total award) and relative TSR (40% of the total award). Awards
under the LTIP granted in March and August 2015 vested
during 2018.

The Group achieved an average RoTE of 18.1% over 2015,
2016 and 2017 resulting in 100% of the maximum potential
vesting of the RoTE element for both awards (60% of the
total awards).

The TSR performance periods run from the date of award to
the third anniversary of award (as opposed to across the three
financial years commencing with the year in which the award
was granted as for the RoTE measure). For the March 2015
award the TSR performance was positioned between the
median and the upper quintile against its comparator group
which resulted in 62% of the maximum potential vesting for this
element (24.8% of the total award). Accordingly, this gave a
total vesting outcome of 84.8%. For the August 2015 award,
the TSR performance was below the threshold requirement
of median and therefore no shares vested under this measure.
Subsequently the overall vesting outcome for this award
was 60%.

Awards under the LTIP granted in March and August 2016
are due to vest during 2019, 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 2018.
The three-year average RoTE performance for 2016, 2017
and 2018 was 18.5% against a maximum target of 17.5%.
Awards under the RoTE element are, therefore, due to vest at
100% of the maximum potential.

In calculating the RoTE achievement, the reported RoTE for
2018 was adjusted downwards to exclude the favourable
impact of the capital management exercises executed in the
2017 financial year on the outcome for these awards. The
ongoing enhancement to earnings expected in future years
has been explicitly recognised by the Committee in setting
higher targets than would otherwise be the case.

Consistent with the regulations, due to the different timings of
the performance periods for RoTE and TSR, the TSR element of
the 2016 awards due to vest during 2019 will be reported
separately next year. Accordingly, we have included an
estimated value of the RoTE vesting outcomes for 2016’s
awards plus the TSR vestings from the 2015 awards in
the single figure remuneration table for 2018 for the
Executive Directors.

UK Corporate Governance Code 2018 and
the new CEO pay ratio disclosure
There have been several changes to the UK Corporate
Governance Code which affect the remit of this Committee:
communication with employees about Directors’ remuneration
(in addition to the workforce consultation requirements); policy
on post-employment shareholding requirements; and the
alignment of pension contributions for Directors to those of the
workforce. The Committee worked hard to be in compliance
with these requirements for when they came into effect on
1 January 2019 and the Committee will report details on how
we have met these requirements in our 2020 report. We have
also chosen to adopt early the new disclosure requirements
on the CEO’s pay relative to the wider workforce as part of
our efforts to strengthen the transparency in our approach to
the alignment of Directors’ pay with that of the wider workforce.

Approval of the Directors’ Remuneration
Report for 2017 at the AGM in May 2018
At the Direct Line Group plc AGM held in May 2018 the
resolution approving the Directors’ Remuneration Report was
passed by 76.6% of the votes cast in favour of the resolution.
The resolution, which only required a simple majority to be
approved and is advisory in nature, was therefore convincingly
approved by shareholders. However, this was significantly
lower than the percentage of votes in favour of resolutions
that the Company has historically received and as a result the
Group have been included on the Investment Association’s
register of companies that have more than 20% of votes
cast against a resolution at a general meeting. All of the
remuneration arrangements described within the 2017
report were in line with the Remuneration Policy approved by
shareholders at the AGM in 2017. The main issue raised by
some of the proxy voting agencies on the Remuneration Report
was the increase in remuneration for the new Chief Financial
Officer compared with that of her predecessor. Consequently,
the proxy voting agencies recommended an automatic vote
against the Remuneration Report in 2017.

The Board carried out a thorough recruitment process and
identified Penny James as the ideal candidate for the role:
after considering the needs of the Group, the role and her
experience, the Committee agreed to match the remuneration
from her previous employer to secure her services. The Board
was satisfied that Penny was the right person for the job and
this was considered the only way to bring Penny into the
organisation. The Committee Chair and the Board Chair
engaged with shareholders to understand any concerns.
Shareholders were supportive of the decisions that the Board
and Committee had made and understood the reasons for
them. Engagement with investors in relation to remuneration
will continue with regards to new appointments to the Board.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Any payments relating to Paul Geddes’ departure will be
in accordance with the Remuneration Policy approved by
shareholders at the Company’s 2017 AGM and will be
disclosed in the Directors’ Remuneration Report to be contained
in the Company’s Annual Report and Accounts for the year
ending 31 December 2019.

Advisers to the Committee
During the year, the Committee appointed PwC as its
independent adviser from 1 January 2019. FIT Remuneration
Consultants LLP have been advisers to the Remuneration
Committee since the time of the IPO in 2012 and therefore
the Committee felt it was appropriate to seek a change of
adviser at this time. On behalf of myself and the Committee
I wish to extend our thanks to FIT, and John Lee in particular,
for their support and counsel over the past years.

Your AGM vote
I hope that having read the information in this report, and
considering the performance of the Group during 2018, you
will vote in support of the Remuneration Report at the AGM.
Should you have any questions about my Committee’s report
please email our AGM email address shareholderenquiries@
directlinegroup.co.uk and I or my team will respond to you.

Yours sincerely

DANUTA GRAY
CHAIR OF THE REMUNERATION COMMITTEE

Approach to pay in 2019
No change to the overall approach to pay is anticipated
for 2019. The updated Remuneration Policy will be put to
shareholders in 2020.

The MD Personal Lines will be awarded a salary increase
of 2.25% from 1 April 2019 in line with the average rate for
staff generally. The Committee is satisfied that the increase is
warranted based on his performance and the role he performs.

No increase will be awarded to the CEO in view of the fact
that he will be leaving the Group during 2019.

The CEO-designate will not receive a salary increase before
her appointment as CEO on 9 May 2019 (see below).

No change will be made to either the weightings or the
approach to assessment of the metrics under the AIP.

We are not proposing any changes to the performance
conditions for the 2019 awards under the LTIP. Likewise the
target RoTE scale of 17.5% to 20.5% will remain at the same
level as in 2018 and reflects an appropriate performance
range in the context of the Group’s planned underlying
RoTE performance.

Chief Executive Officer
On 26 February 2019, Penny James, the current CFO, was
appointed to succeed Paul Geddes as Chief Executive Officer
and will become the CEO from the conclusion of the AGM on
9 May 2019. Paul will step down from the Board following
the AGM on 9 May 2019 and will leave the Group at the
end of July 2019.

In setting Penny’s remuneration, we benchmarked her salary
against the FTSE 51-100 and positioned her salary below
the current CEO’s salary level. There will be no change to her
participation in the Company’s AIP up to a maximum of 175%
of salary and the LTIP up to 200% of salary. We have however
taken the opportunity to set Penny’s pension contribution at 9%
of salary (reduced from the existing pension contribution rate
of 25% of salary), in line with that of the wider workforce
which will be our policy for all new Executive appointments.
The Committee will be considering the reduction of pension
contribution for all Executive Directors as part of the
remuneration policy review during 2019. The details
of Penny’s remuneration, which will take effect from
9 May 2019, are set out on page 112.

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STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSDIRECTORS’ REMUNERATION REPORT CONTINUED

Remuneration at a glance

Remuneration outcomes for 2018

Executive Directors’ total pay
This chart illustrates the total remuneration components received in 2018.

Paul Geddes
(CEO)

Penny James
(CFO)

Mike Holliday-Williams
(MD Personal Lines)

John Reizenstein
(Former CFO)

£0m

Salary

Find out more on page 95

Total pay (£’000)
£3,238

TBU

£1m

£2m

£3m

£4m

£3,920

£1,841

£555

£5m

Pensions and Benefits
(including all-employee share plans)

Annual bonus

LTIP

LTIP buy-out from
previous employer

AIP achievement
This chart illustrates the actual amounts earned from the AIP and reflecting performance in 2018. 60% of the amount is payable
in March 2019 and 40% will be deferred into shares for three years.

Paul Geddes

Penny James

119%

£983k

105%

119%

£803k

105%

175%

Mike Holliday-Williams

John Reizenstein

102%

£180k

90%

150%

102%

£570k

90%

150%

£0m

£0.3m

£0.6m

£0.9m

£1.2m

£1.5m

£1.8m

Target (% of salary)

Actual (% of salary)

Maximum (% of salary)

Actual (£’000)

Find out more on pages 96 – 99

LTIP

Release of value
This chart illustrates the total value of the 2015 LTIP awards that
vested in 2018.

Shareholding at year end
This chart illustrates the number of shares held at the end
of 2018 by the Executive Directors against the share
ownership guidelines of 200% of salary.

Paul Geddes

Grant

Vesting

Paul Geddes

£0m

£0.5m

£1.0m

£1.5m

£2.0m

£0m

£0.5m

£1.0m

£1.5m

£2.0m

£2.5m

Mike Holliday-Williams

Grant

Vesting

Penny James

£0m

£0.5m

£1.0m

£1.5m

£2.0m

£0m

£0.5m

£1.0m

£1.5m

£2.0m

£2.5m

John Reizenstein

Grant

Vesting

Mike Holliday-Williams

£0m

£0.5m

£1.0m

£1.5m

£2.0m

£0m

£0.5m

£1.0m

£1.5m

£2.0m

£2.5m

Shares under award

Reinvested dividend

Share price growth

2018

Guideline

Find out more on pages 100 – 101 and 105

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Implementing the policy in 2019

Key feature

Base salary

Implementation in 2019

– 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

– No salary increase for the outgoing CEO
– CEO-designate salary to increase to £800,000
(effective from appointment on 9 May 2019)

– No salary increase for the CEO-designate at 1 April
– New CFO to be appointed
– 2.25% salary increase for the MD Personal Lines to £575,242

Pensions

– CEO and CFO contribution rate of 25% of salary
– MD Personal Lines contribution rate of 15% of salary

– CEO-designate pension contribution to be reduced to 9% of salary

(effective from appointment on 9 May 2019)

– New CFO to be appointed
– The pension contribution rate will be in line with that of the wider

workforce for all new Executive Director appointments

– The reduction of pension contribution for all Executive Directors in
line with that of the wider workforce will be considered as part of
the policy review during 2019

– No change to the maximum opportunity
– No change to the weightings or measures used for 2019
– The targets are commercially sensitive and will be disclosed

in next year’s report.

– No change to the maximum annual award levels
– Nil-cost options will continue to be used for the grants
– The current 60% RoTE and 40% TSR mix will continue to apply
– A RoTE target range of 17.5% to 20.5% is required for the

2019 awards to vest

Annual Incentive Plan

– Maximum opportunity of 175% of salary for the

CEO and the CFO, and 150% for the MD Personal
Lines; 40% of the award is deferred into shares,
typically vesting after three years and subject to
continued employment

– At least 50% of bonus is based on financial
measures. The Committee considers various
non-financial and strategic performance measures.
It bases its judgement on 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

Long-Term Incentive Plan

– Awards typically granted as nil-cost options
– Awards typically granted every March and

August 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
– Awards are subject to an additional two-year
holding period following the end of the three-
year performance period

Find out more on page 114

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DIRECTORS’ REMUNERATION REPORT CONTINUED

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.

Annual remuneration report
Remuneration Committee members and governance
The following list details members of the Remuneration Committee during 2018. You can find information about each member’s
attendance at meetings on page 67. You can find their biographies on pages 62 to 64.

Committee Chair
Danuta Gray1
Non-Executive Directors
Mike Biggs
Sebastian James
Andrew Palmer2
Clare Thompson

Notes:
1. Danuta Gray was appointed as Chair of the Remuneration Committee with effect from 10 May 2018.
2. Andrew Palmer stepped down from the Board with effect from 10 May 2018.

Advisers to the Committee
The Committee consults with the Chief Executive Officer, the Group 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 Group 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 input from those Chairs regarding target-setting and pay-outs under incentive plans, and whether
it is appropriate to operate malus and clawback. The Chair of the Board Risk Committee attended Remuneration Committee
meetings on two occasions. The Remuneration and Board Risk Committees can also hold joint meetings to consider matters
of common interest.

The Committee retained FIT Remuneration Consultants LLP (“FIT”) as its independent adviser until the end of 2018. FIT is a
signatory to the Remuneration Consultants Group’s Code of Conduct. The Committee appointed FIT when preparing for the IPO.

During the year, FIT advised on market practice, corporate governance and regulations, incentive plan design and target-setting,
recruitment, investor engagement and other matters that the Committee was considering. FIT did not provide the Company with
other services. The Committee is satisfied that the advice FIT provided was objective and independent.

FIT’s total fees for remuneration-related advice in 2018 were £110,349 exclusive of VAT. FIT charged its fees based on its
standard hourly rates for providing advice.

Following a competitive tender process, the Committee appointed PwC as its independent adviser from 1 January 2019. PwC
is a member of the Remuneration Consultants Group and, as such, operates under the code of conduct in relation to executive
remuneration consulting in the UK. The Committee is satisfied that the advice received is objective and independent. PwC also
provides other advice to the Group covering accounting, tax and immigration services. The total fees (charged on an hourly
basis) for the provision of remuneration advice to the Committee in relation to the 2018 financial year were £8,000 exclusive
of VAT.

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.

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Implementing policy and pay outcomes relating to 2018 performance

Single figure table (Audited)

Salary1

Benefits2

Annual
bonus3,6

Long-term
incentives4,7,8

All-employee
share plans5

Pension

Total

£’000

2018

2017

2018

2017

2018

2017

2018

2017

2018

2017

2018

2017

2018

2017

Paul Geddes
Penny James9
Mike Holliday-
Williams10
John
Reizenstein11

826 807
675 113

19
14

983 1,242 1,204 1,770
2 803 1,014 2,259 532

559 501

13 570 721 614 851

−
−

−

177 488

180

644

150 1,071

0.3

−
−

−

206 202 3,238 4,039
28 3,920 1,689
169

75 1,841 2,161

122

555 2,335

Notes:
1. Salary – the Company operates a flexible benefits policy, and salary is reported before any personal elections are made.
2. Benefits – includes a company car or allowance, private medical insurance, life assurance, income protection, health screening and discounted insurance. The

value of benefits in the table above includes all taxable benefits received.

3. Annual bonus – includes amounts earned for performance during the year, but deferred for three years under the DAIP. For more information, see page 106.

These deferred awards are not subject to any conditions, except continuous employment. However, awards remain subject to malus and clawback.

4. 2015 LTIP awards RoTE – the expected vesting outcome figures for the RoTE portion of the awards granted under the LTIP in 2015 and reported in 2017 have

been updated. These updates are based on the actual vesting of the RoTE portion of the awards and a share price of £3.75300 and £3.34400 on 25 March
2018 and 26 August 2018 respectively, compared to the three-month average share price of £3.65557 used in reporting this figure in the 2017 report.
The revised figures include the actual number of dividends accrued on this portion of the award at vesting. This results in an adjusted reportable decrease of
approximately £292,700 for Paul Geddes, £177,160 for John Reizenstein, and £149,439 for Mike Holliday-Williams with a corresponding decrease of
the single figure for 2017 reflected in the table above. Further information on LTIP awards can be found on pages 107 to 108.

5. SIP – includes the value of matching shares under the SIP.
6. The 2017 annual bonus figure for Penny James includes a payment of £840,841 made in lieu of the bonus forfeited at her previous employer and is pro rated

for the period 1 January to 31 October 2017 (before Penny joined the Group). This is in line with the estimated payment shown in last year’s report and therefore
this figure has not been updated.

7. The 2017 estimated long-term incentive figure for Penny James in respect of the first tranche of her buy-out awards, which vested in May 2018 and which was

reported in 2017, has been updated. This value is based on an actual level of vesting of 95.835% and the share price on 2 May 2018 of £3.658. Details of
this award are disclosed on page 109.

8. The 2018 long-term incentive figure for Penny James relates to an estimated amount in respect of the second and final tranche of her buy-out awards, disclosed
on page 109, which vests in April 2019. The award is subject to the achievement of performance targets, ending in the 2018 performance year, that relate
partly to the performance of the Company and partly to the performance of her previous employer. The value of this award is based on an expected level of
vesting of 97.335% and a three-month average share price to 31 December 2018 of £3.20042. The actual vesting outcome will be confirmed in next year’s
report once actual performance and the vesting date share price are known. Further details are set out on page 101.

9. Penny James was appointed to the Board on 1 November 2017 and also became employed on that date.
10. Mike Holliday-Williams was appointed to the Board on 1 February 2017. His salary, benefits and pension for 2017 have been pro rated accordingly.
11. John Reizenstein stepped down from the Board at the AGM on 10 May 2018. His remuneration for the purposes of this table has been pro rated accordingly,
with LTIPs vesting by reference to performance conditions met while he was on the Board in 2018. Details of John’s salary, pension and benefits paid following
his cessation as an Executive Director on 10 May 2018 until the date of his retirement on 7 September can be found on page 112.

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.

2016 single figure table restated (Audited)
As set out in the Chair’s letter, the Committee concluded that an adjustment to the 2016 profit out-turn as a result of the impact
of reserve releases that are due to the Ogden rate changes is appropriate. This led to additional payments in March 2019,
in relation to the 2016 AIP, representing 20% of maximum opportunity of the original awards. The 2016 single figure table is
therefore restated below to reflect this. All additional payments in relation to the 2016 AIP have been made in accordance with
the normal policy with 40% deferred into the Group’s shares which will vest on the third anniversary of award (March 2022).

£’000
Paul Geddes1
John Reizenstein2
Mike Holliday-
Williams3

Salary

Benefits

Annual
bonus

Long-term
incentives

All-employee
share plans

2016

2015

2016

2015

2016

2015

2016

2015

2016

2015

790
478

771
467

19
10

18
15

871 1,120 2,471 2,693
452 602 1,495 1,630

–

546

–

–
1

–

–
1

–

Pension

Total

2016

197
119

2015

2016

2015

193 4,348 4,795
117 2,555 2,832

–

Notes:
1. The revised 2016 annual bonus figure for Paul Geddes relates to an adjustment of 20% of maximum opportunity of the original award of £594,287, resulting in

an increase of £276,413.

2. The revised 2016 annual bonus figure for John Reizenstein relates to an adjustment of 20% of maximum opportunity of the original award of £308,294, resulting

in an increase of £143,393.

3. Although Mike Holliday-Williams was not an Executive Director during 2016, his restated annual bonus has been included above for completeness. This

represents an adjustment of 20% of maximum opportunity of the original award of £385,074, resulting in an increase of £160,448.

4. The original out-turn and explanation of the 2016 AIP can be found on page 88 of the 2016 Annual Report and Accounts.
5. The 2016 figures are as disclosed on page 79 of the 2017 Annual Report other than in relation to the restated bonus.

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DIRECTORS’ REMUNERATION REPORT CONTINUED

Annual Incentive Plan outcomes for 2018 (Audited)
The chart illustrates the final assessment of the level of achievement under the AIP and total outcome approved by the
Remuneration Committee.

Performance measure
and weighting

Performance
achievement 2018

Outcome 2018

20%
Personal

10%
People

15%
Customer

Executive Director

Paul Geddes

Penny James

Mike Holliday-Williams

John Reizenstein

55%
Financial

64%

60%

Financial

Customer

People

Personal

Total
68%

35%

100%

10%

70%

14%

Achievement under the 2018 AIP

2018 AIP payment

68% of maximum

£982,569

£803,250

£570,337

£180,226

Note: The annual incentive award made to John Reizenstein represents a pro rated amount for the period to the AGM on 10 May 2018.

40% of any AIP award is deferred into shares under the DAIP, vesting three years after grant.

Financial element (55% weighting)

The financial performance measure is profit before tax. The Committee established a target performance level at the start of
the year. The only adjustment from the reported accounting position, as explained in the letter from the Committee Chair, was to
exclude the assumed benefit as a result of the Ogden discount rate change. In the table below, we have disclosed the target set
for profit before tax performance. The actual profit before tax performance includes the adjustment to reported profit before tax
as described above.

The approach taken to assessing financial performance against this measure was based on a straight-line outcome between 10%
for threshold performance and 60% for on target performance, and a straight-line outcome between on target performance and
100% for achievement of maximum performance.

The formulaic outcome from 2018 performance against the financial measure was 64%, giving a total of 35% out of 55%
attributable to this element. A summary of the assessment is provided in the following table.

Measure

Threshold 10%

Target 60%

Maximum 100%

2018 Actual

2018 Achievement

Profit before tax

£469.6m

£521.8m

£574.0m

£527.6m

64%

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Customer element (15% weighting)

Customers are at the heart of the Group’s strategy and success. As part of our customer strategy, and to ensure that the business
strives to achieve a sustained and competitive level of overall service to our customers, the Board sets challenging customer-centric
KPIs. These key customer metrics focus on continuous improvement of the customer experience. The Committee considered that
overall the Group had continued to improve on an already strong performance against stretching targets. The Group’s brands
perform well (mainly top quartile) across the majority of insurance customer experience benchmarking studies.

Having considered performance against targets and an assessment of the quality of performance achieved, the Committee
judged the Customer measures to be on target and agreed an out-turn of 60%, giving a total of 9% out of 15% attributable to
this element. A detailed assessment of the Customer measures is set out below.

Measure

Assessment

Net Promoter Score (NPS)
Improvement of customer
advocacy across Direct
Line Group

Complaints
Reduction in complaints
volume and process
improvements

– Direct Line NPS was ahead of the target and continued to show strong year on year

performance. Market leading propositions were successfully launched during the year
and are performing well with consumers.

– Churchill NPS was relatively flat over the year, and was below the target set for 2018;
we launched campaigns focused on meeting key customer needs for target segments.

– An improved perception of ‘price’ and ‘value for money’ supported the significantly increased

Renewal NPS for the year during which several of our best ever months were recorded.
– Rescue NPS performance ended the year below the target set as the result of a challenging

H1 due to extreme weather events, with improved performance across H2.

– The volume of complaints in Personal Lines and Commercial reduced significantly in 2018,

exceeding the stretch targets for both areas.

– We introduced and rolled out a specialist bereavement team to assist the families of

deceased customers.

– Claims complaints were adverse to target due to higher than forecast volumes caused by
extremes in weather in the first half of 2018, with performance stabilising throughout the
second half of 2018.

Claims Ease
Increase ease on claims
and strategic improvements

– We were unable to meet the ambitious targets set in this area in a year when the ‘Beast from

the East’ and increased volume challenged capacity across claims and networks.

– However several programmes contributed to improvements for customers, including:

– earlier identification of total loss vehicles in Motor which resulted in faster payments, a key

driver of improved Ease for customers.

– Travel ‘Return to Green’ plan (all KPIs at target levels) successfully delivered against a

challenging landscape.

MyCustomer
Transaction customer
experience performance
measuring our people/calls

– Over 1.5 million responses from customers across the Group have provided feedback on
the experience delivered by our people and 84% rated our people as 9 or 10 out of 10.
A new platform was launched in Q4 to further improve insight capabilities.

– In Personal Lines MyCustomer consultant performance was significantly ahead of target.
– MyCustomer for Claims stabilised in H2 after a challenging start to the year due to the high

volumes of claims, however ended the year short of the ambitious target set.

Measure

Customer element

2018 Achievement

60%

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People element (10% weighting)

For the People element of the AIP, the Board set a range of people measures specifically around succession strength, diversity
and employee engagement, reflecting the importance of this agenda to the success of the Group. The Committee considered that
performance across these measures was very strong and had exceeded expectations against a background of high employee
engagement. The Committee therefore agreed an out-turn of 100% for the People measures, giving a total of 10% out of 10%
attributable to this element. A detailed assessment of the People measures is set out below.

Measure

Succession

Diversity

Assessment

– We continue to develop our senior leaders, collectively and as individuals, to ensure we

continue to strengthen our succession depth.

– After a comprehensive programme in 2017 to map our talent, with a particular focus on

gender balance, we developed an emerging leader programme which has been attended
by 20 high potential managers in 2018.

– 52 (87%) of our senior leaders have completed personal assessments and profiles carried
out to enable individual development planning in 2018 and development of the senior
leadership team as a whole, and have attended mental health awareness training.

– We have successfully recruited for our new graduate and apprenticeship schemes with

a further 26 graduates and 114 apprentices joining us during 2018.

– Since becoming a signatory to the Women in Finance Charter, we have actively recruited
and promoted more women into senior roles; women now account for 28% of our senior
management (2017: 22%) and we are on track to meet our 2019 target.

– We continue to focus on building an inclusive organisation, valuing diversity and uniqueness.
93% of our people responded positively that they feel they can ‘bring all of themselves to
work’ in our 2018 survey.

– All senior leaders have Diversity and Inclusion action plans in place.
– We launched Wellbeing, CSR and My Life family policies to respond to the variety of life

needs our people may have.

– Mental health was a particular focus this year and we trained over 135 Mental Health First
Aiders with at least one available on every floor across all our locations, and all people
managers attended mental health awareness training. It is our aspiration to enable
conversations and support to be at the same level as they are for physical health.

Engagement

– We achieved record participation levels (90%) in our employee survey, DiaLoGue, and

increased our already high overall engagement levels from 78% in 2017 to 81%,
which places us in the upper quintile of high performing companies.

– We achieved a strong 2* accreditation in the Sunday Times ‘Best Big Companies to Work
For’ survey and are extremely proud to have been ranked in third place overall in our first
year of entry.

– In 2018 our focus on fair pay for all employees resulted in ‘Fair Deal’ being one of the

most positively valued aspects by our people in the ‘Best Companies to Work For’ survey.
– About 250 of our people managers completed Engage training focused on helping them

develop more authentic relationships with their people.

– Through Idea Lab, our employee suggestions scheme established in 2015, we have adopted
c.90 ideas to improve customer service, the way we work or save cost. Cost saving ideas
have delivered over £3.2 million in savings so far and employees have received over £130
thousand in recognition rewards.

Measure

People

2018 Achievement

100%

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Personal element (20% weighting)

This element relates to an objective that is shared across the Executive Committee and set by the Remuneration Committee.
The shared objective for 2018 focused on the Company’s key technology transformation and the changes it is making to its
IT infrastructure, as well as other areas of the general change agenda. There has been significant progress on the stability and
performance of the broader technology landscape and with the management of overall change across the organisation. Taking
performance against each Executive Director’s individual performance objectives and the above challenges into account, and
the material progress seen over the past two years, the Committee determined that the Executive Directors should each receive
awards of 70% of the maximum available, giving a total of 14% out of 20% attributable to this element. Further details of the
assessment of the Personal element is set out below.

– We have remained focused on improving our digital offering, customer experience and operational efficiency, recognising
the challenges experienced in previous years. The Committee is pleased to report that strong progress has been made in
the development and delivery of the Group’s ambitious technology transformation programme to build capability for the future.
The implementation of the new core Personal Lines systems is on track to start to roll out for Motor and Travel during 2019, and
within the budget as agreed with the Board. The programme includes a new pricing engine and a digital Travel platform, both
of which went into testing in 2018.

– Following the launch of our bespoke Direct Line for Business insurance products, Hair & Beauty and Bed & Breakfast, Direct

Line for Business launched Office, Professional and Retail. Although a few weeks later than scheduled, this release is the largest
of our bespoke offerings to date, and supported by a national Small and Medium-sized Enterprises marketing campaign, has
shown month on month improvements in gross written premiums in H2.

– Significant improvements in the stability and performance of the technology transformation programme, supporting our people
perform their roles more efficiently, resulted in increased internal customer satisfaction, with savings for the programme on track.

– The Company saw satisfactory progress in implementing and embedding Change controls across the business.

– The EU General Data Protection Regulation programme was implemented successfully and notably delivered our compliance

strategy ahead of time against tight deadlines.

Measure

Personal element

2018 Achievement

70%

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LTIP outcomes for 2018 (Audited)
LTIP awards are granted in March and August of each year. Each grant is subject to the following performance conditions:

– RoTE (60% weighting) – performance is measured over three financial years starting from the 1 January preceding the

March grant; and

– Relative TSR (40% weighting) – performance is measured over a three-year period from the date of grant.

2015 LTIP awards (vested in 2018)
Awards under the LTIP granted in March and August 2015 vested during 2018. They were subject to relative TSR performance
over the three-year vesting period, and RoTE performance in 2015, 2016 and 2017.

Consistent with the regulations, the expected RoTE vesting outcomes for the year ended 31 December 2017 (together with
the TSR elements from the 2014 awards), were included in the 2017 single remuneration figure in the 2017 report. The 2017
single remuneration figure has been updated in the 2018 report to reflect the known share price at the actual vesting date for the
RoTE portion of the awards. You can find details of this on page 95. The performance outcomes of these elements are included
in the table below.

The 2018 single remuneration figure includes the value of the 2015 TSR elements (which vested in March and August 2018).
Details of the targets and performance achieved are set out in the table below.

The Committee was satisfied that the financial and risk underpins were met at the end of the vesting period and therefore the
performance achieved against the targets and the vesting of the awards is as follows:

Award

Performance measure

Weighting

Threshold

Maximum

Actual performance

Achievement Outcome

March 2015

August 2015

Relative TSR
(2018 single figure)
RoTE
(2017 single figure)
Total
Relative TSR
(2018 single figure)
RoTE
(2017 single figure)
Total

40%

Median

60%

14.5%

40%

Median

60%

14.5%

Upper
quintile
17.5%

Between median

62% 24.8%

and upper quintile
18.1%

Below median

100%

60%

84.8%
0%

18.1%

100%

60%

2016 LTIP awards (vesting in 2019)
Awards under the LTIP granted in March and August 2016 will vest during 2019. They are subject to relative TSR performance
over the three-year vesting period, and RoTE performance in 2016, 2017 and 2018. The RoTE performance period for these
awards ended on 31 December 2018 and performance in respect of this element is set out in the table below. Performance
under the relative TSR measure will be assessed at the end of the vesting periods in March 2019 and August 2019 respectively
and will be disclosed in the 2019 Directors’ Remuneration Report. This is subject to the Committee’s satisfaction that the financial
and risk underpins have been met at the end of the vesting period.

Consistent with the regulations, the expected RoTE vesting outcomes (together with the TSR elements from the 2015 awards) are
included in the 2018 single remuneration figures for the Executive Directors based on the three-month average share price to
31 December 2018. You can find details of this on page 95.

Award

Performance measure

Weighting

Threshold

Maximum

Actual performance

Achievement Outcome

March 2016

August 2016

Relative TSR
(2019 single figure)
RoTE
(2018 single figure)
Relative TSR
(2019 single figure)
RoTE
(2018 single figure)

40%

Median

60%

14.5%

40%

Median

60%

14.5%

Upper
quintile
17.5%

Performance period not yet complete

18.5%

100%

60%

Performance period not yet complete

18.5%

100% 100%

100

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Summary of the 2018 LTIP single remuneration figure outcomes

Number of shares
awarded (inc.
dividends) subject to this
performance condition

Percentage vested
by reference to
performance achieved

March 2016
LTIP – RoTE1

August 2016
LTIP – RoTE1

March 2015
LTIP – TSR

August 2015
LTIP – TSR

Total single
figure LTIP

Paul Geddes
Mike Holliday-Williams
John Reizenstein
Paul Geddes
Mike Holliday-Williams
John Reizenstein
Paul Geddes
Mike Holliday-Williams
John Reizenstein
Paul Geddes
Mike Holliday-Williams
John Reizenstein
Paul Geddes
Mike Holliday-Williams
John Reizenstein

149,080
75,723
90,233
149,743
76,054
90,626
106,371
55,110
64,383
111,350
56,558
67,396

100%
100%
100%
100%
100%
100%
62%
62%
62%
0%
0%
0%

Number of

shares vested

149,080
75,723
73,504
149,743
76,054
61,079
65,929
34,157
39,904
0
0
0

Total value
of shares (inc.

dividends) vested
£’000

£477
£242
£2352
£479
£243
£1952
£247
£128
£150
£0
£0
£0
£1,204
£614
£1502

Notes:
1. 2016 RoTE elements are based on the three-month average share price to 31 December 2018 of £3.20042.
2. John Reizenstein stepped down from the Board on 10 May 2018. His 2016 LTIP awards are pro rated accordingly and will be disclosed as a payment to past
directors in the 2019 annual report on remuneration. John Reizenstein’s 2018 single figure disclosure will therefore only include the amount vesting in relation to
the March 2015 TSR component of the LTIP.

Buy-out award
The second tranche of Penny James’ buy-out award is due to vest on 1 April 2019, based on the achievement of performance
targets that relate partly to the performance of the Company and partly to the performance of her previous employer. The
performance conditions for this award are relative TSR (50%) and IFRS profit over 2016, 2017 and 2018 (50%). Relative
TSR performance is measured against a peer group based on the prior employer’s TSR performance from 1 January 2016 to
31 October 2017 and Direct Line Group’s TSR performance from 1 November 2017 to 31 December 2018 with a threshold
vesting of median (25% vests) and a maximum vesting of upper quartile (100% vests). The peer group is consistent with that used
by the prior employer.

Relative TSR performance over the period was just below the upper quartile of the comparator group. As such, 94.7% of this
element will vest. The prior employer does not disclose the IFRS profit targets in advance of vesting. The outcome for this element
is estimated to be 100% based on the prior employer’s previous year’s LTIP out-turn and the 2018 mid-year results. The overall
estimated vesting outcome is therefore 97% of maximum. The final vesting outcome will be disclosed in the 2019 Directors’
Remuneration Report once the prior employer’s targets and actual performance have been published. The number of shares
expected to vest is 705,871, calculated as 97% of 725,199. The estimated value is £2,259,087 based on a three-month
average share price to 31 December 2018 of £3.20042.

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101

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

DIRECTORS’ REMUNERATION REPORT CONTINUED

Using shares (Audited)
In receiving an award under the LTIP or DAIP, Executive Directors commit not to hedge their exposure to outstanding awards
under these plans or in respect of shares they are reporting to the Company 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.

At 31 December 2018

Share plan
awards subject to
performance
conditions

1,081,288
1,413,501
829,306

Share plan
awards subject to
continued service

Share plan
interests vested
but unexercised

320,239
106,242
193,524

1,154
–
–

Shares held
outright

759,844
213,075
372,026

Share plan interests exercised during the
year to 31 December 2018

Number of options
exercised

Share price on
date of exercise

365,467
167,025
145,500
200,807
84,837

3.7280
3.3200
3.3520
3.7280
3.3200

At end of employment 7 September 2018

Share plan awards
subject to
performance
conditions

Share plan awards
not subject to
performance
conditions

Share plan
interests vested but
unexercised

Shares held
outright

659,353

169,104 1,052,440

511,489

Share plan interests exercised during
the year to end of employment
7 September 2018

Number of options
exercised

Share price on
date of exercise

208,988
971,146
101,094

3.7280
3.3710
3.3200

Shares held at
31 December
2018

Shares held at
31 December
2017

--
10,000
--

11,083
5,000
--
10,475
--
44,065
--

--
10,000
n/a

26,190
5,000
n/a
10,475
n/a
40,128
–

Paul Geddes
Penny James
Mike Holliday-Williams

Note:
There have been no changes to the above share interests since 31 December 2018.

Paul Geddes

Penny James
Mike Holliday-Williams

Note:
The above relates to nil cost options.

John Reizenstein

Note:
The above relates to nil cost options.

The table below shows the Non-Executive Directors’ beneficial interests in the Company’s shares.

Director

Michael Biggs
Danuta Gray
Mark Gregory3

Jane Hanson
Sebastian James
Fiona McBain4
Andrew Palmer5
Gregor Stewart6
Clare Thompson
Richard Ward

Notes:
1. There were no changes to the number of shares held by Non-Executive Directors between the year end and the date of this report.
2. Includes holdings of connected person, as defined in section 96B(2) of the Financial Services and Markets Act 2000.
3. Mark Gregory was appointed to the Board with effect from 1 March 2018.
4. Fiona McBain was appointed the Board with effect from 1 September 2018.
5. Andrew Palmer stepped down from the Board at the AGM on 10 May 2018 and this represents his holding at that date.
6. Gregor Stewart was appointed to the Board with effect from 1 March 2018.

102

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Non-Executive Directors (Audited)
Fees were the only remuneration paid to Non-Executive Directors in 2017 and 2018. 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 ‘Taxable Benefits’ below. The Non-Executive Directors receive no
other benefits.

Director1

Michael Biggs
Danuta Gray3
Mark Gregory4
Jane Hanson
Sebastian James
Fiona McBain5
Andrew Palmer6
Gregor Stewart7
Clare Thompson
Richard Ward

Fees

2018
£’000

400
103
75
120
95
25
51
88
102
120

2017
£’000

400
74
–
115
90
–
125
–
110
115

Taxable Benefits2

2018
£’000

2017
£’000

Total

2018
£’000

6
4
–
10
–
2
–
4
–
0.4

6
–
–
12
–
–
–
–
–
–

406
107
75
130
95
27
51
92
102
120.4

2017
£’000

406
74
–
127
90
–
125
–
110
115

Notes:
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 ‘Taxable Benefits’ above comprise the value of taxable travel and subsistence expenses reimbursed by the Company (including any

gross-up for tax and National Insurance Contributions due).

3. Danuta Gray was appointed as Chair of the Remuneration Committee with effect from the AGM on 10 May 2018.
4. Mark Gregory was appointed to the Board with effect from 1 March 2018. He was appointed as Chair of the Investment Committee and as a member of the

Audit Committee with effect from the AGM on 10 May 2018.

5. Fiona McBain was appointed to the Board with effect from 1 September 2018.
6. Andrew Palmer stepped down from the Board at the AGM on 10 May 2018.
7. Gregor Stewart was appointed to the Board with effect from 1 March 2018. He was appointed as Chair of the Audit Committee and as a member of the Board

Risk Committee with effect from the AGM on 10 May 2018.

CEO pay ratio
The Committee has chosen to adopt early the CEO pay ratio disclosure requirements which would otherwise come into
effect from next year’s Directors’ Remuneration Report. Over the coming year, the Committee will determine the appropriate
methodology (Option A, B or C) to be used in future years, considering the robustness of the calculation methodology, the
consistency of the method going forward as well as operational time constraints. For the purposes of this year’s disclosure,
the April 2018 gender pay gap data has been used to identify the three appropriate employees for comparison with the
CEO (Option B). Further detail on this methodology is set out below.

The table below compares the 2018 single total figure of remuneration for the CEO with that of the Group employees who are
paid at the 25th percentile (lower quartile), 50th percentile (median) and 75th percentile (upper quartile) of its employee population.

Year

2018

Method

25th percentile pay ratio

Median pay ratio

75th percentile pay ratio

Option B

127:1

116:1

81:1

The remuneration figures for the employee at each quartile were determined with reference to 31 December 2018.

Under Option B, the latest available gender pay gap data is used to identify the best equivalent for three Group employees
whose hourly rates of pay are at the 25th, 50th and 75th percentiles for the Group and their total pay and benefits figure for
2018 is then calculated. A sample of employees with hourly pay rates either side of the initially identified individuals are also
reviewed to ensure that the appropriate representative employees are selected. The table below sets out the salary and total pay
and benefits for the three identified quartile point employees:

Salary
Total pay and benefits

25th percentile (P25)

Median (P50)

75th percentile (P75)

£20,072
£25,072

£24,810
£27,538

£34,452
£39,555

Each employee’s pay and benefits were calculated using each element of employee remuneration, consistent with the CEO, on a
full-time equivalent basis. No adjustments (other than to achieve full-time equivalent rates) were made and no components of pay
have been omitted.

Base salaries of all employees, including our Executive Directors, are set with reference to a range of factors including market
practice, experience and performance in role. For reference, the CEO base salary median pay ratio is 33:1. In reviewing the
ratios the Committee also noted that the CEO’s remuneration package is weighted more heavily towards variable pay (including
the AIP and LTIP) than the wider workforce due to the nature of the role, and this means the ratio is likely to fluctuate depending
on the performance of the business and associated outcomes of incentive plans in each year.

The Group’s employees are fundamental to the Group’s strategy and to ensuring a high level of service to our customers.
We are proud that the high number of consultants in our customer service centres are employed by the Group (rather than being
outsourced), and note that the impact of these lower paid roles is reflected in the ratios above. Further details on our approach to
fairly paying and motivating our employees are set out on page 58.

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103

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIRECTORS’ REMUNERATION REPORT CONTINUED

Percentage change in Chief Executive Officer’s pay for 2017 to 2018
The table below shows the Chief Executive Officer’s year on year percentage change in salary, taxable benefits and bonus,
compared to the average pay for all other employees.

Chief Executive Officer
All employees (average)

Salary1

2.5%
4.46%

Bonus (including
deferred
amount)3

(20.9%)
(12.1%)

Benefits2

7.1%
16.9%

Notes:
1. Based on the change in average pay for employees employed in the year ended 31 December 2018 and the year ended 31 December 2017.
2. There were no changes in benefits provision between 2017 and 2018. There has been a change in the assumptions used to calculate the all-employee average
benefits figure, making the year on year change appear high to last year. If the treatment was the same as previous years, this would result in a 5% benefits
increase from 2017 for all employees.

3. For employees other than the Chief Executive Officer, this includes average amounts earned under the AIP, and other variable incentive schemes, including

monthly and quarterly incentive schemes operated in certain parts of the Group.

Chief Executive Officer’s pay between 2012 and 2018 and historical
performance of TSR
The table below shows historical levels of the Chief Executive Officer’s pay between 2012 and 2018. It also shows vesting of
annual and long-term incentive pay awards as a percentage of the maximum available opportunity. This is presented against 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
300300

(%)

DLG

FTSE 350
(excluding investment trusts)

250

200

150

100

16 Oct 2012

31 Dec 2012

31 Dec 2013

31 Dec 2014

31 Dec 2015

31 Dec 2016

31 Dec 2017

31 Dec 2018

CEO single figure of remuneration
(£’000s)
Annual bonus payment
(% of maximum)
LTIP vesting
(% of maximum)1

2012

2013

2014

2015

20162

20173

20184

1,908

2,536

5,356

4,795

4,348

4,039

3,238

65%

30%

63%

55%

75%

88%

83%

96%

63%

86%

88%

99%

68%

71%

Notes:
1. Based on actual vesting under the 2010, 2011 and 2012 RBS Group LTIP. The value included in the single figures in respect of these awards is £205,000 in

2012, £728,000 in 2013 and £2,437,428 in 2014.

2. The 2016 single figure and annual bonus payment have been updated to reflect an adjustment to the original award of 20% of maximum opportunity related to

the Ogden discount rate change.

3. The 2017 single figure has been revised to reflect the actual vesting of the 2015 awards under the LTIP, an increase of £292,700.
4. The 2018 single figure reflects the estimated vesting of the RoTE portion of the LTIP granted in March and August 2016. Any shares under the LTIP granted in

2015 will not be delivered until the end of the applicable vesting periods in March and August 2019. However, they have been included in the single figure,
as the performance period in respect of the RoTE portion has now been completed.

104

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Distribution statement
This chart shows the overall pay expenditure across all Group employees compared with the total dividend value paid to
shareholders in 2017 and 2018.

Dividend (£m)

Overall expenditure on pay (£m)

% change
116%

3
.
5
0
2

9
.
1
8
2

3
.
5
2
2

17y

18y

8
.
5
6
4

% change
4.8%

3
.
4
4
4

Special

Ordinary

17y

18y

Notes:
1. During 2018 the Company paid special dividends of £205m in addition to the regular dividends. Under the dividend policy the Board considers whether

to make additional distributions each year alongside the full-year results. During 2017, no special dividend was paid for the 2016 financial year as following
the implementation of the new Ogden discount rate the Board did not consider the Group had surplus capital.

2. There have been no share buy-backs since the IPO. The dividends paid information has been taken from note 14 to the consolidated financial statements.

The overall expenditure on pay has been taken from note 10 and therefore, consistent with market practice, it has not been calculated in a manner consistent
with the single figure in this report.

AGM voting outcomes
The table shows the percentage of shareholders voting for or against, and the percentage of votes withheld, relating to
the resolutions to approve the 2017 Directors’ Remuneration Report which was put to shareholders at the 2018 AGM on
10 May 2018.

The resolution approving the Directors’ Remuneration Report was passed by 76.58% of the votes cast in favour of the resolution.
The reasons for this outcome and subsequent actions taken are discussed by the Chair in her letter on page 90.

For

Against

Number

Percentage

Number

Percentage

Number of votes
withheld (abstentions)

Percentage of votes
withheld (abstentions)

Approval of Directors’
Remuneration Report (2018 AGM) 766,710,834
Approval of Directors’
Remuneration Policy (2017 AGM)

881,046,703

76.58% 234,492,835

23.42%

7,284,313

0.72%

98.29%

15,349,348

1.71%

32,669,059

3.52%

Shareholdings (Audited)
This table sets out the share ownership guidelines and actual share ownership levels:

Name

Position

Paul Geddes
Penny James
Mike Holliday-Williams MD Personal Lines

Chief Executive Officer
Chief Financial Officer

Share ownership
guideline1
(% of salary)

Value of shares
held at 31
December 2018
(% of salary)

200%
200%
200%

292%
101%
211%

Notes:
1. Executive Directors are expected to retain all the ‘after tax’ 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.

2. For these purposes, holdings of Ordinary Shares will be treated as including all vested but unexercised awards, or awards unvested but after the performance

period in the holding period, valued on a basis that is net of applicable personal taxes payable on acquiring such Ordinary Shares.

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105

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIRECTORS’ REMUNERATION REPORT CONTINUED

Direct Line Group share awards
Direct Line Group Deferred Annual Incentive Plan awards (Audited)
This table details the Directors’ interests 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
2018

No. of share
options
granted
during the
year1

No. of share
options vested
during the
year

No. of
dividend
shares
acquired at
vesting2

No. of
dividend
shares added
post vesting

No. of
share
options
exercised1,3,4,5

No. of share
options held at
31 December
20186

Vesting date

2.0157

380,004

1,044

3.3007

400,000

111,087

3.752

447,996

119,402

3.36

237,715

70,713

–

3.818

496,816

–

130,124

–

110

–

1,154

28-Mar-16

111,087

28,874

–

139,961

–

25-Mar-18

–

119,402

29-Mar-19

70,713

27-Mar-20

130,124

26-Mar-21

302,246

130,124

111,087

28,874

110

139,961

321,393

Grant date

Paul Geddes
28-Mar-13

25-Mar-15

29-Mar-16

27-Mar-17

26-Mar-18

Penny James
26-Mar-18

3.818

405,636

–

106,242

–

Mike Holliday-Williams
25-Mar-15

3.3007

239,997

29-Mar-16

27-Mar-17

26-Mar-18

3.752

270,797

3.36

154,030

66,651

72,174

45,819

3.818

288,378

–

John Reizenstein
28-Mar-13

25-Mar-15

29-Mar-16

27-Mar-17

26-Mar-18

2.0157

137,999

3.3007

207,200

3.752

240,800

3.36

123,318

3.818

257,724

184,644

94,009

57,542

64,179

36,683

–

252,413

–

75,531

–

67,502

–

106,242

26-Mar-21

106,242

83,975

– 25-Mar-18

–

72,174

29-Mar-19

45,819

27-Mar-20

75,531

26-Mar-21

83,975

193,524

66,651

17,324

–

66,651

17,324

–

9,911

–

103,920

28-Mar-16

57,542

14,957

–

72,499

–

25-Mar-18

–

64,179

29-Mar-19

36,683

27-Mar-20

67,502

26-Mar-21

57,542

14,957

9,911

72,499

272,284

Notes:
1. These awards take the form of nil-cost options over the Company’s shares. 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. Dividends added post-vesting are shown to 31 December 2018, although these are not realised until exercise.
3. Paul Geddes exercised 139,961 options on 26 March 2018 when the share price was £3.728 resulting in a notional gain of £521,775.
4. Mike Holliday-Williams exercised 83,975 options on 26 March 2018 when the share price was £3.728 resulting in a notional gain of £313,059.
5. John Reizenstein exercised 72,499 options on 26 March 2018 when the share price was £3.728 resulting in a notional gain of £270,276.
6. John Reizenstein stepped down from the Board at the AGM on 10 May 2018 and his share interests are as that date. However, the movements in his DAIP

interests across the entire year are disclosed above. Further information on what happened to his share scheme interests on leaving employment (on 7 September
2018) can be found on page 108.

7. The dates of the three-day averaging period used to determine the number of shares granted on 26 March 2018 were 21, 22 and 23 March, being the three

days preceding the grant.

106

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Direct Line Group Long-Term Incentive Plan 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
£

No. of
share
options at 1
January
20181

Face value
of award
£

No. of
share
options
granted
during the
year2

No. of
share
options
vested
during the
year3

No. of share
options
lapsed for
performance 4

No. of
share
options
lapsed on
leaving
employment

No. of
dividend
shares
acquired
at vesting 5

No. of
dividend
shares
added
post
vesting

No. of
share
options
exercised 6

No. of
share
options held
at 31
December

2018 Vesting date

Grant date

Paul Geddes
25-Mar-15

3.3007

760,000 211,066

26-Aug-15

3.517

775,200 220,415

29-Mar-16

3.752

775,197 206,609

30-Aug-16

3.6833

794,598 215,730

27-Mar-17 3.361667

794,597 236,370

29-Aug-17

3.854

810,488 210,298

– 178,984

– 132,249

32,082

88,166

–

26-Mar-18

3.818

810,492

– 212,281

1,300,488

212,281 311,233

120,248

Penny James
28-Nov-17

3.5673 1,349,984 378,433

26-Mar-18

3.818

675,000

28-Aug-18

3.3377

675,000

-- 176,794

-- 202,237

378,433

379,031

–

46,522

34,776

–

81,298

–

225,506

167,025

– 25-Mar-18

– 26-Aug-18

– 206,609 29-Mar-19

– 215,730 30-Aug-19

– 236,370 27-Mar-20

– 210,298 29-Aug-20

– 212,281 26-Mar-21

392,531 1,081,288

-- 378,433 28-Nov-20

-- 176,794 26-Mar-21

-- 202,237 28-Aug-21

–

757,464

Notes:
The Company’s share price on 31 December 2018 was £3.187, and the range of prices in the year was £3.049 to £3.932.

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 2018, applying to 60% of the award, were 17.5% for 20% vesting,18.5% for 40% vesting and 20.5% 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 111.

3. The closing market price on the dates of the vesting of the awards was £3.728 on 26 March 2018 and £3.371 on 28 August 2018.
4. Awards under the LTIP vested at 84.8% of the maximum potential on 26 March 2018 and 60.0% of the maximum potential on 28 August 2018.
5. Dividends added post-vesting are shown to 31 December 2018, although these are not realised until exercise.
6. Paul Geddes exercised 225,506 options on 26 March 2018 when the share price was £3.728 resulting in a notional gain of £840,686, and on 29 August

2018 167,025 options when the share price was £3.32 resulting in a notional gain of £554,523.

7. The dates of the three-day averaging period used to determine the number of shares granted on 26 March 2018 were 21, 22 and 23 March, being the
three days preceding the grant. The dates of the three-day averaging period used to determine the number of shares granted on 28 August were 22, 23
and 24 August.

8. The performance period for the awards granted on 26 March 2018 will end on 31 December 2020 for the RoTE element and 25 March 2021 for the TSR

element. The performance period for the awards granted on 28 August 2018 will end on 31 December 2020 for the RoTE element and 27 August 2021 for
the TSR element.

All awards made from August 2017 include an additional two-year holding period before awards may be released. The Company’s normal 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 annual policy level. This means the total
combined face value of awards per year to each of the Executive Directors equates to 200% of base salary.

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STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

DIRECTORS’ REMUNERATION REPORT CONTINUED

Direct Line Group Long-Term Incentive Plan awards (Audited) continued

Three-day
average
share price
for grant of
awards
£

No. of
share
options at 1
January
20181

Face value
of award
£

No. of
share
options
granted
during the
year2

No. of
share
options
vested
during the
year3

No. of share
options
lapsed for
performance 4

No. of
share
options
lapsed on
leaving
employment

No. of
dividend
shares
acquired
at vesting 5

No. of
dividend
shares
added
post
vesting

No. of
share
options
exercised 6,7

No. of
share
options held
at 31
December

20188 Vesting date

Grant date

Mike Holliday-Williams
25-Mar-15

3.3007

393,747 109,351

26-Aug-15

3.5170

393,749 111,956

29-Mar-16

3.7520

393,750 104,944

30-Aug-16

3.6833

403,572 109,568

27-Mar-17 3.361667

538,099 160,069

29-Aug-17

3.854

548,860 142,413

–

26-Mar-18

3.818

548,862

28-Aug-18

3.3377

562,584

– 143,756

– 168,556

92,729

67,173

16,622

44,783

–

738,301

312,312 159,902

61,405

John Reizenstein
7-Nov-12

1.96

460,000 299,271

28-Mar-13

2.0157

459,999 302,089

28-Aug-13

2.1564

459,999 277,167

25-Mar-15

3.3007

460,000 127,750

-- 108,332

26-Aug-15

3.5170

469,200 133,409

29-Mar-16

3.7520

469,199 125,053

30-Aug-16

3.6833

480,899 130,562

27-Mar-17 3.361667

480,900 143,054

29-Aug-17

3.854

490,518 127,275

80,045

19,418

53,364

–

24,103

17,664

–

41,767

–

116,832

84,837

– 25-Mar-18

– 26-Aug-18

– 104,944 29-Mar-19

– 109,568 30-Aug-19

– 160,069 27-Mar-20

– 142,413 29-Aug-20

– 143,756 26-Mar-21

– 168,556 28-Aug-21

201,669

829,306

-- 31,551

330,822

-- 31,848

333,937

-- 29,220

306,387

136,489

101,094

9-Nov-15

-- 28-Mar-16

-- 28-Aug-16

-- 25-Mar-18

-- 26-Aug-18

-- 101,869 29-Mar-19

87,995 30-Aug-19

69,048 27-Mar-20

43,431 29-Aug-20

28,157

21,049

23,184

42,567

74,006

83,844

1,665,630

– 188,377

72,782

223,601

49,206

92,619 1,208,729

302,343

Notes:
The Company’s share price on 31 December 2018 was £3.187, and the range of prices in the year was £3.049 to £3.932.

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 2018, applying to 60% of the award, were 17.5% for 20% vesting, 18.5% for 40% vesting and 20.5% 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 111.

3. The closing market price on the dates of the vesting of the awards was £3.728 on 26 March 2018 and £3.371 on 28 August 2018.
4. Awards under the LTIP vested at 84.8% of the maximum potential on 26 March 2018 and 60.0% of the maximum potential on 28 August 2018.
5. Dividends added post-vesting are shown to 31 December 2018, although these are not realised until exercise.
6. Mike Holliday-Williams exercised 116,832 options on 26 March 2018 when the share price was £3.728 resulting in a notional gain of £435,550 and

84,837 options on 29 August 2018 when the share price was £3.32 resulting in a notional gain of £273,175.

7. John Reizenstein exercised 136,489 options on 26 March 2018 when the share price was £3.728 resulting in a notional gain of £508,831, 971,146 options
on 28 August 2018 when the share price was £3.371 resulting in a notional gain of £3,273,733 and 101,094 options on 29 August 2018 when the share
price was £3.32 resulting in a notional gain of £335,632.

8. John Reizenstein stepped down from the Board at the AGM on 10 May 2018 and his share interests are as at that date. However, the movements in his LTIP

interests across the entire year are disclosed above. Further information on what happened to his share scheme interests on leaving employment (on 7 September
2018) can be found on page 106.

9. The dates of the three-day averaging period used to determine the number of shares granted on 26 March 2018 were 21, 22 and 23 March, being the

three days preceding the grant. The dates of the three-day averaging period used to determine the number of shares granted on 28 August were 22, 23 and
24 August.

10. The performance period for the awards granted on 26 March 2018 will end on 31 December 2020 for the RoTE element and 25 March 2021 for the TSR

element. The performance period for the awards granted on 28 August 2018 will end on 31 December 2020 for the RoTE element and 27 August 2021 for
the TSR element.

All awards made from August 2017 include an additional two-year holding period before awards may be released. The Company’s normal 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 annual policy level. This means the total
combined face value of awards to each of the Executive Directors equates to 200% of base salary.

108

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Buy-out awards (Audited)
The table below details buy-out awards made to Penny James. These awards were made to the CFO in November 2017
as compensation for the forfeiture of legacy awards granted by her previous employer. The awards were made in the form of
restricted stock options (pursuant to Listing Rule 9.4.2) and subject to performance conditions that, as far as possible, mirrored
those of the original awards.

The first tranche of these buy-out awards, which vested in April 2018, was subject to the performance conditions and comparator
groups identical to those of the original award, ending in the 2017 performance year. For the second tranche, which will vest in
April 2019, the performance conditions differ from the above in that the Group’s TSR performance replaces that of the former
employer for the period from 1 November to 31 December 2018 (post-joining).

The awards accrue dividend equivalent shares until vesting, as per the terms of the legacy awards.

Three-day
average share
price for grant
of awards
£

Face value of
award
£

No. of share
options at 1
January 2018

No. of share
options vested
during the year

No. of share
options lapsed
for performance

No. of dividend
shares acquired
at vesting

No. of share
options
exercised

No. of share
options held at
31-Dec-18

Vesting date

3.5673

500,492 140,298

134,454

5,844

11,046

145,500

– 3-Apr-18

3.5673 2,340,304 656,037

–

– 656,037 1-Apr-19

Grant date

Penny James
28-Nov-17
Penny James
28-Nov-17

Notes:
1. Penny James exercised 145,500 options on 2 August 2018 when the share price was £3.352 resulting in a notional gain of £487,716.
2. The first tranche of the above buy-out awards vested on 2 May 2018, deferred from the original vesting date of 3 April 2018 due to the Company being in

a closed period from 29 March to 1 May 2018.

Direct Line Group 2012 Share Incentive Plan (Audited)
During 2018, all employees, including Executive Directors, were eligible to invest from £10 to £150 a month from their pre-tax
pay into the scheme, 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, Mike Holliday-Williams and Penny James do not participate in
the plan.

Director

John Reizenstein

Matching shares as
at 31 December
2017

Matching shares
granted during the
period

Matching shares
cancelled during
the period

Matching shares
vested during the
period

Value of matching
shares granted¹
£

Balance of
matching shares at
10 May 2018

742

–

303

740

Notes:
1. The accumulated market value of matching shares at the time of each award. Purchase of the matching shares takes place within 30 days of the contributions

being deducted from salary.

2. John Reizenstein stepped down from the Board on 10 May 2018 and his interests are shown as at that date. On leaving employment on 7 September 2018,

his SIP shares were transferred to him in accordance with the rules of the scheme.

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.

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STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

Maximum annual
incentive award
for 2019
(% base salary)

Deferred under
the DAIP
(% bonus)

175%
175%
150%

40%
40%
40%

Weighting for
2019

Weighting for
2018

55%

15%

10%

20%

55%

15%

10%

20%

DIRECTORS’ REMUNERATION REPORT CONTINUED

Statement of policy implementation in 2019

Executive Directors’ salaries in 2019
The salary increase awarded to the Executive Directors, effective 1 April 2019, reflects the average increase awarded to
staff generally.

Position

Chief Executive Officer to 9 May 2019
Chief Financial Officer to 9 May 2019
CEO-designate from 9 May 2019
MD Personal Lines

2019 base salary
£’000

2018 base salary
£’000

Annual change in
base salary

831
675
800
575

831
675
–
563

–
–
–
2.25%

Director

Paul Geddes
Penny James

Mike Holliday-Williams

AIP 2019

Director

Paul Geddes
Penny James
Mike Holliday-Williams

The AIP measures remain unchanged:

Position

Chief Executive Officer
CEO-designate
MD Personal Lines

Financial

Customer

People

Personal

Measures

Profit before tax
A range of customer metrics including Net Promoter
Score and complaints
A range of people measures including succession,
diversity and engagement
Objectives for each Executive Director, including shared
objectives across the Executive Committee

As in previous years, all AIP outcomes will be determined after the Committee establishes 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 targets are commercially sensitive and will be disclosed in next year’s report.

The list on the following page sets out the gateway criteria for the AIP for 2019.

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DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Gateway criteria for the AIP for 2019 – 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, and, more widely, 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.

LTIP 2019

Director

Paul Geddes
Penny James
Mike Holliday-Williams

Position

Chief Executive Officer
CEO-designate
MD Personal Lines

Annual LTIP
award for 2019

–
200%
200%

Performance conditions for LTIP awards
LTIP awards to be granted in 2019 will continue to be subject to performance against these performance conditions:

– 60% based on RoTE over a three-year performance period (2019, 2020 and 2021)

– 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 192.

The Committee reviewed the performance targets and decided to maintain the RoTE target range at the same level as in 2018
as follows:

Performance measure

Vesting for threshold
performance

RoTE

Relative TSR

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 2019

Awards in 2018

Awards in 2017

Awards in 2019

Awards in 2018

Awards in 2017

Average
annual RoTE
performance
of 17.5%

Average
annual RoTE
performance
of 17.5%
Median

Average
annual RoTE
performance
of 15.0%

Average
annual RoTE
performance
of 20.5%

Average
annual RoTE
performance
of 20.5%
Upper quintile

Average
annual RoTE
performance
of 18.0%

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 18.5% for awards to be made
in 2019. 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.

The LTIP will continue to be subject to the application of malus and clawback and an additional two-year holding period
post vesting which facilitates post-employment shareholding requirements. The Committee will be considering the application
of a post-employment shareholding requirement in more detail as part of the Remuneration Policy review during 2019.

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STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

DIRECTORS’ REMUNERATION REPORT CONTINUED

Pension and benefits
A pension contribution of 25% of base salary will be paid to the CEO in 2019 (until date of leaving). The pension contribution
for the CEO-designate will be reduced from the current level of 25% of salary to 9% of salary (from date of appointment) in line
with the wider workforce. A pension contribution of 15% of salary will be paid to the MD Personal Lines in 2019; this level of
contribution remained unchanged following his promotion to the Board in 2017. Pension contribution rates will be in line with
those of the wider workforce for all new Executive appointments. The reduction in pension contributions for the current Executive
Directors, in line with those of the wider workforce, will be considered as part of the policy review during 2019. No Directors
participate in any defined benefit pension arrangements operated by the Company.

Appointment of new Chief Executive Officer
On 26 February 2019, Penny James, the current CFO, was appointed CEO-designate to succeed Paul Geddes. Penny will
become CEO from the conclusion of the AGM on 9 May 2019. Penny’s annual salary will be £800,000. This salary is in line
with the FTSE 51-100 CEO benchmark and below the current CEO’s salary level.

At the same time, Penny’s pension contribution will be reduced from her current contribution rate of 25% of salary to 9% of salary,
in line with that of the wider workforce. There will be no change to her participation in the Company’s AIP up to a maximum of
175% of salary and the LTIP up to 200% of salary.

Retirement of Executive Director (Audited)
John Reizenstein, the former CFO, retired on 7 September 2018 having stepped down from the Board as an Executive Director
at the end of the AGM on 10 May 2018. Following his cessation as a Director of the Company, John’s salary, pension and
benefits were paid in monthly instalments until the end of his employment as follows:

Pay component

Payments since cessation as a Director of the Company

Salary
(£’000)

160

Pension
(£’000)

Benefits
(£’000)

Total
(£’000)

203

John’s planned retirement was announced in September 2017 and the Committee confirmed his ‘good leaver’ status, without
the exercise of any discretion, at that time. He has, therefore, retained share awards granted to him up to that date (for details
of all awards see pages 106 and 108). LTIP awards made in 2016 and 2017 have been time pro rated to reflect the period
from their date of grant to the end of his period of employment. No LTIP awards were made to him in 2018. John has also been
made an award under the AIP for the period to the AGM on 10 May 2018, details of which can be found on page 96.

Payments to former Directors (Audited)
There have been no payments made to a former Director during the year, with the exception of the payments made to John
Reizenstein since his cessation as a Director of the Company.

112

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Non-Executive Directors’ fees

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 and Investment Committees
Member of Board Committee (Audit, Board Risk or Remuneration)
Member of Board Committee (CSR or Nomination)

No additional fees are paid for membership of the Investment Committee.

Fees for 2019
£’000

400
75

30
30
10
10
5

External directorships
Paul Geddes is a Non-Executive Director for Channel 4 for which he receives and retains an annual fee of £22,177. Otherwise,
the Executive Directors do not currently hold any further external directorships.

Service contracts
Subject to the discretion set out in the recruitment remuneration policy, 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
Mike Holliday-Williams 30 January 2014
Penny James

1 September 2012

1 November 2017

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.

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 and the termination policy.

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.

The Board reviewed and approved this report on 4 March 2019.

DANUTA GRAY
CHAIR OF THE REMUNERATION COMMITTEE

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STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
DIRECTORS’ REMUNERATION REPORT CONTINUED

Policy report
The following is a copy of the main table from the policy approved by shareholders at the 2017 AGM. The full policy
is available in the Directors’ Remuneration Report of the 2016 Annual Report and Accounts.

Policy table

Element

Purpose and link to strategy Operation

Maximum opportunity

Performance measures

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

Pension

– To remain competitive
within the market place
– To encourage retirement
planning and retain
flexibility for individuals

– 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

– 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

Benefits

– A comprehensive and

– Executive Directors receive a benefits package generally set by reference

– The costs of benefits provided may fluctuate from year

– Not performance-related

flexible benefits package
is offered, emphasising
individuals being able to
choose the combination
of cash and benefits that
suits them

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

114

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

– When determining salary increases, the Committee

– Not applicable

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

– The maximum pension contribution is set at 25% of base

– Not performance-related

salary per annum

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

Base

salary

– This is the core element

– Base salaries are typically reviewed annually and set in April of each year,

of pay that reflects the

individual’s role and

this to be appropriate

although the Committee may undertake an out-of-cycle review if it determines

position within the Group.

– When reviewing base salaries, the Committee typically takes the following

It is payable for doing the

into account:

expected day-to-day job

– level of skill, experience and scope of responsibilities, individual

– Staying competitive in the

and business performance, economic climate, and market conditions;

market allows us to attract,

– the median market pay in the context of companies of a similar size,

retain and motivate

high-calibre executives

particularly FTSE 31-100 companies, as they are considered to reflect

the size and complexity of the Group;

with the skills to achieve

– the practice of insurance peers such as Admiral Group, Aviva, esure

our key aims while

managing costs

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

planning and retain

flexibility for individuals

allowance in lieu of pension

Benefits

– A comprehensive and

– Executive Directors receive a benefits package generally set by reference

flexible benefits package

to market practice in companies of a similar size and complexity, particularly

is offered, emphasising

FTSE 31-100 companies. Benefits currently provided include a company car

individuals being able to

or car allowance, private medical insurance, life insurance, health screening

choose the combination

and income protection

of cash and benefits that

– The Committee may periodically amend the benefits available to some

suits them

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

Element

Purpose and link to strategy Operation

Maximum opportunity

Performance measures

– When determining salary 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

– Not applicable

Pension

– To remain competitive

– Pension contributions are paid only in respect of base salary

– The maximum pension contribution is set at 25% of base

– Not performance-related

within the market place

– Executive Directors are eligible to participate in the defined contribution

– To encourage retirement

pension arrangement or alternatively they may choose to receive a cash

salary 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

WWW.DIRECTLINEGROUP.CO.UK

115

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSDIRECTORS’ REMUNERATION REPORT CONTINUED

Element

Purpose and link to strategy Operation

Maximum opportunity

Performance measures

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

– 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

– Maximum and target bonus levels for Executive

– Performance over the financial year is assessed against performance

Directors are set by taking into account annual

measures which the Committee considers to be appropriate

bonus practice throughout the organisation and

– These may be financial, non-financial (Group, divisional or business

referring to practice at other insurance and

line) and individual. Each year, at least 50% of the bonus is based on

general market comparators

financial measures. The remainder of the bonus may be based on a

– The maximum bonus opportunity under the AIP

combination of strategic, shared and individual performance measures

is 175% of base salary per annum. The current

– The Committee sets targets at the beginning of each financial year

maximum bonus opportunity applying for each

– No more than 10% of the bonus is paid for threshold performance

individual Executive Director is shown in the

(30% of the bonus for the individual performance element). No more

statement of implementation of policy

than 60% of the maximum opportunity pays out for target performance.

LTIP

– Aligning executives’

interests with those of
shareholders to motivate
and incentivise delivering
sustained business
performance over
the long term

– Awards will typically be made in the form of nil-cost options or conditional
share awards, which vest to the extent performance conditions are satisfied
over a period of at least three years. Under the Plan rules, awards may
also be settled in cash at the discretion of the Committee. This may be
appropriate, for example, if legal difficulties arise with settling in shares
– Vested options will remain exercisable up to the 10th anniversary of grant
– Malus and clawback provisions apply to the LTIP. These are explained in

– To aid retaining key

the notes to the policy table

executive talent long-term

– 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

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

– 200% of salary for all Executive Directors

– The Committee reserves the discretion to

amend these levels in future years

holding period

– Not applicable

116

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

– The maximum LTIP award in normal

circumstances is 200% of salary

– The Committee will determine the performance conditions for each

award made under the LTIP, measuring performance over a period

– Awards of up to 300% of base salary

of at least three years with no provision to retest

are permitted in exceptional circumstances,

– Performance is measured against targets set at the beginning of the

relating to recruiting or retaining an employee,

performance period, which may be set by referring to the time of

as determined by the Committee

grant or financial year

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

– 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

Element

Purpose and link to strategy Operation

Maximum opportunity

Performance measures

AIP

– To motivate executives

– For Executive Directors, at least 40% of the award is deferred into shares

and incentivise delivery

of performance over a

under the Deferred Annual Incentive Plan (the “DAIP”). This typically vests

three years after grant (with deferred awards also capable of being settled

one-year operating cycle,

in cash at the discretion of the Committee, for example, when it gives rise

focusing on the short- to

to legal difficulties to settle in shares). The remainder of the award is paid

medium-term elements of

in cash following the year end

our strategic aims

– The Committee will keep the percentage deferred and terms of deferral under

review. This will ensure levels are in line with regulatory requirements and

best practice and may be changed in future years but will not, in the

Committee’s view, be changed to be less onerous overall

– Malus and clawback provisions apply to the cash and deferred elements.

These are explained in the notes to the policy table

– 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

– 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

LTIP

– Aligning executives’

– Awards will typically be made in the form of nil-cost options or conditional

interests with those of

share awards, which vest to the extent performance conditions are satisfied

shareholders to motivate

over a period of at least three years. Under the Plan rules, awards may

and incentivise delivering

also be settled in cash at the discretion of the Committee. This may be

sustained business

performance over

the long term

appropriate, for example, if legal difficulties arise with settling in shares

– Vested options will remain exercisable up to the 10th anniversary of grant

– Malus and clawback provisions apply to the LTIP. These are explained in

– To aid retaining key

the notes to the policy table

executive talent long-term

– 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

– The maximum LTIP award in normal
circumstances is 200% of salary

– Awards of up to 300% of base salary

– The Committee will determine the performance conditions for each
award made under the LTIP, measuring performance over a period
of at least three years with no provision to retest

are permitted in exceptional circumstances,
relating to recruiting or retaining an employee,
as determined by the Committee

– Performance is measured against targets set at the beginning of the
performance period, which may be set by referring to the time of
grant or financial year

– 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

ownership

guidelines

– To align the interests of

– Executive Directors are expected to retain all the Ordinary Shares vesting

Executive Directors with

under any of the Company’s share incentive plans, after any disposals

those of shareholders

for paying applicable taxes, until they have achieved the required

shareholding level unless such earlier sale, in exceptional circumstances,

is permitted by the Chairman

– 200% of salary for all Executive Directors
– The Committee reserves the discretion to

amend these levels in future years

– Not applicable

WWW.DIRECTLINEGROUP.CO.UK

117

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

DIRECTORS’ REPORT

The Directors present their report for the financial year ended
31 December 2018.

You can find the forward-looking statements disclaimer on
page 195.

Strategic report
The Company’s Strategic report is on pages 1 to 59. It includes
the following information that would otherwise need to be
disclosed in this Directors’ report:

Subject

Use of financial instruments
Important events since
the financial year end
Likely future developments in the business
Employee involvement
Research and development

Pages

30 and 36

12 to 17
17
56 to 59
18 to 21

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 60 to 117. 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

Page

None
None

109
109
Not applicable
Not applicable

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
Not applicable
Contracts of significance involving a director Not applicable
Contracts of significance involving
a controlling shareholder
Details of shareholder dividend waivers
Controlling shareholder agreements

Not applicable
119
Not applicable

None

Dividends
The Board recommends a final dividend of 14.0 pence
per share to shareholders. Subject to shareholder approval
at the Company’s 2019 AGM, this will become payable
on 16 May 2019 to all holders of Ordinary Shares on the
Register of members at close of business on 5 April 2019.
A special interim dividend has been declared of 8.3 pence
per share and will have the same record and payment dates
as the final dividend for 2018.

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 2019. Likewise,
the special interim dividend can also be cancelled if necessary.

You can find further details regarding dividends paid during
2017 and 2018 in the Finance review on page 26 and in
note 14 to the consolidated financial statements on page 164.
You can also find information on dividend and capital
management in the Finance review on page 32.

Directors
You can find the current Directors’ biographies on pages 62
to 64. All Directors will retire and, excepting Paul Geddes and
Clare Thompson, will be submitted for election or re-election at
the 2019 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 62 and 64 were the Directors
of the Company throughout the year apart from Mark Gregory
and Gregor Stewart, who were each appointed as Directors
on 1 March 2018, and Fiona McBain, who was appointed
as a Director on 1 September 2018; Andrew Palmer and
John Reizenstein also served during the year, retiring from
the Board on 10 May 2018.

The Company’s Articles of Association set out the Directors’
powers. You can view these on the Company’s website at
www.directlinegroup.co.uk. 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 88 to 117.

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.

118

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

Share capital
The Company has a premium listing on the London Stock
Exchange. As at 31 December 2018, the Company’s share
capital comprised 1,375,000,000 fully paid Ordinary Shares
of 10 10/11 pence each.

At the Company’s 2018 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 and to allot further shares
up to an aggregate nominal amount of £50,000,000, for
the purpose of a rights issue;

– allot shares having a nominal amount not exceeding in

aggregate £7,500,000 for cash, without offering the shares
first to existing shareholders in proportion to their holdings;

– allot additional shares having a nominal amount not

exceeding in aggregate £7,500,000 for the purposes of
financing a transaction which the Board of the Company
determines to be an acquisition or other capital investment,
without offering the shares first to existing shareholders in
proportion to their holdings;

– 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; and

– allot shares (with the disapplication of pre-emption rights)
up to an aggregate nominal amount of £23,250,000 in
relation to the issue of solvency II RT1 Instruments.

To date, the Directors have not used these authorities. At
the 2019 AGM, shareholders will be asked to renew these
authorities. 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 as
31 December 2018 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 a participant’s instructions.

The Trustee of the Employee Benefit 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 35 on page 176. 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 of 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 (which may exclude non-working days). 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 is considered significant in terms of its 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.

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 direct and indirect interests
in the Company’s voting rights. 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.

WWW.DIRECTLINEGROUP.CO.UK

119

STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSDIRECTORS’ REPORT CONTINUED

APG Asset Management N.V
Artemis Investment Management LLP
BlackRock, Inc.
Standard Life Aberdeen plc
T.Rowe Price Associates, Inc

31 December
2018

4 March
2019

3.35%
4.79%
10.13%
8.08%
5.79%

3.26%
4.81%
10.14%
8.32%
4.52%

insurance products are provided. It allows us to compare
our year-on-year performance and performance against other
insurance companies. You can find verification statements on
the Group’s website at www.directlinegroup.co.uk. You can
find further information on the Group’s approach to energy
and the environment in the Responsibility report on page 55.

Global GHG emissions data for reporting year
1 January 2018 – 31 December 2018

Political donations
The Group made no political donations during the year
(2017: nil).

Employees with disabilities
The Group is committed to promoting diversity and inclusion
across every area of the business through initiatives such as the
DNA. At recruitment, we adjust and enhance our application
and selection process, and guide and provide additional
training for interviewers, where necessary.

Our DNA focuses on a number of strands including employees
with disabilities. It identifies areas where we can improve and
help people to 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 using both the location-based Scope 2
and market-based Scope 2 calculation methodologies. GHG
emissions are classified as direct or indirect, and divided into
Scope 1, Scope 2 and Scope 3 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 seven main GHGs, reported in tonnes
of carbon dioxide equivalent (“CO2e”), and set 2013 as
the base year.

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.

Scope 3 – includes all other indirect emissions such as waste
disposal, business travel and staff commuting.

Total GHG emissions (Scope 1 and Scope 2) in 2018 were
16,219 tonnes (2017: 17399 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 2018, this
was 5.2 tonnes CO2e per £ million of net earned premium
(2017: 5.5 tonnes). This is a measure of how efficiently

Emissions from:

Combustion of fuel & operation
of facilities (Scope 1)
Electricity, heat, steam and cooling
purchased for own use (Scope 2)
Total (Scope 1 & 2)
Intensity metric: tonnes CO2e/
Million GBP net earned
premium (£m)
Transmission and Distribution
(“T&D”) losses from electricity
(Scope 3)
Total (Scope 1, 2 & 3 –
T&D Losses)
Intensity metric: tonnes CO2e/
Million GBP net earned
premium (£m)
T&D losses from electricity,
commuting, paper and
business travel (Scope 3)
Total (Scope 1, 2 & 3)
Intensity metric: tonnes CO2e/
Million GBP net earned
premium (£m)

Scope 2
Location-based
Tonnes
of CO2e

Scope 2
Market-based
Tonnes

of CO2e

8,304

7,915
16,219

10,290
18,594

5.2

6.0

675

16,894

19,269

5.5

6.2

17,809
34,028

17,809
36,403

11.0

11.8

Year on year comparison (Scope 2 location-based
methodology)

Tonnes of CO2e

Emissions from:

2013

2017

2018

Percentage
change
(2013 to
2018)

Scope 1
Scope 2
Total (Scope 1 & 2)
Intensity metric: tonnes
CO2e/million GBP net
earned premium (£m)

Scope 3 (Only T&D
losses from electricity)

Total (Scope 1, 2 & 3
– T&D losses)

Intensity metric: tonnes
CO2e/Million GBP net
earned premium (£m)

8,304
8,429 8,027
7,915
21,480 9,371
29,909 17,399 16,219

-1.5
-63.2
-45.8

8.5

5.5

5.2

-38.2

1,774

876

675

-62.0

31,683 18,275 16,894

-46.7

9.0

5.8

5.5

-39.2

120

DIRECT LINE GROUP 2018 ANNUAL REPORT & ACCOUNTS

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 32 to 34 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 4
March 2019 (the date of approval of the financial statements).
Accordingly, the Directors have adopted the going concern
basis in preparing the financial statements.

Disclosing information to
the Auditor
Each Director at the date of approving these Annual Report
& Accounts confirms that: as far as they are aware, there is
no relevant audit information of which Deloitte, the Company’s
External Auditor, is unaware; and they have taken all the steps
that they ought to have taken as a Director to make themselves
aware of any relevant audit information, and to establish that
Deloitte 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.

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.co.uk. Legislation in the UK
governing preparing and disseminating financial statements
may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed on
pages 62 to 64, confirms that, to the best of their knowledge:

– the financial statements, prepared in accordance with
IFRS, give a true and fair view of the assets, liabilities,
financial position, and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole;

– the Strategic report (on pages 1 to 59) and Directors’

report (on pages 118 to 121) include a fair review of:
(i) the business’s development and performance; and
(ii) 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; and

Auditor
Deloitte has expressed its willingness to continue in office
as the External Auditor. A resolution to reappoint Deloitte
will be proposed at the forthcoming AGM. You can find
an assessment of the effectiveness and recommendation for
reappointing Deloitte in the Audit Committee report on page 79.

– the Annual Report and the financial statements, taken as a

whole, are fair, balanced and understandable, and provide
the information necessary for shareholders to assess the
Company’s position and performance, business model
and strategy.

The Board reviewed and approved this report on 4 March 2019.

By order of the Board

ROGER C. CLIFTON
COMPANY SECRETARY

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.

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Financial statements

32. Subordinated liabilities

Independent Auditor’s report

123

33. Insurance liabilities

34. Unearned premium reserve

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

Parent Company financial statements
Parent Company balance sheet

Parent Company statement of comprehensive income

Parent Company statement of changes in equity

Notes to the Parent Company financial statements
1. Accounting policies

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. Tier 1 notes

10. Subordinated liabilities

11. Borrowings

12. Trade and other payables

13. Dividends

14. Share-based payments

15. Risk management

16. Directors and key management remuneration

17. Post balance sheet event

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 judgements and key sources

of estimation uncertainty

3. Risk management

4. Segmental analysis

5. Net earned premium

Investment return

7. Other operating income

8. Net insurance claims

9. Commission expenses

10. Operating expenses

11. Finance costs

12. Tax charge

13. Current and deferred tax

14. Dividends and appropriations

15. Earnings per share

16. Net assets per share and return on equity

17. Goodwill and other intangible assets

18. Property, plant and equipment

19. Investment property

20. Subsidiaries

21. Reinsurance assets

22. Deferred acquisition costs

23. Insurance and other receivables

24. Derivative financial instruments

25. Retirement benefit obligations

26. Financial investments

27. Cash and cash equivalents and borrowings

28. Assets held for sale

29. Share capital

30. Other reserves

31. Tier 1 notes

131

132

133

134

135

136

144

146

157

160

161

162

163

164

165

166

167

168

169

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

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INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DIRECT LINE INSURANCE GROUP PLC

Report on the audit of the financial statements

Opinion

In our opinion:

– the financial statements of Direct Line Insurance Group plc (the “Parent Company”) and its subsidiaries (together the “Group”)
give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2018 and of
the Group’s profit for the year then ended;

– the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards
(“IFRSs”) as adopted by the European Union and IFRSs as issued by the International Accounting Standards Board (“IASB”);

– the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally
Accepted Accounting Practice including Financial Reporting Standard 101 “Reduced Disclosure Framework” applied in
accordance with the provisions of the Companies Act 2006; 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.

We have audited the financial statements which comprise:

– the Consolidated Income Statement;

– the Consolidated and Parent Company Statements of Comprehensive Income;
– the Consolidated and Parent Company Balance Sheets;

– the Consolidated and Parent Company Statements of Changes in Equity;

– the Consolidated Cash Flow Statement; and

– the related notes 1 to 41 on the Consolidated financial statements and related notes 1 to 17 on the Parent Company financial
statements, excluding the capital adequacy disclosures in note 3 calculated in accordance with the Solvency II regime which
are marked as unaudited.

The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the
European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of
the Companies Act 2006.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements
section of our report.

We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to
our audit of the financial statements in the UK, including the Financial Reporting Council’s (“FRC”) Ethical Standard as applied
to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We
confirm that no non-audit services prohibited by the FRC’s Ethical Standard were provided to the Group or the Parent Company.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Summary of our audit approach

Key audit matters

The key audit matters that we identified in the current year were:

– valuation of insurance reserves:

1) The frequency and severity of bodily injury claims; and
2) The inflation and discount rate assumptions for valuing periodic payment orders (“PPOs”).

– valuation of intangible assets; and

– valuation of investments not held at fair value.

These key audit matters are consistent with those identified in the prior period audit.

The materiality that we used for the Group financial statements was £28 million which approximates 5.2%
of three-year average profit before tax.
Our Group audit scoping included two entities being subject to a full scope audit and a further two entities
being subject to an audit of specified account balances. These four entities represent the principal business
units and account for 99% of the Group’s net assets, 100% of the Group’s gross earned premium and 98%
of the Group’s profit before tax.
There have been no significant changes in our approach.

Materiality

Scoping

Significant
changes in our
approach

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INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DIRECT LINE INSURANCE GROUP PLC
CONTINUED

Conclusions relating to going concern, principal risk and viability statements

Going concern
We have reviewed the Directors’ statement on page 121 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 and Parent Company’s ability to continue to
do so over a period of at least twelve months from the date of approval of the financial statements.

We are required to state whether we have anything material to add or draw attention to in relation to that
statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our
knowledge obtained in the audit.

We confirm that
we have nothing
material to report,
add or draw
attention to
in respect of
these matters.

We considered as part of our risk assessment the nature of the Group, its business model and related risks including where
relevant the impact of Brexit, the requirements of the applicable financial reporting framework and the system of internal control.
We evaluated the Directors’ assessment of the Group’s ability to continue as a going concern, including challenging the
underlying data and key assumptions used to make the assessment, and evaluated the Directors’ plans for future actions in
relation to their going concern assessment.

Principal risks and viability statement
Based solely on reading the Directors’ statements and considering whether they were consistent with the
knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation
of the Directors’ assessment of the Group’s and Parent Company’s ability to continue as a going concern,
we are required to state whether we have anything material to add or draw attention to in relation to:
– the disclosures on pages 46 and 47 that describe the principal risks and explain how they are being

managed or mitigated;

– the Directors’ confirmation on page 75 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; or

– the Directors’ explanation on page 49 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 are also required to report whether the Directors’ statement relating to the prospects of the Group
required by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.

We confirm that
we have nothing
material to report,
add or draw
attention to
in respect of
these matters.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the engagement team.

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon. We do not provide a separate opinion on these matters.

Valuation of insurance reserves
Refer to page 77 (Audit Committee Report), page 138 (Accounting policies) and page 174 (Financial statements).

The Group’s insurance reserves total £4.0 billion (2017: £4.2 billion). The determination of the value of the insurance
reserves requires significant judgement in the selection of key actuarial 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 given their significance to the Group’s result and the level of judgement involved. Therefore,
we have also identified these as potential fraud risk areas.

1) The frequency and severity of large bodily injury claims
Key audit matter description
The insurance reserve valuation for large bodily injury claims has a significant impact on the Group’s results, with the ultimate
quantum of large bodily injury claims being driven by a variety of factors. These factors include the completeness and accuracy
of source data, the transparency of any changes in the reporting of large claims, and actuarial assumptions being consistent
with emerging data, internal processes and market factors. As a result of these factors, there is a significant level of estimation
uncertainty in the valuation of these claims, which increases the susceptibility of the balance to material misstatement due to
error and fraud.

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Furthermore, a key market factor occurring in 2018 was the Civil Liability Act, which came into force on 20 December 2018
after passing Royal Assent. Going forward this Act will result in the Government determining the Ogden discount rate, which
is currently minus 0.75%, with reference to ‘low risk’ rather than ‘very low’ or ‘zero risk’ investments. The Government will also
now conduct regular rate reviews at least every five years. In response to this legislative change the Group has moved to valuing
its lump sum bodily injury reserves using an Ogden discount rate of 0%, rather than minus 0.75%, on the basis that the Civil
Liability Act requires the Government to set the discount rate with reference to low risk rather than very low risk investments.
The selection of the new rate required significant judgement by management and has resulted in a reduction in the insurance
reserves of £55 million.

How the scope of our audit responded to the key audit matter
We have gained a detailed understanding of the end-to-end claims and reserving process and assessed the design and
implementation of selected controls, including peer review of actuarial workings and committees where the key assumptions
are challenged. In order to gain assurance over the completeness and accuracy of source data used in the Group’s actuarial
calculations and by our in-house actuarial specialists in performing their work, we have tested the operating effectiveness of
data reconciliations controls and performed reconciliations on the data back to the financial ledger.

Having done this, we worked with those specialists to:

– assess and challenge the methodologies and key assumptions, and their underlying rationale, adopted by the Group, including

the potential risk of increased claims inflation caused by Brexit;

– review the estimated impact on reserves of recent paid and incurred claim developments using our in-house reserve software;

– inspect the Group’s actuarial models and perform sensitivity testing and peer benchmarking on key assumptions;

– assess management’s rationale for adopting a best estimate Ogden discount rate of 0%, and challenge its reasonableness in

light of market benchmarking; and

– assess and challenge the methodology of the Group’s Ogden sensitivity model.

Key observations
We have determined the estimate for the ultimate value of large bodily injury claims to be reasonable. In making this
determination we observed that the frequency and severity assumptions used in determining the ultimate value are reasonable,
albeit slightly prudent.

2) The inflation and discount rate assumptions for valuing PPOs
Key audit matter description
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 £875.9 million (2017: £898.7 million)
on a discounted gross basis as detailed in note 2. PPOs are sensitive to the choice of inflation and discount rate used, with
small rate changes resulting in material valuation differences. The significant judgement exercised by management in setting
the inflation rate of 4% (2017: 4%) and discount rate of 4% (2017: 4%), increases the susceptibility of the balance to material
misstatement due to error and fraud.

How the scope of our audit responded to the key audit matter
We have gained a detailed understanding over Management’s process for setting these assumptions and assessed the design
and implementation of key governance controls surrounding the setting of the PPO inflation rate and discount rate. 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:

– review and challenge the Group’s PPO inflation assumption through inquiries with the Actuarial Director, reviewing relevant
supporting documentation and benchmarking against market economic data, including the potential risk of increased claims
inflation caused by Brexit;

– review the Group’s sensitivity testing on the PPO inflation assumption;

– review and challenge the selected discount rate with reference to current and future performance of the assets backing the

PPO liabilities, taking account of the uncertainty created for investment markets by Brexit; and

– challenge the consistency of the approach with that used in the 2017 year-end valuation and the appropriateness of

maintaining that approach in light of the current economic climate and market benchmarking.

Key observations
We have determined that the inflation and discount rate assumptions used in the calculation of the PPO claims reserve are in the
middle of a reasonable range. Given the current low yield environment, and the potential for increased risk of claims inflation in
certain Brexit scenarios, we determined that these assumptions continue to require close monitoring going forward.

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INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DIRECT LINE INSURANCE GROUP PLC
CONTINUED

Valuation of intangible assets
Refer to page 77 (Audit Committee Report), page 138 (Accounting policies) and page 166 (Financial statements).

Key audit matter description
We have identified a key audit matter over the valuation of intangible assets totalling £354.1 million (2017: £258.8 million)
as detailed in note 17. Our key audit matter specifically addresses those intangible assets relating to strategic projects that aim
to improve the customer experience, support growth and increase efficiency across the Group.

Having decided to rework certain elements of the capitalised expenditure, which resulted in an impairment charge of £56.9
million in 2017, the Group has progressed in developing the asset with roll out scheduled to commence in 2019. Whilst this
reduces the risk of delivery failure, in comparison to last year’s audit, until the assets are complete there continues to be a risk of
future impairment charges, with the determination of which requiring a significant level of judgement. As a result of these factors,
we continue to identify this as a key audit matter as well as a potential fraud risk.

How the scope of our audit responded to the key audit matter
We assessed the design and implementation of key controls over the impairment of intangible assets. This included senior
management review and approval of the impairment review.

In addition, we performed the following audit procedures:

– inquired of system integrators and programme managers, and inspected internal reports, system architecture maps and

meeting minutes in order to challenge management on which components of the capital expenditure will ultimately be used
in the end-state system;

– engaged our in-house IT consultants to assess the feasibility of the IT architecture in delivering the expected benefits across

the Group; and

– challenged management on the reasonableness of the future cash flows for the assets. Whilst performing our work we

leveraged our knowledge of the system based on our testing over the components of the capital expenditure.

Key observations
We have determined that the £nil impairment charge is reasonable. Based on the information available to date we deem the
feasibility of successful project delivery and the expected benefits thereof to be reasonable.

Valuation of investments not held at fair value
Refer to page 77 (Audit Committee Report), page 139 (Accounting policies) and page 171 (Financial statements).

Key audit matter description
Investments that are not held at fair value are carried at amortised cost and represent a higher credit risk relative to the
majority of DLG’s investment portfolio. Our work primarily focused on the valuation of the Group’s commercial real estate loan,
infrastructure debt and private placement bond portfolios. Having recognised a £6 million (2017: £10 million) impairment on
a non-performing loan in the year, these investments totalled £592.2 million (2017: £589 million) and represented 12.5%
(2017: 11.7%) of the Group’s investment portfolio.

The Group satisfies the exemption criteria within IFRS 4 Insurance Contracts and has decided to defer the application of IFRS 9
Financial Instruments until the expected effective date of the new insurance contracts standard IFRS 17 on 1 January 2022. Under
IAS 39 Financial Instruments: Recognition and Measurement, management judgement continues to be required in determining if
an incurred loss event has occurred and there is significant uncertainty in determining the fair value of the loans in the instance
an event has occurred. As a result, we identified the valuation of investments not held at fair value as a key audit matter.

How the scope of our audit responded to the key audit matter
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 observe the operation of a key management review control.

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In addition, we performed the following audit procedures:

– traced a sample of interest payments to bank during the year to test for default or delinquency in interest payments;

– engaged our in-house complex pricing team to determine an independent fair value of these assets and identify any significant

decreases in fair value below book cost;

– assessed the need for impairment on a collective basis through analysing significant macroeconomic and sector specific

developments, such as the impact of Brexit on property valuations, as well as the high street decline; 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 have determined that the £6 million impairment charge arising on non-performing credit assets is reasonable. In performing
our procedures, we did not note any other indicators of material impairment.

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.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Group financial statements

Parent Company financial statements

Materiality

£28.0 million (2017: £28.0 million).

£25.2 million (2017: £25.2 million).

Basis for
determining
materiality

Materiality was determined as approximately 5.2%
(2017: 5.2%) of three-year average profit before tax,
excluding the impact of the Ogden discount rate change
on year-end results.

Materiality equates to less than 1% (2017:
1%) of shareholders’ equity and is capped at
90% (2017: 90%) of Group materiality.

Rationale for
the benchmark
applied

We determined that the critical benchmark for the Group
was average profit before tax. This measure uses a three-year
average of profit before tax which we deemed appropriate
due to the inherent volatility of profits in the insurance industry.
We also elected to exclude the impact of the Ogden discount
rate change on the 2016 results and the subsequent move
to 0% in 2018 results due to the non-recurring nature of
these events.

We also considered this measure to be suitable having
compared to other benchmarks: our materiality equates
to 4.8% (2017: 5.1%) of statutory profit before tax,
0.9% (2017: 0.8%) of gross earned premium and
1.1% (2017: 1.1%) of equity.

We determined that the critical benchmark
for the Parent Company was shareholder’s
equity. This is because the Parent Company
is not a trading entity but rather receives
dividend income from its subsidiaries.

When determining materiality for the
Parent Company, we also considered
the appropriateness of this materiality for
the consolidation of this set of financial
statements to the Group’s results.

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,
UK Insurance Limited, which makes up 100% of Group gross earned premium and 73% of Group statutory profit before tax,
is scoped to a component materiality of £25.2 million (2017: £25.2 million).

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 £19.6 million (2017: £19.6 million) and the audit testing for UK Insurance Limited is carried out
to a performance materiality of £17.6 million (2017: £17.6 million).

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £1.4 million
(2017: £1.4 million) for the Group financial statements, 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.

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INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DIRECT LINE INSURANCE GROUP PLC
CONTINUED

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.

Consistent with the prior period, this resulted in two entities being subject to a full scope audit and a further two were subject
to an audit of specified account balances where the extent of our testing was based on our assessment of the risks of material
misstatement and of the materiality of the Group’s operations. All entities within scope of the Group audit are based in the UK.

These four entities represent the principal trading and service operations of the Group and account for 99% (2017: 99%) of
the Group’s net assets, 100% (2017: 100%) of the Group’s gross earned premium and 98% (2017: 98%) 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 Group 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 all of the entities listed above, including the Parent Company.

Other information

The Directors are responsible for the other information. The other information comprises the information
included in the Annual Report, other than the financial statements and our auditor’s report thereon.

Our opinion on the financial statements does not cover the other information and, except to the extent
otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

We have nothing
to report in respect
of these matters

In connection with our audit of the financial statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If we identify such material inconsistencies or apparent material misstatements, we are required to determine
whether there is a material misstatement in the financial statements or a material misstatement of the other
information. If, based on the work we have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact.

In this context, matters that we are specifically required to report to you as uncorrected material
misstatements of the other information include where we conclude that:

– fair, balanced and understandable – the statement given by the Directors that they consider the Annual

Report and financial statements taken as a whole is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group’s performance, business model and strategy,
is materially inconsistent with our knowledge obtained in the audit; or

– Audit Committee reporting – the section describing the work of the Audit Committee does not

appropriately address matters communicated by us to the Audit Committee; or

– Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the Directors’
statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate
Governance Code containing provisions specified for review by the auditor in accordance with Listing
Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate
Governance Code.

Responsibilities of Directors

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, and for such internal control as the Directors determine is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to
continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of
accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no
realistic alternative but to do so.

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Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance
is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect
a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these
financial statements.

Details of the extent to which the audit was considered capable of detecting irregularities, including fraud, are set out below.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s
website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

Extent to which the audit was considered capable of detecting irregularities, including fraud

We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then
design and perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and
appropriate to provide a basis for our opinion.

Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with
laws and regulations, our procedures included the following:

– enquiring of management, internal audit, legal counsel, financial reporting, risk, IT, financial crime and the Audit Committee,
including obtaining and reviewing supporting documentation, concerning the Group’s policies and procedures relating to:

a) identifying, evaluating and complying with laws and regulations and whether they were aware of any instances

of non-compliance;

b) detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or

alleged fraud; and

c) the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations.

– discussing among the engagement team and involving relevant internal specialists, including actuarial, tax, IT, valuations

and pension specialists regarding how and where fraud might occur in the financial statements and any potential indicators
of fraud. As part of this discussion, we identified potential for fraud in the following areas: the valuation of the insurance
reserves as well as the valuation of the intangible assets due to the estimates and judgements exercised by management; and

– obtaining an understanding of the legal and regulatory framework that the Group operates in, focusing on those laws and

regulations that had a direct effect on the financial statements or that had a fundamental effect on the operations of the Group.
The key laws and regulations we considered in this context included the UK Companies Act, Listing Rules and tax legislation.
In addition, we considered compliance with the terms of the Group’s regulatory solvency requirements when assessing the
Group’s ability to continue as a going concern.

Audit response to risks identified
As a result of performing the above, we identified valuation of insurance reserves and valuation of intangible assets as key audit
matters. The key audit matters section of our report explains these matters in more detail and also describes the specific
procedures we performed in response to those key audit matters.

Our procedures to respond to risks identified included the following:

– reviewing the financial statement disclosures and testing the supporting documentation to assess compliance with relevant laws

and regulations discussed above;

– enquiring of management, the Audit Committee and in-house legal counsel concerning actual and potential litigation

and claims;

– performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material

misstatement due to fraud;

– reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence

with HMRC, PRA and FCA; and

– in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and
evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.

We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members
including internal specialists and remained alert to any indications of fraud or non-compliance with laws and regulations
throughout the audit.

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INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DIRECT LINE INSURANCE GROUP PLC
CONTINUED

Report on other legal and regulatory requirements

Opinion on other matters prescribed by the Companies Act 2006

In our opinion the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the
Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

– the information given in the strategic report and the Directors’ report for the financial year for which the financial statements are

prepared is consistent with the financial statements; and

– the strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.

In the light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in
the course of the audit, we have not identified any material misstatements in the strategic report or the Directors’ report.

Matters on which we are required to report by exception

Adequacy of explanations 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 in respect
of these matters.

Other matters

Audit tenure
Following the recommendation of the Audit Committee, we were appointed by the Board of Directors of the Royal Bank
of Scotland Group plc on 21 March 2000 to audit the financial statements for the year ending 31 December 2000 and
subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments
of the firm is 19 years, covering the years ending 31 December 2000 to 31 December 2018.

Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance
with ISAs (UK).

Use of our report

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 full 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.

COLIN RAWLINGS FCA (SENIOR STATUTORY AUDITOR)
for and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom

4 March 2019

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CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2018

Gross earned premium
Reinsurance premium
Net earned premium
Investment return
Instalment income
Other operating income
Total income
Insurance claims
Insurance claims recoverable from / (payable to) reinsurers
Net insurance claims
Commission expenses
Operating expenses
Total expenses
Operating profit
Finance costs
Profit before tax
Tax charge
Profit for the year attributable to owners of the Company

Earnings per share:
Basic (pence)
Diluted (pence)

Notes

5
5
5
6

8
8
8

9
10

15
15

2018
£m

3,306.7
(217.2)
3,089.5
154.6
119.9
72.1

3,436.1
(1,966.9)
55.1
(1,911.8)

(200.4)
(722.2)

(922.6)
601.7
(19.1)
582.6
(108.9)

473.7

2017
£m

3,339.7
(204.7)
3,135.0
175.4
116.4
62.9

3,489.7
(1,571.1)
(183.1)
(1,754.2)

(286.4)
(806.3)

(1,092.7)
642.8
(103.8)
539.0
(105.0)

434.0

33.5
33.1

31.8
31.5

The attached notes on pages 136 to 181 form an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2018

Profit for the year
Other comprehensive income
Items that will not be reclassified subsequently to the income statement:

Actuarial gain on defined benefit pension scheme
Tax relating to item that will not be reclassified

Items that may be reclassified subsequently to the income statement:

Cash flow hedges
Fair value (loss) / gain on AFS investments
Less: realised net gains on AFS investments included in income statement
Tax relating to items that may be reclassified

Other comprehensive loss for the year net of tax
Total comprehensive income for the year attributable to owners of the Company

Notes

25
13

30
30
30

2018
£m

473.7

2.7
(0.4)

2.3

0.5
(121.4)
(19.5)
23.9
(116.5)
(114.2)
359.5

2017
£m

434.0

2.1
(0.4)

1.7

(1.1)
8.8
(23.2)
2.5
(13.0)
(11.3)
422.7

The attached notes on pages 136 to 181 form an integral part of these consolidated financial statements.

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FINANCIALS V6.1

CONSOLIDATED BALANCE SHEET
As at 31 December 2018

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
Shareholders’ equity
Tier 1 notes
Total 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

2018
£m

2017
£m

17
18
19
21
13
22
23

24
25
26
27
28

32
33
34
27
24
36
13
13

566.8
156.2
322.1
1,208.7
–
171.0
875.9
128.0
48.2
17.0
4,737.8
1,154.4
–
9,386.1

471.1
174.4
309.3
1,178.5
0.1
185.4
981.2
146.2
84.4
14.4
5,040.4
1,358.6
4.2
9,948.2

2,573.1
346.5
2,919.6

2,715.1
346.5

3,061.6

259.5
4,005.9
1,505.5
62.0
25.9
554.1
7.6
46.0
6,466.5
9,386.1

264.7
4,225.7
1,600.3
54.1
12.0
658.0
31.1
40.7
6,886.6
9,948.2

The attached notes on pages 136 to 181 form an integral part of these consolidated financial statements.

The financial statements were approved by the Board of Directors and authorised for issue on 4 March 2019. They were signed
on its behalf by:

PENNY JAMES
CHIEF FINANCIAL OFFICER

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2018

AFS
revaluation
reserve
(note 30)
£m

Foreign
exchange
translation
reserve
£m

Balance at 1 January 2017

Profit for the year

Other comprehensive loss

Dividends paid (note 14)

Shares acquired by employee trusts

Credit to equity for equity-settled share-based
payments (note 35)

Shares distributed by employee trusts

Tax on share-based payments

Issue of Tier 1 notes

Balance at 31 December 2017

Profit for the year

Other comprehensive loss

Dividends and appropriations paid (note 14)

Shares acquired by employee trusts

Credit to equity for equity-settled share-based
payments (note 35)

Shares distributed by employee trusts

Tax on share-based payments

Balance at 31 December 2018

Share
capital
(note 29)
£m

Employee
trust
shares
£m

Capital
reserves
(note 30)
£m

150.0
–
–
–
–

(34.3) 1,450.0
–
–
–
–

–
–
–
(19.6)

–
–
–
–

–

19.8
–
–

–
–
–
–

150.0
–
–
–
–

–
–
–
150.0

(34.1) 1,450.0
–
–
–
–

–
–
–
(19.5)

–
18.4
–

–
–
–
(35.2) 1,450.0

92.1
–
(11.9)
–
–

–
–
–
–

80.2
–
(117.0)
–
–

–
–
–
(36.8)

Retained
earnings
£m

Shareholders’
equity
£m

862.3 2,521.5
434.0
434.0
(11.3)
(225.3)
(19.6)

1.7
(225.3)
–

Tier 1
notes
(note 31)
£m

Total
equity
£m

– 2,521.5
434.0
–
(11.3)
(225.3)
(19.6)

–

1.4
–
(1.1)
–
–

–
–
–
–

14.8
(19.8)
1.0
–

14.8
–
1.0

–

14.8
–
1.0
346.5

–
– 346.5

0.3 1,068.7 2,715.1 346.5 3,061.6
473.7
473.7
(114.2)
(114.2)
(503.8)
(503.8)
(19.5)
(19.5)

473.7
2.3
(503.8)
–

–
0.5
–
–

–
–
–
–

–
–
–

21.0
(18.4)
0.8
0.8 1,044.3

21.0
–
0.8
2,573.1

–
–
–

21.0
–
0.8
346.5 2,919.6

The attached notes on pages 136 to 181 form an integral part of these consolidated financial statements.

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FINANCIALS V6.1

CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2018

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 used in investing activities
Purchases of property, plant and equipment
Purchases of goodwill and other intangible assets
Proceeds on disposals of assets held for sale
Proceeds on disposal of property, plant and equipment
Net cash used in investing activities
Cash flows used in financing activities
Net proceeds from issue of Tier 1 notes
Repayment of subordinated liabilities
Dividends and appropriations paid
Finance costs
Purchase of employee trust shares
Net cash used in financing activities
Net (decrease) / increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year

Notes

37
37

18
17

2018
£m

4.2
468.1
472.3

(13.3)
(142.4)
13.8
0.1

(141.8)

–
–
(503.8)
(19.3)
(19.5)
(542.6)
(212.1)
1,304.5
1,092.4

2017
£m

204.0
341.9
545.9

(22.4)
(73.2)
–
0.3

(95.3)

346.5
(326.8)
(225.3)
(31.7)
(19.6)
(256.9)
193.7
1,110.8

1,304.5

The attached notes on pages 136 to 181 form an integral part of these consolidated financial statements.

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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 in full compliance
with IFRSs as issued by the IASB. The Company has elected to
prepare its parent entity financial statements in accordance
with FRS 101 ‘Reduced Disclosure Framework’.

The consolidated financial statements are prepared on
the historical cost basis except for available-for-sale (“AFS”)
financial assets, investment property and derivative financial
instruments, which are measured at fair value (fair value is
defined in note 40).

The Company’s financial statements and the consolidated
financial statements are presented in sterling, which is the
functional currency of the Company.

Adoption of new and revised standards
The Group has adopted the following new amendments
to IFRSs and International Accountings Standards (“IASs”) that
became mandatorily effective for the Group for the first time
during 2018 however these had no material impact on the
consolidated financial statements or performance.

IFRS 15 ‘Revenue from Contracts with Customers’
introduces new recognition and disclosure requirements.
Entities are required to recognise revenue as goods and
services are transferred to the customer in proportion to
the total consideration it expects to receive in exchange for
those services. The Group has adopted the standard on a
fully retrospective basis. This has not had a material impact
on the consolidated financial statements.

Insurance contracts are out of scope of IFRS 15.

Amendments to IFRS 4: ‘Applying IFRS 9 Financial Instruments
with IFRS 4 Insurance Contracts’ was issued on 12 September
2016 and endorsed by the EU on 3 November 2017. These
amendments permitted insurers who satisfied certain criteria
to defer the effective date of IFRS 9 ‘Financial Instruments’, to
coincide with the expected effective date of IFRS 17 ‘Insurance
Contracts’, to 1 January 2022. The IASB permitted this option
having considered potential asset and liability mismatching
and temporary profit and loss volatility caused by introducing
these new standards in different periods within a short
period of time.

When first published, Amendments to IFRS 4 required
insurance entities to evaluate whether their activities were
predominantly connected to insurance as at its annual
reporting date immediately preceding 1 April 2016, providing
an option to defer adoption of IFRS 9 if liabilities connected
to insurance comprised a predominant proportion of its total
liabilities as at that date. The Group concluded that it satisfied
the criteria that the carrying value of its liabilities connected
to insurance was greater than 90% of the carrying value of
its total liabilities at 31 December 2015. In making this

conclusion, the Group determined that the subordinated debt
of £521.1 million and derivative liabilities of £46.4 million
represented liabilities connected with insurance but not
liabilities arising from contracts within the scope of IFRS 4.
There have been no significant changes in the Group’s
activities since this assessment to require a reassessment
of the criteria.

The fair value at the end of the reporting period for financial
assets with contractual terms that give rise on specified dates to
cash flows that are solely payments of principal and interest on
the principal amount are disclosed in note 40. The amount of
change in the fair value during the period for these financial
assets was: AFS debt securities £103.7 million decrease,
held-to-maturity (“HTM”) debt securities £3.2 million decrease,
infrastructure debt £18.2 million decrease and commercial
real estate loans had a small increase.

Derivative assets do not have contractual terms that give rise
on specified dates to cash flows that are solely payment of
principal and interest on the principal amount outstanding.
The fair value of these financial assets is disclosed in note 40
and the amount of change in the fair value during the period
was £26.7 million.

In note 3.3.3 the Group has disclosed the carrying amount
of financial assets at the end of the reporting period by credit
risk rating grade, as defined in IFRS 7 ‘Financial Instruments:
Disclosures’. The fair value and the carrying amount of
financial assets that meet the solely payments of principal
and interest criteria and, at the end of the reporting period
do not have a low credit risk, was £393.9 million.

IFRS 9 information that relates to entities within the Group
that is not provided in the Group’s consolidated financial
statements can be obtained from their individual financial
statements. This information will be available from Companies
House once the individual financial statements have been
approved and filed with Companies House.

The IASB amended IFRS 2 ‘Share-based Payment’ to
provide further clarity on: the effects of vesting conditions
on the measurement of cash-settled share-based payment
transactions; 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 Group operates equity-settled share-based schemes
only and has no obligation to withhold tax in respect of
the employee’s personal tax liability. These amendments
have no impact on the Group’s share-based payments
accounting policy.

A number of further narrow scope amendments which became
effective for the Group but do not have an impact on existing
accounting policies, are as follows:

The IASB amended IAS 40 ‘Investment Property’ to clarify
when an entity should categorise a property as an investment
property. Property should be transferred to or from investment
property when there is evidence of a change in use meaning
the property now satisfies, or ceases to satisfy, the definition
of an investment property.

IFRIC 22 ‘Foreign Currency Transactions and Advance
Consideration’ clarifies how to determine the date of the
transaction for the exchange rate to be used on the initial
recognition where an entity pays or receives consideration
in advance for foreign currency denominated contracts.

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Annual Improvements to IFRS Standards 2014–2016 Cycle
relating to IFRS 1 ‘First-time Adoption of International Financial
Reporting Standards’ – the amendment deletes certain short-
term exemptions for first-time adopters, and IAS 28 ‘Investments
in Associates and Joint Ventures’ – the amendment provides
clarification that measuring investees at fair value through
profit or loss is an investment-by-investment choice.

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 2018 and 31 December
2017. 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 2018 and
31 December 2017 to items considered material to the
consolidated financial statements.

A subsidiary acquired is included in the consolidated financial
statements from the date it is controlled by the Group until
the date the Group ceases to control it. On acquisition of
a subsidiary, its identifiable assets, liabilities and contingent
liabilities are included in the consolidated financial statements
at fair value.

All intercompany transactions, balances, income and expenses
between Group entities are eliminated on consolidation.

1.2 Foreign currencies
The Group’s consolidated financial statements are presented
in sterling which is the presentational currency of the Group.
Group entities record transactions in the currency of the
primary economic environment in which they operate (their
functional currency), translated at the foreign exchange rate
ruling at the date of the transaction.

Monetary assets and liabilities denominated in foreign
currencies are translated into the relevant functional currency
at the foreign exchange rates ruling at the balance sheet date.
Foreign exchange differences arising on the settlement of foreign
currency transactions and from the translation of monetary assets
and liabilities are reported in the income statement.

Non-monetary items denominated in foreign currencies that are
stated at fair value are translated into the relevant functional
currency at the foreign exchange rates ruling at the dates the
values are determined. Translation differences arising on non-
monetary items measured at fair value are recognised in the
income statement except for differences arising on AFS non-
monetary financial assets, which are recognised in other
comprehensive income.

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 recognised
at a point in time 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 when the customer or claimant has been
provided with a vehicle by the supplier.

Revenue from vehicle recovery and repair services
Fees in respect of services for vehicle recovery are
recognised at a point in time on satisfaction of performance
obligations. The cost of providing the service is incurred as
the service is rendered.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

1.4 Revenue recognition continued
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
repair obligations. The price is determined using market rates
for the services and materials used after discounts have been
deducted where applicable.

Legal services income
Legal services income represents the amount charged to clients
for professional services provided during the year including
recovery of expenses but excluding value added tax. Income
relating to variable legal services fees is recognised on a best
estimate basis.

Other income
Commission fee income in respect of services is recognised
at a point in time on satisfaction of related performance
obligations. Where fees have a variable element, income
is recognised on a best estimate of the total consideration
expected. Income is stated excluding applicable sales taxes.

1.5 Insurance claims
Insurance claims are recognised in the accounting period
in which the loss occurs. Provision is made for the full cost of
settling outstanding claims at the balance sheet date, including
claims incurred but not yet reported at that date, net of salvage
and subrogation recoveries. Outstanding claims provisions are
not discounted for the time value of money except for claims
to be settled by PPOs established under the Courts Act 2003.

A court can award damages for future pecuniary loss in
respect of personal injury or for other damages in respect of
personal injury and may order that the damages are wholly
or partly to take the form of PPOs. These are covered in more
detail in note 2.4. 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 PPOs. 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.

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Intangible assets that are acquired by the Group are stated
at cost less accumulated amortisation and impairment losses.
Amortisation is charged to the income statement over the
assets’ economic lives using methods that best reflect the
pattern of economic benefits and is included in operating
expenses. The estimated useful economic lives are as follows:

Software development costs

Up to 10 years

Expenditure on internally generated goodwill and brands is
written off as incurred. Direct costs relating to the development
of internal-use computer software and associated business
processes are capitalised once technical feasibility and
economic viability have been established. These costs include
payroll costs, the costs of materials and services and directly
attributable overheads. Capitalisation of costs ceases when the
software is capable of operating as intended. During and after
development, accumulated costs are reviewed for impairment
against the projected benefits that the software is expected to
generate. Costs incurred prior to the establishment of technical
feasibility and economic viability are expensed as incurred,
as are all training costs and general overheads.

1.9 Property, plant and equipment
Items of property, plant and equipment (except investment
property – note 1.11) are stated at cost less accumulated
depreciation and impairment losses. Where an item of
property, plant and equipment comprises major components
having different useful lives, they are accounted for separately.

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, 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.

Available-for-sale
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.

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1.12 Financial assets continued
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.

Held-to-maturity
Non-derivative financial assets not designated as AFS or loans
and receivables with fixed or determinable payments and fixed
maturity where the intention and ability to hold them to maturity
exists are classified as HTM.

Subsequent to initial recognition, HTM financial assets are
measured at amortised cost using the effective interest rate
method less any impairment losses.

Loans and receivables
Non-derivative financial assets with fixed or determinable
repayments that are not quoted in an active market are
classified as loans and receivables, except those that are
classified as AFS or HTM. Loans and receivables are initially
recognised at fair value plus directly related transaction costs
and are subsequently measured at amortised cost using the
effective interest rate method less any impairment losses.

Impairment of financial assets
At each balance sheet date, the Group assesses whether
there is any objective evidence that a financial asset or
group of financial assets classified as AFS, HTM or loans
and receivables is impaired. A financial asset or portfolio of
financial assets is impaired and an impairment loss incurred
if there is objective evidence that an event or events since
initial recognition of the asset have adversely affected the
amount or timing of future cash flows from the asset.

Available-for-sale
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.

Held-to-maturity 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.

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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.

A financial liability is derecognised when the obligation under
the liability is discharged, cancelled or expires.

1.15 Subordinated liabilities
Subordinated liabilities comprise subordinated guaranteed
dated notes which are initially measured at the consideration
received less related transaction costs. Subsequently,
subordinated liabilities are measured at amortised cost
using the effective interest rate method.

1.16 Provisions
The Group recognises a provision for a present legal or
constructive obligation from a past event when it is more likely
than not that it will be required to transfer economic benefits to
settle the obligation and the amount can be reliably estimated.

The Group makes provision for all insurance industry levies,
such as the Financial Services Compensation Scheme and
Motor Insurance Bureau.

When the Group has an onerous contract, it recognises
the present obligation under the contract as a provision.
A contract is onerous when the unavoidable costs of meeting
the contractual obligations exceed the expected future
economic benefit. In respect of leasehold properties, a
provision is recognised when the Group has a detailed formal
plan to vacate the leasehold property, or significantly reduce
its level of occupancy, the plan has been communicated to
those affected and the future property costs under the lease
exceed future economic benefits.

Restructuring provisions are made, including redundancy costs,
when the Group has a constructive obligation to restructure.
An obligation exists when the Group has a detailed formal
plan and has communicated the plan to those affected.

Scheme assets are measured at their fair value. Any surplus
or deficit of scheme assets over liabilities is recognised in
the balance sheet as an asset (surplus) or liability (deficit).
The current service cost and any past service costs, together
with the net interest on net pension liability or asset, is charged
or credited to operating expenses. Actuarial gains and losses
are recognised in full in the period in which they occur outside
the income statement and presented in other comprehensive
income under ‘Items that will not be reclassified subsequently
to the income statement’.

1.19 Taxation
The tax charge or credit represents the proportion of the tax
payable and receivable arising in the current year only.

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.

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 25, 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.

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 payment
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).

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1.20 Share-based payment continued
The fair value of options granted is estimated using valuation
techniques which incorporate exercise price, term, risk-free
interest rates, the current share price and its expected volatility.

The cost of employee services received in exchange for an
award of shares or share options granted is measured by
reference to the fair value of the shares or share options on the
date the award is granted and takes into account non-vesting
conditions and market performance conditions (conditions
related to the market price of the Company’s Ordinary Shares).

The cost is expensed on a straight-line basis over the vesting
period (the period during which all the specified vesting
conditions must be satisfied) with a corresponding increase in
equity in an equity-settled award, or a corresponding liability
in a cash-settled award. The cost is adjusted for vesting
conditions (other than market performance conditions) so as to
reflect the number of shares or share options that actually vest.

The cancellation of an award through failure to meet non-
vesting conditions triggers an immediate expense for any
unrecognised element of the cost of an award.

1.21 Capital instruments
The Group classifies a financial instrument that it issues as a
financial liability or an equity instrument in accordance with
the substance of the contractual arrangement. An instrument is
classified as a liability if it is a contractual obligation to deliver
cash or another financial asset, or to exchange financial assets
or financial liabilities on potentially unfavourable terms, or as
equity if it evidences a residual interest in the assets of the
Group after the deduction of liabilities.

The Tier 1 notes are classified as equity as they have a
perpetual maturity and the Group has full discretion over
interest payments, including ability to defer or cancel interest
payments indefinitely.

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 2018 reporting period 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.

The IASB issued IFRS 16 ‘Leases’ in January 2016 to replace
IAS 17 ‘Leases’ and will be effective for reporting periods
beginning on or after 1 January 2019, applied by the
Group fully retrospectively from this date. IFRS 16 sets out
the principles for recognition, measurement 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 a short-term nature
of 12 months or less. At the start of the 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 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.

The Group expects to recognise right-of-use assets of
approximately £150.0 million on 1 January 2019 and lease
liabilities of approximately £165.0 million. The reduction
to equity after tax is approximately £15.0 million. From
1 January 2019 lease charges previously recognised as rental
expenses in profit or loss will instead comprise depreciation
and finance costs. The profit or loss impact, had this standard
been adopted on 1 January 2018, would have been a
reduction in operating expenses of approximately £5 million
and an increase in finance costs of approximately £7 million
in the 2018 consolidated income statement.

The actual impacts may differ from the amounts presented
above when the Group presents its first financial statements
from the initial date of application.

In July 2014, the IASB issued the final version of IFRS 9
which replaces IAS 39 ‘Financial Instruments: Recognition
and Measurement’ and all previous versions of IFRS 9;
it 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;
it is effective for annual periods beginning on or after
1 January 2018.

In September 2016, the IASB issued amendments to IFRS 4 to
address issues arising from the different effective dates of IFRS
9 and IFRS 17. The amendments to IFRS 4 were endorsed by
the EU in November 2017.

The Group conducted a high-level assessment of the three
aspects of IFRS 9 and based on current information, the impact
of applying the expected loss model for the first time is currently
immaterial. The Group does not expect any other significant
impact on its financial statements. The Group satisfies the
exemption criteria within IFRS 4 and has decided to defer
the application of IFRS 9 until the expected effective date of
the new insurance contracts standard IFRS 17, on 1 January
2022, applying the temporary exemption from applying
IFRS 9 as introduced by the amendments to IFRS 4.

Amendments to IFRS 9: ‘Prepayment Features with Negative
Compensation’ was issued in October 2017 to allow
instruments with symmetric prepayment options to qualify for
amortised cost or fair value through other comprehensive
income measurement because they would otherwise fail the
‘solely payments of principal and interest on the principal
amount’ condition. The amendments are effective from the
same period as IFRS 9.

IFRS 17 was issued by the IASB in May 2017 to replace
IFRS 4 and is expected to be effective for reporting periods
beginning on or after 1 January 2022, with comparative
figures required. IFRS 17 is a comprehensive new accounting
standard for all insurance contracts covering recognition
and measurement, presentation and disclosure. The overall
objective of IFRS 17 is to provide an accounting model for
insurance contracts that is more useful and consistent for
insurers and to replace the requirements of IFRS 4 that
allowed insurers to apply grandfathering of previous local
accounting policies.

The core of IFRS 17 is the general model, supplemented by
an optional simplified premium allocation approach which
is permitted for the liability for the remaining coverage for
short duration contracts (one year or less). The general model
measures insurance contracts using the building blocks of:

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discounted probability weighted cash flows; an explicit risk
adjustment; and a contractual service margin representing the
unearned profit of the contract which is recognised as revenue
over the coverage period.

An assessment on the impact of IFRS 17 on the Group’s
financial statements is in progress. The Group expects to be
able to apply the simplified premium allocation approach to
most of its insurance and reinsurance contracts.

The following accounting developments are not expected to
have a material impact on the Group’s financial statements in
future periods:

Amendments to IAS 28: Long-term Interests in Associates and
Joint Ventures was issued in October 2017 to clarify that an
entity applies IFRS 9 to long-term interests in associates or joint
ventures that form part of the net investment in the associate or
joint venture but to which the equity method is not applied.
The amendments are effective from 1 January 2019.

IFRIC 23 ‘Uncertainty over Income Tax Treatments’ was
issued in June 2017 and provides interpretation when there
is uncertainty over income tax treatments under IAS 12
‘Income Taxes’. This is effective from 1 January 2019.

Amendments to IAS 19 ‘Employee Benefits’: Plan Amendment,
Curtailment or Settlement was issued in February 2018. The
amendments clarify the accounting when a plan amendment,
curtailment or settlement occurs. This is effective from
1 January 2019.

In December 2017 the IASB issued ‘Annual Improvements
to IFRS Standards 2015-2017 Cycle’ with an effective
date of 1 January 2019, which included the following
three amendments:

IFRS 3 ‘Business Combinations’ and IFRS 11 ‘Joint
Arrangements’ – the amendments to IFRS 3 clarify that when
an entity obtains control of a business that is a joint operation,
it remeasures previously held interests in that business; the
amendments to IFRS 11 clarify that when an entity obtains
joint control of a business that is a joint operation, the entity
does not remeasure previously held interests in that business.

IAS 12 ‘Income Taxes’ – the amendments clarify that all
income tax consequences of dividends should be recognised
in profit or loss, regardless of how the tax arises.

IAS 23 ‘Borrowing Costs’– the amendments clarify that if any
specific borrowing remains outstanding after the related asset
is ready for its intended use or sale, that borrowing becomes
part of the funds that an entity borrows generally when
calculating the capitalisation rate on general borrowings.

In March 2018 the IASB issued ‘Amendments to References
to the Conceptual Framework in IFRS Standards’ – amending
some references to previous versions of the Conceptual
Framework in IFRS Standards and their accompanying
documents and IFRS Practice Statements. This is effective
from 1 January 2020.

In October 2018 the IASB issued ‘Amendments to IFRS 3
Business Combinations’ – this will permit a simplified
assessment of whether an acquired set of activities and
assets is a group of assets rather than a business. This is
effective from 1 January 2020.

In October 2018 the IASB issued ‘Amendments to IAS 1
and IAS 8 Definition of Material’ – this clarifies and aligns the
definition of ‘material’ and provides guidance to help improve
consistency in the application of that concept whenever it is
used in IFRS Standards. This is effective from 1 January 2020.

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2. Critical accounting judgements and key sources of estimation uncertainty

The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underline the
preparation of its financial information. The Group’s principal accounting policies are set out on pages 136 to 143.
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.

2.1 Impairment provisions – financial assets
The Group makes a judgement 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;

– 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; and

– an event has occurred that could be reliably estimated and which had an impact on the financial asset or its future cash flows.

The Group has made a judgement that there was objective evidence of impairment of an asset within the loan and receivables
portfolio in the year ended 31 December 2018. The Group has also made an estimation of the recoverable value of the loan
and this resulted in an impairment charge of £6.0 million (2017: £9.5 million).

Had all the declines in AFS asset values met the criteria above at 31 December 2018, the Group would suffer a loss of
£21.0 million (2017: £6.5 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 have therefore been recorded for these movements.

2.2 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 G10 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, most of the HTM debt securities, commercial real estate
loans and infrastructure debt fall within level 3 of the Group’s fair value hierarchy (note 40) as the valuation models used are
driven predominantly by unobservable inputs: investment property valuations are derived from recent market transactions which
are adjusted for specific characteristics of each property including the size, location and condition by reference to the benchmark
property transactions.

2.3 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 17.

Judgement is applied to determine whether intangible assets are impaired. In making this judgement, the Group considers:
the projection of the economic benefits associated with each asset; subsequent re-measurement of these benefits through the
development cycle and into use; the projected ultimate cost of each asset at each point through the development cycle due to
specification changes; and the likelihood of obsolescence of any component parts. Details of intangible assets are shown
in note 17.

2.4 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 costs. Outstanding claims
provisions net of related reinsurance recoveries at 31 December 2018 amounted to £2,900.7 million (2017: £3,144.5 million).

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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 calculations
have reference to a standardised annuity factor at a discount rate normally referenced to as the Ogden discount rate. The Ogden
discount rate was at 2.5% from 2001 until 2017, when it was changed to minus 0.75% based on a 3-year average of yields
on index-linked Government securities, in line with case law that claimants were entitled to invest their lump sum in a way which
was very low or even zero risk. The Civil Liability Act 2018 changes this approach and instead requires the Government to reset
the Ogden discount rate by reference to low risk rather than very low or zero risk investments. The process is due to conclude in
2019, but there is considerable uncertainty about its outcome and the date from which a new rate will apply.

The Group will continue to exercise judgement around the Ogden discount rate used in its reserves. Risks and uncertainties
here are significant but the move to introduce additional asset classes into the assumed claimant portfolio points towards a
higher rate than minus 0.75%. The Group has therefore made a judgement that it is likely that the Ogden discount rate will
change and has selected an estimate of 0% to value its lump sum bodily injury reserves. An allowance for further movements
in the Ogden discount rate is made within the Group’s solvency II balance sheet and capital requirements. Details of the IFRS
sensitivity analysis to the assumed Ogden discount rate are shown in note 3.3.1.

The Group settles some large bodily injury claims as PPOs rather than lump sum payments.

The table below analyses the outstanding PPO claims provisions on a discounted and an undiscounted basis at
31 December 2018 and 31 December 2017. These represent the total cost of PPOs rather than any costs in excess of
purely Ogden-based settlements.

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
2018
£m

Undiscounted
2018
£m

Discounted
2017
£m

Undiscounted
2017
£m

516.2
358.1
874.3

(268.6)
(245.2)
(513.8)

247.6
112.9
360.5

1,424.5
943.9
2,368.4

524.9
373.8
898.7

1,460.3
974.7
2,435.0

(784.5)
(701.1)
(1,485.6)

(276.5)
(240.4)
(516.9)

(806.8)
(680.7)
(1,487.5)

640.0
242.8
882.8

248.4
133.4
381.8

653.5
294.0
947.5

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 has made a
judgement on the likelihood of large bodily injury claims settling as PPOs. The anticipated PPOs in the table above are based on
historically-observed propensities adjusted for the assumed Ogden discount rate. They 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% (2017: 4%). The Group has
estimated a rate of interest used for the calculation of present values as 4% (2017: 4%), which results in a real discount rate of
0% (2017: 0%). The Group will continue to exercise judgement around the inflation and discount rates used to calculate these
insurance reserves.

Details of sensitivity analysis to the discount rate applied to PPO claims are shown in note 3.3.1.

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3. Risk management

3.1 Enterprise Risk Management Strategy and Framework
The Enterprise Risk Management Strategy and Framework 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 45.

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, using its Partial Internal Model approved by the PRA in 2016. The SCR
quantifies the insurance, market, credit, operational and liquidity 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
There is considerable uncertainty as to the effect of Brexit on the Group and we have proactively considered a variety of
possible implications of a disruptive ‘hard’ Brexit, including of a financial and operational nature; these are referred to in
the risk management section of the strategic report.

The risk management section of the strategic report also 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, credit risk, operational risk and liquidity 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 premium and claims. This is the risk of understatement or overstatement 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 and premiums, along with an assessment of the requirement for a liability adequacy provision for

the main classes of business by the internal actuarial team;

– the use of external actuaries to review periodically the actuarial best estimate reserves produced internally, either through peer

review or through provision of independent reserve estimates;

– accompanying all reserve reviews with actuarial assessment of the uncertainties through a variety of techniques including

bootstrapping and scenario analysis;

– oversight of the reserving process by relevant senior management and the Board;

– regular reconciliation of the data used in the actuarial reviews against general ledger data and reconciliation of the claims

data history against the equivalent data from prior reviews; and

– regular assessment of the 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 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 had been 2.5% since 2001 but was changed to minus 0.75% from
20 March 2017. The Group revised its reserve estimation to be based on the new rate for year ended 31 December 2016.
However, this rate is expected to change again in 2019 following the passing of the Civil Liability Act 2018. In anticipation of
change, the Group has revalued its reserves based on an assumed Ogden discount rate of 0% for the year ended 31 December
2018. The new Ogden discount rate may differ from this assumption, and consequently further reserve revaluation may be
required, both in 2019 and going forwards as part of the new Ogden discount rate review process introduced by the Civil
Liability Act.

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 discount rate.

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The table below provides a sensitivity analysis of the potential net impact of a change in a single factor (discount rate used for
PPOs and separately the Ogden discount rate) with all other assumptions left unchanged. Other potential risks beyond the ones
described could have an additional financial impact on the Group.

Notes:

1. These sensitivities are net of reinsurance and exclude the impact of taxation.

2. These sensitivities reflect one-off impacts at 31 December and should not be interpreted as predictions.

Increase / (decrease) in profit
before tax1,2

2018
£m

50.7
(70.1)

2017
£m

54.6
(75.1)

56.2

68.4

(76.3)

(102.9)

3. 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% for reserving. The PPO sensitivity has been calculated on the direct impact on the change in the real discount rate with all other factors
remaining unchanged.

4. Ogden discount rate sensitivity has been calculated on the direct impact of a permanent change in the discount rate with all other factors remaining unchanged.

The Group will consider the statutory discount rate when setting its reserves but not necessarily provide on this basis, as is the case at the year ended 31
December 2018. This is intended to ensure that reserves are appropriate for current and potential future developments.

The sensitivity above is calculated on the basis of a permanent change in the rate used for the actuarial best estimate reserves as
at 31 December 2018. It does not take into account a change in the Ogden discount rate setting regime, nor any second order
impacts such as those on the Group’s PPO assumptions or reinsurance bad debt assumptions.

The reduction in sensitivity to a change in the Ogden discount rate since 31 December 2017 primarily reflects the overall
reduction in bodily injury exposures. The reduction in exposure is due to continued positive prior-year development of claims
reserves for large bodily injury claims, particularly for accident years where the reinsurance retention level was higher than
the current level of £1.0 million.

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; and

– 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 small and medium-sized enterprises 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 revise
renewal terms by amending the premium or other policy terms and conditions such as the excess as appropriate.

Underwriting risk includes catastrophe risk and 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.

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3. Risk management continued

When underwriting policies, the Group is subject to concentration risk in a variety of forms, including:

– geographic concentration risk – the Group purchases a catastrophe reinsurance programme to protect against a modelled

1 in 200-years catastrophe loss. The programme is structured with the retention and limits expressed as percentages of gross
earned premium. At 31 December 2018 this was the equivalent of £969.0 million (114% of gross earned premium of the
previous 12 months) in excess of a retained deductible of £126.5 million (14.9% of gross earned premium);

– 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 reinsurance arrangements, 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 of 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.

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

– 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.

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The Group monitors its market risk exposure on a monthly basis and, in addition, 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 by 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 First and Second 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 to generate a real return which, from an asset liability
matching perspective, is used to offset the liability arising from 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 asset portfolio, most notably through its investment in corporate 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 Group has subordinated guaranteed dated notes with fixed coupon rates with a nominal value of £250 million. £500
million were issued on 27 April 2012; at the same time the Group entered into a 10-year designated hedging instrument, to
exchange the fixed rate of interest on these notes to a floating rate, to hedge exposure to interest rate risk and have a redemption
date of 27 April 2042. £250 million was repurchased by the Group on 8 December 2017.

The Group also has perpetual Tier 1 notes with fixed coupon rates with a nominal value of £350 million that were issued on
7 December 2017.

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 £405.2 million of short duration high yield bonds (2017:
£403.9 million), the Group hedges the exposure of this portfolio to the US Dollar interest rate risk using swaps.

Property risk
This is the risk of loss arising from sensitivity of assets and financial investments to the level or volatility of market prices, rental
yields, or occupancy rates of properties. At 31 December 2018, the value of these property investments was £322.1 million
(2017: £309.3 million). The property investments are located in the UK.

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3. Risk management continued

Currency risk
This is the risk of loss from changes in the level or volatility of currency exchange rates.

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 £1,699.3 million (2017: £2,084.5 million) of investments in
US Dollar corporate bonds and Euro securities through £79.4 million (2017: £110.4 million) 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 risk on the hedging contracts.

A limited exposure to currency risk also arises through the Group’s insurance and other contractual liabilities.

Currency risk is not material at Group level.

Use of derivatives
As mentioned above, the Group uses derivatives to hedge against interest rate and currency risk.

The tables below analyse the maturity of the Group’s derivative assets and liabilities.

At 31 December 2018

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 2018

Derivative liabilities
At fair value through the income statement:
Foreign exchange contracts (forwards)
Designated as hedging instruments:
Interest rate swaps
Total

At 31 December 2017

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 2017

Derivative liabilities
At fair value through the income statement:
Foreign exchange contracts (forwards)
Designated as hedging instruments:
Interest rate swaps
Total

Notional amounts

Maturity and fair value

Less than
1 year
£m

1 – 5 years
£m

Over
5 years
£m

£m

1,354.6

19.2

–

18.5
1,198.3
2,571.4

1.2
(2.7)
17.7

0.2
15.9
16.1

–
14.4
14.4

Notional amounts

Maturity and fair value

Less than
1 year
£m

1 – 5 years
£m

Over
5 years
£m

£m

1,716.2

20.6

341.2
2,057.4

0.4
21.0

–

0.4
0.4

–

4.5
4.5

Notional amounts

Maturity and fair value

Less than
1 year
£m

1 – 5 years
£m

Over
5 years
£m

£m

Total
£m

19.2

1.4
27.6
48.2

Total
£m

20.6

5.3
25.9

Total
£m

2,735.3

51.1

–

51.1

17.3
1,794.9

4,547.5

1.0
(1.9)

50.2

–
21.5

21.5

–
12.7

12.7

Notional amounts

Maturity and fair value

Less than
1 year
£m

1 – 5 years
£m

Over
5 years
£m

£m

1.0
32.3

84.4

Total
£m

579.9

11.3

–

11.3

113.1
693.0

0.5
11.8

(0.1)
(0.1)

0.3
0.3

0.7
12.0

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Sensitivity analysis
The table below provides a sensitivity analysis of the potential impact on financial investments and derivatives 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
investments2,3,5
Interest rate
Impact of a 100 basis points increase in interest rates on financial
investments and derivatives2,3,4,5
Investment property
Impact of a 15% decrease in property markets

Notes:

1. These sensitivities exclude the impact of taxation.

Increase / (decrease)
in profit before tax1

Decrease
in total equity1
at 31 December

2018
£m

2017
£m

2018
£m

2017
£m

–

(171.1)

(183.5)

15.6

17.3

(101.1)

(98.3)

(48.3)

(46.4)

(48.3)

(46.4)

2. 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.

3. 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 points increase in spreads would have been
£22.2 million (2017: £23.7 million) and a 100 basis points increase in interest rate would have been £5.8 million (2017: £6.2 million).

4. 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.

5. The subordinated liabilities and associated interest rate swap are excluded from the sensitivity analysis.

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 predictions.

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 2018, the Group has pledged £31.8 million in cash
(2017: £28.2 million) and £2.9 million in UK Gilts (2017: £0.3 million) to cover initial margins and out-of-the-money derivative
positions. At 31 December 2018, counterparties have pledged £24.0 million in cash and £7.6 million in UK Gilts (2017:
£25.1 million in cash and £15.5 million in UK Gilts) to the Group to cover in-the-money derivative positions.

The terms and conditions of collateral pledged for both assets and liabilities are market standard. When securities are pledged
they are required to be readily convertible to cash, and as such no policy has been established for the disposal of assets not
readily convertible into cash.

3.3.3 Credit risk
This is the risk of loss resulting from default in 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 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 forums 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;

– 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 increase significantly the length of time to reach final payment. This can increase reinsurance
counterparty default risk in terms of both amount and longevity; and

– consumer credit – exposure from offering monthly instalments on annual insurance contracts.

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3. Risk management continued

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 quarterly 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. For these contracts, reinsurance is only
purchased from reinsurers that hold a credit rating of at least A+ at the time cover is purchased.

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 2018

Reinsurance assets
Insurance and other receivables
Derivative assets
Debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents1
Total

At 31 December 2017

Reinsurance assets
Insurance and other receivables
Derivative assets
Debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents1
Total

Note:

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

1,208.7
836.0
48.2
4,246.6
289.6
201.6
1,154.4
7,985.1

–
39.6
–
–
–
–
–
39.6

–
0.3
–
–
–
–
–
0.3

–
–
–
–
–
–
–
–

1,208.7
875.9
48.2
4,246.6
289.6
201.6
1,154.4
8,025.0

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

1,178.5
942.5
84.4
4,555.0
316.4
169.0
1,358.6

8,604.4

–
38.2
–
–
–
–
–

38.2

–
0.5
–
–
–
–
–

0.5

–
–
–
–
–
–
–

–

1,178.5
981.2
84.4
4,555.0
316.4
169.0
1,358.6

8,643.1

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 2018 of £1,125.2 million (2017:
£1,197.4 million), that can be further analysed as: secured £63.0 million (2017: £63.5 million); unsecured £949.8 million
(2017: £976.3 million); and subordinated £112.4 million (2017: £157.6 million).

Concentration risk
This is the risk of loss associated with inadequately diversified portfolios of assets and/or obligations, in particular:

– large exposures to individual credits (either bond issuers or deposit-taking institutions); and

– 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.

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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 2018

Australia
Austria
Belgium
Bermuda
Canada
Cayman Islands
Denmark
Finland
France
Germany
Hong Kong
Ireland
Italy
Japan
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Spain
Sweden
Switzerland
UK
USA
Supranational
Total

Corporate
£m

169.5
11.3
37.2
1.5
72.7
5.7
12.0
22.5
217.1
200.5
6.3
13.8
38.7
33.9
2.6
14.3
139.9
27.0
15.8
35.2
85.4
64.5
1,081.6
1,708.0
–
4,017.0

Local
government
£m

Sovereign
£m

Supranational
£m

–
–
–
–
–
–
–
12.0
7.5
–
–
–
–
–
–
–
–
–
10.0
–
–
–
–
–
–
29.5

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
156.9
–
–
156.9

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
43.2
43.2

Debt
securities
total
£m

169.5
11.3
37.2
1.5
72.7
5.7
12.0
34.5
224.6
200.5
6.3
13.8
38.7
33.9
2.6
14.3
139.9
27.0
25.8
35.2
85.4
64.5
1,238.5
1,708.0
43.2
4,246.6

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3. Risk management continued

The table below analyses the distribution of debt securities by geographical area (commercial real estate loans and infrastructure
debt are all within the UK).

Local
government
£m

Sovereign
£m

Supranational
£m

At 31 December 2017

Australia
Austria
Belgium
Bermuda
Canada
Cayman Islands
Denmark
France
Germany
Hong Kong
Ireland
Italy
Japan
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Singapore
South Korea
Spain
Sweden
Switzerland
UK
USA
Supranational
Total

Corporate
£m

101.7
1.8
39.6
6.4
35.6
16.8
18.2
216.3
231.9
3.9
9.9
23.1
53.0
4.5
10.6
166.6
18.1
27.1
25.0
3.8
42.1
80.6
104.5
1,113.2
1,919.8
–

4,274.1

–
–
–
–
–
–
–
3.6
–
–
–
–
–
–
–
–
–
–
–
–
–
8.6
–
–
–
–

12.2

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
Sovereign, supranational and local government
Technology
Transport
Utilities
Total

2018

£m

104.4
241.9
312.8
449.8
51.8
206.9
1,817.6
233.3
229.6
115.5
13.4
469.6
4,246.6

Debt
securities
total
£m

101.7
1.8
49.1
6.4
35.6
16.8
18.2
219.9
231.9
3.9
9.9
23.1
53.0
4.5
10.6
166.6
18.1
27.1
25.0
3.8
42.1
89.2
104.5
1,328.5
1,919.8
43.9

4,555.0

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
43.9

43.9

2017

£m

110.3
239.2
374.9
494.4
57.9
263.6
1,836.1
216.2
280.9
163.1
13.4
505.0
4,555.0

3%
5%
8%
11%
1%
6%
40%
5%
6%
4%
0%
11%
100%

–
–
9.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
215.3
–
–

224.8

2%
6%
8%
11%
1%
5%
43%
5%
5%
3%
0%
11%
100%

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FINANCIALS V6.1

The table below analyses the distribution of infrastructure debt by industry sector classifications.

At 31 December

Social, of which:

Education
Healthcare
Other
Transport
Total

2018

£m

125.8
76.0
54.9
32.9

289.6

44%
26%
19%
11%

100%

2017

£m

140.5
84.3
56.3
35.3

316.4

44%
27%
18%
11%

100%

The tables below analyse the credit quality of debt securities that are neither past due nor impaired.

At 31 December 2018

Corporate
Supranational
Local government
Sovereign
Total

At 31 December 2017

Corporate
Supranational
Local government
Sovereign
Total

AAA
£m

AA+ to AA–
£m

A+ to A–
£m

BBB+ to BBB–
£m

BB+ and below
£m

145.8
38.7
10.0
–
194.5

549.3
4.5
19.5
156.9
730.2

1,785.0
–
–
–
1,785.0

1,143.0
–
–
–
1,143.0

393.9
–
–
–
393.9

Total
£m

4,017.0
43.2
29.5
156.9
4,246.6

AAA
£m

AA+ to AA–
£m

A+ to A–
£m

BBB+ to BBB–
£m

BB+ and below
£m

Total
£m

183.1
39.3
–
–
222.4

412.0
4.6
12.2
224.8
653.6

2,145.8
–
–
–
2,145.8

1,144.6
–
–
–
1,144.6

388.6
–
–
–
388.6

4,274.1
43.9
12.2
224.8
4,555.0

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. The Group’s approach to reinsurance
counterparty default risk is detailed on page 151.

At 31 December 2018

Reinsurance assets
Insurance and other receivables1
Derivative assets
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents2
Total

At 31 December 2017

Reinsurance assets
Insurance and other receivables1
Derivative assets
Infrastructure debt
Commercial real estate loans
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

–
–
–
–
–
997.0
997.0

837.4
7.0
15.5
–
58.6
39.6
958.1

366.9
15.7
22.6
78.7
117.2
59.1
660.2

3.0
16.1
10.1
210.9
25.8
58.7
324.6

–
–
–
–
–
–
–

1.4
797.2
–
–
–
–
798.6

AAA
£m

AA+ to AA−
£m

A+ to A−
£m

BBB+ to BBB–
£m

BB+ and below
£m

Not rated
£m

–
–
–
–
13.8
1,100.6

1,114.4

823.2
24.7
34.5
–
34.8
134.6

1,051.8

349.5
15.1
33.4
81.2
101.1
46.8

627.1

1.0
10.0
16.5
229.2
19.3
76.6

352.6

–
–
–
6.0
–
–

6.0

4.8
892.7
–
–
–
–

897.5

Total
£m

1,208.7
836.0
48.2
289.6
201.6
1,154.4
3,738.5

Total
£m

1,178.5
942.5
84.4
316.4
169.0
1,358.6

4,049.4

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.

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3. Risk management continued

3.3.4 Operational risk
This is the risk of loss due to inadequate or failed internal processes, people, systems, or from external events. Material 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 third party 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, intellectual property or failure of business-critical systems resulting in
reputational damage, regulatory censure, supervision, fines and/or loss of competitive advantage.

Partnership contractual obligations
This is the risk of contractual obligations not being delivered for business partners resulting in damaged reputation, the loss of
contract at renewal, significant liability payments and/or the early termination of a partnership scheme.

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 Committee. Compliance is monitored in
respect of both the minimum standard and the regulatory requirements of the PRA.

The following table analyses the carrying value of financial investments and cash and cash equivalents, by contractual maturity,
which are able to fund the repayment of liabilities as they crystallise.

At 31 December 2018

Debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents1
Total

At 31 December 2017

Debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents1
Total

Note:

Within
1 year
£m

411.5
13.3
18.2
1,154.4
1,597.4

Within
1 year
£m

492.5
13.0
4.3
1,358.6

1,868.4

1 – 3 years
£m

3 – 5 years
£m

5 – 10 years
£m

907.1
27.0
74.6
–
1,008.7

1,153.4
31.3
108.8
–
1,293.5

1,612.3
94.2
–
–
1,706.5

1 – 3 years
£m

3 – 5 years
£m

5 – 10 years
£m

1,017.9
30.9
56.6
–

1,105.4

1,109.5
29.8
108.1
–

1,247.4

1,710.2
94.4
–
–

1,804.6

Over
10 years
£m

162.3
123.8
–
–
286.1

Over
10 years
£m

224.9
148.3
–
–

373.2

Total
£m

4,246.6
289.6
201.6
1,154.4
5,892.2

Total
£m

4,555.0
316.4
169.0
1,358.6

6,399.0

1. This represents money market funds with no notice period for withdrawal and cash at bank and in hand.

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FINANCIALS V6.1

The following table analyses the undiscounted cash flows of insurance and financial liabilities by contractual repricing or maturity
dates, whichever is earlier.

At 31 December 2018

Subordinated liabilities
Insurance liabilities1
Borrowings
Trade and other payables,
including insurance payables
Total

At 31 December 2017

Subordinated liabilities
Insurance liabilities1
Borrowings
Trade and other payables,
including insurance payables
Total

Note:

Within
1 year
£m

23.1
1,175.0
62.0

1 – 3 years
£m

46.3
1,025.1
–

547.6
1,807.7

5.2
1,076.6

Within
1 year
£m

23.1
1,144.6
54.1

1 – 3 years
£m

46.3
1,035.0
–

648.8
1,870.6

8.0
1,089.3

3 – 5 years
£m

5 – 10 years
£m

261.6
547.1
–

0.7
809.4

–
452.9
–

0.6
453.5

3 – 5 years
£m

5 – 10 years
£m

284.7
560.4
–

0.4
845.5

–
573.3
–

0.8
574.1

Over
10 years
£m

–
2,299.9
–

Total
£m

331.0
5,500.0
62.0

Carrying
value
£m

259.5
4,005.9
62.0

–
2,299.9

554.1

6,447.1

554.1
4,881.5

Over
10 years
£m

–
2,448.7
–

Total
£m

354.1
5,762.0
54.1

Carrying
value
£m

264.7
4,225.7
54.1

–
2,448.7

658.0
6,828.2

658.0
5,202.5

1. Insurance liabilities exclude unearned premium reserves as there are no liquidity risks inherent in them.

3.4 Capital management
The Group manages capital in accordance with the Group’s capital management minimum standard, the aims of which are to
manage capital efficiently and generate long-term sustainable value for shareholders, while balancing operational, regulatory,
credit rating agency and policyholder requirements. The Group seeks to hold capital resources such that, in normal
circumstances, the solvency capital ratio is around the middle of the target range of 140% to 180%.

The Group’s regulatory capital position is assessed against the solvency II framework. From 1 July 2016, the Group gained
approval 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 considers business written to date and one year of future
written business over a one-year time horizon, in line with solvency II requirements.

3.5 Capital adequacy (unaudited)
Using the Group’s partial internal model, there is a capital surplus of approximately £0.89 billion above an estimated SCR of
£1.26 billion as at 31 December 2018 (31 December 2017: £0.91 billion and £1.39 billion respectively). 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,
which are all UK based, 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 direct to customers through its own brands Direct Line, Churchill and Privilege, and through partnership brands such
as vehicle manufacturers and through price comparison websites. The Motor segment includes results previously reported in the
Run-off and restructuring segments. Comparative data has been re-presented accordingly.

Home
This segment consists of home insurance together with associated legal protection cover. The Group sells home insurance
products through our brands Direct Line, Churchill and Privilege, and our partnership brands (RBS, NatWest and Prudential),
as well as through price comparison websites.

Rescue and other personal lines
This segment consists of rescue products which are sold direct 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 and through price comparison websites.

Commercial
This segment consists of commercial insurance for small and medium-sized enterprises sold through our brands NIG, Direct Line
for Business and Churchill. NIG sells its products exclusively through brokers operating across the UK. Direct Line for Business sells
its products directly to customers, and Churchill sells its products directly to customers and through price comparison websites.

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4. Segmental analysis continued

No inter-segment transactions occurred in the year ended 31 December 2018 (2017: £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.

The table below analyses the Group’s revenue and results by reportable segment for the year ended 31 December 2018.

Gross written premium

Underwriting profit
Loss ratio
Commission ratio
Expense ratio
COR

Note:

Motor
£m

1,671.2

1,684.3
(142.5)
1,541.8
105.9
89.2
48.3

1,785.2
(1,026.7)
46.7

(980.0)
(30.9)
(359.1)
(390.0)
415.2

171.8

63.6%
2.0%
23.3%
88.9%

Rescue
and other
personal lines
£m

Commercial
£m

422.8

416.6
(1.9)
414.7
5.2
2.5
15.8

438.2
(277.1)
(0.1)

(277.2)
(19.0)
(98.6)
(117.6)
43.4

19.9

66.8%
4.6%
23.8%
95.2%

511.0

507.8
(42.6)
465.2
27.6
6.3
5.3

504.4
(242.1)
0.8

(241.3)
(87.9)
(115.2)
(203.1)
60.0

20.8

51.8%
18.9%
24.8%
95.5%

Home
£m

606.9

698.0
(30.2)
667.8
15.9
21.9
2.7

708.3
(421.0)
7.7

(413.3)
(62.6)
(149.3)
(211.9)
83.1

42.6

61.8%
9.4%
22.4%
93.6%

Total
Group
£m

3,211.9

3,306.7
(217.2)
3,089.5
154.6
119.9
72.1

3,436.1
(1,966.9)
55.1
(1,911.8)
(200.4)
(722.2)
(922.6)
601.7
(19.1)
582.6

255.1
61.8%
6.5%
23.4%
91.7%

1. Results for the year ended 31 December 2018 are based on total Group operations including the restructuring costs and Run-off segment.

The table below analyses the Group’s assets and liabilities by reportable segment at 31 December 2018.

Goodwill
Other segment assets
Segment liabilities
Segment net assets

Motor
£m

128.1
6,755.0
(4,775.7)
2,107.4

Rescue
and other
personal lines
£m

28.7
210.3
(147.0)
92.0

Home
£m

45.8
788.1
(551.0)
282.9

Commercial
£m

10.1
1,420.0
(992.8)
437.3

Total
£m

212.7
9,173.4
(6,466.5)

2,919.6

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. This does not
represent the Group’s view of the capital requirements for its operating segments.

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The table below analyses the Group’s revenue and results by reportable segment for the year ended 31 December 2017.

Gross written premium

Gross earned premium
Reinsurance premium
Net earned premium
Investment return
Instalment income
Other operating income
Total income
Insurance claims
Insurance claims (payable to) / recoverable from reinsurers
Net insurance claims
Commission expenses
Operating expenses
Total expenses
Operating profit
Finance costs
Profit before tax

Underwriting profit
Loss ratio
Commission ratio
Expense ratio
COR

Loss ratio
Commission ratio
Expense ratio
COR

Notes:

Motor1
£m

1,670.4

1,603.0
(132.4)
1,470.6
117.9
85.3
43.0

1,716.8
(717.1)
(135.8)
(852.9)
(36.7)
(430.8)
(467.5)

396.4

150.2

58.0%
2.5%
29.3%

89.8%

Home
£m

799.1

819.4
(28.9)
790.5
21.1
23.1
0.9

835.6
(403.3)
2.8
(400.5)
(139.7)
(166.6)
(306.3)

128.8

83.7

50.6%
17.7%
21.1%

89.4%

Rescue
and other
personal lines
£m

Commercial
£m

421.1

419.2
(1.6)
417.6
4.6
2.1
12.9

437.2
(273.8)
0.5
(273.3)
(22.9)
(97.4)
(120.3)

43.6

24.0

65.4%
5.5%
23.4%

94.3%

501.5

498.1
(41.8)
456.3
31.8
5.9
6.1

500.1
(176.9)
(50.6)
(227.5)
(87.1)
(111.5)
(198.6)

74.0

30.2

49.9%
19.1%
24.4%

93.4%

Motor2

60.9%
2.5%
28.5%
91.9%

Total
Group
£m

3,392.1

3,339.7
(204.7)
3,135.0
175.4
116.4
62.9

3,489.7
(1,571.1)
(183.1)
(1,754.2)
(286.4)
(806.3)
(1,092.7)

642.8
(103.8)

539.0

288.1

56.0%
9.1%
25.7%

90.8%

Total
Ongoing2

57.4%
9.1%
25.3%
91.8%

1. The Motor segment for the year ended 31 December 2017 includes restructuring costs and the Run-off segment, which were total income of £0.7 million, net

insurance claims of £43.1 million and operating expenses of £11.9 million.

2. Comparative ratios for the Motor segment and total Ongoing operations, prior to re-presentation of the restructuring costs and the Run-off segment. Ongoing

operations for 2017 comprised total Group operations less the restructuring costs and the Run-off segment.

The table below analyses the Group’s assets and liabilities by reportable segment at 31 December 2017.

Goodwill
Other segment assets
Segment liabilities
Segment net assets

Note:

Motor1
£m

127.7
7,297.5
(5,177.4)

2,247.8

Rescue and
other
personal lines
£m

28.7
204.3
(143.2)

89.8

Home
£m

45.8
708.8
(496.8)

257.8

Commercial
£m

10.1
1,525.1
(1,069.0)

Total
£m

212.3
9,735.7
(6,886.4)

466.2

3,061.6

1. The Motor segment for the year ended 31 December 2017 includes the Run-off segment, which comprised other segment assets of £642.7 million and other

segment liabilities of £512.8 million.

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. This does not
represent the Group’s view of the capital requirements for its operating segments.

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5. 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

6. Investment return

Investment income:

Interest income from debt securities
Interest income from cash and cash equivalents
Interest income from infrastructure debt
Interest income from commercial real estate loans
Interest income
Rental income from investment property

Net realised (losses) / gains:

AFS debt securities
Derivatives
Investment property (note 19)

Net unrealised gains / (losses):

Impairment of loans and receivables
Derivatives
Investment property (note 19)

Total

2018
£m

2017
£m

3,211.9
94.8

3,306.7

(223.5)
6.3

(217.2)
3,089.5

3,392.1
(52.4)

3,339.7

(208.4)
3.7

(204.7)
3,135.0

2018
£m

2017
£m

124.0
6.2
6.9
6.2
143.3
15.9
159.2

19.5
(32.2)
–
(12.7)

(6.0)
1.4
12.7

8.1
154.6

137.5
3.0
6.8
3.6

150.9
16.2

167.1

23.2
175.0
1.6

199.8

(9.5)
(202.0)
20.0

(191.5)
175.4

The table below analyses the realised and unrealised gains and losses on derivative instruments included in investment return.

Derivative (losses) / gains:
Foreign exchange forward contracts1
Associated foreign exchange risk
Net (losses) / gains on foreign exchange forward contracts
Interest rate swaps1
Associated interest rate risk on hedged items
Net (losses) / gains on interest rate derivatives
Total

Note:

Realised

Unrealised

Realised

Unrealised

2018
£m

2017
£m

(102.6)
72.6
(30.0)

22.1
(24.3)

(2.2)
(32.2)

(41.3)
41.3
–

(1.8)
3.2

1.4
1.4

107.8
68.4
176.2

1.8
(3.0)

(1.2)
175.0

62.5
(259.1)
(196.6)

(1.7)
(3.7)

(5.4)
(202.0)

1. Foreign exchange forward contracts are measured at fair value through profit and loss and interest rate swaps are designated as hedging instruments.

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7. Other operating income

Vehicle replacement referral income
Revenue from vehicle recovery and repair services
Legal services income
Other income1,2
Total

Notes:

1. Other income includes salvage income and fee income from insurance intermediary services.

2. Other income includes a £9.6 million gain on the sale of a property in Bristol in January 2018.

8. Net insurance claims

2018
£m

17.2
11.7
11.2
32.0
72.1

2017
£m

16.9
11.3
11.0
23.7
62.9

Current accident year claims paid
Prior accident year claims paid
(Decrease) / increase in insurance liabilities
Total

Gross

2018
£m

1,308.5
878.2
(219.8)
1,966.9

Reinsurance

2018
£m

(0.2)
(30.9)
(24.0)
(55.1)

Net

2018
£m

1,308.3
847.3
(243.8)
1,911.8

Gross

2017
£m

1,165.0
847.0
(440.9)
1,571.1

Reinsurance

2017
£m

(0.2)
(13.8)
197.1
183.1

Net

2017
£m

1,164.8
833.2
(243.8)
1,754.2

Claims handling expenses for the year ended 31 December 2018 of £192.9 million (20171: £174.8 million) have been
included in the claims figures above.

Note:

1. Results for the year ended 31 December 2018 are based on total Group operations including the Run-off segment. Comparative data has been

re-presented accordingly.

9. Commission expenses

Commission expenses
Expenses incurred under profit participations
Total

10. Operating expenses

Staff costs1
Other operating expenses1,2
Marketing
Amortisation and impairment of other intangible assets3
Depreciation
Total

Notes:

2018
£m

188.5
11.9
200.4

2018
£m

269.9
253.3
121.2
46.7
31.1
722.2

2017
£m

225.4
61.0
286.4

2017
£m

280.1
273.6
113.7
111.0
27.9
806.3

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. Amortisation and impairment of other intangible assets includes a £1.5 million impairment charge for the year ended 31 December 2018 (2017: £56.9 million),

which relates to capitalised software development costs for ongoing IT projects primarily relating to development of new systems.

The table below analyses the number of people employed by the Group’s operations.

Insurance operations
Repair centre operations
Support
Total

At 31 December

Average for the year

2018

8,583
1,368
1,278

11,229

2017

8,267
1,272
1,269
10,808

2018

8,569
1,326
1,266

11,161

2017

8,431
1,238
1,280
10,949

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10. Operating expenses continued

The aggregate remuneration of those employed by the Group’s operations comprised:

Wages and salaries
Social security costs
Pension costs
Share-based payments
Total

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

Audit-related assurance services
Other assurance services
Non-audit services
Total

2018
£m

374.9
41.2
28.7
21.0
465.8

2017
£m

363.6
40.4
25.5
14.8
444.3

2018
£m

2017
£m

0.2
1.7
1.9

0.1
0.1
0.6
2.7

0.3
1.6
1.9

0.1
–
0.1
2.1

Aggregate Directors’ emoluments
The table below analyses the total amount of Directors’ remuneration in accordance with Schedule 5 to the Accounting Regulations.

Salaries, fees, bonuses and benefits in kind
Gains on exercise of share options
Total

2018
£m

5.9
4.2
10.1

2017
£m

5.6
5.3

10.9

Further information about the remuneration of individual Directors is provided in the Directors’ remuneration report.

At 31 December 2018, no Directors (2017: no Directors) had retirement benefits accruing under the defined contribution
pension scheme in respect of qualifying service. During the year ended 31 December 2018, four Directors exercised share
options (2017: three Directors).

11. Finance costs

Interest expense on subordinated liabilities
Net interest received on designated hedging instrument1
Unrealised losses on designated hedging instrument1
Unrealised gains on associated interest rate risk on hedged item1
Realised gain on associated interest rate risk on hedged item1
Premium paid to repurchase subordinated liabilities and associated transaction costs
Amortisation of arrangement costs and discount on issue of subordinated liabilities
Total

2018
£m

23.1
(3.8)
5.0
(5.6)
–
–
0.4

19.1

2017
£m

44.8
(8.0)
10.4
(11.7)
(11.3)
77.4
2.2

103.8

Note:

1. As described in note 32, 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 3-month LIBOR plus a spread of 706 basis points, which increased to 707 basis points with effect from 29 July 2013. On 8 December 2017, the Group
redeemed £250 million nominal value of the notes.

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12. Tax charge

Current taxation:

Charge for the year
(Over) / under provision in respect of prior year

Deferred taxation (note 13):

Credit for the year
Under / (over) provision in respect of prior year

Current taxation
Deferred taxation (note 13)
Tax charge for the year

2018
£m

2017
£m

114.4
(4.8)

109.6

(4.2)
3.5
(0.7)

109.6
(0.7)
108.9

114.4
5.3

119.7

(5.8)
(8.9)
(14.7)

119.7
(14.7)
105.0

2017
£m

539.0

103.8

5.4
(0.3)
(0.2)
(3.7)
–

105.0

19.5%

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 19.0%1 (2017: 19.25%).

Profit before tax

Expected tax charge
Effects of:

Disallowable expenses
Non-taxable items
Effect of change in corporation taxation rate
Over provision in respect of prior year
Deductible Tier 1 notes coupon payment in equity

Tax charge for the year

Effective income tax rate

Note:

2018
£m

582.6

110.7

5.4
(2.5)
(0.2)
(1.3)
(3.2)
108.9

18.7%

1. In the Finance (No 2) Act 2015 the UK Government enacted a reduction in the UK corporation tax rate from 20% to 19% effective from 1 April 2017, and then
the Finance Act 2016 enacted a further reduction to 17% effective from 1 April 2020. As a consequence, the closing deferred tax assets and liabilities have
been recognised at the tax rates expected to apply when the assets or liabilities are settled. The impact of these changes on the tax charge for the year is set out
in the table above.

13. Current and deferred tax

Per balance sheet:
Current tax assets
Current tax liabilities
Deferred tax liabilities

2018
£m

–
(46.0)
(7.6)

2017
£m

0.1
(40.7)
(31.1)

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

13. Current and deferred tax continued

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

At 1 January 2017
Credit to the income statement
(Charge) / credit to other
comprehensive income
Charge direct to equity
Other movements
At 31 December 2017
Credit / (charge) to the income
statement
(Charge) / credit to other
comprehensive income
Charge direct to equity
At 31 December 2018

Note:

2.6
–

–
–
(0.6)
2.0

0.3

–
–
2.3

(2.1)
–

(0.4)
–
–
(2.5)

(1.0)
1.5

–
–
–
0.5

(23.4)
4.8

–
–
–
(18.6)

(0.1)

(3.9)

4.9

(0.4)
–
(3.0)

–
–
(3.4)

–
–
(13.7)

(8.2)
8.2

–
–
–
–

–

–
–
–

4.1
0.2

–
(1.0)
–
3.3

(0.5)

–
(0.6)
2.2

Total
£m

(46.0)
14.7

1.8
(1.0)
(0.6)
(31.1)

(18.0)
–

2.2
–
–
(15.8)

–

0.7

23.8
–
8.0

23.4
(0.6)
(7.6)

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 the claims equalisation 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. It is provided for in deferred tax above as it represents the future unwind of
previously claimed tax deductions for transfers into the reserve.

In addition, the Group has an unrecognised deferred tax asset at 31 December 2018 of £4.7 million (2017: £7.4 million)
in relation to capital losses of which £4.7 million (2017: £4.1 million) relates to realised losses and £nil (2017:
£3.3 million) relates to unrealised losses.

14. Dividends and appropriations

Amounts recognised as distributions to equity holders in the period:

2017 final dividend of 13.6 pence per share paid on 17 May 2018
2016 final dividend of 9.7 pence per share paid on 18 May 2017
2018 first interim dividend of 7.0 pence per share paid on 7 September 2018
2017 first interim dividend of 6.8 pence per share paid on 8 September 2017
2017 special dividend of 15.0 pence per share paid on 17 May 2018

Coupon payments in respect of Tier 1 notes1

Proposed dividends:

2018 final dividend of 14.0 pence per share
2017 final dividend of 13.6 pence per share
2018 special dividend of 8.3 pence per share
2017 special dividend of 15.0 pence per share

Note:

2018
£m

2017
£m

186.1
–
95.8
–
205.3
487.2
16.6
503.8

192.5
–
114.1
–

–
132.4
–
92.9
–

225.3
–
225.3

–
187.0
–
206.3

1. Coupon payments on the Tier 1 notes issued in December 2017 are treated as an appropriation of retained profits and, accordingly, are accounted for

when paid.

The proposed final and special dividends for 2018 have 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 dividends
paid for the year ended 31 December 2018 by £2.4 million (2017: £1.6 million).

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15. Earnings per share

Earnings per share is calculated by dividing earnings attributable to the owners of the Company less coupon payments in respect
of Tier 1 notes by the weighted average number of Ordinary Shares during the year.

Basic
Basic earnings per share is calculated by dividing the earnings attributable to the owners of the Company less coupon payments
in respect of Tier 1 notes by the weighted average number of Ordinary Shares during the period, excluding Ordinary Shares
held as employee trust shares.

Earnings attributable to owners of the Company
Coupon payments in respect of Tier 1 notes

Profit for the calculation of earnings per share

Weighted average number of Ordinary Shares (millions)
Basic earnings per share (pence)

2018
£m

473.7
(16.6)

457.1

2017
£m

434.0
–

434.0

1,366.5

1,366.1

33.5

31.8

Diluted
Diluted earnings per share is calculated by dividing the earnings attributable to the owners of the Company less coupon
payments in respect of Tier 1 notes by the weighted average number of Ordinary Shares during the period adjusted for the
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
Coupon payments in respect of Tier 1 notes
Profit for the calculation of earnings per share
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)

2018
£m

473.7
(16.6)
457.1
1,366.5
15.8
1,382.3

33.1

2017
£m

434.0
–
434.0

1,366.1
12.9

1,379.0

31.5

16. Net assets per share and return on equity

Net asset value per share is calculated as total shareholders’ equity (which excludes Tier1 notes) 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 assets1
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)

Note:

2018
£m

2,573.1
(566.8)
2,006.3

1,375.0
(10.4)
1,364.6

188.6
147.0

2017
£m

2,715.1
(471.1)

2,244.0

1,375.0
(9.9)
1,365.1

198.9
164.4

1. Goodwill has arisen on acquisition by the Group of subsidiary companies and on acquisition of new accident repair centres. Intangible assets are primarily

comprised of software development costs.

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16. Net assets per share and return on equity continued

Return on equity
The table below details the calculation of return on equity.

Earnings attributable to owners of the Company
Coupon payments in respect of Tier 1 notes
Profit for the calculation of return on equity

Opening shareholders’ equity
Closing shareholders’ equity
Average shareholders’ equity
Return on equity

17. Goodwill and other intangible assets

Cost
At 1 January 2017
Acquisitions and additions
At 31 December 2017
Acquisitions and additions
Disposals and write-off1
At 31 December 2018

Accumulated amortisation and impairment
At 1 January 2017
Charge for the year
Impairment losses2
At 31 December 2017
Charge for the year
Disposals and write-off1
Impairment losses2
At 31 December 2018

Carrying amount

At 31 December 2018

At 31 December 2017

Notes:

2018
£m

473.7
(16.6)
457.1

2,715.1
2,573.1

2,644.1

17.3%

Other
intangible
assets
£m

569.9
72.2

642.1
142.0
(4.7)
779.4

272.3
54.1
56.9
383.3
45.2
(4.7)
1.5
425.3

2017
£m

434.0
–
434.0

2,521.5
2,715.1

2,618.3

16.6%

Total
£m

781.2
73.2

854.4
142.4
(4.7)
992.1

272.3
54.1
56.9
383.3
45.2
(4.7)
1.5
425.3

Goodwill
£m

211.3
1.0

212.3
0.4
–
212.7

–
–
–
–
–
–
–
–

212.7

212.3

354.1

258.8

566.8

471.1

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.

Included within other intangible assets, are assets still in development of £269.9 million (2017: £171.4 million). These assets
are reviewed for potential indicators of impairment at each reporting date.

Goodwill arose on the acquisition of U K Insurance Limited (£141.0 million), Churchill Insurance Company Limited (£70.0 million)
and accident repair networks (£1.7 million) and is allocated to reportable segments. The addition to goodwill in the year ended
31 December 2018 of £0.4 million arose on acquisition of a new accident repair centre.

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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The table below analyses the goodwill of the Group by CGU.

Motor
Home
Rescue and other personal lines
Commercial
Total

2018
£m

128.1
45.8
28.7
10.1
212.7

2017
£m

127.7
45.8
28.7
10.1
212.3

There have been no impairments in goodwill for the year ended 31 December 2018 (2017: £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 strategic plan. The long-term growth
rates have been based on gross domestic product 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:

Terminal
growth
rate
%

3.0
3.0
3.0
3.0

Assumptions

Sensitivity: Impact on recoverable amount of a:

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

11.5
11.5
11.5
11.5

1,112.3
777.3
557.7
575.4

(247.4)
(81.8)
(56.0)
(85.0)

(264.2)
(112.0)
(75.7)
(114.8)

(32.5)
(10.6)
(6.6)
(10.0)

1. Reflects a 1% decrease in the profit for each year of the strategic plan, which is five years.

18. Property, plant and equipment

Cost
At 1 January 2017
Additions
Disposals
At 31 December 2017
Additions
Disposals
At 31 December 2018
Accumulated depreciation and impairment
At 1 January 2017
Depreciation charge for the year
Disposals
At 31 December 2017
Depreciation charge for the year
Disposals
At 31 December 2018

Carrying amount
At 31 December 2018

At 31 December 2017

Freehold land
and buildings
£m

Other
equipment
£m

79.8
–
–
79.8
–
–
79.8

3.1
1.1
–
4.2
1.1
–
5.3

196.3
22.4
(15.1)
203.6
13.3
(31.9)
185.0

92.1
26.8
(14.1)
104.8
30.0
(31.5)
103.3

Total
£m

276.1
22.4
(15.1)
283.4
13.3
(31.9)
264.8

95.2
27.9
(14.1)
109.0
31.1
(31.5)
108.6

74.5

75.6

81.7

98.8

156.2

174.4

The Group is satisfied that the aggregate value of property, plant and equipment is not less than its carrying value.

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19. Investment property

At 1 January
Additions at cost
Increase in fair value during the year
Disposals
At 31 December

Note:

2018
£m

309.3
0.1
12.7
–
322.1

2017
£m

329.0
–
21.6
(41.3)
309.3

1. The cost included in the carrying value at 31 December 2018 is £252.5 million (2017: £252.4 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 2017.

Lease agreements with tenants are drawn up in line with local practice and the Group has no exposure to leases that include
contingent rents.

20. Subsidiaries

The principal subsidiary undertakings of the Group, over which it exercises 100% voting power, are shown below. Their capital
consists of Ordinary Shares which are unlisted. All subsidiaries (a full list of which is included in note 2 of the Parent Company’s
financial statements) are included in the Group’s consolidated financial statements.

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

The Group did not dispose of any subsidiaries in the years ended 31 December 2018 and 31 December 2017.

21. Reinsurance assets

Reinsurers’ share of general insurance liabilities
Impairment provision1
Total excluding reinsurers’ unearned premium reserves
Reinsurers’ unearned premium reserve
Total

Note:

Notes

33
34

2018
£m

1,159.9
(54.7)
1,105.2
103.5
1,208.7

2017
£m

1,141.1
(59.9)
1,081.2
97.3
1,178.5

1. Impairment provision relates to reinsurance debtors, allowing for the risk that reinsurance assets may not be collected, or where the reinsurer’s credit rating has

been significantly downgraded and may have difficulty in meeting its obligations.

Movements in reinsurance asset impairment provision

At 1 January
Additional provision
Release to income statement
At 31 December

22. Deferred acquisition costs

At 1 January
Net decrease in the year
At 31 December

2018
£m

(59.9)
(7.5)
12.7
(54.7)

2018
£m

185.4
(14.4)
171.0

2017
£m

(50.7)
(9.6)
0.4
(59.9)

2017
£m

203.1
(17.7)
185.4

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23. Insurance and other receivables

Receivables arising from insurance contracts:

Due from policyholders
Due from agents, brokers and intermediaries
Impairment provision of policyholder receivables
Impairment provision of agent, broker and intermediary receivables

Other debtors
Total

Movement in impairment provisions during the year

At 1 January 2018
Additional provision
Released to income statement
At 31 December 2018

24. 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:
Interest rate swaps
Total

Note:

1. Cash flow hedges in relation to supplier payments.

25. Retirement benefit obligations

2018
£m

2017
£m

740.4
82.9
(0.9)
(0.5)
54.0

875.9

Agents,
brokers and
intermediaries
£m

Policyholders
£m

1.2
24.7
(25.0)
0.9

0.9
0.2
(0.6)
0.5

840.4
71.3
(1.2)
(0.9)
71.6

981.2

Total
£m

2.1
24.9
(25.6)
1.4

2018
£m

2017
£m

19.2

51.1

1.4
27.6
48.2

1.0
32.3
84.4

20.6

11.3

5.3
25.9

0.7
12.0

Defined contribution scheme
The pension charge in respect of the defined contribution scheme for the year ended 31 December 2018 was £28.7 million
(2017: £25.5 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 2018 is 20 years (2017: 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

2018
%

2.2
2.2
2.9
3.3

2017
%

2.2
2.2
2.5
3.3

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25. Retirement benefit obligations continued

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
Liquidity fund1
Absolute return bond fund2
Other
Total

Notes:

2018

2017

87.3
89.0

89.1
90.9

2018
£m

30.4
24.9
0.8
39.4
0.1
95.6

87.5
89.2

89.3
91.1

2017
£m

28.7
17.7
52.7
–
2.6

101.7

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.

2. The absolute return bond fund is an investment in an open-ended fund incorporated in Luxembourg which targets positive returns in all market conditions. It is invested in
short-term fixed income asset classes and seeks additional returns via a range of additional investments including certificate of deposits, rates and global currencies.

The majority of debt instruments have quoted prices in active markets. The absolute return bond fund holds bonds that, rather than
being traded on exchange, are traded through agents, brokers or investment banks matching buyers and sellers.

Movement in net pension surplus

At 1 January 2017
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 losses arising from changes in financial assumptions

Benefits paid
At 31 December 2017
Income statement:

Net interest income / (cost)1
Administration costs
Prior service costs2
Settlement3

Statement of comprehensive income:

Actuarial losses arising from experience adjustments
Actuarial gains arising from changes in demographic assumptions
Actuarial gains arising from changes in financial assumptions

Benefits paid
At 31 December 2018

Notes:

Fair value of
defined benefit
scheme assets
£m

Present value of
defined benefit
scheme
obligations
£m

Net pension
surplus
£m

102.5

(90.5)

12.0

2.7

(2.4)

0.3

1.0
–
–
(4.5)

1.5
3.1
(3.5)
4.5

101.7

(87.3)

2.4
(0.2)
–
(2.4)

(3.5)
–
–
(2.4)

95.6

(2.1)
–
(0.2)
2.4

–
0.4
5.8
2.4

(78.6)

2.5
3.1
(3.5)
–

14.4

0.3
(0.2)
(0.2)
–

(3.5)
0.4
5.8
–

17.0

1. The net interest income / (cost) in the income statement has been included under other operating expenses.

2. This results from the outcome of a court case ruling in October 2018 involving the Lloyds Bank pension schemes but leading to a one-off increase in liabilities for

UK pension schemes more widely.

3. A number of historical annuity policies held by the scheme were transferred to individual members during the year.

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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

Experience adjustment gains on scheme liabilities
Experience adjustment (losses) / gains on scheme assets

2018
£m

(78.6)
95.6
17.0

–
(3.5)

2017
£m

(87.3)
101.7
14.4

1.5
1.0

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

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

2018
£m

(0.2)
0.1

–
–

0.1
(0.1)

2017
£m

(0.2)
0.1

–
–

0.1
(0.1)

Impact on present value
of defined benefit
scheme obligations

2018
£m

2017
£m

(3.9)
3.9

2.0
(2.0)

2.7
(2.7)

(4.4)
4.4

2.2
(2.2)

3.1
(3.1)

The most recent funding valuation of the Group’s defined benefit scheme was carried out as at 1 October 2017. This showed
an excess of assets over liabilities. The Group agreed with the trustees to make contributions of up to £1.5 million per annum
in 2019, 2020 and 2021 in the event that a deficit subsequently emerges on the anniversary of the funding valuation date.
As a result of the most recent funding update, no contributions are expected to be payable in 2019 (2018: £nil).

26. Financial investments

AFS debt securities
Corporate
Supranational
Local government
Sovereign
Total
HTM debt securities
Corporate
Total debt securities

Total debt securities
Fixed interest rate1
Floating interest rate
Total
Loans and receivables
Infrastructure debt
Commercial real estate loans
Total

Note:

2018
£m

2017
£m

3,916.0
43.2
29.5
156.9

4,145.6

4,170.5
43.9
12.2
224.8

4,451.4

101.0

103.6

4,246.6

4,555.0

4,211.1
35.5

4,246.6

289.6
201.6
4,737.8

4,540.1
14.9

4,555.0

316.4
169.0
5,040.4

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 2018 was £1,206.1 million (2017: £1,591.5 million).

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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

2018
£m

157.4
997.0

1,154.4
(62.0)
1,092.4

2017
£m

258.0
1,100.6

1,358.6
(54.1)
1,304.5

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 and transactions flowing through the accounts at

the bank.

3. Cash and bank overdrafts disclosure note 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 2018 was 0.58%
(2017: 0.29%) and average maturity was 10 days (2017: 10 days).

28. Assets held for sale

Freehold property held for sale

Note:

1. The freehold property held for sale at 31 December 2017 related to a property in Bristol which was sold in January 2018.

2018
£m

–

20171
£m

4.2

29. Share capital

Issued and fully paid: equity shares
Ordinary Shares of 1010/11 pence each1

Note:

2018
Number
millions

2017
Number
millions

2018
£m

2017
£m

1,375

150.0

1. The shares have full voting dividend and capital distribution rights (including wind up) attached to them; these do not confer any rights of redemption.

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 2018, 10,432,376 Ordinary Shares (2017: 9,945,473 Ordinary Shares) were owned by the employee
share trusts with a cost of £35.2 million (2017: £34.1 million). These Ordinary Shares are carried at cost and at 31 December
2018 had a market value of £33.2 million (2017: £38.0 million).

30. Other reserves

Movements in the AFS investments revaluation reserve

At 1 January
Revaluation during the year – gross
Revaluation during the year – tax
Realised gains – gross
Realised gains – tax
At 31 December

2018
£m

80.2
(121.4)
20.6
(19.5)
3.3
(36.8)

2017
£m

92.1
8.8
(1.5)
(23.2)
4.0
80.2

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Capital reserves

Capital contribution reserve1
Capital redemption 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 redemption reserve.

31. Tier 1 notes

Tier 1 notes

2018
£m

100.0
1,350.0

1,450.0

2017
£m

100.0
1,350.0

1,450.0

2018
£m

346.5

2017
£m

346.5

On 7 December 2017, the Group issued £350 million of fixed rate perpetual Tier 1 notes with a coupon rate of 4.75%
per annum.

The Group has an optional redemption date of 7 December 2027. If the notes are not repaid on that date, a fixed rate of
interest per annum will be reset. The notes are direct, unsecured and subordinated obligations of the issuer ranking pari passu
and without any preference amongst themselves.

The Tier 1 notes are treated as a separate category within equity and the coupon payments are recognised outside of the profit
after tax result and directly in shareholders’ equity.

The Group has the option to cancel the coupon payment which becomes mandatory upon breach of non-compliance with the
Group SCR, a breach of the minimum capital requirement or where the Group has insufficient distributable reserves.

32. Subordinated liabilities

Subordinated guaranteed dated notes

2018
£m

259.5

2017
£m

264.7

The subordinated guaranteed dated notes with a nominal value of £500 million 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 3-month LIBOR plus a spread of 706 basis points which was credit value adjusted to 707 basis
points with effect from 29 July 2013.

On 8 December 2017, the Group repurchased £250 million nominal value of the subordinated guaranteed dated notes for a
purchase price of £330.1 million including accrued interest of £2.7 million and associated transaction costs of £0.6 million.

The remaining notes, with a nominal value of £250 million, have a redemption date of 27 April 2042 with the option to repay
the notes on 27 April 2022. If the notes are not repaid on that date, the rate of interest will be reset at a rate of the 6-month
LIBOR plus 7.91%.

The Group has the option, in certain circumstances, to defer interest payments on the notes but to date has not exercised this right.

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.

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33. Insurance liabilities

Insurance liabilities

Gross insurance liabilities

2018
£m

2017
£m

4,005.9

4,225.7

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

2008 and prior
Claims handling
provision
Total

2009
£m

2010
£m

2011
£m

2012
£m

2013
£m

2014
£m

2015
£m

2016
£m

2017
£m

2018
£m

Total
£m

3,823.3 3,941.7 2,698.1 2,372.7 2,184.0 2,094.5 2,118.1 2,157.7 2,217.3 2,300.1

(30.0)
(143.5)
(62.4)

20.7
(38.4)
(144.9)
(50.2)

(116.2)

(86.7)
(53.3)

(117.1)
(99.1)
(50.3)
(105.5)
(57.7)
(25.9)
(50.0)
(17.6)

121.6
(37.0)
(14.0)
(101.5)
(38.8)
(80.8)
(27.3)
(14.0)
(36.4)

(117.6)
(153.0)
(21.0)
(102.1)
(50.8)

(163.3)
(118.9)
(49.3)
(9.9)
(79.2)
(36.2)

(99.3)
(94.6)
(89.3)
(60.9)
(21.2)
(60.3)
(25.1)

3,595.1 3,418.5 2,247.4 1,915.9 1,739.5 1,881.7 1,882.2 2,017.7 2,101.1 2,300.1

(3,474.6) (3,323.4) (2,172.8) (1,862.3) (1,655.4) (1,592.6) (1,547.7) (1,554.6) (1,471.4) (1,174.0)

120.5

95.1

74.6

53.6

84.1

289.1

334.5

463.1

629.7 1,126.1 3,270.4

655.5

80.0
4,005.9

Net insurance liabilities

Accident year

Estimate of ultimate
net claims costs:

2008 and prior
Claims handling
provision
Total

2009
£m

2010
£m

2011
£m

2012
£m

2013
£m

2014
£m

2015
£m

2016
£m

2017
£m

2018
£m

Total
£m

3,790.6 3,902.0 2,644.4 2,271.8 2,093.9 1,971.0 1,926.7 1,922.2 2,016.9 2,125.9

(29.7)
(42.0)
(100.7)
(41.3)

(123.6)
(134.4)
(27.8)
(64.3)
(38.9)

(146.7)
(107.8)
(35.6)
(11.6)
(54.2)
(30.4)

(79.7)

(18.9)
(38.2)

(67.0)
(77.8)
(30.4)

(131.5)
(82.1)
(76.5)
(48.7)
(37.3)
(37.0)
(20.4)

(125.2)
(120.4)
(44.0)
(93.6)
(52.3)
(43.9)
(24.8)
(17.4)

70.0
(17.4)
(54.1)
(67.0)
(29.6)
(74.6)
(38.2)
(0.4)
(35.1)

3,544.2 3,380.4 2,210.9 1,885.5 1,704.9 1,757.3 1,751.5 1,865.1 1,937.2 2,125.9

(3,441.4) (3,308.2) (2,149.3) (1,845.4) (1,637.1) (1,585.0) (1,544.1) (1,548.8) (1,470.3) (1,173.7)

102.8

72.2

61.6

40.1

67.8

172.3

207.4

316.3

466.9

952.2 2,459.6

361.1

80.0
2,900.7

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Movements in gross and net insurance liabilities

Claims reported
Incurred but not reported
Claims handling provision
At 1 January 2017
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 2017

Claims reported
Incurred but not reported
Claims handling provision
At 31 December 2017
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 2018

Claims reported
Incurred but not reported
Claims handling provision
At 31 December 2018

Note:

Gross1
£m

Reinsurance
£m

2,584.5
2,002.8
79.3

4,666.6
(2,012.0)

(388.3)
(890.0)
–

(1,278.3)
14.0

Net1
£m

2,196.2
1,112.8
79.3

3,388.3
(1,998.0)

2,389.9
(818.8)

(200.3)
383.4

2,189.6
(435.4)

4,225.7

(1,081.2)

3,144.5

3,003.7
1,142.7
79.3
4,225.7
(2,186.7)

2,490.4
(523.5)
4,005.9

3,001.0
924.9
80.0
4,005.9

(742.5)
(338.7)
–
(1,081.2)
31.1

(174.2)
119.1
(1,105.2)

(809.8)
(295.4)
–
(1,105.2)

2,261.2
804.0
79.3
3,144.5
(2,155.6)

2,316.2
(404.4)
2,900.7

2,191.2
629.5
80.0
2,900.7

1. Included within the incurred but not reported claims provision is a £55 million net release (gross: £175 million release) relating to assumed changes to the Ogden

discount rate which have not yet been reflected in claims reported (31 December 2017: gross and net £nil; 1 January 2017: £217 million net provision
increase; £542 million gross provision increase).

Movement in prior-year net claims liabilities by operating segment

Motor1
Home
Rescue and other personal lines
Commercial
Total

Note:

2018
£m

(276.3)
(32.6)
(16.1)
(79.4)
(404.4)

2017
£m

(318.6)
(23.7)
(6.8)
(86.3)

(435.4)

1. Results for the year ended 31 December 2018 are based on total Group operations including the Run-off segment. Comparative data has been re-presented

accordingly to include Run-off segment prior-year claims movements within the Motor segment (2017: £43.1 million).

34. Unearned premium reserve

Movement in unearned premium reserve

At 1 January 2017
Net movement in the year
At 31 December 2017
Net movement in the year
At 31 December 2018

Gross
£m

Reinsurance
£m

Net
£m

1,454.4
48.6

1,503.0
(101.0)

(93.5)
(3.8)

(97.3)
(6.2)

(103.5)

1,402.0

1,547.9
52.4

1,600.3
(94.8)

1,505.5

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

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.
For awards since August 2017, the Directors are subject to an additional two-year holding period following the three-year
vesting period.

Awards were made in the year ended 31 December 2018 over 3.9 million Ordinary Shares with an estimated fair value of
£10.5 million at the 2018 grant dates (2017: 4.2 million Ordinary Shares with an estimated fair value of £15.2 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

2018

2017

355
0
21%
30%
3 years
0.9%

359
0
20%
30%
3 years
0.2%

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.

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 0.5 million Ordinary Shares (2017: 1.1 million Ordinary Shares) with an estimated fair value of
£1.6 million (2017: £3.9 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 AIP, 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 1.3 million Ordinary
Shares (2017: 0.9 million Ordinary Shares) under this plan with an estimated fair value of £4.9 million (2017: £2.9 million)
using the market value at the date of grant.

The awards outstanding at 31 December 2018 have no performance criteria attached; there is a 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 early 2018, the Group offered all eligible employees a Free Share award granting 133 Ordinary Shares free of charge to
celebrate the Group’s fifth anniversary in October 2017 of its launch on the London Stock Exchange. These awards have no
performance criteria attached and vest on the third anniversary of the award grant date, subject to completion of three years,
continuing employment. The Group initially granted 1.4 million Ordinary Shares with an estimated fair value of £5.4 million
using the market value at the date of grant.

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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 2018, matching share awards were granted over 0.4 million Ordinary Shares (2017: 0.4 million
Ordinary Shares) with an estimated fair value of £1.5 million (2017: £1.3 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
Forfeited during the year
Exercised during the year
At 31 December

Exercisable at 31 December

Note:

Number of share awards

2018
millions

20.2
9.2
(2.7)
(5.4)
21.3

1.5

2017
millions

18.1
9.6
(1.3)
(6.2)
20.2

1.9

1. In accordance with the rules of the LTIP and DAIP award plans, additional awards of 1.7 million shares were granted during the year ended 31 December 2018

(2017: 3.0 million) in respect of the equivalent dividend.

In respect of the outstanding options at 31 December 2018, the weighted average remaining contractual life is 1.58 years
(2017: 1.39 years). No share awards expired during the year (2017: nil).

The weighted average share price for awards exercised during the year ended 31 December 2018 was £3.58 (2017: £3.61).

The Group recognised total expenses in the year ended 31 December 2018 of £21.0 million (2017: £14.8 million) relating
to equity-settled share-based compensation plans.

Further information on share-based payments, in respect of Executive Directors, is provided in the Directors’ remuneration report.

36. Trade and other payables, including insurance payables

Trade creditors and accruals
Other taxes
Other creditors
Provisions
Due to reinsurers
Due to agents, brokers and intermediaries
Deferred income
Due to insurance companies
Total

Movement in provisions during the year

At 1 January 2018
Additional provision
Utilisation of provision
Released to income statement
At 31 December 2018

2018
£m

227.7
100.0
89.1
72.8
47.4
11.9
4.7
0.5
554.1

Other
£m

36.1
32.5
(26.0)
(8.8)

33.8

2017
£m

282.8
103.9
95.9
74.2
74.2
18.2
4.8
4.0

658.0

Total
£m

74.2
82.8
(71.5)
(12.7)

72.8

Regulatory levies
£m

Restructuring
£m

31.7
47.5
(43.6)
–

35.6

6.4
2.8
(1.9)
(3.9)

3.4

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

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 charge / (income)
Equity-settled share-based payment charge
Tax charge
Depreciation and amortisation charge
Impairment of property, plant and equipment, goodwill and intangible assets
Impairment provision movements on reinsurance contracts
Gain on sale / fair value adjustment on assets held for sale
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 decrease / (increase) in prepayments and accrued income and other assets
Net decrease in insurance and other receivables
Net decrease in trade and other payables, including insurance payables

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
Purchase of investment property
Proceeds on disposal of investment property
Proceeds on disposal / maturity of AFS debt securities
Proceeds from maturity of HTM debt securities
Advances made for infrastructure debt and commercial real estate loans
Repayments of infrastructure debt
Purchase of AFS debt securities
Purchase of HTM debt securities
Cash generated from investment of insurance assets

2018
£m

473.7

(154.6)
(119.9)
19.1
0.1
21.0
108.9
76.3
1.5
(5.2)
(9.6)
0.3
411.6

(325.2)
18.2
105.3
(103.9)
106.0
(102.6)
0.8
4.2

2017
£m

434.0

(175.4)
(116.4)
103.8
(0.3)
14.8
105.0
82.0
56.9
9.2
(0.4)
0.7
513.9

(186.7)
(15.2)
7.1
(41.2)
277.9
(76.5)
2.6

204.0

303.6
15.9
(0.1)
–
2,159.2
2.5
(59.3)
49.2
(2,002.9)
–
468.1

316.6
16.2
–
41.3
1,948.4
–
(108.5)
31.8
(1,885.4)
(18.5)
341.9

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FINANCIALS V6.1

The table below details changes in liabilities arising from the Group’s financing activities.

At 1 January
Repayment of subordinated liabilities
Interest paid on subordinated liabilities2
Interest rate swap cash settlement
Financing cash flows
Premium paid to buy back of debt issued
Amortisation of arrangement costs and discount on issue of subordinated
liabilities
Accrued interest expense on subordinated liabilities
Unrealised gain on associated interest rate risk on hedged item
Realised gain on associated interest rate risk on hedged item
Net accrued interest on interest rate swap
Fair value movement in interest rate swap
Non-cash changes
At 31 December

Notes:

Subordinated liabilities

Interest rate swaps1

2018
£m

(264.7)
–
23.1
–
23.1
–
(0.4)

(23.1)
5.6
–
–
–
(17.9)

(259.5)

2017
£m

(539.6)
326.8
51.6
–
378.4
(76.8)
(2.2)

(47.5)
11.7
11.3
–
–
(103.5)

(264.7)

2018
£m

16.3
–
–
(5.8)
(5.8)
–
–

–
–
–
(0.2)
(1.3)
(1.5)

9.0

2017
£m

38.4
–
–
(19.9)
(19.9)
–
–

–
–
10.7
(1.2)
(11.7)
(2.2)

16.3

1. The interest rate swaps relate to the Group’s 10-year designated hedging instrument which exchanges the fixed rate of interest for a floating rate of 3-month LIBOR

plus a spread of 706 basis points which was credit value adjusted to 707 basis points with effect from 29 July 2013.

2. This includes £2.7 million of accrued interest settled in relation to the £250 million of repayment of subordinated guaranteed notes in 2017.

38. Contingent liabilities

The Group did not have any material contingent liabilities at 31 December 2018 (2017: none).

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

2018
£m

21.3

2017
£m

18.8

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

2018
£m

19.2
56.4
148.7
224.3

2017
£m

19.2
58.1
154.8

232.1

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

2018
£m

14.5
42.9
70.4

2017
£m

15.3
46.1
73.1

127.8

134.5

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

40. Fair value

Fair value hierarchy
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date, regardless of whether that price is directly observable or estimated using another
valuation technique.

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.

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 2018

Assets held at fair value:
Investment property (note 19)
Derivative assets (note 24)
AFS debt securities (note 26)
Other financial assets:
HTM debt securities (note 26)
Infrastructure debt (note 26)
Commercial real estate loans (note 26)
Total

Liabilities held at fair value:
Derivative liabilities (note 24)
Other financial liabilities:
Subordinated liabilities (note 32)
Total

At 31 December 2017

Liabilities held at fair value:
Derivative liabilities (note 24)
Other financial liabilities:
Subordinated liabilities (note 32)
Total

Carrying value
£m

322.1
48.2
4,145.6

101.0
289.6
201.6
5,108.1

25.9

259.5
285.4

Level 1
£m

–
–
156.9

–
–
–
156.9

–

–
–

Level 2
£m

Level 3
£m

Fair value
£m

–
48.2
3,988.7

13.9
–
–
4,050.8

25.9

297.8
323.7

322.1
–
–

87.4
286.3
201.6
897.4

–

–
–

322.1
48.2
4,145.6

101.3
286.3
201.6
5,105.1

25.9

297.8
323.7

Carrying value
£m

Level 1
£m

Level 2
£m

Level 3
£m

Fair value
£m

309.3
84.4
4,451.4

103.6
316.4
169.0

–
–
224.8

–
84.4
4,226.6

–
–
–

14.4
–
–

5,434.1

224.8

4,325.4

12.0

264.7
276.7

–

–
–

12.0

328.7
340.7

309.3
–
–

92.8
326.0
169.0

897.1

–

–
–

309.3
84.4
4,451.4

107.2
326.0
169.0

5,447.3

12.0

328.7
340.7

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FINANCIALS V6.1

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 within investment property
and are analysed in note 19. There were no changes in the categorisation of assets between levels 1, 2 and 3 for assets and
liabilities held by the Group since 31 December 2017.

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 2018
(2017: £nil).

Compensation of key management

Short-term employee benefits
Share-based payments
Total

2018
£m

11.2
8.9

20.1

2017
£m

10.6
5.5

16.1

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STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS

PARENT COMPANY BALANCE SHEET
As at 31 December 2018

Assets
Investment in subsidiary undertakings
Other receivables
Current tax assets
Derivative financial instruments
Financial investments
Cash and cash equivalents
Total assets

Equity
Shareholders’ equity
Tier 1 notes
Total equity

Liabilities
Subordinated liabilities
Borrowings
Derivative financial instruments
Trade and other payables
Deferred tax liabilities
Current tax liabilities
Total liabilities
Total equity and liabilities

Notes

2018
£m

2017
£m

2
3
4
5
6
7

10
11
5
12
4
4

3,119.0
548.3
–
1.4
5.1
236.1

3,909.9

3,099.1
613.5
16.1
1.0
5.2
209.3

3,944.2

3,205.8
346.5
3,552.3

3,257.5
346.5
3,604.0

253.0
100.7
1.4
1.7
0.6
0.2

252.7
84.5
1.0
1.4
0.6
–

357.6
3,909.9

340.2
3,944.2

The attached notes on pages 184 to 188 form an integral part of these separate financial statements.

The financial statements were approved by the Board of Directors and authorised for issue on 4 March 2019. They were signed
on its behalf by:

PENNY JAMES
CHIEF FINANCIAL OFFICER

Direct Line Insurance Group plc

Registration No. 02280426

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FINANCIALS V6.1

PARENT COMPANY STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2018

Profit for the year
Other comprehensive loss
Items that may be reclassified subsequently to income statement:

Fair value loss on fair value through other comprehensive income investments
Tax relating to items that may be reclassified
Other comprehensive loss for the year 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 2018

2018
£m

449.6

(0.1)
–

(0.1)
449.5

2017
£m

50.6

(0.4)
0.1

(0.3)
50.3

Share
capital
£m

Capital
reserves
£m

Share-based
payment
reserve
£m

Fair value
through other
comprehensive
income
revaluation
reserve
£m

Retained
earnings
£m

Shareholders’
equity
£m

Tier 1
notes
£m

Total
equity
£m

Balance at 1 January 2017

Total comprehensive income for the year

Dividends paid

Credit to equity for equity-settled share-based
payments

Shares distributed by employee trusts

Issue of Tier 1 notes (note 9)
Balance at 31 December 2017

Total comprehensive income for the year

Dividends and appropriations paid (note 13)

Credit to equity for equity-settled share-based
payments

Shares distributed by employee trusts
Balance at 31 December 2018

150.0 1,450.0
–
–

–
–

–
–
–

–
–
–
150.0 1,450.0
–
–

–
–

–
–
150.0

–
–
1,450.0

1.8
–
–

14.8
(19.8)
–
(3.2)
–
–

21.0
(18.4)
(0.6)

0.4 1,835.3 3,437.5
50.3
(0.3)
(225.3)
–

50.6
(225.3)

–
–
–

3,437.5
50.3
(225.3)

–
–
–

–
–
–
0.1 1,660.6
449.6
(0.1)
(503.8)
–

14.8
(19.8)
–
3,257.5
449.5
(503.8)

–
–
–
–
– 1,606.4

21.0
(18.4)
3,205.8

–
–
346.5
346.5
–
–

–
–
346.5

14.8
(19.8)
346.5
3,604.0
449.5
(503.8)

21.0
(18.4)
3,552.3

The attached notes on pages 184 to 188 form an integral part of these separate financial statements.

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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 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.

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 Company’s financial statements are prepared in accordance with Financial Reporting Standard FRS 101 ‘Reduced
Disclosure Framework’. In preparing these financial statements, the Company applies the recognition, measurement and
disclosure requirements of IFRSs issued by the IASB as adopted by the EU but makes amendments where necessary to comply
with the Companies Act 2006.

The Company has taken advantage of the following FRS 101 disclosure exemptions:

– FRS 101.8 (d): the requirements of IFRS 7 ‘Financial Instruments: Disclosures’ to make disclosures about financial instruments;

– FRS 101.8 (e): the disclosure requirements of IFRS13 ‘Fair Value Measurement’;

– FRS 101.8 (g): the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B, 38C, 38D, 40A, 40B, 40C, 40D, 111 and
134 – 136 of IAS 1 ‘Presentation of Financial Statements’ to produce a cash flow statement, a third balance sheet and to
make an explicit and unreserved statement of compliance with IFRSs;

– FRS 101.8 (h): the requirements of IAS 7 ‘Statements of Cash Flows’ to produce a cash flow statement and related notes;

– FRS 101.8 (i): the requirements of paragraphs 30 and 31 of IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and

Errors’ to include a list of new IFRSs that have been issued but that have yet to be applied; and

– FRS 101.8 (k): the requirements of IAS 24 ‘Related Party Disclosures’ to disclose related party transactions entered into

between two or more members of a group, provided that any subsidiary which is party to a transaction is wholly owned
by such a member.

1.2 Adoption of new and revised standards
The accounting policies used in the preparation of these separate financial statements are consistent with previous years, and the
accounting policies applied in the consolidated financial statements of Direct Line Insurance Group plc, except for the adoption
of IFRS 9 ‘Financial Instruments’ and the additional accounting policies specific to the separate financial statements of the
Company as set out below.

The Company has adopted IFRS 9 which became mandatory for the first time in 2018. IFRS 9 replaces IAS 39 ‘Financial
Instruments: Recognition and Measurement’, introducing new guidance on the classification and measurement of financial assets,
an expected credit loss impairment model, and new hedge accounting requirements.

The Company completed an impact assessment on transition to IFRS 9, including an assessment of its financial assets under the
new impairment model, and concluded there was no impact on the Company’s equity at 1 January 2018. The Company will
continue applying the hedge accounting requirements of IAS 39 as permitted under IFRS 9.

The Company assessed its business model for managing the financial assets held by the Company and classified its financial
assets into the appropriate IFRS 9 categories. The impact of the reclassification was as follows:

Financial asset

AFS debt securities

IAS 39

AFS

Measurement category

IFRS 9

Fair value through other comprehensive income

Loan to subsidiary undertakings

Amortised cost

Derivative financial instruments

Fair value through profit or loss

Cash and cash equivalents

Amortised cost

Carrying amount

Difference

IAS 39
£m

IFRS 9
£m

5.1
531.8
1.4
236.1

£m

–
–
–
–

UK sovereign debt securities were reclassified from AFS to fair value through other comprehensive income as the AFS category
has been removed under IFRS 9. This is appropriate as the Company’s business model is achieved by collecting contractual cash
flows and selling these investments, and contractual cash flows are solely payments of principal and interest. The treatment of
changes in fair value remain consistent and as a result there is no impact on equity. There is no difference in the carrying amount
of any financial assets under IAS 39 and IFRS 9. IFRS 9 accounting policies adopted in the period are presented in note 1.5.

1.3 Investment in subsidiaries
Investment in subsidiaries is stated at cost less any impairment.

1.4 Dividend income
Dividend income from investment in subsidiaries is recognised when the right to receive payment is established.

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FINANCIALS V6.1

1.5 Financial assets
Financial assets are classified at initial recognition and subsequently measured at amortised cost or fair value through other
comprehensive income. The classification of financial assets at initial recognition depends on the financial asset’s contractual
cash flow characteristics and the Company’s business model for managing them. The Company initially measures a financial
asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs.

Amortised cost
Assets which are held to collect contractual cash flows, and with contractual terms which give rise to cash flows which are
solely payments of principal and interest on the principal amount outstanding, are subsequently measured at amortised cost,
unless designated as fair value through profit or loss. Financial assets at amortised cost are subsequently measured using the
effective interest method and are subject to impairment. Gains and losses are recognised in the income statement when the
asset is derecognised, modified or impaired.

Fair value through other comprehensive income
Assets which are held both to collect contractual cash flows and to sell the financial asset, where the contractual terms of
the asset give rise to cash flows which are solely payments of principal and interest on the principal amount outstanding, are
measured at fair value through other comprehensive income, unless designated as fair value through profit or loss. Movements
in the carrying amount are taken through other comprehensive income, except for gains or losses recognised in the income
statement when the asset is derecognised, modified or impaired.

Impairment
On recognition of a financial asset measured at amortised cost or fair value through other comprehensive income, an expected
credit loss allowance is recognised by multiplying the financial asset’s gross carrying amount by the probability of default
multiplied by the loss given default.

At each balance sheet date, the Company assesses on a forward-looking basis, whether there is objective evidence that an
impairment loss on a financial asset or group of financial assets classified as held at amortised cost or fair value through other
comprehensive income, is expected. This assessment depends on whether there has been a deterioration in the instrument’s credit
quality since initial recognition. The Company measures the expected loss as the difference between the carrying amount of the
asset or group of assets including the allowance for expected losses, 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. The expected loss allowance is based on
assumptions about risk of default and expected loss rates. The Company uses judgement in making these assumptions and
selecting the inputs to the impairment calculation based on the credit quality and history of the financial asset or group of
financial assets, as well as existing market conditions and forward-looking expectations.

Impairment losses, including the expected credit allowance, 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 expected impairment allowance reduces, and this can be ascribed to an event after the
impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. A financial asset is written
off when there is no reasonable expectation of recovery.

Hedge accounting
The Company has utilised the transition for hedge accounting option in IFRS 9 to continue applying the hedge accounting
requirements of IAS 39.

2. Investment in subsidiary undertakings

At 1 January
Additional investment in subsidiary undertakings
Impairment of investment in subsidiary undertakings
At 31 December

2018
£m

3,099.1
20.9
(1.0)

3,119.0

2017
£m

3,084.3
14.8
–

3,099.1

The subsidiary undertakings of the Company are set out on page 186. 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.

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NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED

2. Investment in subsidiary undertakings continued

Name of subsidiary

Place of incorporation
and operation

Principal activity

United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom

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
Jersey
Churchill Insurance Company Limited1
United Kingdom
Direct Line Insurance Limited1
United Kingdom
DL Support Services India Private Limited5
India
DLG Legal Services Limited6
United Kingdom
DLG Pension Trustee Limited1
United Kingdom
Farmweb Limited1
United Kingdom
Green Flag Group Limited2
United Kingdom
Green Flag Holdings Limited1
United Kingdom
Green Flag Limited2
United Kingdom
Intergroup Assistance Services Limited1
United Kingdom
National Breakdown Recovery Club Limited1
United Kingdom
Nationwide Breakdown Recovery Services Limited1
United Kingdom
The National Insurance and Guarantee Corporation Limited1 United Kingdom
UKI Life Assurance Services Limited1
United Kingdom

Notes:

1. Registered office at: Churchill Court, Westmoreland Road, Bromley, BR1 1DP.

2. Registered office at: The Wharf, Neville Street, Leeds, LS1 4AZ.

3. U K Insurance Limited has a branch in the Republic of South Africa.

4. Registered office at: 22 Grenville Street, St Helier, JE4 8PX, Jersey.

Intermediate holding company
Management services
Non-trading company
Non-trading company
Motor vehicle repair services
Dormant7
Insurance intermediary services
General insurance

Dormant7
General insurance
Dormant7
Support and operational services
Legal services
Dormant7
Non-trading company
Intermediate holding company
Intermediate holding company
Breakdown recovery services
Non-trading company
Dormant7
Dormant7
Dormant7
Dormant7

5. Registered office at: 4 Aradhana Enclave, Sector 13, Rama Krishna Puram, New Delhi, South West Delhi, Delhi, 110066, India.

6. Registered office at: 42 The Headrow, Leeds, LS1 8HZ.

7. In accordance with the requirements under sections 394A and 448A of the Companies Act 2006, there is no requirement to audit a dormant company.

3. Other receivables

Loans to subsidiary undertakings1
Trade receivables due from subsidiary undertakings
Other debtors
Total

Current
Non-current
Total

Note:

2018
£m

531.9
15.1
1.3

548.3

48.3
500.0

548.3

2017
£m

612.2
–
1.3

613.5

113.5
500.0

613.5

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 6-month LIBOR plus 8.16%. All loans are neither past due nor impaired.

4. Current and deferred tax

Per balance sheet:
Current tax assets
Current tax liabilities
Deferred tax liabilities

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2018
£m

–
(0.2)
(0.6)

2017
£m

16.1
–
(0.6)

FINANCIALS V6.1

The table below analyses the major deferred tax liabilities recognised by the Company and movements thereon.

At 1 January 2017
Credit to the income statement
Credit to other comprehensive income
Other movements
At 31 December 2017 and 2018

5. Derivative financial instruments

Derivative assets
Designated as hedging instruments:

Foreign exchange contracts2

Total

Derivative liabilities
Designated as hedging instruments:

Foreign exchange contracts2

Total

Notes:

Fair value
through other
comprehensive
income
revaluation
reserve
£m

Provisions and
other temporary
differences
£m

(0.3)
0.4
–
(0.7)
(0.6)

(0.1)
–
0.1
–
–

Total
£m

(0.4)
0.4
0.1
(0.7)
(0.6)

Notional amount

Fair value Notional amount

Fair value

2018
£m

2017
£m

18.5
18.5

1.4
1.4

17.3
17.3

1.0
1.0

1. The derivative assets and liabilities are both classified as level 2 within the Group’s fair value hierarchy set out in note 40 of the consolidated financial statements.

2. The foreign exchange cash flow hedges have been entered into on behalf of the Group’s subsidiary companies.

6. Financial investments

Fair value through other comprehensive income debt securities1

Note:

2018
£m

5.1

2017
£m

5.2

1. The fair value through other comprehensive income debt securities are fixed interest UK sovereign debt classified as level 1 within the Group’s fair value hierarchy

which is 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.

8. Share capital and capital reserves

2018
£m

0.1
236.0

236.1

2017
£m

3.8
205.5

209.3

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.

9. Tier 1 notes

Full details of the Tier 1 notes of the Company are set out in note 31 to the consolidated financial statements.

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NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED

10. Subordinated liabilities

Subordinated guaranteed dated notes

2018
£m

253.0

2017
£m

252.7

The subordinated guaranteed dated notes with a nominal value of £500 million were issued on 27 April 2012 at a fixed rate
of 9.25% and 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 6-month LIBOR
plus 7.91%.

On 8 December 2017, the Company repurchased £250 million nominal value of subordinated guaranteed dated notes for a
purchase price of £330.1 million including accrued interest of £2.7 million and associated transaction costs of £0.6 million.

The Company has the option, in certain circumstances, to defer interest payments on the notes but to date has not exercised
this right.

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 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 aggregate fair value of subordinated guaranteed dated notes at 31 December 2018 was £297.8 million (2017:
£328.7 million).

11. Borrowings

Loans from fellow subsidiaries within the Group¹

Note:

2018
£m

100.7

2017
£m

84.5

1. Included in the above is a loan of £73.0 million (2017: £61.5 million) from UK Assistance Accident Repair Centres Limited. Other loans of £23.7 million from

fellow Group subsidiaries are repayable on demand and are subject to interest on outstanding balances based on the average 3-month LIBOR rate.

12. Trade and other payables

Payables to subsidiary undertakings
Payables to third parties
Total

13. Dividends

2018
£m

–
1.7
1.7

2017
£m

0.1
1.3
1.4

Full details of the dividends paid and proposed by the Company are set out in note 14 to the consolidated financial statements.

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 10 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.

17. Post balance sheet event

On 28 February 2019, the Board of U K Insurance Limited, a subsidiary undertaking of the Company, agreed to repay
£250 million of its £500 million subordinated loan to the Company. This transaction is expected to occur in March 2019.

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FINANCIALS V6.1

ADDITIONAL INFORMATION

Corporate website

Shareholder warning

Almost five thousand people contact the FCA about share
fraud each year – and victims lose an average of £20,000.

Fraudsters use persuasive and high-pressure tactics to lure
investors into scams. They may offer to sell shares that prove to
be worthless or non-existent. Or they can offer to buy shares at
an inflated price in return for you paying upfront. They promise
high profits. However, if you buy or sell shares in this way,
you will probably lose your money.

How to avoid share fraud
– Remember that FCA-authorised firms are unlikely to contact

you 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, and

– 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.

The Group’s corporate website is www.directlinegroup.co.uk.
It contains useful information for the Company’s investors and
shareholders. For example, it includes press releases, details of
forthcoming events, essential shareholder information, a dividend
history, a financial calendar, and details of the Company’s
AGM. You can also subscribe to email news alerts.

Market

The Company has a premium listing on the UK Listing Authority’s
Official List. The Company’s Ordinary Shares (EPIC: DLG) are
admitted to trading on the London Stock Exchange.

Share ownership

Share capital
You can find details of the Company’s share capital in note 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.

To access information, the website requires shareholders to
quote their shareholder reference number. Shareholders
can find this number on their share certificates.

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Tips on protecting your shares

Dividend tax allowance

From April 2018, the dividend tax-free allowance was
reduced from £5,000 to £2,000 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

2019

Date

05 March
04 April

05 April

24 April

08 May1

09 May
16 May

31 July1
08 August1

09 August1
15 August1

06 September1
05 November1

Event

Preliminary Results 2018 announcement
“Ex-dividend” date for 2018 final
dividend and special interim dividend
Record date for 2018 final dividend
and special interim dividend
Final date for election under the
Dividend Reinvestment Plan
Trading update for the first quarter
of 2019
Annual General Meeting
Payment date for 2018 final dividend
and special interim dividend
Half Year Report 2019
‘Ex-dividend’ date for 2019 interim
dividend
Record date for 2019 interim dividend
Final date for election under the
Dividend Reinvestment plan
Payment date for 2019 interim dividend
Trading update for the third quarter
of 2019

Annual General Meeting

The 2019 AGM will be held on 9 May 2019 at the offices of
Deloitte LLP, 2 New Street Square, London EC4A 3BZ, 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.

– 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; and

– 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, and

– 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.

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ADD INFO V5.2

GLOSSARY AND APPENDICES

Term

Definition and explanation

Actuarial best estimate
(“ABE”)

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.
This incentivises the performance of Executive Directors 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 139.

Annual Incentive Plan
(“AIP”)
Available-for-sale
(“AFS”) investment
Average written premium Average written premium is the total written premium at inception divided by the number of policies.
Bootstrapping

Buy-As-You-Earn Plan

Capital
Claims frequency
Claims handling provision
(provision for losses and
loss-adjustment expense)
Clawback

Combined operating
ratio (“COR”)

Commission expenses
Commission ratio
Company
Current-year attritional
loss ratio
Deferred Annual
Incentive Plan (“DAIP”)

Direct own brands

Earnings per share

Employee Representative
Body
Expense ratio
Finance costs
Financial Conduct
Authority (“FCA”)
Financial Reporting
Council
Gross written premium
Group
Incurred but not reported
(“IBNR”)
In-force policies

Insurance liabilities

International Accounting
Standards Board (“IASB”)
Investment income yield

A statistical sampling technique used to estimate reserve variability around the Actuarial Best Estimate
(“ABE”). Results produced from bootstrapping historical data are used to set and inform the level of
margin incorporated in the management best estimate (“MBE”).
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 number of claims divided by the number of policies per year.
Funds the Group sets aside to meet the estimated cost of settling 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 for equity-settled
share-based payments.
The sum of the loss, commission and expense ratios. The ratio measures the amount of claims costs,
commission and operating expenses, compared to net earned premium generated. A ratio of less
than 100% indicates profitable underwriting. Normalised combined operating ratio adjusts loss
and commission ratios for a normal level of expected major weather events in the period.
Payments to brokers, partners and price comparison websites for generating business.
The ratio of commission expense divided by net earned premium.
Direct Line Insurance Group plc (the “Company”).
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.
For Executive Directors and certain members of senior management, 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.
Direct own brands include Home and Motor under the Direct Line, Churchill and Privilege brands,
Rescue under the Green Flag brand and Commercial under the Direct Line for Business brand.
The amount of the Group’s profit after deduction of the Tier 1 coupon payments 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.

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.
Direct Line Insurance Group plc and its subsidiaries (“Direct Line Group” or the “Group”).
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.
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.
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.
The income earned from the investment portfolio, recognised through the income statement during
the period divided by the average assets under management (“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. (See Appendix A – APM from page 194).

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Term

Definition and explanation

Investment return

Investment return yield

Leverage

Long-Term Incentive Plan
(“LTIP”)
Loss ratio
Malus

Management’s best
estimate (“MBE”)
Net asset value

Net claims

Net earned premium

Net investment
income yield
Ogden discount rate

Operating profit

Own Risk and Solvency
Assessment (“ORSA”)
Periodic payment order
(“PPO”)

Prudential Regulation
Authority (“PRA”)
Reinsurance

Reserves
Restructuring costs

Return on equity

Return on tangible equity
(“RoTE”)

Run-off

Solvency II

Solvency capital ratio
Total Shareholder Return
(“TSR”)
Underwriting result
profit / (loss)

The investment return earned from the investment portfolio, including unrealised and realised gains
and losses, impairments, and fair value adjustments.
Investment return divided by the average AUM. The average AUM derives from the period’s opening
and closing balances. (See Appendix A – APM from page 194).
Tier 1 notes and financial debt (subordinated guaranteed dated notes) as a percentage of total
capital employed.
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.
Net insurance claims divided by net earned premium.
An arrangement that permits unvested remuneration awards to be forfeited, when the Company
considers it appropriate.
These reserves are based on management’s best estimate, which includes a prudence margin that
exceeds the internal ABE.
The net asset value of the Group is calculated by subtracting total liabilities (including Tier 1 notes)
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 net investment income yield is calculated in the same way as investment income yield but
includes the cost of hedging. (See Appendix A - APM from page 194).
The discount rate set by the Lord Chancellor and used by courts to calculate lump sum awards in
bodily injury cases.
The pre-tax profit that the Group’s activities generate, including insurance and investment activity,
but excluding finance costs.
A forward-looking assessment of the Group’s risks and associated capital requirements, over the
business planning period.
These are claims payments as awarded under the Courts Act 2003. PPOs are used to settle some
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.
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.
Restructuring costs are costs incurred in respect of the business activities where the Group has
a constructive obligation to restructure its activities.
Return on equity is calculated by dividing the profit attributable to the owners of the Company
after deduction of the Tier 1 coupon payments by average shareholders’ equity for the period.
Return on tangible equity is adjusted profit after tax divided by the Group’s average shareholders’
equity, less goodwill and other intangible assets. For 2018 profit after tax is adjusted to include
the Tier 1 coupon payments dividend and for 2017 profit after tax is adjusted to exclude one-off
costs in relation to the buy-back of subordinated liabilities. It is stated after charging tax using the
UK standard tax rate of 19% (2017: 19.25%). The profit after tax for comparative periods prior
to 2017 is adjusted to exclude operating profit from the Run-off segment and restructuring and
other one-off costs. (See Appendix A – APM from page 194).
Refers to the lines of business no longer underwritten by the Group including Tesco Motor and
Personal Lines Broker.
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.
The ratio of solvency II own funds to the solvency capital requirement.
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.

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GLOSSARY & APPENDICES V5.2

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 191 to 192 and reconciled to the most directly
reconcilable line items in the financial statements and notes. Note 4 on page 158 of the consolidated financial statements
presents a reconciliation of the Group’s business activities on a segmental basis to the consolidated income statement. All note
references in the table below are to the notes to the consolidated financial statements on pages 136 to 181.

In 2018, the Group ceased presenting APMs for the following measures:

– adjusted diluted earnings per share;

– operating profit from Ongoing operations; and

– adjusted profit before tax and after tax from Ongoing operations.

These APMs no longer provide relevant information, as 2018 results are based on total Group operations including the Run-off
segment and restructuring costs which are included in the Motor segment.

Definition and/or reconciliation

Rationale for APM

Group APM

Current-year
attritional loss
ratio
Combined
operating ratio

Closest
equivalent
IFRS measure

Net
insurance
claims
Operating
profit

Current-year attritional loss ratio is defined in the glossary
on page 191 and is reconciled to loss ratio (discussed
below) on page 158.
Combined operating ratio is defined in the glossary on
page 191.

Investment
income yield

Investment
income

Investment income yield is defined in the glossary on page
191 and is reconciled on page 194.

Investment
return yield

Investment
return

Investment return yield is defined in the glossary on page
192 and is reconciled on page 194.

Loss ratio

Net investment
income yield

Net
insurance
claims
Investment
income

Loss ratio is defined in the glossary on page 192 and is
reconciled in note 4.

Net investment income yield is defined in the glossary on
page 192 and is reconciled on page 194.

Return on
tangible equity

Return on
Equity

Return on tangible equity is defined in the glossary on page
192 and is reconciled on page194.

Tangible equity Equity

Tangible equity is defined as equity (excluding Tier 1 notes)
less intangible assets within the balance sheet and is
reconciled on page 165.

Tangible net
assets per share

Net assets
per share

Tangible net assets per share is defined as tangible equity
(as above) expressed as a value per share and is reconciled
in note 16 on page 165.

Expresses claims performance in the current
accident year in relation to net earned premium.

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 adjusted for portfolio hedging instruments.
Expresses a relationship between the investment
return and the associated opening and closing
assets net of any associated liabilities.
Expresses claims performance in relation to net
earned premium.

Expresses a relationship between the investment
income and the associated opening and closing
assets adjusted for portfolio hedging instruments.
This shows performance against a measure of
equity that is more easily comparable to that of
other companies.
This shows the equity excluding Tier 1 notes
and intangible assets for comparability with
companies who have not acquired businesses
or capitalised intangible assets.
This shows the equity excluding Tier 1 notes and
intangible assets per share for comparability with
companies who have not acquired businesses or
capitalised intangible assets.

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GLOSSARY AND APPENDICES CONTINUED

Appendix A – Alternative performance measures continued

Additionally, the current-year attritional loss ratio within the analysis by division section has also been identified as an alternative
performance measure, similarly reconciled to the financial statements and notes on page 29 and defined in the glossary
on page 191.

Return on tangible equity1

Operating profit
Finance costs
Profit before tax
Finance costs adjustment for one-off subordinated debt buy back
Coupon payments in respect of Tier 1 notes
Adjusted profit before tax
Tax charge
Tax charge (using the 2017 UK standard tax rate of 19.25%)
Adjusted profit after tax

Opening shareholders’ equity
Opening goodwill and other intangible assets
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

Investment income and return yields1

Investment income
Hedging to a sterling floating rate basis5
Net investment income
Net realised and unrealised gains excluding hedging
Investment return

Opening investment property
Opening financial investments
Opening cash and cash equivalents
Opening borrowings
Opening derivatives asset / (liability)6
Opening investment holdings
Closing investment property
Closing financial investments
Closing cash and cash equivalents
Closing borrowings
Closing derivatives asset6
Closing investment holdings
Average investment holdings
Investment income yield
Net investment income yield
Investment return yield

Notes:

1. See glossary on pages 191 and 192 for definitions.

20182
£m

601.7
(19.1)

582.6
–
(16.6)
566.0
(108.9)
–

457.1

2,715.1
(471.1)
2,244.0
2,573.1
(566.8)
2,006.3

2,125.2

21.5%

2018
£m

159.2
(30.8)

128.4
26.2

154.6

309.3
5,040.4
1,358.6
(54.1)
55.1
6,709.3

322.1
4,737.8
1,154.4
(62.0)
11.8
6,164.1

6,436.7

2.5%
2.0%
2.4%

20172
£m

642.8
(103.8)

539.0
66.1
–
605.1
–
(116.5)

488.6

2,521.5
(508.9)
2,012.6
2,715.1
(471.1)

2,244.0

2,128.3

23.0%

2017
£m

167.1
(27.0)

140.1
35.3

175.4

329.0
5,147.0
1,166.1
(55.3)
(5.8)
6,581.0

309.3
5,040.4
1,358.6
(54.1)
55.1
6,709.3

6,645.2

2.5%
2.1%
2.6%

Notes4

6
6

19
26
27
27

2. Results for year ended 31 December 2018 are based on total Group operations including the restructuring costs and Run-off segment. Comparative data has
been re-presented accordingly to include the restructuring costs and Run-off profits in the 2017 operating profit. The adjusted profit after tax reported in 2017
was £462.9 million and the return on tangible equity was 21.7%.

3. Mean average of opening and closing balances.

4. See notes to the consolidated financial statements.

5. Includes net realised and unrealised gains / (losses) of derivatives in relation to AUM.

6. See note 1 on page 36.

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GLOSSARY & APPENDICES V5.2

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”, “ambition”, “anticipates”, “aspire”,
“believes”, “continue”, “could”, “estimates”, “expects”,
“guidance”, “intends”, “may”, “mission”, “outlook”, “over the
medium term”, “plans”, “predicts”, “projects”, “propositions”,
“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 ratio, the Group’s combined operating
ratio, prior-year reserve releases, cost reduction, reductions in
expense and commission ratios, investment income yield, net
realised and unrealised gains 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 contained in this
document, for example directly or indirectly as a result of, but
not limited to, United Kingdom (“UK”) domestic and global
economic business conditions, the outcome of discussions
within the UK parliament and discussions between the UK and
the European Union (“EU”) regarding the manner and terms on
which, if any, the UK leaves the EU (usually called “Brexit”)
and the terms in due course of any future trading relationship
between the UK and the EU, market-related risks such as
fluctuations in interest rates and exchange rates, the policies
and actions of regulatory authorities (including changes related
to capital and solvency requirements or the Ogden discount
rate), the impact of competition, currency changes, inflation
and deflation, the timing impact and other uncertainties of
future acquisitions, disposals, joint ventures or combinations
within relevant industries, as well as the impact of tax and
other legislation and other regulation in the jurisdictions in
which the Group and its affiliates operate. In addition, even
if the Group’s actual results of operations, financial condition
and the development of the business sector in which the
Group operates are consistent with the forward-looking
statements contained in this document, those results or
developments may not be indicative of results or
developments in subsequent periods.

The forward-looking statements contained in this document
reflect knowledge and information available as of the date
of preparation of this document. The Group and the Directors
expressly disclaim any obligations or undertaking to update
or revise publicly any forward-looking statements, whether as
a result of new information, future events or otherwise, unless
required to do so by applicable law or regulation. Nothing
in this document should be construed as a profit forecast

Neither the content of Direct Line Group’s website nor the
content of any other website accessible from hyperlinks on
the Group’s website is incorporated into, or forms part of,
this document.

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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 7489 1188
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.co.uk

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

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Designed and produced by Black Sun Plc

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Registered in England & Wales No. 02280426
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