Insurance
that is personal,
inclusive and
a force for good
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Annual Report & Accounts 2020
2020 highlights
Contents
Strategic report
Introduction
2020 highlights timeline
Investment case
Business model
Chair’s statement
Section 172(1) statement
Chief Executive Officer’s review
Market overview
Our key performance indicators
Finance review
Operating review
Sustainability
Streamlined Energy and Carbon
Reporting
Non-financial information
statement
Risk management
Governance
Chair’s introduction
Board of Directors
Executive Committee
Corporate governance report
Committee reports
Directors’ Remuneration Report
Directors’ report
Financial Statements
Contents
Independent Auditor’s report
Consolidated Financial Statements
Notes to the Consolidated
Financial Statements
Parent Company Financial
Statements
Notes to the Parent Company
Financial Statements
Other information
Additional information
Glossary and Appendices
Forward-looking Statements
Disclaimer
Contact information
1
2
4
6
8
10
11
16
18
20
36
44
68
68
69
76
78
81
83
97
113
140
145
146
157
162
215
217
222
224
231
232
Profit before
tax
£451.4m
(2019: £509.7m)
Return on
tangible equity1
19.9%
(2019: 20.8%)
Combined
operating ratio1,2
91.0%
(2019: 92.2%)
Solvency
capital ratio1,3
191%
(2019: 189% adjusted4)
Operating
profit1
Dividends and
capital returns5
£522.1m
(2019: £546.9m)
£595.2m
(Includes £195.5m special dividend
to replace the cancelled 2019
final dividend)
(2019: £128.6m adjusted4)
Customers
People
450k+
Customers benefited
from support measures
Society
£7m+
Donated to charities
and good causes
£3.8m
Invested in free shares
for our people
Planet
100%
Carbon neutral
via offsetting
Notes:
1. See glossary on pages 224 to 226 for definitions and Appendix A – Alternative
performance measures on pages 227 to 230 for reconciliation to financial
statement line items.
2. 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 224 for definitions.
3. Estimates based on the Group’s Solvency II partial internal model.
4. The 2019 comparatives for dividends and capital returns and the solvency capital
ratio have been adjusted to remove the cancelled 2019 final dividend and £120
million of share buyback. (The reported numbers were solvency capital ratio of
165% and capital returns of £447.0 million). See page 18 for further details.
5. See page 28 for the dividend policy.
Introduction
Our vision is to create a world where
insurance is personal, inclusive and a force
for good.
To deliver this we need to build an insurance
company of the future with technology and
data at its core, adapting to an ever-changing
world, delivering more for customers at speed.
As we navigated the challenges that 2020
presented, we focused on supporting our
customers, the wellbeing of our people,
contributing to society and stepping up
our plans to tackle climate change.
We believe embracing sustainable practices
creates a better corporate culture, more
reliable products and brings long-term
rewards for our shareholders.
For more information please visit
www.directlinegroup.co.uk
www.directlinegroup.co.uk
1
Strategic Report Introduction
2020 Highlights
Claims teams take
over 6,500 calls from
customers helping to
support them following
Storm Ciara
Sign Social
Mobility Pledge
New ad campaign
launches for
Direct Line
£3.5 million Community
Fund launches,
distributing £2 million
in two weeks to charities
supporting the most vulnerable
£2m
distributed in
two weeks
Our Finance team delivers
a new cloud-based Oracle
accounting ledger and
claims payment system
January
March
May
Privilege offers full end-to-
end motor insurance service
on new platform, for both
new business and renewal
customers
Direct Line for Business
rolls out new Van and
Tradesperson products
on its digital platform
Covid-19: The Group
moves the majority
of its operations to
homeworking,
guaranteeing usual pay
regardless of whether
individual working
practices are affected
Green Flag refreshes
"Green Flag Rescue Me"
app allowing more claims
to be serviced digitally
Our Travel team continues
to settle claims for over
26,000 customers and
repatriate over 900
customers stranded
abroad
900+
travel insurance
customers
repatriated
2
2020 Darwin live on four price
comparison websites
(“PCWs”)
Migrates to a new
mainframe platform
as part of the
Group’s technology
transformation
Group becomes a 100%
carbon-neutral business
by investing in high social
impact projects to offset our
Scope 1, 2 and 31 emissions
Launch a new counter
fraud operating system
Group successfully
transitions a number
of business areas to
agile ways of working
We’re reimagining how we work,
to be more agile. Empowering
you to transform what we do.
450k+
customers benefit from
support measures2
August
October
December
Group announces intention
to set Science-Based
Targets to strengthen
our disclosures on
tackling emissions
Strong Churchill
new business growth,
increased share of new
business on PCWs across
Motor and Home
Group announces new
diversity and inclusion
targets for improving
Black, Asian and Minority
Ethnic representation in
senior leadership roles
New “Mileage
MoneyBack”
proposition offers
Direct Line Motor
customers
a flexible
approach
to manage
their car
insurance
Task Force on Climate-
related Financial
Disclosures: Issue
our first comprehensive
disclosure on how
the Group approaches
climate change risks and
opportunities
Notes:
1. Scope 3 emissions which are under our direct control
– see page 61.
2. Payment deferrals, mileage refunds for motor customers,
waiving cancellation fees and reducing cover.
Find out more about our
plans for 2021 in the Chief
Executive Officer’s Review
on pages 11 to 17
3
Strategic Report Investment case
Transforming to drive competitiveness
Delivering strong
shareholder returns
Diversified business
model
We have a track record of delivering strong
returns to shareholders, having distributed
£1.2 billion in dividends over the past three
years. This, together with our share price
performance, has delivered an attractive
total shareholder return.
As a UK-focused company, we have the ability
to be a deep specialist in our chosen markets
and our range of channels and products gives
us real diversification and scale.
Total shareholder return (%)
This represents the cumulative dividends paid and
change in share price over a three-year period
Gross written premiums (£m)
2020: £3,180.4m
110
100
567.8
2019: £3,203.1m
417.8
1,616.9
528.9
90
1 Jan
2018
31 Dec
2018
31 Dec
2019
31 Dec
2020
577.9
DLG
FTSE 350 (excluding investment trusts)
436.0
1,651.6
586.6
£1.2bn
Dividends paid to shareholders
in the last three years
Operating profit (£m)
2020: £522.1m
6.8
50.4
101.4
2019: £546.9m
54.6
39.1
363.5
150.6
302.6
Motor
Home
Rescue and other personal lines
Commercial
4
Direct Line Group Annual Report and Accounts 2020
Transforming to drive
competitiveness
Improving the sustainability
of our earnings
We are transforming our technology and
changing the way we work to increase the
competitiveness of our business, with the
aim of improving the quality of our earnings,
with a greater proportion coming from
current-year business.
In 2020 we made good progress against our
targets to improve the sustainability of our
earnings, growing current-year contribution
to operating profit and delivering a strong
combined operating ratio. Our focus on
supporting our customers, our people and
wider society led to an increase in costs in 2020.
Best at direct
To be the UK’s leading insurer, because we anticipate our
customers’ needs and develop services and products
they want to buy.
Win on price comparison websites (PCWs)
To deliver a step change in our pricing and trading
capability so that our leading PCW brands win
customers from our competitors.
Extend our reach
To utilise the potential of our investments and
capabilities to win more customers through acquisitions
and brand partnerships.
Technical edge
To use our data, scale, skill and insight across claims,
pricing and underwriting to deliver value to customers.
Costs
Target: Expense ratio1,2 of 20% in 2023
2020:
24.5%
Normalised current-year operating profit1,3
Target: At least 50% contribution to total operating profit
by 2021
2020:
65.4%
Following an elevated contribution in 2020 due to lower
claims frequency associated with Covid-19 disruption
Normalised combined operating ratio (“COR”)1,4
Target: Between 93-95% throughout the medium term
Nimble and cost efficient
To transform into an agile, cost effective business to drive
efficiency and simplicity for us and our customers.
2020:
91.7%
Great people
A home for empowered people who celebrate difference,
and challenge the status quo to deliver for our customers.
See page 12 for more information
Notes:
Return on tangible equity (“RoTE”)1
Target: At least 15% per annum over the long term
2020:
19.9%
1. See glossary on pages 224 to 226 for definitions and Appendix A – Alternative performance measures on pages 227 to 230 for
reconciliation to financial statement line items.
2. Applies to operating expenses excluding restructuring and one-off costs.
3. Normalised for weather and changes to the Ogden discount rate. Reported contribution 66.7%.
4. Normalised for weather and changes to the Ogden discount rate. Reported COR 91.0%.
www.directlinegroup.co.uk
5
Strategic Report Business model
Protecting our
customers
We help people carry on with their
lives, giving them peace of mind now
and in the future.
Across the business we have a number
of real strengths and our customers
and our people are at the heart of
our business.
Giving customers a choice
of brands and channels
We know how to build brand value and
have some of the most loved brands
in the UK which are available direct,
through PCWs, or via specialist brokers.
We also partner with some of the UK’s
leading banks.
Motor
Home
We are Britain’s leading
personal motor insurer
measured by in-force policies1,
mainly represented through
our well-known brands Direct
Line, Churchill, Privilege, our
Darwin brand, 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 partner
NatWest Group
Rescue and
other personal
lines
We are one of the leading
providers of rescue, travel
and pet insurance in the UK.
Green Flag is the third largest
roadside recovery provider2.
We are also the second
largest travel and the
fourth largest pet insurer3
Commercial
We protect commercial
businesses through our brands,
including NIG and Direct Line
for Business
DLG PARTNERSHIPS
Notes:
1.
Includes Direct Line, Churchill, Privilege, Darwin and partner brands: RBS, NatWest. © Ipsos MORI 2021, Financial Research Survey
(FRS), six months ended January 2021. c. 14,000 adults (aged 16+) surveyed across Great Britain. Interviews were conducted online and
by telephone, and weighted to reflect the overall profile of the adult population.
2. Mintel Vehicle Recovery – September 2020.
3. Mintel Pet Insurance – August 2020 & Mintel Travel Insurance – February 2021.
6
Direct Line Group Annual Report and Accounts 2020
This is how we
create value
We have a number of
strengths, from strong
brands to rich data, to
leading claims skills, that are
hard to replicate and provide
real long-term value.
A triple win
We aim to deliver a
sustainable and thriving
business that generates
attractive shareholder
returns.
Premiums
Our diversified model enables us
to offer a range of products across
a range of distribution channels.
Investment return
Our diversified investment portfolio
provides additional income whilst
also ensuring we can support our
long-term claim commitments.
See page 33.
Accident repair centres
We own 21 accident repair centres,
the largest owned network of any
insurer, delivering lower repair costs
and providing data-led insight
enabling us to react to emerging
trends and helping inform pricing.
Claims management
We have deep specialism in claims
handling, including market-leading
counter-fraud capability.
A win for customers
by sharing real value with them.
Our customers
We earn our customers’ trust by
demonstrating how we are acting
in their best interests.
450k+
Customers benefited
from support measures
A win for our people and shareholders
who are invested in our success.
Our people
We encourage a culture that celebrates
difference and empowers people
so that they can thrive.
£3.8m
Invested in free
shares for our people
Shareholders
We have a track record of delivering
strong returns to shareholders.
This, together with our share price
performance, has delivered an
attractive total shareholder return.
£1.2bn
Paid in dividends
over the last three
years
Costs
We invest in market-leading brands
and strong customer service, whilst
targeting cost reduction measures in
order to increase our competitiveness.
A win for society and the planet
because our long-term success is intrinsically linked to the
success of the community and environment around us.
Tax
We manage our tax obligations
responsibly contributing either
directly or indirectly £888 million
in tax to the Exchequer this year.
See more on page 35.
Society
We use our expertise to improve
outcomes for society and the
communities we serve.
£7m+
Donated to charities
and good causes
The planet
We protect our business from the
impact of climate change and give
back more to the planet than we
take out.
100%
Carbon neutral
via offsetting
www.directlinegroup.co.uk
7
Strategic Report Chair’s statement
Danuta Gray
Chair of the Board
Working for all
our stakeholders
In 2020, our resilience and agility enabled us to support
our customers and communities, distribute surplus capital
and progress building the capability designed to deliver
our sustainable strategy.
I would like to start my first statement as Chair by
recognising the efforts of all my Direct Line Group
(the “Group”) colleagues in navigating the turbulent
conditions that we experienced in 2020.
The resilience and adaptability demonstrated by our
people has been commendable. The Covid-19 pandemic
has affected all our stakeholders and I am proud of
the senior leadership team for responding swiftly and
effectively and for addressing the rapidly changing needs
of the Group’s stakeholders, including our customers,
our workforce and the communities we serve.
In the extraordinary market conditions caused by
lockdowns and market uncertainty related to Brexit
and other global economic factors, our disciplined
underwriting model produced a combined operating ratio
of 91.0% (2019: 92.2%). Profit before tax was down 11.4% to
£451.4 million (2019: £509.7 million) but our strong capital
position has enabled us to increase our final dividend to
14.7 pence and commence a share buyback of up to
£100 million. This is on top of the £30 million share buyback
we made in March 2020 before we prudently cancelled the
programme against a background of market volatility.
New leadership and Board changes
I am delighted to have been chosen by my fellow
Directors to succeed Mike Biggs as Chair following his
retirement from office in August 2020. It was a pleasure
to have served with him as an independent Non-Executive
Director and, on behalf of the Board, I extend our thanks
to Mike for his exemplary stewardship of the Board as
Chair since before the Company separated from the
Royal Bank of Scotland and listed on the London Stock
Exchange in 2012. Mike formed the Board, led it through
the IPO and was instrumental in defining the Group’s
enviable culture and ambition. We are indebted to him
for his wisdom, for the contribution of his deep experience,
honed over four decades in the financial services sector,
and for his legacy of inclusivity and solidarity in the Board’s
culture. The selection process which led to my appointment
as Chair is summarised in the Governance report on
page 91.
“The resilience and adaptability demonstrated
by our people has been commendable.”
We announced in December that Jane Hanson, who was
appointed as an independent Non-Executive Director in
December 2011, will be stepping down from the Board at
the conclusion of the Annual General Meeting in May 2021.
On behalf of the Board, I would like to thank Jane for her
energetic leadership of the Board Risk Committee and for
her hard work as a member of the Audit, Investment and
Sustainability Committees.
Adrian Joseph OBE joined the Board as an independent
Non-Executive Director on 1 January 2021. As the business
is transformed into a technology- and data-led company,
with the customer at its heart, Adrian’s deep experience of
digital, artificial intelligence and data will be an important
addition to the Board’s capabilities.
We are committed to our diversity and inclusion agenda,
including our target of increasing female representation
in our senior leadership team. Details about the progress
we are making on Board diversity appear in our
Nomination and Governance Committee report on pages
106 to 108 and further information about changes to the
Board and its Committees is set out on page 91.
8
Direct Line Group Annual Report and Accounts 2020
Working for all
our stakeholders
Strategy
Our vision is to create a world where insurance is personal,
inclusive and a force for good. Our purpose is to help
people carry on with their lives, giving them peace of mind
now and in the future. We have worked exceptionally hard
to deliver against that purpose throughout the
challenging events of 2020.
Linking remuneration to performance
We remain focused on ensuring that executive pay is
aligned with the Group’s strategy of targeting sustainable
shareholder and customer value, that it reflects investor
experience and, particularly in respect of 2020, that it
reflects the way in which the business has interacted
with its customers, its people and its communities.
A significant proportion of executive remuneration is
delivered through shares and shareholding requirements
and our incentive schemes’ performance measures are
aligned with the long-term performance measures
considered important by investors.
“We have responded with sensitivity to the
huge disruption that Covid-19 has caused to
many of our customers.”
The Group’s share price on 31 December 2020 was
319.0 pence (2019: 312.5 pence). Total shareholder return
(“TSR”), which includes dividend payments, increased by
9.0 percentage points for the year (2019: 7.0 percentage
point increase). During 2020, the Group’s share price grew
by 2.1% (2019: 1.9% decrease), reflecting increased investor
confidence following the Capital Markets Day at the end
of 2019 and the delivery of strong financial results in
March 2020. This was partially offset by concerns over
margin contraction in Motor and Home following the
publication of the FCA’s Pricing Practices Report (“PPR”)
which put pressure on UK Personal Lines stocks.
In April 2020, the Group took the difficult decision to
cancel the 2019 final dividend of 14.4 pence and the
£150 million share buyback programme, in recognition
of heightened uncertainty in the macroeconomic
environment due to Covid-19, although its solvency
position was strong. At the time of the interim results in
August 2020, the Group’s financial resilience in the face of
Covid-19 enabled it to declare a regular interim dividend
and catch-up on the cancelled 2019 final dividend. We are
grateful to our shareholders for their understanding
during this challenging period.
Over the past three years, the Group has delivered a TSR
of 7.9% compared to the FTSE 350 (excluding investment
trusts) reduction of 5.0%, having returned £1.2 billion to
shareholders during the period.
More information on the Group’s remuneration policy and
share awards is disclosed in the Directors’ remuneration
report on pages 113 to 139.
Our strategic objectives aim to ensure that we build
technological and organisational capability to continue
providing products which meet our customers’ changing
needs and are available through multiple channels, to
continue providing outstanding customer service and
value for money, to create value for our investors, to
support our communities and to protect the environment.
Dividend and capital management
The Group’s solvency capital ratio as at 31 December 2020,
prior to any proposed dividends or incremental capital
returns, was 213%.The Board has recommended a final
dividend of 14.7 pence per share, an increase of 2.1% on
the special interim dividend of 14.4 pence announced
with our interim results, which reflected a full catch up
of the cancelled 2019 final dividend.
Reflecting the strength of the Group’s capital position,
and in line with our dividend policy to return capital
to shareholders which is expected to be surplus to the
Group’s requirements for a prolonged period, the Group
intends to commence a share buyback programme.
The Board has approved a share buyback programme
of up to £100 million, with an initial tranche of up to
£50 million expected to be completed by the time of
the half-year results.
After the proposed final dividend and £100 million share
buyback, the estimated solvency capital ratio was 191%
as at 31 December 2020. The Group has outstanding Tier 2
debt issued in 2012 with nominal value of £250 million and
a first call date during the first half of 2022. Excluding this
debt, the Group’s solvency ratio after the proposed final
dividend and share buyback would be 172%. In February
2021, the Group acquired the head lease of its Bromley
office site, which reduced the Group’s coverage ratio by
an additional 6 percentage points.
Assuming a return to more normal circumstances, the
Group intends to move towards the middle of its risk
appetite range of 140% to 180% of its solvency capital
requirement, consistent with its previously stated target.
Our customers
Customer experience is at the heart of everything we do,
and it is the central element that connects all our people
regardless of role. We recognise that the Covid-19 pandemic
has had a huge, in some cases devastating, effect on many
of our customers and we have sought to respond with
sensitivity to customers whose travel plans have been
disrupted, who find themselves under financial strain, or
who have experienced bereavement. The Board oversees
the Group’s conduct, aiming to ensure that the Group acts
in our customers’ best interests and that there is an active
and constructive dialogue with its insurance regulators on
customer conduct matters.
www.directlinegroup.co.uk
9
Strategic Report Chair’s statement continued
Sustainability and culture
In December 2020, we published our first Task Force on
Climate-related Financial Disclosures Report and our
first Sustainability Report. These set out the progress
the Group has made against its Environment, Social
and Governance agenda, including the Group’s intention
to set Science Based Targets which will strengthen our
disclosures across Scope 1, Scope 2 and Scope 3 emissions,
as well as the actions we took in response to the Covid-19
pandemic to support our people, customers and
communities. For definitions of terms used, please see
the glossary on pages 224 to 226.
Climate-related risks and opportunities have grown in
importance for us as a business. As an insurance company,
understanding and managing risk is of fundamental
importance, and we recognise that climate change poses
material long-term risks to the business.
We are embracing the sustainable practices that we
believe underpin a better corporate culture, offering
products that meet our customers’ needs and providing
greater long-term sustainability for investors.
The Board believes that working for all our stakeholders
is the foundation needed for delivering long-term
sustainability. The Board recognises the importance of
setting the tone of the Group’s culture and embedding it
throughout the organisation. More information about this
can be found in the Governance introduction on page 76.
In November 2019, we set out our vision for building a
world where insurance is personal, inclusive and a force
for good. At that time, we could not have anticipated
the extraordinary events of 2020 and now more than ever,
it is essential that we live up to that ambition and play
our part in supporting the communities we serve. The DLG
Community Fund of £3.5 million is being used to support
the communities where our largest sites are based as well
as several national charities.
Our People
We pride ourselves in having an empowering culture that
celebrates difference and authenticity, and encourages
each colleague to bring their whole self to work. The
Group’s success and resilience is due in no small part to
the contribution of its people. In a year which could have
produced very different outcomes, the Board and I are
grateful for the hard work, initiative and commitment of
our people, who have continued to live the Group’s values
and to demonstrate dedication to serving our customers.
I would also like to thank each member of the Board for
their significant contribution, commitment and service
and I look forward to my first full year as Chair of the Board
working with them in supporting and encouraging our
management team in the execution of the Group’s
ambitious strategy.
DANUTA GRAY
Chair of the Board
10
Direct Line Group Annual Report and Accounts 2020
Section 172(1) statement
Direct Line Group is a leading motor, home and
commercial insurer which depends on its reputation
for high standards of business conduct and on the trust
and confidence of its stakeholders to operate sustainably
in the long term. The Group seeks to put its customers’
best interests first, continually invests in and engages
with its employees, supports the communities in which
it operates and strives to generate value for shareholders.
The Directors of Direct Line Insurance Group plc
(the “Company”) have been subject to the duties
codified in law, which include the duty to act in the
way in which they consider, in good faith, would be
most likely to promote the success of the Group for
the benefit of its members as a whole, having regard
to the stakeholders and matters set out in Section 172(1)
of the Companies Act 2006 (“Section 172(1)”).
The Board recognises that the Group has a range of
stakeholders with diverse interests and an analysis of its
principal stakeholders can be found on pages 48 to 61
and on page 86.
Section 172(1) considerations are embedded in decision-
making at Board-level and are demonstrated
throughout its governance framework.
The underlying principles of promoting the success of
the Company for the benefit of its members as a whole,
and of considering stakeholders when making decisions
that could affect them, is understood by the senior
leadership team and consideration and respect for
stakeholders is demonstrated throughout the Group.
The Group has adapted to a change of working
practices throughout the year and keeps engagement
mechanisms under review so that they remain effective
and so that the Board understands the evolving needs
of its stakeholders.
In taking decisions, the Directors carefully consider
the balance of interests of the stakeholders who might
be affected. The Board and its Committees discuss
stakeholders and their interests during the cycle of
Board meetings, and in 2020 we increased both the
frequency and length of meetings, not least to focus on
stakeholder needs as a result of the Covid-19 pandemic.
We are committed to ensuring that the Group takes
action both to protect the business and to reduce its
direct and indirect impact on the environment.
In March 2020, the Board considered it prudent to
cancel its share buyback programme and, in April 2020,
to cancel the 2019 final dividend as a result of
the volatile conditions arising from the Covid-19
pandemic, although an interim and a special interim
dividend were paid later in the year when conditions
stabilised and on the basis of a strong capital position.
See pages 86 to 87 for more detailed examples of how
the Board considered Section 172(1) when making
decisions that affected its stakeholders.
Chief Executive Officer’s review
Navigating an
extraordinary year
Penny James
Chief Executive Officer
Despite the many challenges we faced in the year as a result of
the Covid-19 pandemic, we traded well and prioritised support
for our customers, our people and local communities. I am proud
that our people, even when working remotely, have continued
both to care for our customers and to help us build an insurance
company of the future.
I am proud of what the Group has achieved during 2020.
Once again, we have demonstrated financial resilience by
delivering another good set of results, whilst supporting
our customers, our people and local communities through
the challenges of the pandemic. Despite the disruption
and uncertainty that 2020 has brought, we have made
real progress towards becoming a technology-driven
business which can adapt quickly to the changing world
around us and deliver more for our customers at speed.
We could not have done this without our highly engaged
people, who have demonstrated the commitment and
flexibility needed to do what it takes for our customers
and to drive forward our business plans regardless of their
personal circumstances. I am grateful to them for their
dedication, skill and support.
Business performance and the impact
of Covid-19
In 2020, we delivered another year of strong profitability
at the same time as growing our direct own brand policy
count. The investments we have made in systems and
capability over the last few years are showing through
in this growth and are contributing to underlying
improvements in current-year underwriting profitability.
Overall Covid-19 led to a modest net benefit to the result.
Despite the impact of the pandemic, we made further
progress in delivering the change required to implement
the Group’s transformation plans.
“In 2020, we delivered another year of strong
profitability at the same time as growing our
direct own brand policy count.”
We traded well through the year, delivering growth in
our Home, Commercial and Green Flag Rescue businesses
despite prolonged periods of lockdown when new
business shopping dropped significantly. Retention has
held up well. In contrast average premiums have fallen as
risk mix has reduced, with fewer new drivers on the road
as no driving tests have been conducted for parts of the
year and fewer new cars have been purchased. In the
midst of these trends we are happy to see direct own
brand policy growth of 2.2% and gross written premium
broadly flat.
At a headline level we delivered operating profit of
£522.1 million, a combined operating ratio of 91.0% and
a return on tangible equity of 19.9%, well ahead of our
target of at least 15% over the long term. Operating profit
of £522.1 million was £24.8 million lower than 2019
(£546.9 million) due to higher major weather costs
of £43.0 million (2019: £6.0 million) and reduced
prior-year reserve releases, partially offset by improved
current-year profitability.
www.directlinegroup.co.uk
11
Strategic Report Chief Executive Officer’s review continued
Forging ahead with our strategy
Our values
Do the right
thing
Aim higher
Take
ownership
Say it like
it is
Work
together
Bring all
of yourself
to work
Our vision and purpose
We want to create a world
where insurance is personal,
inclusive and a force for good
We help people carry on with
their lives, giving them peace
of mind now and in the future
Performance against strategic objectives
Best at direct
Win on price comparison
websites
Extend our reach
– Superhero branding campaign
launched
– New Motor “Mileage MoneyBack”
proposition
– Launched Van and Tradesperson
products on new Direct Line for
Business platform
– Privilege Motor new business
and renewals now live on the
new platform
– Increased PCW focus including
Churchill Home
– Darwin brand launched on two
more PCWs
– Green Flag awarded “Superbrand”
– Churchill Motor started roll-out to
status
new platform in Q1 2021
– Agreed a two-year extension with
NatWest Group for Home
– Enhanced API capabilities to enable
potential Home partners to link
and test
– Increased our presence in the
on-demand mobility market
Technical edge
Nimble and cost efficient
Great people
– Launched new market-leading
Motor counter-fraud system
– Expanded electric vehicle
repair capabilities
– Launched a free on-line risk
management portal for every NIG
policyholder
– Green Flag launched a new
cloud-based claims system
– New agile operating model
– Our people continued to deliver
embedded across digital, data
and pricing
– Increased proportion of service
interactions through digital
channels
our transformation agenda while
working remotely
– Our engagement scores remained
high as we focused on the security
and wellbeing of our people
– Launched new property strategy
– Awarding free shares and ensuring
following success of remote working
all eligible employees receive a
bonus for the year
Sustainability pillars
See page 44 for more information
Customers
People
Society
Planet
Governance
12
Direct Line Group Annual Report and Accounts 2020
Overall, the impact of the pandemic led to a modest net
benefit to our financial result, with the effects
concentrated in four main areas:
– Reduction in motor claims frequency falling to below
normal levels from Q2
– Increase in Travel claims, relating to both claims
volumes and claims handling costs as well as additional
commission payments
– An estimated £6 million in Covid-19 related business
interruption claims
– Investments to support our customers, people and
society totalling £93 million
Motor claims frequency levels were significantly lower
than normal due predominantly to lockdown restrictions
leading to claims frequency falling to around half normal
levels during Q2. Whilst it increased during the second
half of the year, claims frequency did not return to
pre-Covid-19 levels during 2020. However, severity costs
have increased due to the costs of making accident repair
centres Covid-19 safe, longer repair times and
consequently higher credit hire costs. We have seen an
increase in the volume of claims within our Travel business
and so have also incurred additional claims handling
costs supporting our customers. In terms of business
interruption, our standard wordings were clear from
the outset and we were not party to the FCA’s test case
nor the appeal to the Supreme Court, which has been
relevant to many commercial insurers, and our overall
Covid-19 related business interruption claims are
estimated at £6 million.
Consistent with our “Force for Good” vision, we have
invested extensively in our customers in the form of
premium refunds, waived fees and reduced premiums,
and also in our people by protecting jobs at the most
critical points in lockdown, preserving salaries and
incentives in return for flexibility and investing in
strengthening home working capability. And finally
we have invested in society: we have helped local
communities with over £7 million of donations helping
100,000s of households and contributing to the ABI
Covid-19 Support Fund. In total these initiatives represent
an impact of around £93 million, of which £34 million is
within our operating expenses and £59 million is within
our loss ratio.
“As we transform the business both in terms of
the technology we use and our agility, we are
changing the way the organisation works.”
A further effect was felt in our investment portfolio where
we saw investment return fall from £134.6 million in 2019
to £95.1 million in 2020, reflecting the dual impact of lower
reinvestment rates and a small number of writedowns
in the investment portfolio. When we look at some of
the volatility in the market over the period we are pleased
with the overall performance of the portfolio.
Prior to the pandemic we had set out to achieve
improvements in our current-year loss ratio and therefore
to improve the profitability of the business we write.
Offsetting this we had expected to see the level of releases
from prior year business reduce, reflecting changes in the
level of Motor excess of loss reinsurance some years ago.
During 2020, prior-year reserve releases reduced to
£173.8 million (2019: £294.5 million). Although the
improvements in our loss ratio undoubtedly benefited
from the impact of the Covid-19 pandemic, we are
confident we have made progress in increasing the
current-year contribution to operating profit.
Overall we have sought to do the right thing by all our
stakeholders throughout 2020, and believe the underlying
performance and quality of change delivery in the year
indicate we are on track to deliver on our targets.
Strategic update
2020 was always a critical change delivery year on our
path to building the insurance company of the future
– technology and data led but with the customer at its
heart. I have been very pleased by our ability to continue
delivering major transformational change, even from
our homes. The table opposite outlines some of our
key achievements.
Many of the foundation blocks are now in place and we
are increasingly moving to extracting benefits from the
technology we have implemented rather than focusing
purely on technology delivery.
As we transform the business both in terms of the
technology we use and our agility, we are changing the
way the organisation works. We have found through 2020
that we can create and protect the culture of the Group,
even with almost everyone working from home, and our
regular people surveys tell us that our people want the
personal flexibility that homeworking offers. Our intention,
therefore, is to take this opportunity to change the way we
use our premises in future so they support collaboration,
training and teamwork rather than being an everyday
place of work for most people.
We will remain focused around our core hub sites so our
people can get together, but believe our approach gives
both cost savings and advantages for our people, allowing
us to support greater social mobility and assist us in
identifying top talent. To this end we are reviewing our
office site property strategy and have chosen to buy
out our Bromley lease, the run costs of which were above
market rate. This will accelerate the costs from the future
17 years of the lease and so we will take a charge to
Solvency II own funds in 2021 of £85 million as we
effectively de-leverage the business and, in return, make
savings in excess of £10 million per annum from 2022,
incremental to our original cost target plans. We will then
have greater freedom to create the nature of property
usage this business needs.
www.directlinegroup.co.uk
13
Strategic Report – Being well placed for customers and at a competitive
advantage to other players in a post FCA pricing
practices market.
We are also heavily focused on improving efficiency in
order to meet our cost targets by:
– Continuing organisational transformation to further
digitalise customer journeys, automate business
processes and adopt new ways of working, as we aim
to step change both customer experience and the
efficiency of our cost base.
– Realising the benefits of agile ways of working
throughout the organisation with the aim of reducing
the cost and increasing the pace of change.
These plans are designed with fantastic customer experience
and propositions at their heart. Supporting our activities
and central to the long-term sustainability of the business,
we have deeply embedded and fundamental principles:
– Our values sit at the very heart of our everyday behaviours.
– Our sustainability pillars bring environmental, social and
governance (“ESG”) factors into the heart of our
strategic thinking, whether that’s our customers, our
people, our society, our planet, or the importance of
strong governance – they all play central roles in helping
deliver our business in a sustainable way.
Chief Executive Officer’s review continued
With the potential impact of the FCA Pricing Practices
report, discussed in the Market Overview section later,
combined with whiplash reform, currently due to be
effective from May 2021, a mixed picture is emerging in
terms of lockdowns in H1 and uncertainty over the
long-term level of driving in our new “normal”, and there
are clearly many moving parts.
That said, capital generation has been strong and our
perception is that the level of risk in the system, with
vaccines rolling out and a Brexit deal in place, is beginning
to reduce. As a result we are declaring a final dividend
of 14.7 pence per share and announcing a share buyback
programme, as we reiterate our target of operating
around the middle of our risk appetite range of 140% to
180% in normal circumstances. The share buyback will
be for up to £100 million, with an initial tranche of up to
£50 million expected to be completed by the time of
the half-year results.
As you move through the Strategic report we will seek
not only to guide you through understanding our financial
performance and how that positions us for the future
but also to bring to life examples of the technology
development and the benefit we believe it will bring.
I hope it will allow you to feel why we are so excited about
the progress we have made and the opportunity ahead.
Looking into 2021 we will be continuing the roll-out of
our technology transformation and increasingly turning
our attention to utilising these new platforms to deliver
benefits for our customers.
Our plans include:
– Continuing the migration of Direct Line and Churchill
Motor policies onto our new platform, enabling us to
improve customers’ online journey and extend our
product range even further.
– Continuing the journey towards greater digitalisation,
applying advanced analytical techniques to enhance
the customer experience.
– Rolling out a new policy and pricing system for Green
Flag enabling it to grow beyond traditional breakdown
services and look after customers’ motoring needs in
and out of an emergency.
‘Bring all of yourself to work’ is a value lived vibrantly
across the Group but after extensive discussions with
our people, we launched a new diversity and inclusion
strategy and set ourselves stretching targets around
ethnicity and gender in our leadership so that we are
truly inclusive and reflect the customers we serve.
14
Direct Line Group Annual Report and Accounts 2020
2020 - a year like no other
Supporting
our customers
450k+
Over 450,000
customers supported
through payment
deferrals, waiving
cancellation fees and
mileage refunds
26k+
Free
More than 26,000
customer travel claims
settled and over 900
customers repatriated
Free Rescue cover,
fast-track claims and
free home emergencies
cover for NHS staff
Supporting
our people
9,000
Moved 9,000 people
to home working and
supported our motor
accident repair centres
to open safely and keep
Britain moving
Protected
Protected roles and
salaries during initial
lockdown, without
government support,
and offered maximum
flexibility to help our
people manage home
and work
Free
shares
£3.8 million distributed
as a thank you to
our people
Supporting
our communities
£3.5m
Established our first
Community Fund which
distributed £3.5 million
to 250 charities, helping
over 200,000 people
£1.5m
Extended our
Community Fund
into 2021 with £1.5
million to support
charities dealing with
the impact of the
Covid-19 pandemic
£3.6m
Contributed
£3.6 million to
the Association
of British
Insurers
Covid-19
Support
Fund
Supporting a
greener future
Reduce
Committed to setting
Science-Based Targets1
for Scope1 1, 2 and 3 to
help the Group reduce
its carbon footprint
Carbon
neutral
Became a 100% carbon-
neutral business by
investing in high social
impact projects to
offset our Scope1 1, 2
and 32 emissions
Report
Published our first Task
Force on Climate-related
Financial Disclosures
(“TCFD”) Report3
Notes:
1. See glossary on pages 224 to 226 for definitions.
2. Scope 3 emissions which are under our direct control.
3. For more information please see our published 2020 TCFD Report on
the Group’s website at www.directlinegroup.co.uk/2020_TCFD.
www.directlinegroup.co.uk
15
Strategic Report Chief Executive Officer’s review continued
Market overview
Consumer trends
In 2020 we saw a number of
trends emerging through the
year. Ultimately these tell us that
our strategy is the right one.
Those trends are:
– Consumers’ willingness to
interact digitally has been
transformed. Digitalisation is
at the heart of our technology
transformation so this trend is
entirely aligned with our plans.
– Agility is a must. We need to
be quicker at implementing
changes to fulfil changing
customer needs.
– The working model has
changed. Knowing our people
can deliver from home has
provided an opportunity to
change how we use our offices
in a way that supports what
our people tell us they want
and offers opportunities to
recruit people irrespective
of geography.
– Car technology continues
to evolve rapidly. Having the
largest owned repair network
of any UK insurer gives us the
opportunity to develop further
commercial insights.
– Cross collaboration is a must.
We can achieve more by
working together; co-operation
across industries is essential to
tackling climate change and
ensuring greater diversity.
Financial Conduct Authority
Pricing Practices
In September 2020 the FCA released
its General Insurance Pricing
Practices Final Report, which remains
a key focus for us. It included the
FCA’s proposed remedy package
aiming to ensure retail home and
motor insurance products offer fair
value to customers. The FCA
recognised that insurers do not make
excessive profits and their key
proposal was that firms should offer
renewal prices no higher than the
equivalent new business price
through the same sales channel. The
consultation period ended on 25
January 2021 and we look forward to
understanding the final details some
time in Q2 2021.
This is an area where we have already
been proactive for several years by
implementing a range of measures
to reduce the differential in pricing
between our new business and
renewal customers. We are
supportive of the aims of the FCA and
believe that, in a world where prices
become less of a differentiator, our
strong brands, diversified business
model and the capabilities we are
building will enable us to win in the
future market. On the way there is
uncertainty around the detailed
application of the rules, the timelines
for implementation and the nature
of short-term volatility as the market
rebalances. We have prepared for a
range of outcomes and we continue
“We recognise that our
actions as a business can
contribute to climate risk
mitigation and help accelerate
the transition to a low carbon
and sustainable future.”
to work with the FCA to assist it
in navigating some of the issues
and are seeking to help shape the
right outcome for our customers
and shareholders.
Climate
The impact of climate change has far
reaching implications for economies
around the world. Our Planet pillar,
which aims to protect our business
from the impact of climate change
and give back to the planet more
than we take out, drives our
approach. We recognise that our
actions as a business can contribute
to climate risk mitigation and help
accelerate the transition to a low
carbon and sustainable future.
We take this seriously and have
continued to challenge ourselves
to reduce emissions and energy
consumption through greater
transparency.
We have previously published our
Scope 1 and 2 emissions1, but this year
we wanted to go further. For the first
time we broke down our emissions
across our offices and our accident
repair centres to help us to focus our
plans on where we can have the most
impact. Alongside this we evaluated
our Scope 3 emissions1 starting with
those under our direct control and
purchased goods and services which
make a substantial contribution
to our overall emissions. Our first
comprehensive TCFD report
(see page 62) provides us with a
roadmap to strengthen our strategic
response in tackling climate change
and we see the Bank of England’s
Climate Biennial Exploratory Scenario
(“CBES”), in which the Group has been
invited to participate, as a way to help
enhance our climate change scenario
analysis capability.
The Group’s focus in 2021 is to
evaluate the Scope 3 emissions1
arising out of our investment portfolio
and we will begin to scope out
Science-Based Targets, which are a
set of goals to provide a clear route
16
Direct Line Group Annual Report and Accounts 2020
to reduce emissions, to submit to
the Science Based Target Initiative
(“SBTi”) for approval. Finally, we
know that we are on a journey
and cannot reduce our emissions
overnight, therefore we became
carbon neutral through offsetting,
as we work to reduce our emissions
over time.
Note:
1. See glossary on pages 224 to 226
for definitions.
UK economy and Brexit
Following the recession in 2020,
economic uncertainty is expected to
remain high throughout H1 2021 as
a result of the Covid-19 pandemic,
although the UK Government has
acted to support UK businesses
and employees and prevent lasting
damage to the economy. However,
the uncertainty surrounding the
pandemic makes the overall impact
and recovery progress unclear.
The disruption to global trade
and supply chains caused by the
pandemic could increase the risk
of inflation in the long term. The
Group’s investment portfolio
is positioned defensively and
additional steps could be taken,
such as further shifting the portfolio
towards ‘defensive’ sectors or
increasing more allocation to cash.
The portfolio also contains a
proportion of short-maturity bonds
which could be sold relatively
quickly if necessary.
As a UK-based business with UK
customers, we identified that the
biggest potential financial exposure
for the Group, from a disruptive or
disorderly Brexit, would be to
market volatility. We continue
to work through the operational
effects of Brexit for customers and
supply chains but the potential
effects have been helped by a trade
deal which has avoided otherwise
expected tariffs on EU goods
needed to serve our customers.
“Given the progress we are making on our
transformation, we enter 2021 with real
momentum and are confident in delivering
our vision of being a technology and data led
insurance company of the future with our
customers at its heart.”
Outlook
The capability delivered as the Group looks to transition
from technology transformation into business
transformation underpins the improvement in the
current-year profitability and provides a platform for
growth, underwriting improvements and cost efficiency.
Through increased digitalisation and self-serve, enabled
by new ways of working, we aim to deliver significant
customer and efficiency improvements and underpin
our target of an operating expense ratio of 20% by 2023.
The new ways of working during 2020 have enabled us to
think more ambitiously about how we use our office space
and we have therefore launched a property strategy
which aims to help deliver incremental savings to this
target. In addition, greater pricing sophistication and
counter-fraud initiatives aim to continue the improvement
in the current-year loss ratio. The Group remains on track
to maintain the contribution from current-year operating
profit at more than half of the Group’s total operating
profit and we reiterate our ongoing target of achieving
at least a 15% return on tangible equity per annum.
The Group targets a combined operating ratio of 93-95% for
2021 and over the medium term, normalised for weather,
although we acknowledge there will be increased
uncertainty for a period as we progress through the
implementation of the FCA pricing practices proposals and
as the market reacts to the ongoing Covid-19 pandemic.
2020 has been a testing year for everyone and I am proud
of how we have responded as a Group, demonstrating
throughout the resilience of our business model. We had
strong momentum coming into the Covid-19 crisis and
have delivered a good financial result whilst
simultaneously navigating the Covid-19 pandemic,
supporting our various stakeholders and staying true to
our vision and purpose throughout. Given the progress we
are making on our transformation, we enter 2021 with real
momentum and are confident in delivering our vision of
being a technology and data led insurance company of
the future with our customers at its heart.
Penny James
Chief Executive Officer
www.directlinegroup.co.uk
17
Strategic Report
Our key performance indicators
Combined operating
ratio1 (%)
.
7
7
9
.
3
5
2
5
.
1
1
.
9
0
6
.
8
0
9
.
7
5
2
1
.
9
.
0
6
5
6
.
1
9
.
2
3
2
.
5
6
9
.
1
6
.
2
2
9
.
2
3
2
1
.
7
9
.
1
6
0
.
1
9
.
5
4
2
.
6
8
.
9
7
5
16
17
18
19
20
Expense ratio
Commission ratio
Basic earnings
Loss ratio
per share1 (pence)
.
3
3
3
8
.
1
3
.
5
9
2
.
8
5
2
.
4
0
2
Aim
Remuneration
We aim to make an
underwriting profit.
The target in the medium
term is a COR in the range
of 93% to 95% normalised
for weather.
We base part of the Annual
Incentive Plan (“AIP”)
awards on profit before tax.
The COR is closely linked
to this.
Definition
.
7
7
9
.
8
0
9
6
.
1
9
.
2
2
9
0
.
1
9
.
.
.
.
.
.
1
.
7
1
.
9
5
6
5
.
1
1
2
3
2
2
3
2
3
5
2
7
5
2
5
4
2
A measure of financial year
underwriting profitability.
A COR of less than
100% indicates profitable
underwriting. The COR is
the sum of claims, expense
and commission ratios and
compares the cost of doing
business against net
earned premium generated.
9
0
6
0
6
5
9
7
5
9
.
1
6
9
.
1
6
6
8
20
18
16
19
17
.
.
.
.
Expense ratio
Commission ratio
Loss ratio
This is calculated by
dividing the earnings
attributable to shareholders
less coupon payments
in respect of Tier 1 notes
by the weighted average
number of Ordinary Shares
in issue.
For additional performance
information see page 24
For additional information
see pages 117 and 123
We have not set a target.
However, growing earnings
per share is considered
an indicator of a healthy
business.
This is a broad measure
of earnings and reflects
the results of the Group
after tax less Tier 1 coupon
payments. We base part
of the AIP awards on profit
before tax.
16
17
18
2020 COL BAR TO BE IN PANTONE 275
19
20
For additional performance
information see page 27
2020 COL BAR TO BE IN PANTONE 275
.
Capital returns2
(£m)
2
2
.
.
5
5
9
9
5
5
0
0
1
3
4
8
4
The amount of cash paid
in dividends to shareholders
and amount of share
3
.
1
buybacks funded from
0
4
the Group’s retained
profits. (See page 192 for
dividend breakdown).
4
6
3
3
3
5
0
2
5
5
5
5
9
9
1
1
7
3
1
1
.
.
.
.
.
.
6
8
2
1
.
.
7
7
9
9
9
9
2
2
0
3
.
6
8
9
19
20
.
9
6
3
1
.
5
9
9
1
.
0
9
7
2
.
6
7
8
2
16
17
18
Buybacks
Special
Ordinary
The return generated
on the capital that
shareholders have in the
business. This is calculated
by dividing adjusted
earnings by average
tangible equity.
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.
For additional information
see page 117 and 123
We base Long-Term
Incentive Plan (“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.
For additional performance
information see page 28
For additional information
see pages 117 and 127
We aim to achieve at least
a 15% RoTE per annum over
the long term.
We base the LTIP awards
partly on adjusted RoTE
over a three-year
performance period.
For additional performance
information see page 27
For additional information
see page 117 and 127
.
3
4
8
4
.
3
5
0
2
.
0
9
7
2
3
.
1
0
4
.
7
3
1
1
.
6
7
8
2
.
4
6
3
3
.
9
6
3
1
.
5
9
9
1
16
17
18
.
6
8
2
1
0
3
.
6
8
9
19
2
2
.
.
5
5
9
9
5
5
0
0
1
.
.
5
5
5
5
9
9
1
1
.
.
7
7
9
9
9
9
2
2
20
Buybacks
Special
Return on tangible
Ordinary
equity1 (%)
.
0
3
2
6
.
1
2
.
8
0
2
.
.
9
9
9
9
1
1
2
.
4
1
16
17
18
19
20
Notes:
1. See glossary on pages 224 to 226 and Appendix A – Alternative performance measures on pages 227 to 230 for reconciliation to
financial statement line items.
2. The 2019 dividends and capital returns have been adjusted to remove the cancelled 14.4p final dividend and £120 million of the share
buyback as announced in March/April 2020. (The reported number were dividends and capital returns of £447.0 million).
3. The 2019 solvency capital ratio has been adjusted to remove the cancelled 14.4p final dividend and £120 million of the share buyback
as announced in March/April 2020. (The reported number was a solvency capital ratio of 165%.)
18
Direct Line Group Annual Report and Accounts 2020
Solvency capital
ratio3,4 (%)
0
0
.
.
1
1
9
9
1
1
.
0
9
8
1
.
0
5
6
1
.
0
5
6
1
.
0
0
7
1
Definition
Aim
Remuneration
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.
Under normal
circumstances, the Group
aims to maintain a solvency
capital ratio around the
middle of the risk appetite
range of 140% to 180%.
Solvency capital ratio
within our risk appetite
is an indicator of capital
strength, which is one of
the gateways for the AIP
awards and an underpin
for LTIP awards.
16
17
18
19
20
Employee engagement
(%)
0
.
1
8
.
0
8
7
.
0
8
7
.
.
0
0
4
4
7
7
.
0
3
7
For additional performance
information see page 28
For additional information
see page 117
Engagement is about
being proud to work for
the 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.
To make the Group best
for employees and best for
our customers. We gauge
employee engagement
through our employee
opinion survey and we
aim for high employee
engagement scores
each year.
The AIP awards include
a weighting to a balance
of employee metrics,
including engagement.
16
17
18
19
20
Net promoter score5,6
(points)
.
0
5
5
1
.
.
0
0
8
8
5
5
1
1
.
0
4
4
1
.
6
5
4
1
1
.
9
2
1
16
17
18
19
20
Customer complaints6,7
(%)
9
8
0
.
8
7
0
.
7
7
0
.
3
6
0
.
1
1
5
5
0
0
.
.
16
17
18
19
20
For additional People
information see page 50
For additional information
see page 117 and 125
We aim to increase our net
promoter score over time.
The AIP awards include
a weighting to a balance
of customer metrics,
including NPS.
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.
For additional performance
information see page 48
For additional information
see page 117 and 124
The number of complaints
we received during the
year as a proportion of
the average number of
in-force policies.
This measure indicates
where our customer service
has not met expectations
to the extent that the
customer has initiated
a complaint. We aim to
improve this over time.
The AIP awards include
a weighting to a balance
of customer metrics,
including complaints.
For additional information
see page 117 and 124
4. Estimates based on the Group’s Solvency II partial internal model.
5. On an aggregated 12-month rolling basis, with 2013 rebased to 100.
6. For the Group’s principal underwriter, U K Insurance Limited.
7. 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.
www.directlinegroup.co.uk
19
Strategic Report Finance review
Strong capital
position, good results
Neil Manser
Acting Chief Financial Officer
We made good progress against our targets to improve the
sustainability of our earnings in a challenging environment
and maintained our balance sheet strength.
Financial highlights
Direct own brands in-force policies grew by 2.2% driven by
strong segments of growth across the business including
Home, Commercial and Green Flag Rescue, whilst Motor
was broadly stable. Total in-force policies reduced due to
lower partnerships and Travel volumes.
Progress on the Group’s transformation continued to drive
improved current-year profitability via increased pricing
and underwriting sophistication in Commercial and
improved counter-fraud capability in Motor.
Profit before tax of £451.4 million was £58.3 million lower
than 2019, following the reduction in operating profit
alongside £39.4 million of restructuring and one-off costs
as the Group invested in cost-saving initiatives.
Proposed final ordinary dividend of 14.7 pence per share,
increased 2.1%2 and announcing a share buyback
programme of up to £100 million. Intention to move back
towards the middle of the Group’s capital risk appetite
range assuming more normal circumstances.
Notes:
1. See glossary on pages 224 to 226 for definitions and appendix A
– Alternative performance measures on pages 227 to 230 for
reconciliation to financial statement line items.
2. The 2019 final dividend of 14.4 pence was subsequently
cancelled and paid as a special interim dividend in 2020.
Direct own brands gross written premium was stable with
growth across Home and Commercial direct own brands
and Green Flag Rescue offset by lower average premiums
in Motor. Overall gross written premium reduced by 0.7%
due to falling partnership and Travel premium.
Increased major weather costs of £43.0 million (2019:
£6.0 million) contributed to lower operating profit of
£522.1 million, £24.8 million (4.5%) lower than 2019 (£546.9
million). Covid-19 restrictions reduced claims frequency in
Motor and Commercial, although this was partially offset
by investment in initiatives to protect our customers,
people and society, lower investment asset returns and
the impact of the Covid-19 pandemic on Travel. Overall,
the impact of the pandemic was a modest net benefit
to the result.
Combined operating ratio improved to 91.0% (2019: 92.2%).
Normalised combined operating ratio1, of 91.7%, was ahead
of target of 93% to 95% predominantly due to the lower
claims frequency in Motor.
20
Direct Line Group Annual Report and Accounts 2020
Financial highlights continued
In-force policies (thousands)
Of which: direct own brands (thousands)
Gross written premium
Of which: direct own brands
Net earned premium
Underwriting profit
Instalment and other operating income
Investment return
Operating profit
Restructuring and other one-off costs
Finance costs
Profit before tax
Tax
Profit after tax
Key metrics
Current-year attritional loss ratio1,2
Loss ratio1,2
Commission ratio1,2
Expense ratio1,2
Combined operating ratio1,2
Investment income yield2
Net investment income yield2
Investment return yield2
Basic earnings per share (pence)
Diluted earnings per share (pence)
Return on tangible equity2
Return on equity
Dividend per share – interim (pence)
– final (pence)
– total ordinary (pence)
– special (pence)
Share buyback actioned (10.4 million shares)
Share buyback proposed3
Net asset value per share (pence)
Tangible net asset value per share (pence)
Solvency capital ratio post dividends3,4
Notes:
FY 2020
£m
14,615
7,454
FY 2019
£m
14,789
7,290
3,180.4
2,225.6
2,960.5
3,203.1
2,227.8
2,984.9
267.8
159.2
95.1
522.1
(39.4)
(31.3)
451.4
(84.2)
367.2
62.3%
57.9%
8.6%
24.5%
91.0%
2.1%
1.8%
1.6%
25.8
25.5
19.9%
13.1%
7.4
14.7
22.1
14.4
30.0
100.0
31 Dec
2020
199.7
141.5
191%
232.1
180.2
134.6
546.9
(11.2)
(26.0)
509.7
(89.8)
419.9
71.6%
61.9%
7.1%
23.2%
92.2%
2.4%
2.1%
2.2%
29.5
29.2
20.8%
15.5%
7.2
14.4
21.6
–
–
150.0
31 Dec
2019
193.4
142.0
165%
1. A reduction in the ratio represents an improvement as a proportion of net earned premium, while an increase in the ratio represents
a deterioration.
2. See glossary on pages 224 to 226 for definitions and appendix A – Alternative performance measures on pages 227 to 230 for
reconciliation to financial statement line items.
3. The solvency capital ratio as reported at 31 December 2019 is after taking into account the then expected 14.4p final dividend and
the £150 million share buyback announced on 3 March 2020. The impacts of the cancellation of the dividend (as announced on
8 April 2020) and of the share buyback programme (as announced on 19 March 2020 after £30 million of the buyback had been
executed) would have added 24 percentage points to the ratio as reported to give an adjusted solvency capital ratio of 189%.
4. Estimates based on the Group’s Solvency II partial internal model.
www.directlinegroup.co.uk
21
Strategic Report
Finance review continued
Performance
Operating profit1
Underwriting profit
Instalment and
other operating income
Investment return
Operating profit
Operating profit (£m)
Current-year operating profit
Prior-year reserve releases
FY 2020
£m
267.8
159.2
95.1
522.1
FY 2019
£m
232.1
180.2
134.6
546.9
20
£173.8m (33.3%)
£348.3m (66.7%)
19
£294.5m (53.8%)
£252.4m (46.2%)
0
100
200
300
400
500
600
Note:
1. See glossary on pages 224 to 226 for definitions and
appendix A – Alternative performance measures on pages
227 to 230 for reconciliation to financial statement line items.
The Group again delivered an operating profit in
2020 above £500 million and saw underlying progress
towards achieving more than 50% of the profit arising
from the current year. The results have been affected
by the usual variability around weather events but
the addition of the factors surrounding Covid-19 make
them more difficult to navigate than in previous years.
First, the Group experienced major weather event
claims of £43.0 million in 2020, below our expectations
of £64 million but higher than the very benign weather
experienced in 2019 (£6.0 million).
Second, the impact of the Covid-19 pandemic can
be seen across all the main lines within the income
statement, with the largest impact from reduced
claims frequency in Motor. Whilst it is difficult to be
exact about the impact of Covid-19 on the results, as
the length of the pandemic has made initially ‘one-off’
impacts now more business as usual in their nature, (for
example motor market pricing), this review will indicate
the broad direction of these impacts.
Overall the Group incurred £93 million in supporting
customers, our people and society as part of our “Force
for Good” initiatives. This support included customer
refunds, job protection, charity donations and supplier
support measures. Over this period the Group has not
taken any Government support. The cost of these
initiatives are all recognised in the underwriting result.
Furthermore, within the underwriting result there are
four additional factors: a net reduction in motor claims
from significantly reduced driving, partly offset by
higher claims severity; a reduction in motor premiums
as a result of fewer new drivers and market-wide
premium deflation; additional travel claims and claims
handling costs; and business interruption claims in
Commercial. These factors together had a net positive
impact on the underwriting result.
Outside of the impact from Covid-19, prior-year releases
reduced to £173.8 million during 2020 (2019: £294.5
million), reflecting changes in the level of Motor excess
of loss reinsurance some years ago and were materially
offset by improvements in the underlying current-year
loss ratio across Motor and Commercial.
Overall this delivered an increase in underwriting profit
to £267.8 million (2019: £232.1 million).
Lower motor premium and claims volumes, primarily
arising from the Covid-19 pandemic, led to a reduction in
instalment and other operating income to £159.2 million
(2019: £180.2 million).
Investment return decreased to £95.1 million (2019:
£134.6 million), reflecting the dual impact of lower
reinvestment rates and lower valuations on property in
the investment portfolio.
Taking all of this together, operating profit decreased
by £24.8 million to £522.1 million (2019: £546.9 million)
and current-year operating profit, as a proportion of total
operating profit, improved to 66.7% (65.4% on a
normalised basis). Whilst current-year profitability has
benefited from the impact of Covid-19 related factors in
2020, the Group remains on track for its target of
achieving more than half of the Group’s annual operating
profit from current-year earnings by the end of 2021.
In-force policies and gross written premium
In-force policies (thousands)
At
Direct own brands
Partnerships
Motor
Direct own brands
Partnerships
Home
Rescue
Travel
Pet
Other personal lines
Rescue and other personal lines
Of which: Green Flag direct
Direct own brands
NIG and other
Commercial
Total in-force policies
Of which: direct own brands
31 Dec
2020
3,943
118
4,061
1,837
801
2,638
3,400
3,499
145
61
7,105
1,114
560
251
811
14,615
7,454
31 Dec
2019
3,921
122
4,043
1,765
829
2,594
3,450
3,648
157
122
7,377
1,063
541
234
775
14,789
7,290
22
Direct Line Group Annual Report and Accounts 2020
Underwriting profit and combined operating ratio1
Underwriting profit (£ million)
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Note:
FY 2020
267.8
57.9%
8.6 %
24.5%
91.0%
FY 2019
232.1
61.9%
7.1%
23.2%
92.2%
1. See glossary on pages 224 to 226 for definitions and appendix A
– Alternative performance measures on pages 227 to 230
for reconciliation.
Overall underwriting profit increased to £267.8 million
(2019: £232.1 million) with an improvement in the
combined operating ratio to 91.0% (2019: 92.2%).
The loss ratio improved significantly to 57.9% (2019: 61.9%)
as higher major weather-related claims and lower
prior-year reserve releases were more than offset by
the net positive effect of Covid-19 related factors. These
included reduced claims frequency in Motor, only partially
offset by premium deflation in Motor, higher claims
handling costs in Travel and a cautious estimate of Travel
claims. The improvement in the loss ratio was partially
offset by a higher commission ratio and higher expense
ratio. The commission ratio increased primarily as a
result of increased profit share payments, particularly on
packaged bank accounts, and volume related commission
payments to PCWs, while the expense ratio increased
due to investment in initiatives to protect our customers,
people and society. Excluding costs related to the protection
of our customers and people against the Covid-19
pandemic, the Group made progress in reducing its
underlying expense base.
Own brand policies increased to 7.5 million (2019:
7.3 million) driven by growth in Home, Commercial and
Green Flag Rescue, whilst Motor was broadly stable. Total
in-force policies reduced slightly to 14.6 million (2019: 14.8
million) primarily due to reductions in Home partnerships,
as Prudential and Sainsbury’s partnerships are closed to
new business, and the impact of Covid-19 on Travel sales.
Gross written premium
Direct own brands
Partnerships
Motor
Direct own brands
Partnerships
Home
Rescue
Travel
Pet
Other personal lines
Rescue and other personal lines
Of which: Green Flag direct
FY 2020
£m
1,567.6
49.3
1,616.9
411.6
166.3
577.9
166.7
134.0
72.8
44.3
417.8
83.1
FY 2019
£m
1,591.7
59.9
1,651.6
407.7
178.9
586.6
167.5
151.3
72.6
44.6
436.0
79.0
Direct own brands
NIG and other
Commercial
Total gross written premium
Of which: direct own brands
163.3
404.5
567.8
3,180.4
2,225.6
149.4
379.5
528.9
3,203.1
2,227.8
Gross written premium of £3,180.4 million (2019: £3,203.1
million) reduced by 0.7% with strong premium growth in
Commercial offset by lower Motor and Home partnership
premiums and the impact of Covid-19 disruption in Travel.
Direct own brands gross written premium was broadly
stable at £2,225.6 million (2019: £2,227.8 million). Growth
across Commercial, Green Flag Rescue and Home own
brands was offset by Motor.
www.directlinegroup.co.uk
23
Strategic Report Finance review continued
Ratio analysis by division
For the year ended 31 December 2020
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
Combined operating ratio
Current-year combined operating ratio
For the year ended 31 December 2019
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
Combined operating ratio
Current-year combined operating ratio
Note:
Notes
Motor
£m
Home
£m
Rescue and
other
personal lines
£m
Commercial
£m
4
4
34
4
4
4
4
4
4
34
4
4
4
4
1,484.8
888.1
100.6
n/a
988.7
66.6%
(6.8%)
n/a
59.8%
3.2%
24.7%
87.7%
94.5%
1,507.7
1,043.3
180.5
n/a
1,223.8
81.2%
(11.9%)
n/a
69.3%
2.6%
22.9%
94.8%
106.6%
555.8
309.1
10.8
(27.0)
292.9
52.7%
(1.9%)
4.8%
55.6%
8.1%
23.4%
87.1%
89.0%
573.6
268.4
41.4
(3.0)
306.8
53.5%
(7.2%)
0.5%
46.8%
9.7%
23.8%
80.3%
87.6%
422.9
261.1
5.6
n/a
266.7
63.0%
(1.3%)
n/a
61.7%
16.4%
23.9%
102.0%
103.3%
425.2
284.4
7.6
n/a
292.0
68.7%
(1.8%)
n/a
66.9%
6.4%
22.1%
95.4%
97.2%
497.0
255.3
56.8
(16.0)
296.1
59.6%
(11.4%)
3.2%
51.4%
18.7%
25.4%
95.5%
106.9%
478.4
251.5
65.0
(3.0)
313.5
65.6%
(13.6%)
0.7%
52.7%
18.5%
24.5%
95.7%
109.2%
Total
Group
£m
2,960.5
1,713.6
173.8
(43.0)
1,844.4
62.3%
(5.9%)
1.5%
57.9%
8.6%
24.5%
91.0%
96.9%
2,984.9
1,847.6
294.5
(6.0)
2,136.1
71.6%
(9.9%)
0.2%
61.9%
7.1%
23.2%
92.2%
102.1%
1. Home and Commercial claims for major weather events, including inland and coastal flooding and storms.
Ratio analysis by division
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
106.6%
22.9%
2.6%
94.5%
24.7%
3.2%
69.3%
59.8%
89.0% 87.6%
23.4%
8.1%
23.8%
9.7%
55.6%
46.8%
103.3%
97.2%
106.9% 109.2%
23.9%
22.1%
25.4%
24.5%
16.4%
6.4%
18.7%
18.5%
102.1%
96.9%
24.5%
23.2%
8.6%
7.1%
61.7%
66.9%
51.4%
52.7%
57.9%
61.9%
2020
2019
2020
2019
2020
2019
Motor
Home
RoPL
2020
2019
Commercial
2020
2019
Total
Loss ratio
Commission ratio
Expense ratio
Current-year combined operating ratio
24
Direct Line Group Annual Report and Accounts 2020
Operating expenses before restructuring and one-off costs
increased by £30.7 million to £724.4 million (2019: £693.7
million). This resulted in an increase in the expense ratio
of 1.3 percentage points to 24.5% (2019: 23.2%). The increase
in costs was entirely due to investment in initiatives for our
customers, people, suppliers and the wider society in the
context of the Covid-19 pandemic. In total these initiatives
are estimated to have increased operating expenses by
£34 million and in some cases had the effect of delaying
cost saving programmes which were planned for 2020.
Adjusting for these initiatives, operating expenses were
broadly flat year on year and we reiterate our 20% expense
ratio ambition for 2023.
Instalment and other operating income
Instalment income
Other operating
income:
Revenue from
vehicle recovery and
repair services
Vehicle replacement
referral income
Legal services
income
Other income1
Other operating
income
Total instalment and
other operating
income
Note:
Note
FY 2020
£m
109.3
FY 2019
£m
114.0
7
7
7
7
24.0
28.3
12.2
8.8
4.9
19.1
11.3
7.5
49.9
66.2
159.2
180.2
1. Other income includes mainly fee income from insurance
intermediary services.
Instalment and other operating income, which is primarily
driven by premium and claims volumes, decreased by
£21.0 million to £159.2 million. Instalment income fell
primarily due to lower motor premium, whereas lower
other operating income reduced due to Covid-19 related
lower motor claims frequency.
The current-year attritional loss ratio excludes prior-year
reserve releases and claims costs from major weather
events, although in 2020 it was impacted by Covid-19
disruption. The Group’s current-year attritional loss ratio
of 62.3% improved by 9.3 percentage points compared
to 2019, due to reduced Motor claims frequency alongside
improved underlying current-year performance across
all lines. Home and Commercial experienced increased
major weather costs, up £24.0 million and £13.0 million
respectively compared to 2019.
Prior-year reserve releases reduced in 2020 to £173.8 million
(2019: £294.5 million), equivalent to 5.9% of net earned
premium (2019: 9.9%) and were concentrated towards
more recent accident years. In 2019 prior-year reserve
releases included a £16.9 million reserve strengthening
in relation to the change in the Ogden discount rate to
minus 0.25%. Assuming current claims trends continue,
prior-year reserve releases are expected to remain a
significant contribution to profits. The sensitivity analysis
on page 32 includes information on the effect of
claims inflation.
The Group’s current-year combined operating ratio
improved by 5.2 percentage points to 96.9% (2019: 102.1%)
as a 9.3 percentage point improvement to the current-
year attritional loss ratio was partly offset by a 1.3 percentage
point increase in claims due to major weather events, a
1.5 percentage point increase in the commission ratio and
a 1.3 percentage point increase in the expense ratio.
Operating expenses before restructuring and
one-off costs
Staff costs1
IT and other
operating expenses1,2
Marketing
Insurance levies
Depreciation and
amortisation3,4
Total operating
expenses before
restructuring and
one-off costs
Notes:
Note
10
10
10
FY 2020
£m
255.6
196.0
106.6
80.4
FY 2019
£m
261.5
158.0
113.9
81.5
85.8
78.8
724.4
693.7
1. Staff costs and other operating expenses attributable to claims
handling activities are allocated to the cost of insurance claims.
2. IT and other operating expenses include professional fees and
property costs.
3. Depreciation and amortisation includes a £6.6 million
impairment charge (2019: £1.3 million), which relates to
capitalised software development costs for ongoing IT projects
primarily relating to development of new systems.
4. Includes depreciation on right-of-use assets of £14.8 million
(2019: £14.2 million).
www.directlinegroup.co.uk
25
Strategic Report Finance review continued
Investment return
Reconciliation of operating profit
Investment income
Hedging to a sterling
floating rate basis
Net investment
income
Net realised and
unrealised (losses)/
gains excluding
hedging
Total investment
return
Investment yields
Investment income yield1
Net investment income yield1
Investment return yield1
Note:
Note
FY 2020
£m
127.1
FY 2019
£m
146.4
(20.3)
(22.1)
106.8
124.3
(11.7)
10.3
6
95.1
134.6
FY 2020
FY 2019
2.1%
1.8%
1.6%
2.4%
2.1%
2.2%
1. See glossary on pages 224 to 226 for definitions and appendix A
– Alternative performance measures on pages 227 to 230 for
reconciliation to financial statement line items.
Total investment return decreased by £39.5 million to
£95.1 million (2019: £134.6 million) with a reduction in
investment income and write downs on investment
property. Lower reinvestment rates, following interest rate
cuts made by both the US Federal Reserve and the Bank
of England during Q1 2020, led to a lower net investment
income yield of 1.8% (2019: 2.1%).
Realised and unrealised losses excluding hedging were
predominantly driven by lower investment property
valuations and a reduction in gains from bond disposals.
Overall the investment portfolio performed well in the
context of challenging market conditions.
In 2021, the Group expects a net investment income yield
of around 1.5% with minimal gains.
The Group’s 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 periodic payment orders (“PPOs”) and non-
PPO liabilities in an optimal manner; and
– to deliver a suitable risk-adjusted investment return
commensurate with the Group’s risk appetite.
Motor
Home
Rescue and other
personal lines
Commercial
Operating profit
Restructuring and
one-off costs
Finance costs
Profit before tax
Tax
Profit for the year
attributable to the
owners of the
Company
Note
4
4
4
4
4
11
4
12
FY 2020
£m
363.5
101.4
6.8
50.4
522.1
(39.4)
(31.3)
451.4
(84.2)
FY 2019
£m
302.6
150.6
39.1
54.6
546.9
(11.2)
(26.0)
509.7
(89.8)
367.2
419.9
Operating profit by segment
All divisions contributed to profit in 2020, demonstrating
the diversity of the Group’s multi-product, multi-brand
and multi-channel portfolio. Motor operating profit
increased significantly primarily due to the reduction in
claims frequency whereas Home operating profit reduced
primarily due to higher weather-related costs and lower
prior-year reserve releases. Commercial continued to
generate strong profit despite higher weather claims
while improved Rescue operating profit of £51.2 million
(2019: £45.2 million) offset a weak result in other personal
lines, mainly from Travel.
Restructuring and one-off costs
In order to support its cost reduction targets, the Group
announced approximately £60 million of restructuring
and one-off costs across 2019 and 2020 at its Capital
Markets Day in November 2019. The Group incurred
£39.4 million of restructuring and one-off costs in 2020
bringing the total cost to date to £50.6 million. As part of
the Group’s response to the Covid-19 pandemic to support
its people it paused some elements of its restructuring
programme. The Group expects the remaining £9 million
in relation to this cost reduction programme to be
incurred during 2021.
In addition, the Group is reviewing its office site property
strategy and has bought out the lease of its Bromley
office thus accelerating payment of an existing long-term
liability. This transaction will incur restructuring costs of
£85 million in 2021.
26
Direct Line Group Annual Report and Accounts 2020
Finance costs
Finance costs increased to £31.3 million (2019: £26.0
million) primarily due to interest on the £260 million Tier 2
subordinated debt issued in June 2020.
Effective corporation tax rate
The effective tax rate for 2020 was 18.7% (2019: 17.6%),
which was slightly lower than the standard UK corporation
tax rate of 19.0% (2019: 19.0%) driven primarily by tax relief
for the Tier 1 coupon payments partly offset by
disallowable expenses. The effective rate is higher than
2019, which benefited from the release of an overprovision
from a prior year.
On 3 March 2021 the Chancellor announced that the rate
of UK corporation tax will increase to 25% from 1 April 2023.
This is not reflected in the figures above as it was not
substantively enacted at the balance sheet date, however,
the effect is not expected to be material.
Profit for the year and return on tangible equity1
Profit for the year was lower at £367.2 million (2019: £419.9
million) in line with the reduction in operating profit as
well as increased restructuring and one-off costs and
finance costs.
Return on tangible equity decreased to 19.9% (2019: 20.8%)
due primarily to a £24.4 million decrease in adjusted1 profit
after tax to £384.1 million (2019: £408.5 million). Profit after
tax was adjusted for restructuring and one-off costs and
coupon payments in respect of Tier 1 notes.
Note:
1. See glossary on pages 224 to 226 for definitions and appendix A
– Alternative performance measures on pages 227 to 230 for
reconciliation to financial statement line items.
Earnings per share
Basic earnings per share decreased by 12.5% to 25.8 pence
(2019: 29.5 pence). Diluted earnings per share decreased
by 12.7% to 25.5 pence (2019: 29.2 pence) mainly reflecting
the reduction in profit after tax.
Cash flow
The Group’s cash and cash equivalents increased by
£271.9 million during the year (2019: £196.1 million decrease)
to £1,168.2 million.
The Group generated operating cash flows before
movements in working capital of £398.6 million (2019:
£370.3 million), an increase of £28.3 million due to the
increase in profit for the year adjusted for non-cash
movements. After taking into account movements in
working capital, the Group generated £402.6 million
(2019: £182.4 million), an increase of £220.2 million. The
Group has considerable assets under management; the
cash generated from these reduced by £58.0 million to
£315.9 million following reductions in the Group’s assets
under management, as a result of dividend payments.
Net cash generated from operating activities was £584.7
million (2019: £462.1 million).
Net cash used in investing activities of £161.0 million
reflected the Group’s continuing investment in its major
IT programmes (2020: £140.7 million, 2019: £175.7 million).
Net cash used in financing activities of £151.8 million
comprised £312.5 million (2019: £420.7 million) in dividends
and Tier 1 capital coupon payments in the year, partly
offset by net proceeds of £257.2 million on the Tier 2
subordinated debt issued in June. Dividends paid in the
year comprised the 7.4 pence first interim dividend and
14.4 pence special dividend announced in the half-year
results in 2020.
Net cash used in financing and investing activities partly
offset the £584.7 million generated from operating
activities and resulted in a net increase in cash and cash
equivalents of £271.9 million (2019: £196.1 million decrease)
to £1,168.2 million (2019: £896.3 million).
The levels of cash and other highly liquid sources of funding
that the Group holds to cover its claims obligations is
continually monitored to ensure that the levels remain
within the Group’s risk appetite.
Net asset value
At 31 December
Note
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
16
16
16
16
2020
£m
2019
£m
2,699.7
2,643.6
(786.8)
1,912.9
(702.5)
1,941.1
1,351.8
1,366.6
199.7
193.4
141.5
142.0
1. See glossary on pages 224 to 226 for definitions and appendix A
– Alternative performance measures on pages 227 to 230 for
reconciliation to financial statement line items.
Net assets at 31 December 2020 increased to
£2,699.7 million (31 December 2019: £2,643.6 million)
and tangible net assets decreased to £1,912.9 million
(31 December 2019: £1,941.1 million) reflecting the 2020
retained profit and increases in available-for-sale reserves.
This was offset by additional expenditure on intangible
assets as the Group continued to invest in the business.
www.directlinegroup.co.uk
27
Strategic Report 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
14.7 pence per share (2019: 14.4 pence), an increase of
2.1% on the special interim dividend of 14.4 pence per
share announced at the time of the interim results which
reflected a full catch up of the cancelled 2019 final
dividend. The Board has also approved a share buyback
of up to £100 million, with an initial tranche of up to
£50 million expected to be completed by the time of
the half-year results. This reflects the Board’s continued
confidence in the Group’s capital position and the
sustainability of its earnings. In normal circumstances,
the Board expects the Group to operate around the
middle of its solvency capital ratio risk appetite range
of 140% to 180%.
After the dividend and share buyback, the estimated
solvency capital ratio was 191% as at 31 December 2020.
The Group has outstanding Tier 2 debt issued in 2012 with
nominal value of £250 million and a first call date during
the first half of 2022. Excluding this debt, the Group’s
solvency ratio after the dividend and share buyback would
be 172%. In February 2021, the Group acquired the head
lease of its Bromley office site, which reduced the Group’s
coverage ratio by an additional 6 percentage points.
The final dividend will be paid on 20 May 2021 to
shareholders on the register on 9 April 2021. The ex-
dividend date will be 8 April 2021.
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 2020.
Capital position
At 31 December 2020, the Group held a Solvency II capital
surplus of £1.22 billion above its regulatory capital
requirements, which was equivalent to an estimated
solvency capital ratio of 191%, after the proposed final
dividend and share buyback.
The Group’s SCR and solvency capital ratio are as follows:
At 31 December
2020
2019
Solvency capital requirement
(£ billion)
Capital surplus above solvency
capital requirement (£ billion)
Solvency capital ratio after
proposed final dividend and
share buyback
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
Tier 2 debt issue
Cancellation of 2019 year-end
distribution and reinstatement
for 2020 half year1
Interim dividend
Final dividend2
Share buyback
Net surplus movement
Capital surplus at 31 December
Notes:
1.34
1.32
1.22
0.85
191%
165%
2020
£bn
0.85
0.59
(0.02)
0.57
(0.02)
0.55
(0.16)
0.26
0.12
(0.10)
(0.20)
(0.10)
0.37
1.22
2019
£bn
0.89
0.60
0.06
0.66
(0.06)
0.60
(0.19)
–
–
(0.10)
(0.20)
(0.15)
(0.04)
0.85
1. Relates to the cancellation of the 2019 cash dividend (£198
million) and share buyback (£120 million) offset by the special
dividend subsequently declared at half year 2020.
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.
28
Direct Line Group Annual Report and Accounts 2020
Movement in capital surplus (£bn)
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.02
0.02
0.16
0.26
0.12
0.40
0.59
Capital
generation
£0.57bn
Surplus
generation
£0.55bn
Net surplus
movement
£0.37bn
1.22
0.85
Capital
surplus at
1 January
Capital
generation
excluding
market
movements
Market
movements
Change in
solvency
capital
requirement
Capital
expenditure
Tier 2
debt issue
Cancellation of
2019 capital
distribution
Dividends
and share
buyback
Capital
surplus at
31 December
In 2020, the Group generated £0.57 billion of Solvency II
capital and added £0.26 billion via a Tier 2 debt issue,
whilst cancelled distributions added £0.12 billion to own
funds. This was offset by £0.16 billion of capital expenditure
and distributions of £0.40 billion. Capital expenditure
reflects the significant investment the Group is making
in building future capability, including the development
of the next generation core personal lines IT systems.
In 2021 annual capital expenditure levels are expected
to reduce to around £120 million. In addition, £85 million
of restructuring costs in relation to the purchase of the
Bromley office lease will decrease capital generation
in 2021.
Change in solvency capital requirement
Solvency capital requirement at 1 January
Model and parameter changes
Exposure changes
Solvency capital requirement at 31 December
2020
£bn
1.32
–
0.02
1.34
The Group’s SCR has increased by £0.02 billion in the year
due to exposure changes. Model and parameter changes
were largely offsetting.
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 2020. The impact on
the Group’s solvency capital ratio arises from movements
in both the Group’s solvency capital requirement and
own funds.
Scenario
Deterioration of small bodily
injury motor claims equivalent to
that experienced in 2008/09
One-off catastrophe loss
equivalent to the 1990 storm
“Daria”
One-off catastrophe loss based
on extensive flooding of the River
Thames
Change in Solvency II 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
Notes:
Impact on solvency capital
ratio
31 Dec
2020
31 Dec
2019
(6pts)
(7pts)
(8pts)
(9pts)
(8pts)
(9pts)
(10pts)
(9pts)
(8pts)
(9pts)
(3pts)
1pt
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 PRA discount rate curve.
2. Only includes the impact on available-for-sale (“AFS”) assets
(excludes illiquid assets such as infrastructure debt) and
assumes no change to the SCR.
www.directlinegroup.co.uk
29
Strategic Report Finance review continued
Own funds
The following table splits the Group’s own funds by tier on
a Solvency II basis.
Reconciliation of IFRS shareholders’ equity
to Solvency II own funds (£bn)
At 31 December
Tier 1 capital before foreseeable
distributions
Foreseeable dividend and share
buyback
Tier 1 capital – unrestricted
Tier 1 capital – restricted
Tier 1 capital
Tier 2 capital – subordinated debt
Tier 3 capital – deferred tax
Total own funds
2020
£bn
2019
£bn
1.84
1.80
(0.30)
1.54
0.38
1.92
0.53
0.11
2.56
(0.35)
1.45
0.37
1.82
0.26
0.09
2.17
3.00
2.50
2.00
1.50
1.00
0.50
0
0.79
2.70
0.04
0.11
0.30
Total
shareholders’
equity
Goodwill
and
intangible
assets
Change
in valuation
of technical
provisions
Other
asset and
liability
adjustments
Foreseeable
dividend
and share
buyback
2.56
0.11
0.53
0.38
1.54
Total
own
funds
During 2020, the Group’s own funds increased from
£2.17 billion to £2.56 billion. Tier 1 capital after foreseeable
distributions represents 75% of own funds and 143% of the
estimated SCR. Tier 2 capital relates solely to the Group’s
£0.53 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 is less than
15%. Therefore, the Group currently has no ineligible
capital. The maximum amount of Restricted Tier 1 capital
permitted as a proportion of total Tier 1 capital under the
Solvency II regulations is 20%. Restricted Tier 1 capital
relates solely to the Tier 1 notes issued in 2017.
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 dividend and share
buyback
Tier 1 capital – unrestricted
Tier 1 capital – restricted
Tier 1 capital
Tier 2 capital – subordinated debt
Tier 3 capital – deferred tax
Total own funds
2020
£bn
2.70
(0.79)
2019
£bn
2.64
(0.70)
0.04
(0.06)
(0.11)
(0.08)
(0.30)
1.54
0.38
1.92
0.53
0.11
2.56
(0.35)
1.45
0.37
1.82
0.26
0.09
2.17
Tier 1 capital – unrestricted
Tier 2 capital
Tier 1 capital – restricted
Tier 3 capital
Leverage
The Group’s financial leverage increased by 5.6 percentage
points to 24.2% (2019: 18.6%). The increase was primarily
due to the issue of £260 million of Tier 2 subordinated
debt in June 2020.
At 31 December
Shareholders’ equity
Tier 1 notes
Financial debt – subordinated debt
Total capital employed
Financial-leverage ratio1
Note:
2020
£m
2019
£m
2,699.7
346.5
516.6
3,562.8
2,643.6
346.5
259.0
3,249.1
24.2%
18.6%
1. Total IFRS financial debt and Tier 1 notes as a percentage of
total IFRS capital employed.
Credit ratings
Moody’s Investors Service provide insurance financial-
strength ratings for U K Insurance Limited, the Group’s
principal underwriter. Moody’s rate U K Insurance Limited
as “A1” for insurance financial strength (strong) with a
stable outlook.
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 associated
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.
30
Direct Line Group Annual Report and Accounts 2020
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. When this includes an element of
indemnity for recurring costs, such as loss of earnings or
ongoing medical care, the settlement calculations apply
the statutory discount rate (known as the Ogden discount
rate) to reflect the fact that payment is made on a one-off
basis rather than periodically over time. The current Ogden
discount rate is minus 0.25% for England and Wales, minus
0.75% in Scotland, and 2.5% in Northern Ireland.
The Group reserves its large bodily injury claims at the
relevant discount rate for each jurisdiction, with the
overwhelming majority now reserved at minus 0.25% as
most will be settled under the law of England and Wales.
The Ogden discount rate will be reviewed again at the
latest in 2024. There has been an ongoing reduction
in large bodily injury exposures as a result of continued
positive prior-year development of claims reserves,
and a higher proportion of reserves being covered by
reinsurance as a result of the decision to opt for a lower
reinsurance attachment point from 2014 onwards.
If the claimant prefers, large bodily injury claims can
be settled using a PPO. This is an alternative way to
provide an indemnity for recurring costs, making regular
payments, usually for the rest of the claimant’s life. These
claims are reserved for using an internal discount rate,
which is progressively unwound over time. As it is likely
to take time to establish whether a claimant will prefer
a PPO or a lump sum, until a settlement method is agreed
the Group makes assumptions about the likelihood that
claimants will opt for a PPO. This is known as the
PPO propensity.
The Group’s prior-year reserve releases were £173.8 million
(2019: £294.5 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 with an appropriate
degree of conservatism. Assuming current claims trends
continue, the contribution from prior-year reserve releases
is expected to remain significant.
Claims reserves net of reinsurance 2020
(£m)
£2,591.7m
518.5
104.8
289.5
1,678.9
Claims reserves net of reinsurance 2019
(£m)
£2,670.0m
516.1
88.5
266.3
1,799.1
Motor
Home
Rescue and other personal lines
Commercial
www.directlinegroup.co.uk
31
Strategic Report Finance review continued
The Covid-19 pandemic has led to the largest shock to the UK economy on record and the outlook remains unusually
uncertain at year end 2020. Much depends on the evolution of the pandemic and measures taken to protect public
health, as well as the transition to the new trading arrangements between the EU and the UK. In addition to concerns
about general indicators of economic health, such as falls in gross domestic product, rising unemployment and rising
public sector debt ratios, the Group’s reserves are exposed to the risk of changes in claims development patterns and
claims inflation resulting from the pandemic. Changes in claims frequency present greater uncertainty for the unearned
part of the business, whereas uncertainty over the level of claims severity has a greater impact on the earned claims
reserves. Claims severity risk is particularly acute with respect to care costs for large bodily injury claims and car repair
costs due to potential supply chain interruptions. The Group has therefore developed additional claims inflation
scenarios, which look at 100 basis point changes in the claims inflation assumed in the actuarial best estimate over the
next two years and these can be found in the table below.
Sensitivity analysis – the discount rate used in relation to PPOs, changes in the assumed Ogden
discount rate and claims inflation
The table below provides a sensitivity analysis of the potential net impact of a change in a single factor (the internal
discount rate used for PPOs , the Ogden discount rate or claims inflation) with all other assumptions left unchanged.
Other potential risks beyond the ones described could have additional financial impacts 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 0.75% compared to minus 0.25%
(2019: 0.75% compared to minus 0.25%)
Impact of the Group reserving at a discount rate of minus 1.25% compared to minus 0.25%
(2019: minus 1.25% compared to minus 0.25%)
Claims inflation
Impact of a decrease in claims inflation by 100 basis points for two consecutive years
(new scenario in 2020)
Impact of an increase in claims inflation by 100 basis points for two consecutive years
(new scenario in 2020)
Notes:
Increase / (decrease) in profit
before tax1,2
2020
£m
2019
£m
45.9
48.5
(62.7)
(66.5)
43.7
53.3
(61.1)
(75.0)
32.4
(32.2)
–
–
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 on the direct impact of a permanent change in the discount rate in England and
Wales 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. This is intended to ensure that reserves are appropriate for current and potential future developments.
The PPO sensitivity above is calculated on the basis of a change in the internal discount rate used for the actuarial best
estimate reserves as at 31 December 2020. It does not take into account any second order impacts such as changes in
PPO propensity or reinsurance bad debt assumptions.
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 £130 million and cover is placed annually on 1 July up to a modelled 1-in-200 year loss event of £1,125 million.
– Motor reinsurance to protect against a single claim or an accumulation of large claims which renews on 1 January.
The retained deductible is set at an indexed level of £1 million per claim but the reinsurance is only 75% placed up to
a level of £10 million and the protection above £10 million is subject to an additional aggregate retention of £37.5
million. This programme was renewed on 1 January 2021.
– Commercial property risk reinsurance to protect against large individual claims with a retained deductible of £4.0 million
which renews annually on 1 July.
32
Direct Line Group Annual Report and Accounts 2020
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
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
Fixed – “Key rate duration
matched”
Tier 1 equity
Investment-grade credit
Fixed
Tier 2 sub-debt (swapped fixed to floating)
Commercial real estate loans and cash
Floating
Tier 2 sub-debt (fixed)
Surplus − tangible equity
Investment-grade credit and cash
Fixed or floating
Investment-grade credit, short-term high
yield, cash and government debt
securities
Fixed or floating
Asset allocation and benchmarks – U K Insurance Limited
The current strategic asset benchmarks for U K Insurance Limited 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 investment holdings
Benchmark
holding
2020
Actual
holding
2020
Benchmark
holding
2019
Actual
holding
2019
66.0%
6.0%
3.0%
75.0%
3.0%
78.0%
4.0%
6.5%
6.0%
5.5%
100.0%
63.8%
6.0%
1.8%
71.6%
0.4%
72.0%
4.5%
3.5%
15.0%
5.0%
100.0%
65.0%
6.0%
3.0%
74.0%
5.0%
79.0%
5.0%
4.0%
7.0%
5.0%
100.0%
62.5%
6.9%
1.8%
71.2%
1.7%
72.9%
4.9%
3.7%
13.4%
5.1%
100.0%
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33
Strategic Report Finance review continued
Investment holdings and yields – total Group
Investment-grade credit1
High-yield
Investment-grade private placements
Credit
Sovereign1
Total debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents2
Investment property
Equity investments3
Total Group
Notes:
Allocation
(£m)
2020
Income
(£m)
Yield
(%)
Allocation
(£m)
2019
Income
(£m)
3,736.6
349.0
103.9
4,189.5
25.5
4,215.0
264.5
206.7
1,168.2
292.1
3.2
6,149.7
76.3
18.9
2.7
97.9
0.7
98.6
5.8
6.5
2.5
13.7
–
127.1
2.1%
5.1%
2.6%
2.3%
1.1%
2.3%
2.1%
3.3%
0.2%
4.7%
0.0%
2.1%
3,676.8
390.8
104.0
4,171.6
99.8
4,271.4
278.1
205.7
896.3
291.7
–
5,943.2
82.1
21.2
2.8
106.1
2.3
108.4
7.0
6.9
7.9
16.2
–
146.4
Yield
(%)
2.3%
5.4%
2.6%
2.3%
1.8%
2.5%
2.5%
3.4%
0.8%
5.3%
0.0%
2.4%
1. Asset allocation at 31 December 2020 includes investment portfolio derivatives, which have a mark-to-market asset value of £7.7
million included in investment-grade credit and £0.3 million in sovereign debt (31 December 2019: £81.8 million and nil respectively).
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.
3. Equity investments consist of an equity fund which is valued based on external valuation reports received from a third-party
fund manager.
At 31 December 2020, total investment holdings of £6,149.7 million were 3.5% higher than at the start of the year,
primarily reflecting the cash received on issue of the Tier 2 subordinated debt. Total debt securities were £4,215.0 million
(31 December 2019: £4,271.4 million), of which 2.6% were rated as ‘AAA’ and a further 54.4% were rated as ‘AA’ or ‘A’.
The average duration at 31 December 2020 of total debt securities was 2.8 years (31 December 2019: 2.5 years).
At 31 December 2020, total unrealised gains, net of tax, on available-for-sale investments were £83.9 million
(31 December 2019: £47.5 million).
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 function 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 https://www.directlinegroup.
co.uk/en/who-we-are/governance/other-policies.html.
34
Direct Line Group Annual Report and Accounts 2020
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. Taxes borne and collected in other tax jurisdictions have not been included in this note as the
amounts are minimal in the context of the wider UK Group.
During 2020 the sum of taxes either paid or collected across the Group was £888.0 million. The composition of this
between the various taxes borne and collected by the Group is shown below.
At 31 December
Current-year corporation tax charge
Irrecoverable value added tax incurred on overheads
Irrecoverable value added tax embedded within claims spend
Employer’s national insurance contributions
Other taxes
Total taxes borne
At 31 December
Insurance premium tax
Value added tax
Employee’s pay as you earn and national insurance contributions
Total taxes collected
2020
£m
95.2
79.1
158.6
39.8
9.1
381.8
2020
£m
397.0
11.3
97.9
506.2
Total taxes borne by tax type (£m)
£381.8m
Total taxes collected by tax type (£m)
£506.2m
9.1
39.8
95.2
97.9
11.3
237.7
Corporation tax
Irrecoverable VAT
Employer’s NIC
Other taxes
397.0
Insurance premium tax
VAT
Employee’s PAYE and NIC
Neil Manser
Acting Chief Financial Officer
www.directlinegroup.co.uk
35
Strategic Report Operating review
Motor
Own brand in-force policies increased by 0.6%, with an overall
increase in in-force policies of 0.4% to 4.1 million.
Own brand gross written premium reduced by 1.5%, overall gross
written premium reduced by 2.1%.
Operating profit of £363.5 million was £60.9 million higher than prior
year due to lower claims frequency, mainly due to Covid-19
restrictions, partly offset by lower prior-year reserve releases.
Gross written premium by channel
30.2%
2.8%
67.0%
In-force policies
(‘000s)
4,061
(2019: 4,043)
Gross written
premium
£1,616.9m
(2019: £1,651.6m)
Operating
profit
£363.5m
(2019: £302.6m)
Direct
Partnerships
Price comparison
websites
Combined
operating ratio
87.7%
(2019: 94.8%)
36
Direct Line Group Annual Report and Accounts 2020
In-force policies (thousands)
Of which direct own brands
Gross written premium
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Operating profit
2020
2019
4,061
3,943
4,043
3,921
£1,616.9m £1,651.6m
69.3%
2.6%
22.9%
94.8%
£363.5m £302.6m
59.8%
3.2%
24.7%
87.7%
Overview
In 2020, the motor market experienced disruption driven
by Covid-19 lockdowns, with reductions in claims frequency
and lower new business shopping. These trends were
reflected in lower average premiums.
Against this backdrop, the Group focused on providing
financial support to its customers experiencing financial
difficulties while maintaining a focus on underwriting
discipline and indemnity management in a highly
competitive market.
During the year, the Group continued to focus on technology
and business transformation. Despite the operational
challenges in moving to remote working, further progress
was made on the roll-out of the Group’s new motor
platform with roll-out completed for Privilege new
business and renewal customers in the year and scheduled
to be started for Churchill PCW and new phone business in
Q1 2021. Motor improved its PCW competitiveness with the
launch of the Darwin brand on two more PCWs helping
drive strong growth during the year. In addition, the Group
launched a new “Mileage Moneyback” proposition for Direct
Line Motor customers.
The Group’s in-house vehicle repair network continued
to repair customers’ vehicles and prioritised repairs for
NHS workers.
The combination of market dynamics and strategic
progress resulted in a current-year attritional loss ratio of
66.6% (2019: 81.2%).
Performance
Motor in-force policies grew by 0.4% to 4.1 million with own
brand in-force policies up by 0.6% at 3.9 million. Strong
retention was partially offset by a slow down in the new
business market as new car sales fell and fewer new drivers
entered the market. The Group saw good growth in the
PCW channel as both Churchill and Darwin strengthened
their propositions.
Note:
1. Average incepted written premium excluding IPT for Motor own
brands (covering 96.5% of Motor) for year end 31 December 2020.
Mileage refunds
For our customers who were experiencing immediate
financial difficulty due to the impact of Covid-19, we
implemented a range of support measures. We waived
cancellation fees and offered payment deferrals for
people who had lost their job or seen changes to their
employment. We recognised that the lockdown was
changing customers’ behaviour and invited every
customer to contact us if their annual mileage had
reduced, resulting in thousands of premium refunds
and waived administration fees. We also launched a
new Direct Line “Mileage MoneyBack” proposition
giving customers the flexibility to update their mileage
at the end of their policy and claim a refund on the
miles not driven when the policy comes up for renewal.
The Group offered premium refunds to all customers
where miles driven were expected to be lower than
anticipated at policy inception. Furthermore, the Group
launched a “Mileage MoneyBack” proposition for all Direct
Line customers such that customers would be able to
receive a refund at the end of the policy period where they
had driven less than expected. Gross written premium
reduced by 2.1% to £1,616.9 million, primarily due to lower
average premium.
Motor own brand average premium1 reduced 2.0% during
2020 due predominantly to a 4.0% impact from reducing
risk mix following lower new car sales and fewer new
drivers entering the market. Motor risk-adjusted prices,
before taking account of lower claims frequency,
increased by 1.8%. Market premium deflation accelerated
through 2020 as claims frequency remained low.
The Motor result has been significantly affected by the
factors surrounding Covid-19, with the current-year
attritional loss ratio improving by 14.6 percentage points
to 66.6% (2019: 81.2%). The majority of this reduction
reflects lower levels of claims frequency as driving
patterns evolved through the year. A relatively normal first
quarter was followed by a halving of claims frequency
during the second quarter with less significant but still
lower levels of claims frequency through the rest of the
year. While claims frequency was down as fewer miles
were driven, claims severity was higher than the Group’s
medium-term expectation of 3% to 5% inflation per
annum. Claims severity has been impacted by longer
repair times and consequent greater credit hire costs and
additional cleaning and by extending the scope of vehicle
replacement as part of the customer initiatives.
Although it is not possible to entirely adjust for all of
the above factors, the Group believes that it made some
underlying progress in reducing the current-year loss ratio
during the year.
In total, prior-year reserve releases were £79.9 million
lower year on year at £100.6 million. The 2019 prior-year
reserve releases included a strengthening of £15.9 million
as a result of the change in the Ogden discount rate to
minus 0.25% from an assumed rate of 0%.
Overall Motor’s reported combined operating ratio
improved by 7.1 percentage points to 87.7% (2019: 94.8%).
The improvements in the current-year attritional loss ratio
were offset by a 0.6 percentage point increase in the
commission ratio, primarily due to increased volume
related commission payments to PCWs, a 1.8 percentage
point increase in the expense ratio and a 5.1 percentage
point reduction in prior-year reserve releases.
www.directlinegroup.co.uk
37
Strategic Report
Operating review continued
Home
Total in-force policies 1.7% higher at 2.6 million. Own brand policies
were 4.1% higher at 1.8 million principally due to strong growth in
the PCW channel where new business sales increased by over 30%.
Total gross written premium was 1.5% lower at £577.9 million.
Own brand gross written premium was 1.0% higher.
Total operating profit was £49.2 million lower than prior year due
to £27.0 million of major weather costs (2019: £3.0 million) alongside
a reduction in prior-year reserve releases.
Gross written premium by channel
In-force policies
(‘000s)
2,638
(2019: 2,594)
Gross written
premium
£577.9m
(2019: £586.6m)
Operating
profit
£101.4m
(2019: £150.6m)
28.0%
15.8%
56.2%
Direct
Price comparison
websites
Partnerships
Combined
operating ratio
87.1%
(2019: 80.3%)
38
Direct Line Group Annual Report and Accounts 2020
In-force policies (thousands)
Of which direct own brands
Gross written premium
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Operating profit
2020
2019
2,638
1,837
2,594
1,765
£577.9m £586.6m
46.8%
9.7%
23.8%
80.3%
£150.6m
55.6%
8.1%
23.4%
87.1%
£101.4m
Overview
In 2020 the home market continued to shift towards the
PCW channel and Covid-19 led to changes in claims mix
with fewer claims for escape of water and theft as more
people were at home.
The Home segment grew direct own brands policy count
due to strong PCW performance reflecting the Group’s
improved focus and capability in this channel. Direct Line
policies remained stable over the period. Partnership
policy count continued to reduce, partly due to the
continued run-off of some schemes whilst bank branch
sales reduced due to lower footfall.
Home continued to focus on its transformation with
the acquisition of Brolly, a small digital insurer. The team
behind Brolly joined the Group and will help fast track our
ability to deliver tailored products to the market. We also
agreed a two year extension with NatWest Group for
Home insurance.
Home operating profit of £101.4m was lower due to higher
weather-related claims costs, lower prior-year reserve
releases and lower investment return, partly offset by
favourable claims experience across other perils.
Notes:
1. Average incepted written premium excluding IPT for Home
own brands for year end 31 December 2020.
2. See glossary on pages 224 to 226 for definitions and appendix A
– Alternative performance measures on pages 227 to 230
for reconciliation.
Performance
In-force policies for Home’s own brands increased by 4.1%
in 2020 to 1.8 million policies. Retention and new business
were strong with particular strength in PCW new business
which grew over 30%. This reflected the Group’s increased
focus on, and capability in, the PCW channel. Partnership
volumes reduced by 3.4%; Prudential and Sainsbury’s
partnerships are closed to new business and continued
to run off in line with expectations.
Gross written premium was 1.5% lower than 2019, primarily
due to the reduction in partnership volumes. Own brands
gross written premium increased by 1.0% as growth in
in-force policies was offset by lower average premium.
Home own brand average premium1 reduced by 3.8%
primarily reflecting a change in mix towards lower risk and
consequently lower average premium policies in the PCW
channel. Risk-adjusted prices reduced by 1.2% reflecting
initiatives taken to reduce claims inflation and actions
taken to reduce the differential between new business
and renewal prices.
The current-year attritional loss ratio, excluding major
weather event claims, improved by 0.8 percentage points
to 52.7%. Home has experienced a change in mix towards
more accidental damage claims and fewer theft claims
during 2020 with continuing positive trends in escape of
water severity. Whilst the Covid-19 pandemic is believed
to have contributed positively to these trends, the impact
is not significant.
The commission ratio of 8.1% was 1.6 percentage points
lower than 2019 due to lower profit share payments
to partners.
Home’s combined operating ratio increased by 6.8
percentage points to 87.1% (2019: 80.3%). This was driven
primarily by a 5.3 percentage point reduction in prior-year
releases and a 4.3 percentage point increase in major
weather costs partly offset by an improvement in the
current-year attritional loss ratio. Normalised for weather,
the combined operating ratio was 3.4% percentage points
higher than 2019 at 90.3%2 (2019: 86.9%).
Peace of mind when it matters most
At the start of the year we supported customers
affected by Storms Ciara and Dennis, which saw the
Group provide in the region of £25 million in claims
payments so customers could get their lives back
on track.
At one point 6,500 customers got in touch to tell us
their homes had been damaged by Storm Ciara’s
100mph winds and torrential rain – over four times the
calls we had seen the previous week. Our Claims teams
coordinated our Group response, as well as colleagues
on the ground in our Direct Line Defenders and
Churchill branded vehicles who were there for our
customers when it mattered most, so they could give
them peace of mind that we were able to help at this
difficult time.
www.directlinegroup.co.uk
39
Strategic Report
Operating review continued
Rescue and other
personal lines
In-force policies
(‘000s)
7,105
(2019: 7,377)
Gross written
premium
£417.8m
(2019: £436.0m)
Operating
profit
£6.8m
(2019: £39.1m)
Combined
operating ratio
102.0%
(2019: 95.4%)
The Group’s direct Rescue brand, Green Flag, grew in-force policies
by 4.8% and gross written premiums by 5.2% in the year.
Total in-force policies and gross written premium reduced by 3.7%
and 4.2% respectively, reflecting lower premium from Travel partly
offset by higher premium in Green Flag.
Operating profit of £6.8 million included £51.2 million
(2019: 45.2 million) profit for Rescue largely offset by loss of
£44.4 million (2019: £6.1 million loss) for Other Personal Lines.
Gross written premium by product
10.6%
17.4%
39.9%
32.1%
Rescue
Travel
Pet
Other personal
lines
Meeting our customers’ travel needs
We have invested in and enhanced
our digital platform, which has
enabled us to deliver for our travel
customers. This year we significantly
accelerated our digital capabilities,
and quickly mobilised an online
claims process after the national
lockdown. This new online forms
and prioritisation process has
helped us handle claims up to five
times faster. The Travel team have
been exceptionally busy with travel
claims over the pandemic; during
this period, we received 87,500
Covid-19 related travel claims and
have brought home over 900
customers who were stranded
overseas. To cope with the
increased demand, we retrained
over 500 of our colleagues to
understand the changes in travel
guidance as the pandemic
progressed.
40
Direct Line Group Annual Report and Accounts 2020
In-force policies (thousands)
Of which direct own brands
Gross written premium
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Operating profit
2020
2019
7,105
1,114
7,377
1,063
£417.8m £436.0m
66.9%
6.4%
22.1%
95.4%
£39.1m
61.7%
16.4%
23.9%
102.0%
£6.8m
Overview
Rescue and other personal lines consists of Rescue
products, including those sold through the Green Flag
brand, and other personal lines insurance, including
Travel, Pet and Creditor, which are sold through own
brands and partnership arrangements.
Green Flag’s ongoing transformation, positioning itself as
the challenger brand in the rescue market, continued in
2020 with the launch of a new claims system. Throughout
the pandemic in 2020 Green Flag offered free breakdown
cover to NHS workers and offered free vehicle health
checks to all its customers.
Green Flag’s in-force policy count continued to grow, and
in August it recorded its biggest sales month since 2012.
Policy count growth was slower overall as there were
fewer cars on the road and fewer miles driven due
to lockdown restrictions. The restrictions and changes to
customer behaviours also led to lower claims in the year
which contributed to an increase in Rescue operating
profit to £51.2 million.
Travel experienced elevated claims being registered in
2020, particularly during the first lockdown and
operational capacity was strengthened to support
customers. In addition, the Group has taken a cautious
stance in its approach to Travel claims reserving.
Overall Rescue and other personal lines made a small
operating profit of £6.8 million as the strong profit in
Rescue was largely offset by a loss of £44.4 million in other
personal lines due to Travel.
Performance
The combined operating ratio for Rescue and other
personal lines increased by 6.6 percentage points to
102.0% (2019: 95.4%) due predominantly to Travel which
incurred increased claims handling costs supporting
customers throughout 2020 and higher commissions
to partners. The Group has taken a cautious stance in
its reserving for travel claims.
Rescue in-force policies reduced by 1.4% to 3.4 million and
gross written premium reduced by 0.5% to £166.7 million.
Green Flag Rescue continued to grow its higher average
premium direct business during 2020, increasing in-force
policies by 4.8% to 1.1 million and gross written premium
by 5.2% to £83.1 million. Other Rescue lines, which include
the linked channel, where cover can be purchased with a
Group Motor policy, and Rescue partnerships, saw in-force
policies and gross written premium reduce by 4.2% and
5.5% respectively.
The combined operating ratio for Rescue of 76.5% was
5.0 percentage points better than 2019’s ratio of 81.5%.
Lower claims frequency during Covid-19 lockdown
alongside lower claims costs due to fewer long-distance
recoveries, was partially offset by supplier network support
payments and free rescue given to NHS staff. Approximately
half of the improvement in the combined operating ratio
is expected to be one-off.
Other personal lines (comprising Travel, Pet, Creditor and
policies tailored to mid- to high-net worth customers)
in-force policies reduced by 5.7% to 3.7 million primarily
due to lower Travel, following the Group’s suspension of
sales in Q2 and Q3, as a result of the Covid-19 lockdown,
and continued reductions in packaged bank volumes.
Gross written premium for Other personal lines decreased
by 6.5% with reductions across all lines except Pet, where
premium levels were maintained.
Other personal lines combined operating ratio increased
by 14.4 percentage points to 118.5%. The increase is entirely
due to Travel where the Group has incurred increased
claims handling costs supporting customers throughout
2020, has taken a cautious stance in its reserving and has
incurred additional commission payments, particularly on
packaged bank account business.
Transforming the way rescue service is delivered
Being able to anticipate and adapt quickly is at the heart
of our strategy. This year, Green Flag expanded its service
to support the NHS during lockdown, whilst updating its
user-friendly “Green Flag Rescue Me” app which has
seen more customers interact digitally and receive
exceptional1 service. It has coordinated 78,931 rescues and
seen a 30% increase in people accessing it during 2020.
Part of the app’s success is based on the ability to
introduce enhancements quickly, giving the Green Flag
team greater agility to meet customer needs and service
more claims digitally.
Elsewhere, Green Flag continues to record digital
milestones by using advanced technology systems to
reduce our mileage by sending customers the right
resource first time. This leads to an efficient customer
service but also helps minimise our carbon emissions
in what is one of the most carbon intensive parts of our
operation. Similarly our “Phone Fix” initiative means we
are fixing approximately 6% of jobs over the phone with
customers, an increase of 3%, across all jobs, in “Phone
Fix” compared to the previous year, resulting in saving
miles driven.
Note:
1. Trustpilot score of 4.4/5 (23/02/21).
www.directlinegroup.co.uk
41
Strategic Report
Operating review continued
Commercial
Total gross written premium increased by 7.4% with direct own
brands increasing by 9.3%.
Strong performance in Direct Line for Business as it continued to
focus on micro business tailored propositions.
NIG and other gross written premium grew by 6.6%, benefiting from
improvements arising from the re-platforming of the products on its
award-winning electronic trading platform and improvements in Van
insurance pricing.
Gross written premium by channel
28.8%
71.2%
Direct
NIG & other
In-force policies
(‘000s)
811
(2019: 775)
Gross written
premium
£567.8m
(2019: £528.9m)
Operating
profit
£50.4m
(2019: £54.6m)
Combined
operating ratio
95.5%
(2019: 95.7%)
42
Direct Line Group Annual Report and Accounts 2020
In-force policies (thousands)
Of which direct own brands
Gross written premium
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Operating profit
2020
2019
811
560
775
541
£567.8m £528.9m
52.7%
18.5%
24.5%
95.7%
£54.6m
51.4%
18.7%
25.4%
95.5%
£50.4m
Overview
In 2020 customers continued to seek cover in the direct
market that was flexibly tailored to their individual needs.
Against this backdrop, Commercial maintained
underwriting discipline and grew its policy count across
all product lines.
Direct Line for Business continued to grow policy count
through its ongoing focus on offering micro business
tailored propositions, with the launch of its Van insurance
product at the start of the year.
Commercial also grew policy count through more
competitive pricing in the traditional broker channel as
well as through the PCW channel via the Churchill brand,
following investment and focus on digital, pricing and
marketing of the brand.
Commercial’s current-year attritional loss ratio continued
to improve. Higher weather event costs were offset by
fewer claims associated with the Covid-19 pandemic
and UK lockdowns and underlying claims benefits from
Commercial’s ongoing investment in pricing
and underwriting.
Performance
Commercial in-force policies of 811,000 increased by 4.6%
compared with 2019, reflecting strong growth in both
Commercial direct own brands and NIG and other.
Commercial direct own brands grew in-force policies
by 3.5% supported by the growth in Van for Direct Line,
where the product was added to the new Commercial
direct platform, and for Churchill where Van is sold
through the PCW channel. Gross written premium
increased by 9.3% to £163.3 million with increases across
all Commercial direct product lines.
NIG and other in-force policy numbers were 7.3% higher
and gross written premium grew by 6.6% to £404.5
million. This reflected growth across all categories as the
book continued to benefit from improvements arising
from the re-platforming of the products on its award-
winning electronic trading platform and improvements
in Van insurance pricing.
The current-year attritional loss ratio in Commercial
improved by 6.0 percentage points to 59.6%. This was
driven by improvements to underwriting through pricing
and risk selection as well as frequency benefits in motor
lines since the end of Q1. This was partially offset by
Covid-19 related business interruption claims at £6 million.
Prior-year reserve releases were £8.2 million lower at £56.8
million, primarily due to lower general liability reserve
releases on older accident years. 2019’s result included a
£1.0 million strengthening of prior-year reserves as a result
of the change in the Ogden discount rate to minus 0.25%
from an assumed rate of 0%.
The combined operating ratio for Commercial improved
slightly by 0.2 percentage points to 95.5% (2019: 95.7%) as
an improvement in the current-year attritional loss ratio of
6.0 percentage points was largely offset by an increase in
claims related to severe weather, a reduction in prior-year
reserve releases and an increase of 0.9 percentage points
on the expense ratio.
NIG self-help online portal
The NIG Risk Assist tool was launched to help business
owners manage and respond to a broad range of risks
through a comprehensive range of easy-to-use
online tools.
The online portal offers a wide range of services, such
as: unlimited online access to health & safety and
HR professionals for support and guidance on specific
issues facing their businesses; unlimited phone
counselling and medical advice; a suite of online
eLearning courses to help train and develop staff;
assessments, guides and templates to keep up with
changing rules and regulations; business continuity
planning to keep our customers in business when
disaster strikes; and much more. The proposition was
launched during the Covid-19 pandemic and has since
been a valuable support for our customers.
www.directlinegroup.co.uk
43
Strategic Report
Sustainability
Building a sustainable future
Our approach to sustainability is based
on a simple premise: the role we play as
a business to support the stakeholders
we interact with on a daily basis –
customers, shareholders, suppliers,
our people, communities and the planet
– makes the Group stronger and can bring
future rewards.
We are transforming to maintain a
competitive edge, but doing it in a way
that is sustainable and mindful of our
impact on society and the environment.
Our established five pillar sustainability strategy, underpinned by our vision and purpose, has given the Group
confidence when responding to the unforeseen circumstances of 2020. By aiming to be a force for good and giving
people peace of mind we have tried at all times to deliver on our ambition of doing the right thing for all of
our stakeholders.
Sustainability pillars
Customers
People
Society
Planet
Governance
Earn our customers’
trust by
demonstrating
how we are acting
in their best interests.
Encourage a culture
that celebrates
difference and
empowers people so
that they can thrive.
Use our expertise
to improve outcomes
for society and
the communities
we serve.
Protect our business
from the impact of
climate change and
give back more to
the planet than we
take out.
Look to the long
term for our
stakeholders,
build a reputation
for high standards
of business conduct
and a sustainable
business.
Gaining confidence from 2020
We remained focused on our sustainability strategy
despite the disruption created by the Covid-19 pandemic.
Far from restricting the Group, it enhanced our response.
The way we supported customers in need, made remote
working effective, created flexible insurance products
and made ourselves accountable for reducing carbon
emissions are all significant milestones. We also supported
partners in our supply chain when lockdown impacted
their operations.
2020 has opened up new possibilities, provided fresh
insight and given the business more confidence to drive
sustainable outcomes, many of which have the potential
to leave a lasting impact. More detail can be found in our
summary of activity for each of our sustainability pillars on
pages 48 to 61.
44
Direct Line Group Annual Report and Accounts 2020
This year we published our first Sustainability Report
which you can view online at:
www.directlinegroup.co.uk/2020_Sustainability_Report
Priorities
1 Meeting customer needs each and every day
2
3
4
Investing in and supporting our great people
Realising the potential of data and technology
Understanding and managing the impact
of climate change
Maximising our impact for all our stakeholders
In 2019, we conducted our first in-depth Materiality
Assessment. It has helped shape the Group’s sustainability
strategy as it prioritises what our stakeholders value,
alongside the impact on the business and how we can use
this insight to build a sustainable business for the future.
We asked a range of business and external stakeholders
to prioritise a range of sustainability issues against our
business priorities through a series of in-depth interviews
and surveys to create a business impact assessment of
risks, impacts and opportunities for the Group.
It means everything from delivering great service to
all customers, investing in our people so they are
supported, harnessing the latest data and technology
and ensuring we manage our suppliers responsibly,
including prompt payment.
Building on the four priorities outlined opposite, in 2020
we chose to actively prioritise social mobility, as well
as developing a diverse and inclusive workforce and
reducing our impact on climate change which our
stakeholders place in the high category. We did this
because each of these issues is an integral part of living
up to our vision of a world where insurance is personal,
inclusive and a force for good.
Materiality matrix
C
Protecting
customers’ data
Pe
Upholding good
labour standards
G
Investing
responsibly
P
G
C
Pe
Supporting
employee
wellbeing
G
Building strong
Board governance
Pe
P
Maximising
employee
engagement
P
Advancing the
low carbon
transition
Reducing our
impact on
climate change
Developing
a diverse
and inclusive
workforce
Pe
Reducing waste
and optimising
resource use
Managing our
supply chain
responsibly
Innovating
products & services
for sustainable
impact
Delivering
great service
to all customers
C
Communicating
clearly and openly
with customers
Investing in training &
developing our people
Very high
need active
management
Harnessing data
& technology
C
Pe
C
P
Adapting to the
impacts of climate
change
G
Appropriate tax
strategy and
transparent
disclosure
G
Controlling
executive pay
High
actively monitoring
Increasing safety
on our roads
S
S
Contributing to
local economic
development
S
Improving social
mobility
S
Driving financial
inclusion
Moderate
tracking
Our Sustainability
Pillars
C
Pe
S
P
G
Customers
People
Society
Planet
Governance
r
e
h
g
H
i
l
s
r
e
d
o
h
e
k
a
t
s
o
t
e
c
n
a
t
r
o
p
m
I
r
e
w
o
L
Lower
Impact on our business
Higher
www.directlinegroup.co.uk
45
Strategic Report
Sustainability continued
United Nations SDGs
In 2015 the United Nations launched 17 Sustainable Development Goals (“SDGs”) to help end poverty, fight inequality
and tackle climate change by 2030. Through our sustainability work, we believe we can contribute to seven of the Goals.
Detail
Group activity
Good Health and
Well-being
Ensure healthy lives
and promote well-
being for all at all ages.
– Financial wellbeing
– Mental health first
aider network
– Supporting Mind
– Bereavement team
– Carbon offsetting
projects: clean water
in Kenya, clean
cookstoves in
Bangladesh
Sustainability
priorities
2
Pillars
C
Pe
P
S
Quality Education
Ensure inclusive and
equitable quality
education and
promote lifelong
learning opportunities
for all.
– Apprenticeships
– Graduate
programme
– Continuous learning
– Donation to Teach
First
Pe
S
2
P
– Carbon offsetting
projects: clean water
in Kenya, clean
cookstoves in
Bangladesh,
rainforest protection
in Brazil
Gender Equality
Achieve gender
equality and empower
all women and girls.
– New diversity and
inclusion strategy
– Women in Finance
– Thrive network
– Bespoke talent
programmes
Pe
2
Charter
Affordable
and clean energy
Ensure access to
affordable, reliable,
sustainable and
modern energy for all.
– Carbon Offsetting
– Sourcing 100%
Project: clean
cookstoves in
Bangladesh
renewable energy
sources for our
operations
P
4
Decent Work and
Economic Growth
Industry,
Innovation
and Infrastructure
Promote sustained,
inclusive and
sustainable economic
growth, full and
productive
employment and
decent work for all.
Build resilient
infrastructure,
promote inclusive and
sustainable
industrialization and
foster innovation.
– Continuous learning
– Social Mobility
Pledge
– Leadership targets
for BAME and Black
representation
– Carbon offsetting
projects: clean water
in Kenya, clean
cookstoves in
Bangladesh,
rainforest protection
in Brazil
– Tech innovations at
accident repair
centres
– Encouraging electric
– Safe roads
– Carbon offsetting
project: clean water
in Kenya
vehicle use
– Supporting the
adoption of
autonomous
vehicles
Climate Action
Take urgent action to
combat climate
change and its
impacts.
– Commitment to
Science-Based
Targets
– Socially responsible
– Carbon offsetting
projects: clean water
in Kenya, rainforest
protection in Brazil
investing
Pe
S
2
P
P
S
P
S
1
3
4
3
46
Direct Line Group Annual Report and Accounts 2020
External memberships
and benchmarks
Direct Line Group actively supports various initiatives related to climate change, ESG and sustainability.
These supplement our identification and management of climate-related risks, and include:
CDP: The Carbon Disclosure Project is a globally
recognised platform measuring reporting performance
and this year the Group maintained its ‘B’ rating based
on 2019 activity.
Sustainalytics: In 2020 the Group was ranked as an
ESG leader out of all companies assessed in the property
and casualty insurance sector and maintained its top
ten position in the broader insurance industry group of
261 companies.
MSCI: The Group maintained its ‘A’ rating this year
highlighting our Board-level diversity, staff training and
development programmes and the strengthening of ESG
integration into our investment portfolio. The Group is also
in the top quartile for Corporate Governance and Human
Capital development.
RE100: We are in the process of applying for membership
of RE100, a global initiative dedicated to accelerating
a global shift in clean energy. Under this initiative,
we will continue our objective of sourcing 100%
renewable electricity.
PRI: The UN Principles for Responsible Investment,
launched in 2006, is a major collective initiative that seeks
to promote responsible investment among investors and
asset managers. We expect all of our external portfolio
managers to be signatories.
SBTi: The Science Based Targets Initiative helps
companies to determine emission reduction targets in
line with climate science. In 2020 we began the process
of setting new science-based reduction targets for our
Scope 1 and Scope 2 emissions and Scope 3 emissions
under our direct control. These targets will be submitted
for approval within the two-years’ time frame set by the
SBTi (August 2022).
www.directlinegroup.co.uk
47
Strategic Report Sustainability continued
Customers
Earn our customers’ trust by
demonstrating how we are
acting in their best interests
Our Covid-19 response for customers
Throughout 2020 we adapted quickly to the changing
world around us so that we could deliver more for
customers at speed, helping them navigate the disruption
to their lives. Some of the highlights included:
– free rescue cover, fast-track claims and free home
emergencies for our NHS customers;
– individualised support for customers in financial difficulty;
– over 450,000 customers benefiting from support
measures;
– our Travel team settled claims for over 26,000 customers
with payments for those who saw their travel plans
cancelled or curtailed due to Covid-19 disruption
and repatriated over 900 customers stranded
abroad; and
– retrained over 500 people to support travel
customers to navigate the pandemic.
We seek to understand customer needs,
providing real value across our brands and
products. It requires a deep appreciation
of customer expectations, a determination
to provide an exceptional insurance
experience and a consistent desire
to innovate.
We know that communicating clearly and openly with
customers is important to our stakeholders and business.
This is why our Customer Experience Pillars continue to
guide the Group by using a clear framework with the aim
of delivering great customer service. These principles have
been invaluable this year when responding to the Covid-19
pandemic where we adapted to customer needs and
changing circumstances across the business.
Our determination to deliver the best possible customer
value and experience drove our response to Covid-19.
We are proud that our net promoter scores have yet
again demonstrated the willingness of our customers
to recommend our Direct Line brand year on year.
Net promoter score1 – Direct Line brand
2018
2019
2020
0
Note:
145.6
155.0
158.0
50
100
150
200
1. Please see Net Promoter Score KPI on page 19 for
further information.
48
Direct Line Group Annual Report and Accounts 2020
Customer pillars
Expectations
Manage and exceed
my expectations
Ease
Make it as effortless
as possible for me
Personalisation
Treat me like a real
person and not like
a process
Fix-it
Identify the issue,
own it and fix it
Trust
Earn my trust
Empathy
Understand me
and work hard to
build a relationship
Taking action on pricing
The insurance sector operates in a highly competitive
market which works well for most customers. We
support change to improve outcomes for long-standing
customers and that is why we welcome the FCA’s Market
Study on General Insurance Pricing Practices. These
reforms, that aim to equalise customer prices whether
they are renewing or looking for a new policy, should
reduce unnecessary turnover and deliver fairer prices
to all.
Not all insurance products are equal across the market,
with varying levels of cover and service. We offer a range
of propositions to protect our customers, underpinned
by a high-quality claims service for all customers to give
them peace of mind.
We want to earn our customers’ loyalty and give them
a reason to stay with our brands by taking measures
such as:
– actively reviewing customers’ renewal price when they
reach their five-year anniversary with us, as a result of
which many of our customers have seen their
premiums frozen or discounted;
– introducing a facility to enable a customer to opt out of
automatic renewal through our web chat service; and
– investing in a major technology upgrade to help us
make it easier for our customers to manage their
protection, from the moment they think about buying
a policy, managing their cover 24/7, all the way
through to making a claim.
Caring for customers in need
Losing a loved one is always difficult and taking care
of financial matters is the last thing on people’s minds.
This is why we created a dedicated team with specialist
skills to help customers who want everything to be
made as simple as possible when they experience a
bereavement.
All queries are dealt with in one place by experienced
consultants trained to handle the sensitive nature of
these conversations. This helps to make a difficult task,
that nobody wants to face alone, just that little bit easier.
– customers seeking medical assistance abroad are
offered localised care as we can recommend the
nearest medical facility that can support them.
First end-to-end online Home claim
Our digital capability saw us deliver a first for the Group
in 2020 by delivering an end-to-end online claims
process for a Home customer – all registered, processed
and settled fully online. This is the next step in our digital
journey, giving customers the flexibility to handle their
insurance matters how they want.
www.directlinegroup.co.uk
49
Making claims easy
When customers make a claim they want peace of mind
that it is being treated with due care, but we also know
that speed matters. Whether it is fixing cars in our
accident repair centres or assisting people who have
suffered flooding or had their homes hit by storm
damage, we want to help our customers get back
to normal. This year our Travel customers’ plans were
turned upside down so we created a new claims
prioritisation process that has handled claims up to
five times faster for thousands of our travel customers.
Digital developments have also enabled us to make the
claims process easier for customers who wish to claim
online. As a result:
– our new online travel platform gives our customers
the ability to settle small value claims in four minutes
or less, without any human interaction at all; and
Strategic Report Sustainability continued
People
Encourage a culture that
celebrates difference and
empowers people so that
they can thrive
Our Covid-19 response for our people
The Group is nothing without its people. When lockdown
happened we quickly moved 9,000 people to home
working and supported our motor accident repair centres
with enhanced safety measures, offering maximum
flexibility to help our people manage home and work.
We aspire to create an environment where
everyone feels free to be themselves and
succeed in their careers. Our culture is
one where we strive to care about our
customers and one another. That’s what
our values are designed to achieve, and
they underpin who we are and what we
stand for.
Diversity and inclusion strategy
One of our values is “bring all of yourself to work” because
as well as simply being the right thing to do, focusing on
diversity and inclusion makes good business sense and
delivers better outcomes.
This year we completed a comprehensive diversity and
inclusion survey – to which nearly 6,500 of our people
responded. It’s shown us what we do well and where we
need to improve, highlighting a gap between the
experiences of different communities.
These findings have helped to inform a refreshed diversity
and inclusion strategy, with greater ambition and reach.
Supporting race equality
Alongside our survey, we completed an in-depth analysis
of our ethnicity data.
What we found:
– One in six or 17% of our colleagues is Black, Asian or
Minority Ethnic (“BAME”); Black colleagues make up 3%
of the total.
– BAME representation is concentrated in our lower and
middle grades and reduces with seniority.
– If you are Black, mixed ethnicity, or from one of the
smaller ethnic groups, it doesn’t feel as positive to work
for the Group as it does for other colleagues.
50
Direct Line Group Annual Report and Accounts 2020
Our response:
We have signed Business in the Community’s Race
at Work charter and introduced new targets to hold
ourselves to account for improving Black, Asian and
Minority Ethnic representation in leadership roles by
the end of 2022.
13%
Increasing BAME
representation
in leadership roles
from 10% to 13%
1.5%
Increasing Black
representation
in leadership roles from 0.5%
to 1.5%
Making progress
Supported by our employee networks, we have launched
an awareness and education programme to build
empathy and a greater understanding of issues. This
includes a reverse mentoring scheme to help our senior
leaders better appreciate the barriers and challenges
faced by certain communities.
We have introduced new principles for senior-level
recruitment to help protect from bias – including
anonymised CVs and diverse shortlisting, as well as
enhancing the mandatory training completed by
recruiting managers.
All our leaders are completing inclusive leadership training
and in 2021 we’re launching a diversity and inclusion
fluency programme to ensure all people managers
are equipped to have better conversations and support
their teams.
Gender diversity of all employees
Female
Male
Diversity Network Alliance (DNA)
We have a vibrant DNA community that works together
to promote and champion diversity and inclusion within
our business.
53.3%
46.7%
Our strands
– BAME (Black, Asian & Minority Ethnic)
– Belief
– Generations, families & carers
– LGBT+
– Neurodiversity & disability
– Social mobility
– Thrive (representing gender)
The strands are led by volunteers from across the Group
based in locations spanning the UK. They provide a
network for colleagues and allies, as well as guiding our
people policies and what we support externally.
Enabling gender equality
We are proud to be one of only a few companies in the
FTSE 250 with a female Chief Executive Officer and Chair.
We recognise that to enable women to fulfil their
potential, we need to offer them support throughout their
different career stages. Women have a different set of
barriers to men and these need to be navigated in a
different way.
In our 21 accident repair centres we want to encourage
women to think about careers in the bodyshop industry
through awareness of our engineering graduate
programme.
Women in Finance Charter
We are a signatory to the HM Treasury’s Women in
Finance Charter. At the end of 2020, 30% of our senior
leadership were women. We are determined to go further
and this year we took the decision to increase our target
from 30% to 35% female representation in our senior
leadership by the end of 2022 in order to maintain a keen
focus on progression.
Excludes an estimated 0.5% colleagues who identify as non-binary,
gender-fluid or other gender due to data reporting constraints
Gender diversity of senior leadership
Female
Male
38 (2019: 41)
90 (2019: 90)
Gender diversity of senior leadership figures based on 2020
Women in Finance reporting
Ethnicity of all employees
5.6%
9.5%
2.8%
4.3%
Asian
Black
Minority Ethnic
White
Prefer not say
77.8%
Excludes 13% of colleagues who have not submitted an
option for ethnicity
For more information on leadership gender diversity
see page 92
40%
female Board
representation
30%
female senior leadership
representation
51
Strategic Report Sustainability continued
Hampton Alexander Review
The Hampton Alexander Review set a target for FTSE 350
companies to have at least 33% representation of women
on their Board and in their Executive Committee and direct
reports by the end of 2020. We are pleased to have exceeded
this with 40% and 39.1% representation1, respectively.
Tech Talent Charter
As signatories to the Tech Talent Charter, we are committed
to gender diversity across our technology teams. We are
proud to have a 34% female tech team versus a UK average2
of 19% and a signatory average of 25%.
Gender pay gap
Our gender pay gap continues to be low compared to the
broader financial services sector; we know there is more to
do. After three years of reporting we feel we understand
our gender pay gap well, with a large portion of this being
from the under-representation of women at more senior
levels across the Group.
This is why we have continued to invest in development
programmes for high-potential females to support them
in progressing into senior leadership roles. This helps our
women to think differently and start taking risks, put
themselves forward and make a plan to advance more
quickly through the organisation.
Flexibility
Additionally, our My Life policies, offered to all our people,
provide flexibility and support at work to do the things
that matter to people outside work. We believe it’s
important that everyone embraces flexibility because that’s
the only way we’ll ever achieve gender equality. We have
pushed this policy further over the last 12 months to ensure
those with caring or home-schooling responsibilities as a
result of Covid-19 are not disadvantaged.
Supporting and developing our people
As we adjust to this new way of working remotely, we
remain committed to looking after our people. This
includes a programme where both financial and mental
wellbeing are top priorities.
Minimum salaries
Our success is down to the hard work and commitment
of our people and we want to reward them for their
contribution. Whilst we look for ways to boost the reward
proposition for as many of our colleagues as possible, our
focus is to ensure that those in our lowest-paid roles
receive a meaningful pay increase. In March 2020, for the
third year running, we increased our minimum salaries for
full time colleagues working 37.5 hours from £19,000 to
£19,500 which is 19% higher than the Government’s
National Minimum Wage and 5% higher than the Living
Wage Foundation rate outside London, benefiting 5,200
of our people.
Annual incentive plan
The annual incentive plan ensures there is a strong link
between pay and the Group’s performance on specific
metrics, such as our Customers’ Experience agenda which
focuses on making the customer’s journey as easy as
possible, and broadening our diversity impact to include
BAME and Black representation targets at senior
leadership positions.
Employee share incentive scheme
Despite the impact of Covid-19, we are continuing with our
commitment to award free shares. The Group awarded
eligible colleagues 180 shares which were worth £500 in
April 2020. For employees who have been with the Group
since our IPO in 2012, this was our fifth award of free
shares totalling 626 shares which were worth £1,997 at
31 December 2020, plus dividends paid on those shares
which amount to a further £793.
Mental health
We strongly encourage our people to be open about
how they feel both in and out of work so we can best
support them. Our mental health programme includes
ensuring people managers receive specialist training
on dealing with mental health issues. Pre-lockdown
we had a network of trained mental health first aiders
(MHFA) – one on each floor of each of our sites and
we are proud of how quickly our approach adapted
to deliver the same support remotely.
We are determined to raise the profile of mental health,
supporting everyone to be open about how they feel
in and out of work. Over the course of the pandemic
the Group ran frequent pulse surveys to assess the
sentiment and wellbeing of employees whilst many
were working remotely.
Notes:
1. Board representation at 11 January 2021 and Executive Committee & direct report representation at 31 October 2020 as per Hampton-
Alexander data sourcing.
2. Source: https://www.techtalentcharter.co.uk/toolkit
52
Direct Line Group Annual Report and Accounts 2020
Talent pipeline
We have continued to invest in our graduate and
apprenticeship programme over the years and we
recognise they are key to driving our digital agenda
and building a ‘fit for the future’ organisation. To date,
we have recruited over 180 people into our graduate
programme and it is designed to develop the people
who will enable us to create an exciting future.
Our apprenticeship scheme has won the Top 100
Apprenticeship employer three years running, which
reflects our standing in the market.
New ways of working
Earlier this year we took the decision to radically
change the way we worked and transform our trading
and change areas into an agile business. Agile is a way
of working that began in the tech sector to improve the
speed that a product went from conception to market.
We decided that adopting agile values, principles, tools
and most importantly mindset would allow us to
deliver customer value faster. We chose to press ahead
with the transformation as the sudden change to our
work and home lives only served to emphasise why our
people needed to be empowered to self-organise and
create new ways of doing things providing solutions for
customers as quickly as possible. An immense amount
of work went into consultation with our Employee
Representative Body (“ERB”) and our people so that we
could create an agile model that’s true to the Group
and can take advantage of the investment we have
already made in our technology.
Human rights
Happy people deliver better outcomes for our
customers and the business overall so we strive to
ensure that our employment practices and policies
exceed those in the Universal Declaration of Human
Rights. Whether that’s our wellbeing strategy which
supports mental, physical and financial health, or our
My Life policies which help our people balance work
and life priorities or our policy to pay more than the
Living Wage to all our people. We want to help our
people thrive in and outside of work.
Employee Representative Body
We are proud to have an active and engaged ERB. They
help us share and discuss proposals and initiatives that
may affect our future and are consulted as part of any
future change programme. During the agile
transformation the ERB helped individuals understand
what the changes were, helped communicate the
views of colleagues and provided alternative proposals
and approaches.
www.directlinegroup.co.uk
53
Strategic Report Sustainability continued
Society
Use our expertise to improve
outcomes for society and
the communities we serve
Our Covid-19 response for society
The Group wants to support communities throughout the
UK which is why we prioritised social mobility in 2020 and
established our Group Community Fund in response to
the Covid-19 pandemic, working to deliver £3.5 million
to 250 charities, helping over 200,000 people.
How we choose to give back to our
communities and what to campaign on all
have a bearing on society and in turn how
we remain a force for good. The actions we
take are all focused on making a tangible
impact which leads to lasting change.
Our commitment to social mobility
Our diversity makes us stronger. We are a business
employing thousands of people throughout the UK who
all possess a variety of skills, experiences and, crucially,
bring different perspectives to our work.
We pride ourselves on a culture that celebrates difference
and authenticity, where colleagues can bring their whole
self to work.
Celebrating difference, however, is more than simply
catering for a multitude of voices. A person’s background
should never act as a barrier, but like other companies we
know that people still feel held back from making progress.
The reasons can be complex and specific
for each individual. That’s why we have a
renewed sense of purpose in supporting
people throughout their career. It’s not simply
about attracting people into the Direct Line
Group family, but also what happens once they
have joined so that people can be helped to fulfil their
career potential.
That’s why “Getting In, Getting On, Getting Ahead” is how
we think about social mobility as a Company – creating an
environment where people feel confident whatever their
start in life.
SoMo DNA strand
Our newly established Social Mobility Employee Network
– known across the business as “SoMo”– is a driving force
behind how we talk about the issue. What started as a
small group is now growing with over 100 active members.
SoMo seeks to raise awareness of social mobility issues,
establish role models to inspire others from similar
backgrounds, and encourage more open conversations
about social mobility in the workplace. It has provided an
open forum for people to speak about barriers and inspire
confidence, as well as driving some of the Group’s
outreach activity.
54
Direct Line Group Annual Report and Accounts 2020
Social Mobility Action Plan
SoMo group
With the support of our active Social Mobility Employee
Network, we have backed up our decision to sign the
Social Mobility Pledge by working towards creating our
own bespoke Social Mobility Action Plan. This plan
provides a candid assessment of our current approach
and how we can improve.
– We are exploring how to take advantage of remote
working so we can open up new recruitment areas,
starting with a pilot scheme of over 20 apprentice home
workers.
– We are reviewing our recruitment approach to target
social mobility ‘cold spots’ where our main offices are
based.
– We have surveyed colleagues to understand what our
social mobility make-up is across the business because
we know that with meaningful data our interventions
will have more impact.
Insight day
In 2020 we partnered with the
Social Mobility Business
Partnership to run our first work insight and skills day
for bright students from less advantaged backgrounds
to give them the opportunity to hear from companies
directly and learn what career opportunities are available.
It was a pleasure to support their future career aspirations
by explaining what life is like at the Group.
Auto-Raise
We’re delighted to have made a corporate
donation to Auto-Raise, a long-standing
charity partner that supports youngsters
who wish to enter the bodyshop industry and
receive relevant qualifications so they become
the vehicle repairers of the future.
Teach First
We’ve partnered with Teach First,
who recruit, train and place teachers
in schools in some of the most
disadvantaged communities in England. Our funding
will support the training and development of 17 teachers
each year, who will go on to reach over 2,000 pupils.
Colleagues will also be hosting work experience
placements at our offices.
Achievement for All
Our Social Mobility DNA strand this
year used the Group’s Community
Fund to partner with Achievement for All which provide
wellbeing and education support for disadvantaged
young people to thrive emotionally, socially and
academically. Our partnership will focus on schools in
Walsall, Barnsley and Doncaster where our commitment
to social mobility is matched with tangible impact in
communities located near to some of our main office
sites, also offering the opportunity for colleagues to
become mentors.
Envision
This year we supported Envision, who are
long-term partners of our Bristol office to
provide the Community-Apprentice
Programme for school children. By setting
group tasks it aims to empower young
people through problem solving, building
confidence, as well as testing teamwork skills, all guided
by mentors from the Group. Through programmes such
as this it supports participants to gain knowledge about
what skills are required in the work place.
www.directlinegroup.co.uk
55
Strategic Report Sustainability continued
Our tax contribution
A key part of being a responsible corporate citizen is
ensuring that we comply with all applicable tax laws
and regulations and meet our responsibilities both as a
contributor of corporate taxes and as a collector of taxes
on behalf of HMRC. In 2020 the Group’s total tax
contribution was £888.0 million which includes the
Group’s direct and indirect taxation. More information
can be found in the tax contribution section on page 35.
Suppliers
The Group is a long-standing signatory of the Prompt
Payment Code. This year Green Flag supported our
independent network of 200 local rescue businesses
by offering a number of them support payments which
contributed to the protection of over 4,000 key workers
when lockdown started. We take our commitment to
ensuring modern slavery is not present in our supply chain
seriously. The Modern Slavery Act 2015 is incorporated into
our risk profiling, with specific requirements incorporated
in our due diligence and assurance processes.
Group’s 2020 total tax contribution
Our
customers
IPT
£397.0m
HM Treasury
Society
Our suppliers VAT
Our people
PAYE NIC
Our
operations
Our profit
Note:
Other taxes
including
business
rates
Irrecoverable
VAT
Employer’s
NIC
Corporation
Tax
£11.3m
£97.9m
£9.1m
£237.7m
£39.8m
£95.2m
£888.0m1
total tax contribution
Public services
Healthcare
Infrastructure
Welfare
Education
Defence
1. The Group’s total tax contribution in 2020, including direct and indirect tax contributions.
Road safety campaigners
As one of the UK’s leading motor insurers we have a
long tradition of campaigning for improved road safety.
This year we worked with the Parliamentary Advisory
Council on Transport Safety (“PACTS”) to highlight
increased numbers of road deaths and serious injury
where people do not wear a seat belt. Our research
discovered that almost a third (31 per cent) of those
who died in vehicles on Britain’s roads in 2018 were not
wearing a seat belt and that 72 per cent of the British
public wanted the introduction of penalty points for
those caught not wearing a seat belt. We will continue
to campaign with PACTS to increase the penalty for
failing to wear a seat belt because it saves lives.
56
Direct Line Group Annual Report and Accounts 2020
Our Community Fund
We immediately responded to the
Covid-19 crisis by establishing our very
own Community Fund targeting much
needed resource to charities and local
authorities where our main office sites
are based. It was a small way of providing
a helping hand to a variety of causes
throughout the UK.
Phase 1:
£2 million of immediate support to
the most vulnerable, directly assisting
children and families in refuges,
parents needing baby packs, food
banks and community groups
Phase 2:
£500,000 for colleagues to nominate
180 local causes they cared
passionately about with
micro-donations
Phase 3:
£1 million directed towards recovery
efforts focused on four pressing
challenges: social mobility,
marginalised groups, food poverty
and public health
£2m
of immediate
support to the
most vulnerable
£500k
180 charities
received donations
of up to £5,000
£1m
directed towards
recovery efforts
Community Fund 2021
We know that Covid-19 will
continue to dominate our lives
throughout 2021 and we have
allocated £1.5 million to support
charities across the coming year.
Computers for kids
Following our immediate crisis
support to refuges, we funded
700 laptops for KidsOut to
distribute to children in support
of their education. Since then
the first donation from our 2021
Community Fund has seen
£125,000 go towards the
Daily Mail’s Computers for
Kids campaign.
ABI Covid-19 Support Fund
We also donated £3.6 million to the
ABI’s Covid-19 Support Fund which
has supported hundreds of
charities across the UK.
Giving back to our
communities
Colleagues have taken advantage
of our popular Community
Cashback initiative which awards
£250 to chosen charities.
www.directlinegroup.co.uk
57
Strategic Report Sustainability continued
Planet
Protect our business from the
impact of climate change and
give back more to the planet
than we take out.
45%
reduction in energy
consumption
compared to 20131
Enabling and
encouraging
flexible working
69%2
reduction in CO2
emissions (Scope 1 and 2)
compared to 20131
The impact of climate change has far
reaching implications for economies
and societies around the world. We are
determined to contribute to a long-term
sustainable future and know that through
our actions as a business we can
contribute to climate risk mitigation
and help to accelerate the transition
to a low carbon future. There are three
steps to our plan.
Greenhouse gas emissions (tCO2e)3
9
0
9
9
2
,
8
0
3
7
2
,
1
1
6
,
2
2
5
1
3
9
1
,
8
9
3
7
1
,
9
6
6
6
1
,
8
2
3
6
1
,
7
3
1
,
2
1
13
14
15
16
17
18
19
20
Energy consumption (kWh)
Electricity
Gas
Total
2020
16,669,842
21,699,765
38,369,607
Step one:
Disclose to track progress
We have always challenged ourselves to reduce emissions
and energy consumption across the business through
greater transparency. We exceeded our 2020 targets set in
2017 against a 2013 baseline and now intend to hold
ourselves to account against a new 2019 baseline.
We comply with the applicable greenhouse gas reporting
requirements of the Large and Medium-sized Companies
and Groups (Accounts and Reports) Regulations 2008 and
apply the GHG Protocol Corporate Accounting and
Reporting Standard (revised edition) to calculate our
emissions, which includes emissions associated with
electricity consumption using both the Location-based
Scope 2 and Market-based Scope 2 calculation
methodologies. We monitor the intensity metric of
emissions per £ million of net earned premium as a
measure of how efficiently we provide our insurance
products (see page 61). We also engage with the Carbon
Disclosure Project (“CDP”) and recently maintained a ‘B’
rating based on 2019 activity.
We have always published our Scope 1 and 2 emissions,
but this year we wanted to go further by breaking down
our emissions across our offices and our accident repair
centres and by publishing our first TCFD report
(see page 62).
We also began the process of evaluating our Scope 3
emissions starting with those under our direct control
(such as waste disposal and business travel) and
purchased goods and services. Plans are underway to
evaluate the final part of our Scope 3 emissions, and our
investment portfolio in 2021.
58
Direct Line Group Annual Report and Accounts 2020
Help more and more
customers fix cars
over the phone
100%
carbon neutral
business in 20204
100%
of office waste
diverted from
landfill
Aiming to be the most
energy efficient repair
network in the UK
Step two:
Step three:
Commit to tangible actions
We have committed to set Science-Based Targets for
Scope 1, 2 and 3 emissions within the two-years timeframe
set out by the SBTi. On Scope 1 and 2
emissions, we intend to set a target that
enables us to play our part in holding off
some of the worst climate impacts by
limiting the global temperature rise to no
more than 1.5°C above pre-industrial levels.
Offset while we reduce
We know that it will take time to reduce our emissions so
in the meantime we have made a long-term commitment
to be a 100% carbon neutral business by offsetting Scope 1
and 2 emissions as well as the elements of our Scope 3
emissions which are under our direct control.
This year we achieved carbon neutrality by working with
ClimateCare who has over 22 years of experience in
project development, carbon asset development, and
delivery of corporate carbon programmes.
Over the next three years we are funding carbon offsetting
projects which will also deliver high social impact benefits
in three countries.
Notes:
1. See page 66 for more information on reduction targets.
All emission and energy use data reported are related to
UK operations.
2. Scope 1 and 2 emissions are reported here on a like-for-like
basis against a 2013 baseline and exclude emissions from
additional vehicles used during repairs, courtesy car fuel usage
and from vehicles that are Company-funded. For our full Scope
1 and Scope 2 results inclusive of these emissions please see
page 61.
3. Total scope 1 and 2 emissions. The 2019 result of 16,328 tCO2e
differs from the reported result in the 2019 Annual Report and
Accounts of 13,932 tCO2e as it now includes the additional
emissions cited in footnote 2. The 2020 result is inclusive of
these emissions.
4. By offsetting Scope 1 and 2 emissions as well as the elements of
our Scope 3 emissions under our direct control.
www.directlinegroup.co.uk
59
Strategic Report Sustainability continued
Our journey to net zero
Each year we will become less reliant on carbon offsetting
to achieve net zero. Through our “Greener, Cleaner Action
Plan” we aim to mitigate our impact on climate change:
– Offices: Reimagining the way we work by investing in
energy-efficient features, encouraging flexible working,
improving recycling rates, continuing to use 100%
renewable electricity and ensuring 100% of office waste
is diverted from landfill.
– Accident repair centres: Aiming to be the most
energy-efficient repair network in the UK by investing
in our estate and repair processes.
– Green Flag: Reducing mileage and supporting
sustainable transport through efficiency initiatives, such
as optimising our roadside fix rate to reduce our mileage
and tow fewer vehicles.
– Our supply chain: Extending our reach by calculating
and disclosing our Scope 3 purchased goods and
services emissions and exploring how we can work with
individual suppliers to drive lower emissions.
– Our customers: Supporting green choices by
conducting customer market research to explore
attitudes to insurance.
Continuing to invest in energy reduction
measures
This year the Group continued to invest in energy
efficient measures with over £2 million invested in our
office estate including:
– New electric air conditioning systems in our Bromley
office enabling a reduction in gas usage and
better maintainability
– Installation of LED lighting and new power systems
in our Birmingham and Glasgow offices which could
lead to a 50% reduction in electricity use
This year the Group was also awarded the ISO 14001
accreditation by the Lloyds Register Quality Assurance
body for our office management – an internationally
agreed standard that helps organisations improve their
environmental performance.
We have also continued to invest in our auto services
sites catering for their individual energy efficiency needs:
– Installing a new air conditioning system in our
Peterborough site allowing for more accurate
temperature control, alongside a reduction in
electricity usage compared to conventional units
– Training technicians in new repair techniques which
reduce the need for repair materials and reliance on
paint spray booths
– New LED lighting in our Weybridge site enabling
energy savings of up to 60%, a reduction in
maintenance costs over a projected lifespan of
10 to 20 years
– Two new dual electric car charging points in our
Birmingham site preparing for the rise in electric
vehicle usage
60
Direct Line Group Annual Report and Accounts 2020
Our investments: moving climate up the agenda
– 100% of our portfolio will be net carbon neutral
by 2050
– Corporate bond portfolios are committed to a 50%
reduction in weighted average greenhouse gas
emission intensity by 2030
– A preference for companies with carbon reduction
targets approved by the Science Based Targets
initiative
– A preference for companies with at least a 2°C
carbon performance alignment with the Transition
Pathway Initiative
– The exclusion of any companies with a carbon
transition score indicating assets could be
economically stranded
– The exclusion of any mining companies that
generate >5% of revenues from thermal coal
production and electricity generators that derive >5%
of revenues from thermal coal power generation
(unless, in either case, the company has an approved
Science Based Targets initiative plan)
– The exclusion of any companies that are developing
new thermal coal mines or coal burning power plants
– Ensuring all of our investment-grade corporate bond
portfolios maintain an average MSCI ESG rating of ‘A’
Our offsetting projects
Over the next three years, we will offset those emissions
we can’t yet avoid through projects that cut carbon
emissions whilst also delivering tangible benefits to local
communities and environments in three countries:
– Rainforest protection, Brazil: Our funding will support
efforts to prevent unplanned deforestation across
350,000 hectares of the Portel micro region, through
training and educating local communities in alternative
agroforestry methods. By opening up new economic
opportunities, the project is reducing slash and burn
agriculture, which has been one of the largest
contributors to deforestation. The project is also
providing access to official land titles for native families
and is protecting more than 30 vulnerable species.
– Water filters, Kenya: Our funding will support the
distribution of safe water filters for families. As well as
delivering health impacts, the project also reduces the
need for people to boil water to make it safe to drink,
which requires the burning of unsustainable energy
sources such as wood or charcoal. This reduced reliance
on fuel reduces family expenditure and reduces
pressure on forests, as well as cutting carbon emissions.
– Clean cookstoves, Bangladesh: Less than 20% of
Bangladeshi households have access to clean cooking,
instead using traditional “three-stone” fires, contributing
to approximately 49,000 premature deaths a year.
Our funding will support entrepreneurs to produce,
manufacture and distribute the “bondhu chula”, a clean
cookstove designed for an efficient burn to reduce
fuel use.
Group emissions
Our 2020 progress against our new 2019 baseline represents our most transparent emission reporting to date. In 2020
we were able, for the first time, to break out our Scope 1 and Scope 2 emissions into separate performance figures across
our office sites and accident repair centres, and disclose a Scope 3 footprint with greater clarity of the activities under
our direct control. Emission results reported below are all related to UK operations.
Scope 1
Office sites
Auto services1
Total (tCO2e)1,2
Scope 2
Office sites
Auto services
Total (tCO2e)4
Scope 3 emissions under
our direct control
Fuel and energy related activities
Waste generated in operations
Business travel – air travel
Business travel – hotel night stays
Business travel – rail
Employee commuting5
Upstream leased assets1,6
Upstream transportation and distribution of
auctioned vehicles
Total (tCO2e)1
Direct Line Group carbon footprint
(operational control)
Office sites (Scope 1&2 tCO2e)
Auto services (Scope 1&2 tCO2e)
Total Scope 1&2 (tCO2e)
Total Scope 3 under our direct control (tCO2e)
Total (tCO2e)
2020
1,432
6,819
8,251
2020
2019 baseline
1,881
7,838
9,719
2019 baseline
Location-based3 Market-based3 Location-based3 Market-based3
2,176
1,710
0
0
4,516
2,093
0
0
3,886
2020
2,332
413
198
75
63
1,450
63
625
5,219
2020
3,608
8,529
12,137
5,219
17,356
6,609
2019 baseline
2,465
1,245
928
469
410
4,599
193
912
11,221
2019 baseline
6,397
9,931
16,328
11,221
27,549
In addition, we monitor the intensity metric of emissions per £ million annually of net earned premium. This is a
measure of how efficiently we provide our insurance products and allows us to compare our performance year-on-year
and against other insurance companies.
Intensity metric
Year
2020
2019
2018
2017
2016
2015
2014
2013
Notes:
Emissions per £ million of net earned premium7
4.1
5.5
5.4
5.5
6.4
7.7
9.1
9.5
1. The 2019 result differs from the Group’s TCFD 2020 report published in December 2020 as a result of a reclassification of 320 tCO2e
from upstream leased assets (Scope 3 under our direct control) to Scope 1 auto services.
2. The 2019 Scope 1 total of 9,719 CO2e differs from our previously reported figure of 7,365 CO2e in the 2019 Annual Report and Accounts
as it now includes emissions from additional vehicles used during repairs, courtesy car fuel usage and vehicles that are Company
funded, which had not previously been tracked. The 2020 result includes these emissions.
3. Figures for Scope 2 use standard location-based methodology. We follow GHG Protocol to disclose both location and market-based
figures; and as we have secured our energy from 100% renewable sources since 2014, our Scope 2 market-based results are nil.
4. The 2019 Scope 2 total of 6,609 CO2e differs from our previously reported figure of 6,567 CO2e in the 2019 Annual Report and Accounts
following recalculation.
5. Employee commuting is based on UK national averages, not actual individual methods of transport of Direct Line Group employees
commuting. This data is not currently tracked.
6. Upstream leased assets refer to leased office space locations where Direct Line Group does not directly control the energy provision as
it is included in the service agreement.
7. Prior to 2019, the emissions used in the calculation of the intensity metric excluded emissions from additional vehicles used during
repairs, courtesy car fuel usage and vehicles that are Company funded, as these were not previously tracked. The 2019 result has been
re-presented accordingly (reported as 4.7 in the 2019 Annual Report and Accounts). The 2020 result includes these emissions.
www.directlinegroup.co.uk
61
Strategic Report Sustainability continued
Task Force on Climate-related
Financial Disclosures
This year the Group published its first
comprehensive climate disclosure
reporting against the Task Force on
Climate-related Financial Disclosures
(“TCFD”) framework. TCFD has enhanced
our reporting and we are confident it will
continue to do so as we strengthen our
strategic response to one of the biggest
challenges facing the world today.
A summary of the Group’s 2020 TCFD
Report follows.
Governance
The Group prides itself on good sustainability governance
underpinned by our Vision and Purpose and a clear
commitment from the top to align sustainability goals
and ensure relevant accountability across the business.
The Sustainability Steering Group, led by our CEO, drives
the sustainability agenda through our sustainability pillars,
each of which is sponsored by a member of our senior
management team. Our five-pillar sustainability strategy,
endorsed by the Board, aims to foster the highest
standard of ESG practice and deliver long-term
sustainability for all of our stakeholders. The Planet pillar
takes the lead on climate-related issues and is sponsored
by our Chief Risk Officer (“CRO”).
Board and Committees
The potential impact of climate change on the business
(“inbound”), as well as the Group’s impact on the
environment (“outbound”), are issues that have grown
in importance and sit firmly within the Group’s
governance approach.
The Board has oversight on two key aspects of the
Group’s approach:
– the Board considers and approves the Group’s strategic
and financial plan (“the Plan”) annually and monitors
progress at each of its meetings during the year. In
approving the Plan, the Board reviews and approves
the Group’s Own Risk and Solvency Assessment
(“ORSA”), which includes an analysis of the climate
change-related risks to the business; and
– the Board oversees the Group’s sustainability activity
through its Committees which scrutinise and provide
appropriate challenge on the Group’s five pillar
sustainability strategy. The Chair of each Committee
reports to the Board after each Committee meeting,
including on sustainability activities when relevant.
62
Direct Line Group Annual Report and Accounts 2020
For access to the full report please go online at:
www.directlinegroup.co.uk/2020_TCFD_Report
The Board sets and monitors the Group’s performance
against its risk strategy, risk appetite and risk framework
and has also established a risk management model that
separates responsibilities into ‘Three Lines of Defence’.
– The First Line of Defence is the Group’s management
roles with responsibility for owning and managing risks
to achieve business objectives on a day-to-day basis.
– The Second Line of Defence is the Risk Function which
is responsible for the design and implementation of the
Enterprise Risk Management Strategy and Framework,
and provides proportionate oversight of, and challenge
to, the business’s handling of risks, events and
management actions.
– The Third Line of Defence is Group Audit, providing an
independent and objective view of the adequacy and
effectiveness of the Group’s risk management,
governance and internal control framework. The Group
Audit Plan includes sustainability and climate change-
specific reviews.
Management’s role
There are three primary management roles designed
to assign responsibility for the delivery of the Group’s
assessment and management of climate-related issues:
– the CEO has overall responsibility for climate change
and environmental matters;
– the CRO is responsible for overseeing the management
of climate change-related financial risk and sponsors
the Planet pillar of the Group’s sustainability framework.
The CRO is also the senior manager with responsibility
for assessing and monitoring climate change-related
risk. In that capacity, the CRO oversees the work of the
Risk function in analysing and stress testing the
potential future impact of climate change on the
business. The results of these stress tests are submitted
to the Risk Management Committee, the Board Risk
Committee and the Board, including as part of the
ORSA; and
– the Chief Financial Officer (“CFO”) is responsible for
setting the Group’s investment strategy and is advised
by the Investment Committee on the application of ESG
weightings, including those related to climate change,
to the relevant portfolios. The CFO is a member of the
Committee and the CEO, CRO and the Director of
Investment Management & Treasury are attendees.
We have defined the following time horizons for these
risks: Short (1-5 years), Medium (5-10 years), and Long (10+
years). In general, transition risks are likely to materialise
more rapidly than physical risks, which are likely to be
gradual and materialise in the longer term. The timing
of liability risks is less certain due to the nature of
the exposure.
In addition, the Climate Change Working Group has been
established to help assess the potential impacts of climate
change on the Group. Members of this working group
represent various teams from across the business with the
aim of ensuring risks are identified and managed effectively.
Strategy
Our strategy is to drive change across our underwriting
activity, our operations and our investments. The specific
impacts of climate change on our business are diverse,
and fall into three broad categories:
– Physical risks and opportunities resulting from the
physical effects of climate change such as weather-
related events. This is important to our business as it
includes the potential for increased insurance claims,
driven by both the frequency and severity of natural
catastrophes and other weather-related events in
the UK.
– Transition risks and opportunities arising from efforts
to mitigate climate change, which are driving the
transition to a lower-carbon economy. This is significant
as we navigate this transition, ensuring our insurance
products and operations continue to meet our
customers’ needs as a result of any changes in market
dynamics and customer behaviour, for example a shift
towards electric vehicle usage.
– Liability risks arising when parties who have suffered
losses from climate change seek to recover them
from those they believe may have been responsible. This is
important to our business, because this includes exposure
to liability risk through commercial liability insurance.
Stress test
We participated in the PRA’s 2019 insurance stress test
which considered the impact of climate change on
our business, based on three hypothetical climate
change scenarios.
– Scenario A, a rapid, disorderly transition to a low-
carbon economy.
– Scenario B, a slow, more orderly transition that keeps
global temperatures well within the Paris Agreement
target of 2°C of warming.
– Scenario C, a scenario with failed future
improvements in climate policy, reaching a
temperature increase in excess of 4°C (relative to
pre-industrial levels) by 2100 assuming no transition
and a continuation of current policy trends.
Whilst the transition scenarios saw material impacts on
the investment portfolio, the most notable impacts on
both investments and insurance liabilities arose from
the physical effects of no transition, that is no additional
actions beyond those already announced. Based on the
PRA specifications, Scenario C, in which physical risk
dominates, resulted in the most significant impact on
the Group but did not breach risk appetite despite not
allowing for reinsurance. This demonstrates the
resilience of the Group’s strategy to such a scenario.
Furthermore, the projected time frame (2100) for this
scenario is likely to allow the business to adapt.
Further disclosure on the outputs from the scenario
analysis can be found in our full TCFD 2020 report,
pages 11 to 13
Risk time horizons
Short
(1 – 5 years)
Medium
(5 – 10 years)
Long
(10+ years)
Increasing frequency and severity
of natural catastrophes and other
weather-related events in the UK.
As a general insurer we have the
ability to re-price annually and
transfer risk through reinsurance
arrangements. This is likely to limit
insurance liability impact in the
short term.
Strategic and operational response to
the transition towards a lower-carbon
economy. This will include including
changes to risk nature, opportunities
and risks within our supply chain and
repair processes and changes to, and
opportunities in, our product
offerings.
The impacts of risks and
opportunities that need to be
considered over the longer term
include significant adjustments to
weather-related modelling, a shift
in dynamics within the markets
we operate in and continued efforts
towards net carbon neutrality in our
investment portfolio.
www.directlinegroup.co.uk
63
Strategic Report Sustainability continued
Strategic approach Our strategy focuses on the Group’s
underwriting activity, our operations
and our investments where we assess
the inbound and outbound risks
and opportunities.
A full explanation of our strategic response can be found
in our 2020 TCFD Report1
Underwriting
Operations
Climate change is a key risk facing the insurance
industry. It has the potential to affect both the
frequency and severity of natural catastrophes
and other weather-related events in the UK
which are key drivers in the Group’s solvency
capital requirements.
In our Motor business, the transition to electric-powered
vehicles could affect strategic and operational
considerations, including changes to the profile of
accidents and changes to the nature of risks, supply
chain and repair processes. Understanding this
transition provides an opportunity to ensure optimum
risk assessments influence pricing decisions and seek
to ensure an efficient repair process in our accident
repair centres.
Developing further insight into electric-powered vehicles
for pricing considerations, the nature of the risks involved,
developing efficient repair practices and strengthening
technical expertise in our accident repair centres are
therefore commercial opportunities. Failing to do this
could have an adverse impact on market share if the
Group fails to grasp the scale of the transition in the
medium term.
Climate change also creates the opportunity to enhance
our risk-modelling expertise that can strengthen our
pricing decisions. Remaining active participants in
developing solutions to influence the debate on weather-
related events gives the Group an opportunity to enhance
risk modelling and ensure commercial impacts are
understood, particularly how claims and fulfilment
operations function, for example flooding and resilient
repairs in our Home business. Changes in building codes
and standards could also impact the way the Group prices
property underwriting risk.
Consumers and existing customers could gravitate in
greater numbers to competitors as part of a desire for
environmentally friendly products. This is a risk and
opportunity in equal measure. Developing products that
could encourage a reduction in emissions would highlight
the Group’s capability to customers, opening up a
potential commercial opportunity, for example mileage
refund propositions for motor customers.
The Group is now conducting market research on
consumer attitudes to green products in the insurance
industry in order to give the Group greater insight into
their commercial viability.
Our operations are exposed to physical and
transition risks. Climate change could disrupt
our direct operations as it has the potential to
affect both the frequency and severity of natural
catastrophes and other weather-related events
in the UK. We could also face increased operating
costs due to potential carbon cost increases and
regulatory requirements designed to limit carbon
emissions. In seeking to mitigate such potential
challenges the Group is setting reduction targets,
improving the way individual business areas
operate and the way we leverage our relationship
with suppliers.
A failure to set long-term emission reduction targets for
business operations could see energy consumption and
costs increase. Targets, however, allow the Group to focus
on energy reduction across its estate and be transparent
about progress achieved.
We continue to invest in energy-efficient features and
equipment across our office estate and accident repair
centres providing the opportunity to reduce energy costs,
which could otherwise increase. The Group is also
improving operational efficiencies in order to save energy
costs and mitigate environmental impact, for example, in
our roadside rescue and recovery business where we are
focused on lessening our impacts by reducing our mileage
through attendance efficiency. More information can be
found on page 20 of the Group’s 2020 TCFD Report.
Our responsibilities extend far beyond our direct
operations. Therefore, another key area of focus for us is
to continually enhance our understanding of the risks
and impacts in our supply chain and continue to drive
improvements that are designed to minimise carbon
and waste.
We recognise that total Scope 3 emissions could either
increase or reduce as a result of how we manage our
supply chain, particularly the goods and services we
purchase. Once approved, our new Science-Based Targets
will enable the Group to monitor its progress and the
effectiveness by reducing emissions in our supply chain.
We will use our established relationships and purchasing
power through procurement to mitigate our risks by
seeking to reduce the emissions in our supply chain,
while we support our supply chain partners to adapt to a
low-carbon world. Once approved, our new Science-Based
Targets will enable us to monitor our progress and the
effectiveness of this approach.
Note:
1. For access to the full report please go online at: www.directlinegroup.co.uk/2020_TCFD_Report
64
Direct Line Group Annual Report and Accounts 2020
Investments
In recent years we have started to integrate more
ESG considerations into our investment strategy,
recognising this is a long-term process which will
require assessment and challenge to inform future
decision making. We know that the impacts of
potential physical and transition risks arising in
the wider economy can have an impact on our
investment portfolio, through their influence on
the value of assets.
Our largest asset portfolios are focused on corporate
bonds, and in early 2019 we introduced a significant
new initiative. The Group’s investment-grade portfolios,
representing the bulk of its fixed income investments,
now include a new investment objective: to achieve a
minimum MSCI ESG rating of ‘A’ for the portfolio.
Companies with higher ESG credentials have more
sustainable practices, so this new objective has enabled
us to better align our investment goals with our
environmental and social goals. We are proud to have
achieved the objective and, by the end of 2019, 100% of
the investment-grade corporate bond portfolios had an
average ESG rating of ‘A’.
We are also actively encouraging our investment
managers to invest in green bonds. Green bonds are
designated bonds intended to encourage sustainability
and to support climate-related or other environmental
projects. All our relevant bond mandate guidelines direct
the portfolio manager to purchase a green bond where
the risk/return characteristics are similar to those of a
non-green bond.
We hold an investment property portfolio, and all assets
in this portfolio must have an Energy Performance
Certificate of ‘D’ or better, or a plan and funds in place
for achieving that level. This is one level above the
Government-mandated efficiency level of ‘E’. The property
portfolio also has a tailored set of 2022 ESG targets covering,
amongst other things, carbon, energy, water and waste.
Looking ahead, we intend to increase our efforts to
develop a more focused climate-related investment
approach with a long-term goal of ensuring our entire
investment portfolio is net carbon neutral by 2050.
Our first steps on this path relate to our corporate bonds
portfolio, the largest part of our investment portfolio.
Across these portfolios we have committed to a 50%
reduction in weighted-average GHG emissions intensity
by 2030, benchmarked against 2020 levels.
We recognise the importance of avoiding investing in
the companies least prepared for the transition to a
low-carbon economy due to the risk of stranded assets.
In response, we are working to increase allocations to
those companies providing the solutions and those
demonstrating a serious intent to decarbonise.
We also know that to meet the aims of the Paris
Agreement, energy generation from fossil fuels will have
to be drastically reduced in the coming decade. From
2021, asset managers will not be authorised to buy bonds
in mining companies that generate more than 5% of
revenues from thermal coal production, and electricity
generators that derive more than 5% of revenues from
thermal coal power generation. To encourage positive
climate action, an exception will be made for companies
which have either made commitments for emission
reduction targets through the SBTi or assigned a ’2
degree’ or better Carbon Performance Alignment from
the Transition Pathway Initiative. We also plan to exclude
companies that are developing new thermal coal plants or
mines, in a time frame consistent with our application to
the global corporate renewable energy initiative, RE100.
We will review the above exclusions annually and may,
in the future, divest completely from companies with any
involvement in coal or expand the list to include other
types of fossil fuels.
Alongside these actions against our investment-grade
bonds, we are committed to a wider framework which
encompasses all asset classes to deliver our net carbon
neutral long-term goal (see page 31 of the Group’s 2020
TCFD Report).
www.directlinegroup.co.uk
65
Strategic Report Sustainability continued
Risk management
The predominant direct physical drivers of risk to the Group’s
capital position are UK floods and major UK windstorms.
Whilst additional risks such as freezing weather and
subsidence are less material to capital requirements,
these are modelled within the Group’s Internal Economic
Capital Model and reviewed at least biennially.
The influence of climate change is difficult to isolate from
the complex oceanic and atmospheric processes driving
UK weather. The Group uses catastrophe models to
capture these factors, and in turn these models are
regularly reviewed against specific criteria including how
they have considered latest scientific thinking, to ensure
they appropriately capture the Group’s risk profile.
Responsibility for this work sits within the Capital
Modelling function.
Our most exposed policies renew annually and are priced
according to risk. Pricing algorithms use sophisticated
rating engines to account for recent trends and are
supplemented with views of catastrophic risk to seek
to ensure sufficient pricing. These prices will evolve as
climate change influences manifest themselves through
changing loss patterns, and views of catastrophic risk
develop because of rising sea levels, changes in
precipitation rates and urban resilience.
Risk pricing models are built using historical data covering
a multi-decadal time period for perils most likely to
be influenced by climate change. This allows us to
understand and incorporate long-term signals and past
trends into our modelling.
These models benefit from considerable amounts of
internal and externally purchased data. External data
is reviewed and updated regularly, and we maintain
a relationship with data suppliers to understand the
methodologies and assumptions in their work.
Nevertheless, the underlying trends can be difficult to
measure as they emerge through infrequent one-off
catastrophe events and may have additional contributory
factors (for example, deforestation increasing the pace of
rainwater run-off upstream of a flood). Furthermore, future
trends are likely to differ from past projections. As such,
we recognise a range of uncertainty as to current and
future impacts.
Increases in frequency and severity of large catastrophe
weather events are mitigated by the Group’s use of
catastrophe excess of loss reinsurance. This reinsurance
covers property (Personal Lines and Commercial) and
Motor physical damage losses; in addition to significant
capital benefits, it transfers the volatility of low-frequency,
high-severity natural perils events away from the Group.
The reinsurance purchase decision is a combination of
catastrophe modelling, capital analysis, the Group’s risk
appetite, cost of cover and the overall income statement
impact. Cover is purchased with an upper limit equivalent
to a 200-year modelled loss and the retention will be
based upon the amount that the Group is willing to
sustain from such a loss. This cover has benefited from
two substantial improvements in recent years that provide
additional climate change mitigation against
multiple events:
– an increase in the number of reinstatement provisions.
The reinsurance limit is purchased with a reinstatement
provision where, in the event of a catastrophe loss, the
limit of cover available is automatically reinstated to
provide cover for the next event loss. Up until recently
the cover was purchased with just a single
66
Direct Line Group Annual Report and Accounts 2020
reinstatement provision across the whole programme
but this was increased to two in 2017 for a significant
proportion of the reinsurance. This has resulted in more
overall reinsurance cover being available for catastrophe
losses; and
– an extension to the ‘hours clause’. Catastrophe
reinsurance covers are generally subject to an hours
clause that defines a loss event by a number of hours.
In practice, the Group can accumulate all losses within
a number of hours to determine the reinsurance event
for recovery purposes. In recent years, the amount of
time available has been extended which means that
the Group can capture more claims and longer duration
events and have a greater level of protection for
these losses.
In addition, we purchase risk covers to protect against
large individual commercial losses.
For a full summary of how the Group approaches Risk
management please go to page 24 of our full 2020
TCFD report
Metrics and targets
We take our environmental impact responsibilities
seriously and recognise the value of target-setting and
reporting in driving our emission reductions. We comply
with the applicable greenhouse gas reporting
requirements of the Large and Medium-sized Companies
and Groups (Accounts and Reports) Regulations 2008 and
apply the GHG Protocol Corporate Accounting and
Reporting Standard (revised edition) to calculate our
emissions, which includes emissions associated with
electricity consumption using both the Scope 2 location-
based and Scope 2 market-based calculation
methodologies. This year we also began the process of
evaluating our Scope 3 emissions under our direct control
and plans are underway to evaluate the final part of our
Scope 3 emissions, and our investment portfolio in 2021.
Our 2020 emissions data can be found on page 61, which
reflects reduced energy usage in 2020 due to the impact
of Covid-19. This data includes our intensity metric of
emissions per £ million annually of net earned premium.
This is a measure of how efficiently we provide our insurance
products and allows us to compare our performance
year-on-year and against other insurance companies.
In addition, we have two Group-wide environmental
impact targets:
– a 57% reduction in emissions (Scope 1 and 2) on a
like-for-like basis by the end of 2020 against a 2013
baseline. We exceeded this target with a 69% reduction
in energy related emissions in 2020, which takes into
account the impact of Covid-19 where home working
and lockdown measures altered our energy usage.
Excluding the impact of Covid-19 we estimate energy
related emissions would have been approximately 63%
lower than 2013; and
– a 30% reduction in energy consumption on a like-for-like
basis by the end of 2020 against a 2013 baseline. This
year we again exceeded our target with a 45% reduction
in energy consumption, which takes into account the
impact of Covid-19 where the move to home working
reduced energy use across our estate. Excluding the
impact of Covid-19 we estimate that energy
consumption in 2020 would have been approximately
34% lower than 2013.
Having met and exceeded these targets we will now
benchmark the Group’s environmental performance
against a 2019 baseline and will set Science-Based Targets
within the two-year timeframe set out by the SBTi.
We also have the following long-term goal for our
investments:
– ensuring our entire investment portfolio is net
carbon neutral by 2050 in line with the aims of the
Paris Agreement.
To support this aim we have now set an interim target of a
50% reduction in weighted average GHG emissions intensity
by 2030 within our corporate bonds portfolio, the largest
part of our investment portfolio. We will use GHG emissions
intensity1 as the key metric of measurement as follows:
GHG emissions intensity =
Metric tonnes CO2e (CO2
equivalent) GHG emissions
Million $ Sales
Normalising by sales as the denominator allows the
investor to compare carbon efficiency of different sized
firms within the same industry and has become the
standard metric used in the investment industry. Our aim
in 2021 is to be able to report the weighted average carbon
intensity of our corporate bonds portfolio. Furthermore, in
order to improve monitoring, management and future
reporting in this area, we are working towards an
improved picture of the emissions intensity of other
significant portions of our investment portfolio, where
appropriate data and methodologies exist.
Looking forward, we are working with the Carbon Trust to
set Science-Based Targets across the full Scope 1, 2 and 3
of our operations. These targets will be submitted for
approval and subject to the two-year time frame set out
by the SBTi.
For a full breakdown of the Group’s overall emissions,
including our intensity metric and historical performance,
see page 61.
Future Group activity
The Group has now set itself new priorities against the TCFD recommendations.
TCFD recommendation
Future Group activity
Governance
Describe the Board’s oversight of climate-related
risks and opportunities.
Describe management’s role in assessing and
managing climate-related risks and opportunities.
Strategy
The Group plans to maintain strong Board oversight, ensuring
the Planet pillar, as part of its sustainability strategy, continues
to take a strategic lead. Setting the Board’s strategic debates in
a climate change context will be supported by periodic debates
on climate-related risks and opportunities, as well as inviting
thought leaders to engage with Board meetings.
Describe the climate-related risks and
opportunities the organisation has identified over
the short, medium and long term.
The Group intends to conduct more analysis in order to present
more detailed impact assessments of climate-related risks
across different time horizons.
Describe the impact of climate-related risks and
opportunities on the organisation’s businesses,
strategy, and financial planning.
Describe the resilience of the organisation’s strategy,
taking into consideration different climate-related
scenarios, including a 2°C or lower scenario.
The Group intends to strengthen how it systematically considers
climate-related issues from a risk and opportunity perspective
across business areas, strategic decision making and financial
planning in order to be better able to describe impacts.
Quantifying the impact of climate-related scenarios, including
a 2°C or lower scenario, will strengthen the Group’s ability to
describe how resilient its strategy is, particularly placing
monetary values on climate-related impacts.
Risk management
Describe the organisation’s processes for
identifying and assessing climate-related risks.
Describe the organisation’s processes for
managing climate-related risks.
Describe how processes for identifying, assessing,
and managing climate-related risks are integrated
into the organisation’s overall risk management.
Metrics and targets
Disclose the metrics used by the organisation to
assess climate-related risks and opportunities in
line with its strategy and risk management process.
Disclose Scope 1, Scope 2, and, if appropriate, Scope
3 GHG emissions, and the related risks.
Describe the targets used by the organisation to
manage climate-related risks and opportunities
and performance against targets.
Note:
The Group will continue its robust approach towards the
management of physical risk and intends examining in more
depth inbound and outbound impacts in order to be able to
better describe transition and liability risks. The ambition is for
risk management processes to support the Group in
conducting detailed analysis on each risk and applying
monetary values to support the Group’s overall strategy.
The Group plans to work towards establishing Science-Based
Targets within the business to be approved by the SBTi which
will strengthen our disclosures across Scope 1, Scope 2 and total
Scope 3 GHG emissions.
1. GHG emissions intensity is used to account for greenhouse gases other than just carbon dioxide which contribute to global warming
(such as methane and nitrous oxide). These other gases are converted into a CO2 equivalent measure based on their warming potential.
www.directlinegroup.co.uk
67
Strategic Report Sustainability continued
Sustainability continued
Streamlined Energy and Carbon Reporting (SECR) regulations
The following table highlights where information can be found that supports the requirement to disclose how the
Group manages its energy consumption and carbon emissions.
Requirement
Annual global GHG emissions (CO2e)
– from activities for which the Company is responsible
– from buying electricity, heat, steam or cooling by the Group for its own use
Annual global energy consumption in kWh, being the aggregate of:
– energy consumed from activities for which the Company is responsible
– energy consumed resulting from buying electricity, heat, steam or cooling by the Group for its
own use
Pages
61
61
58
58
The proportion of GHG emissions and energy consumed relating to the UK and offshore area1
59 and 61
Methodology used to calculate emissions and energy consumption
At least one intensity metric in relation to emissions
Description of energy efficiency actions taken
Note:
58
61
60
1. The offshore area is broadly defined as the sea adjacent to the UK, including the territorial sea, plus the sea in any designated area
under section 1(7) of the Continental Shelf Act 1964 and section 41 (3) of the Marine and Coastal Access Act 2009.
Non-financial information statement
This Non-financial information statement highlights information necessary for an understanding of the Company’s
development, performance, position and impact of its activity, information relating to environmental, employee, social,
respect for human rights, anti-corruption and anti-bribery matters.
Where possible, the following table states where additional information can be found that supports the requirements of
sections 414CA and 414CB of the Companies Act 2006.
Reporting requirement
Environmental
Employees
Social and
community
matters
Human rights
Anti-bribery
and corruption
Innovation
Information necessary to understand our business and
its impact within the Annual Report & Accounts
– Our sustainability pillars
– Sustainable Development Goals
– Greenhouse gas emissions
– Climate-related risks
– TCFD Report
– Covid-19 response and people
– Diversity and inclusion
– Hampton-Alexander Review
– Gender pay gap
– Performance and pay
– Social Mobility Employee Network
– Prompt Payment Code
– Our Community Fund
– Well-being strategy
– My Life policies
– Living wage
– Ethical Code for Suppliers
– Modern Slavery Statement
– Ethical matters
– Sustainability Committee report
– Code of Business Conduct
– New products, channels and propositions
– Digital customer journey
Business model
– Strategic report
Principal risks
and impact on
business activity
Non-financial KPIs
– Managing our risk
– Risk management
– Audit, risk and internal control
– Board Risk Committee report
– Change delivery
– Workforce engagement
– Net promoter score
– Customer complaints
68
Direct Line Group Annual Report and Accounts 2020
Pages
44 to 61
46
58, 61
66
62
50, 102
50 , 92, 107, 110, 125
52, 93, 108
52
10, 15, 52, 86, 110
54 to 55
56, 142
57
52 to 53
52, 53
52, 118
142
86, 109, 142
105, 110
109 to 110
77, 85, 88, 142
2 to 3, 12, 37
14, 16, 40, 43, 49
1 to 75
69 to 75, 95 to 96, 104
172 to 185
95 to 96
102 to 105
13 to 14
19, 117, 118
19, 48, 124
19, 124
Risk management
Our aim is to make risk management simple, well understood and embedded. We will
provide oversight which is pragmatic and commercial to help the business make good
risk-based decisions and to move quickly whilst understanding the risks.
Risk appetite
Our risk appetite statements are an expression of the level
of risk the Group is prepared to accept to achieve its
business objectives. The statements are used to drive
risk-aware decision-making by key business stakeholders.
Our risk appetite statements are documented in our
policies and include:
– monitoring whether the business remains within
risk appetite, among other information, using key
risk indicators;
– deriving the key risk indicators from the risk appetite
statements to drive and monitor risk-aware decision-
making; and
– both qualitative and quantitative risk statements which
are forward and backward-looking. We review our risk
appetite statements and key risk indicators annually.
Our Risk Management Framework
The Risk Management Framework document sets out,
at a high level, the Group’s approach to setting risk
strategy and managing risks to the strategic objectives
and day-to-day operations of the business.
Aligned to the three lines of defence model, not only does
the Risk Management Framework articulate the high-level
principles and practices needed to achieve appropriate
risk management standards, but it also demonstrates the
inter-relationships between components of the Risk
Management Framework.
Within this, the risk management process is a key element
in the development and on-going maintenance of an
accurate risk profile. The objective of the risk management
process is to identify, assess, manage, monitor and report
on the risks that the Group is exposed to. See page 66 for
specific information on how the business identifies and
assesses the risks associated with climate change.
Within the Risk Management Framework, policies address
specific risk areas and are aligned to the Group’s risk
appetite. Policies, where appropriate, are supported by
underlying minimum standards which interpret policies
into a set of risk and control requirements to be
implemented across the Group.
Managing risk in line with our strategy
Our management team, with oversight from the Board
and Board Risk Committee, 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.
A key aspect of any effective strategic planning process
is to understand and manage those risks appropriately.
To achieve this, the Risk Function works closely with the
business to help it to identify and assess risks, which is
done through setting and achieving targets as well as
through its review and challenge of business plans in 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.
Our risk governance framework
The Risk Function continues to lead transformation and
cultural change to drive ownership of risks in the business,
recognising the Group’s changing risk profile and the
maturing control and governance environment.
To begin with, the focus was on establishing standards
and governance, articulating the Group’s risk appetite and
ensuring we had appropriate capability across its three
lines of defence. We now have an embedded Enterprise
Risk Management and Strategy Framework (“Risk
Management Framework”) with clear accountabilities
and risk ownership designed to ensure that we identify,
manage, mitigate and report on all key risks and controls
through the three lines of defence model:
First line: Management is responsible for embedding risk
management into business as usual and change
processes whilst creating transparent reporting of risks
and management actions.
Second line: The Risk Function is responsible for the
design and recommendation to the Board Risk
Committee of the Risk Management Framework, its
implementation across the Group and the provision of
proportionate oversight of risks, events and management
actions throughout the Group.
Third line: Group Audit is responsible and accountable
for providing an independent and objective view of
the adequacy and effectiveness of the Group’s risk
management, governance and internal control framework.
See page 89 for governance structure
www.directlinegroup.co.uk
69
Strategic Report Risk management continued
Risk appetite statement
Overarching risk objective
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 United Kingdom. The Group
has appetite for non-insurance risks, as appropriate,
to enable and assist it to undertake its primary activity
of insurance.
1. Maintain capital adequacy
The Group seeks to hold capital
resources in the range of 140%-180%
of its solvency capital requirement.
Three strategic risk objectives
2. Stable/efficient access to
funding and liquidity
The Group aims to meet both
planned and unexpected cash
outflow requirements, including
those requirements that arise
following a 1-in-200 year insurance,
market or credit risk event.
3. Maintain stakeholder
confidence
The Group has no appetite for
material risks resulting in
reputational damage, regulatory
or legal censure, poor customer
outcomes, fines or prosecutions
and other types of non-budgeted
operational risk losses associated
with the Group’s conduct and
activities. The Group will maintain
a robust and proportionate internal
control environment.
Our risk culture
Our risk culture underpins our business and decision-
making, and helps us embed a robust approach to
managing risk. Our Risk Function drives ownership of
risks in the business and ensures that risk consideration
is integral to all decision-making. It also provides expert
advice and guidance to business areas, whilst also
challenging the effectiveness of controls to manage
risk and compliance.
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.
We also have an annual Risk Communications Plan which
features activity to reinforce the message that risk is
everyone’s responsibility. The Plan features staff awareness
campaigns, articles on the intranet and the imaginative
“Risk Heroes” campaign which enabled members of staff
to harness social media and mobile phone photograph
filters; and enabled Risk to engage with colleagues about
the importance of risk management in a unique and
conversational way.
Proactive risk management through Covid-19:
The Covid-19 pandemic created an unprecedented set
of circumstances in the UK, as the country moved to
national lockdowns. To minimise transmission of
the Covid-19 virus, people across the UK were asked
to remain at home, including working from home
where possible and restricting any travel.
Within the Group, Covid-19 presented a series of
challenges in seeking to protect its people, maintain
customer operations, and safeguard the business.
In responding to the pandemic, management
demonstrated strong proactive leadership, took
accountability and showed a clear understanding of risk
as they transitioned the business to a home working
model. We transitioned our people to working from
home prior to the national lockdown being called,
while maintaining service continuity for our customers.
Throughout the pandemic, the Risk Function worked
closely with business areas to perform key risk and
control assessments to inform this decision making;
including assessments of risks introduced through mass
homeworking, which enabled us to take mitigating
action where necessary. The results of this exercise
informed management of our critical supply chain.
Collaboration took place across the business to manage
other Group responses to the pandemic; such as, the
management of the surge in customer claims related
to Travel; the assessment of additional scenarios relating
to operational resilience; and documenting how impacts
of the pandemic may evolve, in order to identify and
mitigate risk.
Throughout this challenging period, business functions
have continued to work together proactively to ensure
that our customers receive appropriate levels of service
and support, whilst still delivering business performance.
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Direct Line Group Annual Report and Accounts 2020
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 risk
Description
Risk commentary
Insurance Risk
Strategic Alignment
3
Relative size of risk
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.
Trend – increasing
Key drivers of the outlook for insurance
risk across our business plan include
reserve, underwriting, distribution,
pricing and reinsurance risks. Issues
relating to Covid-19 have been a key
area of focus for the Group in 2020 and
the main driver of the increasing trend
in Insurance risk. Claims trends have
been significantly impacted particularly
during the lockdown period. This has
led to uncertainty in claims reserving
and pricing.
We continue to monitor this closely.
In response to this uncertainty we have
used stress testing to understand
the potential impacts of an economic
downturn on frequency and severity
of claims costs.
Finally, climate change presents a risk
of more frequent extreme events and
key risk indicators are being continually
enhanced to monitor related risks
across Home, Motor and Commercial.
Market Risk
Strategic Alignment
3
Relative size of risk
Market risk
The risk of loss resulting
from fluctuations in the
level and in the volatility
of market prices of
assets, liabilities and
financial instruments.
Trend – stable
In 2021 and beyond, Covid-19, Brexit
and potential recession may have an
impact on claims inflation together
with market and customer behaviour.
Key drivers of market risk are the
sensitivity of the values of our assets
and investments to changes in credit
spreads, and our exposure to losses as
a result of changes in interest rate term
structure or volatility.
Concerns about the Covid-19 pandemic
and Brexit fallout could impact equity
and credit markets within the global
economy leading to credit spread
increases, foreign exchange rate
volatility, interest rate changes and
devaluation of UK property assets.
To address this, we have an investment
strategy which is approved by the
Board and includes limiting exposure
to individual asset classes and the
number of illiquid investments we hold.
We also use risk reduction techniques
such as hedging foreign currency
exposures with forward contracts.
The risk of loss due to
inadequate or failed
internal processes or
systems, human error or
from external events.
Operational risks can arise within all
areas of the business and can manifest
themselves through inadequate or
failed internal processes or systems,
human error or from external events.
With significant strategic investment
we continue actively to strengthen our
change implementation controls to
further mitigate potential impacts from
risk events.
Operational Risk
Strategic Alignment
4 5 6
Relative size of risk
Operational risk
Trend – decreasing
The key risks within this
category are Cyber,
Technology &
Infrastructure, Operational
Resilience, Change, People,
Information Management,
Outsourcing, Partnerships
and Fraud.
Link to strategy
1
2
3
4
5
6
Be best at direct
Win on price comparison websites
Extend our reach
Be nimble and cost efficient
Have technical edge
Empower Great people
Our approach is to manage our
operational risks to proactively mitigate
potential customer harm, regulatory
or legal censure, financial and
reputational impacts. The decreasing
trend in operational risk is driven
mainly by the good progress made
by the business in delivering
technology improvements.
We have in place operational processes
and systems, including prevention
and detection measures. These include
processes which seek to ensure we
can absorb and/or adapt to internal
or external events that could impact
customer operations and the
wider business.
With the majority of staff now working
from home, we continue to work to
improve the performance of our IT
systems, focusing on improving both
system stability and capability.
We continue to deliver sustainable
improvements to the overall security
control environment, designed to
enable us to respond to malicious and
unintended threats from both internal
and external entities. Processes are also
in place to automate controls to
enhance risk monitoring.
We operate a strong control
environment through the delivery of
the Procurement & Supply Chain target
operating model, which is focused on
delivering active monitoring and
management of key suppliers.
Our Risk Management Framework is
designed to enable us to capture risk
information in a complete and
consistent way, enabling proactive
trend analysis, root cause analysis and
read across to facilitate early warnings
and a ‘learning’ risk environment.
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71
Strategic Report Risk management continued
Principal Risk
Description
Risk commentary
Regulatory &
Compliance Risk
Strategic Alignment
1 2 3 5
Relative size of Risk
Trend – stable
The risks leading to
reputational damage,
regulatory or legal censure,
fines or prosecutions
and other types of
non-budgeted operational
risk losses associated
with the Group’s conduct
and activities.
We have maintained regular and
open dialogue with both the FCA and
PRA on our responses to Covid-19,
outlining actions taken with the aim
of ensuring that good customer
outcomes are achieved and that
the Group remains financially
and operationally resilient.
We have worked closely with UK
regulators on our Brexit preparations,
and with the Central Bank of Ireland
to establish an Irish Branch in
preparation for the end of the Brexit
transition period.
Finally, we have put in place a strong
governance and accountability
framework as part of the Senior
Managers and Certification Regime,
and carry out an annual declaration
process to ensure the ongoing fitness
and propriety of the Group’s Senior
Managers and Certified Functions.
We maintain a constructive and open
relationship with our regulators and
have a strong culture of delivering on
our commitments to our customers
(see pages 48 to 49).
Pricing practices within the general
insurance market is a key area of focus
for the FCA and for the Group. We
continue to devote a lot of attention
to this area as we prepare for the
implementation of the FCA’s pricing
practices remedies, expected in
Q2 2021. Our existing conduct Risk
Management Framework is designed
to deliver fair outcomes to customers
and minimise our risk exposure. The
framework is supported by a set of
conduct pricing principles designed to
enable the fair pricing of business
across our book. We continue to
develop our approach to anticipate
regulatory developments and to ensure
that we can continue to provide good
outcomes for our customers. We carry
out planned risk-based monitoring of
customer processes as well as more
targeted thematic reviews to help
us manage the risk of unfair
customer outcomes.
Credit Risk
Strategic Alignment
3
Relative size of risk
Credit
Trend – stable
The risk of loss resulting
from default in obligations
due from and/or changes
in the credit standing of
issuers of securities,
counterparties or any
debtors to which the
Group is exposed.
To manage credit risk, we set credit
limits for each counterparty and
actively monitor credit exposures.
In addition, we only purchase
reinsurance from reinsurers with
at least an A- rating and, for liabilities
with a relatively long period of time
to settlement, this rating is at least A+.
Finally, we also have well defined
criteria to determine which customers
are offered and granted credit.
Strategic Risk
Strategic Alignment
2 3 4 5 6
Relative size of risk
The risk of direct or indirect
adverse effects resulting
from strategies not being
optimally chosen,
implemented or adapted
to changing conditions.
Trend – stable
Strategic risk is influenced by internal
and external developments such as
the Covid-19 pandemic, Brexit and
the FCA’s Pricing Practices Review.
In addition, the adoption of agile ways
of working is designed to allow the
business to more quickly identify and
react to risks to the implementation
of the Group’s strategic goals.
To manage our risks, we have taken
the following steps:
– we agree, monitor and manage
performance against the Board-
approved plan and targets;
– the Board leads an annual strategy
and five-year planning process which
considers our performance,
competitor positioning and strategic
opportunities;
– as part of the timetable for the
Strategic Plan, the Risk Function
carries out a risk review of the Plan
which is documented in the Group’s
Own Risk and Solvency Assessment
and presented to the Board; and
– we identify and manage emerging
risks using established governance
processes and forums.
Link to strategy
1
2
3
4
5
6
Be best at direct
Win on price comparison websites
Extend our reach
Be nimble and cost efficient
Have technical edge
Empower Great people
72
Direct Line Group Annual Report and Accounts 2020
UK recession and global financial
instability
The risk of a further UK-wide recession and global financial
instability is ongoing. The economic uncertainty is
expected to remain high throughout H1 2021, as a result
of the Covid-19 pandemic, and the Group continues to
monitor the worst-case impact.
Emerging risks
Emerging risks are defined in the Group as newly
developing risks that are often difficult to quantify but
may materially affect the Group. Emerging risks are
usually highly uncertain risks which are external to the
Group. The Group has in place an emerging risks process
which enables it to:
– have a proactive approach to emerging risk
management;
– identify, manage and monitor a broad range of potential
emerging risks; and
– mitigate the impact of emerging risks which could
impact the delivery of the Group’s Strategic Plan.
The Group records emerging risks within an Emerging
Risk Register. An update on emerging risk is presented to
the Board Risk Committee annually and is supplemented
by deep dives into selected emerging risks. During 2020,
the Group Risk function worked with first line of defence
subject matter experts to enhance the quality and detail
of emerging risk updates.
The Covid-19 pandemic was not included within the
Emerging Risk Register as an emerging risk, as it has
emerged and is impacting and is reflected in our current
Group risk profile. However, ‘Global Pandemic’ remains on
the Emerging Risk Watchlist for monitoring, which
focuses on the potential for a similar type of outbreak in
years to come. Many of the lessons from the Covid-19
situation can be applied to how the Group would respond
to another global pandemic.
The Covid-19 pandemic continues to challenge the way
the industry operates, both now and in the future. Second
line of defence and first line of defence subject matter
experts continue to monitor potential threats and
opportunities which may impact the Group and the wider
industry, as the ‘new normal’ becomes clearer.
The most notable emerging risks are outlined on the
following page.
As a result of the Covid-19 pandemic, the UK Government
has acted to support UK employees and prevent lasting
damage to the economy. However, the uncertainty
surrounding the pandemic makes the overall impact
and recovery progress unclear.
The disruption to global trade and supply-chains caused
by the pandemic could increase the risk of inflation in
the long-term.
For the Group, the investment portfolio is positioned
relatively defensively; however, if the UK recession were to
worsen significantly, additional steps could be taken such
as further shifting the portfolio towards ‘defensive’ sectors
or increasing more allocation to cash.
Globally, the economic shock caused by the Covid-19
pandemic initially resulted in credit spreads in Europe
and the US moving to levels last seen in the 2008/09 credit
crisis, and equity markets posted extremely steep
percentage falls. Whilst markets have recovered to a
degree, there still remains uncertainty over the duration
and continued impact of the pandemic.
The Group portfolio contains a proportion of short-maturity
bonds which could be sold relatively quickly if necessary.
Recent stress and scenario testing has highlighted that the
largest impacts would be on the Group’s asset portfolio. The
Group believes that the risks from global financial instability
are being appropriately monitored.
Potential effects of Brexit
The Brexit transition period following the UK leaving the
EU ended at 11pm on 31 December 2020. A trade and
co-operation agreement had been agreed, tariffs on
goods entering the UK from the EU were avoided and the
more severe risks identified in connection with a so-called
‘no-deal’ Brexit have not materialised.
Key risks identified as potentially arising in the context of
disruption following the end of the transition period
included financial impacts (for example, if credit spreads
widened) and operational impacts (for example, if goods
were delayed at the EU/UK border). Other risks identified
included risks of changes to the value of sterling, inflation,
recession, recruitment and retention of people, impacts
on travel, and potential changes to tax and regulation.
Some of these risks could still occur to some degree and
we continue to monitor developments.
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. Accordingly, following approval from the
Central Bank of Ireland the Group established an Irish
branch in the Republic of Ireland with effect from the end
of the transition period.
www.directlinegroup.co.uk
73
Strategic Report Viability statement
In accordance with Provision 31 of the 2018 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 75, sets out the
Group’s financial performance, business environment,
outlook and financial management strategies. It
covers how the Group measures its regulatory and
economic capital needs and deploys capital. You can
find discussion about the Group’s principal risks and
risk management on pages 69 to 74. Note 3 to the
consolidated financial statements starts on page 172
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 includes reviews of
solvency, liquidity, assessment of principal risks and
risk management over a three-year period from 2020
to 2022 with a further two years of indicative planning
from 2023 to 2024. The first year following approval of
the business plan has greater certainty, so it was used
to set detailed budgets across the Group. Outcomes
Risk management continued
Climate change
The Group recognises that climate change potentially
poses material long-term financial risks to the business
and is receiving increased scrutiny from regulators and
investors. Climate change risks can be divided into three
categories: physical, transition and liability risks. All three
of these categories can manifest themselves through a
range of existing risks within the material risk register,
including insurance, market, operational, strategic and
reputational risks.
Following the issue of the PRA’s Supervisory Statement
SS3/19, the Group has appointed the CRO as the Senior
Management Function holder for Climate Change and put
an initial plan in place to address the expectations set out
in the supervisory statement.
The Group has updated risk policies and minimum
standards explicitly to reference the risks from climate
change, and we reviewed climate-related key
performance indicators for energy usage and emissions
across the business throughout H2 2020, to help inform
future climate-related financial disclosures.
The risks and impacts of climate change are wide ranging;
the Group is focusing increasingly on climate change,
with related risk management activity which includes
monitoring climate change through the emerging risk
process, forming a Climate Change Working Group and
continuing its journey to implement the recommendations
of the Financial Stability Board’s Taskforce on Climate-
related Financial Disclosures (“TCFD”).
As part of embedding the management of these climate-
related financial risks in 2021, the Group will take part in
the Bank of England’s Climate Biennial Exploratory
Scenarios exercise. This stress testing exercise aims to
understand the impact on the Group of future climate
scenarios incorporating physical and transition risks.
Ethical use of data
The Group identified the ‘failure to establish an ethical
way to use data’ as an emerging risk in H2 2019, with
activity underway to mitigate against associated risks.
The industry and policymakers’ view of this risk is still
emerging, as legislation and regulation in this area is yet
to mature; however, it is a growing area of focus for the
Group’s regulators and for the Group itself.
A group of stakeholders including the Chief Data Officer
and the Privacy & Information Management team has
been established to provide visibility of the challenge
for the Group, and a working group has been established
to gather external views and create visibility for the
required timelines, and to provide the focus required
to move development of a data ethics framework at
an appropriate pace.
The Group has been outlining a proposed approach for
the management and governance of data ethics. Work
will continue in 2021 to confirm and embed the proposed
principles-based approach. In addition, we have
commenced work to determine how the Group could best
incorporate emerging data ethics considerations into
current customer conduct processes and forums.
74
Direct Line Group Annual Report and Accounts 2020
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.
The Board has assessed the principal risks of the
Group over the duration of the planning cycle. The
assessment included considering the possible
challenging market conditions due to the impact of
Covid-19 on the economy and customer behaviour,
the possible adverse implications of Brexit, the
implementation of the FCA’s Pricing Practices Review
and change risk. The 2020 Plan modelled a number of
different scenarios which were directly and indirectly
influenced by the Covid-19 pandemic. These included
delay to improvements in technological capability, the
impact of Covid-19 on claims frequency levels and the
impact of Brexit on the investment return. The key
judgements applied were in relation to the likely time
period of Covid-19 related restrictions, and the
subsequent impact on customer behaviour and the
economic recovery.
Covid-19 pandemic
– The Plan has been stress tested for the impact of a
deep UK recession triggered by the end of furlough
and extended lockdown throughout the first half of
2021. This is a severe but plausible scenario that we
have used to challenge our contingent
management actions.
Brexit
– Following the Brexit deal announced in December
2020 the likelihood and severity of impacts relating
to a disorderly Brexit have significantly reduced.
However, the Plan has been stress tested for the
potential impact of adverse consequences on
investment values.
FCA General Insurance Pricing Practices Review
(“PPR”)
– The FCA’s consultation period ended in January
2021 and the final report has not yet been published.
The Group’s Plan includes a scenario for the impact
of the PPR from 2022 onwards based upon the
differential between new business and renewal
prices. The Group considered a spectrum between
two potential outcomes. A series of management
actions have been identified to mitigate the impact
of this scenario.
In addition, the Group’s Risk Function has carried out
an assessment of the risks to the plan and the
dependencies for the success of the Strategic Plan.
This included running stress tests on the Plan to
consider the 1-in-8-years and 1-in-25-years loss
simulations based on the internal economic capital
model. In both cases, the Group remained within its
risk appetite range for its solvency capital ratio and
did not breach the Group’s solvency capital
requirement after contingent management actions in
any of the years covered by the plan (2020 to 2024).
A reverse stress test was also performed to identify
the most probable combination of stresses that would
result in capital loss and thus threaten the viability of
the Group, i.e. a reduction of own funds to below the
solvency capital requirement. The test combined a
number of independent events and concluded that
the Group’s solvency capital requirement would not
be breached after management actions.
Based on the results of these reviews, the Board has
a reasonable expectation that the Company and the
Group can continue in operation, meet liabilities as
they fall due and provide the appropriate degree of
protection to those who are, or may become,
policyholders or claimants in the period to 31
December 2024.
Statement of the Directors in respect
of the Strategic report
The Board reviewed and approved the Strategic report
on pages 1 to 75 on 5 March 2021.
By order of the Board
Penny James
Chief Executive Officer
5 March 2021
www.directlinegroup.co.uk
75
Strategic Report Chair’s introduction
Our Governance
Danuta Gray
Chair of the Board
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 2020.
I have been very impressed by the way the Group has
responded to the challenge presented by Covid-19.
I am extremely proud of our people who have played
such an important part in continuing to deliver much
needed services throughout the crisis. I am pleased to
report that our governance operated well in a different
working environment.
As Chair, it is my role to provide leadership of the Board
to ensure that it operates effectively. In the light of the
impact of Covid-19 and the unprecedented level of
uncertainty for the business, the Board held a number of
unscheduled meetings to consider significant operational
matters, as well as to monitor the Group’s solvency
through a period of market volatility.
Your Board is committed to underpinning all of the
Group’s activities with the highest standards of corporate
governance. This section of our Annual Report & Accounts
explains how your Board seeks to ensure that we have
effective corporate governance in place to help support
the creation of long-term sustainable value for all our
shareholders and other stakeholders.
The Board endorses the UK Corporate Governance Code
2018 (the “Code”), which applied to our 2020 financial year,
and the related FRC Guidance on Board Effectiveness.
We seek to ensure that our governance framework
remains aligned with best practice, consistent with the
Code. Throughout the year ended 31 December 2020, the
Company complied with the Principles and Provisions set
out in the Code.
Sustainability is at the heart of how we think about our
business. We have always been conscious of our broader
role in society, giving something back to our local
communities and fostering social mobility. Further
information on our sustainable business model can be
found in the Strategic report.
There is a duty, enshrined in the Companies Act 2006,
for your Directors to act in the way each of us considers,
in good faith, would be most likely to promote the success
of the Company for the benefit of its members as a whole,
having regard to various matters identified in the
legislation. In this Annual Report & Accounts, we have
detailed the stakeholders and issues which the Directors
considered when discharging this duty throughout the
year. Our formal statement in relation to Section 172(1) of
the Companies Act 2006 appears on page 10.
I would like to thank you for your support and look forward
to hearing your views as we prepare for our forthcoming
AGM on Thursday, 13 May 2021.
Purpose, culture and values
The Board recognises the importance of its role in setting
the tone of the Group’s culture, aligning it with our
purpose, values and strategy, and embedding it
throughout the Group. The Board aims to foster an open
and collaborative culture based on our vision and purpose,
supporting decisions that are best for our shareholders,
whilst having regard to the interests of our other
stakeholders. Our vision, purpose, values and Code of
Business Conduct are central to the Group’s culture.
We encourage our people to be curious, to be aligned on
outcomes, to build trust, encourage simplicity, empower
their teams and continually test, learn and adapt.
Communication with our shareholders and other
stakeholders is extremely important to us. During 2020,
directors attended virtual meetings with major investors
to ensure their views were considered and our objectives
were understood. For the safety of our shareholders and
colleagues, we held a closed AGM in 2020 and encouraged
shareholders to submit questions in advance of the
meeting. In 2021, acknowledging that restrictions on
public gatherings may remain in place, we plan to enable
shareholders to participate in our AGM electronically.
Shareholders are encouraged to contact us by email
at ShareholderEnquiries@directlinegroup.co.uk.
76
Direct Line Group Annual Report and Accounts 2020
For more on communication with major investors, see
page 88.
“The Board recognises the importance of its
role in setting the tone of the Group’s culture
and embedding it throughout the Group.”
Succession planning and Board changes
There have been changes to our Board since last year’s
AGM. I succeeded Mike Biggs as Chair in August 2020
and Adrian Joseph OBE joined as an independent
Non-Executive Director in January 2021.
Jane Hanson has served as a Non-Executive Director for
over nine years and will step down from the Board at the
conclusion of the 2021 AGM.
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. For a wider understanding of the skills and
experience of our Board, see pages 78 to 80 and pages 106
to 108.
The Nomination and Governance Committee continues
to review succession plans both for the Board and at
executive level each year.
In early 2021, three levels of the emergency succession
plan were invoked to provide cover for Tim Harris’s leave
of absence while he cared for a member of his family
receiving medical treatment: Neil Manser stepped up as
Acting Chief Financial Officer; Jasvinder Gakhal as Acting
Chief Strategy Officer and Rebecca Clapham as Interim
Managing Director of Direct Line for Business.
Further information on our diversity policy, our approach
to succession planning and Board appointments can be
found in the Nomination and Governance Committee
report on pages 106 to 108.
Effectiveness and evaluation
As Chair, one of my principal objectives is to ensure that
the Board includes a body of Non-Executive Directors with
the skills and experience to be able to support and
challenge our Senior Management in developing and
executing an ambitious strategy for the benefit of our
shareholders and other stakeholders. In accordance with
the Code, we conduct evaluations of the effectiveness of
the Board and its Committees annually, including an
externally facilitated review every third year. The 2019
review was facilitated by Robert Goffee, Professor of
Organisational Behaviour at the London Business School,
who had no other connection with the Company or any
individual Director.
In 2020, having recently been appointed as Chair, I chose
to conduct the effectiveness review myself. Building on
themes identified by Professor Goffee, this year’s review
focused on the value capable of being added by
Non-Executive Directors from their experience, the
emphasis on strategic issues on the Board’s agenda, the
Board’s ability to challenge executive performance based
on the quality of information provided, and the external
sources of insight available.
As part of the annual evaluation process, all Non-Executive
Directors were assessed as being independent and able to
provide a valuable and effective contribution to the Board.
Suggestions for further improving effectiveness that were
raised during the review process have been taken into
consideration by the Board. Further details can be found
on page 94.
Remuneration
The Board has delegated responsibility to the Remuneration
Committee for the remuneration arrangements for
the Chair, Executive Directors and Senior Management.
The Remuneration Committee also reviews workforce
remuneration and related policies and the alignment
of incentives and rewards with the Group’s culture.
The Group’s Remuneration Policy was approved at the
2020 AGM and the current Policy will remain in place for
a further two years.
Further details on the work of the Remuneration
Committee can be found in the Directors’ remuneration
report which begins on page 113.
Annual General Meeting
Direct Line Insurance Group plc’s 2021 AGM will be held on
Thursday 13 May 2021 at 11.00 am. Full details including the
resolutions to be proposed to our shareholders can be
found in the Notice of AGM which will be made available
on our corporate website.
The outcome of the resolutions put to the AGM, including
poll results detailing votes for, against and withheld, will
be published on the London Stock Exchange’s and the
Company’s websites once the AGM has concluded.
Yours sincerely,
Danuta Gray
Chair of the Board
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.
UK Corporate Governance Code 2018
Board leadership and company purpose
Read more on pages 84 to 88
Division of responsibilities
Read more on pages 89 to 90
Composition, succession & evaluation
Read more on pages 91 to 94
Audit, risk & internal control
Read more on pages 95 to 96
Remuneration
Read more on pages 113 to 139
www.directlinegroup.co.uk
77
Governance Board of Directors
Danuta Gray
Chair of the Board
Penny James
Chief Executive Officer
Tim Harris
Chief Financial Officer
Appointed: February 2017
Appointed: November 2017
Appointed: October 2019
Biography
Biography
Biography
Danuta is Chair of the Nomination and
Governance Committee and was
appointed as Chair of the Board in August
2020. The Board benefits from her previous
experience as Chair, Chief Executive and
NED (including two positions as Chair of
Remuneration Committees), significant
experience in sales, marketing, customer
services and technology and in leading
and changing large businesses.
Danuta was Chair of Telefónica in Ireland
until 2012, having previously been its Chief
Executive from 2001 to 2010. During her
nine-year tenure as Chief Executive, she
increased the customer base from just
under 1 million to over 1.7 million. Before
working at Telefónica, Danuta held various
senior positions within BT Group from 1984
to 2001. Until 2018, Danuta was a NED and
Chair of the Remuneration Committee at
both PageGroup plc and Old Mutual plc.
Current external appointments
– Senior Independent Director of
Aldermore Group plc (standing down
March 2021)
– Non-Executive Chair of St Modwen
Properties plc
– Non-Executive member of the Ministry
of Defence Board
Penny was CFO of Direct Line Group until
her appointment as CEO in May 2019.
The Board benefits from Penny’s deep
understanding of our sector as well as her
leadership skills, financial and risk expertise,
strategic thinking and cultural alignment.
The Board benefits from Tim’s many years
of experience as a finance director in the
insurance industry, his detailed knowledge
of capital markets and his track record of
successfully leading finance transformation
programmes.
As CEO, Penny is leading both 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 of targeting long-term sustainability.
Penny was previously Group Chief Risk
Officer and Executive Director at
Prudential, where she was responsible for
leading risk oversight globally. Before this,
she was Director of Group Finance at
Prudential. Penny was previously Group
CFO at Omega Insurance Holdings Limited
and CFO, UK General Insurance, at Zurich
Financial Services. She was a NED of
Admiral Group plc from 2015 to 2017. She is
an Associate of the Institute of Chartered
Accountants in England and Wales.
Tim was Deputy Chief Executive and Group
Finance Director of the Royal London
Group until July 2019. He joined Royal
London as Group Finance Director in 2014
and was additionally appointed as Deputy
Chief Executive in 2018. Before joining
Royal London, Tim had been Group CFO
of Torus Insurance, Deputy Group CFO
and Chief Capital Officer of Aviva plc and
a Partner in the Global Capital Markets
practice of PricewaterhouseCoopers. Tim is
also a Fellow of the Institute of Chartered
Accountants in England and Wales and a
Chartered Insurance Practitioner.
In January 2021, we announced that Tim
would be taking a temporary leave of
absence. During the interim period, Neil
Manser is Acting Chief Financial Officer.
Current external appointments
– Member of the Association of British
Current external appointments
– Member of the Association of British
Insurers Board
Insurers Board
– Deputy Chair of the FCA Practitioner
– Chair of the Prudential Financial and
Panel
– Member of the Build Back Better
Business Council
Taxation Committee of the Association
of British Insurers
– Member of the PRA Practitioner Panel
Key for Committee membership
Audit Committee
Board Risk Committee
Investment Committee
Nomination and Governance Committee
Remuneration Committee
Sustainability Committee
78
Direct Line Group Annual Report and Accounts 2020
Mark Gregory
Non-Executive Director
Jane Hanson
Non-Executive Director
Sebastian James
Non-Executive Director
Appointed: March 2018
Appointed: December 2011
Appointed: August 2014
Biography
Biography
Biography
Mark Gregory is Chair of the Investment
Committee and interim Chair of the
Remuneration Committee.
The Board benefits from his previous
extensive experience and knowledge of the
financial services sector, particularly in life
and general insurance, gained through his
roles at Legal & General. Additionally, he
has a detailed understanding of the retail
sector and customer service.
Mark previously held the role of Group CFO
and Executive Director at Legal & General
until 2017, and was CEO of Merian Global
Investors from January 2019 to August 2020.
During his 19-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 and 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
– Chair of Remuneration Committee and
Non-Executive Director of Entain plc
Jane Hanson is Chair of the Board Risk
Committee.
Sebastian James is Chair of the
Sustainability Committee.
Jane 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. Jane 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.
Jane has her own financial sector consulting
business and is also a magistrate.
Current external appointments
– Non-Executive Director of William Hill plc
– Non-Executive Director of Rothesay Life plc
– Non-Executive Director of Welsh Water
– Honorary Treasurer of the Disasters
Emergency Committee
– Chair and Non-Executive Director of
Reclaim Fund Limited
The Board benefits from Sebastian’s
extensive experience in retail and
consumer practice at large groups,
his detailed understanding of the UK’s
consumer markets, products and brands
as well as his strategic and operational
experience running Dixons Carphone plc
and Boots.
Until 2018, Sebastian was Group Chief
Executive of Dixons Carphone plc, having
previously held the role of Group Chief
Executive of Dixons Retail plc from 2012.
Before this, he was CEO of Synergy
Insurance Services Limited, a private equity
backed insurance company, and was
previously Strategy Director at Mothercare
plc. Sebastian has a degree in law from the
University of Oxford and an MBA from
INSEAD. He began his career at The Boston
Consulting Group.
Current external appointments
– Managing Director of Boots UK, subsidiary
of Walgreens Boots Alliance, Inc
– Senior Vice President of Walgreen Boots
Alliance, Inc
– Trustee of the Museum of Modern Art
Limited
Fiona McBain
Non-Executive Director
Appointed: September 2018
Biography
The Board benefits from Fiona’s profound
knowledge of the financial services
industry and her previous extensive
experience as both a business leader and
an auditor makes her well suited to her role
as a member of the Audit, Board Risk and
Investment Committees.
Fiona has over 30 years’ experience in retail
financial services, both in the industry and
as an auditor, in the UK and the USA. She is
an Associate Member of the Institute of
Chartered Accountants in England and
Wales, qualifying as an accountant early on
in her career at Arthur Young (now Ernst &
Young). Until January 2019, she was
Vice-Chair of Save the Children UK and a
Trustee Director of the Humanitarian
Leadership Academy. Previously, Fiona
served as CEO of Scottish Friendly Group
for 11 years, before which she was Scottish
Friendly Group’s Finance Director.
Current external appointments
– Chair of Audit Committee and Non-
Executive Director of Dixons Carphone
plc
– Chair and Non-Executive Director of the
Scottish Mortgage Investment Trust plc
– Chair of Audit Committee and Non-
Executive Director of Monzo Bank
Limited
www.directlinegroup.co.uk
79
Governance Board of Directors continued
Gregor Stewart
Non-Executive Director
Appointed: March 2018
Biography
Gregor Stewart is Chair of the Audit
Committee.
The Board benefits from his wide-ranging
experience of the financial services sector,
and in particular, significant experience
gained in the insurance and investment
management sectors. His career and
experiences at Ernst & Young and Lloyds,
in particular, make him suitable to chair
the Audit Committee.
Gregor worked at Ernst & Young for 23
years, including 10 years as a partner in
the financial services practice. Following his
career at Ernst & Young, he was Finance
Director for the Insurance division at 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
– Chair and Non-Executive Director of
Alliance Trust plc
– Chair and Non-Executive Director of FNZ
(UK) Limited
– Non-Executive Director of FNZ Group
Dr Richard Ward
Non-Executive Director and Senior
Independent Director
Adrian Joseph OBE
Non-Executive Director
Appointed: January 2021
Appointed: January 2016
Biography
Richard’s previous experience as a Chief
Executive, a Non-Executive Director and a
Chair makes him well suited to the role of
Senior Independent Director of the
Company. The Board benefits from his
experience in the insurance industry
and his insight into prudential regulation.
Richard was Chief Executive of Lloyd’s
of London from 2006 to 2013. He was
Non-Executive Chair of Brit Syndicates
Limited and Executive Chair of
Cunningham Lindsey from 2014 to 2018.
He was a Non-Executive Director of
Partnership Assurance Group plc, now part
of Just Group plc, between 2013 and 2016.
Before becoming Chief Executive of Lloyd’s
of London, Richard was previously Chief
Executive, later Vice Chair, of the
International Petroleum Exchange,
rebranded ICE Futures. Before this, he held
a range of senior positions at British
Petroleum and was a research scientist for
the Science and Engineering Council.
Richard was also a Non-Executive Director
of London Clearing House, a member of
the PwC Advisory Board and a Board
member of the Geneva Association.
Current external appointments
– Member of the Executive Committee
of the Ardonagh Group
Biography
Adrian Joseph joined BT Group in February
2020 as Managing Director, Group Data
and Artificial Intelligence. Prior to this he
was a senior Partner at Ernst & Young for
three years and the Head of the UK Data
and Analytics practice for Financial
Services. He joined Ernst & Young with
over ten years’ cloud, digital, platform, data
science and analytics experience gained
in senior leadership roles at Google, and
a further 15 years in industry and
consultancy. This included two years as the
main Board member responsible for Sales
and Marketing at Trafficmaster Plc.
Adrian was a Non-Executive Director at the
Home Office from 2016 to 2020, where he
sat on the Home Office Data Board and
advised on data science, digital
transformation, and diversity and inclusion.
From January 2012-2017, Adrian was Chair
of the Race Equality Board, the race
campaign of Business in the Community
charity. In 2014 he was appointed to the
main Board of Business in the Community
and he continues to serve as an Advisor.
He was awarded an OBE for services to
equality and diversity in business in the
2019 New Year’s honours list and was
announced as the most influential black,
Asian and minority ethnic technology
leader in the UK by the Financial Times and
Inclusive Boards in 2018.
Adrian’s expertise in data analytics, AI
and automation, as well as his passionate
advocacy for diversity and inclusion, benefit
the Board as it oversees the execution of
a strategy of which these issues are a
fundamental part.
Current external appointments
– Member of HM Government’s AI Council
Key for Committee membership
Audit Committee
Board Risk Committee
Investment Committee
Nomination and Governance Committee
Remuneration Committee
Sustainability Committee
80
Direct Line Group Annual Report and Accounts 2020
Executive Committee
Penny James chairs the Executive Committee. In addition to Penny James and Tim Harris, the Committee
comprises the following:
Mark Evans
Managing Director, Marketing & Digital
Jonathan Greenwood
Managing Director, Commercial
Steve Maddock
Chief Operating Officer
Joined: 2012
Joined: 2000
Joined: 2010
Experience and qualifications
Experience and qualifications
Experience and qualifications
Mark joined Direct Line Group in 2012 and
is Managing Director of Marketing &
Digital. He is responsible for leading the
Group’s Marketing and Digital functions.
Before joining the Group, Mark held roles
at HSBC, 118 118 (now 118 118 Money) and
Mars Inc. He is Chair of the Advertising
Association’s Front Foot and a NED of
LearnEtAl, an EdTech digital learning
company. Mark is also co-founder of the
School of Marketing which encourages
more school children to consider a career
in Marketing.
Mark is a member of Save the Children’s
Digital Advisory Board and also a Fellow of
the Marketing Society.
Jonathan joined the Group in 2000 and
is Managing Director, Commercial.
Steve joined the Group in 2010 and is Chief
Operating Officer.
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.
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 Chair of the Motor
Insurers’ Bureau and a member of the
Association of British Insurers’ General
Insurance Committee.
Neil Manser
Chief Strategy Officer and
Acting Chief Financial Officer
Gus Park
Managing Director of Motor, Pricing
And Underwriting
Kate Syred
Managing Director of Household,
Partnerships And Data
Joined: 2011
Joined: 2011
Joined: 2000
Experience and qualifications
Experience and qualifications
Experience and qualifications
Neil joined Direct Line Group in 2011 as
Director of Investor Relations and was
instrumental in the Group’s successful IPO
in 2012. He has worked in a number of roles
within the Group, in Finance including
Strategy and within the business, as
Managing Director of NIG. Neil was
appointed Deputy CFO in August 2018
before becoming Chief Strategy Officer
in March 2020. He is now responsible for
leading the Group’s corporate strategy.
On 11 January 2021, it was announced that
Neil would be Acting Chief Financial Officer
during Tim Harris’s leave of absence.
Neil has extensive industry and capital
markets experience prior to joining the
Group having previously worked at Brit
Insurance and as an equity analyst at
Merrill Lynch and Fox-Pitt, Kelton. He
qualified as a Chartered Accountant with
Ernst & Young and is an Associate of the
Institute of Chartered Accountants in
England and Wales.
Gus joined Direct Line Group in 2011 and
is Managing Director of Motor, Pricing
& Underwriting. He is responsible for
leading the Group’s Personal Motor
business across all brands, as well as the
Pricing and Underwriting function across
all consumer products.
Gus joined the Direct Line Group as
Strategy Director before becoming
Commercial Director for the Group’s Motor
insurance business. Following this he was
Managing Director of Motor Insurance and
Business Development.
Gus has over 25 years’ experience in a wide
range of sectors and roles, having started
his career as a civil servant for the Home
Office. After this he moved into strategy
consulting for the Boston Consulting
Group, and then into retail banking for
Bradford & Bingley.
In February 2020, Gus became a
Non-Executive Director of Five AI Inc.
Kate joined Direct Line Group in 2000 and
is Managing Director of Household,
Partnerships & Data. Kate has over 20 years’
experience of the insurance industry. Kate
is responsible for delivering the strategy
and developing products for the Group’s
Home, Pet, Travel, Life and Private
Businesses as well as leading the
Partnerships division. She is Chair of the
Group’s Diversity Network Alliance.
Previously, Kate was Commercial &
Marketing Director for Privilege and
launched Direct Line for Business in 2007.
Before joining the Group, Kate held roles in
Calvin Klein Cosmetics, Moore Stephens –
Vladivostok and qualified as a Chartered
Accountant with the National Audit Office.
She is also an Associate of the Royal
College of Science.
www.directlinegroup.co.uk
81
Governance Executive Committee continued
Humphrey Tomlinson
General Counsel
Joined: 2011
José Vazquez
Chief Risk Officer
Joined: 2012
Vicky Wallis
Chief People Officer
Joined: 2020
Experience and qualifications
Experience and qualifications
Experience and qualifications
Humphrey joined the Group in 2011 and
is General Counsel.
José joined the Group in 2012 and is Chief
Risk Officer.
Humphrey has over 30 years’ experience
as a solicitor. He is responsible for the
Group Legal function and oversees a range
of areas of legal advice and services. He has
been a Non-Executive Director of The
Floow Limited since July 2014.
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 has over 25 years’ experience of the
insurance industry. He is responsible for the
Group’s Risk function 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.
Vicky is Chief People Officer at Direct Line
Group and has a wealth of experience
in building HR functions, developing
cultural frameworks and enhancing
people capabilities.
Vicky joined the Group having worked
previously at Santander where she was the
HR Director for five years. Having operated
in international organisations with global
roles and projects in India, Romania, EMEA
and the US, Vicky has experience in finance,
retail and mobile telecommunications.
Vicky is accredited by the Chartered
Institute of Personnel Development
and holds a Master’s degree in
Organisational Leadership.
Jasvinder Gakhal
Acting Chief Strategy Officer
Joined: 2005
Jasvinder attends the Executive
Committee meetings in her capacity
as Acting Chief Strategy Officer, and as
such she is leading the Group Strategy
and Group Communications and
Sustainability functions.
Experience and qualifications
Jasvinder joined Direct Line Group in 2005.
In January 2021, it was announced that
Jasvinder would be Acting Chief Strategy
Officer whilst Neil Manser took on the role
of Acting Chief Financial Officer.
Before stepping into the Acting Chief
Strategy Officer role, she was Managing
Director of Direct Line for Business, leading
the growth of the direct Commercial
Insurance business.
Prior to this Jasvinder has held roles
leading the Pet Insurance portfolio, Head
of Direct Line Home and across the
Partnerships business.
Before joining Direct Line Group, Jasvinder
was a maths teacher.
82
Direct Line Group Annual Report and Accounts 2020
Corporate governance report
Corporate governance report
This report explains the Board’s role and activities, and how corporate governance
operates throughout the Group.
Corporate Governance Statement
This Corporate Governance Statement explains
key features of Direct Line Insurance Group plc’s
(the “Company”) governance structure and how it
measures itself against the standards set out in the UK
Corporate Governance Code 2018 (the “Code”). The Code
set by the Financial Reporting Council (the “FRC”) applied
to the financial year ended 31 December 2020. For more
information about the Code, visit the FRC’s website at
www.frc.org.uk. This Corporate Governance Statement
fulfils the requirements of the FCA’s Disclosure Guidance
and Transparency Rule 7.2 (“DTR 7.2”). For full details refer
to the Directors’ report on pages 140 to 144.
The Company complied with all of the principles and
provisions of the Code throughout the financial year
and up to the date of this Annual Report & Accounts.
Further details of how the Company applied the Code’s
principles and complied with its provisions can be found
in the following sections of the Annual Report & Accounts.
Board leadership &
company purpose
– The Board
– Board activities
– The Board and culture
Division of
responsibilities
Composition,
succession &
evaluation
Audit, risk &
internal control
– Governance framework and
structure
– The structure of the Board, Board
Committees and executive
management
– Board composition
– Development, information,
support, induction, training
– Diversity and inclusion
– Board effectiveness
– Fair, balanced and
understandable assessment
– Risk management and internal
control systems
– Audit Committee report
– Board Risk Committee report
Remuneration
– Directors’ Remuneration Report
84
85
88
89
90
91
91
92
93
95
95
97
102
113
www.directlinegroup.co.uk
83
Governance Corporate governance report continued
Board leadership and company purpose
The Group ensures that it communicates the information
that its investors require, using: traditional methods,
such as annual report & accounts, RNS newswires and
corporate and press releases; in person; and, (wherever
possible) by virtual means. In 2020, virtual engagement
included investor meetings attended by the Chair, CEO
and CFO and broker attendance at Board meetings.
Where appropriate, communication with investors is fed
back to the Board.
For more information on how shareholders will be able to
participate in the 2021 AGM see page 223 and for further
information on communication with major investors see
page 88. Additional information on how the Board has
regard for the Group’s wider stakeholders and other
relevant matters can be found on pages 86 to 87.
Operations
The Board is responsible for overseeing the
implementation of a robust control framework to allow
effective management of risk. 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. The Board is accountable to
investors for financial and operational performance.
Strategy
The Board oversees the development of the Group’s
strategy and monitors management’s performance and
progress against the strategic aims and objectives.
Vision and purpose
Our vision is to create a world where insurance is personal,
inclusive and a force for good. Our purpose is to help
people carry on with their lives, giving them peace of mind
now and in the future.
The Board
The Board receives regular updates on the views of the
Company’s shareholders from the Group’s brokers and
directly from institutional shareholder meetings with
senior executives and the Chair. The Board has regard
to the interests of a range of stakeholders including
customers, employees and suppliers when agreeing
the Group’s strategic and financial plans and in all other
decision-making. Illustrations of the breadth and depth
of the Board’s regard to stakeholders’ interests are
contained in the Sustainability section of the Annual
Report & Accounts on pages 44 to 68.
There is a 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 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 for
the Board, each Board Committee has written terms of
reference defining its role and responsibilities. The terms
of reference of the Board Committees can be found on
our corporate website. Further details regarding the role
and activities of the Board and its Committees can be
found below and in the Directors’ remuneration report
which begins on page 113.
The role of the Board
Pages 89 and 90 summarise the role of the Board, its
Committees and the responsibilities of the Chair, the
Senior Independent Director, the Non-Executive Directors,
the Executive Directors and the Executive Committee.
Whilst some of the key areas of the Board responsibility
are summarised in the following paragraphs, these are not
intended to be an exhaustive list.
Leadership
The Board is the main decision-making body of the
Company. It provides leadership within a framework
of prudent and effective controls. The Board has clear
divisions of responsibility and seeks the long-term
sustainable success of the Group. Information on how
opportunities and risks to the future success of the
business have been considered and addressed, and about
the sustainability of the Company’s business model, is set
out in the Strategic report which begins on page 1.
Acting fairly between members and engagement
methods
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.
The Group seeks to ensure that it acts fairly between all
members and considers all types of investors (including
our institutional investors and private shareholders)
when making decisions that impact them.
84
Direct Line Group Annual Report and Accounts 2020
Board meetings and activity in 2020
The activities undertaken by the Board in 2020 were intended to help promote the long-term success of the
Company. Scheduled Board meetings focused on four main themes, as detailed below:
Themes
Description
Strategy and
execution
Strategic alignment
– 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
Financial
performance
and investor
relations
Strategic alignment
costs;
– Considering growth opportunities; and
– Reviewing the individual strategy of key business lines.
– 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 and
approving financial results for publication;
– Approving reinsurance programmes and renewals;
– Approving the issuance of £260 million of Tier 2 debt in June 2020;
– Reviewing broker reports on the Group, alongside feedback from investor meetings; and
– In March 2020, the Board considered it prudent to cancel the share buyback programme
and, in April 2020, to cancel the 2019 final dividend as a result of the volatile conditions
arising from Covid-19. The Board subsequently declared a 2020 interim dividend of 7.4 pence
alongside a further special dividend of 14.4 pence to replace the cancelled 2019 final
dividend.
Risk
management,
regulatory and
other related
governance
Strategic alignment
– Reviewing and agreeing the Group’s policies;
– Setting risk appetites;
– Approving the Own Risk and Solvency Assessment (“ORSA”);
– Seeking to ensure that the Group complies with its regulatory obligations;
– Reviewing the Group’s solvency position and forecast;
– Reviewing the Group’s ESG initiatives; and
– Reviewing and approving the Group’s TCFD and Sustainability reports.
Board and
Board
Committee
governance
Strategic alignment
– Receiving reports from the Board’s Committees;
– Updating the Schedule of Matters Reserved for the Board;
– Updating terms of reference for the Board Committees;
– Receiving corporate governance updates;
– Overseeing Board and executive succession planning;
– Conducting the annual review of the Board and Board Committees’ effectiveness;
– Approving the Company’s Code of Business Conduct and conducting an annual review of
the Group’s governance framework; and
– In addition to routine business, 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 2020, the Board held a session to set and monitor progress against
the Group’s strategy and to discuss the Group’s long-term sustainability and its future
opportunities as well as the strategic implications of Covid-19.
Link to strategy
Be best at direct
Win on price comparison
websites
Extend our reach
Be nimble and cost efficient
Have technical edge
Empower great people
www.directlinegroup.co.uk
85
Governance
Corporate governance report continued
Board activity and stakeholder priorities
Our stakeholders are at the root of both our strategy and our values. By engaging with our stakeholders we are able
to understand who they are and what matters to them. This meant that the Group was able to react swiftly in
challenging circumstances in 2020 while still planning for the long-term sustainable success of the Company.
The Group’s Section 172(1) statement is part of the Chair’s statement in the Strategic report on page 10 and is
supported by the Group’s five-pillar sustainability strategy on pages 44 to 45 and the TCFD statement on
pages 62 to 63.
The table below provides an insight into decisions taken by the Board during 2020 which directly affect its
stakeholders. In all cases, the Board considers the likely consequences of any decision in the long term.
Decision of the Board
Considerations
Further information
Stakeholder
Group
Customers,
suppliers
and other
business
relationships
a b c
Customer metrics form part of Annual Incentive
Plan targets.
The Board approved the following:
– Code of Business Conduct;
– Group pricing approach and associated governance
and control framework;
– Prompt Payment Practice Report; and
– Covid-19 support measures for customers and
suppliers.
People
a a b
People metrics form part of Annual Incentive Plan
targets and a people update is presented at each
Board meeting.
The Board approved the following:
– Covid-19 response to employees;
– Agile working transformation;
– Modern slavery statement;
– Code of Business Conduct;
– Whistleblowing procedures;
– Buy As You Earn Plan; and
– Free share award.
– Urgency of
settling claims
– Financial
difficulties of
customers
– Product offering
(range and price)
– Ease of
communication
– Customer service
– Prompt payment
– Supply chain
management
– Culture
– Employee
wellness
– Human rights
– Employee
satisfaction
– Employee
development
– Sustainability
– Customers
– Sustainability
– People
– Directors’
remuneration
report
Society
a d
Planet
a d
Investors
a e f d e
The Board gives its full support to the Force for Good
Initiative and the DLG Community Fund.
– Responsible
investing
– Sustainability
– Society
The Board approved the following:
– Code of Business Conduct;
– Modern slavery statement; and
– Board diversity statement.
The Board actively supports initiatives to reduce the
Group’s impact on the environment and manage climate
change risks.
The Board approved the following:
– New measures for the investment portfolio to help
the Group to achieve net zero carbon emissions
by 2050;
– Publication of commitments to setting Science-Based
Targets and becoming a 100% carbon-neutral business
from 2020;
– Approval of climate change-related stress testing; and
– TCFD Report.
The Board considers feedback from investors
communicated directly and through its brokers.
The Board approved the following:
– The methods by which surplus capital should be
returned to shareholders;
– Termination of 2020 buyback programme and
cancellation of 2019 final dividend;
– Subsequent approval of the interim and special interim
dividend; and
– Annual Report & Accounts.
– Human rights
– The welfare of the
communities in
which we operate
– ESG factors
– Climate change
– Emissions targets
– Environmental
practices
– Sustainability
– Planet
– Financial
performance
– Strategic delivery
– Capital returns
– FRC
recommendations
– Corporate
governance
report
86
Direct Line Group Annual Report and Accounts 2020
Link to S172(1) Companies Act 2006
a
the likely consequences of any decision in the long term
a b
b c
the interests of the company’s employees
the need to foster the company’s business relationships with suppliers, customers and others
d
the impact of the company’s operations on the community and the environment
d e
e f
the desirability of the company maintaining a reputation for high standards of business conduct
the need to act fairly between members of the company
Board and Committee meetings
The Board and Board Committees held a number of scheduled meetings in 2020 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 20201. Additional Board and Committee meetings
were convened during the year to discuss ad hoc business development, governance and regulatory matters and in
response to Covid-19.
Board
6 of 6
9 of 9
9 of 9
9 of 9
9 of 9
9 of 9
9 of 9
9 of 9
9 of 9
9 of 9
Chairs
Mike Biggs3
Danuta Gray
Senior Independent
Director
Richard Ward
Non-Executive Directors
Mark Gregory
Jane Hanson
Sebastian James
Fiona McBain
Gregor Stewart
Executive Directors
Penny James
Tim Harris
Executive Committee
Member
Simon Linares4
Notes:
Audit
Committee
Board Risk
Committee
Sustainability
Committee2
Investment
Committee
Nomination and
Governance
Committee
Remuneration
Committee
–
–
–
5 of 5
5 of 5
–
5 of 5
5 of 5
–
–
–
–
5 of 5
–
5 of 5
–
5 of 5
5 of 5
–
–
–
–
–
–
4 of 4
4 of 4
–
–
4 of 4
–
1 of 1
–
–
–
4 of 4
4 of 4
–
–
–
–
4 of 4
3 of 3
4 of 4
2 of 2
3 of 3
4 of 4
–
–
–
–
–
–
–
–
3 of 3
–
3 of 3
–
–
–
–
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. Formerly the Corporate Responsibility Committee.
3. Mike Biggs stepped down from the Board on 4 August 2020.
4. Simon Linares stepped down from the Sustainability Committee on 21 April 2020.
www.directlinegroup.co.uk
87
Governance
Corporate governance report continued
The Board and culture
The Board is responsible for establishing the Company’s
purpose, values and strategy, promoting its culture,
overseeing its conduct and affairs, and for promoting the
success of the Company for the benefit of the members
and all the stakeholders.
The Board recognises that culture and capability are key
enablers for achieving the Group’s strategic objectives
and encourages an open and inclusive culture and an
environment in which people can be themselves.
During the year the Board championed the Group’s
culture through:
– Assessing and monitoring culture and satisfying itself
that the Group’s purpose, values and strategy are
aligned with its culture;
– Reviewing the Code of Business Conduct to ensure
that it reflects the Group’s purpose and sustainability
strategy;
– Reviewing means, for the workforce, to raise concerns
in confidence and, if they wish, anonymously
(“Whistleblowing”). Further details on the Group’s
Whistleblowing arrangements can be found on
page 105;
– Seeking feedback from our people through the
‘DiaLoGue Survey’, a tool to measure engagement,
which this year included questions on inclusivity
and culture;
– NEDs’ engagement with Employee Representative
Body (“ERB”) activities. The NEDs have an active
interest in the workings of the ERB and in the normal
course of business attend the meetings on a rotation
basis so all NEDs participate and engage with the
workforce. Whilst circumstances during the year have
made active participation difficult, our NEDs have been
kept fully informed by the Chief People Officer and
Chief Executive Officer, and the Chair has attended a
virtual ERB conference;
– Investing in and rewarding our workforce. During the
year, the Group further built on its commitment to
ensure that all of our people are rewarded fairly and
have an interest in the success of the Group.
See page 117 of the Remuneration Committee report
for more detail;
– Supporting the Strategic Leadership Development
Programme, the aim of which is to create a pipeline
of diverse talent for development into future senior
leaders;
– Enabling our employees to benefit from the Group’s
success. All eligible employees can participate in the
Group’s Buy As You Earn (“BAYE”) Plan which provides
a cost-effective way for all employees to acquire shares
in the Company; and
– Supporting management’s emphasis on employee
wellbeing, including mental health awareness and
financial wellbeing. For more information please see
the People section of the Sustainability Pillars on
page 50.
Communication with major investors
The Group is committed to keeping investors informed
of its strategy and progress and to ensuring appropriate
channels of communication are in place. We believe that
actively engaging with investors is fundamental to our
business. Having an active dialogue and ongoing
engagement is vital for keeping in touch with opinions
and provides the opportunity to address questions and
concerns. The Chief Executive Officer and Chief Financial
Officer frequently meet investors and the Board is also
kept up to date on investor views by the Group’s corporate
brokers who regularly attend Board meetings. The Chair
is also available to, and has engaged with, institutional
shareholders. For more information on engagement with
investors, see page 86.
Despite the challenges that we saw with physical
meetings in 2020, the Chief Executive Officer and/or Chief
Financial Officer had the following direct engagements
with investors during 2020:
– attended 15 sell-side investor events;
– met 141 investors during 2020; and
– had 53 interactions with the top 25 largest investors.
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 including in relation to Directors’ external
directorships and their interests in securities of other
financial service institutions. Accordingly, the Board 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 to ensure that each Director
applies independent judgement.
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Direct Line Group Annual Report and Accounts 2020
Division of responsibilities
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 69.
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 the Prudential Regulation
Authority (“PRA”) requirements to identify key functions
and to have and maintain a Responsibilities Map in
respect of the PRA and FCA’s Senior Managers and
Certification Regime requirements. The Board reviews this
document annually.
The core elements of the governance framework are the:
– Matters Reserved for the Board and the Board
Committees’ terms of reference;
– High Level Control and System of Governance
Framework document;
– Risk appetite statements, which are described on
page 70;
– Enterprise Risk Management Strategy and Framework,
which is described on page 69;
– Group policies, which address specific risk areas, are
aligned to the Group’s risk appetite, 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 requirements that can be implemented
throughout the Group.
The diagram below summarises the split of responsibilities for the different parts of the Group’s governance framework.
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
for the Board and
Board
Committees’
terms of
reference
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.
High Level Control and System of
Governance Framework document
Overarching risk appetite
statements
Group policies
Enterprise Risk
Management Strategy
and Framework
Policy risk appetite
statements
Minimum standards
www.directlinegroup.co.uk
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Governance Corporate governance report continued
Structure of the Board, Board Committees
and executive management
The following chart sets out the structure of the Board and
its Committees and highlights the responsibilities of the
Chair, the Senior Independent Director, the Non-Executive
Directors, the Executive Directors, the Company Secretary
and the Executive Committee. The role descriptions for
CEO and Chair are set out in writing and the profiles
clearly define their respective roles and responsibilities
and ensure that no one person has unlimited powers of
decision making.
The Board and Board Committees have unrestricted
access to management and external advisers to help
discharge their responsibilities. Each Committee plays a
vital role in helping the Board to operate efficiently and
consider matters appropriately.
Roles and responsibilities of the Board
Board of Directors
Each Director brings different skills, experience and
knowledge to the Company, and the NEDs contribute
additional independent thought and judgement.
Depending on the business needs, the NEDs and the
Chair commit at least two days a month and two days a
week respectively to discharging their duties effectively in
accordance with their letters of appointment. Biographies
of the full Board can be found on pages 78 to 80.
Board Committees
Full details of membership, responsibilities and activity of
each Committee throughout the year can be found on
pages 97 to 139.
Audit
Committee
Investment
Committee
Remuneration
Committee
Board Risk
Committee
Nomination
and Governance
Committee
Sustainability
Committee1
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
Biographies of the Executive Committee can be found on
pages 81 to 82.
Note:
1. Formerly the Corporate Responsibility Committee.
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Direct Line Group Annual Report and Accounts 2020
The Board and Board Committees are satisfied that,
in 2020, sufficient, reliable and timely information
was received in order for them to perform their
responsibilities effectively.
The reports by each Board Committee are given in this
Annual Report & Accounts. The terms of reference for each
Committee can be found on the corporate website at:
www.directlinegroup.co.uk/en/who-we-are/governance/
board-committees.
Chair
– Guides, develops and leads the Board
– Plans and manages the Board’s business
– Oversees the governance framework
Senior Independent Director
– Acts as a sounding board for the Chair and an
intermediary for the other Directors when necessary
– Is available to shareholders if they have concerns
they cannot resolve through other channels
– Leads the Chair’s performance evaluation
Non-Executive Directors
– Challenge management in an objective and
constructive manner
– Use their wider business experience to help develop
the Group’s strategy
Executive Directors
– The CEO and CFO are members of the Board with
delegated responsibility for the day-to-day
operation of the Group and delivering its strategy
– The CEO delegates certain elements of her
authority to the Executive Committee members to
help ensure that senior executives are accountable
and responsible for managing their business and
functions
Company Secretary
– Ensures the Directors receive accurate, timely and
clear information
– Alongside the Chair, oversees the governance
framework
Composition, succession & evaluation
Board composition
As at the date of this report, the Board comprised the
Chair, who had previously served as an independent
Non-Executive Director and was independent when
appointed as Chair; two Executive Directors; and seven
independent Non-Executive Directors, including the
Senior Independent Director. The current Directors served
throughout all of 2020, except for Adrian Joseph who
joined the Board as an independent Non-Executive
Director on 1 January 2021. The Board has previously
announced that Jane Hanson will retire at the conclusion
of the AGM to be held in May 2021, having completed nine
years of service.
Mike Biggs, our previous Chairman, stepped down from
the Board on 4 August 2020.
Biographical details of the Directors of the Company as
at the date of this report are set out on pages 78 to 80.
Board succession
The Nomination and Governance Committee continues
to review succession plans both for the Board and at
executive level each year. Further information on our
diversity policy, our approach to succession planning and
Board appointments can be found in the Nomination
and Governance Committee’s report on pages 106 to 108.
Chair succession
In March 2020, we announced that our former Chair, Mike
Biggs, had decided, after having served as Chair, to step
down from the Board later in the year.
As a first step in the process of searching for and selecting
a successor, Non-Executive members of the Board were
asked whether they might consider submitting
themselves as candidates. Danuta Gray was the only
existing member of the Board who wished to be
considered. Richard Ward, Senior Independent Director,
was asked to lead the selection process.
A Selection Board was constituted, consisting of all Board
members except Mike Biggs, the outgoing Chair, and
Danuta Gray, the internal candidate. The framework for
the thorough and rigorous selection process, and the
terms of reference for the Selection Board, were defined
with the assistance of the Company Secretary. The
Selection Board authorised Richard Ward and Penny
James to appoint an executive search firm to assist in
ensuring that a thorough review of both internal and
external candidates was carried out.
Following presentations by shortlisted firms, Russell
Reynolds, which is a signatory to the Voluntary Code
of Conduct for Executive Search Firms, and has no other
connection with the Company or any of its Directors, was
selected. Russell Reynolds’ team was led by Julia Budd
and Laura Sanderson.
In a series of interviews with Richard Ward and Russell
Reynolds, each member of the Selection Board indicated
the skills, experience and characteristics that they thought
would be important in a new Chair. Based on the criteria
defined as a result of consultation with Selection Board
members, Russell Reynolds proposed a list of eligible
external candidates, which the Selection Board refined
into a shortlist of candidates to be approached.
The Selection Board acknowledged from the outset that
Danuta Gray was an extremely strong, well-qualified and
highly regarded candidate. Following approaches to
external candidates, interviews by members of the
Selection Board and the resulting further refinement
of the shortlist, the Selection Board invited Danuta Gray
to present her proposed approach to the role of Chair.
In March 2020, the Selection Board resolved unanimously
that Danuta was the preferred candidate, subject to
regulatory approval and to confirmation of the timing
of succession. In May 2020, having obtained regulatory
approval for Danuta Gray’s proposed appointment, the
Board made its decision to appoint Danuta as Chair and
we announced that she would succeed Mike Biggs as
Chair with effect from 4 August 2020.
Board induction and training
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.
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 Chair 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 the Senior Managers and
Certification Regime, the IT transformation programme,
data privacy, cyber and operational resilience and the
Internal Economic Capital Model.
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.
NED Independence
On behalf of the Board, the Nomination and Governance
Committee assesses the NEDs’ independence, skills,
knowledge and experience annually. The Nomination and
Governance Committee concluded that every current
NED was independent, continued to contribute effectively,
and demonstrated they were committed to the role. Each
current Director will submit themselves for election or
re-election at the 2021 AGM, except for Jane Hanson, who
is retiring from the Board.
You can find out more about the activities of the
Nomination and Governance Committee’s work during
the year on pages 106 and 108.
www.directlinegroup.co.uk
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Governance Corporate governance report continued
Information and 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 Board’s approach to diversity and inclusion
The Board and executive management are dedicated
to building a diverse and inclusive organisation, in which
everyone is treated fairly, irrespective of their racial or
ethnic origin, age, disability, gender, sexual orientation,
belief or religion, or educational or professional
background.
Supporting equality of opportunity and building a culture
that values difference has a strong correlation with our
values, both at Board level and within the wider workforce.
The Code encourages diversity of gender, social and ethnic
backgrounds, cognitive and personal strengths. The Board
understands 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 Group has a Board-approved diversity
policy which is reviewed annually.
Whilst all appointments are based on merit and objective
criteria, we are proud to be able to demonstrate a Board
that not only boasts a female Chair and Chief Executive
Officer but also a broader range of diversity characteristics.
The Board advocates the importance of cultural and
ethnic diversity and aims to increase it at Board and
Executive Committee level, as well as across the Group.
The charts below provide an overview of the Board independence and tenure, along with a summary of the Board
and Executive Committee gender as at 31 December 2020.
Board composition
Board independence
Board and Senior Management1 gender
Board gender
Executive Director
Chair
Independent Non-Executive
Directors
22%
11%
Female
Male
4
(44%)
67%
5
(56%)
Chair and NED tenure
Executive Committee gender
22%
22%
0-3 years
3-6 years
6-10 years
56%
Female
Male
3
(25%)
9
(75%)
Executive Committee and direct reports
Female
Male
37
(45.7%)
44
(54.3%)
Note:
1. Senior Management is defined as the Executive Committee and direct reports (excluding administrative and support staff)
as at 31 December 2020.
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Direct Line Group Annual Report and Accounts 2020
The Board is pleased to have appointed Adrian Joseph as
a Non-Executive Director from 1 January 2021. Adrian has
deep experience of data strategy and artificial intelligence
and is a respected thought leader in diversity and inclusion.
Beyond the Board and into Executive Committee and the
wider workforce, we are pleased with the progress that
has been made in embedding principles and practices
to promote diversity and to champion the benefits of a
diverse and inclusive workforce.
The Board and Executive Committee continue to support
the Diversity Network Alliance which champions diversity
and inclusion within our organisation through strands
relating to gender, ethnicity, social mobility, disability and
neurodiversity, sexual orientation, generations, families
and carers and belief.
The Board has oversight of diversity and inclusion
initiatives carried out through the remit of the
Sustainability Committee. Further details on diversity
inclusion initiatives can be found in the Strategic report,
in the Sustainability Committee report and in the
Nomination and Governance Committee report on pages
106 to 108.
Board skills, experience and knowledge
Our Nomination and Governance Committee has an
active and dynamic process of understanding and
identifying the skills, experience and knowledge of its
board members. The principles of the Code are embodied
in the Committee’s approach to board evaluation and
succession planning and the Chair of the Committee goes
through a continuous process of evaluating the skill and
experience required on the Board. The principles and
practices set by the Board and the progress made with
the diversity of the Board include:
1. Maintaining at least 33% female representation on
the Board
The Board aims to maintain female representation of at
least 33% and remains committed to seeking to improve
further its position on gender 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 (5 March 2021), female representation
on the Board was 40% which exceeds the target set in
Lord Davies’ Women on Boards Review Five Year
Summary to be achieved by 2020 and exceeds the
Hampton-Alexander Review’s recommendation for a
minimum of 33% of women’s representation on boards by
2020. The Group ranked 44th in the FTSE 250 for female
Board representation in the Hampton-Alexander review.
2. 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, when using executive search
firms, the Board will only engage those who are
signatories to the Voluntary Code of Conduct for Executive
Search Firms as recommended by Lord Davies.
Executive Committee 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. As at 31 December 2020, the Group
exceeded its target set the previous year of achieving at
least 33% female representation at senior leadership team
level, with 45.7% of Executive Committee and direct report
positions held by women. For a breakdown of the
Executive Committee, please see biographical details on
pages 81 to 82.
The Board continues to support Group-wide diversity
initiatives, including succession planning programmes,
to broaden and strengthen female talent at middle
management level. For more information on the Group’s
diversity and inclusion strategy please see the People
section on page 50.
Board and Committee effectiveness review
three-year Board evaluation cycle
The Board conducts an annual review of the effectiveness
of the performance of the Board, its Committees, the Chair
and individual Directors with the input of an external
facilitator at least every third year. The effectiveness review
in 2020 was managed internally.
The Board recognises that a continuous and constructive
review of its performance is an important factor in
achieving its objectives and realising its full potential.
The 2020 evaluation focused on both the preservation of
the strengths identified in the 2019 and earlier evaluations
and on themes for sustaining effectiveness suggested by
Professor Goffee, including building Board cohesion,
making space for strategic discussion, and equipping the
Board to monitor the delivery of organisational
transformation and to balance challenge with support.
2019
External
2020
Internal
2021
Internal
Evaluation process
Step 1: with the assistance of the Company Secretary, the
Chair identified the effectiveness priorities for discussion.
Step 2: The Chair interviewed members of the Board and
Senior Management team.
Step 3: Reports were prepared for the Board and for each
Committee for discussion.
Step 4: An action plan was defined following discussion of
the reports.
Evaluation outcome
The Chair prepared a report for discussion by the Board
and each of the Board Committees.
In addition, the Senior Independent Director discussed the
Chair’s performance with the Non-Executive Directors
(except the Chair) to enable him to provide constructive
feedback. No Director was involved in the review of their
own performance.
The review concluded that, during the year, the Board, its
Committees and individual members of the Board had
performed effectively. Progress was found to have been
made on the actions suggested in the 2019 review, as
summarised in the table below. Suggestions for fine-
tuning the effectiveness of Committees, including
strengthening the membership of the Remuneration
Committee and clarifying the role and authority of the
Sustainability (formerly the Corporate Responsibility)
Committee, were addressed during the year.
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Governance
Corporate governance report continued
The table below illustrates the areas of focus that resulted from the 2019 review and the actions taken in 2020 as a result.
Focus areas from the 2019 review
Action taken during 2020
Build Board solidarity around key strategic
challenges facing the Group.
Make space for strategy
Refresh the Board
The Board has built on its cohesion by creating opportunities for
NEDs to add value based on their experience and by focusing on
strategy in post-Covid-19 markets, the impact of the FCA pricing
practices review, the pace of organisational and technological
change, the cost base, capital strategy and growth.
The number and length of Board meetings have been increased to
allow time for deeper discussion of strategic topics including costs,
capital structure, growth, technology, digitalisation, the Agile
operating model, data strategy, ethics and governance, investment
in, and realising the benefits of, talent management, and succession
planning.
The Board has focused on strengthening its experience and diversity
to enhance its ability to monitor the delivery and performance of
technological and other change. Criteria for new Non-Executive
Directors have reflected these priorities, resulting in the
appointment of Adrian Joseph OBE as a Non-Executive Director on
1 January 2021.
The table below illustrates the areas of focus that resulted from the 2020 review and the actions that are proposed for 2021.
Focus areas from the 2020 review
Proposed action for 2021
Use of Non-Executive Directors’ experience
The Board’s agenda and information flow
External expertise
Opportunities for the Non-Executive Directors to interact directly
with the business in a remote working environment should continue
to be found until site visits can be reinstated.
The sequence of strategic topics on the Board’s agenda to be
aligned with the executive programme, taking the opportunity of
longer meetings, when necessary, to allow for deeper and more
regular strategic discussion. The early sharing of thinking on key
strategic topics should continue. Key topics for 2021 to include the
FCA’s pricing practices review, capital strategy, driving the benefits
of investment in data and technology and growth.
Regular broker updates to be obtained during a time of market
volatility and increased M&A activity, as well as from thought leaders
on future trends in the industry.
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Direct Line Group Annual Report and Accounts 2020
Audit, Risk & Internal Control
An explanation of how the Board complies with the Code
in relation to audit, risk and internal control is set out
below, except for the following matters, which are covered
elsewhere in the Annual Report & Accounts:
– 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 page 74 and page 143;
– 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 which starts on page 97.
Responsibility for preparing the Annual Report
& Accounts
The Board’s objective is to give shareholders a fair,
balanced and understandable assessment of the Group’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 143. The
Group’s External Auditor explains its responsibilities on
page 153.
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.
Assessing emerging and 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 emerging and
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 71
to 72.
This confirmation is based on the Board Risk Committee’s
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 Material Risk Assessment. The Material
Risk Assessment also plays a key role in developing the
ORSA and assessing the Group’s strategic plan.
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 emerging and 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 FCA’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 69.
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.
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Governance Corporate governance report continued
The Board was also supported in its review of the annual
Internal Risk and Control Assessment. This process
involved each function completing a self-assessment
of its risks and key controls and an Executive Sponsor,
responsible for the function, attesting to the status of the
effectiveness of the risk management and internal control
systems. The Risk function reviewed and challenged these
findings and the Group Audit function provided an
independent assessment of the overall effectiveness of the
governance and risk and control framework of the Group.
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.
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 the Group’s risk
management, control and governance frameworks
and processes.
The Directors acknowledge that any internal control
system can manage, but not eliminate, the risk of not
achieving business objectives. It can only provide
reasonable, not absolute, assurance against material
misstatement or financial loss.
On behalf of the Board, the Audit Committee regularly
reviews the effectiveness of the Group’s internal control
systems. Its monitoring covers all material controls.
Principally, it reviews and challenges reports from
management, the Group Audit function and the External
Auditor. This enables it to consider how to manage or
mitigate risk in line with the Group’s risk strategy.
Remuneration
The Board is mindful at all times that remuneration
policies and practices must be designed to support
strategy and promote the long-term sustainable success
of the Group. It delegates responsibility to the
Remuneration Committee to ensure that there are formal
and transparent procedures for developing policy on
executive remuneration and determining Director and
Senior Management remuneration. The Remuneration
Policy was approved by the shareholders in the 2020 AGM
and was drafted to include provisions and principles in
the Code.
In his report on pages 113 to 139, the Remuneration
Committee Chair provides an overview of the Committee’s
work in setting an appropriate framework for
remuneration of the Executive Directors, Executive
Committee and other senior managers as well as the
wider workforce to ensure fair pay for all our colleagues.
For details on how the Company has applied Provision
40 of the Code in determining Executive Director
remuneration policy and practices, see the summary on
page 121.
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Direct Line Group Annual Report and Accounts 2020
Audit Committee report
Gregor Stewart
Chair of the Audit Committee
Committee membership
– Gregor Stewart
Chair
– Mark Gregory
Independent Non-Executive Director
– Jane Hanson
Independent Non-Executive Director
– Fiona McBain
Independent Non-Executive Director
Committee meeting attendance can be found on
page 87.
Key responsibilities
– Oversee the integrity of the Group’s financial
statements
– Oversee and challenge the effectiveness of the
Group’s systems of financial and other internal
controls, and financial and regulatory reporting
– Oversee the actuarial reserving process
– Oversee the work and effectiveness of the Group’s
internal and external auditors
– Oversee the Group’s financial and non-financial
disclosures, including any climate-related financial
disclosures
Audit Committee
Report
Areas of focus in the reporting period
– Financial reporting: reviewed and challenged the key
accounting and actuarial estimates and judgements
made by management to support the financial
statements, and gave due consideration to the
increased level of uncertainty in respect of Covid-19, with
reference to the Financial Reporting Council’s guidance
issued on this matter.
– Subordinated Tier 2 Notes: oversaw certain matters in
relation to the issue of £260 million Subordinated Tier 2
Notes at a 4.0% coupon in June 2020.
– Actuarial and Finance Transformation: received updates
from management on: the progress of the
transformation programme, including oversight of the
budget; IFRS 17 accounting policies; and the general
ledger migration.
– TCFD Report: reviewed and challenged the Group’s
first Task Force on Climate-related Financial
Disclosures Report.
– Insurance reserves: reviewed the Group’s insurance
reserves to obtain assurance that they remained
appropriate for discharging expected liabilities. In doing
so, the Committee challenged the actuarial best
estimate of technical provisions and the prudential
margin for IFRS 4 ‘Insurance Contracts’.
Committee skills and experience
In line with the UK Corporate Governance Code 2018
(the “Code”), all members of the Audit Committee are
independent and the 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 the Chair, Gregor Stewart, who is a member
of the Institute of Chartered Accountants of Scotland.
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Governance Audit Committee report continued
Each member has recent and relevant financial experience
gained in a number of different financial services businesses
including insurance, enabling them to contribute diverse
expertise to the Committee’s proceedings.
To keep their skills current and relevant, members of the
Committee received training during the period on matters
including IFRS 17, the Internal Economic Capital Model
and Solvency II technical provisions and have a schedule
of technical updates planned for 2021.
Main activities during the year
The agendas for the meetings taking place during the
year are agreed by the Chair of the Committee and detail
the matters to be discussed and considered at each
meeting. An analysis of the activity of the Committee
during the year identified that it had discussed all
intended matters during the year.
At each scheduled Committee meeting, the Committee
received reports on financial and non-financial reporting,
insurance reserves, internal controls and Group Audit.
Having reviewed the Committee’s terms of reference
during the year, the Committee has included the
additional responsibility of reviewing the Group’s Task
Force on Climate-related Financial Disclosures Report
(“TCFD Report”) on behalf of the Board on an annual basis.
Financial reporting
The Committee followed a review process before
recommending the Annual Report & Accounts and Half
Year report to the Board, which focused on the choice
and application of significant accounting policies,
emphasising those requiring a major element of
estimation or judgement. Further information on the
significant matters considered is provided in the table
on page 99.
The Committee also considered: the Financial Reporting
Council’s guidance on the Strategic Report; the UK
Corporate Governance Code 2018; Section 172(1) of the
Companies Act 2006 (as previously defined); the
Companies (Directors’ Report) and Limited Liability
Partnerships (Energy and Carbon Report) Regulations
2018; the Financial Reporting Council’s 2020 year-end
letter to Audit Committee Chairs; and guidance issued
by the Financial Reporting Council during the year on
Covid-19 disclosures.
Subordinated Tier 2 Notes
In order to strengthen the Group’s long-term finances
further, the Committee was asked to oversee certain
matters regarding the issue of £260 million Subordinated
Tier 2 Notes at a 4.0% coupon to be listed on the General
Exchange Market (GEM) of Euronext Dublin. The
Committee reviewed the approach to the production and
verification of the Listing Particulars and agreed that the
listing would improve the financial flexibility and liquidity
of the Group during the heightened uncertainty in the
macroeconomic environment.
For more information on the Subordinated Tier 2 Notes
see page 221.
Reserves
The Committee reviewed and challenged 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 recommended them to the Board.
The Committee also considered an appropriate balance
between internal and external actuarial review. An
external actuarial review of the material risk areas of the
insurance reserves was carried out for the Directors of the
Company by PricewaterhouseCoopers LLP (“PwC”). The
appointment of consultants to provide actuarial reviews
of reserves is subject to approval by the Committee.
Actuarial and Finance Transformation
During the year, the Committee continued to receive
reports on progress against key milestones in the Actuarial
and Finance Transformation programme. Updates
included in respect of the migration of the general ledger,
which was completed successfully in May 2020, an
overview of the technology solution design for IFRS 17 and
progress on accounting policy choices. The Committee
also reviewed the findings of a third party assurance
review and approved the budget for the programme.
TCFD Report
The Group is aware that investors, regulators and other
stakeholders expect transparent and high quality
disclosure on matters relevant to climate change and
expect companies to provide details on their approach
to the risks and opportunities associated with climate
change. At the end of 2020, the Group published its first
TCFD Report, which highlighted the Group’s response
to the issues of climate change and how the TCFD
framework has been used to enhance the Group’s
reporting in this area. The Committee discussed how
production of the report had been integrated into the
existing financial reporting control framework, reviewed
the report on behalf of the Board and recommended its
approval to the Board. A summary of the TCFD report is
included in the Sustainability section which starts on
page 44, and this also includes a link to the full report
which can be found on the Group’s website.
Going concern and viability statement
The Committee also considered the going concern
assumptions and viability statement in the 2020 Annual
Report & Accounts, valuation of assets and impairment
reviews, non-recurring period-specific transactions and
clarity of disclosures. The Committee reviewed and
concluded that the Annual Report & Accounts taken as
a whole were fair, balanced and understandable and
provided sufficient information to enable the reader to
assess the Group’s position and performance, business
model and strategy.
When considering the 2020 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 99 and also included a detailed review of
the impact of Covid-19, ensuring that the disclosure on
matters relevant to the financial statements was fair,
balanced and understandable in the context of the
Group’s operations.
The Committee challenged the estimates and
judgements being made and also discussed these matters
with the External Auditor.
For more information on the Viability statement see
page 74.
98
Direct Line Group Annual Report and Accounts 2020
Significant judgements and issues
Matter considered
Description
Action
Insurance
reserves
valuation
The Committee reviewed the level of insurance
reserves of the Group. Insurance reserves relate
to outstanding claims at the balance sheet date,
including claims incurred but not reported at
that date. By their nature, insurance reserves
require analysis of trends and risks and the
application of management judgement,
knowledge and experience. Further information
on reserves is provided on pages 30 to 32.
In 2020, the Committee reviewed and
challenged the level of insurance reserves
and monitored developing trends that could
materially impact them. On an ongoing basis
it received updates from the Actuarial Director
on how estimates of reserves compared to
claims paid. The Committee also obtained
insight from an independent actuarial review
of the reserves.
Valuation of
investments not
held at fair value
and investment
property
Impact of
Covid-19 on
financial
statements
Migration of
general ledger
system
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. In addition the Group
also holds a portfolio of investment properties.
Information was provided to the Committee on a
regular basis to support the value recognised in
the accounts.
Accounting estimates and judgements made in
the Group’s financial statements are subject to
increased levels of uncertainty as a result of
Covid-19. The Committee referred to the
Financial Reporting Council’s guidance on this
matter, which encourages companies to explain
the significant estimates and judgements made
in accounting for the impact of Covid-19. As part
of its review, the Committee: evaluated the going
concern basis used to prepare the half-year 2020
and full-year 2020 results; reviewed the impact
on principal risks and uncertainties; and assessed
whether the pandemic could trigger an
impairment of assets.
In 2020, the Group migrated to a new general
ledger system. This involved a process of key risk
assessments and mitigation plans following a
decision to go live whilst most staff were working
remotely. Detailed plans covering areas such as
testing, dry runs, data migration, reconciliation
and business user training were managed and
implemented remotely and the migration was
successfully completed in May 2020.
In 2020, the Committee considered major
accounting estimates and judgements in
respect of assets not held at fair value and
the investment property portfolio and was
satisfied with the carrying value of
investments and the basis for their valuation.
The Committee considered the impact of
Covid-19 on the investment property portfolio
and noted the year-end independent
valuation reflected factors in relation to the
impact of Covid-19 on certain sectors of the
portfolio, primarily in relation to the retail and
hospitality sectors.
The Committee reviewed and challenged the
reports presented by management and was
satisfied that the financial statements of the
Group presented the impact of Covid-19 in
sufficient detail to enable users to understand
the impact of the pandemic on the Group’s
position and financial performance.
The Committee received regular reports on
the general ledger migration, in particular
with reference to the overall progress of the
project and the migration of data from the
previous general ledger to the new ledger.
The Committee was satisfied that the data
migration had been performed in a controlled
manner and that appropriate reconciliations
had been performed to ensure the integrity of
the Group’s financial data.
www.directlinegroup.co.uk
99
Governance Audit Committee report continued
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 and 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 2020, the Committee received regular
reports on any control deficiencies, compensating controls
and the mitigating actions taken by management.
The Committee is responsible for overseeing the work
of Group Audit and for ensuring industry best practice is
adopted appropriately.
In February, we welcomed Mark Stock to the Group who
was appointed as Group Head of Audit. 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 CEO.
Group Audit has continued to build on the improvements
suggested in the 2018 PwC External Quality Assessment
as part of an ongoing Continuous Improvement Plan. In
line with recommendations from PwC, the Chair of the
Committee, along with the Group Head of Audit,
promoted the adoption of new tooling and training to
enhance the insight delivered by Group Audit function
reviews through the greater use of data analytics. PwC
was appointed this year by Group Audit to provide insight
and challenge to the function’s vision and strategy, as well
as taking on Quality Assurance activity. The Committee
approved the Group Audit Charter, which is reviewed
annually.
During the year, Group Audit provided the Committee
with independent and objective reports on the adequacy
and effectiveness of the Group’s governance, risk
management and internal controls. The Committee
approved Group Audit’s annual plan and received
quarterly reports detailing internal audit activity, key
findings, management responses, and proposed action
plans. Group Audit also monitored progress so as to be
able to confirm that the most significant actions were
completed. There were no significant failings or
weaknesses reported to the Committee in the year.
As a direct response to Covid-19, the Committee was asked
to approve the rescheduling of the internal audit plan.
The Committee assessed the resources available and
those required to complete the Group Audit Plan.
Following assessment by the Committee during the year,
it concluded that the Group Audit function was effective.
Additional information
The Committee has unrestricted access to management
and external advisers to help discharge its duties. It is
satisfied that in 2020 it received sufficient, reliable and
timely information to perform its responsibilities effectively.
During the reporting period, the Actuarial Director,
external actuarial advisers, External Auditor and Group
Head of Audit met privately with the Audit Committee,
in the absence of management.
The Chair of the Committee also reported on matters
dealt with at each Committee meeting to the subsequent
Board meeting.
Committee effectiveness review
During the year, an internal evaluation of the effectiveness
of the Committee was conducted as part of the wider
review of the Board and the Board Committees by the
Chair of the Board. The review found that the Committee
functions effectively and that issues are dealt with in a
thoughtful and rigorous manner.
The activity of the Committee was reviewed during the
year against the Committee’s terms of reference. The
Committee terms of reference can be found on the
corporate website: www.directlinegroup.co.uk/en/
who-we-are/governance/board-committees.
External audit
Deloitte LLP (“Deloitte”) has served as the Company’s
Auditor since 2000. Before listing in 2012, 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 audit partner is Colin Rawlings, FCA, who was first
appointed for the 2016 audit. Following conclusion of the
2020 audit, Colin will have completed five years as lead
audit partner and, in compliance with the Group’s
minimum standard on independence of the External
Auditor, will complete his engagement with the Group.
During the year, the Committee confirmed the
appointment of a new partner proposed by Deloitte and
are satisfied that Adam Addis, ACA, can be appointed to
the audit for 2021.
External Auditor tenure
During the year, the Committee again 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. As Deloitte was appointed as Auditor
to the Company in 2000 (when it was a subsidiary of The
Royal Bank of Scotland Group plc), under the transitional
provisions of the legislation, the firm may not re-engage
for the audit after 17 June 2023. The Committee
considered whether it was appropriate to tender the
external audit contract for the year ending 31 December
2021 and concluded it was not appropriate.
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 system, 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 all stakeholders including
potential investors and shareholders. The Committee
will review the position on an annual basis, but currently
anticipates tendering the audit contract after the
implementation of IFRS 17 to ensure the broadest choice
of firms. The Committee also confirmed that it will
continue to comply with the regulations governing
auditor rotation.
There are no contractual obligations restricting the
Group’s choice of External Auditor.
100
Direct Line Group Annual Report and Accounts 2020
Effectiveness of the external audit process and
re-appointing Deloitte as External Auditor
In 2020, 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;
ii. discussing matters with the CFO;
iii. formally reviewing the External Auditor’s
independence;
iv. assessing the key risks identified by the External Auditor,
the quality controls put in place to deliver the audit and
whether the agreed audit plan was fulfilled; and
v. private meetings with the External Auditor in the
absence of management.
In addition, through regular interaction with the
External Auditor, the Committee was satisfied that the
External Auditor continued to demonstrate professional
scepticism and challenged management’s assumptions.
The quality of the audit was assessed through review
and discussion of the External Auditor’s report to the
Committee at each meeting and from the challenges and
insights brought to significant areas of judgement in the
Group’s financial statements.
After taking into account all of the information available
and considering FRC Audit Quality: Practice aid for audit
committees, 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, to which
the Board agreed. A resolution regarding the
reappointment of Deloitte as auditor of the Group
will be put to shareholders at the 2021 AGM.
The Board reviewed and approved this report on
5 March 2021.
Gregor Stewart
Chair of the Audit Committee
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.
Auditor independence and non-audit services
The Group has a minimum standard in relation to the
independence of the External Auditor. 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 certain non-audit-related
services by the External Auditor. The minimum standard
has been revised and updated in light of the Financial
Reporting Council’s review of its Ethical Standard for
Auditors which was published in December 2019.
During the year, the Committee reviewed the audit-
related 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
ongoing basis, 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 Auditor
is independent and objective.
During the year, the Committee approved fees of
£0.6 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 2020.
Audit fees
Audit-related assurance services
Non-audit services
Total fees for audit and
other services
Fees
£m
Proportion
%
2.1
0.2
0.6
2.9
72
7
21
100
Audit-related assurance services were in respect of the
Group’s Solvency II reporting and the review of the Half
Year Report 2020 and non-audit services primarily related
to assurance activities on IT projects in relation to the
development of new systems where Deloitte was chosen
to provide the non-audit services because of its expertise
and insight in this area. The engagement with Deloitte for
this activity was compliant with the transitional rules of
the Financial Reporting Council’s revised Ethical Standard
and this engagement is now coming to an end. To guard
against any independence issues, appropriate safeguards
were discussed and agreed by the Committee and
Deloitte. In addition, Deloitte also undertook procedures
to support the Group’s issue of £260 million of Tier 2 debt
in May 2020. They were considered to be an appropriate
choice of service provider as their understanding of the
Group was deemed relevant for the service. The
Committee determined that the services provided would
not affect the independence of the External Auditor.
Further information in respect of audit fees paid to
Deloitte is disclosed in note 10 to the consolidated
financial statements.
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101
Governance Board Risk Committee report
Board Risk
Committee Report
Areas of focus in the reporting period
– Considered the Group’s approach to pricing practices,
aiming to ensure that they are delivering fair and
appropriate outcomes for its customers.
– Proactively monitored the impacts and risks of the
Covid-19 global pandemic.
– Oversaw change risk arising from the Group’s multi-year
transformation programmes.
– Reviewed and understood the Group’s climate-related
risks.
– Monitored the progress of the Group’s proactive
operational resilience programme.
Jane Hanson
Chair of the Board Risk Committee
Committee membership
– Jane Hanson
Chair
– Fiona McBain
Independent Non-Executive Director
– Gregor Stewart
Independent Non-Executive Director
– Dr Richard Ward
Senior Independent Director
Committee meeting attendance can be found on
page 87.
Further detail on these areas can be found in the body of
the Committee report.
Key responsibilities
– Provide oversight and advice to the Board in relation
to current and emerging risk exposures of the
Group and the strategic approach to managing risk,
including determination of risk appetite and tolerance
– Promote a risk-aware culture within the Group
– Review the design and implementation of the
Enterprise Risk Management and Strategy
Framework, risk appetite and tolerances
Covid-19
At the heart of the Group’s strategy is the vision to
become a force for good and so it has been a key focus
for the Group to support its customers, people and wider
society through the Covid-19 pandemic. The Committee
was supportive of the Group’s move to homeworking to
protect the lives of its people and their families, to
maintain the Group’s ability to service its customers, to
safeguard its business for the longer term and to support
the Government in protecting the country. The Committee
took a proactive approach in monitoring the impacts and
risk of the Covid-19 pandemic.
The Committee received regular updates and challenged
management on the actions being taken across the
business to support customers during the pandemic with
a particular focus on factors such as public perception,
affordability and the importance of doing the right thing
for the Group’s financially distressed customers. The
Committee also closely monitored and challenged
management on the impact that Covid-19 was having
on colleague morale and wellbeing, travel and business
interruption claims, the supply chain of goods, operational
resilience, the Group’s technology and business
transformation programme timelines, market risk,
solvency capital requirements and risk appetite range and
the Strategic Plan. Details of stress testing in relation to
Covid-19 can be found in the financial risk section of the
Committee report.
102
Direct Line Group Annual Report and Accounts 2020
Board Risk
Committee Report
The Committee held an ad hoc meeting and received
regular updates on cyber mitigation planning to manage
cyber risk appetite which was being monitored closely by
the Risk function. The Committee probed to ensure that
risks were being managed appropriately and
compensating controls and mitigating actions were in
place to manage the Group’s transition to homeworking
for all of its in-house and outsourced operations, including
in the UK and offshore in South Africa and India. The
Committee subsequently reviewed plans for the re-
opening of offices, gaining assurance from management
on their plans for the return of limited numbers of staff
and the measures taken to ensure social distancing
was maintained.
The Committee sought assurance and was satisfied with
the Risk function’s review of the governance of the key
Covid-19-related decisions made during the year and the
management actions recommended by Group Audit
following its consultative exercise of the lessons learnt
from the crisis management response to the initial phases
of Covid-19.
Customer and conduct
Customer and conduct risk has continued to be a
principal focus of the Committee in 2020. During the
period, the Committee devoted significant time to
considering, challenging and supporting management
on its approach to managing these risks and sought
assurance that fair pricing and outcomes were being
achieved for customers across all Direct Line Group
products. The Committee received reports and probed
management on the Group’s pricing strategy and
governance and control framework, the process taken to
review and manage conduct thresholds and margins and
pricing transparency, the methods used for pricing for
vulnerable customers, protected characteristics and the
approach to data ethics. In October 2020, the Committee
held a risk strategy session and discussed in detail the
Group’s use and governance of pricing factors, key
customer judgements being applied in pricing, customer
outcomes illustrating the effectiveness of the Group’s
pricing approach as well as initial thoughts on the FCA’s
General Insurance Pricing Practices Market Study and its
impact on the Group.
The Group has a management-level Customer Conduct
Committee, which reviews, challenges and oversees
customer and conduct matters for all of the Group’s
brands and channels with the aim of promoting
customers’ best interests and ensuring that the Group’s
business activities are consistent with the best interests
of its customers. The Customer Conduct Committee’s
findings and any recommendations for improvement are
regularly reported both to the Board and the Committee.
Compliance and regulatory risk
As part of the Chief Risk Officer’s (“CRO”) report submitted
to each meeting, the Committee reviewed regular
updates on key ongoing regulatory developments and
interactions with the PRA and FCA. Areas on which the
Committee focused included pricing practices,
operational resilience, Brexit, the status of cyber risk and
travel and business interruption claims as a result of the
pandemic, the implementation of the Insurance
Distribution Directive to improve customer demands and
needs and the approach to assessing customer
affordability.
During the year, the Committee considered the Group’s
compliance with regulatory requirements including those
relating to conduct and financial crime. The Committee
approved the annual Compliance Plan setting out the
compliance activities to be undertaken in the coming year
with the objectives of ensuring compliance, maintaining
an open and co-operative relationship with regulators
and ensuring the Board and colleagues understand their
regulatory responsibilities. The Committee reviewed and
challenged the outputs from conduct and compliance
assurance reviews, including in relation to Solvency II
compliance. The Committee received data privacy
updates and a report on the Group’s adherence to privacy
and data protection legislation during 2020, including
actions taken to respond to data information requests to
comply with the General Data Protection Regulation and
the Information Commissioner’s Office guidelines. The
Committee reviewed the actions being undertaken to
ensure compliance with the regulators’ Senior Managers
and Certification Regime, which included a
comprehensive review of the Group’s High Level Control
and System of Governance Framework and Management
Responsibilities Map.
During the period, the Group continued to work on its
proactive operational resilience programme aligned to
the expectations set by the Bank of England, PRA and
FCA, aiming to address business process, organisational,
third-party and technological resilience as well as
prioritising the prevention of, and recovery from, financial
and other shocks to the business. Through receipt of
regular updates, the Committee challenged and
supported management on the key indicators and
management information which would be used to
provide the Board with oversight of the Group’s
operational resilience, the impact tolerances to be set
and the suitable strategies, processes and systems for
identifying important business services.
Operational risk
The oversight of change risk was a central focus for the
Committee as the Group made good progress on its
strategic transformation, continuing major technical
deliveries in the remote working environment, whilst also
focusing on business transformation to take advantage of
the tools being built.
The Committee received updates at each of its meetings
on the developing, testing and implementation of releases
under the Group’s technological transformation
programmes, on interdependencies between programmes
and on the overall management of the Group’s change
portfolio, reviewing and challenging the operational and
financial risks and controls and the potential impact on
customers, people and the Group’s strategic and financial
plan. Each report was accompanied by an update from
the Risk function on its assurance activity, which included
reviewing and challenging programme plans, testing
methodology and performance, and reviewing
preparations for implementation. Reasonable assurance on
the Group’s technology re-platforming programme, “Best
for Customer”, was provided to the Committee by Deloitte,
who had been engaged to conduct a number of deep
dive reviews of a range of programme stages and risks
focusing on planning methodology and approach, testing,
technical readiness for business volume increases and
programme closedown.
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103
Governance Board Risk Committee report continued
The Committee reviewed updates during the year on the
progress the Group had made to deliver stable desktop,
telephony and mainframe platforms. The Committee
challenged management on the lessons learned from
other firms’ IT migration programmes and sought
assurance that the Group had appropriate mitigating
controls and actions in place to prevent occurrence of
such issues which could have a detrimental impact on
the Group and its customers.
The Committee received updates on the progress of
the Group’s transformation of its operating model and
challenged how the risk framework had been adapted
to align with the new model as well as on the mitigating
actions in place to address the key impact risks of
the programme.
Financial risk
As an insurance company, Direct Line Group understands
the importance of managing climate-related risk and
recognises that climate change could pose material
long-term financial impacts to the business. During the
year, the Committee received regular climate-related
updates as part of the CRO’s report and examined and
monitored management’s 2020 and 2021 plans to protect
the Group from climate-related financial risks and address
the PRA’s climate change expectations. The Committee
recognised the progress that had been made, including
the development of a governance framework and
workstreams to manage climate-related risks and the
publication of the TCFD Report in December 2020. As part
of a strategy session in October 2020, the Committee also
considered the potential financial risks and impacts from
climate change, including an external view on regulatory
expectations in the context of the sustainability agenda.
Further details on the risks due to climate change faced
by the Group can be found on pages 58 and 74.
At each meeting, the Committee monitored the Group’s
performance against its capital risk appetite through the
CRO’s report. Committee members considered financial
risks and assessed these risks against risk appetite.
Committee members also reviewed and challenged
the Own Risk and Solvency Assessment (“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 with a particular focus on certain
scenarios including in relation to the potential financial,
operational and reputational impacts of Covid-19, the
potential financial risks of climate change, the potential
impacts to the business following a rapid reduction of
motor in-force polices and premiums as well as the
impacts of a potential hard Brexit combined with
economic implications resulting from the end of the
furlough scheme and further lockdown periods in 2020
and 2021.
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. As a result of reviewing the internal
model owners’ report, the Committee challenged
management on its approach to diversification risk.
During the year, the Committee also scrutinised the
Group’s risk appetite guidance for affirmative and
non-affirmative cyber underwriting risks and challenged
the actions taken to mitigate such risks.
Risk monitoring and oversight
At each scheduled meeting, the Committee received a
report from the CRO 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 and, provided
outputs of regular risk monitoring and details of specific
risk issues, including in relation to Covid-19 and Brexit.
The Committee also received and discussed 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 of tolerance.
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 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.
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 the Risk Management
Framework as well as the Group’s response to Covid-19 and
the implementation of the Group’s new ways of working as
part of the business transformation programme. The
Committee discussed the outputs of the assessment, as well
as areas for further improvement, seeking to ensure the
appropriateness of the actions identified.
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Direct Line Group Annual Report and Accounts 2020
Risk governance
During the reporting period, with the aim of balancing
efficiency and appropriate ownership and oversight, the
Committee reviewed the Group’s most significant policies.
The Committee reviewed and challenged each of these
policies 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
controls environment undertaken by each business
division, as well as monitoring controls on an ongoing
basis. The Committee considered, challenged and
approved the annual risk operational plan and the
adequacy and objectivity of the Risk function’s resources.
The Committee has unrestricted access to management
and external advisers to help discharge its duties. It is
satisfied that in 2020 it received sufficient, reliable and
timely information to perform its responsibilities
effectively. 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 also reported on matters dealt with at each
Committee meeting to the subsequent Board meeting.
Committee effectiveness review
During the year, an internal evaluation of the effectiveness
of the Committee was conducted as part of the wider
review of the Board and the Board Committees by the
Chair of the Board. The review found that the Committee
functions effectively and that issues are dealt with
rigorously and in a considered manner.
The activity of the Committee was reviewed during the
year against the Committee’s terms of reference. The
Committee terms of reference can be found on the
corporate website: www.directlinegroup.co.uk/en/
who-we-are/governance/board-committees.
The Board reviewed and approved this report on
5 March 2021.
Jane Hanson
Chair of the Board Risk Committee
Principal and emerging risks
The Committee assessed the principal risks facing the
Group, which are listed on pages 71 and 72, through
reviewing and challenging the matters listed in the
Group’s Material Risk Register in the context of the
Group’s risk appetite and through consideration of the risk
assessment contained in the CRO’s report received at
each scheduled meeting.
The Committee assessed the Group’s emerging risks.
It challenged the assumption that management had
identified all possible significant emerging risks during
the year and the Risk function’s role in ensuring that such
risks were being monitored and managed appropriately.
The most notable emerging risks identified included
those relating to climate change and ethical use of data.
Further details regarding such risks can be found on
pages 71 to 72.
Whistleblowing
As delegated by the Board, the Committee routinely
reviewed the arrangements by which employees may, in
confidence, raise concerns about possible improprieties
in matters of financial reporting or other matters
(“whistleblowing”) during the year. The Committee also
reviewed reports relating to whistleblowing, including
anonymised, individual cases, to ensure arrangements
were 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. This
was supported by Group Audit’s review of the Group’s
whistleblowing arrangements during the year which
concluded that whistleblowing procedures and controls
were fit for purpose and operating effectively.
Financial Crime and anti-bribery and corruption
The Group has a fraud and financial crime policy, which
includes the requirement that all employees of the Group
comply with an anti-bribery and corruption minimum
standard. The aim of the standard is to ensure compliance
with applicable anti-bribery and corruption legislation
and regulation and that employees act responsibly
and ethically at all times when conducting and
awarding business.
The Committee considered the Group’s actions to prevent
financial crime through its review of the annual Financial
Crime Report. Annually, the Committee considers an
anti-bribery and corruption report, which includes a risk
assessment of the level of anti-bribery and corruption risk
to the Group. The Group’s annual anti-bribery and
corruption risk assessment was completed, noting that no
allegations or suspicions of bribery or corruption had been
identified or reported in 2020. 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.
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Governance Nomination and Governance Committee report
Nomination and Governance
Committee Report
Danuta Gray
Chair of the Nomination and Governance Committee
Committee membership1
– Danuta Gray – appointed as Chair
26 October 2020
Chair
– Sebastian James – appointed 26 October 2020
Independent Non-Executive Director
– Dr Richard Ward
Independent Non-Executive Director
Committee meeting attendance can be found on
page 87.
Key responsibilities
– Review Board composition
– Lead the process for Board appointments and make
recommendations to the Board
– Ensure orderly succession plans are in place for
the Board
– Oversee executive succession planning at a high level
to ensure the development of a diverse Senior
Management talent pipeline
– Oversee and monitor the corporate governance
framework of the Group
– Monitor developments in governance and investor
ESG expectations
Note:
1. Mike Biggs was a member of this Committee until he retired
from the Board on 4 August 2020.
Areas of focus in the reporting period
– Reviewed the skills and experience of the Board with
regard to the oversight of the Group’s strategy and led
the search for a new Non-Executive Director, which
resulted in the appointment of Adrian Joseph on
1 January 2021.
– Monitored progress on executive succession planning,
both for members of the Executive Committee and for
new roles in the Agile operating model adopted by the
Group during the year.
Main activities during the year
Board and Senior Management succession
planning
The Committee regularly monitors the composition of
the Board and its Committees to ensure that they have
a suitable balance of skills and experience to oversee and
challenge the delivery of the Group’s strategy and to
discharge the Committee’s responsibilities effectively.
The process adopted by the Board which culminated in
my selection as Mike Biggs’ successor as Chair of the
Board is described in detail in the Corporate Governance
report on page 91.
In October 2020, the Company announced my
appointment as Chair of the Nomination and Governance
Committee; Mark Gregory became Interim Chair of the
Remuneration Committee; and Sebastian James was
appointed as a member of the Nomination and
Governance Committee.
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Direct Line Group Annual Report and Accounts 2020
New appointments
We engaged Heidrick and Struggles, which is a signatory
to the Voluntary Code of Conduct for executive search
firms, to assist in the search for a new independent NED
in 2020. Heidrick and Struggles has no other connection
with the Company or any individual Director. Shortlisted
candidates were interviewed by members of the
Committee and the preferred candidate subsequently
met all other members of the Board.
Following the Committee’s recommendation, the Board
agreed, in December 2020, that Adrian Joseph OBE would
be appointed as an independent Non-Executive Director
with effect from 1 January 2021.
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.
The Board’s diversity policy is available to view on the
Company’s website at www.directlinegroup.co.uk/en/
who-we-are/governance/other-policies. This policy, which
is annually reviewed and monitored by the Committee, is
presented to any executive search firm engaged to assist
with the selection and appointment process for Board
positions. The objective of the diversity policy is to seek to
ensure that individual differences, which contribute to the
success of the Company and represent the diversity of our
customers and colleagues, are reflected at Board level.
Further information on the Board diversity policy and the
Group’s diversity initiatives can be found in the Corporate
Governance report on page 92.
The Board supports the recommendations set out in
the Parker Review and was delighted to welcome Adrian
Joseph as a member as of 1 January 2021. Adrian brings
a wealth of experience in data strategy and analytics and
has a history of commitment to diversity and inclusion
initiatives. The Board looks forward to benefiting from
his knowledge and experience, particularly in these fields,
which are central to its strategy.
Diverse pipeline
During the year, the Committee reviewed the Group’s
management succession planning and talent
development initiatives, with the objective of building
a diverse and inclusive talent pipeline and identifying
potential in the senior leadership population.
The Group has a detailed diversity and inclusion plan
which is supported by the Board and overseen by the
Sustainability Committee, and which includes the
objectives both of encouraging diversity in our succession
planning and of fostering a culture of growing inclusivity.
The Group also supports the empowerment of its senior
managers through its Emerge development programme.
The Committee recognises the importance of thorough
contingency planning and in January 2021, it reviewed
both emergency cover and longer-term succession
planning for all Executive Committee roles, along with
plans for developing senior leaders in new roles in the
Group’s Agile operating model.
At the Committee’s recommendation, the Board also
agreed that, from 1 January 2021, Adrian would join
the Sustainability Committee, Richard Ward would
become a member of the Remuneration Committee
and Fiona McBain would become a member of the
Investment Committee.
Electing and re-electing Directors
Before recommending the proposed election or re-
election of Directors at the 2020 AGM, the Committee
reviewed the independence of the Non-Executive
Directors and concluded that all Non-Executive Directors
remained independent in judgement and character and
met the criteria for independence set out in the Code.
The then Chair, Mike Biggs, was independent at the time
of his appointment as Chair and was not involved in his
own review.
Special attention was paid to the Non-Executive Directors’
external responsibilities and it was concluded that all
Directors had sufficient time to dedicate to their
respective roles. The Board considered and approved Jane
Hanson’s new roles as a Non-Executive Director of Welsh
Water and Rothesay Life PLC, concluding that she would
continue to have sufficient time to devote to her role as a
Non-Executive Director of the Company. The Committee
recommended to the Board and shareholders that all
serving Directors be submitted for election or re-election
at the Company’s 2020 AGM.
With the exception of Jane Hanson, who will be stepping
down from the Board after having served as a Non-
Executive Director for over nine years, all current Directors
will submit themselves for election or re-election at the
Company’s 2021 AGM.
Diversity and inclusion
The Board believes that an effective Board with a broad
strategic perspective embraces a diversity of gender, race,
skills and experience, as well as of regional, socio-economic,
educational and professional backgrounds, amongst other
differences. The individual experience of each Director
is recognised and forms a valuable part of the decision-
making process at Board level. The annual evaluation of
the Board considers its composition and diversity.
www.directlinegroup.co.uk
107
Governance Nomination and Governance Committee report continued
Gender of Board and Senior Management
The Board supports the targets set in the Hampton-
Alexander Review. As at 31 December 2020, female
representation on the Board was 44.4%.
In August 2020, the Board was proud to mark a historic
moment when it became one of only four FTSE 250
companies with both a female CEO and female Chair.
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. As
at 31 December 2020, female representation at Executive
Committee level and their direct reports was 45.7%.
Board effectiveness review
In accordance with our three year cycle of Board
effectiveness evaluation, the review was facilitated
internally in 2020.
Further information on the evaluation process, including
the outcomes and actions proposed, can be found in the
Corporate Governance report on page 93.
Committee effectiveness review
During the year, I conducted an internal evaluation of the
effectiveness of the Committee as part of the wider review
of the Board and its Committees. The review found that
the Committee functions effectively and that issues are
dealt with in a thoughtful and rigorous manner.
The activity of the Committee was reviewed during the
year against the Committee’s terms of reference and
found that the Committee had discharged its
responsibilities effectively in 2020. The Committee’s terms
of reference can be found on the corporate website:
www.directlinegroup.co.uk/en/who-we-are/governance/
board-committees.
Corporate governance
The Committee monitors emerging governance matters,
compliance with the Corporate Governance Code and ESG
standard and subsidiary governance. It will continue to
monitor consultations, developments and reforms which
affect the Group’s corporate governance obligations.
The Board reviewed and approved this report on
5 March 2021.
Danuta Gray
Chair of the Nomination and Governance Committee
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Direct Line Group Annual Report and Accounts 2020
Sustainability Committee report
Sustainability
Committee Report
Sebastian James
Chair of the Sustainability Committee
Committee membership
– Sebastian James
Chair
– Penny James
Chief Executive Officer
– Adrian Joseph – appointed 1 January 2021
Independent Non-Executive Director
– Jane Hanson
Areas of focus in the reporting period
– Oversaw the Group’s efforts to be a force for good in
response to the Covid-19 pandemic.
– Monitored the Group’s sustainability activity through
regular updates on each of the five pillars of the
sustainability strategy.
– Challenged the robustness of management decision-
making relating to the five pillar sustainability strategy.
– Received updates on the development of the Group’s
first Sustainability Report.
Independent Non-Executive Director
– Reviewed ethical matters including the Group’s Modern
Committee meeting attendance can be found on
page 87.
Key responsibilities
– Provide oversight and advice on how the Group
conducts its business in a responsible and
sustainable manner that reflects the Group’s vision
and purpose
– Monitor the progress of the Group’s initiatives under
its sustainability pillars
slavery statement.
– Agreed to expand its remit to ensure alignment with
the Group’s sustainability strategy; and vision to be a
force for good.
– Changed its name from Corporate Responsibility
Committee to Sustainability Committee.
Main activities during the year
Customers
During 2020, the Committee monitored steps taken to
earn customers’ trust by demonstrating how the Group
acts in their best interests. The Committee reviewed
management’s initiatives to support customers in the
light of the challenges presented by the Covid-19
pandemic including supporting our customers with roles
in the NHS by offering a fast track claims service, free
personal possession, home emergency and rescue cover.
The Committee was supportive of other initiatives to assist
customers in financial difficulty as a result of Covid-19 such
as providing “Mileage MoneyBack” refunds, offering to
waive cancellation fees, payment deferrals, and adding
flexibility to motor and rescue policies.
The Committee received updates on the work to
understand the reasons behind the marginalisation of
certain customer groups from various rights, opportunities
and resources that are normally available to others,
defined by management as social exclusion. The
Committee reviewed and challenged reasons proposed by
management as explanations for social inclusion which
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109
Governance Sustainability Committee report continued
included access, affordability and data availability. The
Committee acknowledged that action to reduce social
exclusion would be explored alongside the Group’s
response to the FCA’s Market Study on General Insurance
Pricing Practices.
People
The Committee considered management’s mission to
build a culture that celebrates difference and empowers
people so that they can thrive. The Committee and Board
regard diversity and inclusion as an integral aspect of
ensuring that people can thrive at the Group, and
the Committee was pleased to receive updates on
management’s progress against its diversity and inclusion
priorities. The Group’s first diversity and inclusion survey
as well as insights from the Group’s Diversity Network
Alliance were incorporated into a new diversity and
inclusion strategy, setting targets for progress.
The Committee received updates on measures to protect
people during Covid-19 including remote working
arrangements, safeguarding roles and remuneration,
and on efforts to support mental health and wellbeing.
The Committee noted the increased frequency of
engagement with employees through regular employee
pulse surveys and impactful internal communications
campaigns such as #WeCare.
The Committee was supportive of management’s
commitment to continue building a great place to work
despite the challenges of Covid-19 through the Agile
transformation programme. The Committee was pleased
to see management’s focus on empowering employees to
self-organise and provide solutions for customers as
quickly as possible and noted progress updates regarding
upskilling and the development of Agile behaviours.
Planet
During the year, the Committee oversaw management
actions towards protecting the business from the impact
of climate change and giving back to the planet more
than it takes out. The Committee monitored progress
against the Group’s climate targets for reducing energy
consumption and greenhouse gases and environmental
initiatives and was pleased to see that at Half Year the
Group had:
– exceeded its target to reduce Group-wide emissions on
a like-for-like basis by 2020 against a 2013 baseline by
57%; and
– met its target for a 30% like-for-like reduction in the
Group’s energy use by 2020 against a 2013 baseline.
The Committee also received updates on the Group’s work
to set science-based carbon targets for Scope 1 and 2
emissions, and Scope 3 emissions under the Group’s
control, and submit them in line with the Science-Based
Targets Initiative framework. More information regarding
the Group’s greenhouse gas emissions data can be found
on page 61 of the Strategic report.
The Committee considered the Group’s progress towards
achieving its carbon neutrality ambitions in 2020. The
Group agreed a three-year commitment with the Carbon
Trust to offset carbon emissions by investing in high
impact projects that both reduce carbon emissions and
support global communities.
Society
During 2020, the Committee monitored how the Group
used its expertise to improve outcomes for our society
and the communities it served. The Committee received
updates on the Group’s Community Fund, created to
support communities during Covid-19 in areas where
Direct Line had a presence. The Committee was pleased
to see £3.5 million of assistance given to vulnerable
groups, small, local charities and charitable projects
supporting public policy areas.
The redevelopment of Shotgun, the Group’s initiative
aimed at reducing young driver accidents, continued
during 2020. Despite the delayed relaunch of Shotgun,
the Committee noted management’s conviction in the
core aims of the mobile application to: reduce young
driver accidents; and have a positive influence on young
drivers’ behaviours on our roads.
Additional ethical matters
The Committee recognises that respecting human rights
is self-evidently the right thing to do and is committed
to ensuring that the Group conducts its business in a
manner which is ethical and sustainable.
In December 2020, the Committee 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 Committee challenged the Procurement function and
concluded that processes and policies in connection with
the Modern Slavery Act were robust, effective in being
embedded in supply chain processes, and had
appropriately responded to unprecedented circumstances
presented by Covid-19.
Committee effectiveness review
During the year, an internal evaluation of the effectiveness
of the Committee was conducted as part of the wider
review of the Board and the Board Committees by the
Chair of the Board. The review found that the Committee
functioned effectively and that the refreshed scope of the
Committee allowed sustainability issues to be addressed
creatively and thoughtfully. The Committee’s terms of
reference were reviewed during the year against the
activity of the Committee. At the time of reviewing the
Committee’s Terms of Reference, the Board agreed that
its name should be changed from the Corporate
Responsibility Committee to the Sustainability
Committee.
The Committee’s Terms of Reference can be found on the
corporate website:
www.directlinegroup.co.uk/en/who-we-are/governance/
board-committees.
The Board reviewed and approved this report on
5 March 2021.
Sebastian James
Chair of the Sustainability Committee
110
Direct Line Group Annual Report and Accounts 2020
Investment Committee report
Mark Gregory
Chair of the Investment Committee
Committee membership
– Mark Gregory
Committee Chair
– Jane Hanson
Independent Non-Executive Director
– Tim Harris
Chief Financial Officer
– Fiona McBain – appointed 1 January 2021
Independent Non-Executive Director
Committee meeting attendance can be found on
page 87.
Key responsibilities
– Provide oversight of the Group’s investment strategy
– Oversee the management and performance of the
Group’s investment portfolio
Investment
Committee Report
Areas of focus in the reporting period
– Understood the potential risks and monitored the
financial consequences for investment assets from
the economic downturn driven by the Covid-19 global
pandemic.
– Considered how the investment portfolio started to
respond proactively to the global challenge to reduce
greenhouse gas emissions and support the transition
to a low carbon economy.
– Monitored developments and progress towards a trade
agreement between the EU and the United Kingdom
and any attendant impact on investment assets.
– Ensured investment activities continued always to
provide sufficient access to liquidity to meet a stress
insurance or market event.
– Monitored market developments in response to the
planned discontinuation of the London Inter-Bank
Offered Rate (“LIBOR”) after 2021 and the progress made
by the Group to ensure it is ready for the changes.
Main activities during the year
Covid-19
The April meeting, which took place against a background
of lockdowns around the world and fiscal and monetary
responses by governments and central banks being
implemented at pace, considered a comprehensive paper
confirming the levels of diversification within the asset
portfolios, the quality of assets held and exposures to
sectors most adversely affected by lockdowns and social
distancing. The paper detailed exposure to those assets
at the lower end of the Company’s risk appetite and,
therefore, more susceptible to being downgraded outside
of risk appetite. At the same meeting the Committee
reviewed waivers agreed by management with asset
managers for fixed income holdings already outside risk
appetite, the waivers allowing the asset managers a
longer timeframe in which to consider when to dispose
of such assets in view of improving market conditions.
The Committee received regular updates on the waiver
positions between scheduled meetings until all waivers
were closed later in the year.
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Governance Investment Committee report continued
In July, the Committee considered the findings and
recommendations resulting from a detailed review of the
investment property portfolio. The review examined the
business case for continuing to hold each property asset
in the portfolio against the medium-term changes
expected to impact the commercial property market as
a result of the move to increased working from home
and online shopping. At the meeting, the Committee also
sought assurances from the asset manager that tenants
were being offered flexibility, where necessary, regarding
finding mutual solutions for rent payments due in
situations where the tenant’s cash flows had deteriorated
markedly due to the pandemic.
The financial consequences of the pandemic on the
Company’s budgeted investment result and changes in
assets valuations were reported at each meeting.
Responsible investing – climate change
In 2020, the Committee approved new measures for
the corporate bond portfolios (75% of the total investment
portfolio benchmark) to help achieve the Group’s
ambition to limit its impact on the climate and to achieve
net zero carbon emissions by 2050. In summary,
a commitment was given to set a target to reduce the
Green House Gas (“GHG”) Emissions Intensity1 across the
relevant portfolios by 50% before the end of 2030
(benchmarked against the end of 2020 GHG emissions
intensity). In addition, the Committee agreed that asset
managers should be encouraged to allocate capital
increasingly towards companies demonstrating an intent
to decarbonise through the following guideline changes
and restrictions:
– A preference for companies with carbon reduction
targets approved by the Science-Based Targets
Initiative;
– A preference for companies with at least a 2°C carbon
performance alignment with the Transition Pathway
Initiative;
– The exclusion of any companies with a carbon transition
score indicating assets could be economically stranded;
– The exclusion of any mining companies that generate
>5% of revenues from thermal coal production and
electricity generators that derive >5% of revenues from
thermal coal power generation (unless, in either case,
the company has an approved Science-Based Targets
Initiative Plan); and
– The exclusion of any companies that are developing
new thermal coal mines or coal burning power plants.
The Committee will continue to monitor the results of
the responsible investing framework in place and seek
updates on market developments and trends. The
Committee expects management to recommend further
adjustments to the framework over the next two to
three years.
The Committee recognised that it was important for the
Group to seek to comply with the recommendations
made by the Task Force on Climate-related Financial
Disclosures (“TCFD”) and to carry out climate change
scenario stress testing.
Further information about the Group’s approach to TCFD
can be found on pages 62 to 63.
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 Committee also
monitored the development of interest rate policies set
by the Bank of England, the US Federal Reserve and the
European Central Bank and the impact of non-sterling
assets held on hedged yields.
Suitability of investment strategy
The annual studies examining stressed liquidity
requirements and asset and liability matching were
presented to the Committee during the year. Such work
informs strategic benchmark allocations and provides part
of the context for the addition of new asset classes or
disposing of a holding. During the year, the Committee
agreed amendments to the existing strategic benchmark
which entailed reductions in benchmark allocations to
assets supporting liquidity and infrastructure debt and net
increases in allocations to investment grade credit and
Commercial Real Estate (“CRE”) loans.
Monitoring investment activity and performance
The Committee received a comprehensive report at each
scheduled meeting covering: the financial results of
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.
During the year the Committee invited the managers
responsible for the investment property portfolio, the CRE
loans portfolio and the private placements portfolio to
present updates on their respective portfolios.
Committee evaluation
During the year, an internal evaluation of the effectiveness
of the Committee was conducted as part of the wider
review of the Board and the Board Committees by the
Chair of the Board. The review found that the Committee
functions effectively and that issues are dealt with in a
thoughtful and rigorous manner. The Committee’s terms
of reference can be found on the corporate website:
www.directlinegroup.co.uk/en/who-we-are/governance/
board-committees.
The Board reviewed and approved this report on
5 March 2021.
Mark Gregory
Chair of the Investment Committee
Note:
1. Greenhouse gas (GHG) emissions intensity = metric tonnes
CO2e (CO2 equivalent) GHG emissions/million $ sales
112
Direct Line Group Annual Report and Accounts 2020
Directors’ Remuneration report
Directors’
Remuneration Report
Mark Gregory
Chair of the Remuneration Committee
Committee membership1
– Mark Gregory – appointed Chair
on 26 October 2020
Chair
– Danuta Gray
Chair of the Board
– Sebastian James
Independent Non-Executive Director
– Dr Richard Ward – appointed 1 January 2021
Senior Independent Director
Key responsibilities
– Determines the policy for rewarding Directors and
senior leadership for results that are generated within
the risk appetite set by the Board 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; and
– Reviews workforce remuneration and related
policies and the alignment of incentives and rewards
with culture.
Note:
1. Mark Gregory was appointed to the Committee on
29 May 2020 and as Chair on 26 October 2020. Mike Biggs
was a member of this Committee until he retired from the
Board on 4 August 2020.
Dear Shareholders,
I am pleased to introduce my first Directors’
Remuneration Report (the “Report”) as Chair of the
Remuneration Committee (the “Committee”), for the 2020
financial year. I would like to thank Danuta Gray for her
stewardship of the Committee over the last few years and
congratulate her on being appointed as Chair of the Board.
The Committee is immensely proud of the ways in which
our people continued to provide exceptional service, value
and flexibility to our customers in 2020, aligning with our
desire to make insurance personal, inclusive and a force
for good. We offered extra value to all our customers and
further support to those in financial difficulty in response
to the unexpected impact of the Covid-19 pandemic. Many
measures were introduced across the business to achieve
this, including payment deferrals, waiving cancellation
fees, mileage refunds and free roadside assistance to
key workers.
During 2020, we have sought to balance the needs of our
different stakeholders, by caring for our people, looking
after our customers, protecting the business for the long
term, and supporting the national effort and our
local communities. After reinstating our ordinary dividend
as soon as possible in August (along with a 2020 special
dividend, reflecting a full catch-up of the cancelled 2019
final dividend) we have also delivered to our investors.
We had voluntarily withdrawn our ordinary dividend to
indicate restraint and consistency with the PRA when it
asked insurers to consider the protection of policyholders.
As a result of the Covid-19 pandemic, and delivering on our
desire to be a force for good, the Group also established
our first Community Fund which distributed £3.5 million
to 250 charities supporting over 200,000 people, and we
have extended this by a further £1.5 million for 2021 to
serve our local communities. More information on these
initiatives can be found on page 57.
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Governance Directors’ Remuneration report continued
Through the year and into 2021, the health, safety and
wellbeing of our people has never been more crucial.
Despite the challenges the pandemic has presented,
the Group provided stability and security of pay for our
entire workforce. We did not seek or receive any
government support and did not furlough any colleagues.
Just before and as we moved into the initial lockdown in
March 2020, we moved 9,000 people to work from home
and continued to pay all of our employees their usual pay,
including fixed-term contractors, regardless of whether
they were fully or partially working, or temporarily not able
to work. The Group also initially suspended the structural
workforce changes, previously announced in February
2020, to provide further job security at this challenging
time. A gradual implementation of the planned structural
changes has now begun. There have been no
redundancies as a result of the impact of the Covid-19
pandemic. Furthermore, through a combination of
employee redeployments and alterations to the timing
of planned changes, fewer than anticipated exits have
occurred as part of the planned structural changes. Penny
James also voluntarily donated the value of her salary
increase from 1 April 2020 to FareShare, a charity that
redistributes surplus food to other charities that turn it
into meals for those in need. These measures demonstrate
our understanding that these are challenging times for
everyone and that we will continue to make the decisions
needed to protect the long-term interests of the Group
for the good of all of our stakeholders.
Further details of decisions which the Committee has
made in respect of key components of executive
remuneration as a consequence of Covid-19 are
summarised on pages 115 and 116.
The Group has had a good year, in difficult circumstances,
demonstrating financial resilience and making significant
progress against our key strategic aims despite the
challenges we faced in 2020. Our objective is to turn
the Group’s potential into growth through combining
our customer-focused philosophy, strong brands and
technology transformation to become a simpler, leaner
and more agile organisation. Therefore, we are committed
to being a home for capable people who celebrate
difference and challenge the status quo to deliver to our
customers. We can only do this by empowering and
developing the best people.
We also know from regular engagement surveys that our
employees have remained exceptionally engaged during
the challenges that Covid-19 has brought in 2020.
With this in mind I am pleased to provide an overview
of our work in relation to the remuneration of both the
Executive Directors and the wider workforce for the year
ended 31 December 2020.
The Committee’s objectives include:
– rewarding Directors for results that are generated
within the risk appetite set by the Board;
– setting an appropriate framework for remuneration for
the Executive Directors, Executive Committee and other
senior management with enough flexibility so that the
Group can attract and retain the best people for the
organisation; and
– having oversight of remuneration policies throughout
the Group and ensuring all our colleagues are paid fairly.
The Report is set out in the following sections:
Section
Chair’s statement
Remuneration at a glance – summarising
the remuneration arrangements for
Executive Directors
Annual Report on Remuneration –
detailing pay outcomes for 2020 and
covering how the Group will implement
remuneration in 2021
Summary of the Policy approved at
the 2020 AGM
Page
113 to 118
119
120 to 135
136 to 139
Remuneration Policy
In last year’s report, we presented an updated Directors’
Remuneration Policy (the “Policy”) to be submitted for
shareholder approval at the AGM on 14 May 2020. The
updated Policy included relatively minor changes to align
with regulatory and governance updates, such as the
introduction of a post-cessation shareholding
requirement, an increase in the shareholding requirement
for the CEO, and changes aimed at simplifying the
remuneration structure, such as adopting a straight-line
performance schedule for the Annual Incentive Plan
(“AIP”) between threshold and maximum (consistent with
the Long-Term Incentive Plan (“LTIP”)). The updated Policy
was approved by shareholders, with 97.55% of votes cast in
favour, and the Committee has implemented this Policy
during 2020. During the year, the Committee has taken
full account of the 2018 Corporate Governance Code
(the “Code”) in our discussions and remuneration practices.
The full Policy can be found on the Direct Line Group
website, under the ‘Results and Reports’ heading of
the Investors page, and on pages 128 to 138 in the 2019
Directors’ Remuneration Report. In our Remuneration
at a glance section on page 119, we summarise the
performance outcomes against our remuneration
framework, in the context of how the Policy was applied
in 2020.
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Direct Line Group Annual Report and Accounts 2020
Covid-19 trigger factors
The Committee proactively considered the impact of Covid-19 throughout the year, beginning in late March when the
Committee established a set of principles to assess its decisions. These were developed with the key overarching aim
of ensuring that pay decisions for 2020 were set at a reasonable level and appropriate with reference to all our
stakeholders and the external economic backdrop. They were set, and continue to be referred to, as follows:
Principle
Description
Committee end of year assessment
Dividends and
shareholder
experience
The Committee would consider the extent
to which cash dividends have been paid
over 2020, and hence the alignment of pay
decisions with shareholder experience.
Regulatory
factors
Direct
government
support
Wider
workforce
The Committee would be mindful of
the PRA’s request that insurers consider
the need to protect policyholders and
“maintain safety and soundness” when
making decisions on variable
remuneration.
The Committee would consider whether
the Company had used any direct
government support, such as the
Coronavirus Job Retention Scheme, VAT
deferral, or business interruption loans.
The Committee would consider whether
the Company has made (or intends to
make) any staff redundancies as a result
of Covid-19, or other impacts on the wider
workforce such as salary freezes, the
scaling back of salary increases or incentive
opportunity reductions. The Committee
would ensure that management are
treated consistently with the approach for
the general workforce.
Non-financial
impact
The Committee would consider any
adverse impact in respect of customer
experience, reputation or regulatory
relationship during 2020.
Shareholder
expectations
The Committee would consider the
expectations of institutional shareholders
and proxy voting agencies.
Following consultation with the PRA, the Group
re-started dividends following the HY2020 results
and also paid a catch-up dividend in respect of the
cancelled 2019 final dividend. 2019 and 2020 pay
outcomes are therefore aligned with the experience
of our shareholders.
The Group consulted with the PRA before re-starting
dividends and concluded that the Group was
financially strong. Decisions on pay outcomes for
senior leadership and the wider workforce for 2020
reflect the Group’s performance.
The Group has not sought or received any direct
government support during the year.
No staff redundancies were made as a result of
Covid-19, and the Committee supported the Group’s
decision to delay planned redundancies as a result of
the restructuring programme to provide job security
for colleagues. The Committee noted that the number
of redundancies was reduced as a result of re-
deploying some employees.
Management outcomes are consistent with the wider
workforce – the AIP outcome is the same across the
Group and senior leadership salary increases are nil for
2021 (the wider workforce received increases of
between 1.5% to 2%).
The Group has provided exceptional service to
customers during the year, as illustrated in the outturn
of the Customer element of the AIP. The Committee is
proud of the measures the Group took to support
customers and local communities.
The Committee carefully considered the expectations
of shareholders and proxy agencies in determining
2020 remuneration outcomes and is satisfied that the
decisions are consistent with these expectations.
www.directlinegroup.co.uk
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Governance Directors’ Remuneration report continued
Covid-19 impact on executive remuneration
The following table summarises the key components of executive remuneration and the decisions made
by the Committee:
Committee decision
2019 bonus (AIP)
Rationale
To pay the bonus in the normal manner
with no adjustment.
The 2019 bonus reflected the Company’s good performance in a challenging year of
change, before the impact of Covid-19.
All eligible employees received their 2019 bonuses.
At the time that 2019 bonuses were paid, it was expected that the 2019 ordinary final
dividend would be paid in May 2020.
It was agreed in April 2020 that Executive Directors would not be considered for any
further bonuses until dividends for ordinary shareholders resumed (which was announced
in August).
The Company’s balance sheet and liquidity remain strong.
2020 salary rises
To increase the level of base salary of the
CEO in line with the average rise made to
all employees.
The Company made its commitment to all eligible employees to receive a salary increase
for the 2020 financial year, prior to the impact of Covid-19, and felt it was important to
meet this commitment to our hard working colleagues.
The CEO voluntarily donated the increase
to charity for the 2020 financial year.
During the year, we have made a commitment not to furlough any employees as result of
Covid-19.
The CFO did not receive an increase, due to
his joining date in the final quarter of 2019.
2020 bonus (AIP)
The Committee has used the performance
conditions and weightings agreed at the
start of the year.
However, in relation to the People metric,
the set of indicators was refined to refocus
on a few key indicators given the external
circumstances and wider impact of
Covid-19.
2017 LTIP vesting
The Committee approved the vesting of
the March and August 2017 LTIP awards
without adjustment during 2020.
2020 LTIP grant
The Committee approved the grants
of the 2020 LTIP awards on the normal
timetable and made no changes to the
performance conditions and targets
agreed with shareholders.
The Company followed its normal practice
of using the three-day average share price
immediately before the date of grant to
determine the number of shares awarded.
The Company committed publicly to the operation of a bonus plan for all eligible
employees for 2020. The Company performance conditions are the same for employees
and Executive Directors. A formulaic assessment of achievement against the financial and
strategic elements was carried out. Profit before tax performance was above the
maximum level set at the start of the financial year. However, the Committee recognises
that the pandemic has had both positive and negative results on our financial
performance. Examples include direct effects arising from reduced claims frequencies,
refunds as a result of offering customers the opportunity to adjust their policy terms as
well as the Group’s charitable donations and community actions. After rigorous debate,
the Committee determined that it was appropriate to apply a discretionary downward
adjustment of 10% to the financial outturn of the AIP to 90% of maximum. The overall AIP
outturn is 82% of maximum.
The 2017 LTIP measured performance over three years (up to 31 December 2019 for RoTE,
and up to the vesting date for TSR).
The value of the shares on vesting reflected the share price experience of shareholders.
The LTIP performance conditions are based on the long-term RoTE and TSR and therefore
remain appropriate.
Despite the initial decline experienced in our share price in March 2020, similar to the
declines experienced across the market, overall the Company’s share price has been less
adversely affected by Covid-19 than that of many other companies and recovered well
during the year.
‘Windfall gains’ were considered before granting the March and August 2020 LTIPs. The
Committee also took the opportunity to agree and document certain circumstances that
might trigger the Committee to commence a ‘windfall gains’ review at vesting, including
reviewing share price analysis over time versus the sector and our peers.
The Committee will assess the value of the 2020 LTIP awards at vesting and will ensure
that the final outturns reflect all relevant factors, including consideration of any
‘windfall gains.’
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Direct Line Group Annual Report and Accounts 2020
Wider workforce engagement and pay
considerations for 2020
The Committee has consistently considered wider
employee pay as context for the decisions it makes. Every
year we review and act on the outcome of our DiaLoGue
People Survey. The Chair of the Committee has attended
meetings of the Group’s Employee Representative Body
(“ERB”) since 2018, at appropriate times during the year.
However, given the unprecedented activity of the ERB
during 2020, it was not possible for the Remuneration
Committee Chair to attend directly, but I have been kept
abreast of matters by the Chief People Officer and Chief
Executive Officer throughout the year. Our existing
workforce engagement is strengthened through internal
social networking, “town halls” and other forums.
To supplement this, the Committee receives papers
setting out details of all-employee pay and workforce
policies across the Group at each meeting. We found that
this standing agenda item gave us further valuable insight
and context for framing executive pay and policies.
The Committee considers it important to monitor
and assess internal pay relativities and takes these
into account when determining Executive Director
remuneration. Early adoption of the CEO pay ratio
disclosure in 2018 emphasised the Committee’s intention
to do so. Option A was adopted to report the employee
pay ratio last year to better reflect the diverse range of
job roles across the business, (see page 129), and the
Committee continues to review the annual CEO pay
ratio disclosures.
During 2020, the Group further built on its commitment
to ensure that all of our people are rewarded fairly and
have an interest in the success of the Group, with a
minimum salary increase of £500 in 2020, bringing the
minimum salary across the Group to £19,500 in the UK.
We are also pleased that, through our continued focus
on building an inclusive organisation, we have maintained
our female representation in senior jobs in line with the
Women in Finance Charter target of 30% during 2019
and 2020, and we will continue with the programmes
underway to further reduce our gender pay gap.
The Group’s Gender Pay Gap Report can be found at
www.directlinegroup.co.uk.
Performance and incentive outcomes
for 2020
During 2020, the management team has worked
extremely hard to launch the refocused strategy and is
proud of the Group’s performance in the past year.
The Group delivered good results in a challenging market
with a strong capital position supported by our successful
customer-focused strategy and our investment in future
capabilities. This performance is reflected in the incentive
outcomes for our Executive Directors. No adjustments to
the performance targets set at the beginning of the year
were made as a result of Covid-19. When assessing the
formulaic outcome of the 2020 AIP, the Committee
agreed that a discretionary downward adjustment to the
financial metric was appropriate. Further details are set
out in the following section. No discretion was exercised
in respect of LTIP awards vesting during the year, which
reflect the Group’s strong performance over the last
three years.
AIP
Financial resilience, whilst supporting our customers,
people and local communities during this extraordinary
period, has helped us to achieve strong underlying results
in 2020, exceeding the financial plan for the year. This has
led to a profit before tax of £451.4 million, which
formulaically results in a maximum performance outturn
for this element. However, the Committee recognises that
the Covid-19 pandemic has acted both positively and
negatively on our financial performance. Some of these
influences relate to macro market trends, whereas others
can be more directly linked to Covid-19 either as direct
effects (for example, reduced motor claims frequencies,
as a result of reduced travel during national lockdowns,
and reduced motor premiums due to refunds offered to
customers for reduced mileage expectations), or through
choices the Group has made to manage through the
pandemic (such as our charitable donations and
supporting colleagues working from home). Therefore,
after rigorous debate, the Committee determined that
it was appropriate to apply a discretionary downward
adjustment of 10% to the financial outturn of the AIP
to 90% of maximum.
The Committee is pleased to report this year that
performance across the Customer measures was
extraordinary and awarded a maximum outturn for this
element. The People measures were assessed as being
between target and maximum. Although management
has made significant progress on successfully landing
much of the major technology transformation elements
in 2020, there has been slower than expected progress on
the cost reduction agenda on which the Shared objective
was measured. Therefore the Committee awarded an
outturn of 50% of maximum for this element. The overall
AIP outcome for the Executive Directors for 2020 (after the
application of downward discretion) was therefore 82% of
maximum. In line with the Policy, 40% of any AIP award
will be deferred for three years under the Deferred Annual
Incentive Plan (“DAIP”). Full details on the outcomes for
the year are included on pages 123 to 126.
LTIP
The Group grants LTIP awards in two tranches each year.
RoTE performance (60% of the award) is measured over
three financial years. Relative TSR performance (40% of
the award) is measured over the three-year period from
the date of grant. All LTIP awards granted to Executive
Directors in August 2017 or later are subject to a two-year
holding period after vesting. The March 2017 and August
2017 LTIP awards (which vested during 2020) were
granted before the appointment of Penny James and Tim
Harris; however, the outcomes of these awards are
relevant to certain former Directors. The overall outcome
of the March 2017 and August 2017 LTIP awards was 70.8%
and 78.0% of maximum respectively. Performance under
each metric was as follows:
– As disclosed last year, average RoTE performance of
20.4% over 2017, 2018 and 2019 was above the maximum
target level of 18.0%, leading to a maximum payout
for this element. 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. Consistent with
the regulation, the value in respect of this element was
disclosed in last year’s Report.
www.directlinegroup.co.uk
117
Governance Directors’ Remuneration report continued
– Relative TSR performance was above the threshold
performance level for both the March and August 2017
LTIP awards (based on performance over the three-year
period from the date of grant of each award), leading to
vesting of 26.9% and 45.1% of maximum respectively for
this element.
– Penny James joined the Group in November 2017 and
was granted an LTIP award at that time in respect of
2017. The RoTE performance was assessed over the
same three-year period as the March and August 2017
LTIP awards. Relative TSR performance was above
threshold (based on performance over the three-year
period from the date of grant), leading to vesting of
51.5% of maximum for this element. The overall outcome
for this award was therefore 80.6%.
The March and August 2018 LTIP awards are due to vest
in 2021, subject to the Committee’s satisfaction that the
financial and risk underpins have been met at the end of
the vesting period. These awards were granted before Tim
Harris’s appointment, and have the following characteristics:
– Average RoTE performance of 20.7% over 2018, 2019 and
2020, is above the maximum target level of 20.5%, and
therefore this element will vest at the maximum level
(subject to the above underpins). 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.
– As performance under the relative TSR element is based
on the three-year period from the date of grant, the
outcomes in respect of this element are not yet known.
Consistent with the regulations, as the performance
period for the TSR elements of the 2018 LTIP is not yet
complete, the outcome will be reported separately next
year. Accordingly, we have included an estimated value
of the RoTE vesting outcomes for the 2018 LTIP awards,
plus the TSR vestings from the 2017 LTIP awards, in the
single figure remuneration table for 2020 for the
Executive Directors.
Committee decisions on outcomes
As mentioned, the Group has delivered a good performance
this year in extremely challenging circumstances and
the overall outcomes for the annual bonus resulted in a
payout (after application of downward discretion) of
£1,166,296 for the CEO and £767,725 for the CFO, which
the Committee believes is appropriate in the context of
the Group’s performance in 2020. The Committee believes
that the application of downward discretion to the profit
before tax outturn of the AIP was appropriate and balanced
in light of the positive and negative effects of Covid-19 on
our financial performance. This demonstrates that the
Policy (which provides the Committee with such discretionary
powers) operated as intended during the year.
The level of vesting of the LTIP awards made in 2017
was considered appropriate in the light of the Group’s
performance over the three-year performance period,
and therefore no discretion was exercised in relation to
these awards.
Approach to pay in 2021
No change to the overall approach to pay is anticipated
for 2021. Neither the CEO nor CFO will be awarded a salary
increase, consistent with the approach we have taken
across our senior leadership population given the
challenging external economic climate. Salary increases
will be awarded for the wider workforce population, in
recognition of their hard work during this challenging
period. The wider workforce will receive increases of
between 1.5% and 2%.
No change will be made to the weightings of the metrics
under the AIP. The approach to assessment will focus on
performance measures agreed at the start of the year.
We are not proposing any changes to the performance
conditions for the 2021 awards under the LTIP. Likewise,
the target RoTE scale of 17.5% to 20.5% will remain at the
same level as in 2020 and reflects an appropriate
performance range in the context of the Group’s planned
underlying RoTE performance.
As part of the wider Committee oversight on all-employee
pay matters, the Committee can confirm that the Group
will maintain the minimum salary level across the Group,
that is 5% above the Living Wage Foundation rate outside
London, and 15% higher than the Government’s current
National Minimum Wage. We continue to want our
employees to have direct interest in the ownership of
the Group. As such, the Committee approved a grant of
free shares (under the Company’s Share Incentive Plan) to
all employees in 2021 to recognise their invaluable
contribution to the business and the desire to strengthen
shareholder alignment across the Group. In addition, a
£400 one-off ‘thank you’ bonus will be awarded in April
2021 to everyone who is not usually eligible for a bonus as
part of their contract.
Committee performance
The Committee’s performance was assessed as part of the
annual Board evaluation. I am pleased to report that the
Committee is regarded as operating effectively and the
Board takes assurance from the quality of the
Committee’s work.
Your AGM vote
The Committee welcomes investor feedback on an
ongoing basis and this Report seeks to describe and
explain our remuneration decisions clearly. At this year’s
AGM you are being asked to vote on a resolution for the
Directors’ Remuneration Report. I hope that, having read
the information in this Report, and considering the
performance of the Group during 2020, you will vote
in support of the Directors’ 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 one
of my colleagues at Direct Line Group will respond to you.
Yours sincerely,
MARK GREGORY
Chair of the Remuneration Committee
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Direct Line Group Annual Report and Accounts 2020
Remuneration at a glance
Remuneration outcomes for 2020
Executive Directors’ total pay
Penny James
(CEO)
Tim Harris
(CFO)
Total pay (£’000)
£3,188
£1,365
£0m
0.5m
£1.0m
1.5m
2.0m
2.5m
3.0m
£3.5m
Base salary
Pensions and benefits
Annual bonus
LTIP
Find out more on page 122
AIP achievement
This chart illustrates the actual amounts earned from the AIP and reflecting performance in 2020. 60% of the
amount is payable in March 2021 and 40% will be deferred into shares for three years.
Penny James
(CEO)
Tim Harris
(CFO)
£1,166k
144%
175%
£768k
144%
175%
£0m
£0.2m
£0.4m
£0.6m
£0.8m
£1m
£1.2m
£1.4m
£1.6m
Actual (% of salary)
Maximum (% of salary)
Actual (£)
Find out more on pages 123-126
LTIP
Shareholding at 31 December 2020
This chart illustrates the number of shares held at the
end of 2020 by the Executive Directors against the share
ownership guidelines of 250% of salary for the CEO and
200% of salary for the CFO.
Release of value under the LTIP
This chart illustrates the total value of the 2017 LTIP
awards that vested in 2020.
Penny James (CEO)
Penny James (CEO)
£0m
£0.5m
£1.0m £1.5m £2.0m £2.5m £3.0m
£3.5m
Tim Harris (CFO)
£0m
£0.5m
£1.0m £1.5m £2.0m £2.5m £3.0m
£3.5m
2020
Guideline
Grant
Vesting
£0m
£1.0m
£2.0m
Shares under award
Reinvested dividends
Find out more on page 133
Find out more on page 127-128
www.directlinegroup.co.uk
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Governance Directors’ Remuneration report continued
Annual Report on Remuneration
Introduction
We have prepared this 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 FCA and describes how the Board has
complied with the principles and provisions of the Corporate Governance Code relating to remuneration matters.
Remuneration tables subject to audit in accordance with the relevant statutory requirements are contained in this
report and stated to be audited. Unless otherwise stated, the information within the Report is unaudited.
Committee members and governance
The following list details members of the Committee during 2020. You can find information about each member’s
attendance at meetings on page 87. You can find their biographies on pages 78 to 80.
Committee Chair
Mark Gregory1
Non-Executive Directors
Mike Biggs2
Danuta Gray3
Sebastian James
Notes:
1. Mark Gregory joined the Committee on 9 May 2019 and was appointed as Chair of the Committee with effect from 26 October 2020.
2. Mike Biggs stepped down as Chair of the Board with effect from 4 August 2020.
3. Danuta Gray succeeded Mike Biggs as Chair of the Board with effect from 4 August 2020.
4. Richard Ward joined the Committee with effect from 1 January 2021.
Advisers to the Committee
The Committee consults with the Chief Executive Officer,
the Chief People Officer, 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 Chair of the Board, Chief Executive Officer and Chief
People Officer 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 payouts under incentive plans, and
whether it is appropriate to apply malus and/or clawback.
The Chair of the Board Risk Committee attended
Committee meetings on three occasions in 2020. The
Remuneration and Board Risk Committees can also hold
joint meetings to consider matters of common interest.
The Committee appointed PricewaterhouseCoopers LLP
(“PwC”) as its independent adviser from 1 January 2019
following a competitive tender process. PwC is a signatory
to the Remuneration Consultants Group’s Code of
Conduct.
During the year, PwC 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. PwC supported the Group in several ways,
including the provision of IFRS 17, tax, technology
consulting and immigration services during 2020.
The Committee is satisfied that the advice PwC provided
was objective and independent.
PwC’s total fees for remuneration-related advice in 2020
were £78,500 excluding VAT. PwC charged its fees based
on its standard hourly rates for providing advice.
Allen & Overy LLP, one of the Group’s legal advisers, also
provided legal advice relating to the Group’s executive
remuneration arrangements. It also provided the Group
with other legal services.
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Direct Line Group Annual Report and Accounts 2020
Alignment to Provision 40 of the Corporate Governance Code
The following table summarises how the Remuneration Committee has addressed the factors set out in Provision 40 of the 2018 UK
Corporate Governance Code.
Clarity
Remuneration
arrangements should be
transparent and promote
effective engagement
with shareholders and
the workforce.
Simplicity
Remuneration structures
should avoid complexity
and their rationale and
operation should be easy
to understand.
Risk
Remuneration
arrangements should ensure
reputational and other risks
from excessive rewards, and
behavioural risks that can
arise from target-based
incentive plans, are
identified and mitigated.
Predictability
The range of possible values
of rewards to individual
directors should be identified
and explained at the time of
approving the Policy.
Proportionality
The link between individual
awards, the delivery of
strategy and the long-term
performance of the Company
should be clear. Outcomes
should not reward poor
performance.
Alignment to culture
Incentive schemes should
drive behaviours consistent
with company purpose,
values and strategy.
– The remuneration arrangements for the Executive Directors are set out in a clear and simple way in
the Directors’ Remuneration Policy (“Policy”) and in the plan rules for each incentive plan.
– Guides are accessible explaining how each incentive plan operates via the employee portal to ensure
full understanding.
– The Committee is committed to transparent disclosure – full details of incentive targets and outcomes
are published in detail in the Annual Report on Remuneration each year.
– Queries on remuneration practices from shareholders or the workforce are welcomed by the
Committee throughout the year and encouraged at the AGM and at the Group’s regular Employee
Representative Body (“ERB”) meetings.
– The Group’s remuneration arrangements are intentionally simple in nature and well understood.
Executive Directors (and senior leadership) receive fixed pay (salary, benefits, pension), and participate
in a single short-term incentive (the “AIP”) and a single long-term incentive (the “LTIP”).
– The Committee reviews the appropriateness of targets annually, being mindful of alignment with
strategy and keeping them simple.
– The ability to mitigate potential risk associated with remuneration is built into the Policy.
Examples include:
– the Committee’s discretionary powers to amend the formulaic outcome from incentive awards
(for example, where not consistent with performance);
– the inclusion of malus and clawback provisions under a wide range of potential scenarios; and
– in-employment and post-employment shareholding requirements.
– The Committee considers that the incentive arrangements do not encourage inappropriate risk-
taking, due to the Committee’s rigorous process for reviewing incentive outcomes, which includes
seeking the view of the Chair of the Board Risk Committee before making its final variable pay
determinations.
– The Committee also considers that the Policy provides wide-ranging flexibility to adjust payments
where outcomes are not considered to reflect underlying business performance and individual
contributions, or where behaviours are inconsistent with the risk appetite of the Group.
– Full information on the potential values of the AIP and LTIP are provided, with strict maximum
opportunities and minimum, target and maximum performance scenarios provided when the Policy
was approved.
– An indication of the potential impact of a 50% share price appreciation on the value of LTIP awards is
also included.
– Payments under variable incentive schemes require robust performance against challenging
conditions over the short and longer term. The Committee considers the formulaic outcome, as well
as other relevant factors, when making decisions on remuneration outcomes.
– Outcomes do not reward poor performance due to the Committee’s overriding discretion to depart
from formulaic outcomes which do not reflect underlying business performance.
– Performance conditions consist of both financial and non-financial metrics to support Group strategy,
including measures focused on delivering for our customers (for example, Net Promoter Score and
complaints), our people (diversity and engagement) and our shareholders (profit before tax and TSR).
– The Committee oversees consistent workforce reward principles and is satisfied that these policies drive
the right behaviours and reinforce the Group’s values, which in turn promote an appropriate culture.
– Our values are reflected in the measures used in our incentive schemes. In particular, our incentive
arrangements link to the following values:
– Do the right thing – AIP and LTIP performance measures incentivise participants to choose the
right path for our customers, our people and shareholders by using measures which directly assess
outcomes for these stakeholders.
– Work together – the Shared element of the AIP requires our Executive Directors and senior
leadership to work together to deliver key results to our stakeholders.
– Take ownership – financial targets under the AIP are the same for all participants, regardless of
seniority, linking everyone’s individual contribution to AIP reward outcomes.
– The use of annual bonus deferral, LTIP holding periods and our shareholding requirements strengthen
the focus on our strategic aims, and ensure alignment with the interests and experiences of
shareholders, both during and after employment.
www.directlinegroup.co.uk
121
Governance Directors’ Remuneration report continued
Implementing policy and pay outcomes relating to 2020 performance
Single figure table (Audited)
Salary1
Benefits2
Annual
bonus3
Long-term
Incentives4,5
Other6
Pension
Fixed pay
and benefits
sub-total
Variable
remuneration
sub-total
2020
2019
2020
2019
813
755
535
134
26
35
14
3
1,166
1,005
768
178
1,110
871
–
–
–
–
–
198
73
107
48
12
912
897
597
149
2,276
1,876
768
376
Total
3,188
2,773
1,365
525
£’000
Penny James
Tim Harris
Notes:
1. Salary – the Company operates a flexible benefits policy, and salary is reported before any personal elections are made.
2. Benefits – include a company car or allowance, private medical insurance, life assurance, income protection, health screening and
discounted insurance. The CEO uses a car service for travelling on journeys between home and office; the Group also pays for any
associated tax liability that arises on this benefit.
3. Annual bonus – includes amounts earned for performance during the year but deferred for three years under the DAIP. For more
information, see page 133. These deferred awards are normally subject to continuous employment. However, awards remain subject
to malus and clawback.
4. The 2019 LTIP figure for Penny James disclosed in the 2019 Report should have included the value of the RoTE element of her LTIP
award granted in November 2017, which was based on average RoTE over 2017, 2018 and 2019. As disclosed in last year’s Report, the
performance outcome for this element was 100% of maximum. The 2019 LTIP figure has been restated this year to include that value,
based on the share price at the date of vesting (28 November 2020) of £2.97. The 10-year CEO history and 2019 CEO pay ratios have
been updated accordingly.
5. The 2020 LTIP figure for Penny James reflects the relative TSR element of her November 2017 LTIP award and the RoTE element of her
2018 awards. The value is calculated based on the share price at date of vesting for the November 2017 LTIP award, of £2.97, and a
three-month average share price to 31 December 2020 of £2.91 for the 2018 awards. Further information on LTIP awards can be found
on pages 127-128.
6. The 2019 “Other” figure for Tim Harris relates to the amount in respect of his buyout awards, disclosed in the 2019 Report. The award is
not subject to any performance conditions, and the value of this award is based on a share price at the date of grant (1 October 2019)
of £2.99.
Each Executive Director has confirmed they have not received any other form of remuneration, other than that already
disclosed in the single figure table.
122
Direct Line Group Annual Report and Accounts 2020
20%
Shared
10%
People
15%
Customer
Executive Director
Penny James
Tim Harris
Annual Incentive Plan outcomes for 2020 (Audited)
The chart illustrates the final assessment of the level of achievement under the AIP and total outcome approved by the
Committee.
Performance measure
and weighting
Performance
achievement 2020
55%
Financial
90%
100%
Financial
Customer
People
Shared
75%
50%
Outcome 2020
49.5%
Total
82%
15.0%
7.5%
10.0%
Achievement under the 2020 AIP
2020 AIP
payment
82% of maximum £1,166,296
82% of maximum £767,725
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 threshold and maximum
performance levels at the start of the year and did not adjust the targets during the year. In the table below, we have
disclosed the target set for profit before tax performance.
The approach taken to assessing financial performance against this measure was based on a straight-line outcome
between 10% for threshold performance and 100% for achievement of maximum performance.
A formulaic assessment of achievement against the financial and strategic elements was carried out. Whilst the
financial plan for the year did not reflect any impact of the Covid-19 pandemic, the Committee sought quantitative data
and qualitative information summarising losses and gains from the impacts of the pandemic. After a rigorous
assessment, the Committee agreed to make a discretionary downward adjustment of 10% against the financial target
component of the 2020 bonus. The outcome from 2020 performance against the financial measure was 90%, giving a
total of 50% out of 55% attributable to this element. A summary of the assessment is provided in the following table.
Measure
Threshold 10%
Maximum 100%
Profit before tax
£356m
£428m
2020 Actual
£451m
Formulaic 2020
Achievement1
100%
Adjusted 2020
Achievement2
90%
Notes:
1. Formulaic outcome
2. Outcome including discretionary downward adjustment
www.directlinegroup.co.uk
123
Governance
Directors’ Remuneration report continued
Customer element (15% weighting)
We put our customers at the heart of everything we do. Our long-term sustainability is driven by understanding
customers’ needs and acting in their best interests. As part of our customer strategy, and to ensure that the business
strives to achieve a sustained and competitive level of service, the Board sets challenging customer-centric KPIs.
These are intended to ensure that remuneration is aligned with and supports continuous improvement.
Throughout the changing world around us in 2020 we adapted quickly so that we could deliver more for our customers
at speed and help them navigate disruption in their lives. Our determination to deliver the best possible customer value
and experience drove our response to Covid-19. This drove best-ever and long-term improving performance in 2020. Our
brands performed 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 determined that a maximum outturn for the Customer measures was appropriate, giving a total of 15% 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 the Group
Complaints
Reduction in complaints volume
and process improvements
– We are proud that our NPS scores have yet again demonstrated the willingness
of our customers to recommend our brands year on year, especially with Direct
Line.
– Our NPS scores measure the likelihood of our customers to recommend one of
our brands and showed strong year-on-year performance, exceeding target and
achieving top-quartile performance in a range of independent benchmarking
studies.
– Strong brand NPS scores on Direct Line and Churchill continue with motor claims
and renewals journeys showing particularly positive performance.
– Rescue claims NPS performance ended the year well ahead of target. Record
performance levels have been sustained across the year including during
summer holidays as ‘staycation boom’ put pressure on our recovery network and
migrating our systems to a new operating platform.
– We continued to enhance digital capabilities for customers needing to claim,
amend and renew policies to meet even more customer needs.
– The volume of complaints reduced significantly in 2020 to lowest ever levels.
However, focus on continual improvement and taking learnings from
dissatisfaction helped ensure that our customer outcomes continue to be
positive.
– A large spike of travel claims post ‘lockdown’ in Q2 led to significantly increased
workloads and to mitigate this with the minimum impact to our customers, large
numbers of staff were cross-trained to handle the increased volume of claims
customer queries.
MyCustomer
Transaction customer experience
performance measuring our
people/calls
– Over 1.2 million responses from customers across the Group have provided
feedback on the experience delivered by our people. 84% (Claims) and 90%
(Customer Operations) of customers rated our people as 9 or 10 out of 10.
– MyCustomer performance in Customer Operations and Claims Operations
achieved record levels during 2020 despite the challenges we faced in migrating
a workforce from office to home working in an extremely short period.
– Customers recognised the extraordinary levels of service provided and this was
frequently acknowledged with many comments referring to our peoples
excellence and the Group’s approach to adjusting products, processes and
pricing in this period.
Measure
Customer
2020 Achievement
100%
124
Direct Line Group Annual Report and Accounts 2020
People element (10% weighting)
For the People element of the AIP, the Board set a range of people measures specifically around leadership, diversity
and inclusion and employee engagement, reflecting the importance of these agendas to the success of the Group. Early
into H2, the set of indicators was refined to refocus on a few key measures given that leadership effectiveness and
engagement became most critical in our response to the Covid-19 pandemic. At year end, the Committee considered
that performance across these measures had continued to improve on an already strong H1 performance against
stretching targets. This was particularly laudable given the ongoing uncertainty caused by the pandemic, balanced with
the re-initiation of a number of transformation activities in line with our strategic objectives. The Committee judged the
performance against the People element to be above target, giving a total of 7.5% out of 10% attributable to this
element. A detailed assessment of the People measures is set out below.
Measure
Assessment
Leadership
effectiveness &
succession
Enable the
transformation of the
Group by bringing
about a shift in
leadership style.
Ensure there is good
succession cover and
that we are building
high-quality talent
pipelines of future
leaders
Diversity
Ensure the Group is a
diverse and inclusive
place to work where
differences are
respected, valued and
celebrated
Engagement
Ensure we are fully
engaged with our
employees via the
DiaLoGue programme,
including throughout
the business
transformation
process, with leaders
setting the tone
demonstrating the
Group’s Values and
Behaviours in all
aspects of their role
Measure
People
– To support our leadership community through the challenges of Covid-19, we invested in
improving their ability to lead a more dispersed, digital and agile organisation through
various leadership development initiatives including storytelling training, agile coaching and
developing and launching a new Leadership Discovery programme. This is a six-month
blended learning experience combining masterclasses, 360-degree insights and ongoing
peer coaching to accelerate adoption of our behaviours.
– We have measured progress in leadership effectiveness by creating a leadership index that
was measured regularly throughout 2020 indicating the extent to which colleagues felt
positive about our leaders and the decisions they were making. This has shown that there is
a high level of trust in our leaders with 84% positivity at the end of 2020.
– To prepare future successors we made a number of internal talent moves in 2020 and
provided broadening experiences as well as promotional moves to some of those who
feature in our talent pools. The gender diversity of our succession pipeline is now extremely
strong, something we have improved again in 2020.
– Finally, we maintained our commitment to recruiting graduates into our future leaders’
programme and have continued to rotate those already on the programme to provide a
broad set of early-career experiences. We successfully recruited a further 12 graduates and 51
apprentices in 2020.
– Since becoming a signatory to the Women in Finance Charter, we have recruited, developed
and promoted more women into senior roles. Women now account for 30% of our senior
leadership (2019: 31%, 2018: 28%, 2017: 25%, 2016: 22%) and we are looking forward to working
towards our next milestone of 35% female representation in our senior leadership by the end
of 2022. We have continued to invest in supporting the development of our female leaders
through external programmes and coaching mentoring support.
– We gathered deeper insights via an employee survey where around two thirds of our people
shared their perceptions and experiences on diversity and inclusion, which has informed an
updated strategy, with greater ambition and reach.
– We established BAME and Black representation targets within the organisation for the first
time and signed Business in the Community’s Race at Work charter to demonstrate our
commitment to race inclusion.
– Our #WeCare campaign celebrated the diversity of our people by sharing stories to build a
greater understanding of difference and reinforce a culture where our people can ‘bring all
of themselves to work’.
– We have strengthened senior leadership sponsorship for our Diversity Network Alliance,
which promotes, champions and supports diversity and inclusion within our business.
– At the start of the pandemic we adopted lighter touch and more regular employee pulse
surveys in contrast to our usual bi-annual in-depth process. Short pulse surveys were initially
run on a weekly basis and as pandemic conditions gradually stabilised they extended to
fortnightly and eventually monthly frequency.
– Throughout the year, we continued to achieve high participation levels (64% average),
gathering a mix of quantitative and qualitative data across a range of topics including some
key themes like sentiment, mental health, leadership, engagement and productivity.
– Our ability to check in and monitor engagement, sentiment and wellbeing in a more
adaptive way was critical during 2020, allowing leaders to benefit from rapid access to results
and to design for relevant, targeted actions to address themes, share ideas or build solutions.
– In addition, we re-designed many of our Group-wide high-profile engagement activities such
as our coveted Chief Executive Awards programme to be delivered virtually. Our teams and
leaders have creatively risen to the challenge of keeping motivation, support and engagement
as high as possible through such a testing period.
– In 2020, our mid-year engagement score was 1% off our highest ever score at 80%, having
improved by 2pts from the preceding survey and 4pts year on year. However, towards the
end of 2020 as the new wave of lockdowns hit, this dipped by 6% to 74%. This is in line with
the shape other organisations are reporting. Although we are consistent with upper quartile
high-performing companies, we were slightly below the threshold target of maintaining
2019 engagement levels at 78%.
2020 Achievement
75%
www.directlinegroup.co.uk
125
Governance Directors’ Remuneration report continued
Shared element (20% weighting)
For the Shared element of the AIP, the Board set a range of strategic measures specifically around technology and
business transformation and cost savings, with the aim of ensuring the Group has the capabilities and cost base
to ensure its sustained success. The Committee considered the delivery of the major technology transformation
programmes, for which specific measures and milestones were set; and for the cost objective the Committee focused
on the progress to achieve a reduced cost base. The Committee therefore agreed an outturn of 50% for the Shared
measures, giving a total of 10% out of 20% attributable to this element. A detailed assessment of the technology
transformation and costs measures is set out below.
Measure
Assessment
Technology transformation
Progress and delivery of several
technology investment
programmes on time and on
budget, to deliver new capability
benefits
– In the first half of the year, we transitioned to full-scale home working, whilst
carrying out major system changes. Where appropriate we deferred certain
elements of programmes, primarily to mitigate potential risks arising from
system stability and programme complexity, and to reprioritise resources to
Covid-19-related work. These actions have been well managed and controlled.
– Our major programmes successfully navigated the impacts of Covid-19 and
mitigated delays to the extent possible, delivering a significant amount of change
in a highly challenging environment.
– We launched a number of customer-facing systems, including:
– a Green Flag claims engine delivering significant uplift in platform flexibility and
customer service;
– retooling of NIG ‘complex’ business including improving pricing sophistication;
– the main product builds of the new Direct Line for Business platform, including
Tradesperson and Van and the full-cycle end-to-end delivery model established
for ongoing change;
– major Finance transformation which has moved core finance systems to the
cloud; and
– deployed a new telephony system and migrated our mainframe.
– Alongside launching new systems, we have made good progress on setting the
foundations for changes to come in 2021.
– We continued to make significant steps to put Churchill and Direct Line onto our
new motor system meeting key technical deployment milestones; whilst overall
operational deployment has been slower due to the build of additional scope and
impact of Covid-19 on delivery.
– Despite a strategic ambition to progress towards our target of reducing
operating expenses, they increased during 2020 by £30.7 million to £724.4 million.
The increase in costs was entirely due to investment in initiatives to protect our
customers, people and society from the impact of Covid-19.
– In total these initiatives are estimated to have increased operating expenses by
£34 million and in some cases had the effect of delaying cost-saving programmes
which were planned for 2020. Adjusting for these initiatives, operating expenses
were broadly flat year on year.
– Despite the impact of Covid-19, we have made good progress in building the
capability to reduce our cost base in the future and have reiterated our 20%
expense ratio target in 2023.
Costs
Development and execution of
activities to deliver a sustainably
lower cost base to support future
quality of earnings
Measure
Shared
2020 Achievement
50%
126
Direct Line Group Annual Report and Accounts 2020
LTIP outcomes for 2020 (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 and August grants; and
– relative TSR (40% weighting) – performance is measured over a three-year period from the date of grant.
2017 LTIP awards (vesting in 2020)
Awards under the LTIP granted in March, August and November 2017 vested during 2020. They were subject to relative
TSR performance over the three-year period from the date of grant, and RoTE performance in 2017, 2018 and 2019.
Consistent with the Regulations, the expected RoTE vesting outcomes for the year ended 31 December 2019 (together
with the TSR elements from the 2016 awards) are included in the 2019 LTIP column of the single figure table. The
performance outcomes of these elements are included in the table below.
The 2020 single remuneration figure includes the value of the 2017 TSR elements (for which the performance period
ended in November 2020 for Penny James) and the awards vested shortly after. Details of the targets and performance
achieved are set out in the table below (with the March and August 2017 outcomes only relating to former Directors).
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 (20%
of maximum)
Maximum
(100% of
maximum)
Actual performance
Achievement
Outcome
March 2017
August 2017
November 2017
(Penny James
only)
RoTE
(2019 single figure)
Relative TSR
(2020 single figure)
RoTE
(2019 single figure)
Relative TSR
(2020 single figure)
RoTE
(2019 single figure)
Relative TSR
(2020 single figure)
60%
15.0%
18.0%
20.4%
100.0%
60.0%
40%
Median
60%
15.0%
Upper
quintile
18.0%
Between median
and upper quintile
20.4%
26.9%
10.8%
100.0%
60.0%
40%
Median
60%
15.0%
Upper
quintile
18.0%
Between median
and upper quintile
20.4%
45.1%
18.0%
100.0%
60%
40%
Median
Upper
quintile
Between median
and upper quintile
51.5%
20.6%
2018 LTIP awards (vesting in 2021)
Awards under the LTIP granted in March and August 2018 will vest during 2021. They are subject to relative TSR
performance over the three-year vesting period, and RoTE performance in 2018, 2019 and 2020. The RoTE performance
period for these awards ended on 31 December 2020 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 2021 and
August 2021 respectively and will be disclosed in the 2021 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 for the 2018 LTIP awards (together with the TSR
elements from the 2017 awards) are included in the 2020 single remuneration figures for the Executive Directors based
on the three-month average share price to 31 December 2020. As the awards were granted before Tim Harris joined the
Group, figures are for Penny James only. You can find details of this on page 122.
Award
Performance measure
Weighting
Threshold (20%
of maximum)
Maximum
(100% of
maximum)
Actual performance
Achievement
Outcome
March 2018
August 2018
RoTE
(2020 single figure)
Relative TSR
(2021 single figure)
RoTE
(2020 single figure)
Relative TSR
(2021 single figure)
60%
17.5%
20.5%
20.7%
100%
60%
40%
Median
60%
17.5%
40%
Median
Upper
quintile
20.5%
Upper
quintile
Performance period not yet complete
20.7%
100%
60%
Performance period not yet complete
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127
Governance Directors’ Remuneration report continued
Summary of the 2020 LTIP single remuneration figure outcomes
March 2018
LTIP – RoTE1
August 2018
LTIP – RoTE1
November 2017
LTIP – TSR2
Total single
figure LTIP
Notes:
Penny James
Penny James
Penny James
Penny James
Number of shares
awarded (inc. dividends)
subject to this
performance condition
Percentage vested by
reference to
performance
achieved
136,943
141,711
195,421
100%
100%
51.5%
Number of
shares vested
136,943
141,711
100,642
Total value
of shares (inc.
dividends) vested
£’000
399
412
299
1,110
1. 2018 RoTE elements are based on the three-month average share price to 31 December 2020 of £2.91.
2. 2017 TSR element is based on share price on the date of vesting on 28 November 2020 of £2.97.
Using shares (Audited)
In receiving a share award, 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. There have
been no changes to the share interests below since 31 December 2020.
At 31 December 2020
Share plan
awards subject
to performance
conditions1,2,3
Share plan
awards subject
to continued
service1
Share plan
interests vested
but unexercised1
Share plan interests exercised during
the year to 31 December 2020
Shares held
outright
Number of
options exercised1
Share price on
date of exercise4
1,430,485
741,647
350,847
87,927
393,773
–
665,464
5,785
–
5,388
–
3.24
Penny James
Tim Harris
Notes:
1. These awards take the form of nil-cost options over the Company’s shares. Awards accrue dividend entitlement from the grant date to
the date on which an award vests. Dividends added post-vesting are shown to 31 December 2020 but are not realised until exercise.
2. LTIP awards include an additional two-year holding period before awards may be released.
3. Unvested awards subject to performance conditions represent LTIP awards for which 60% is based on RoTE performance and 40% on
relative TSR performance. The exact targets for each award were disclosed in the relevant Annual Report on Remuneration.
4. Tim Harris exercised options on 4 August 2020.
The table below shows the Non-Executive Directors’ beneficial interests in the Company’s shares1.
Director
Mike Biggs2
Danuta Gray
Mark Gregory
Jane Hanson
Sebastian James
Fiona McBain
Gregor Stewart
Richard Ward
Notes:
Shares held at
31/12/2020
Shares held at
31/12/2019
–
10,000
–
11,083
5,000
–
2,925
–
–
10,000
–
11,083
5,000
–
2,925
–
1. This information includes holdings of any connected persons, as defined in section 253 of the Companies Act 2006.
2. Mike Biggs stepped down from the Board on 4 August 2020.
128
Direct Line Group Annual Report and Accounts 2020
Non-Executive Directors (Audited)
Fees were the only remuneration paid to Non-Executive Directors in 2019 and 2020. 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
Mike Biggs3
Danuta Gray
Mark Gregory
Jane Hanson
Sebastian James
Fiona McBain
Gregor Stewart
Richard Ward
Notes:
Fees
Taxable benefits2
Total
2020
£’000
235
209
109
120
96
95
115
120
2019
£’000
400
110
101
120
95
83
115
120
2020
£’000
2019
£’000
1
–
–
3
–
3
2
0.1
5
7
0.1
11
–
16
19
0.1
2020
£’000
236
209
109
123
96
98
117
120
2019
£’000
405
117
101
131
95
99
134
120
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. Mike Biggs stepped down from the Board on 4 August 2020, on which date Danuta Gray became Chair.
CEO pay ratio
In 2018, the Committee chose to adopt early the CEO pay ratio disclosure requirements. Since 2019, the Committee has
determined that the appropriate methodology to be used in future years is Option A, as the Committee believes this is
the most robust approach to use going forward.
The table below compares the 2020 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. The 2019 figures are also shown for comparison purposes.
Year
2020
20191
Note:
Method
25th percentile pay ratio
Median pay ratio
75th percentile pay ratio
Option A
Option A
128:1
123:1
105:1
101:1
71:1
67:1
1. As required by the regulations, the CEO single figure used to determine the 2019 pay ratios is based on the sum of the total single
figures of remuneration for Paul Geddes and Penny James, but with remuneration in respect of Penny’s service as CFO excluded.
The 2019 figures have been updated for Penny’s updated 2019 single figure value (see page 122 note 4).
The UK employees included are those employed on 31 December 2020 and remuneration figures are determined with
reference to the financial year ending on 31 December 2020.
Option A, as set out under the reporting regulations, was used to calculate remuneration for 2020 as we believe that
it is the most robust methodology for calculating these figures. The value of each employee’s total pay and benefits
was calculated using the single figure methodology consistent with the CEO. No elements of pay have been omitted.
Where required, remuneration was approximately adjusted to be full-time and full-year equivalent basis based on the
employee’s average full-time equivalent hours for the year and the proportion of the year they were employed.
Each employee’s pay and benefits were calculated using each element of the employee remuneration, on a full-time
equivalent basis. No adjustments (other than to achieve a full-time equivalent rate) were made and no components of
pay have been omitted.
Salary
Total pay and benefits
25th percentile (P25)
Median (P50)
75th percentile (P75)
£21,487
£24,885
£25,842
£30,401
£39,325
£44,905
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 (2019:
32.1). 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 of 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.
As there was a change of CEO in 2019, the 2019 pay ratios were calculated based on a “hybrid” single figure of
remuneration for the two CEOs during the year, as required by the Regulations. This means that the 2019 and 2020
ratios are not directly comparable. Nevertheless, the small increase in the pay ratios from 2019 to 2020 is partly
attributable to the increase in the CEO’s AIP and LTIP outcomes for 2020. This increase is partially offset by an increase
in the total pay and benefits of employees, primarily as a result of the increase in the Group’s minimum salary level in
April 2020 and broader annual salary increases, as well as an increase in bonus outcomes (consistent with the CEO’s
AIP outcome).
www.directlinegroup.co.uk
129
Governance Directors’ Remuneration report continued
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 the differences between the remuneration of Executive Directors and the wider workforce are set out
on page 117. The Committee is satisfied that these policies drive the right behaviours and reinforces the Group’s values
which in turn drives the correct culture, and, for the reasons given above, it believes that the ratios are consistent with
the Group’s reward policies.
Percentage change in Executive Directors’ and Non-Executive Directors’ pay for 2019 to
2020
The table below shows the year-on-year percentage change in salary, taxable benefits and bonus (where applicable)
of the Executive Directors and Non-Executive Directors, compared to the average pay for all other employees.
Salary/Fees1
Benefits2
Bonus (including
deferred amount)3
Executive Directors
Chief Executive Officer
Chief Finance Officer4
Non-Executive Directors5
Mike Biggs
Danuta Gray
Mark Gregory
Jane Hanson
Sebastian James
Fiona McBain
Gregor Stewart
Richard Ward
All employees (average)
Notes:
7.6%
0.0%
0.0%
90.1%
7.2%
0.0%
1.0%
14.6%
0.0%
0.0%
3.5%
(24.6)%
0.5%
(82.3)%
(100.0)%
(100.0)%
(73.1)%
0.0%
(79.9)%
(87.2)%
(5.7)%
(1.4)%
16.1%
7.9%
-%
- %
- %
- %
- %
- %
- %
- %
3.9%
1. Based on the change in average pay for employees employed in the year ended 31 December 2020 and the year ended 31 December
2019. The CEO’s salary in 2019 reflected part year as CFO before promotion to CEO, therefore the increase appears larger. Actual pay
increase in 2020 was 2.1%. The increase to the CEO salary from 1 April 2020 was voluntarily paid to FareShare, a charity that
redistributes surplus food to other charities that turn it into meals for those in need.
2. For all employees, there were no changes in benefits provision between 2019 and 2020. For the CEO the decreased value of benefits
relate to the car service not used by the CEO for travelling on journeys between home and office since March, in respect of which
the Group also pays for any associated tax liability that arises on this benefit. For Non-Executive Directors, benefits comprise taxable
travel and subsistence expenses reimbursed by the Company (including any gross-up for tax and national insurance contributions due).
3. For employees other than the CEO, 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. Non-Executive Directors are not eligible
to participate in any of the Group’s bonus or incentive schemes.
4. The figure for the CFO is based on an annualised amount for 2019, as he joined in the final quarter of the year.
5. For Non-Executive Directors, increased fees relate to Board changes. The decreased value of benefits relates to a decrease in travel
expenses due to the Covid-19 pandemic.
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Direct Line Group Annual Report and Accounts 2020
Chief Executive Officer’s pay between 2012 and 2020 and historical performance of TSR
The table below shows historical levels of the CEO’s pay between 2012 and 2020. 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
(%)
350
300
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
31 Dec
2019
31 Dec
2020
DLG
FTSE 350 (excluding Investment Trusts)
CEO single figure of
remuneration (£'000s)
Annual bonus payment
(% of maximum)
LTIP vesting (% of maximum)1
Notes:
20121
20131
20141
2015
20162
2017
2018
20193
20193,4
20205
Paul Geddes
Penny James
1,908
2,536
5,356
4,795
4,071
4,039
3,250
774
2,773
3,188
65%
30%
63%
55%
75%
88%
83%
96%
43%
86%
88%
99%
68%
71%
76%
0%
76%
100%
82%
80%
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 reflect an adjustment, made in 2019, to the original award of 20% of maximum
opportunity related to the Ogden discount rate change.
3. The 2019 single figure reflects part of the year for the outgoing CEO, Paul Geddes, and the entire year for the newly appointed CEO,
Penny James.
4. The 2019 single figure has been revised to reflect the actual vesting of the 2017 awards under the LTIP.
5. The 2020 single figure reflects the estimated vesting of the RoTE portion of the LTIP granted in March and August 2018. Any shares
under the LTIP granted in 2018 will not be delivered until the end of the applicable vesting periods in March and August 2021.
However, they have been included in the single figure, as the performance period in respect of the RoTE portion has now
been completed.
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131
Governance Directors’ Remuneration report continued
Payments to Past Directors (Audited)
March and August 2017 LTIP
The table below sets out the awards which vested during the year to John Reizenstein (former CFO), Paul Geddes
(former CEO) and Mike Holliday-Williams (former MD, Personal Lines), who exited the Group on 7 September 2018,
31 July 2019 and 30 September 2019 respectively:
Award
Executive Director
March 2017
August 2017
Notes:
John Reizenstein
Paul Geddes
Mike Holliday-Williams
John Reizenstein
Paul Geddes
Mike Holliday-Williams
Number of share
options awarded
(inc. dividends)
Vesting proportion
(inc. performance
and pro-rata)
Number of share
options vested
Total value of share
options (including
dividends) vested (£)
167,925
288,554
196,416
148,752
262,956
180,197
35.7%
55.6%
59.3%
29.4%
51.6%
55.4%
59,952
160,439
116,391
43,733
135,567
99,794
171,3431
458,5351
332,6451
128,9692
399,7872
294,2932
1. Based on closing share price of £2.86 on the vesting date (27 March 2020).
2. Based on closing share price of £2.95 on the vesting date (29 August 2020). LTIP awards for Executive Directors are 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.
The March 2017 LTIP award vested overall at 70.8%, with the RoTE element achieving 100%, and TSR at 26.9%. The August
2017 LTIP award vested at 78.0%, with the RoTE element achieving 100% and TSR at 45.1%. All former Directors confirmed
that they complied with the requirements of their individual exit agreements, which enabled the Committee to approve
the vesting of these awards.
March and August 2018 LTIP
The performance period in respect of the RoTE elements of these awards ended on 31 December 2020; however, the
performance periods in respect of the TSR elements of these awards end on 25 March 2021 and 27 August 2021 and the
awards will vest on these dates. The value of the 2018 LTIP awards vesting for Paul Geddes and Mike Holliday-Williams
will therefore be disclosed in the 2021 report.
No payments were made to any Director for loss of office during 2020.
Distribution statement
This chart shows the overall pay expenditure across all Group employees compared with the total dividend value paid to
shareholders in 2019 and 2020.
Dividend (£m)
Overall expenditure on pay (£m)
% change
(26.8)%
Special
Ordinary
.
7
3
1
1
.
4
0
9
2
19
.
5
5
9
1
.
4
0
0
1
20
Notes:
.
0
3
7
4
8
.
1
8
4
% change
1.9%
19
20
1. On 3 March 2020, the Group announced that the Board had approved a share buyback of up to £150 million. On 19 March 2020, the
Board cancelled that share buyback programme given the uncertainty in the capital markets at the time, driven by the rapidly
emerging Covid-19 pandemic.
2. Following the cancellation of the dividend as announced on 8 April 2020, the final dividend for 2019 was not paid. However, a special
interim dividend was subsequently paid in September 2020 reflecting a full catch-up of the cancelled 2019 final dividend.
3. 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 below shows the percentage of shareholders’ votes which were for or against, and the percentage of votes
withheld, relating to the resolutions to approve the 2019 Directors’ Remuneration Report and Remuneration Policy,
both of which were put to shareholders at the 2020 AGM.
The resolutions approving the Directors’ Remuneration Report and Remuneration Policy were passed by 94.88% and
97.55% of the votes cast in favour of the resolutions, respectively.
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Direct Line Group Annual Report and Accounts 2020
For
Against
Number
Percentage
Number
Percentage
Number of
votes withheld
(abstentions)
Percentage of
votes withheld
(abstentions)
Approval of Directors’ Remuneration
Report (2020 AGM)
Approval of Directors’ Remuneration
Policy (2020 AGM)
1,023,165,733
94.88%
55,176,087
5.12%
63,462
1,051,904,620
97.55%
26,440,027
2.45%
60,251
–
–
Shareholdings (Audited)
This table sets out the Executive Directors’ share ownership guidelines and actual share ownership levels:
Name
Position
Penny James
Tim Harris
Chief Executive Officer
Chief Financial Officer
Notes:
Share ownership guideline1
(% of salary)
Value of shares held at
31 December 20202,3
(% of salary)
250%
200%
426%
33%
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 250% of base salary for the CEO and 200% of base salary for the CFO respectively.
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.
3. Shareholding as a percentage of salary has been calculated based on the 31 December 2020 share price of £3.19.
LTIP awards granted during 2020 (Audited)
The table below shows awards granted under the LTIP to Executive Directors in 2020 in the form of nil-cost options.
Director
Position
Award as % of salary
Number of shares granted
Face value of Awards (£)
Penny James
Tim Harris
Chief Executive Officer
Chief Financial Officer
200%
200%
581,357
384,941
1,617,000
1,070,000
Awards granted in 2020 under the LTIP1
Note:
1. The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £2.62 in March
2020 and £2.96 in September 2020.
The performance conditions that apply to the LTIP awards granted in 2020 are set out below:
Performance Measure
RoTE
TSR
Performance conditions for awards granted in 2020 under the LTIP
Proportion of award
Performance for
threshold vesting (20%)
60%
40%
17.5%
Median
Performance for
maximum vesting
20.5%
Upper quintile
The RoTE targets for awards granted in 2020, applying to 60% of the award, were an average annual RoTE of 17.5% for 20%
vesting and 20.5% for full vesting. A straight-line interpolation occurs from threshold to maximum performance.
The remaining 40% of each award is based on TSR performance against the FTSE 350 (excluding Investment Trusts),
for which there is a straight-line interpolation between threshold and maximum performance on a ranked basis.
The performance period for the awards granted on 27 March 2020 will end on 31 December 2022 for the RoTE element
and 26 March 2023 for the TSR element. The performance period for the awards granted on 1 September 2020 will also
end on 31 December 2022 for the RoTE element and 31 August 2023 for the TSR element.
DAIP awards granted during 2020 (Audited)
The table below shows the deferred share awards granted under the DAIP to Executive Directors on 27 March 2020 in
respect of the 2019 AIP. Awards will vest after three years, normally subject to continued service, and were granted in the
form of nil-cost options.
Director
Position
Penny James
Tim Harris
Chief Executive Officer
Chief Financial Officer
Note:
Awards granted in 2020 under the DAIP
Value of deferred bonus (£)
Number of shares granted1
401,899
71,155
153,397
27,158
1. The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £2.62. In
accordance with the DAIP rules, dividends in respect of the deferred shares are reinvested in additional shares, which vest when the
deferred shares vest.
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133
Governance Directors’ Remuneration report continued
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.
Non-Executive Directors’ fees
The fees for the Chair and Non-Executive Directors for 2021 are set out below and were reviewed in 2020.
Position
Board Chair fee
Basic Non-Executive Director fee
Additional fees
Senior Independent Director fee
Chair of Audit, Board Risk and Remuneration Committees
Chair of Sustainability and Investment Committees
Member of Board Committee (Audit, Board Risk or Remuneration)
Member of Board Committee (Sustainability or Nomination)
No additional fees are paid for membership of the Investment Committee.
Fees for 2021
£’000
350
75
30
30
10
10
5
Service contracts
Subject to the discretion set out in the recruitment remuneration policy, it is the Group’s policy to set notice periods for
Executive Directors of no more than 12 months (by the Director or by the Company). The Executive Directors’ service
agreements summary is as follows:
Director
Effective date
of contract
Notice period
(by Director
or Company)
Penny James
01-Nov-17
12 months
Tim Harris
01-Oct-19
12 months
Exit payment policy
Base salary, benefits and pension only for unexpired portion of
notice period to be paid in a lump sum or monthly instalments
in which case, instalments are subject to mitigation if an
alternative role is found.
Base salary, benefits and pension only for unexpired portion of
notice period to be paid in a lump sum or monthly instalments,
in which case, instalments are subject to mitigation if an
alternative role is found.
There are no further obligations which could give rise to a remuneration or loss of office payment other than those set
out in the Remuneration Policy table and the termination policy.
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Direct Line Group Annual Report and Accounts 2020
Implementing the Policy in 2021
Key feature
Base salary
– 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
Implementation in 2021
– The CEO’s salary remains appropriate (at £817,000)
– The CFO’s salary remains appropriate (at £535,000)
Pensions
– Pension contributions are paid only in respect of
– CEO and CFO pension contribution remains at 9%
base salary
(in line with the workforce)
– The Executive Directors’ pension is set in line with the
pension level received by the majority of the employee
population
Annual Incentive Plan
– Maximum opportunity of 175% of salary for the CEO
and the CFO
– No change to the maximum opportunity
– No change from the weightings or measures used
– At least 50% of the AIP is based on financial measures.
for 2020
The Committee considers various non-financial
performance measures such as strategic measures
– It bases its judgement for the payment outcome at the
end of the performance period on its assessment of
the level of performance achieved with reference to
performance targets agreed at the start of the year
– Any payment is subject to an additional gateway
assessment, including assessing risk factors
– Malus and clawback provisions apply
– There will be a straight-line vesting between AIP
threshold and maximum performance
– Financial measures (55%): Profit before tax
– Non-financial measures (45%): People, Customer
and Shared
– The performance targets will be set following the usual
process, considering internal and consensus forecasts
and the key strategic priorities for the Group in 2021
– The performance targets are considered commercially
sensitive and will therefore be disclosed in next
year’s Report
Deferred Annual Incentive Plan
– 40% of the AIP is deferred into shares
– Typically vesting after three years, normally subject to
continued employment
– Malus and clawback provisions apply
– No further performance conditions apply
Long Term Incentive Plan
– Awards typically granted as nil-cost options
– Awards typically granted twice a year
– The LTIP allows for awards with a maximum value of
– 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
200% of base salary per financial year
to apply for 2021
– Performance is measured over three years
– Awards vest subject to financial underpin and
– A RoTE target range of 17.5% (threshold) to 20.5%
(maximum) is required for the 2021 awards to vest
payment gateway
– Malus and clawback provisions apply
– Awards are subject to an additional two-year holding
period following the end of the three-year
performance period
– Vesting at threshold is 20% and maximum is 100% with
straight-line vesting in between
– Relative TSR will be measured against the FTSE 350
(excluding investment trusts) peer group. Vesting for
median TSR performance (threshold) is 20% and for
upper quintile TSR performance (maximum) is 100%
with straight-line vesting in between these points
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135
Governance Directors’ Remuneration report continued
Directors’ Remuneration Policy
The following is a copy of the main table from the Policy approved by shareholders at the 2020 AGM. The full Policy
is available in the Directors’ Remuneration Report of the 2019 Annual Report and Accounts, which is available on the
Direct Line Group website under the ‘Results and reports’ heading in the Investors page. You can find further details
regarding the Policy’s operation for 2021 on page 135.
Policy table
Element and purpose in
supporting the Group’s
strategic objective
Operation
Base salary
– This is the core element
of pay that reflects
the individual’s role
and position within
the Group
– 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
– 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 appropriate benchmarking peer group(s) that reflects the Group’s size and industry
focus, the corresponding market pay range(s) and the relevant positioning within the
market pay range(s); 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 like 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
Maximum opportunity
Performance measures
– When determining salary increases, the Committee
– Not applicable
will consider the factors outlined in this table
under ‘Operation’
Pension
– To remain competitive
within the marketplace
– Pension contributions are paid only in respect of base salary
– Executive Directors are eligible to participate in the defined contribution pension
– The maximum pension percentage contributions are
– Not applicable
set at a level that is consistent with that applied to
arrangement or alternatively they may choose to receive a cash allowance in lieu of pension
the majority of employees
– To encourage
– The Executive Directors’ pension will be set in line with the pension level received by the
retirement planning
and retain flexibility
for individuals
Benefits
– A comprehensive
and flexible benefits
package is offered,
emphasising
individuals being
able to choose
the combination of
cash and benefits that
suits them
majority of the employee population
– Executive Directors receive a benefits package generally set by reference to market practice
– The costs of benefits provided may fluctuate from
– Not applicable
in companies of a similar size and complexity. Benefits currently provided include a
Company car, use of a 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 our HMRC-approved SIP, which has been
used to provide an award of free shares to all employees (including Executive Directors) and
permits 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 and be consistent
with the relocation arrangements available to the workforce generally. In normal
circumstances, relocation benefits will only be paid for a period of up to 12 months
year to year, even if the level of provision has
remained unchanged
– 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
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Direct Line Group Annual Report and Accounts 2020
Element and purpose in
supporting the Group’s
strategic objective
Operation
Base salary
– Base salaries are typically reviewed annually and set in April of each year, although the
– When determining salary increases, the Committee
– Not applicable
Maximum opportunity
Performance measures
will consider the factors outlined in this table
under ‘Operation’
Benefits
– Executive Directors receive a benefits package generally set by reference to market practice
– The costs of benefits provided may fluctuate from
– Not applicable
– The maximum pension percentage contributions are
set at a level that is consistent with that applied to
the majority of employees
– Not applicable
year to year, even if the level of provision has
remained unchanged
– 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
of pay that reflects
the individual’s role
and position within
the Group
the market allows us
to attract, retain and
executives with the
skills to achieve our
key aims while
managing costs
retirement planning
and retain flexibility
for individuals
and flexible benefits
package is offered,
emphasising
individuals being
able to choose
– This is the core element
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 appropriate benchmarking peer group(s) that reflects the Group’s size and industry
– Staying competitive in
focus, the corresponding market pay range(s) and the relevant positioning within the
motivate high-calibre
– The Committee does not follow market data strictly. However, it uses it as a reference point
market pay range(s); and
– general base salary movements across the Group
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 like 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
– Pension contributions are paid only in respect of base salary
– To remain competitive
– Executive Directors are eligible to participate in the defined contribution pension
within the marketplace
arrangement or alternatively they may choose to receive a cash allowance in lieu of pension
– To encourage
– The Executive Directors’ pension will be set in line with the pension level received by the
majority of the employee population
– A comprehensive
in companies of a similar size and complexity. Benefits currently provided include a
Company car, use of a 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
the combination of
– In line with our approach to all employees, certain Group products are offered to Executive
cash and benefits that
Directors at a discount
suits them
– 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 our HMRC-approved SIP, which has been
used to provide an award of free shares to all employees (including Executive Directors) and
permits 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 and be consistent
with the relocation arrangements available to the workforce generally. In normal
circumstances, relocation benefits will only be paid for a period of up to 12 months
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137
Governance Directors’ Remuneration report continued
Element and purpose in
supporting the Group’s
strategic objective
AIP
– To motivate
executives and
incentivise
delivery of
performance over
a one-year
operating cycle
DAIP
– To enable a
stronger focus
and alignment
with the short to
medium-term
elements of our
strategic aims
LTIP
– Aligning
executives’
interests with
those of
shareholders to
motivate and
incentivise
delivering
sustained
business
performance over
the long term
– To aid retaining
key executive
talent long term
Share ownership
guidelines
– To align the
interests
of Executive
Directors with
those of
shareholders
Directors are set by considering annual bonus
(Group, divisional, business line or individual)
practice throughout the organisation and referring
– Each year, at least 50% of the bonus is based on financial
to practice at other insurance and general market
measures. The remainder of the bonus may be based on a
comparators
combination of, for example, strategic, operational, shared
– Outcomes for performance between threshold and
or individual performance measures
maximum will be determined on a straight-line basis
– The Committee sets targets at the beginning of each
– The maximum bonus opportunity under the AIP is
financial year
175% of base salary per year. The current maximum
– Before any payment can be made, the Committee will
bonus opportunity applying for each individual
perform an additional gateway assessment (including in
Executive Director is shown in the statement of
respect of any risk concerns). This will determine whether
implementation of policy
the amount of any bonus is appropriate in view of facts or
– No more than 10% of the bonus is paid for threshold
circumstances which the Committee considers relevant.
performance
This assessment may result in moderating (positively or
– However, the Committee retains flexibility to amend
negatively) each AIP performance measure, subject to the
the pay-out level at different levels of performance
individual maximum bonus levels
for future bonus cycles. This is based on its
– The AIP remains a discretionary arrangement. In line with the
assessment of the level of stretch inherent in the set
Code requirements, the Committee maintains discretion to
targets, and the Committee will disclose any such
override formulaic outcomes where those outcomes are not
determinations appropriately
reflective of the overall Group performance
– Subject to continued employment
Operation
Maximum opportunity
Performance measures
– The AIP is measured based on performance over the financial year against performance targets
– Threshold and maximum bonus levels for Executive
– Performance measures may be financial and non-financial
which the Committee considers to be appropriate
– Clawback provisions apply to the AIP. Further explanatory notes can be found on the Direct Line
Group website, under the ‘Results and reports’ heading on the Investors page, and on pages 128
to 138 in the 2019 Directors’ Remuneration Report
– For Executive Directors, at least 40% of the AIP is deferred into shares under 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
– Dividends will accrue during the deferral period
– Malus and clawback provisions apply to the cash and deferred elements. Further explanatory
notes can be found on the Direct Line Group website, under the ‘Results and reports’ heading
on the Investors page, and on pages 128 to 138 in the 2019 Directors’ Remuneration Report.
– Awards will typically be made in the form of nil-cost options or conditional share awards, which
– The maximum LTIP award in normal circumstances
– The Committee will determine the performance conditions
vest to the extent performance conditions are satisfied over a period of at least three years.
Under the Plan rules, awards may also be settled in cash at the discretion of the Committee.
This may be appropriate, for example, if legal difficulties arise with settling in shares
– Vested options will remain exercisable for up to the tenth anniversary of grant
– Malus and clawback provisions apply to the LTIP. Further explanatory notes can be found on
the Direct Line Group website, under the ‘Results and reports’ heading on the Investors page,
and on pages 128 to 138 in the 2019 Directors’ Remuneration Report.
– Awards under the LTIP may be made at various times during the financial year
– 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
is 200% of salary
for each award made under the LTIP, measuring performance
– Awards of up to 300% of base salary are permitted
over a period of at least three years with no provision to retest
in exceptional circumstances, relating to recruiting
– Performance is measured against targets set at the beginning
or retaining an employee, as determined by
of the performance period, which may be set by referring to
the Committee
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. The Committee may alter the precise
targets used for future awards
– 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
– 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
– In line with the Code requirements, the Committee maintains
discretion to override formulaic outcomes where those
outcomes are not reflective of the overall Group performance
– Executive Directors are expected to retain all the Ordinary Shares vesting under any of the
– 250% of salary for the CEO and 200% for the CFO.
– Not applicable
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 Chair
– Shares considered will include those held by the director and their connected persons, vested
awards subject to holding requirements and unvested awards not subject to performance
conditions (on a net of tax basis)
– Executive Directors are also expected to retain an equivalent level of shareholding post their
employment for a period of two years
– In exceptional circumstances, earlier sale is permitted subject to the Chair’s discretion
– The Committee reserves the discretion to amend
these levels in future years
138
Direct Line Group Annual Report and Accounts 2020
Element and purpose in
supporting the Group’s
strategic objective
Operation
incentivise
delivery of
performance over
a one-year
operating cycle
– To motivate
which the Committee considers to be appropriate
executives and
– Clawback provisions apply to the AIP. Further explanatory notes can be found on the Direct Line
Group website, under the ‘Results and reports’ heading on the Investors page, and on pages 128
to 138 in the 2019 Directors’ Remuneration Report
DAIP
– For Executive Directors, at least 40% of the AIP is deferred into shares under the DAIP
– To enable a
– This typically vests three years after grant (with deferred awards also capable of being settled in
with the short to
– The Committee will keep the percentage deferred and terms of deferral under review. This will
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
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
– Dividends will accrue during the deferral period
– Malus and clawback provisions apply to the cash and deferred elements. Further explanatory
notes can be found on the Direct Line Group website, under the ‘Results and reports’ heading
on the Investors page, and on pages 128 to 138 in the 2019 Directors’ Remuneration Report.
vest to the extent performance conditions are satisfied over a period of at least three years.
Under the Plan rules, awards may also be settled in cash at the discretion of the Committee.
This may be appropriate, for example, if legal difficulties arise with settling in shares
– Vested options will remain exercisable for up to the tenth anniversary of grant
shareholders to
– Malus and clawback provisions apply to the LTIP. Further explanatory notes can be found on
motivate and
the Direct Line Group website, under the ‘Results and reports’ heading on the Investors page,
and on pages 128 to 138 in the 2019 Directors’ Remuneration Report.
– Awards under the LTIP may be made at various times during the financial year
– 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
performance over
– 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
stronger focus
and alignment
medium-term
elements of our
strategic aims
LTIP
– Aligning
executives’
interests with
those of
incentivise
delivering
sustained
business
the long term
– To aid retaining
key executive
talent long term
guidelines
– To align the
interests
of Executive
Directors with
those of
shareholders
AIP
– The AIP is measured based on performance over the financial year against performance targets
– Threshold and maximum bonus levels for Executive
– Performance measures may be financial and non-financial
Maximum opportunity
Performance measures
Directors are set by considering annual bonus
practice throughout the organisation and referring
to practice at other insurance and general market
comparators
– Outcomes for performance between threshold and
(Group, divisional, business line or 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, for example, strategic, operational, shared
or individual performance measures
maximum will be determined on a straight-line basis
– The Committee sets targets at the beginning of each
– The maximum bonus opportunity under the AIP is
175% of base salary per year. The current maximum
bonus opportunity applying for each individual
Executive Director is shown in the statement of
implementation of policy
– No more than 10% of the bonus is paid for threshold
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
financial year
– 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. In line with the
Code requirements, the Committee maintains discretion to
override formulaic outcomes where those outcomes are not
reflective of the overall Group performance
– Subject to continued employment
– Awards will typically be made in the form of nil-cost options or conditional share awards, which
– The maximum LTIP award in normal circumstances
– The Committee will determine the performance conditions
is 200% of salary
– Awards of up to 300% of base salary are permitted
in exceptional circumstances, relating to recruiting
or retaining an employee, as determined by
the Committee
for each award made under the LTIP, measuring performance
over a period of at least three years with no provision to retest
– Performance is measured against targets set at the beginning
of the performance period, which may 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. The Committee may alter the precise
targets used for future awards
– 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
– 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
– In line with the Code requirements, the Committee maintains
discretion to override formulaic outcomes where those
outcomes are not reflective of the overall Group performance
Share ownership
– 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,
– 250% of salary for the CEO and 200% for the CFO.
– The Committee reserves the discretion to amend
– Not applicable
these levels in future years
is permitted by the Chair
– Shares considered will include those held by the director and their connected persons, vested
awards subject to holding requirements and unvested awards not subject to performance
– Executive Directors are also expected to retain an equivalent level of shareholding post their
conditions (on a net of tax basis)
employment for a period of two years
– In exceptional circumstances, earlier sale is permitted subject to the Chair’s discretion
www.directlinegroup.co.uk
139
Governance Directors’ report
Directors’ report
The Board of Directors present their report for the financial
year ended 31 December 2020 as required by the
Companies Act 2006.
The Board would like to draw your attention to the forward-
looking statements disclaimer which can be found on page 231.
Directors’ report disclosures
The Board takes the view that some of the matters required
to be disclosed in the Directors’ report are of strategic
importance and these are, therefore, included in the
Company’s Strategic report which is on pages 1 to 75 as
permitted by the Companies Act 2006. These matters, and
all matters referenced in the table below, are incorporated
into this Directors’ report:
Subject
Use of financial instruments
Important events since the financial
year-end
Likely future developments in the business
Employee engagement
Engagement with suppliers, customers
and other business relationships
Research and development
Greenhouse gas emissions, energy
consumption and energy-efficient action
Pages
26, 33, 34
8 to 17
17
19, 50 , 53, 125, 142
48 to 49
6, 12, 16, 56, 60, 64
61 to 63
Disclosure of information required by Disclosure
Guidance and Transparency Rule 7.2
The FCA’s Disclosure Guidance and Transparency Rule 7.2
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, all of which is
incorporated in the Directors’ report by reference.
Disclosure of information under Listing Rule 9.8.4(C)
In accordance with Listing Rule 9.8.4C, the table below sets
out the location of the information required to be disclosed
under LR 9.8.4(R), where applicable.
Subject
Page
None
Note 3.5
219
Not applicable
Interest capitalised by the Group
Unaudited financial information
Branches outside the UK
Long-term incentive plan involving one
Director only
Directors’ waivers of emoluments
Not applicable
Directors’ waivers of future emoluments Not applicable
Non pro-rata allotments for cash (issuer) Not applicable
None
Non pro-rata allotments for cash
(major subsidiaries)
Listed company is a subsidiary of
another company
Contracts of significance involving
a Director
Contracts of significance involving
a controlling shareholder
Details of shareholder dividend waivers
Controlling shareholder agreements
141
Not applicable
Not applicable
Not applicable
Not applicable
140
Direct Line Group Annual Report and Accounts 2020
Dividends
The Board recommends a final dividend of 14.7 pence per
share to shareholders. Subject to shareholder approval at
the Company’s 2021 AGM, this will become payable on
20 May 2021 to all holders of Ordinary Shares on the
Register of members at close of business on 9 April 2021.
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 2021.
You can find information on dividend and capital
management, including the share buyback programme,
in the Finance review, on pages 20 to 35.
Directors
You can find the names of all current Directors and their
biographies on pages 78 to 80. All Directors will retire and
those wishing to continue to serve will be submitted for
election or re-election at the 2021 AGM (with the exception
of Jane Hanson who will be stepping down from the
Board with effect from the end of the AGM, as previously
announced.) This is in accordance with the Code and the
Articles of Association of the Company, which govern
appointing and replacing Directors.
The Directors listed on pages 78 to 80 were the Directors
of the Company throughout the year under review, except
for Adrian Joseph, who joined the Board on 1 January 2021.
Mike Biggs also served during the year, stepping down as
Chair of the Board and as a Director in August 2020. Mike
was succeeded as Chair by Danuta Gray.
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, including in relation to the issuing
or buying back of shares, 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 113 to 139.
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.
to shareholders and move the Group’s solvency capital
coverage ratio towards the middle of its solvency risk
appetite range. A total number of 10,448,395 ordinary
shares of 1010⁄11 pence each were repurchased under the
share buyback programme. The aggregate consideration
paid was £28,783,407.42.
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 comply
with the UK 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 a time, not more
than 48 hours before the time fixed for the meeting (which
may exclude non-working days), for determining a
shareholder’s entitlement to attend and vote at the
meeting. To be valid, all proxy appointments must be filed
at least 48 hours before the time of the general meeting.
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.
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 232.
Share capital
The Company has a premium listing on the London
Stock Exchange. As at 31 December 2020, the Company’s
share capital comprised 1,364,551,605 fully paid Ordinary
Shares of 1010⁄11 pence each.
At the Company’s 2020 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 £49,620,058, and to allot
further shares up to an aggregate nominal amount
of £49,620,058 for the purpose of a rights issue;
– allot shares having a nominal amount not exceeding
in aggregate £7,443,009 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 £7,443,009 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 136,455,160 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 Restricted Tier 1
(“RT1”) Instruments.
To date, the Directors have not used these authorities
granted in 2020 (although the authority to make market
purchases of shares granted at the AGM in 2019 was used
during the year, as described below.)
At the 2021 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 as at 31 December 2020 in notes 30 and 36 of 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 36 on page 208. The
Company is only aware of the dividend waivers and voting
restrictions mentioned above.
On 3 March 2020, the Company announced the launch of
a share buyback programme, which was then terminated
on 19 March 2020 as a result of the volatile conditions
arising from the Covid-19 pandemic. The share buyback
programme had been designed to return surplus capital
www.directlinegroup.co.uk
141
Governance Directors’ report continued
Substantial shareholdings
The table below shows the direct and indirect holdings
of major shareholders in the Company’s ordinary issued
share capital, as at 31 December 2020 and as at
5 March 2021, as notified in accordance with the provisions
of Chapter 5 of the FCA’s Disclosure Guidance and
Transparency Rules. It should be noted that these
holdings may have changed since the Company was
notified. However, notification of any change is not
required until the next notifiable threshold is crossed.
Information provided by the Company pursuant to the
FCA’s Disclosure Guidance and Transparency Rules is
publicly available via the regulatory information services
and on the Company’s website.
BlackRock, Inc.
Artemis Investment
Management LLP
Norges Bank
Majedie Asset Management
Limited
T.Rowe Price Associates, Inc
31 December
2020
5 March
2021
Nature of
Holding
9.97% 10.08% Indirect
5.07% Indirect
5.07%
5.05%
4.99%
4.91% Direct
4.99% Indirect
4.94% 4.94% Indirect
Standard Life Aberdeen plc
APG Asset Management N.V
4.57%
2.99%
4.57% Indirect
2.99% Direct
Political donations
The Group made no political donations during the year
(2019: nil).
Business relationships
The Board understands and has regard to the need to
foster the Company’s business relationships with
suppliers, customers, and others.
The Group is a leading motor, home and commercial
insurer which depends on the trust and confidence of
its stakeholders to operate sustainably in the long term.
Direct Line Group seeks to put its customers’ best
interests first, invests in its employees, supports the
communities in which it operates and strives to generate
sustainable profits for shareholders.
The Board aims to maintain the highest possible
standards of integrity in business relationships with
suppliers and partners. The Group is a long-standing
signatory of the Prompt Payment Code. There are
mechanisms in place for the Board to be alerted to
problems with payment expectations.
The Group relies on certain key strategic suppliers and a
large number of other suppliers to conduct its business.
The Board receives in-depth updates on its relationship
with strategic suppliers in the context of reports on the
Group’s technology programme. The Board has, in 2020,
received updates on the generic approach to suppliers’
robustness in the context of Brexit preparations.
The Board reviews and approves the Code of Business
Conduct, Ethical Code for Suppliers and Modern Slavery
statement on an annual basis to ensure that these reflect
the Group’s purpose and sustainability strategy.
The Board monitors customer engagement by receiving
a customer and conduct report at each of its scheduled
meetings. We put our customers at the heart of everything
that we do. The Board believes that the Company’s
long-term sustainability is driven by understanding
customers’ needs and acting in their best interests.
For more on key decisions and considerations relating to
stakeholders, see pages 86 to 87, and for more information
on our key stakeholders, please refer to the sustainability
pillars on pages 44 to 67.
Employee engagement
The Board encourages a culture that celebrates difference
and seeks to empower people so that they can thrive.
The Board values the involvement and engagement of its
employees and continues to listen to employees’ views
and opinions.
The whole Board prides itself on its engagement with
the workforce with frequent and consistent engagement
by Executive Directors, which has only increased during
Covid-19. The Board responded immediately to the
Covid-19 crisis by calling additional Board meetings,
including to discuss and consider the best way to protect
its wider workforce.
Further to Provision 5 of the Code, the Non-Executive
Directors see it as their joint responsibility to engage
with the workforce and have, therefore, chosen not to
designate one Non-Executive Director for this role. The
Non-Executive Directors rotate attendance at meetings
of the Group’s National Employee Representative Body,
which are also attended by Executive Directors. The Board
reviews the results of employee engagement surveys, and
metrics relating to employee engagement remain an
important element of the targets for the AIP for Executive
Directors and other senior managers.
Having all Non-Executive Directors engaged with the
workforce allows for greater accessibility for the workforce
and a shared sense of responsibility. In December 2020
our Chair, Danuta Gray, attended the virtually hosted
Employee Representative Body conference, at which she
introduced herself to the members who were given the
opportunity to ask her questions.
The Board uses various technological methods of
communication, including Chief Executive Officer and
Chief Financial Officer all-employee phone conferences,
emails and intranet messages, acknowledging that
circumstances in 2020 created challenges for interaction.
For more on key decisions and considerations relating to
stakeholders see pages 86 to 87 and for more information
on Board-sponsored initiatives to support the workforce,
including in connection with the Covid-19 crisis, the Agile
transformation programme, diversity and inclusion and on
culture see the Sustainability Pillars – People on page 50,
the Sustainability Committee Report on pages 109 to 110
and for wider workforce engagement and pay
considerations in 2020 see the Directors’ Remuneration
Report on pages 113 to 139.
142
Direct Line Group Annual Report and Accounts 2020
Employees with disabilities
The Group is committed to promoting diversity and
inclusion across every area of the business through
initiatives such as the Diversity Network Alliance (“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
seek to ensure that everyone can access the same
opportunities. You can find more information regarding
employee involvement in the Strategic report on pages 1
to 75.
Going concern
The Directors believe that the Group has sufficient
financial resources to meet its financial needs, including
managing a mature portfolio of insurance risk. The
Directors further believe the Group is well positioned
to manage its business risks successfully in the current
economic climate. The Finance review on pages 20 to 35
describes the Group’s capital management strategy,
including the capital actions taken in the year to ensure
the continued strength of the balance sheet. 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.
The Directors have assessed the principal risks of the
Group over the duration of the planning cycle. These
included the implementation of the FCA’s Pricing
Practices Review, possible adverse implications of Brexit,
change risk and possible challenging market conditions
due to the impact of Covid-19 on the economy and
customer behaviour. The 2020 Plan modelled a number
of different scenarios which were directly and indirectly
influenced by the Covid-19 pandemic. These included
delay to improvements in technological capability, the
impact of Covid-19 on claims frequency levels and the
impact of Brexit on the investment return. The key
judgements applied were in relation to the likely time
period of Covid-19 related restrictions, and the subsequent
impact on customer behaviour and the economic
recovery.
In addition, the Group’s Risk function has carried out an
assessment of the risks to the Plan and the dependencies
for the success of the Strategic Plan. This included running
stress tests on the Plan to consider the 1 in 8 years and 1 in
25 years loss simulations based on the internal economic
capital model.
A reverse stress test was also performed to identify
the most probable combination of stresses that would
result in capital loss and thus threaten the viability of the
Group, i.e. a reduction of own funds to below the solvency
capital requirement.
Therefore, having made due enquiries, the Directors
reasonably expect that the Group has adequate resources
to continue in operational existence for at least 12 months
from 5 March 2021 (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.
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 of and a recommendation
for reappointing Deloitte in the Audit Committee report
on page 101.
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 in accordance
with UK-adopted international accounting standards.
The Directors have elected to prepare the Parent
Company financial statements in accordance with FRS 101
“Reduced Disclosure Framework”. Under company law,
the Directors must not approve the accounts unless they
are satisfied that they give a true and fair view of the
Company’s state of affairs and profit or loss for that period.
In preparing these financial statements, IAS 1 requires that
Directors: properly select and apply accounting policies;
present information, including accounting policies, in
a manner that provides relevant, reliable, comparable
and understandable information; provide additional
disclosures when compliance with the specific
requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, other
events and conditions on the entity’s financial position
and financial performance; and assess the Company’s
ability to continue as a going concern.
The Directors are responsible for keeping adequate
accounting records that: are sufficient to show and explain
the Company’s transactions and disclose, with reasonable
accuracy, the Company’s financial position at any time;
and enable them to ensure the financial statements
comply with the Companies Act 2006. Additionally, the
Directors are responsible for safeguarding the Company’s
assets and, hence, taking reasonable steps to prevent and
detect fraud and other irregularities. The Directors are
responsible for maintaining and ensuring the integrity of
the corporate and financial information included on the
Company’s website at www.directlinegroup.co.uk.
In all scenarios, it was concluded that the Group’s solvency
capital requirement would not be breached following the
implementation of management actions.
Legislation in the UK governing preparing and
disseminating financial statements may differ from
legislation in other jurisdictions.
www.directlinegroup.co.uk
143
Governance Directors’ report continued
Each of the Directors, whose names and functions are
listed on pages 78 to 80, 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 75) and Directors’
report (on pages 140 to 144) include a fair review of:
(i) the business’s development and performance; and
(ii) the position of the Group and the undertakings
included in the consolidation taken as a whole, together
with a description of the principal risks and
uncertainties they face; and
– 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.
This report was approved by the Board on 5 March 2021
and signed on its behalf by:
Roger C. Clifton
Company Secretary
Registered address: Churchill Court, Westmoreland Road,
Bromley, BR1 1DP
Registered number: 02280426
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Direct Line Group Annual Report and Accounts 2020
Contents
CONTENTS
Financial Statements
31. Other reserves
Independent Auditor’s Report
146
32. Tier 1 notes
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
6.
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 asset value per share and return on
equity
17. Goodwill and other intangible assets
18. Property, plant and equipment
19. Right-of-use assets
20.
Investment property
21. Subsidiaries
22. Reinsurance assets
23. Deferred acquisition costs
24.
Insurance and other receivables
25. Prepayments, accrued income and other
assets
26. Derivative financial instruments
27. Retirement benefit obligations
28. Financial investments
29. Cash and cash equivalents and borrowings
30. Share capital
157
158
159
160
161
162
170
172
185
188
188
189
189
189
189
190
191
191
192
193
193
194
195
196
196
196
197
197
197
197
198
198
202
202
202
203
203
204
205
208
208
210
210
211
212
212
213
214
214
215
216
33. Subordinated liabilities
34.
Insurance liabilities
35. Unearned premium reserve
36. Share-based payments
37. Provisions
38. Trade and other payables, including
insurance payables
39. Notes to the consolidated cash flow
statement
40. Commitments and contingent liabilities
41. Leases
42. Fair value
43. Related parties
44. Post balance sheet event
Parent Company Financial Statements
Parent Company Balance Sheet
Parent Company Statement of Comprehensive
Income
Parent Company Statement of Changes in Equity 216
Notes to the Parent Company Financial
Statements
1. Accounting policies
2.
Investment in subsidiary undertakings
3. Other receivables
4.
Current and deferred tax
5. Derivative financial instruments
6.
7.
Financial investments
Cash and cash equivalents
8. Share capital, capital reserves and
distributable reserves
9.
Tier 1 notes
10. Subordinated liabilities
11. Borrowings
12. Trade and other payables
13. Dividends
14. Share-based payments
15. Contingent liabilities
16. Risk management
17. Directors and key management
remuneration
217
218
219
219
219
219
220
220
220
220
220
221
221
221
221
221
221
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Financial Statements INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DIRECT LINE INSURANCE
Independent Auditor’s Report to the shareholders of Direct Line Insurance
GROUP PLC
Group plc
Report on the audit of the financial statements
1. 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
2020 and of the Group’s profit for the year then ended;
the Group financial statements have been properly prepared in accordance with international accounting standards in
conformity with the requirements of the Companies Act 2006, 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 FRS 101 ‘Reduced Disclosure Framework’; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
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 44 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 the preparation of the Group financial statements is applicable
law, international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRSs as
adopted by the European Union and as issued by the IASB. The financial reporting framework that has been applied in the
preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards,
including FRS 101 'Reduced Disclosure Framework' (United Kingdom Generally Accepted Accounting Practice).
2. 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.
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Direct Line Group Annual Report and Accounts 2020
3. Summary of our audit approach
Key audit matters
valuation of insurance liabilities:
The key audit matters that we identified in 2020 were:
–
1) The frequency and severity assumptions for large bodily injury claims;
2) The inflation and discount rate assumptions for valuing periodic payment orders (“PPOs”); and
3) The judgement applied in setting the margin above the actuarial best estimate.
–
1) Commercial real estate loans, infrastructure debt and private placement bonds;
2) Investment property;
– general ledger migration.
Within this report, key audit matters are identified as follows:
valuation of illiquid investments:
Newly identified;
Increased level of risk;
Similar level of risk; and
Decreased level of risk.
Materiality
Scoping
The materiality that we used for the Group financial statements was £28 million, which
approximates to 5.6% (2019: 5.3%) of the three year average profit before tax, excluding the impact
of the Ogden discount rate change to 0% in the 2018 results and minus 0.25% in the 2019 results
which we elected to exclude due to the non-recurring nature of these events.
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 95% of the Group’s profit before tax. We performed 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 a full scope audit or
an audit of specified balances.
Significant
changes in our
approach
During the year we have identified one new key audit matter relating to the migration of the
general ledger, given the potential wide-reaching impact this one-off event has on the financial
statements.
We have also extended two existing key audit matters in relation to:
a.
the valuation of insurance liabilities, which now includes the judgement applied in setting
the margin above the actuarial best estimate; and
b.
the valuation of illiquid investments, which now includes investment property.
Lastly, we have no longer identified the valuation of intangible assets as a key audit matter due to
the progress made in 2020 towards rolling out the new motor trading platform.
4. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the Directors’ use of the going concern basis of accounting in
the preparation of the financial statements is appropriate.
Our evaluation of the Directors’ assessment of the Group’s and Parent Company’s ability to continue to adopt the going
concern basis of accounting included:
– assessing the Group’s process around the going concern assessment performed by management;
– evaluating the historical accuracy of forecasts prepared by management;
– challenging the reasonableness of the profit forecasts used by management; and
– evaluating the Group’s current-year performance and year end liquidity and solvency capital position.
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 climate change, Brexit and Covid-19, the requirements of the applicable financial reporting
framework and the system of internal control.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions
that, individually or collectively, may cast significant doubt on the Group and Parent Company’s ability to continue as a
going concern for a period of at least twelve months from when the financial statements are authorised for issue.
In relation to the reporting on how the Group has applied the UK Corporate Governance Code, we have nothing material
to add or draw attention to in relation to the Directors’ statement in the financial statements about whether the Directors
considered it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant
sections of this report.
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Independent Auditor’s Report to the shareholders of Direct Line Insurance
INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DIRECT LINE INSURANCE
Group plc continued
GROUP PLC - CONTINUED
5. 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, and we do not provide a separate opinion on these matters.
5.1 Valuation of insurance liabilities
Refer to page 99 (Audit Committee Report), page 163 (Accounting policies) and page 205 (Financial statements).
The Group’s insurance liabilities total £3.6 billion (2019: £3.8 billion) and represent the single largest liability on the balance
sheet. Valuation of these liabilities requires management to select methods and assumptions that are subject to high
levels of estimation uncertainty. Consequently, small changes in these methods or assumptions can materially impact the
valuation of these liabilities. We have identified the following three key areas of focus for our audit given their significance
to the Group’s result and the high level of estimation uncertainty. We have also identified these as potential fraud risk
areas.
5.1.1 The frequency and severity assumptions for bodily injury claims
Key audit matter description
The frequency and severity of bodily injury claims have a significant impact on the valuation of the insurance liabilities and
the setting of these assumptions is 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 bodily injury claims, and actuarial assumptions being
consistent with emerging data, market factors and the Group’s reserving policy. 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.
In addition, the impact of the UK government’s various lockdown measures introduced first in March 2020, in response to
Covid-19, has resulted in significantly reduced mobility and traffic volumes in March and April 2020 and reduced volumes
for the rest of the year after further lockdown measures were introduced. The Group and the wider market have
experienced reduced motor vehicle accident frequencies as a result. This further adds to the inherent uncertainty
underlying the estimation of the ultimate number of bodily injury claims for the 2020 accident year.
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 obtained an understanding
of relevant controls.
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 our work, we have tested the data reconciliation controls and
performed reconciliations on the actuarial data back to the financial ledger.
Having done this, we worked with our actuarial specialists to:
–
–
inspect and challenge the reserving process in relation to bodily injury claims undertaken by assessing relevant
documentation and meeting with the Actuarial Director and his team; and
inspect and challenge the Group’s documented methodology and key assumptions in respect of the prior years as well
as the current year, with particular reference to Covid-19 impacts. This included:
– using our in-house reserving software to help us challenge the Group’s response to emerging claims trends;
–
inspecting the Group’s models and conducting sensitivity testing on model methodology and assumptions
including prior-year changes to assumptions;
– comparing the Group’s burning cost and frequency diagnostics to market benchmarks and independent
reserve review results; and
– analysing the consistency in reserving strength and reserve releases in comparison with prior years.
Key observations
In the prior financial year we considered the frequency and severity assumptions for large bodily injury claims to be
reasonable and prudent however less prudent than previous financial periods given that the Group’s actuaries had given
credit for favourable experience noted that year. In the current financial year we have concluded that the assumptions
continue to be reasonable, albeit we have seen a continuation in the trend of reduced prudence compared to previous
periods.
5.1.2 The inflation and discount rate assumptions for 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 liabilities totalling £814.8 million (2019: £800.1
million) on a discounted gross basis as detailed in note 34.
Given the ongoing uncertainty in the UK’s inflation environment and investment markets, the selection of the inflation and
discount rate assumptions is highly judgemental and has a material impact on the financial statements. The PPOs are
sensitive to economic assumptions selected and as at 31 December 2020, the Group valued PPOs using an inflation rate of
3.5% (2019: 4%) and a discount rate of 3.5% (2019: 4%). These assumptions represent a key source of estimation
uncertainty for the Group which increases the susceptibility of the balance to material misstatement due to error and
fraud.
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Direct Line Group Annual Report and Accounts 2020
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 obtained an
understanding of the relevant controls surrounding the setting of the PPO inflation rate and discount rate, which is the
challenge and approval of these assumptions by the Loss Ratio Committee and Audit Committee. In addition, we tested
the relevant 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 challenge:
– The PPO inflation assumption through inquiries with the Actuarial Director, reviewing relevant supporting
documentation and benchmarking against market economic data with particular reference to Covid-19 uncertainty,
and other market participants;
– The Group’s sensitivity testing on the PPO inflation assumption;
– The selected discount rate with reference to current and future performance of the assets backing the PPO liabilities;
and
– The methodology and rationale for deriving the discount rate.
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.
5.1.3 Judgement applied in setting the margin above the actuarial best estimate
Key audit matter description
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 reserved for. Consequently, management adds a margin to the actuarial best
estimate to arrive at the booked insurance liabilities. This margin is determined by considering a range of adverse
economic and non-economic scenarios and reflects the inherent uncertainty in estimating the ultimate losses on claims,
over and above that which can be projected actuarially as a best estimate based on underlying claims development data.
The appropriate margin to recognise is an area of significant management judgement based on the perceived uncertainty
and potential for volatility in the underlying claims. In light of the heightened uncertainties created by the Covid-19
pandemic, we have identified the margin as an area of key audit focus given its susceptibility to management bias.
How the scope of our audit responded to the key audit matter
We worked with our in-house actuarial specialists to challenge the appropriateness of the recommended margin to be
applied to the actuarial best estimate. In doing so we performed the following procedures:
–
Inspected and challenged the approach to, and analysis performed in, setting the margin by reviewing relevant
documentation and meeting with the Chief Financial Officer and Actuarial Director;
– Leveraged third party economic studies to challenge the appropriateness of management’s adverse scenarios, with a
specific focus on care worker wage inflation given the sensitivity of the Group’s bodily injury claims to this assumption,
whilst looking back to outcomes from previous economic downturns; and
– Performed a ‘stand back’ test to challenge the level of prudence in the overall insurance liabilities between periods in
light of the level of uncertainties that exist at each respective reporting date.
Key observations
We have determined that the margin remains appropriate and is on balance slightly more prudent than in previous
periods. In combination with the conclusion drawn in relation to large bodily injury claims above, we have concluded in
overall terms the total insurance liabilities show a consistent level of prudence with previous years.
5.2 Valuation of illiquid investments
Refer to page 99 (Audit Committee Report), pages 166 and 167 (Accounting policies) and pages 196 and 202 (Financial
statements).
In the current year, we continue to identify the valuation of illiquid investments, specifically the commercial real estate,
infrastructure and private placements investments as a key audit matter as described below. Additionally, we have
identified the valuation of investment property as a key audit matter due to the greater level of estimation uncertainty in
determining a fair value as a result of Covid-19.
5.2.1 Commercial real estate loans, infrastructure debt and private placement bonds
Key audit matter description
We have identified a key audit matter in relation to these credit portfolios totalling £575.1 million (2019: £587.8 million).
Given the Group continues to recognise and measure financial instruments under IAS 39, these instruments are measured
at amortised cost and require the recognition of an impairment when an incurred loss event arises. Significant
management judgement is required in determining if an incurred loss event has occurred and, in the instance an event
has occurred, there is significant estimation uncertainty in determining the impairment charge.
We deem there to be an increasing risk of default or delinquency on these less liquid assets owing to high and sustained
levels of uncertainty in the UK economy from Covid-19 restrictions coupled with the ongoing impact of the UK's exit from
the European Union.
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INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DIRECT LINE INSURANCE
Group plc continued
GROUP PLC - CONTINUED
5.2.1 Commercial real estate loans, infrastructure debt and private placement bonds continued
How the scope of our audit responded to the key audit matter
We have obtained an understanding and tested the relevant controls that mitigate the risk over the valuation of illiquid
investments. Our work included attendance at the year-end impairment review meeting in order to observe the operation
of a key management review control.
In addition, we performed the following procedures:
– Tested a sample of interest payments to bank during the year to test for default or delinquency in interest payments;
– Utilised market indices to identify commercial real estate loans at risk and inspected the tenancy breakdowns for
potential risks of store closure given the current economic issues facing the UK high street;
– Challenged management on loans of interest where indicators could point to issuer financial difficulty and obtained
evidence to help assess whether the conclusion reached by management is reasonable; and
– Engaged our complex pricing specialists to determine an independent fair value of these assets to identify any
significant decreases in value below book cost.
Key observations
We considered the accounting treatment applied to be reasonable. In performing our procedures, we did not note any
indicators of material impairment.
5.2.2 Investment property
Key audit matter description
The investment properties held by the Group comprise retail, supermarkets and food stores, office, industrial and
alternative properties. As noted in disclosure note 20, the total value as at 31 December 2020 is £292.1 million (2019:
£291.7 million). Given the impact of Covid-19 and its potential to accelerate long-term trends in the use of various types of
property, we have identified the methodology and assumptions used for valuing certain parts of the investment property
portfolio as a key audit matter in the current year. The investment properties we have identified relate to the retail, office
and alternative sector properties held, where tenants possessed an increased exposure to Government imposed Covid-19
lockdown restrictions which may accelerate the long-term downwards trend of property valuation in these sectors. These
properties total £142.0 million (2019: £150.0 million).
We considered the valuation of the investment properties to be a key audit matter as the determination of fair value
involves significant judgement by the external valuation experts in light of Covid-19 and long-term trends in the use of
various types of property. Valuation methodology for investment properties is subjective in nature and involves various key
assumptions. The use of different valuation methodology and assumptions could produce significantly different estimates
of fair value. With the outbreak of Covid-19, the property valuers can attach less weight to previous market evidence in
determining a fair value. This leads to greater levels of estimation uncertainty in determining the valuation.
How the scope of our audit responded to the key audit matter
We have obtained an understanding and tested the relevant control related to the annual meeting with management’s
external valuation expert where a review and challenge of the assumptions and methodologies used in determining the
fair value is performed. This relevant control mitigates the risk over the valuation of investment properties.
In addition, we performed the following procedures:
– We have worked with our real estate specialists who challenged the estimated rental value, yield and capitalisation rate
assumptions and methodologies used in the valuation of the properties;
– We have tested the completeness and accuracy of the data inputs used in the valuation process performed by
management and their external valuer; and
– We tested the data inputs used in the valuation model for investment properties, by agreeing occupation rates, unit
sizes, and contracted rent to the underlying signed agreements and property reports. We then re-performed the
calculation of the yields applied using this data.
Key observations
We considered the accounting treatment applied to be reasonable. In performing our procedures, we did not note any
indicators of material impairment.
5.3 General ledger migration
Refer to page 99 (Audit Committee Report).
Key audit matter description
During May 2020, as part of the Group’s ongoing Finance Transformation programme, the Group migrated their general
ledger system. We have focused on this migration due to the inherent risk of error and the impact such an error may have
on the control environment of the Group. The incomplete and inaccurate transfer of data to the new general ledger
system could result in the incorrect presentation of balances in the Group’s consolidated accounts and would affect the
quality of management information that supports the decision-making for those charged with governance.
Given the increased data integrity risks inherent to the migration of financial information and the importance of
maintaining complete and accurate accounting records throughout the reporting period, we consider the general ledger
migration to be a key audit matter.
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
How the scope of our audit responded to the key audit matter
We have performed the following procedures in order to respond to this risk:
– Obtained an understanding of and tested the relevant controls in the data migration;
– Re-performed key reconciliations to verify the completeness and accuracy of the data transfer and substantively test
material differences; and
– Worked with IT specialists to test the design and implementation of general IT controls around the governance of the
data migration and system controls post-implementation.
Key observations
Based on the work performed, we did not identify any significant issues from our testing of the general ledger migration.
6. Our application of materiality
6.1 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
Materiality
£28.0 million (2019: £28.0 million)
Parent Company financial statements
£25.2 million (2019: £25.2 million)
Basis for
determining
materiality
Rationale
for the
benchmark
applied
The materiality approximates to 5.6% (2019: 5.3%) of
the three year average profit before tax, excluding the
impact of the Ogden discount rate change to 0% in the
2018 results and minus 0.25% in the 2019 results
which we elected to exclude due to the non-recurring
nature of these events.
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
to 0% in the 2018 results and minus 0.25% in the 2019
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 6.2% (2019: 5.5%) of statutory profit before
tax, 0.9% (2019: 0.9%) of gross earned premium and
0.9% (2019: 0.9%) of total equity.
Materiality equates to less than 1% of (2019:
1%) of shareholders’ equity and is capped at
90% (2019: 90%) of Group materiality.
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 received 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 component's 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, U K Insurance Limited, which makes up 100% of Group gross earned premium and 86% of Group statutory
profit before tax, is scoped to a component materiality of £25.2 million (2019: £25.2 million). Component materialities for
other entities within the scope of our Group audit ranged from £0.8 million to £8.8 million (2019: £0.8 million to £9.0
million).
Group materiality £28m
£28m
Component materiality range
£0.8m to £25.2m
£501m
Audit Committee reporting
threshold £1.4m
Average PBT
Group materiality
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INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DIRECT LINE INSURANCE
Group plc continued
GROUP PLC - CONTINUED
6. Our application of materiality continued
6.2 Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected
and undetected misstatements exceed the materiality for the financial statements as a whole.
Performance
materiality
Basis and
rationale for
determining
performance
materiality
Group financial statements
Parent Company financial statements
67.5% (2019: 70%) of Group materiality
67.5% (2019: 70%) of Parent Company
materiality
In determining performance materiality, we considered
the following factors:
– We have audited the Group for a number of years
For consistency within the Group, the same
percentage of 67.5% of materiality has been
applied to the Parent Company.
and so have knowledge of both the Group and the
environment it operates in;
– Our ability to rely on controls over a number of
significant business processes;
– Our past experience of the audit, which has
indicated a low number of corrected and
uncorrected misstatements identified in prior
periods;
– Misstatements noted in prior periods have not been
indicative of deficiencies in internal control and so
there is a low likelihood they will occur in the
current period; and
– The potential impact of Covid-19.
6.3 Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £1.4 million
(2019: £1.4 million), 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.
7. An overview of the scope of our audit
7.1 Identification and scoping of components
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 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% (2019: 99%) of
the Group’s net assets, 100% (2019: 100%) of the Group’s gross earned premium and 95% (2019: 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.
Gross Earned Premium
Net Assets
Profit before tax
1%
9%
5%
9%
100%
Full audit scope
90%
86%
Full audit scope
Specified audit procedures
Review at group level
Full audit scope
Specified audit procedures
Review at group level
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 directly performed the audit work for all of the entities listed above, including the Parent Company.
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
7.2 Our consideration of the control environment
IT Controls
In planning our 2020 audit we identified 13 systems that were material to the Group’s financial reporting processes. These
systems handled data relating to premiums, claims, expenses and payroll and we intended to rely on the IT and business
controls associated with these systems. Having worked with our in-house IT specialists to assess the operating effectiveness
of the IT controls associated with these systems, as well as the wider general IT control environment across the Group, we
were able to rely upon the IT controls associated with all 13 systems identified.
Business process and financial reporting controls
In planning our 2020 audit, we identified 20 business cycles that were material to the Group’s financial reporting processes.
These cycles spanned the Group’s material transactions and account balances including the premiums, claims,
reinsurance, expenses, payroll, investments and intangibles cycles and part of the reserving cycle relating to reconciliation
of data, and we intended to rely on the business controls associated with all of these cycles. Having completed our testing
over the operating effectiveness of business controls associated with these cycles, through a combination of current period
testing and reliance on prior period testing, we concluded that we were able to rely upon the business controls associated
with all 20 cycles.
8. Other information
The other information comprises the information included in the annual report, other than the financial statements and
our auditor’s report thereon. The Directors are responsible for the other information contained within the annual report.
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.
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 course of 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
this gives rise to a material misstatement in the financial statements themselves. 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.
We have nothing to report in this regard.
9. 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.
10. 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.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
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INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DIRECT LINE INSURANCE
Group plc continued
GROUP PLC - CONTINUED
11. Extent to which the audit was considered capable of detecting irregularities,
including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line
with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The
extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.
Identifying and assessing potential risks related to irregularities
11.1
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance
with laws and regulations, we considered the following:
–
–
–
the nature of the industry and sector, control environment and business performance including the design of the
Group’s remuneration policies, key drivers for Directors’ remuneration, bonus levels and performance targets;
the Group’s own assessment of the risks that irregularities may occur either as a result of fraud or error that was
approved by the Board Risk Committee on 11 February 2021;
results of our enquiries of management, internal audit, and the Audit Committee about their own identification and
assessment of the risks of irregularities;
– any matters we identified having obtained and reviewed the Group’s documentation of their policies and procedures
relating to:
– identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of
non-compliance;
– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged
fraud;
–
– the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations; and
the matters discussed among the audit engagement team and involving relevant internal specialists, including tax,
valuations, pensions, IT and industry specialists regarding how and where fraud might occur in the financial statements
and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for
fraud and identified the greatest potential for fraud in the following areas: the valuation of the insurance liabilities. In
common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of
management override.
We also obtained an understanding of the legal and regulatory framework that the Group operates in, focusing on
provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures
in the financial statements. The key laws and regulations we considered in this context included the UK Companies Act,
Listing Rules and tax legislation.
In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial
statements but compliance with which may be fundamental to the Group’s ability to operate or to avoid a material
penalty. These included the Group’s operating licence, regulatory solvency requirements such as those under the relevant
Solvency II requirements and those required by the PRA and FCA and environmental regulations.
11.2 Audit response to risks identified
As a result of performing the above, we identified valuation of insurance liabilities and valuation of intangible assets as key
audit matters related to the potential risk of fraud or non-compliance with laws and regulations. The key audit matters
section of our report explains the matter in more detail and also describes the specific procedures we performed in
response to those key audit matters.
In addition to the above, our procedures to respond to risks identified included the following:
–
reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with
provisions of relevant laws and regulations described as having a direct effect on the financial statements;
– 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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Report on other legal and regulatory requirements
In our opinion the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with
the Companies Act 2006.
Report on other legal and regulatory requirements
12. Opinions on other matters prescribed by the Companies Act 2006
12. Opinions 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.
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 our opinion, based on the work undertaken in the course of the audit:
In our opinion, based on the work undertaken in the course of the audit:
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.
–
–
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.
13. Corporate governance statement
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.
The Listing Rules require us to review the Directors' statement in relation to going concern, longer-term viability and that
part of the Corporate Governance Statement relating to the Group’s compliance with the provisions of the UK Corporate
Governance Code specified for our review.
13. Corporate governance statement
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the
corporate governance statement is materially consistent with the financial statements and our knowledge obtained
during the audit:
The Listing Rules require us to review the Directors' statement in relation to going concern, longer-term viability and that
part of the Corporate Governance Statement relating to the Group’s compliance with the provisions of the UK Corporate
Governance Code specified for our review.
–
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the
corporate governance statement is materially consistent with the financial statements and our knowledge obtained
during the audit:
–
–
–
the Directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and
any material uncertainties identified set out on page 143;
the Directors’ explanation as to its assessment of the Group’s prospects, the period this assessment covers and why the
period is appropriate set out on page 75;
the Directors' statement on fair, balanced and understandable set out on page 95;
the Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page
95;
the section of the Annual Report and Accounts that describes the review of effectiveness of risk management and
internal control systems set out on page 172; and
the section describing the work of the Audit Committee set out on page 97.
–
–
–
–
–
–
the Directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and
any material uncertainties identified set out on page 143;
the Directors’ explanation as to its assessment of the Group’s prospects, the period this assessment covers and why the
period is appropriate set out on page 75;
the Directors' statement on fair, balanced and understandable set out on page 95;
the Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page
95;
the section of the Annual Report and Accounts that describes the review of effectiveness of risk management and
internal control systems set out on page 172; and
the section describing the work of the Audit Committee set out on page 97.
14. Matters on which we are required to report by exception
14.1 Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
–
–
14. Matters on which we are required to report by exception
14.1 Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
–
– we have not received all the information and explanations we require for our audit; or
– adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not
been received from branches not visited by us; or
the Parent Company financial statements are not in agreement with the accounting records and returns.
– we have 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.
–
14.2 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.
We have nothing to report in respect of these matters.
We have nothing to report in respect of these matters.
14.2 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.
15. Other matters which we are required to address
15.1 Auditor tenure
Following the recommendation of the Audit Committee of Royal Bank of Scotland Group plc, (“RBSG”), which at the time
owned Direct Line, we were appointed by the Board of Directors of RBSG on 21 March 2000 to audit the financial
statements for the year ending 31 December 2000 and subsequent financial periods. When the Group became
independent of RBSG the Group’s Board reappointed us to audit the newly demerged Group. Taking into account our
service to predecessor organisations, the period of total uninterrupted engagement including previous renewals and
reappointments of the firm is 21 years, covering the years ending 31 December 2000 to 31 December 2020. Under the
Companies Act 2006, the last financial year of our maximum engagement period is the year ending 31 December 2023.
15. Other matters which we are required to address
15.1 Auditor tenure
Following the recommendation of the Audit Committee of Royal Bank of Scotland Group plc, (“RBSG”), which at the time
owned Direct Line, we were appointed by the Board of Directors of RBSG on 21 March 2000 to audit the financial
statements for the year ending 31 December 2000 and subsequent financial periods. When the Group became
independent of RBSG the Group’s Board reappointed us to audit the newly demerged Group. Taking into account our
service to predecessor organisations, the period of total uninterrupted engagement including previous renewals and
reappointments of the firm is 21 years, covering the years ending 31 December 2000 to 31 December 2020. Under the
Companies Act 2006, the last financial year of our maximum engagement period is the year ending 31 December 2023.
15.2 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).
15.2 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).
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Financial Statements Independent Auditor’s Report to the shareholders of Direct Line Insurance
INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DIRECT LINE INSURANCE
Group plc continued
GROUP PLC - CONTINUED
16. 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 fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a
body, for our audit work, for this report, or for the opinions we have formed.
COLIN RAWLINGS FCA (SENIOR STATUTORY AUDITOR)
FOR AND ON BEHALF OF DELOITTE LLP
SENIOR STATUTORY AUDITOR
LONDON, UNITED KINGDOM
5 MARCH 2021
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Direct Line Group Annual Report and Accounts 2020
Consolidated Income Statement
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2020
For the year ended 31 December 2020
Gross earned premium
Reinsurance premium
Net earned premium
Investment return
Instalment income
Other operating income
Total income
Insurance claims
Insurance claims recoverable from reinsurers
Net insurance claims
Commission expenses
Operating expenses (including restructuring and one-off costs)
Total expenses
Finance costs
Profit before tax
Tax charge
Profit for the year attributable to the owners of the Company
Earnings per share:
Basic (pence)
Diluted (pence)
Notes
5
6
7
8
9
10
11
12
2020
£m
3,189.3
(228.8)
2,960.5
95.1
109.3
49.9
3,214.8
(1,730.4)
16.8
(1,713.6)
(254.7)
(763.8)
(1,018.5)
(31.3)
451.4
(84.2)
367.2
2019
£m
3,202.6
(217.7)
2,984.9
134.6
114.0
66.2
3,299.7
(1,917.3)
69.7
(1,847.6)
(211.5)
(704.9)
(916.4)
(26.0)
509.7
(89.8)
419.9
15
15
25.8
25.5
29.5
29.2
The attached notes on pages 162 to 214 form an integral part of these consolidated financial statements.
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Financial Statements
Consolidated Statement of Comprehensive Income
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2020
For the year ended 31 December 2020
Profit for the year attributable to the owners of the Company
Other comprehensive income
Items that will not be reclassified subsequently to the income statement:
Actuarial loss on defined benefit pension scheme
Tax relating to items that will not be reclassified
Items that may be reclassified subsequently to the income statement:
Cash flow hedges
Fair value gain on AFS investments
Less: net gains on AFS investments transferred to income statement on
disposals
Tax relating to items that may be reclassified
Other comprehensive income for the year net of tax
Total comprehensive income for the year attributable to the owners of the
Company
Notes
2020
£m
2019
£m
367.2
419.9
27
13
31
31
31
(0.4)
0.3
(0.1)
(0.1)
47.4
(1.1)
(9.9)
36.3
36.2
(7.3)
1.3
(6.0)
(0.7)
118.1
(16.5)
(17.3)
83.6
77.6
403.4
497.5
The attached notes on pages 162 to 214 form an integral part of these consolidated financial statements.
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Direct Line Group Annual Report and Accounts 2020
CONSOLIDATED BALANCE SHEET
Consolidated Balance Sheet
As at 31 December 2020
As at 31 December 2020
CONSOLIDATED BALANCE SHEET
As at 31 December 2020
Assets
Goodwill and other intangible assets
Property, plant and equipment
Right-of-use assets
Assets
Investment property
Goodwill and other intangible assets
Reinsurance assets
Property, plant and equipment
Deferred acquisition costs
Right-of-use assets
Insurance and other receivables
Investment property
Prepayments, accrued income and other assets
Reinsurance assets
Derivative financial instruments
Deferred acquisition costs
Retirement benefit asset
Insurance and other receivables
Financial investments
Prepayments, accrued income and other assets
Cash and cash equivalents
Derivative financial instruments
Total assets
Retirement benefit asset
Equity
Financial investments
Shareholders’ equity
Cash and cash equivalents
Tier 1 notes
Total assets
Total equity
Equity
Liabilities
Shareholders’ equity
Subordinated liabilities
Tier 1 notes
Insurance liabilities
Total equity
Unearned premium reserve
Notes
2020
£m
2019
£m
702.5
143.4
2019
£m
149.2
291.7
702.5
1,251.3
143.4
176.2
149.2
846.5
291.7
120.2
1,251.3
121.5
176.2
9.7
846.5
4,673.4
120.2
948.6
121.5
9,434.2
9.7
4,673.4
2,643.6
948.6
346.5
9,434.2
2,990.1
2,643.6
259.0
346.5
3,819.6
2,990.1
1,506.0
Notes
17
18
19
20
17
22
18
23
19
24
20
25
22
26
23
27
24
28
25
29
26
27
28
29
32
786.8
146.1
2020
137.8
£m
292.1
786.8
1,129.2
146.1
172.2
137.8
848.2
292.1
126.0
1,129.2
73.4
172.2
9.0
848.2
4,681.4
126.0
1,220.1
73.4
9,622.3
9.0
4,681.4
2,699.7
1,220.1
346.5
9,622.3
3,046.2
33
32
34
35
29
33
26
34
37
35
38
29
26
13
37
13
38
2,699.7
516.6
346.5
3,617.0
3,046.2
1,497.1
51.9
516.6
57.2
3,617.0
114.8
1,497.1
549.9
51.9
152.4
57.2
8.7
114.8
10.5
549.9
6,576.1
152.4
9,622.3
8.7
10.5
6,576.1
9,622.3
Liabilities
Borrowings
Subordinated liabilities
Derivative financial instruments
Insurance liabilities
Provisions
Unearned premium reserve
Trade and other payables, including insurance payables
Borrowings
Lease liabilities
Derivative financial instruments
Deferred tax liabilities
Provisions
Current tax liabilities
Trade and other payables, including insurance payables
Total liabilities
Lease liabilities
Total equity and liabilities
Deferred tax liabilities
The attached notes on pages 162 to 214 form an integral part of these consolidated financial statements.
Current tax liabilities
The financial statements were approved by the Board of Directors and authorised for issue on 5 March 2021. They were
Total liabilities
signed on its behalf by:
Total equity and liabilities
52.3
259.0
30.5
3,819.6
74.3
1,506.0
478.1
52.3
164.4
30.5
9.6
74.3
50.3
478.1
6,444.1
164.4
9,434.2
9.6
13
13
9,434.2
6,444.1
50.3
The attached notes on pages 162 to 214 form an integral part of these consolidated financial statements.
PENNY JAMES
The financial statements were approved by the Board of Directors and authorised for issue on 5 March 2021. They were
CHIEF EXECUTIVE OFFICER
signed on its behalf by:
PENNY JAMES
CHIEF EXECUTIVE OFFICER
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Financial Statements
Consolidated Statement of Changes in Equity
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2020
For the year ended 31 December 2020
Share
capital
(note 30)
Employee
trust
shares
Capital
reserves
(note 31)
AFS
revaluation
reserve
(note 31)
Foreign
exchange
translation
reserve
Retained
earnings
Share-
holders’
equity
Tier 1
notes
(note 32)
Total
equity
£m
£m
£m
£m
£m
£m
£m
£m
£m
150.0
(35.2) 1,450.0
(36.8)
0.8 1,029.4 2,558.2 346.5 2,904.7
—
—
—
—
—
—
—
(10.4)
—
—
—
—
—
— 419.9 419.9
— 419.9
84.3
(0.7)
(6.0)
77.6
—
77.6
—
—
—
(420.7)
(420.7)
—
(420.7)
—
—
(10.4)
—
(10.4)
—
—
—
—
—
18.4
18.4
—
18.4
—
—
15.4
—
—
—
—
—
—
(15.4)
—
—
0.6
0.6
—
—
—
0.6
150.0
(30.2) 1,450.0
47.5
0.1 1,026.2 2,643.6 346.5 2,990.1
—
—
—
—
(1.1)
—
—
—
—
—
—
(23.8)
—
—
13.7
—
—
—
—
—
1.1
—
—
—
—
—
367.2
367.2
—
367.2
36.4
(0.1)
(0.1)
36.2
—
—
—
—
—
—
—
—
—
—
—
—
(312.5)
(312.5)
—
(23.8)
(30.0)
(30.0)
18.5
18.5
(13.7)
0.5
—
0.5
—
—
—
—
—
—
—
36.2
(312.5)
(23.8)
(30.0)
18.5
—
0.5
Balance at 1 January 2019
Profit for the year
Other comprehensive income
Dividends and appropriations
paid (note 14)
Shares acquired by employee
trusts
Credit to equity for equity-
settled share-based payments
(note 36)
Shares distributed by
employee trusts
Tax on share-based payments
Balance at 31 December 2019
Profit for the year
Other comprehensive income
Dividends and appropriations
paid (note 14)
Shares acquired by employee
trusts
Shares cancelled following
buyback (note 30)
Credit to equity for equity-
settled share-based payments
(note 36)
Shares distributed by
employee trusts
Tax on share-based payments
Balance at 31 December 2020
148.9
(40.3)
1,451.1
83.9
—
1,056.1
2,699.7
346.5
3,046.2
The attached notes on pages 162 to 214 form an integral part of these consolidated financial statements.
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Direct Line Group Annual Report and Accounts 2020
Consolidated Cash Flow Statement
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2020
For the year ended 31 December 2020
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 goodwill and other intangible assets
Purchases of property, plant and equipment
Net cash flows from acquisition of subsidiaries
Net cash used in investing activities
Cash flows used in financing activities
Dividends and appropriations paid
Finance costs (including lease interest)
Principal element of lease payments
Purchase of employee trust shares
Proceeds on issue of subordinated Tier 2 notes
Shares purchased in buyback
Net cash used in financing activities
Net increase / (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Notes
39
39
17
18
2020
£m
268.8
315.9
584.7
(140.7)
(20.1)
(0.2)
(161.0)
2019
£m
88.2
373.9
462.1
(175.7)
(11.9)
—
(187.6)
14
(312.5)
(420.7)
(30.2)
(12.5)
(23.8)
257.2
(30.0)
(151.8)
271.9
896.3
(26.4)
(13.1)
(10.4)
—
—
(470.6)
(196.1)
1,092.4
1,168.2
896.3
39
39
30
29
29
The attached notes on pages 162 to 214 form an integral part of these consolidated financial statements.
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Financial Statements
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Corporate information
Direct Line Insurance Group plc is a public limited company
registered in England and Wales (company number
02280426). The address of the registered office is Churchill
Court, Westmoreland Road, Bromley, BR1 1DP, England.
1. Accounting policies
Basis of preparation
As required by the Companies Act 2006 and Article 4 of the
EU IAS Regulation, the Group’s consolidated financial
statements are prepared in accordance with IFRSs issued by
the IASB as adopted by the EU on 31 December 2020 and
by the UK’s Department of Business, Energy & Industrial
Strategy (“BEIS”) in 2021. The BEIS has been given the power
of endorsing and adopting international accounting
standards while the UK Endorsement Board (“UKEB”) is still
being established. The Group has elected to prepare its
parent entity financial statements in accordance with FRS
101 ‘Reduced Disclosure Framework’.
In addition, the Group’s Risk Function has carried out an
assessment of the risks to the Plan and the dependencies
for the success of the Strategic Plan. This included running
stress tests on the Plan to consider the 1 in 8 years and 1 in
25 years loss simulations based on the internal economic
capital model.
A reverse stress test was also performed to identify the most
probable combination of stresses that would result in
capital loss and thus threaten the viability of the Group, i.e. a
reduction of own funds to below the solvency capital
requirement.
In all scenarios, it was concluded that the Group’s solvency
capital requirement would not be breached following the
implementation of management actions.
Therefore, having made due enquiries, the Directors
reasonably expect that the Group has adequate resources to
continue in operational existence for at least 12 months
from 5 March 2021 (the date of approval of the financial
statements). Accordingly, the Directors have adopted the
going concern basis in preparing the financial statements.
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 42).
Adoption of new and revised standards
The Group has adopted the following new amendments to
IFRSs and International Accounting Standards (“IASs”) that
became mandatorily effective for the Group for the first time
during 2020.
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 2020 and 31
December 2019 to items considered material to the
consolidated financial statements.
The Company’s financial statements and the Group’s
consolidated financial statements are presented in sterling,
which is the functional currency of the Company and the
Group.
Going concern
The Directors believe that 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 climate. The Finance
review on pages 20 to 35 describes the Group’s capital
management strategy, including the capital actions taken in
the year to ensure the continued strength of the balance
sheet. 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.
The Directors have assessed the principal risks faced by the
Group over the duration of the planning cycle. These
included the implementation of the FCA’s Pricing Practices
Review, possible adverse implications of Brexit, change risk
and possible challenging market conditions due to the
impact of Covid-19 on the economy and customer
behaviour. The 2020 Plan modelled a number of different
scenarios which were directly and indirectly influenced by
the Covid-19 pandemic and Brexit. These included delay to
improvements in technological capability, the impact of
Covid-19 on claims frequency levels and the impact of
Brexit on the investment return. The key judgements
applied were in relation to the likely time period of
Covid-19-related restrictions, and the subsequent impact on
customer behaviour and the economic recovery.
None of these amendments require changes to existing
accounting policies.
Amendment to IFRS 16 ‘Leases Covid-19-related Rent
Concessions’ permits lessees, as a practical expedient, not to
assess whether particular rent concessions occurring as a
direct consequence of the Covid-19 pandemic are lease
modifications and instead to account for those rent
concessions as if they are not lease modifications.
‘Amendments to References to the Conceptual Framework
in IFRS Standards’ amends some references to previous
versions of the Conceptual Framework in IFRS Standards
and their accompanying documents and IFRS Practice
Statements.
Amendments to IFRS 3 ‘Business Combinations’, narrow and
clarify the definition of a business. They also permit a
simplified assessment of whether an acquired set of
activities and assets is a group of assets rather than a
business.
Amendments to IAS 1 and IAS 8: ‘Definition of Material’,
clarify and align the definition of "material" and provide
guidance to help improve consistency in the application of
that concept whenever it is used in IFRS Standards.
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 2020 and
31 December 2019. 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
whether the Group controls another entity, the existence
and effect of the potential voting rights that are currently
exercisable or convertible are considered.
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.
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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 reserve, 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.
Dividend income is recognised when the right to receive
payment is established.
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.
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 variable consideration is identified in a
contract, this revenue is estimated and constrained to the
extent that it is highly improbable that revenue recognised
will be reversed. 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.
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Financial Statements Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
1.5 Insurance claims continued
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. 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.
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 for
software development costs is up to 10 years.
Expenditure on internally generated goodwill and indirect
advertising costs 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.
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1.9 Property, plant and equipment
Items of property, plant and equipment (except investment
property – see note 1.12) 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. The
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 Right-of-use assets and lease liabilities
Where the Group is a lessee
At inception, the Group assesses whether a contract
contains a lease arrangement, which involves assessing
whether it obtains substantially all the economic benefits
from the use of a specific asset, and it has the right to direct
the use of that asset. The Group recognises a right-of-use
asset and a lease liability at the commencement of the
lease (when the underlying asset is available for use), except
for short-term leases of 12 months or less and low value
leases which are expensed on a straight-line basis in the
income statement. The right-of-use asset is initially
measured based on the present value of the lease
payments, plus initial direct costs less any incentives
received. Lease payments include fixed payments and
variable payments. Variable payments relate to contractual
rent increases linked to inflation indices. The right-of-use
asset is depreciated over the lease term and is subject to
impairment testing if there is an indicator of impairment.
When leases contain an extension or purchase option which
is reasonably expected to be exercised this is included in the
measurement of the lease.
In calculating the present value of lease payments, the
Group uses the incremental borrowing rate at the lease
commencement date unless the interest rate implicit in the
lease is readily determinable. The incremental borrowing
rate is determined based on available risk-free market yield-
to-maturity pricing linked to the lease amount and term,
and includes a credit spread. The lease liability is
subsequently measured at amortised cost using the
effective interest rate method and remeasured, with a
corresponding adjustment to the right-of-use asset, when
there is a change in future lease payments, terms or
reassessment of options.
The Group’s leasehold property mainly relates to office
space and vehicle repair centres. Leases in respect of motor
vehicles relate to recovery and replacement vehicles, and
management cars. The Group also leases certain IT
equipment which is not a significant portion of the total
leased asset portfolio.
Where the Group is a lessor
Leases where a significant proportion of the risks and
rewards of ownership is retained by the lessor are classified
as operating leases. Lease income from operating leases is
recognised in the income statement on a straight-line basis
over the lease term.
Where assets are subject to finance leases, the present value
of the lease payments, together with any unguaranteed
residual value, is recognised as a receivable.
1.12 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.
1.13 Financial assets
Financial assets are classified as available-for-sale, held-to-
maturity, 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.
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Financial Statements Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
1.13 Financial assets continued
Available-for-sale ("AFS")
Financial assets can be designated as AFS on initial
recognition. AFS financial assets are initially recognised at
fair value plus directly related transaction costs. They are
subsequently measured at fair value. Impairment losses and
exchange differences, resulting from translating the
amortised cost of foreign currency monetary AFS financial
assets, are recognised in the income statement, together
with interest calculated using the effective interest rate
method. Other changes in the fair value of AFS financial
assets are reported in a separate component of
shareholders’ equity until disposal, when the cumulative
gain or loss is recognised in the income statement.
A financial asset is regarded as quoted in an active market if
quoted prices are readily and regularly available from an
exchange, dealer, broker, industry group, pricing service or
regulatory agency, and those prices represent actual and
regularly occurring market transactions on an arm’s-length
basis. The appropriate quoted market price for an asset held
is usually the current bid price. When current bid prices are
unavailable, the price of the most recent transaction
provides evidence of the current fair value as long as there
has not been a significant change in economic
circumstances since the time of the transaction. If
conditions have changed since the time of the transaction
(for example, a change in the risk-free interest rate following
the most recent price quote for a corporate bond), the fair
value reflects the change in conditions by reference to
current prices or rates for similar financial instruments, as
appropriate. The valuation methodology described above
uses observable market data.
If the market for a financial asset is not active, the Group
establishes the fair value by using a valuation technique.
Valuation techniques include using recent arm’s-length
market transactions between knowledgeable and willing
parties (if available), reference to the current fair value of
another instrument that is substantially the same,
discounted cash flow analysis and option pricing models. If
there is a valuation technique commonly used by market
participants to price the instrument, and that technique has
been demonstrated to provide reliable estimates of prices
obtained in actual market transactions, the Group uses that
technique.
AFS financial assets include equity investments.
Held-to-maturity ("HTM")
Non-derivative financial assets not designated as AFS, or
loans and receivables with fixed or determinable payments
and fixed maturity, where the intention and ability to hold
them to maturity exists, are classified as HTM.
Subsequent to initial recognition, HTM financial assets are
measured at amortised cost using the effective interest rate
method less any impairment losses.
Loans and receivables
Non-derivative financial assets with fixed or determinable
repayments that are not quoted in an active market are
classified as loans and receivables, except those that are
classified as AFS or HTM. Loans and receivables are initially
recognised at fair value plus directly related transaction
costs and are subsequently measured at amortised cost
using the effective interest rate method less any impairment
losses.
Impairment of financial assets
At each balance sheet date, the Group assesses whether
there is any objective evidence that a financial asset or
group of financial assets classified as AFS, HTM or loans and
receivables is impaired. A financial asset or portfolio of
financial assets is impaired and an impairment loss incurred
if there is objective evidence that an event or events since
initial recognition of the asset have adversely affected the
amount or timing of future cash flows from the asset.
AFS
When a decline in the fair value of a financial asset classified
as AFS has been recognised directly in equity and there is
objective evidence that the asset is impaired, the
cumulative loss is removed from equity and recognised in
the income statement. The loss is measured as the
difference between the amortised cost of the financial asset
and its current fair value. Impairment losses on AFS equity
instruments are not reversed through profit or loss, but
those on AFS debt instruments are reversed, if there is an
increase in fair value that is objectively related to a
subsequent event.
HTM or 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.
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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 in other
comprehensive income. Any ineffective portion is
recognised in the income statement.
In a fair value hedge, the gain or loss on the hedging
instrument is recognised in the income statement. The gain
or loss on the hedged item attributable to the hedged risk is
recognised in the income statement and, where the hedged
item is measured at amortised cost, adjusts the carrying
amount of the hedged item.
Derecognition of financial assets
A financial asset is derecognised when the rights to receive
the cash flows from that asset have expired or when the
Group has transferred its rights to receive cash flows from
the asset and has transferred substantially all the risk and
rewards of ownership of the asset.
1.14 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 and
are part of the Group’s cash management approach and are
repayable on demand.
1.15 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.
1.16 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.
1.17 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.
Restructuring provisions are made, including redundancy
costs, when the Group has a constructive obligation to
restructure. An obligation exists when the Group has a
detailed formal plan and has communicated the plan to
those affected.
1.18 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 27, was closed in 2003. Scheme liabilities are
measured on an actuarial basis, using the projected unit
credit method, and discounted at a rate that reflects the
current rate of return on a high-quality corporate bond of
equivalent term and currency to the scheme liabilities.
Scheme assets are measured at their fair value. Any surplus
or deficit of scheme assets over liabilities is recognised in the
balance sheet as an asset (surplus) or liability (deficit). The
current service cost and any past service costs, together with
the net interest on the 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 or
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.
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1.19 Taxation continued
Deferred tax assets and liabilities are calculated at the tax
rates expected to apply when the assets are realised or
liabilities are settled based on laws and rates that have been
enacted or substantively enacted at the balance sheet date.
Deferred tax is charged or credited in the income
statement, except when it relates to items charged or
credited to other comprehensive income or equity, in which
case the deferred tax is also dealt with in other
comprehensive income or directly in equity.
Deferred tax assets and liabilities are offset when there is a
legally enforceable right to set off current tax assets against
current tax liabilities and when they relate to income taxes
levied by the same taxation authority and the Group intends
to settle its current assets and liabilities on a net basis.
1.20 Share-based 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 can alter the amount of cash or
shares to which an employee is entitled.
Vesting conditions include service conditions (requiring the
employee to complete a specified period of service) and
performance conditions (requiring the Group to meet
specified performance targets).
The fair value of options granted is estimated using
valuation techniques which incorporate exercise price, term,
risk-free interest rates, the current share price and its
expected volatility.
The cost of employee services received in exchange for an
award of shares or share options granted is measured by
reference to the fair value of the shares or share options on
the date the award is granted and takes into account non-
vesting conditions and market performance conditions
(conditions related to the market price of the Company’s
Ordinary Shares).
The cost is expensed on a straight-line basis over the vesting
period (the period during which all the specified vesting
conditions must be satisfied) with a corresponding increase
in equity in an equity-settled award, or a corresponding
liability in a cash-settled award. The cost is adjusted for
vesting conditions (other than market performance
conditions) so as to reflect the number of shares or share
options that actually vest.
The cancellation of an award through failure to meet non-
vesting conditions triggers an immediate expense for any
unrecognised element of the cost of an award.
1.21 Capital instruments
The Group classifies a financial instrument that it issues as a
financial liability or an equity instrument in accordance with
the substance of the contractual arrangement. An
instrument is classified as a liability if it is a contractual
obligation to deliver cash or another financial asset, or to
exchange financial assets or financial liabilities on
potentially unfavourable terms, or as equity if it evidences a
residual interest in the assets of the Group after the
deduction of liabilities.
The 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 IFRS standards and amendments that are issued, but
not yet effective for the 31 December 2020 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 amendments to IFRS 9 ‘Financial Instruments’, as
explained below.
In July 2014, the IASB issued the final version of IFRS 9
‘Financial Instruments’ 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 was effective for
annual periods beginning on or after 1 January 2018,
however adoption by the Group has been deferred as
described below.
In September 2016, the IASB issued Amendments to IFRS 4:
‘Applying IFRS 9 Financial Instruments with IFRS 4
Insurance Contracts’ to address issues arising from the
different effective dates of IFRS 9 and IFRS 17 ‘Insurance
Contracts’. These amendments to IFRS 4 were endorsed by
the EU in November 2017.
These amendments permitted insurers who satisfied certain
criteria to defer the effective date of IFRS 9, to coincide with
the expected effective date of IFRS 17. 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 amendments required insurance entities to evaluate
whether their activities were predominantly connected to
insurance as at their 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 their total liabilities
as at that date. The Group concluded that it satisfied the
criteria and there have been no significant changes in the
Group’s activities since this assessment to require a
reassessment of the criteria.
As a result, the Group has decided to defer the application
of IFRS 9 and continues to do so. The amendments to IFRS 4
also require certain interim disclosures in relation to the fair
value movements of financial assets as outlined below.
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 42.
The amount of change in the fair value during the period for
these financial assets was:
– AFS debt securities £96.7 million increase (2019: £118.6
million increase);
– HTM debt securities £0.2 million decrease (2019: £3.8
–
million increase);
infrastructure debt £1.1 million increase (2019: £10.6
million increase); and
– commercial real estate loans £3.8 million decrease (2019:
£2.5 million decrease).
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Derivative assets do not have contractual terms that give rise
on specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding.
The fair value of these financial assets is disclosed in note 42
and the amount of change in the fair value during the
period was an increase of £64.5 million (2019: £111.8 million
increase).
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 £377.2 million (2019:
£390.8 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, which are filed at Companies House.
As the effective date of IFRS 17 has since been delayed to 1
January 2023, ‘Amendments to IFRS 4 – Deferral of IFRS 9’
was issued in June 2020 which delays the effective date of
IFRS 9 so as to remain in line with IFRS 17. The
amendments were endorsed by the UK’s Department of
Business, Energy & Industrial Strategy (“BEIS”) in January
2021.
'Amendments to IFRS 9: Prepayment Features with
Negative Compensation’ was issued in October 2017 and is
endorsed by the EU 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' test 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 ‘Insurance Contracts’ and is effective for reporting periods
beginning on or after 1 January 2023, 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. The general model measures
insurance contracts using the building blocks of: 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 initial assessment of the impact of IFRS 17 on the
Group’s financial statements has been completed and work
has now started on the design and build of the systems that
will provide the foundation for reporting under IFRS 17 from
1 January 2023. The Group expects to be able to apply the
simplified premium allocation approach to all material
insurance and reinsurance contract groups. As the standard
was not endorsed by the EU before 31 December 2020, it
will instead require endorsement by the UKEB.
In September 2019, the IASB issued ‘Interest Rate
Benchmark Reform – Amendments to IFRS 9, IAS 39 and
IFRS 7’ which the Group adopted in 2019. These Phase 1
amendments modify some specific hedge accounting
requirements to provide relief from the potential effects of
the uncertainty caused by the IBOR reform. In addition, it
requires companies to disclose additional information about
their hedging relationships which are directly affected by
these uncertainties. The amendments allow the Group to
continue applying hedge accounting to some of its
benchmark interest rate exposure, as the amendments
permit the continuation of hedge accounting where in
future the hedged benchmark interest rate may no longer
be separately available. The amendments do not alter the
requirement for the designated interest rate risk component
to be measurable. If the risk component is no longer reliably
measurable, the hedging relationship is discontinued. The
relief provided by the amendments ceases to apply
prospectively when the uncertainties arising from the
interest rate benchmark reform are no longer present.
The Group holds investments in US dollar and Euro fixed
rate debt securities which it includes in a macro fair value
hedge of the USD LIBOR and EURIBOR risk component of
these investments respectively.
The Group will not discontinue hedge accounting should
the retrospective assessment of hedge effectiveness fall
outside the 80‑125% range where the hedging relationship
is subject to interest rate benchmark reforms. However, for
those hedging relationships that are not subject to the
interest rate benchmark reforms the entity continues to
cease hedge accounting if retrospective effectiveness is
outside the 80‑125% range.
In August 2020, the IASB issued ‘Interest Rate Benchmark
Reform – Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and
IFRS 16 ‘Interest Rate Benchmark Reform – Phase 2’.
The Phase 2 amendments provide additional temporary
reliefs from applying specific IFRS 9 and IAS 39 hedge
accounting requirements to hedging relationships directly
affected by IBOR reform. They also require disclosure of: (i)
how the entity is managing the transition to alternative
benchmark rates, its progress and the risks arising from the
transition; (ii) quantitative information about derivatives and
non-derivatives that have yet to transition, disaggregated by
significant interest rate benchmark; and (iii) a description of
any changes to the risk management strategy as a result of
IBOR reform.
The Phase 2 amendments are effective for annual periods
starting on or after 1 January 2021 and were endorsed by
the BEIS in January 2021.
In January 2020 the IASB issued ‘Classification of Liabilities
as Current or Non-Current (Amendments to IAS 1)' which
clarifies the requirements for classifying liabilities as current
or non-current. More specifically:
– The amendments specify that the conditions which exist
at the end of the reporting period are those which will be
used to determine whether a right to defer settlement of
a liability exists.
– Management expectations about events after the
balance sheet date, for example on whether a covenant
will be breached, or whether early settlement will take
place, are not relevant.
– The amendments clarify the situations that are
considered to determine settlement of a liability.
In July 2020 a further amendment was made: 'Classification
of Liabilities as Current or Non-Current — Deferral of Effective
Date (Amendment to IAS 1)' to defer the effective date of
the January 2020 ‘Classification of Liabilities as Current or
Non-Current (Amendments to IAS 1)’ to annual reporting
periods beginning on or after 1 January 2023.
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1.23 Accounting developments continued
The new guidance is effective for annual periods starting on
or after 1 January 2023 and will require endorsement by the
UKEB.
In May 2020 the IASB issued narrow-scope amendments to
three Standards:
– Amendments to IFRS 3 ‘Business Combinations’ update a
reference in IFRS 3 to the Conceptual Framework for
Financial Reporting without changing the accounting
requirements for business combinations.
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
underlie the preparation of its financial information. The
Group’s principal accounting policies are set out on pages
162 to 170. 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.
– Amendments to IAS 16 ‘Property, Plant and Equipment’
prohibit a company from deducting from the cost of
property, plant and equipment amounts received from
selling items produced while the company is preparing
the asset for its intended use. Instead, a company will
recognise such sales proceeds and related cost in profit
or loss.
– Amendments to IAS 37 ‘Provisions, Contingent Liabilities
and Contingent Assets’ specify which costs a company
includes when assessing whether a contract will be loss-
making.
These three amendments have an IASB effective date of 1
January 2022 and will require endorsement by the UKEB.
Also, in May 2020 the IASB issued ‘Annual Improvements to
IFRS Standards 2018-2020’ which makes minor
amendments to:
–
–
–
IFRS 1 ‘First-time Adoption of International Financial
Reporting Standards’ which simplifies the application of
IFRS 1 for a subsidiary that becomes a first-time adopter
of IFRS Standards later than its parent;
IFRS 9 ‘Financial Instruments’ – this amendment clarifies
that – for the purpose of performing the ‘10 per cent test’
for derecognition of financial liabilities – in determining
those fees paid net of fees received, a borrower includes
only fees paid or received between the borrower and the
lender, including fees paid or received by either the
borrower or lender on the other’s behalf; and
IFRS 16 ‘Leases’ which removes the illustration of
payments from the lessor relating to leasehold
improvements.
All amendments are effective 1 January 2022 and will
require endorsement by the UKEB.
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
Accounting judgement
The Group makes a judgement that financial assets are
impaired when there is objective evidence that an event or
events have occurred since initial recognition that 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 or operational and financing cash
flow; and 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. There was a small impairment
of £2.7 million within the loans and receivables portfolio in
the year ended 31 December 2020 (2019: £nil).
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
– whether an event has occurred that could be reliably
estimated and which had an impact on the financial
asset or its future cash flows.
Had all the declines in AFS asset values met the criteria
above at 31 December 2020, the Group would have suffered
a loss of £3.0 million (2019: £4.0 million), being the transfer
of the total AFS reserve for unrealised losses to the income
statement. However, these movements represent mark-to-
market movements and, as there was no objective evidence
of any loss events that could affect future cash flows, no
impairments have been recorded.
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2.2 Fair value of investment properties
Sources of estimation uncertainty
The Group holds a portfolio of investment properties, with a
value at 31 December 2020 of £292.1 million (2019: £291.7
million). Where quoted market prices are not available,
valuation techniques are used to value these properties. 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. The valuation in the financial
statements is based on valuations by independent
registered valuers and the techniques used include some
unobservable inputs. The valuations used for investment
properties are classified in the level 3 category of the fair
value hierarchy (see note 42).
2.3 Impairment provisions - intangible assets
Accounting judgement
Judgement is applied to determine whether there is
indication of impairment to intangible assets. 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.
Sources of estimation uncertainty
Sources of estimation uncertainty can arise where there are
indicators of impairment of an intangible asset and an
impairment provision is deemed appropriate. Factors, such
as whether the carrying amount of the asset is expected to
be greater than the recoverable amount are assessed, and in
2020 the Group recognised an impairment provision of £6.6
million (2019: £1.3 million) in relation to ongoing IT projects
primarily relating to the development of new systems.
The sensitivities to the assumptions made by the Group in
respect of the testing for impairment of goodwill and other
intangible assets are shown in note 17.
2.4 General insurance: outstanding claims
provisions and related reinsurance recoveries
Accounting judgement
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 long and
short-term risks not reflected in the actuarial inputs, as well
as management’s view of the uncertainties in relation to the
actuarial best estimate.
Source of estimation uncertainty
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 associated
claims handling costs. Outstanding claims provisions net of
related reinsurance recoveries at 31 December 2020
amounted to £2,591.7 million (2019: £2,670.0 million).
Claims reserves are assessed separately for large and
attritional claims, typically using standard actuarial methods
of projection. Key sources of estimation uncertainty include
those arising from the selection of specific methods as well
as assumptions for claims frequency and severity through
the review of historical claims and emerging trends. The
Group seeks to adopt a conservative approach to assessing
claims liabilities, as evidenced by the favourable
development of historical claims reserves.
The corresponding reinsurance recoveries are calculated on
an equivalent basis, with similar estimation uncertainty, as
discussed in note 1.6. The reinsurance bad debt provision is
mainly held against expected recoveries on future PPO
payments.
The most common method of settling bodily injury claims is
by a lump sum. When this includes an element of indemnity
for recurring costs, such as loss of earnings or ongoing
medical care, the settlement calculations apply the
statutory discount rate (known as the Ogden discount rate)
to reflect the fact that payment is made on a one-off basis
rather than periodically over time. The current Ogden
discount rate is minus 0.25% for England and Wales, minus
0.75% in Scotland, and 2.5% in Northern Ireland.
The Group reserves its large bodily injury claims at the
relevant discount rate for each jurisdiction, with the
overwhelming majority now reserved at minus 0.25% as
most will be settled under the law in England and Wales.
The Ogden discount rate will be reviewed again at the latest
in 2024 but, following the most recent change in 2019, only
small movements are expected in future. These will have a
low impact on the Group’s reserves. This is also a function of
the ongoing reduction in large bodily injury exposures as a
result of continued positive prior-year development of
claims reserves, and a higher proportion of reserves being
covered by reinsurance as a result of the decision to opt for
a lower reinsurance attachment point from 2014 onwards.
The Group settles some large bodily injury claims as PPOs
rather than lump sum payments. The Group has estimated
the likelihood of large bodily injury claims settling as PPOs.
Anticipated PPOs consist of both existing large loss case
reserves including allowances for development and claims
yet to be reported to the Group. Reinsurance is applied at
claim level and the net cash flows are discounted for the
time value of money. The discount rate is consistent with
the long duration and the assumed future indexation of the
claims payments.
The Covid-19 pandemic has led to the largest shock to the
UK economy on record and the outlook remains unusually
uncertain at year end 2020. Much depends on the evolution
of the pandemic and measures taken to protect public
health, as well as the transition to the new trading
arrangements between the EU and the UK. In addition to
concerns about general indicators of economic health, such
as falls in gross domestic product ("GDP"), rising
unemployment and rising public sector debt ratios, the
Group's reserves are exposed to the risk of changes in claims
development patterns and claims inflation resulting from
the pandemic. Changes in claims frequency present greater
uncertainty for the unearned part of the business, whereas
uncertainty over the level of claims severity has a greater
impact on the earned claims reserves. Claims severity risk is
particularly acute with respect to care costs for large bodily
injury claims and car repair costs due to potential supply
chain interruptions. The Group has therefore developed
additional claims inflation scenarios, which look at 100 basis
point changes in the claims inflation assumed in the
actuarial best estimate over the next two years.
The table in note 34 to the financial statements provides an
analysis of outstanding PPO claims provisions on a
discounted and an undiscounted basis at 31 December
2020 and 31 December 2019 and further details on sources
of estimation uncertainty. Details of sensitivity analysis to the
discount rate applied to PPO claims and the impact of
changes in claims inflation are shown in note 3.3.1.
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Financial Statements Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
3. Risk management
3.1 Enterprise Risk Management Strategy and Framework
The Enterprise Risk Management Strategy and Framework sets out, at a high level, the Group’s approach and processes for
managing risks. Further information can be found in the Risk management section of the Strategic report on page 69.
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
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.
Following the end of the transition period on 31 December 2020 and the trade and co-operation agreement between the
UK and the EU, there still remains considerable uncertainty as to the effect of Brexit on the Group. The Group has
proactively considered a variety of possible implications of a disruptive end to existing trading and other arrangements
between the UK and the EU, including of a financial and operational nature. Additionally, the risk of a UK-wide recession
and global financial instability as a result of the Covid-19 pandemic remains high and the Group continues to monitor the
worst-case impact. The implications of both these risks are referred to in the Risk management section of the Strategic
report.
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;
–
– changes in underwriting and business written so that past trends are not necessarily a predictor of the future.
failure to recognise claims trends in the market; and
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 recent changes in the
Ogden discount rate. Detailed information on the Ogden discount rate is provided in note 2.4.
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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Direct Line Group Annual Report and Accounts 2020
The table below provides a sensitivity analysis of the potential net impact of a change in a single factor (the internal
discount rate used for PPOs, Ogden discount rate or claims inflation) with all other assumptions left unchanged. Other
potential risks beyond the ones described could have additional financial impacts 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 0.75% compared to minus 0.25% (2019:
0.75% compared to minus 0.25%)
Impact of the Group reserving at a discount rate of minus 1.25% compared to minus 0.25%
(2019: minus 1.25% compared to minus 0.25%)
Claims inflation
Impact of a decrease in claims inflation by 100 basis points for two consecutive years (new
scenario in 2020)
Impact of an increase in claims inflation by 100 basis points for two consecutive years (new
scenario in 2020)
Increase / (decrease) in profit
before tax1,2
2020
£m
2019
£m
45.9
48.5
(62.7)
(66.5)
43.7
(61.1)
32.4
(32.2)
53.3
(75.0)
—
—
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 on the direct impact of the change in the real internal 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 in England and Wales 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. This is
intended to ensure that reserves are appropriate for current and potential future developments.
The PPO sensitivity above is calculated on the basis of a change in the internal discount rate used for the actuarial best
estimate reserves as at 31 December 2020. It does not take into account any second order impacts such as changes in
PPO propensity or reinsurance bad debt assumptions.
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 function. 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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Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
3. Risk management continued
3.3.1 Insurance risk continued
The key risks relating to climate change today are UK floods and major UK windstorms.
The Group recognises that climate change may impact its business over the longer term. In particular, there is a risk that
climate change affects the frequency and severity of extreme weather events (physical risk), which will change the Group’s
view of underwriting risk, reinsurance and pricing. The Group will be developing its risk management systems and
monitoring tools over 2021 for physical risk alongside participating in the Climate Biennial Exploratory Scenario ("CBES").
Low-frequency, high-severity weather losses are mitigated to a significant degree by the catastrophe reinsurance
programme, the ceding of home high flood risks to Flood Re, and the commercial underwriting strategy which reduces
high flood risk exposure. Furthermore, there is a risk that the Group’s insurance products will not meet its customers’ needs
as a result of changes in market dynamics and customer behaviour in relation to climate change, for example a rapid shift
towards electric vehicle usage. The Group expects these specific risks to materialise in the medium to longer-term (see
page 63 for definition) and anticipates that its continued strategic and operational response to the transition to a lower-
carbon economy will support mitigation of these risks and the associated impacts in the long term.
When underwriting policies, the Group is subject to concentration risk in a variety of forms, including:
– geographic concentration risk – the Group purchases a catastrophe reinsurance programme to protect against a
modelled 1-in-200 year catastrophe loss. The programme renews annually on 1 July and has a retention of £130 million
and an upper limit of £1,125 million;
– product concentration risk – the Group’s business is heavily concentrated in the UK general insurance market. However,
the Group offers a diversified portfolio of products and a variety of brands sold through a range of distribution channels
to its customers; and
sector concentration risk – the concentration of the Group to any given industry sector is monitored and analysed in
respect of commercial customers.
–
It is important to note that none of these risk categories is independent of the others and that giving due consideration to
the relationship between these risks is an important aspect of the effective management of insurance risk.
Distribution risk
The risk of a material reduction in profit compared to plan due to the Group not writing its planned policy volumes in each
segment.
Pricing risk
The risk of economic loss arising from business being incorrectly priced or underwritten.
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 (including changes resulting from climate
change) altering the definition and application of reinsurance policy wordings or the effectiveness or value for money of
reinsurance.
The Group uses reinsurance to:
– protect the underwriting result against low-frequency, high-severity losses through the transfer of catastrophe claims
volatility to reinsurers;
– protect the underwriting result against unforeseen volumes of, or adverse trends in, large individual claims in order to
reduce volatility and to improve stability of earnings;
reduce the Group’s capital requirements; and/or
transfer risk that is not within the Group’s current risk appetite.
–
–
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Direct Line Group Annual Report and Accounts 2020
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.
The Group monitors its market risk exposure on a daily 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.
During the year, the Investment Committee agreed long-term targets for the investment portfolio in relation to supporting
the Group's objectives on climate change. These are: ensuring the Group's entire investment portfolio is net carbon neutral
by 2050 in line with the aims of the Paris Agreement; and an interim target of a 50% reduction in weighted average
greenhouse gas emissions intensity by 2030 within the Group's corporate bonds portfolio, the largest part of its investment
portfolio.
The Group has a property portfolio and an infrastructure debt portfolio to generate a real return which, from an asset and
liability matching perspective, is used to offset the liability arising from longer duration PPOs.
When setting the strategic asset allocation, the Group is subject to concentration risk in a variety of forms including:
–
–
large exposures to individual assets (either bond issuers or deposit-taking institutions); and
large exposures to different assets 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 having 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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Financial Statements Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
3. Risk management continued
3. Risk management continued
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
21.3
21.3
311.0
199.6
7.1
27.1
48.2
4.4
14.0
155.3
8.1
15.0
1.9
10.0
3.1
75.8
61.4
33.1
3.6
1,201.1
1,514.2
—
Corporate
3.3.1 Insurance risk continued
3.3.2 Market risk continued
The table below analyses the distribution of debt securities by geographical area (commercial real estate loans and
The key risks relating to climate change today are UK floods and major UK windstorms.
infrastructure debt are all within the UK).
The Group recognises that climate change may impact its business over the longer term. In particular, there is a risk that
climate change affects the frequency and severity of extreme weather events (physical risk), which will change the Group’s
Debt
view of underwriting risk, reinsurance and pricing. The Group will be developing its risk management systems and
securities
total
monitoring tools over 2021 for physical risk alongside participating in the Climate Biennial Exploratory Scenario ("CBES").
At 31 December 2020
Low-frequency, high-severity weather losses are mitigated to a significant degree by the catastrophe reinsurance
Australia
programme, the ceding of home high flood risks to Flood Re, and the commercial underwriting strategy which reduces
205.7
high flood risk exposure. Furthermore, there is a risk that the Group’s insurance products will not meet its customers’ needs
Austria
17.1
as a result of changes in market dynamics and customer behaviour in relation to climate change, for example a rapid shift
Belgium
38.0
towards electric vehicle usage. The Group expects these specific risks to materialise in the medium to longer-term (see
Canada
page 63 for definition) and anticipates that its continued strategic and operational response to the transition to a lower-
carbon economy will support mitigation of these risks and the associated impacts in the long term.
Cayman Islands
When underwriting policies, the Group is subject to concentration risk in a variety of forms, including:
Czech Republic
– geographic concentration risk – the Group purchases a catastrophe reinsurance programme to protect against a
Denmark
11.9
modelled 1-in-200 year catastrophe loss. The programme renews annually on 1 July and has a retention of £130 million
40.0
and an upper limit of £1,125 million;
£m
205.7
17.1
38.0
127.6
1.8
1.1
11.9
27.7
Local
government
France
– product concentration risk – the Group’s business is heavily concentrated in the UK general insurance market. However,
324.1
the Group offers a diversified portfolio of products and a variety of brands sold through a range of distribution channels
Germany
200.9
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.
Ireland
–
Italy
—
12.3
13.1
—
—
1.3
Supranational
Finland
Sovereign
127.6
27.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1.8
7.1
1.1
£m
£m
£m
£m
Japan
48.2
It is important to note that none of these risk categories is independent of the others and that giving due consideration to
Luxembourg
the relationship between these risks is an important aspect of the effective management of insurance risk.
4.4
—
—
—
—
Mexico
Distribution risk
14.0
Netherlands
The risk of a material reduction in profit compared to plan due to the Group not writing its planned policy volumes in each
155.3
segment.
New Zealand
Pricing risk
Norway
The risk of economic loss arising from business being incorrectly priced or underwritten.
Peru
—
—
—
10.2
—
—
—
—
25.2
—
—
8.1
1.9
—
—
South Africa
Reinsurance risk
10.0
This is the risk of inappropriate selection and/or placement of reinsurance arrangements, with either individual or multiple
South Korea
3.1
reinsurers, which renders the transfer of insurance risk to the reinsurer(s) inappropriate and/or ineffective.
Spain
Other risks include:
Sweden
–
Switzerland
–
UAE
– underwriting risk appetite and reinsurance contract terms not being aligned;
UK
–
USA
– non-adherence to the reinsurance policy terms and conditions, in terms of both policy management and claims not
Supranational
—
reinsurance concentration risk – the concentration of credit exposure to any given counterparty;
—
reinsurance capacity being reduced and/or withdrawn;
—
15.1
8.8
—
reinsurance contract terms being inappropriate or ineffective resulting in classes or types of business not being
appropriately reinsured;
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;
4,207.0
inappropriate or inaccurate management information and/or modelling being used to determine the value for money
and purchasing of reinsurance (including aggregate modelling); and
—
—
—
—
—
Total
–
1,523.0
4,124.9
1,216.2
35.6
75.8
25.2
61.4
33.1
21.3
—
—
—
—
—
3.6
– changes in the external legal, regulatory, social or economic environment (including changes resulting from climate
change) 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.
–
–
176
174
176
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Direct Line Group Annual Report and Accounts 2020
The table below analyses the distribution of debt securities by geographical area (commercial real estate loans and
infrastructure debt are all within the UK).
Corporate
Local
government
Sovereign
Supranational
£m
£m
£m
At 31 December 2019
Australia
Austria
Belgium
Canada
Cayman Islands
Denmark
Finland
France
Germany
Ireland
Italy
Japan
Luxembourg
Mexico
Netherlands
New Zealand
Norway
South Africa
South Korea
Spain
Sweden
Switzerland
UK
USA
Zambia
Supranational
Total
£m
198.1
17.8
35.6
89.7
14.1
7.6
19.9
293.8
176.4
12.9
30.2
33.6
8.0
17.2
133.4
34.7
23.2
2.4
3.0
67.1
77.4
86.5
1,105.5
1,540.4
1.1
—
—
—
—
—
—
—
12.1
7.0
—
—
—
—
—
—
—
—
10.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.7
1.3
—
—
—
—
—
0.3
—
—
—
—
—
—
—
91.8
5.4
—
—
4,029.6
29.2
99.5
Debt
securities
total
£m
198.1
17.8
35.6
89.7
14.1
7.6
32.0
301.5
177.7
12.9
30.2
33.6
8.0
17.2
133.7
34.7
33.3
2.4
3.0
67.1
77.4
86.5
1,197.3
1,545.8
1.1
31.3
4,189.6
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
31.3
31.3
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177
177
Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
3. Risk management continued
3. Risk management continued
3.3.1 Insurance risk continued
3.3.2 Market risk continued
The table below analyses the distribution of debt securities by industry sector classifications.
The key risks relating to climate change today are UK floods and major UK windstorms.
44%
26%
19%
11%
100%
£m
£m
2019
2020
6%
3%
212.2
104.5
426.7
121.0
262.2
305.1
358.0
The Group recognises that climate change may impact its business over the longer term. In particular, there is a risk that
climate change affects the frequency and severity of extreme weather events (physical risk), which will change the Group’s
%
At 31 December
%
view of underwriting risk, reinsurance and pricing. The Group will be developing its risk management systems and
Basic materials
3%
monitoring tools over 2021 for physical risk alongside participating in the Climate Biennial Exploratory Scenario ("CBES").
Communications
5%
Low-frequency, high-severity weather losses are mitigated to a significant degree by the catastrophe reinsurance
programme, the ceding of home high flood risks to Flood Re, and the commercial underwriting strategy which reduces
9%
7%
Consumer, cyclical
high flood risk exposure. Furthermore, there is a risk that the Group’s insurance products will not meet its customers’ needs
Consumer, non-cyclical
10%
10%
as a result of changes in market dynamics and customer behaviour in relation to climate change, for example a rapid shift
Diversified
0%
0%
towards electric vehicle usage. The Group expects these specific risks to materialise in the medium to longer-term (see
page 63 for definition) and anticipates that its continued strategic and operational response to the transition to a lower-
Energy
4%
carbon economy will support mitigation of these risks and the associated impacts in the long term.
45%
Financial
When underwriting policies, the Group is subject to concentration risk in a variety of forms, including:
Industrial
7%
– geographic concentration risk – the Group purchases a catastrophe reinsurance programme to protect against a
2%
Sovereign, supranational and local government
3%
0%
12%
100%
– product concentration risk – the Group’s business is heavily concentrated in the UK general insurance market. However,
Transport
0%
the Group offers a diversified portfolio of products and a variety of brands sold through a range of distribution channels
11%
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.
4%
modelled 1-in-200 year catastrophe loss. The programme renews annually on 1 July and has a retention of £130 million
4%
and an upper limit of £1,125 million;
The table below analyses the distribution of infrastructure debt by industry sector classifications.
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.
At 31 December
Distribution risk
Social, of which:
The risk of a material reduction in profit compared to plan due to the Group not writing its planned policy volumes in each
44%
segment.
Technology
Education
4,207.0
1,861.7
4,189.6
Utilities
1,897.0
100%
280.3
Total
–
121.1
181.7
293.5
433.7
405.5
160.1
145.3
523.9
103.9
184.2
115.7
44%
20.8
13.4
82.1
13.4
4%
7%
6.4
2020
2019
£m
£m
%
%
53.5
73.2
70.3
50.7
26%
Healthcare
Pricing risk
Other
The risk of economic loss arising from business being incorrectly priced or underwritten.
Transport
11%
Reinsurance risk
100%
Total
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.
The Group uses its internal economic capital model to determine its capital requirements and market risk limits and
Other risks include:
monitors its market risk exposure based on a 99.5% value-at-risk measure. The Group also applies market risk stress and
scenario 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 market risk 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
– underwriting risk appetite and reinsurance contract terms not being aligned;
interest rate risk exposures.
–
Spread risk
– non-adherence to the reinsurance policy terms and conditions, in terms of both policy management and claims not
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.
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
reinsurance contract terms being inappropriate or ineffective resulting in classes or types of business not being
appropriately reinsured;
reinsurance concentration risk – the concentration of credit exposure to any given counterparty;
reinsurance capacity being reduced and/or withdrawn;
27.8
264.5
30.3
278.1
19%
volatility to reinsurers;
Net interest rate risk
– changes in the external legal, regulatory, social or economic environment (including changes resulting from climate
change) altering the definition and application of reinsurance policy wordings or the effectiveness or value for money of
This is the risk of loss from changes in the term structure of interest rates or interest rate volatility which impact assets and
reinsurance.
liabilities. 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 uses reinsurance to:
The Group has subordinated guaranteed dated Tier 2 notes with fixed coupon rates which were issued on 27 April 2012 at
– protect the underwriting result against low-frequency, high-severity losses through the transfer of catastrophe claims
a fixed rate of 9.25% and have a redemption date of 27 April 2042; at the time of issue, the Group entered into a 10-year
interest rate swap, to exchange the fixed rate of interest on these notes to a floating rate, to hedge exposure to interest
– protect the underwriting result against unforeseen volumes of, or adverse trends in, large individual claims in order to
rates. This was treated as a designated hedging instrument.
reduce volatility and to improve stability of earnings;
reduce the Group’s capital requirements; and/or
–
Of the £500 million notes issued, the Group has bought back a total nominal value of £250 million.
transfer risk that is not within the Group’s current risk appetite.
–
The hedging relationship between the subordinated debt and the interest rate swap was redesignated to reflect this
transaction and ensure continuing hedge effectiveness. However, on 31 July 2020 the Group identified that the hedge no
longer met the criteria of hedge effectiveness under IAS 39 ‘Financial Instruments: Recognition and Measurement’ and,
under the rules of the standard, the accumulated hedging adjustment is being amortised to the income statement from
the date of the last successful hedge effectiveness test over the remaining life of the subordinated debt using an effective
interest rate calculation.
The Group also has subordinated Tier 2 notes with fixed coupon rates with a nominal value of £260 million that were
issued on 5 June 2020 and 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.
178
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Direct Line Group Annual Report and Accounts 2020
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 and Euro corporate bonds, the Group hedges its exposure to US dollar and Euro
interest rate risk using swaps, excluding £361.8 million of US dollar short duration high yield bonds (2019: £398.9 million),
£99.9 million of US dollar subordinated financial debt and £71.4 million of Euro subordinated financial debt (2019: £111.4
million US dollar and £64.7 million Euro) and £58.7 million short duration Euro credit (2019: £194.3 million).
The Group is exposed to the following interest rate benchmarks within its hedging relationships: GBP LIBOR, USD LIBOR
and EURIBOR. The first two are subject to interest rate benchmark reform. The hedged items include issued sterling fixed
rate subordinated debt (which is no longer treated as designated under IAS 39) and holdings of US dollar and Euro
denominated fixed rate debt securities.
The Group has in place an IBOR transition plan which is updated regularly. The most recent version of the plan was
reviewed by the Investment Committee in November 2020. The plan identifies where the Group has IBOR exposures and
the departments responsible for ensuring a suitable plan is in place to enable a smooth transition to alternative
benchmark rates. Delivering the plan is under the governance of the Chief Financial Officer. The Group has also provided
the plan and data in response to data submission requests from the PRA in 2020.
In the course of 2020 and early 2021 the following steps were undertaken as part of the transition process:
– amendments were made to the intra-company loan agreements to ensure that they contain LIBOR fall-back language;
– U K Insurance Limited adhered to the International Swaps and Derivative Association fall-back protocol which covers
the interest rate swap held to hedge issued subordinated debt which references GBP LIBOR; the external asset
managers too have to adhere to the protocol, thus covering the interest rate swaps in the managed portfolios;
the Loan Market Association published the exposure drafts of facility agreements which in the first half of 2021 will be
used to add LIBOR fall-back clauses to the existing loan agreements in the infrastructure debt and commercial real
estate loan portfolios; and
these fall-back clauses will be added to any new agreements.
–
–
The designated hedging instruments and hedged items in scope of the IFRS 9/IAS 39 amendments due to benchmark
interest rate reform are set out in the table below by hedge type.
Hedge type
Instrument type
Maturing in Nominal
Hedged item
Fair value
hedges
Pay USD fixed, receive 3-month USD LIBOR
interest rate swaps
2023 - 2051 US$131
million
Pay USD fixed, receive 1-month USD LIBOR
interest rate swaps
2021 - 2031 US$1,016
million
Pay Euro fixed, receive 6-month EURIBOR
interest rate swaps
2023 - 2041 €107 million
Portfolio fair value hedge
of the 3-month USD
LIBOR component of US
dollar denominated fixed
rate debt securities
Portfolio fair value hedge
of the 1-month USD
LIBOR component of US
dollar denominated fixed
rate debt securities
Portfolio fair value hedge
of the 6-month EURIBOR
component of Euro
denominated fixed rate
debt securities
The Group will continue to apply the amendments to IFRS 9/IAS 39 until the uncertainty arising from the interest rate
benchmark reforms with respect to the timing and the amount of the underlying cash flows to which the Group is
exposed ends. The Group has assumed that this uncertainty will not end until the Group’s contracts that reference IBORs
are amended to specify the date the interest rate benchmark will be replaced, the cash flows of the alternative benchmark
rate and any resulting spread adjustments. This will, in part, be dependent on the introduction of fall-back clauses which
have yet to be added to some of the Group’s contracts and the negotiation with borrowers.
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 2020, the value of these property investments was £292.1
million (2019: £291.7 million). The property investments are located in the UK.
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 debt bonds.
The Group maintains exposure to US dollar securities through £1,331.9 million (2019: £1,366.1 million) of investments in US
dollar bonds and Euro securities through £231.1 million (2019: £359.1 million) of Euro 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.
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Financial Statements Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
3. Risk management continued
3.3.2 Market risk continued
Use of derivatives
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 2020
Derivative assets
At fair value through the income statement:
Foreign exchange contracts (forwards)
Interest rate swaps1
Designated as hedging instruments:
Foreign exchange contracts (forwards)
Interest rate swaps
Total
At 31 December 2020
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
1 – 5 years
£m
£m
£m
Over
5 years
£m
2,182.8
250.0
4.1
150.3
63.5
1.0
0.1
—
—
7.2
—
—
2,587.2
64.6
7.2
—
—
—
1.6
1.6
Notional
amounts
Maturity and fair value
Less than
1 year
1 – 5 years
£m
£m
£m
Over
5 years
£m
Total
£m
63.5
8.2
0.1
1.6
73.4
Total
£m
696.4
12.3
—
—
12.3
785.1
1,481.5
2.4
17.7
14.7
17.7
24.8
24.8
44.9
57.2
1. The 2012 interest rate swap which was entered into at at the same time as the issue of the 9.25% subordinated Tier 2 notes due 2042 was treated as a
designated hedging instrument in 2019 and as fair value through the income statement in 2020.
At 31 December 2019
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 2019
Derivative liabilities
At fair value through the income statement:
Foreign exchange contracts (forwards)
Designated as hedging instruments:
Foreign exchange contracts (forwards)
Interest rate swaps
Total
Notional
amounts
Maturity and fair value
Less than
1 year
1 – 5 years
£m
£m
£m
Over
5 years
£m
Total
£m
2,310.3
112.1
—
—
112.1
7.8
277.7
0.4
0.7
2,595.8
113.2
—
8.3
8.3
—
—
—
0.4
9.0
121.5
Notional
amounts
Maturity and fair value
Less than
1 year
1 – 5 years
£m
£m
£m
Over
5 years
£m
Total
£m
652.6
10.1
—
—
10.1
10.4
853.2
0.2
2.6
1,516.2
12.9
—
2.8
2.8
—
14.8
14.8
0.2
20.2
30.5
180
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Direct Line Group Annual Report and Accounts 2020
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
Interest rate
Impact of a 100 basis points increase in interest rates on financial
investments and derivatives2,3,4
Investment property
Impact of a 15% decrease in property markets
Notes:
Increase / (decrease)
in profit before tax1
Decrease
in total equity1
at 31 December
2020
£m
2019
£m
2020
£m
2019
£m
—
—
(151.2)
(146.4)
12.5
12.0
(114.1)
(103.7)
(43.8)
(43.8)
(43.8)
(43.8)
1. These sensitivities exclude the impact of taxation and 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.
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 £15.1
million (2019: £16.7 million) and a 100 basis points increase in interest rates would have been £4.4 million (2019: £4.9 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.
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 2020, the Group has pledged £65.8
million in cash (2019: £37.8 million) to cover initial margins and out-of-the-money derivative positions. At 31 December
2020, counterparties have pledged £12.0 million in cash and £8.1 million in UK Gilts (2019: £0.3 million in cash and £9.2
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 defaults in obligations due and/or changes in credit standing of either issuers of
securities, counterparties or any debtors to which the Group is exposed. The Group is mainly exposed to counterparty
default risk.
Counterparty default risk
This is the risk of loss from unexpected default or deterioration in the credit standing 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 – this 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;
– commercial credit – this arises as brokers collect premiums on behalf of the Group; and
– consumer credit – exposure from offering monthly instalments on annual insurance contracts.
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Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
3. Risk management continued
3.3.3 Credit risk 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 deal 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 2020
Reinsurance assets
Insurance and other receivables
Derivative assets
Debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents1
Total
At 31 December 2019
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
Past due
1 – 90 days
Past due
more than
90 days
Carrying
value
in the
balance sheet
£m
1,129.1
802.6
73.4
4,207.0
264.5
206.7
1,220.1
7,903.4
£m
—
45.0
—
—
—
—
—
45.0
£m
0.1
0.6
—
—
—
—
—
0.7
£m
1,129.2
848.2
73.4
4,207.0
264.5
206.7
1,220.1
7,949.1
Neither
past due nor
impaired
Past due
1 – 90 days
Past due
more than
90 days
Carrying
value
in the
balance sheet
£m
1,251.2
805.9
121.5
4,189.6
278.1
205.7
948.6
£m
—
40.5
—
—
—
—
—
£m
0.1
0.1
—
—
—
—
—
£m
1,251.3
846.5
121.5
4,189.6
278.1
205.7
948.6
7,800.6
40.5
0.2
7,841.3
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 2020 of £1,282.8 million (2019:
£1,292.2 million) that can be further analysed as: secured £16.2 million (2019: £20.9 million); unsecured £1,125.2 million
(2019: £1,105.5 million); and subordinated £141.4 million (2019: £165.8 million).
The tables below analyse the credit quality of debt securities that are neither past due nor impaired.
At 31 December 2020
Corporate
Supranational
Local government
Sovereign
Total
AAA
£m
68.1
21.3
10.2
10.1
AA+ to AA–
A+ to A–
BBB+ to BBB– BB+ and below
£m
£m
£m
400.9
—
25.4
15.1
1,842.3
1,447.1
—
—
—
—
—
—
£m
366.5
—
—
—
Total
£m
4,124.9
21.3
35.6
25.2
109.7
441.4
1,842.3
1,447.1
366.5
4,207.0
182
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Direct Line Group Annual Report and Accounts 2020
At 31 December 2019
Corporate
Supranational
Local government
Sovereign
Total
AAA
£m
70.9
31.3
10.1
6.7
AA+ to AA–
A+ to A–
BBB+ to BBB– BB+ and below
£m
£m
£m
£m
Total
£m
498.8
1,809.2
1,259.9
390.8
4,029.6
—
19.1
92.8
—
—
—
—
—
—
—
—
—
31.3
29.2
99.5
119.0
610.7
1,809.2
1,259.9
390.8
4,189.6
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 181.
At 31 December 2020
Reinsurance assets
Insurance and other
receivables1
Derivative assets
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents2
AA+ to AA−
A+ to A−
BBB+ to BBB– BB+ and below
Not rated
AAA
£m
£m
£m
—
766.9
359.7
—
—
—
1.2
995.2
17.3
8.5
—
44.7
55.7
40.2
64.9
71.7
117.8
169.2
£m
1.9
16.4
—
192.8
32.3
—
£m
—
—
—
—
10.7
—
£m
0.6
728.7
—
—
—
—
Total
£m
1,129.1
802.6
73.4
264.5
206.7
1,220.1
Total
996.4
893.1
823.5
243.4
10.7
729.3
3,696.4
At 31 December 2019
Reinsurance assets
Insurance and other
receivables1
Derivative assets
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents2
Total
Notes:
AA+ to AA−
A+ to A−
BBB+ to BBB– BB+ and below
Not rated
AAA
£m
£m
£m
—
842.0
406.3
—
—
—
—
2.8
111.5
—
30.3
10.0
75.8
46.6
118.9
725.5
123.7
98.8
£m
2.3
11.3
—
202.3
26.7
0.6
£m
—
—
—
—
13.5
—
Total
£m
£m
0.6
1,251.2
761.5
—
—
—
—
805.9
121.5
278.1
205.7
948.6
725.5
1,126.6
740.1
243.2
13.5
762.1
3,611.0
Includes receivables due from policyholders, agents, brokers and intermediaries which generally do not have a credit rating.
1.
2. This represents money market funds with no notice period for withdrawal and cash at bank and in hand.
3.3.4 Operational risk
This is the risk of loss due to inadequate or failed internal processes, people, systems, or from external events. 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 information or services are unavailable because of compromised, unstable or inadequately performing
systems, all of which impact customers.
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 intra-group relationships. This includes both
domestic and offshore outsourcing activities.
Information security risk
This is the risk of loss or 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 and monitor key controls relating to operational risk.
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Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
3. Risk management continued
3.3.5 Liquidity risk
This is the risk of being unable to access cash from the sale of investments or other assets in order to settle financial
obligations as they fall due.
The measurement and management of the Group’s liquidity risk is undertaken within the limits and other policy
parameters of the Group’s liquidity risk appetite and is detailed in 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 inflows and outflows that is reviewed at least annually by the Investment 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 can fund the repayment of liabilities as they crystallise.
At 31 December 2020
Debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents1
Within
1 year
1 – 3 years
3 – 5 years
5 – 10 years
£m
£m
£m
£m
407.7
1,053.8
1,133.6
1,492.8
14.0
35.0
1,220.1
31.4
106.3
—
34.9
65.4
—
98.1
—
—
Over
10 years
£m
119.1
86.1
—
—
Total
£m
4,207.0
264.5
206.7
1,220.1
Total
1,676.8
1,191.5
1,233.9
1,590.9
205.2
5,898.3
At 31 December 2019
Debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents1
Total
Note:
Within
1 year
£m
1 – 3 years
3 – 5 years
5 – 10 years
£m
£m
£m
Over
10 years
£m
Total
£m
506.1
1,054.8
1,089.7
1,391.3
147.7
4,189.6
13.8
45.8
948.6
29.2
122.9
—
34.2
37.0
—
95.1
105.8
—
—
—
—
278.1
205.7
948.6
1,514.3
1,206.9
1,160.9
1,486.4
253.5
5,622.0
1. This represents money market funds with no notice period for withdrawal and cash at bank and in hand.
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 2020
Subordinated liabilities
Insurance liabilities1
Borrowings
Lease liabilities
Provisions
Within
1 year
£m
33.5
1,053.5
51.9
17.6
108.2
1 – 3 years
3 – 5 years
5 – 10 years
£m
£m
£m
282.4
953.8
—
29.6
6.5
20.8
456.8
—
25.9
0.1
Over
10 years
£m
280.8
1,817.6
—
75.4
—
Total
£m
669.5
4,653.3
51.9
205.6
114.8
Carrying
value
£m
516.6
3,617.0
51.9
152.4
114.8
—
549.9
549.9
52.0
371.6
—
57.1
—
—
Trade and other payables,
including insurance payables
543.6
6.1
0.2
Total
1,808.3
1,278.4
503.8
480.7
2,173.8
6,245.0
5,002.6
At 31 December 2019
Subordinated liabilities
Insurance liabilities1
Borrowings
Lease liabilities
Provisions
Within
1 year
£m
1 – 3 years
3 – 5 years
5 – 10 years
£m
23.1
284.7
£m
—
£m
—
Over
10 years
£m
—
Total
£m
Carrying
value
£m
307.8
259.0
1,120.0
1,000.1
514.9
428.0
2,096.7
5,159.7
3,819.6
52.3
18.3
74.3
—
32.8
—
—
29.1
—
—
48.8
—
—
—
52.3
95.7
224.7
—
74.3
52.3
164.4
74.3
—
478.1
478.1
Trade and other payables,
including insurance payables
473.7
4.2
0.2
Total
Note:
1,761.7
1,321.8
544.2
476.8
2,192.4
6,296.9
4,847.7
1.
Insurance liabilities exclude unearned premium reserves as there are no liquidity risks inherent in them.
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The following table analyses the undiscounted cash flows of derivative financial instruments, by contractual maturity.
At 31 December 2020
Derivatives assets
Derivatives liabilities
Within
1 year
£m
69.2
(24.6)
1 – 3 years
£m
3 – 5 years
£m
5 – 10 years
£m
2.3
(18.2)
0.1
(10.8)
Total
44.6
(15.9)
(10.7)
1.9
(3.6)
(1.7)
At 31 December 2019
Derivatives assets
Derivatives liabilities
Total
Within
1 year
£m
116.1
(15.4)
100.7
1 – 3 years
£m
3 – 5 years
£m
5 – 10 years
£m
5.5
(6.8)
(1.3)
—
(5.3)
(5.3)
—
(3.7)
(3.7)
Over
10 years
£m
—
(0.1)
(0.1)
Over
10 years
£m
—
—
—
Total
£m
73.5
(57.3)
16.2
Total
£m
121.6
(31.2)
90.4
Carrying
value
£m
73.4
(57.2)
16.2
Carrying
value
£m
121.5
(30.5)
91.0
3.4 Capital management
At 31 December 2020, the Group's capital position was comprised of shareholders' equity of £2,699.7 million (31 December
2019: £2,643.6 million) and Tier 1 notes of £346.5 million (31 December 2019: £346.5 million). In addition, the Group's
balance sheet also included £516.6 million of subordinated loan capital (31 December 2019: £259.0 million) which is
classified as Tier 2 for Solvency II purposes.
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 U K
Insurance Limited 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 £1.22 billion above an estimated SCR of
£1.34 billion as at 31 December 2020 (31 December 2019: £0.85 billion and £1.32 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, Privilege and Darwin, and through
partnership brands such as vehicle manufacturers and through price comparison websites ("PCWs").
Home
This segment consists of home insurance together with associated legal protection cover. The Group sells home insurance
products through its brands Direct Line, Churchill and Privilege, and its partnership brands (Royal Bank of Scotland and
NatWest), as well as through PCWs.
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 PCWs.
Commercial
This segment consists of commercial insurance for small and medium-sized enterprises sold through the Group’s 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 PCWs.
Restructuring and one-off costs
Restructuring costs are costs incurred in respect of those business activities which have a material effect on the nature and
focus of the Group’s operations. One-off costs are costs that are non-recurring in nature.
No inter-segment transactions occurred in the year ended 31 December 2020 (2019: £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.
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Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
4. Segmental analysis continued
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 2020.
Gross written premium
Gross earned premium
Reinsurance premium
Net earned premium
Investment return
Instalment income
Other operating income
Total income
Insurance claims
Insurance claims recoverable from / (payable to)
reinsurers
Net insurance claims
Commission expenses
Operating expenses before restructuring and one-off
costs
Total expenses
Operating profit
Restructuring and one-off costs
Finance costs
Profit before tax
Underwriting profit / (loss)
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Rescue
and other
personal lines
Commercial
£m
£m
Motor
£m
1,616.9
1,635.3
(150.5)
1,484.8
62.8
80.1
38.4
Home
£m
577.9
581.9
(26.1)
555.8
10.3
19.2
0.2
417.8
425.6
(2.7)
422.9
3.4
3.0
8.9
1,666.1
585.5
438.2
(889.2)
(316.5)
(279.1)
1.1
7.4
18.0
(888.1)
(309.1)
(261.1)
(47.4)
(45.0)
(69.4)
(367.1)
(130.0)
(100.9)
(414.5)
(175.0)
(170.3)
363.5
101.4
6.8
567.8
546.5
(49.5)
497.0
18.6
7.0
2.4
525.0
(245.6)
(9.7)
(255.3)
(92.9)
(126.4)
(219.3)
50.4
182.2
59.8%
3.2%
24.7%
87.7%
71.7
55.6%
8.1%
23.4%
(8.5)
61.7%
16.4%
23.9%
22.4
51.4%
18.7%
25.4%
87.1%
102.0%
95.5%
Total
Group
£m
3,180.4
3,189.3
(228.8)
2,960.5
95.1
109.3
49.9
3,214.8
(1,730.4)
16.8
(1,713.6)
(254.7)
(724.4)
(979.1)
522.1
(39.4)
(31.3)
451.4
267.8
57.9%
8.6%
24.5%
91.0%
The table below analyses the Group’s assets and liabilities by reportable segment at 31 December 2020.
Goodwill
Other segment assets
Segment liabilities
Segment net assets
Motor
£m
Home
£m
129.6
45.8
Rescue
and other
personal lines
£m
28.7
6,874.0
765.5
304.2
(4,771.6)
(558.7)
(196.2)
2,232.0
252.6
136.7
Commercial
£m
10.1
1,464.4
(1,049.6)
424.9
Total
£m
214.2
9,408.1
(6,576.1)
3,046.2
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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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
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The table below analyses the Group’s revenue and results by reportable segment for the year ended 31 December 2019.
Gross written premium
Gross earned premium
Reinsurance premium
Net earned premium
Investment return
Instalment income
Other operating income
Total income
Insurance claims
Motor
£m
1,651.6
1,653.2
(145.5)
1,507.7
88.6
83.8
51.3
Home
£m
586.6
598.8
(25.2)
573.6
16.7
20.5
0.6
Rescue
and other
personal lines
Commercial
£m
£m
Total
Group
£m
436.0
427.4
528.9
3,203.1
523.2
3,202.6
(2.2)
(44.8)
(217.7)
425.2
478.4
2,984.9
5.6
2.8
11.1
23.7
6.9
3.2
134.6
114.0
66.2
1,731.4
611.4
444.7
512.2
3,299.7
(1,086.8)
(276.2)
(285.2)
(269.1)
(1,917.3)
Insurance claims recoverable from reinsurers
43.5
7.8
0.8
17.6
69.7
Net insurance claims
Commission expenses
Operating expenses before restructuring and one-off
costs
Total expenses
Operating profit
Restructuring and one-off costs
Finance costs
Profit before tax
Underwriting profit
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
(1,043.3)
(268.4)
(284.4)
(251.5)
(1,847.6)
(39.9)
(55.7)
(27.2)
(88.7)
(211.5)
(345.6)
(385.5)
302.6
(136.7)
(192.4)
150.6
(94.0)
(121.2)
39.1
(117.4)
(206.1)
(693.7)
(905.2)
54.6
546.9
78.9
112.8
19.6
20.8
69.3%
2.6%
22.9%
94.8%
46.8%
9.7%
23.8%
80.3%
66.9%
6.4%
22.1%
95.4%
52.7%
18.5%
24.5%
95.7%
(11.2)
(26.0)
509.7
232.1
61.9%
7.1%
23.2%
92.2%
The table below analyses the Group’s assets and liabilities by reportable segment at 31 December 2019.
Goodwill
Other segment assets
Segment liabilities
Segment net assets
Motor
£m
Home
£m
129.6
45.8
Rescue
and other
personal lines
£m
28.7
Commercial
£m
Total
£m
10.1
214.2
6,839.9
682.6
230.3
1,467.2
9,220.0
(4,770.4)
(489.1)
(154.6)
(1,030.0)
(6,444.1)
2,199.1
239.3
104.4
447.3
2,990.1
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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Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
5. Net earned premium
Gross earned premium:
Gross written premium
Movement in unearned premium reserve
Reinsurance premium paid and payable:
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 gains / (losses):
AFS debt securities
Derivatives
Investment property (note 20)
Net unrealised losses:
Impairment of loans and receivables
Derivatives
Investment property (note 20)
Total
2020
£m
2019
£m
3,180.4
8.9
3,189.3
(231.0)
2.2
(228.8)
2,960.5
3,203.1
(0.5)
3,202.6
(215.9)
(1.8)
(217.7)
2,984.9
2020
£m
98.6
2.5
5.8
6.5
113.4
13.7
127.1
1.1
69.9
—
71.0
(2.7)
(90.2)
(10.1)
(103.0)
95.1
2019
£m
108.4
7.9
7.0
6.9
130.2
16.2
146.4
16.5
(9.5)
(0.7)
6.3
—
(12.6)
(5.5)
(18.1)
134.6
The table below analyses the realised and unrealised gains and losses on derivative instruments included in investment
return.
Derivative gains / (losses):
Foreign exchange forward contracts1
Associated foreign exchange risk
Net gains / (losses) 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
2020
£m
57.4
28.1
85.5
(26.2)
10.6
(15.6)
69.9
2020
£m
(50.8)
(45.7)
(96.5)
(23.0)
29.3
6.3
(90.2)
2019
£m
2019
£m
(56.8)
103.4
53.4
(3.4)
(16.8)
10.7
(6.1)
(9.5)
(123.8)
(20.4)
(33.6)
41.4
7.8
(12.6)
1. All foreign exchange forward contracts and certain interest rate swaps are measured at fair value through profit and loss. There are also interest rate swaps
designated as hedging instruments.
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7. Other operating income
Revenue from vehicle recovery and repair services
Vehicle replacement referral income
Legal services income
Other income1
Total
Note:
1. Other income mainly includes fee income from insurance intermediary services.
8. Net insurance claims
2020
£m
24.0
12.2
8.8
4.9
49.9
2019
£m
28.3
19.1
11.3
7.5
66.2
Current accident year claims paid
Prior accident year claims paid
Decrease in insurance liabilities
Total
Gross
Reinsurance
2020
£m
1,056.4
876.6
2020
£m
(18.1)
(123.0)
(202.6)
124.3
1,730.4
(16.8)
Net
2020
£m
1,038.3
753.6
(78.3)
1,713.6
Gross
Reinsurance
2019
£m
1,232.9
870.7
(186.3)
2019
£m
(0.2)
(25.1)
(44.4)
Net
2019
£m
1,232.7
845.6
(230.7)
1,917.3
(69.7)
1,847.6
Claims handling expenses1 for the year ended 31 December 2020 of £208.2 million (2019: £202.9 million) have been
included in the claims figures above.
Note:
1.
Includes costs in respect of low value leases of £0.8 million (2019: £0.3 million).
9. Commission expenses
Commission expenses
Expenses incurred under profit participations
Total
10. Operating expenses
Staff costs1,2
IT and other operating expenses1,2,3
Marketing
Insurance levies
Depreciation and amortisation1,4,5
Total operating expenses (including restructuring and one-off costs)
Of which restructuring and one-off costs
Total excluding restructuring and one-off costs
Notes:
2020
£m
180.9
73.8
254.7
2020
£m
270.3
220.2
106.6
80.4
86.3
763.8
39.4
724.4
2019
£m
171.2
40.3
211.5
2019
£m
267.3
163.4
113.9
81.5
78.8
704.9
11.2
693.7
1. Restructuring and one-off costs of £39.4 million (2019: £11.2 million) are included as follows: staff costs of £14.7 million (2019: £5.8 million), other operating
expenses of £24.2 million (2019: £5.4 million) and depreciation of £0.5 million (2019: £nil).
2. Staff costs and other operating expenses attributable to claims handling activities are allocated to the cost of insurance claims.
3.
4. For year ended 31 December 2020, depreciation and amortisation include a £6.6 million impairment charge (2019: £1.3 million), which relates to capitalised
IT and other operating expenses include professional fees and property costs.
software development costs for ongoing IT projects primarily relating to development of new systems.
Includes depreciation on right-of-use assets of £14.8 million (2019: £14.2 million).
5.
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
2020
8,022
1,441
1,344
10,807
2019
7,963
1,444
1,355
10,762
2020
8,010
1,454
1,388
10,852
2019
8,388
1,384
1,350
11,122
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189
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Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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
Non-audit services
Total
2020
£m
393.5
43.6
26.2
18.5
481.8
2020
£m
0.2
1.9
2.1
0.2
0.6
2.9
2019
£m
387.2
41.9
25.5
18.4
473.0
2019
£m
0.2
1.8
2.0
0.2
0.1
2.3
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
2020
£m
3.8
—
3.8
2019
£m
4.4
5.3
9.7
Further information about the remuneration of individual Directors is provided in the Directors’ Remuneration Report.
At 31 December 2020, no Directors (2019: one Director) had retirement benefits accruing under the defined contribution
pension scheme in respect of qualifying service. During the year ended 31 December 2020, one Director exercised share
options (2019: three Directors).
11. Finance costs
Interest expense on subordinated liabilities1
Net interest received on interest rate swap2
Unrealised losses on interest rate swap2
Unrealised (gain) / loss on designated hedging instrument2
Unrealised loss / (gains) on associated interest rate risk on hedged item2
Amortisation of arrangement costs, discount on issue and fair value hedging adjustment of
subordinated liabilities
Interest expense on lease liabilities
Total
Notes:
2020
£m
29.1
(4.1)
1.9
(1.2)
0.9
(1.3)
6.0
31.3
2019
£m
23.1
(3.4)
—
0.1
(0.8)
0.3
6.7
26.0
1. On 5 June 2020, the Group issued subordinated Tier 2 notes at a fixed rate of 4.0%. See note 33.
2. As described in note 33, on 27 April 2012 the Group issued subordinated guaranteed dated Tier 2 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 interest rate swap to exchange the fixed rate of interest on the notes for a floating rate. This was
treated as a hedging instrument. On 8 December 2017, the Group redeemed £250 million nominal value of the notes and the hedging agreement was
redesignated accordingly. On 31 July 2020, the Group identified that the hedge no longer met the criteria of hedge effectiveness under IAS 39 and, under the
rules of the standard, the accumulated hedging adjustment has begun to be amortised to the income statement from the date of the last successful hedge
effectiveness test over the remaining life of the subordinated debt using an effective interest rate calculation.
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
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12. Tax charge
Current taxation:
Charge for the year
Over 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
2020
£m
95.2
(0.5)
94.7
(11.1)
0.6
(10.5)
94.7
(10.5)
84.2
2019
£m
101.9
(1.1)
100.8
(5.4)
(5.6)
(11.0)
100.8
(11.0)
89.8
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 (2019: 19.0%).
Profit before tax
Expected tax charge
Effects of:
Disallowable expenses
Effect of change in corporation taxation rate1
Under / (over) provision in respect of prior year
Revaluation of property
Deductible Tier 1 notes coupon payment in equity
Tax charge for the year
Effective income tax rate
Note:
2020
£m
451.4
85.8
1.3
0.1
0.1
0.1
(3.2)
84.2
2019
£m
509.7
96.8
2.9
—
(6.7)
—
(3.2)
89.8
18.7%
17.6%
1.
In the Finance Act 2020 the UK Government cancelled the previously enacted reduction in the UK corporation tax rate from 19% to 17% which had been due
to take effect from 1 April 2020. The impact of this change on the tax charge for the year is set out in the table above.
13. Current and deferred tax
Per balance sheet:
Current tax liabilities
Deferred tax liabilities
2020
£m
10.5
8.7
2019
£m
50.3
9.6
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Financial Statements
Notes to the Consolidated Financial Statements continued
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
Retirement
benefit
obligations
Depreciation
in excess
of capital
allowances
Non-
distributable
reserve1
Share-based
payments
AFS
revaluation
reserve
£m
5.4
£m
(3.0)
£m
(3.4)
£m
(13.7)
£m
2.2
£m
8.0
Total
£m
(4.5)
(1.1)
(0.1)
7.4
4.9
(0.1)
—
11.0
—
4.3
1.3
(1.8)
—
4.0
5.9
(0.3)
—
—
10.2
0.3
—
(1.8)
0.2
—
—
4.2
—
(8.8)
3.9
—
—
(4.9)
—
2.1
(17.4)
(9.4)
(16.1)
(9.6)
0.8
—
0.2
3.1
—
10.5
(10.1)
—
(19.5)
(9.8)
0.2
(8.7)
At 1 January 2019
(Charge) / credit to the
income statement
Credit / (charge) to other
comprehensive income
At 31 December 2019
Credit / (charge) to the
income statement
Credit / (charge) to other
comprehensive income
Credit direct to equity
At 31 December 2020
Note:
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 2020 of £5.0 million (2019: £4.5 million) in
relation to capital losses of which £5.0 million (2019: £4.5 million) relates to realised losses and £nil (2019: £nil) relates to
unrealised losses.
On 3 March 2021, the Chancellor of the Exchequer announced that the rate of UK corporation tax will increase to 25%
from 1 April 2023. This is not reflected in the figures above as it was not substantively enacted at the balance sheet date,
however the effect is not expected to be material.
14. Dividends and appropriations
Amounts recognised as distributions to equity holders in the period:
2020 interim dividend of 7.4 pence per share paid on 4 September 2020
2020 special interim dividend of 14.4 pence per share paid on 4 September 2020
2019 first interim dividend of 7.2 pence per share paid on 6 September 2019
2018 final dividend of 14.0 pence per share paid on 16 May 2019
2018 special dividend of 8.3 pence per share paid on 16 May 2019
Coupon payments in respect of Tier 1 notes1
Proposed dividends:
2020 final dividend of 14.7 pence per share
2019 final dividend of 14.4 pence per share
Note:
2020
£m
100.4
195.5
—
—
—
295.9
16.6
312.5
199.3
—
2019
£m
—
—
98.6
191.8
113.7
404.1
16.6
420.7
—
198.0
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 dividends for 2020 have not been included as a liability in these financial statements.
The Board has also approved a share buyback of up to £100 million, with an initial tranche of up to £50 million expected to
be completed by the time of the half-year results.
On 3 March 2020, the Group announced that the Board had approved a share buyback of up to £150 million. On 19 March
2020, the Board cancelled that share buyback programme given the uncertainty in the capital markets at the time, driven
by the rapidly emerging Covid-19 pandemic.
Following the cancellation of the dividend as announced on 8 April 2020, the final dividend for 2019 was not paid. A
special interim dividend of 14.4 pence per share reflecting a full catch-up of the cancelled 2019 final dividend was paid on
4 September 2020.
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 Restricted Share Plan awards, which reduced the
total dividends paid for the year ended 31 December 2020 by £1.6 million (2019: £1.5 million).
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
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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)
2020
£m
367.2
(16.6)
350.6
1,356.5
25.8
2019
£m
419.9
(16.6)
403.3
1,367.2
29.5
As noted in note 30, the Group cancelled the share buyback programme on 19 March 2020. At the time of cancellation,
the Group had repurchased 10.4 million Ordinary Shares.
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, excluding
Ordinary Shares held as employee trust shares, 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)
2020
£m
367.2
(16.6)
350.6
1,356.5
18.6
1,375.1
25.5
2019
£m
419.9
(16.6)
403.3
1,367.2
15.3
1,382.5
29.2
16. Net asset value per share and return on equity
Net asset value per share is calculated as total shareholders’ equity (which excludes Tier 1 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:
2020
£m
2,699.7
(786.8)
1,912.9
1,364.6
(12.8)
1,351.8
199.7
141.5
2019
£m
2,643.6
(702.5)
1,941.1
1,375.0
(8.4)
1,366.6
193.4
142.0
1. Goodwill has arisen on acquisition by the Group of subsidiary companies and on acquisition of new accident repair centres. Intangible assets primarily comprise
software development costs.
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Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
16. Net asset value 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 2019
Acquisitions and additions
Disposals and write-off1
At 31 December 2019
Acquisitions and additions
At 31 December 2020
Accumulated amortisation and impairment
At 1 January 2019
Charge for the year
Disposals and write-off1
Impairment losses2
At 31 December 2019
Charge for the year
Impairment losses2
At 31 December 2020
Carrying amount
At 31 December 2020
At 31 December 2019
Notes:
2020
£m
367.2
(16.6)
350.6
2,643.6
2,699.7
2,671.7
13.1%
2019
£m
419.9
(16.6)
403.3
2,558.2
2,643.6
2,600.9
15.5%
Goodwill
£m
Other
intangible
assets
£m
212.7
1.5
—
779.4
174.2
(8.8)
Total
£m
992.1
175.7
(8.8)
214.2
944.8
1,159.0
—
140.7
140.7
214.2
1,085.5
1,299.7
—
—
—
—
—
—
—
—
425.3
38.7
(8.8)
1.3
425.3
38.7
(8.8)
1.3
456.5
456.5
49.8
6.6
512.9
49.8
6.6
512.9
214.2
214.2
572.6
488.3
786.8
702.5
1. Disposals and write-off include fully amortised intangible assets no longer utilised by the Group in its operating activities.
2.
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 £370.7 million (2019: £343.5 million). These assets
are tested for impairment during the Group’s annual impairment review 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 (£3.2 million) and is allocated to reportable segments.
The Group’s testing for impairment of goodwill and intangible assets includes the comparison of the recoverable amount
of each CGU to which goodwill and other intangible assets have been allocated with its carrying value and is updated at
each reporting date and whenever there are indications of impairment.
The table below analyses the carrying amount of goodwill allocated to each CGU.
Motor
Home
Rescue and other personal lines
Commercial
Total
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Direct Line Group Annual Report and Accounts 2020
2020
£m
129.6
45.8
28.7
10.1
214.2
2019
£m
129.6
45.8
28.7
10.1
214.2
There is no goodwill impairment for the year ended 31 December 2020 (2019: £nil).
There is no goodwill impairment for the year ended 31 December 2020 (2019: £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
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
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 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
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
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
observable market long-term government bond yields and average industry betas adjusted for an appropriate risk
premium based on independent analysis.
premium based on independent analysis.
The table below details the recoverable amounts in excess of carrying value for the CGUs where goodwill and other
The table below details the recoverable amounts in excess of carrying value for the CGUs where goodwill and other
intangible assets are held. Sensitivity information is included to enhance user understanding of the influence of key
intangible assets are held. Sensitivity information is included to enhance user understanding of the influence of key
assumptions. Following the annual impairment review, no reasonable possible change in these key assumptions would
assumptions. Following the annual impairment review, no reasonable possible change in these key assumptions would
have resulted in an impairment of goodwill and other intangible assets.
have resulted in an impairment of goodwill and other intangible assets.
Assumptions
Assumptions
Sensitivity: impact on recoverable amount of a:
Sensitivity: impact on recoverable amount of a:
Terminal
Terminal
growth
growth
rate
rate
Pre-tax
Pre-tax
discount
discount
rate
rate
Recoverable
Recoverable
amount in
amount in
excess
excess
of carrying
of carrying
value
value
1% decrease in
1% decrease in
terminal
terminal
growth
growth
rate
rate
1% increase in
1% increase in
pre-tax
pre-tax
discount
discount
rate
rate
1% decrease
1% decrease
in forecast
in forecast
pre-tax
pre-tax
profit1
profit1
CGU
Motor
CGU
Motor
Home
Home
Rescue and other personal lines
Rescue and other personal lines
Commercial
Commercial
Note:
Note:
%
%
%
%
£m
£m
£m
£m
£m
£m
£m
£m
1.5
1.5
1.5
1.5
10.7
10.7
10.7
10.7
759.2
759.2
(211.7)
(211.7)
(298.1)
(298.1)
(293.6)
(293.6)
540.9
540.9
(59.0)
(59.0)
(83.0)
(83.0)
(83.1)
(83.1)
640.1
640.1
(56.9)
(56.9)
(79.1)
(79.1)
(74.2)
(74.2)
323.4
323.4
(57.2)
(57.2)
(79.6)
(79.6)
(73.9)
(73.9)
1. Reflects a 1% decrease in the profit for each year of the strategic plan, which is five years.
1. Reflects a 1% decrease in the profit for each year of the strategic plan, which is five years.
18. Property, plant and equipment
18. Property, plant and equipment
Cost
Cost
At 1 January 2019
Additions
At 1 January 2019
Additions
Disposals
Disposals
At 31 December 2019
Additions
At 31 December 2019
Additions
Disposals
Disposals
At 31 December 2020
At 31 December 2020
Accumulated depreciation and impairment
Accumulated depreciation and impairment
At 1 January 2019
Depreciation charge for the year
At 1 January 2019
Depreciation charge for the year
Disposals
Disposals
At 31 December 2019
Depreciation charge for the year
At 31 December 2019
Depreciation charge for the year
Disposals
Disposals
At 31 December 2020
At 31 December 2020
Carrying amount
Carrying amount
At 31 December 2020
At 31 December 2020
At 31 December 2019
At 31 December 2019
Land
Land
and buildings
and buildings
Other
Other
equipment
equipment
£m
£m
£m
£m
Total
Total
£m
£m
79.8
79.8
185.0
185.0
264.8
264.8
—
—
—
—
11.9
11.9
11.9
11.9
(7.7)
(7.7)
(7.7)
(7.7)
79.8
79.8
189.2
189.2
269.0
269.0
—
—
—
—
20.1
20.1
20.1
20.1
(13.4)
(13.4)
(13.4)
(13.4)
79.8
79.8
195.9
195.9
275.7
275.7
5.3
5.3
103.3
103.3
108.6
108.6
1.1
1.1
23.5
23.5
24.6
24.6
—
—
(7.6)
(7.6)
(7.6)
(7.6)
6.4
6.4
119.2
119.2
125.6
125.6
1.1
1.1
—
—
14.0
14.0
15.1
15.1
(11.1)
(11.1)
(11.1)
(11.1)
7.5
7.5
122.1
122.1
129.6
129.6
72.3
73.4
72.3
73.4
73.8
70.0
73.8
70.0
146.1
143.4
146.1
143.4
The Group is satisfied that the aggregate fair value of property, plant and equipment is not less than its carrying value.
The Group is satisfied that the aggregate fair value of property, plant and equipment is not less than its carrying value.
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Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
19. Right-of-use assets
Cost
At 1 January 2019
Additions
Disposals
At 31 December 2019
Additions
Disposals
At 31 December 2020
Accumulated depreciation and impairment
At 1 January 2019
Depreciation charge for the year
Disposals
At 31 December 2019
Depreciation charge for the year
Disposals
At 31 December 2020
Carrying amount
At 31 December 2020
At 31 December 2019
20. Investment property
At 1 January
Additions at cost
Decrease in fair value during the year
Disposals
At 31 December1
Note:
Property
£m
Motor
vehicles
£m
204.0
5.9
—
209.9
4.2
(18.7)
195.4
58.5
10.2
—
68.7
11.0
(16.1)
63.6
14.0
4.3
(4.3)
14.0
1.8
(3.2)
12.6
7.0
3.8
(4.1)
6.7
3.6
(3.2)
7.1
131.8
141.2
5.5
7.3
IT
equipment
£m
1.2
—
—
1.2
—
—
1.2
0.3
0.2
—
0.5
0.2
—
0.7
0.5
0.7
2020
£m
291.7
10.5
(10.1)
—
292.1
Total
£m
219.2
10.2
(4.3)
225.1
6.0
(21.9)
209.2
65.8
14.2
(4.1)
75.9
14.8
(19.3)
71.4
137.8
149.2
2019
£m
322.1
—
(6.2)
(24.2)
291.7
1. The cost included in the carrying value at 31 December 2020 is £233.4 million (2019: £222.9 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
2019.
Lease agreements with tenants are drawn up in line with local practice and the Group has no exposure to leases that
include contingent rents.
21. Subsidiaries
The principal subsidiary undertakings of the Group, over which it exercises 100% voting power, are shown below. Their
capital consists of Ordinary Shares which are unlisted. All subsidiaries (a full list of which is included in note 2 of the Parent
Company’s financial statements) are included in the Group’s consolidated financial statements.
Name of subsidiary
DL Insurance Services Limited
U K Insurance Limited
Company
registration
number
03001989
01179980
Place of incorporation
and operation
Principal activity
United Kingdom
Management services
United Kingdom
General insurance
On 15 September 2020, the Group acquired 100% of the issued share capital of Brolly UK Technology Limited. The Group
did not dispose of any subsidiaries in the year ended 31 December 2020 (31 December 2019: no acquisitions or disposals).
For the period ended 31 December 2020, it is expected that Brolly UK Technology Limited will be exempt from the
requirements of the Companies Act 2006 relating to the audit of individual accounts by virtue of section 479 A.
196 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
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Direct Line Group Annual Report and Accounts 2020
22. Reinsurance assets
Reinsurers’ share of general insurance liabilities
Impairment provision1
Total excluding reinsurers’ unearned premium reserves
Reinsurers’ unearned premium reserve
Total
Note:
Notes
34
35
2020
£m
1,071.6
(46.3)
1,025.3
103.9
1,129.2
2019
£m
1,190.1
(40.5)
1,149.6
101.7
1,251.3
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 it 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
23. Deferred acquisition costs
At 1 January
Additions
Recognised in the income statement
At 31 December
24. Insurance and other receivables
Receivables arising from insurance contracts:
Due from policyholders
Impairment provision of policyholder receivables
Due from agents, brokers and intermediaries
Impairment provision of agent, broker and intermediary receivables
Amounts due from reinsurers
Other debtors
Total
Movement in impairment provisions during the year
At 1 January 2020
Additional provision
Released to income statement
At 31 December 2020
25. Prepayments, accrued income and other assets
Prepayments
Accrued income and other assets
Total
2020
£m
(40.5)
(13.7)
7.9
(46.3)
2020
£m
176.2
361.6
(365.6)
172.2
2020
£m
614.6
(2.2)
136.0
(0.3)
51.8
48.3
848.2
Policyholders
Agents,
brokers and
intermediaries
£m
1.0
25.2
(24.0)
2.2
£m
0.2
0.3
(0.2)
0.3
2019
£m
(54.7)
(4.2)
18.4
(40.5)
2019
£m
170.4
366.8
(361.0)
176.2
2019
£m
684.8
(1.0)
111.5
(0.2)
10.1
41.3
846.5
Total
£m
1.2
25.5
(24.2)
2.5
2020
£m
95.1
30.9
126.0
2019
£m
99.2
21.0
120.2
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Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
26. Derivative financial instruments
26. Derivative financial instruments
26. Derivative financial instruments
Derivative assets
Derivative assets
Derivative assets
At fair value through the income statement:
Foreign exchange contracts (forwards)
Interest rate swaps1
At fair value through the income statement:
At fair value through the income statement:
Foreign exchange contracts (forwards)
Foreign exchange contracts (forwards)
Interest rate swaps1
Interest rate swaps1
Designated as hedging instruments:
Designated as hedging instruments:
Designated as hedging instruments:
Foreign exchange contracts (forwards)2
Foreign exchange contracts (forwards)2
Foreign exchange contracts (forwards)2
Interest rate swaps1
Interest rate swaps1
Interest rate swaps1
Total
Total
Total
Derivative liabilities
Derivative liabilities
Derivative liabilities
At fair value through the income statement:
Foreign exchange contracts (forwards)
At fair value through the income statement:
At fair value through the income statement:
Foreign exchange contracts (forwards)
Foreign exchange contracts (forwards)
Designated as hedging instruments:
Designated as hedging instruments:
Designated as hedging instruments:
Foreign exchange contracts (forwards)2
Foreign exchange contracts (forwards)2
Foreign exchange contracts (forwards)2
Interest rate swaps
Interest rate swaps
Interest rate swaps
Total
Total
Total
Notes:
Notes:
Notes:
2020
2020
2020
£m
£m
£m
2019
2019
2019
£m
£m
£m
63.5
63.5
63.5
8.2
8.2
8.2
112.1
112.1
112.1
—
—
—
0.1
0.1
0.1
1.6
1.6
1.6
73.4
73.4
73.4
0.4
0.4
0.4
9.0
9.0
9.0
121.5
121.5
121.5
12.3
12.3
12.3
10.1
10.1
10.1
—
—
—
44.9
44.9
57.2
57.2
57.2
44.9
0.2
0.2
0.2
20.2
20.2
20.2
30.5
30.5
30.5
1. As described in note 33, the 2012 interest rate swap, which was entered into at the same time as the issue of the 9.25% subordinated Tier 2 notes due 2042, was
1. As described in note 33, the 2012 interest rate swap, which was entered into at the same time as the issue of the 9.25% subordinated Tier 2 notes due 2042, was
1. As described in note 33, the 2012 interest rate swap, which was entered into at the same time as the issue of the 9.25% subordinated Tier 2 notes due 2042, was
treated as a designated hedging instrument in 2019 and as fair value through the income statement in 2020.
treated as a designated hedging instrument in 2019 and as fair value through the income statement in 2020.
treated as a designated hedging instrument in 2019 and as fair value through the income statement in 2020.
2. Foreign exchange contracts (forwards) are designated as cash flow hedges in relation to supplier payments.
2. Foreign exchange contracts (forwards) are designated as cash flow hedges in relation to supplier payments.
2. Foreign exchange contracts (forwards) are designated as cash flow hedges in relation to supplier payments.
27. Retirement benefit obligations
27. Retirement benefit obligations
27. Retirement benefit obligations
Defined contribution scheme
The pension charge in respect of the defined contribution scheme for the year ended 31 December 2020 was £26.2 million
(2019: £25.5 million).
Defined contribution scheme
Defined contribution scheme
The pension charge in respect of the defined contribution scheme for the year ended 31 December 2020 was £26.2 million
The pension charge in respect of the defined contribution scheme for the year ended 31 December 2020 was £26.2 million
(2019: £25.5 million).
(2019: £25.5 million).
Defined benefit scheme
Defined benefit scheme
Defined benefit scheme
The Group’s defined benefit pension scheme was closed in 2003, although the Group remains the sponsoring employer for
The Group’s defined benefit pension scheme was closed in 2003, although the Group remains the sponsoring employer for
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
obligations to current and deferred pensioners based on qualifying years’ service and final salaries. The defined benefit
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
scheme is legally separated from the Group with trustees who are required by law to act in the interests of the scheme and
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
of all the relevant stakeholders. The trustees of the pension scheme are responsible for the investment policy with regard
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.
to the assets of the scheme.
to the assets of the scheme.
The trustee invests the scheme’s assets in an appropriate mix of return-seeking assets and liability matching assets to
The trustee invests the scheme’s assets in an appropriate mix of return-seeking assets and liability matching assets to
The trustee invests the scheme’s assets in an appropriate mix of return-seeking assets and liability matching assets to
better match the assets to future pension obligations. The main risks impacting funding levels are interest rates, changes in
better match the assets to future pension obligations. The main risks impacting funding levels are interest rates, changes in
better match the assets to future pension obligations. The main risks impacting funding levels are interest rates, changes in
inflation expectations and the performance of the dynamic bond fund. The split of scheme assets is shown below. The
inflation expectations and the performance of the dynamic bond fund. The split of scheme assets is shown below. The
inflation expectations and the performance of the dynamic bond fund. The split of scheme assets is shown below. The
matching assets are invested in liability-driven investment strategies, primarily UK gilts and index-linked gilt funds, but also
matching assets are invested in liability-driven investment strategies, primarily UK gilts and index-linked gilt funds, but also
matching assets are invested in liability-driven investment strategies, primarily UK gilts and index-linked gilt funds, but also
including some leveraged gilt funds and interest rate and inflation swap funds. These are used to reduce the scheme’s
including some leveraged gilt funds and interest rate and inflation swap funds. These are used to reduce the scheme’s
including some leveraged gilt funds and interest rate and inflation swap funds. These are used to reduce the scheme’s
inflation and duration risks against its liabilities.
inflation and duration risks against its liabilities.
inflation and duration risks against its liabilities.
The weighted average duration of the defined benefit obligations at 31 December 2020 is 20 years (2019: 20 years) using
accounting assumptions.
The weighted average duration of the defined benefit obligations at 31 December 2020 is 20 years (2019: 20 years) using
The weighted average duration of the defined benefit obligations at 31 December 2020 is 20 years (2019: 20 years) using
accounting assumptions.
accounting assumptions.
The table below sets out the principal assumptions used in determining the defined benefit scheme obligations.
The table below sets out the principal assumptions used in determining the defined benefit scheme obligations.
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 in pension payment
Rate of increase in pension payment
Rate of increase of deferred pensions
Rate of increase of deferred pensions
Rate of increase of deferred pensions
Discount rate
Discount rate
Discount rate
Inflation rate
Inflation rate
Inflation rate
2020
2020
2020
%
%
%
2.2
2.2
2.2
2.2
1.4
1.4
2.9
2.9
2019
2019
2019
%
%
%
2.1
2.1
2.1
2.1
2.1
2.1
2.0
2.0
2.0
3.0
3.0
3.0
No assumption has been made for salary growth as there are no obligations in the scheme that are linked to future
increases in salaries.
No assumption has been made for salary growth as there are no obligations in the scheme that are linked to future
No assumption has been made for salary growth as there are no obligations in the scheme that are linked to future
increases in salaries.
increases in salaries.
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Direct Line Group Annual Report and Accounts 2020
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
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
Dynamic bond fund3
Other
Total
Notes:
2020
2019
87.5
89.3
89.3
91.1
2020
£m
30.0
33.6
1.5
—
42.3
0.3
107.7
87.1
88.8
88.9
90.7
2019
£m
28.1
29.1
2.5
40.2
—
0.1
100.0
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 exchanges.
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 certificates of deposit, rates and
global currencies.
In the third quarter of 2020, the scheme transferred the absolute return bond mandate to a new dynamic bond fund which targets positive returns over a three-
year rolling basis. It is invested to maximise the total return from a globally diversified portfolio, predominantly comprising high-yield corporate and government
bonds.
3.
All UK debt instruments have quoted prices in active markets. The dynamic bond fund holds bonds that, rather than being
traded on an exchange, are traded through agents, brokers or investment banks matching buyers and sellers.
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Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
27. Retirement benefit obligations continued
Movement in net pension surplus
Fair value of
defined benefit
scheme assets
Present value of
defined benefit
scheme
obligations
Net pension
surplus
At 1 January 2019
Income statement:
Net interest income / (cost)1
Administration costs
Statement of comprehensive income:
Remeasurement losses
£m
95.6
2.7
(0.5)
£m
(78.6)
(2.2)
—
Return on plan assets excluding amounts included in the net
interest on the defined benefit asset
4.4
—
£m
17.0
0.5
(0.5)
4.4
0.4
0.8
(12.9)
—
9.7
0.1
(0.4)
—
—
—
(2.2)
100.0
1.9
(0.4)
0.4
0.8
(12.9)
2.2
(90.3)
(1.8)
—
9.0
—
9.0
—
—
—
(2.8)
107.7
2.4
(1.7)
(10.1)
2.8
(98.7)
2.4
(1.7)
(10.1)
—
9.0
Actuarial gains of defined benefit scheme
Experience gains
Gains from change in demographic assumptions
Loss from change in financial assumptions
Benefits paid
At 31 December 2019
Income statement:
Net interest income / (cost)1
Administration costs
Statement of comprehensive income:
Remeasurement losses
Return on plan assets excluding amounts included in the net
interest on the defined benefit asset
Actuarial gains of defined benefit scheme
Experience gains
Loss from change in demographic assumptions
Loss from change in financial assumptions
Benefits paid
At 31 December 2020
Note:
1. The net interest income / (cost) in the income statement has been included under other operating expenses.
200 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
200 Direct Line Group Annual Report and Accounts 2020
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 gains on scheme liabilities
Return on plan assets excluding amounts included in
the net interest on the defined benefit asset
2020
£m
(98.7)
107.7
9.0
2.4
9.0
2019
£m
(90.3)
100.0
9.7
0.4
2018
£m
(78.6)
95.6
17.0
—
2017
£m
(87.3)
101.7
14.4
1.5
2016
£m
(90.5)
102.5
12.0
1.2
4.4
(3.5)
1.0
13.7
Sensitivity analysis
The sensitivity analysis has been calculated by valuing the pension scheme liabilities using the amended assumptions
shown in the table below and keeping the remaining assumptions the same as disclosed in the table above, except in the
case of the inflation sensitivity where other assumptions that depend on assumed inflation have also been amended
correspondingly. The pension cost has been determined allowing for the estimated impact on the scheme’s assets. The
sensitivity to discount rates is based on movements in credit spreads, rather than gilt yields, which are hedged in the
scheme’s assets. The selection of these movements to illustrate the sensitivity of the defined benefit obligation to key
assumptions should be viewed as illustrative, rather than providing a view on the likely size of any change.
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
Impact on present value
of defined benefit
scheme obligations
2020
£m
(0.1)
0.1
—
—
0.1
(0.1)
2019
£m
(0.1)
0.1
—
—
0.1
(0.1)
2020
£m
(4.9)
4.9
2.5
(2.5)
3.6
(3.6)
2019
£m
(4.5)
4.5
2.3
(2.3)
3.2
(3.2)
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.
At the date of signing these financial statements, no contributions are expected to be payable in 2021 (2020: £nil). The
Group is currently undertaking a funding valuation of the defined benefit scheme at 1 October 2020, the results of which
are due to be agreed with the trustees in 2021.
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Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
28. 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 loans and receivables
Equity investments2
Total
Notes:
2020
£m
2019
£m
4,021.0
21.3
35.6
25.2
4,103.1
3,925.6
31.3
29.2
99.5
4,085.6
103.9
4,207.0
104.0
4,189.6
4,184.5
22.5
4,207.0
264.5
206.7
471.2
3.2
4,681.4
4,166.5
23.1
4,189.6
278.1
205.7
483.8
—
4,673.4
1. The Group swaps a fixed interest rate for a floating rate of interest on its US dollar and Euro corporate debt securities by entering into interest rate derivatives.
The hedged amount at 31 December 2020 was £971.1 million (2019: £955.8 million).
2. An equity fund which is valued based on external valuation reports received from a third-party fund manager.
29. 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
Notes:
2020
£m
224.9
995.2
1,220.1
(51.9)
1,168.2
2019
£m
223.1
725.5
948.6
(52.3)
896.3
1. This represents money market funds.
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 total 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 2020 was 0.25%
(2019: 0.79%) and average maturity was 10 days (2019: 10 days).
30. Share capital
Issued and fully paid: equity shares
Ordinary Shares of 10 10/11 pence each1
At 1 January
Shares cancelled following share buyback2
At 31 December
Notes:
2020
Share
capital
£m
150.0
Number
of shares
millions
1,375.0
(10.4)
(1.1)
1,364.6
148.9
Transfer to
capital
redemption
reserve
£m
—
1.1
1.1
2019
Number
of shares
millions
1,375.0
—
Share
capital
£m
150.0
—
1,375.0
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.
2. On 3 March 2020, the Group announced a share buyback of Ordinary Shares for an aggregate purchase price of £150 million. On 19 March 2020 the buyback
programme was cancelled, given the uncertainty in the capital markets at the time driven by the rapidly emerging Covid-19 pandemic. At the time of
cancellation, the Group had repurchased 10,448,395 Ordinary Shares for an aggregate consideration of £30,014,567 as reflected in retained earnings. The shares
were subsequently cancelled giving rise to a capital redemption reserve of an equivalent amount as required by the Companies Act 2006.
202 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
202 Direct Line Group Annual Report and Accounts 2020
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 2020, 12,753,755 Ordinary Shares (2019: 8,445,670 Ordinary Shares) were owned by the employee share
trusts at a cost of £40.3 million (2019: £30.2 million). These Ordinary Shares are carried at cost and at 31 December 2020
had a market value of £40.7 million (2019: £26.4 million).
31. Other reserves
Movements in the AFS investments revaluation reserve
At 1 January
Revaluation during the year – gross
Revaluation during the year – tax
Net gains transferred to income statement on disposals – gross
Net gains transferred to income statement on disposals – tax
At 31 December
Capital reserves
Capital contribution reserve1
Capital redemption reserve2
Total
Notes:
2020
£m
47.5
47.4
(10.1)
(1.1)
0.2
83.9
2019
£m
(36.8)
118.1
(20.1)
(16.5)
2.8
47.5
2020
£m
100.0
1,351.1
1,451.1
2019
£m
100.0
1,350.0
1,450.0
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. An additional £1.1 million arose in
2020 when shares repurchased through buyback were cancelled.
32. Tier 1 notes
Tier 1 notes
2020
£m
346.5
2019
£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. Cancellation becomes mandatory if: the Solvency condition1 is
not met at the time of, or following, coupon payment; there is non-compliance with the SCR or the minimum capital
requirement; the Group has insufficient distributable reserves; or the relevant regulator requires the coupon payment to be
cancelled.
Note:
1. All payments shall be conditional upon the Group being solvent at the time of payment and immediately after payment. The Issuer will be solvent if (i) it is able
to pay its debts owed to senior creditors as they fall due and (ii) its assets exceed its liabilities.
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Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
33. Subordinated liabilities
Subordinated Tier 2 notes
2020
£m
516.6
2019
£m
259.0
£250 million 9.25% subordinated Tier 2 notes due 2042
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 interest rate swap 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. This was treated as a designated hedging instrument.
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 designated hedging agreement was adjusted accordingly.
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 terms of the notes provide that the rate of
interest will be reset at a rate of 6-month LIBOR plus 7.91%. If LIBOR has been discontinued by this time, the terms of the
notes provide for an ultimate fall back rate of interest of 9.25% for subsequent interest periods. The terms of the notes do
not automatically provide for the transition of LIBOR to SONIA, which would require a separate agreement between the
Group and the noteholders.
The Group has the option, in certain circumstances, to defer interest payments on the notes but to date has not exercised
this right.
During 2020 the Group identified that the hedge no longer met the criteria of hedge effectiveness under IAS 39 ‘Financial
Instruments: Recognition and Measurement’ and, under the rules of the standard, the accumulated hedging adjustment
has begun to be amortised to the income statement from the date of the last successful hedge effectiveness test over the
remaining life of the subordinated debt using an effective interest rate calculation.
£260 million 4.0% subordinated Tier 2 notes due 2032
On 5 June 2020, the Group issued subordinated Tier 2 notes at a fixed rate of 4.0%. The notes have a redemption date of 5
June 2032 and may be redeemed at the option of the Group commencing on 5 December 2031 until the maturity date.
The Group has the option, in certain circumstances, to defer interest payments on the notes but to date has not exercised
this right.
The 2032 and 2042 notes are unsecured and subordinated obligations of the Group and rank pari passu and 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 and will rank at least pari passu with the claims of holders of other Tier 2 capital.
204 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
204 Direct Line Group Annual Report and Accounts 2020
34. Insurance liabilities
Insurance liabilities
Gross insurance liabilities
2011
£m
Accident year
Estimate of ultimate
gross claims costs:
2020
£m
2019
£m
3,617.0
3,819.6
2012
£m
2013
£m
2014
£m
2015
£m
2016
£m
2017
£m
2018
£m
2019
£m
2020
£m
Total
£m
At end of
accident year
2,698.1 2,372.7 2,184.0 2,094.5 2,118.1 2,157.7 2,217.3 2,300.1 2,110.4 1,847.3
One year later
(99.3) (163.3) (117.6)
20.7
(30.0)
(86.7) (116.2)
(62.3)
(67.2)
Two years later
(94.6) (118.9) (153.0)
(38.4) (143.5)
(53.3) (103.1)
(52.0)
Three years later
(89.3)
(49.3)
(21.0) (144.9)
(62.4)
(82.8)
(42.4)
Four years later
(60.9)
(9.9) (102.1)
(50.2)
(22.9)
(46.1)
Five years later
(21.2)
(79.2)
(50.8)
(51.6)
(22.0)
Six years later
(60.3)
(36.2)
(27.4)
(33.6)
Seven years later
(25.1)
(23.8)
(14.0)
Eight years later
(27.9)
(1.6)
Nine years later
(11.0)
Current estimate of
cumulative claims
Cumulative
payments to date
Gross liability
recognised in
balance sheet
2010 and prior
Claims handling
provision
Total
2,208.5 1,890.5 1,698.1 1,796.5 1,837.3 1,888.8 1,955.6 2,185.8 2,043.2 1,847.3
(2,183.0) (1,873.8) (1,683.5) (1,682.6) (1,688.8) (1,693.8) (1,665.8) (1,740.8) (1,467.3) (895.7)
25.5
16.7
14.6
113.9
148.5
195.0
289.8
445.0
575.9
951.6
2,776.5
762.5
78.0
3,617.0
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205
Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
34. Insurance liabilities continued
Net insurance liabilities
Accident year
Estimate of ultimate
net claims costs:
At end of
accident year
2011
£m
2012
£m
2013
£m
2014
£m
2015
£m
2016
£m
2017
£m
2018
£m
2019
£m
2020
£m
Total
£m
2,644.4 2,271.8 2,093.9 1,971.0 1,926.7 1,922.2 2,016.9 2,125.9 1,941.2 1,674.5
One year later
(131.5) (146.7) (123.6)
(29.7)
(67.0)
(18.9)
(79.7)
(41.4)
(34.5)
Two years later
(82.1) (107.8) (134.4)
(42.0)
(77.8)
(38.2)
(65.3)
(27.1)
Three years later
(76.5)
(35.6)
(27.8) (100.7)
(30.4)
(43.7)
(14.0)
Four years later
(48.7)
(11.6)
(64.3)
(41.3)
(24.1)
(16.9)
Five years later
(37.3)
(54.2)
(38.9)
(52.5)
(20.7)
Six years later
(37.0)
(30.4)
(17.7)
(8.3)
Seven years later
(20.4)
(14.6)
(10.6)
Eight years later
(23.0)
(1.2)
Nine years later
(6.6)
Current estimate of
cumulative claims
Cumulative
payments to date
Net liability
recognised in
balance sheet
2010 and prior
Claims handling
provision
Total
2,181.3 1,869.7 1,676.6 1,696.5 1,706.7 1,804.5 1,857.9 2,057.4 1,906.7 1,674.5
(2,159.5) (1,856.3) (1,664.4) (1,653.8) (1,638.5) (1,678.8) (1,637.6) (1,731.4) (1,459.3) (878.0)
21.8
13.4
12.2
42.7
68.2
125.7
220.3
326.0
447.4
796.5
2,074.2
439.5
78.0
2,591.7
206 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
206 Direct Line Group Annual Report and Accounts 2020
Movements in gross and net insurance liabilities
Claims reported
Incurred but not reported
Claims handling provision
At 1 January 2019
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 2019
Claims reported
Incurred but not reported
Claims handling provision
At 31 December 2019
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 2020
Claims reported
Incurred but not reported
Claims handling provision
At 31 December 2020
Movement in prior-year net claims liabilities by operating segment
Motor
Home
Rescue and other personal lines
Commercial
Total
Gross
Reinsurance
£m
£m
Net
£m
3,001.0
(809.8)
2,191.2
924.9
(295.4)
80.0
—
629.5
80.0
4,005.9
(1,105.2)
2,900.7
(2,103.6)
25.3
(2,078.3)
2,311.3
(169.2)
2,142.1
(394.0)
99.5
(294.5)
3,819.6
(1,149.6)
2,670.0
2,916.0
(829.3)
2,086.7
825.4
(320.3)
78.2
—
505.1
78.2
3,819.6
(1,149.6)
2,670.0
(1,933.0)
141.1
(1,791.9)
2,057.3
(169.9)
1,887.4
(326.9)
153.1
(173.8)
3,617.0
(1,025.3)
2,591.7
2,762.0
(842.8)
1,919.2
777.0
78.0
(182.5)
—
594.5
78.0
3,617.0
(1,025.3)
2,591.7
2020
£m
(100.6)
(10.8)
(5.6)
(56.8)
(173.8)
2019
£m
(180.5)
(41.4)
(7.6)
(65.0)
(294.5)
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207
Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
34. Insurance liabilities continued
Analysis of outstanding PPO claims provisions on a discounted and an undiscounted basis
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 2020 and 31 December 2019. 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 Undiscounted
Discounted
Undiscounted
2020
£m
561.1
253.7
814.8
(309.3)
(186.9)
(496.2)
251.8
66.8
318.6
2020
£m
2019
£m
2019
£m
1,289.5
561.6
1,851.1
(743.6)
(435.8)
(1,179.4)
545.9
125.8
671.7
529.7
1,425.5
270.4
716.8
800.1
2,142.3
(277.2)
(185.6)
(786.9)
(529.1)
(462.8)
(1,316.0)
252.5
84.8
337.3
638.6
187.7
826.3
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
estimated 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.
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 3.5% (2019: 4%). The
Group has estimated a rate of interest used for the calculation of present values as 3.5% (2019: 4%), which results in a real
discount rate of 0% (2019: 0%). The Group will continue to review the inflation and discount rates used to calculate these
insurance reserves.
35. Unearned premium reserve
Movement in unearned premium reserve
At 1 January 2019
Written in the period
Earned in the period
At 31 December 2019
Written in the period
Earned in the period
At 31 December 2020
Gross
Reinsurance
£m
£m
Net
£m
1,505.5
(103.5)
1,402.0
3,203.1
(3,202.6)
(215.9)
217.7
2,987.2
(2,984.9)
1,506.0
(101.7)
1,404.3
3,180.4
(231.0)
2,949.4
(3,189.3)
228.8
(2,960.5)
1,497.1
(103.9)
1,393.2
36. Share-based payments
The Group operates equity-settled, share-based compensation plans in the form of a Long-Term Incentive Plan ("LTIP"), a
Restricted Shares Plan, a Deferred Annual Incentive Plan ("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
Total Shareholder Return ("TSR") and return on tangible equity ("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 2020 over 4.7 million Ordinary Shares with an estimated fair value of
£13.2 million at the 2020 grant dates (2019: 4.5 million Ordinary Shares with an estimated fair value of £14.4 million).
The estimated fair value of the LTIP share awards with market-based performance conditions was calculated using a
Monte-Carlo simulation model.
208 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
208 Direct Line Group Annual Report and Accounts 2020
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
2020
2019
290
0
34%
48%
3 years
0.02%
318
0
19%
29%
3 years
0.50%
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 of eligible
employees. These awards can be granted in the form of a nil-cost option at any time during the year, generally have no
performance criteria, and vest over periods ranging up to seven years from the date of the grant, subject to continued
employment. During the year awards were made over 1.0 million Ordinary Shares (2019: 0.2 million Ordinary Shares) with
an estimated fair value of £2.9 million (2019: £0.7 million) using the market value at the date of grant.
Deferred Annual Incentive Plan
To incentivise delivery of performance over a one-year operating cycle, Executive Directors and certain members of senior
management are eligible for awards under the Annual Incentive Plan ("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 1.8 million Ordinary Shares (2019: 1.3 million Ordinary Shares) under this plan with an estimated fair value
of £4.6 million (2019: £4.5 million) using the market value at the date of grant.
The awards outstanding at 31 December 2020 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 2020, the Group offered all eligible employees a Free Share award granting 180 Ordinary Shares free of charge as a
measure of thanks to the employees for the part they played in the good results that the Group reported for 2019. 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 1.9 million Ordinary Shares with an
estimated fair value of £5.4 million using the market value at the date of grant. No free shares were awarded in the year
ended 31 December 2019.
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 2020, matching share awards were granted over 0.6 million Ordinary Shares (2019: 0.5
million Ordinary Shares) with an estimated fair value of £1.6 million (2019: £1.6 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 continued employment with the Group
together with continued ownership of the associated purchased shares up to the point of vesting.
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209
209
Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
36. Share-based payments continued
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
2020
millions
2019
millions
21.6
11.3
(1.9)
(4.1)
26.9
1.5
21.3
8.0
(3.0)
(4.7)
21.6
1.6
1.
In accordance with the rules of the LTIP, Restricted Shares Plan and DAIP, additional awards of 1.3 million shares were granted during the year ended
31 December 2020 (2019: 1.5 million) in respect of the equivalent dividend.
In respect of the outstanding options at 31 December 2020, the weighted average remaining contractual life is 1.61 years
(2019: 1.57 years). No share awards expired during the year (2019: nil).
The weighted average share price for awards exercised during the year ended 31 December 2020 was £2.86 (2019: £3.29).
The Group recognised total expenses in the year ended 31 December 2020 of £18.5 million (2019: £18.4 million) relating to
equity-settled share-based compensation plans. An equivalent credit was recognised in retained earnings.
Further information on share-based payments, in respect of Executive Directors, is provided in the Directors’ Remuneration
Report.
37. Provisions
Movement in provisions during the year
At 1 January 2020
Additional provision
Utilisation of provision
Released to income statement
At 31 December 2020
Regulatory
levies
Restructuring
Other
Total
£m
40.0
59.3
(57.7)
—
41.6
£m
2.5
26.5
(1.8)
(1.3)
25.9
£m
31.8
45.6
(23.9)
(6.2)
47.3
£m
74.3
131.4
(83.4)
(7.5)
114.8
Of the above, £6.0 million (2019: £nil) is due to be settled outside of 12 months.
Regulatory levies provisions include undiscounted balances held for MIB, FSCS and other insurance levies where the Group
is charged in the following year.
Restructuring provisions include balances held in respect of various property dilapidations and a number of restructuring
programmes within the Group, including office site closures and staff restructuring.
Other provisions primarily include balances held in respect of staff bonuses and reward.
38. Trade and other payables, including insurance payables
Trade creditors and accruals
Other taxes
Other creditors
Due to reinsurers
Due to agents, brokers and intermediaries
Deferred income
Due to insurance companies
Total
2020
£m
293.5
100.4
89.1
60.2
2.5
3.3
0.9
549.9
2019
£m
224.2
101.3
95.3
43.7
9.7
2.9
1.0
478.1
210 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
210
Direct Line Group Annual Report and Accounts 2020
39. 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
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
Loss on sale of property, plant and equipment and right of use assets
Movement in prepayments
Operating cash flows before movements in working capital
Movements in working capital:
Net decrease in net insurance liabilities including reinsurance assets, unearned premium
reserves and deferred acquisition costs
Net (increase) / decrease in insurance and other receivables
Net (increase) / decrease in accrued income and other assets
Net increase / (decrease) in trade and other payables, including insurance payables and
provisions
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
Advances made for commercial real estate loans
Repayments of infrastructure debt and commercial real estate loans
Purchase of AFS debt securities
Purchase of equity investments
Purchase of HTM debt securities
Cash generated from investment of insurance assets
2020
£m
367.2
(95.1)
(109.3)
31.3
0.7
18.5
84.2
79.7
6.6
5.8
4.9
4.1
398.6
(91.3)
(1.6)
(9.9)
106.8
402.6
(134.0)
0.2
268.8
2019
£m
419.9
(134.6)
(114.0)
26.0
—
18.4
89.8
77.5
1.3
(14.1)
0.3
(0.2)
370.3
(220.1)
29.4
4.5
(1.7)
182.4
(95.8)
1.6
88.2
260.0
13.7
(10.5)
—
1,614.0
(46.3)
56.7
(1,568.5)
(3.2)
—
315.9
280.7
16.2
—
24.2
1,886.4
(32.3)
40.6
(1,838.8)
—
(3.1)
373.9
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Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
39. Notes to the consolidated cash flow statement continued
The table below details changes in liabilities arising from the Group’s financing activities.
At 1 January
Proceeds on issue of subordinated
liabilities2
Interest paid on subordinated liabilities
Interest rate swap cash settlement
Lease cash flows
Interest on lease payments
Financing cash flows
Net lease additions
Amortisation of arrangement costs and
discount on issue of subordinated liabilities
Amortisation of fair value hedging
Accrued interest expense on subordinated
liabilities
Unrealised (loss) / 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:
Leases
Subordinated liabilities
Interest rate swap associated
with subordinated debt1
2020
£m
164.4
—
—
—
(18.5)
6.0
(12.5)
0.5
—
—
—
—
—
—
0.5
152.4
2019
£m
167.3
—
—
—
(19.8)
6.7
(13.1)
10.2
—
—
—
—
2020
£m
(259.0)
(257.2)
28.3
—
—
—
(228.9)
—
(0.5)
1.8
(29.1)
2019
£m
(259.5)
—
23.1
—
—
—
23.1
—
(0.3)
—
(23.1)
(0.9)
0.8
—
—
10.2
164.4
—
—
(28.7)
(516.6)
—
—
(22.6)
(259.0)
2020
£m
9.0
—
—
(4.1)
—
—
(4.1)
—
—
—
—
—
0.3
3.0
3.3
8.2
2019
£m
9.0
—
—
(3.4)
—
—
(3.4)
—
—
—
—
—
—
3.4
3.4
9.0
1. As described in note 33, the Group entered into a 10-year interest rate swap on the same date as issuing the £250 million 9.25% subordinated Tier 2 notes due
2042.
2. As described in note 33, on 5 June 2020 the Group issued £260.0 million of subordinated Tier 2 notes at a fixed rate of 4.0%. The notes have a redemption date
of 5 June 2032 and may be redeemed at the option of the Group commencing on 5 December 2031 until the maturity date. Proceeds are net of issue costs of
£2.8 million.
40. Commitments and contingent liabilities
The Group did not have any material commitments and contingent liabilities at 31 December 2020 (2019: none).
41. Leases
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
Total1
Note:
2020
£m
13.7
38.6
66.5
118.8
2019
£m
13.8
39.2
69.1
122.1
1. At year ended 31 December 2020, £116.6 million of the total operating lease commitments where the Group is the lessor relates to the lease of investment
properties detailed in note 20 (2019: £119.6 million).
Other leases disclosures
Sublease income in respect of property right-of-use assets was £0.2 million during the year (2019: £0.3 million). Expenses
relating to short-term and variable lease payments were not included in the measurement of lease liabilities as they were
not significant. Total cash outflow in respect of leases for the year ended 31 December 2020 was £18.7 million (2019: £20.1
million).
212
212
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Direct Line Group Annual Report and Accounts 2020
42. 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 include AFS debt security 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. Derivatives are valued using broker quotes or appropriate valuation
models. Model inputs include a range of factors which are deemed to be observable, including current market and
contractual prices for underlying instruments, period to maturity, correlations, yield curves and volatility of underlying
instruments.
– Level 3 fair value measurements used for investment properties, HTM debt securities, infrastructure debt, commercial
real estate loans and equity investments 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 where fair value is
disclosed
At 31 December 2020
Assets held at fair value:
Investment property (note 20)
Derivative assets (note 26)
AFS debt securities (note 28)
Equity investments (note 28)
Other financial assets:
HTM debt securities (note 28)
Infrastructure debt (note 28)
Commercial real estate loans (note 28)
Total
Liabilities held at fair value:
Derivative liabilities (note 26)
Other financial liabilities:
Subordinated liabilities (note 33)
Total
At 31 December 2019
Assets held at fair value:
Investment property (note 20)
Derivative assets (note 26)
AFS debt securities (note 28)
Other financial assets:
HTM debt securities (note 28)
Infrastructure debt (note 28)
Commercial real estate loans (note 28)
Total
Liabilities held at fair value:
Derivative liabilities (note 26)
Other financial liabilities:
Subordinated liabilities (note 33)
Total
Carrying value
£m
Level 1
£m
Level 2
£m
Level 3
£m
Fair value
£m
292.1
73.4
4,103.1
3.2
103.9
264.5
206.7
—
—
—
73.4
25.2
—
4,077.9
—
—
—
—
14.2
—
—
5,046.9
25.2
4,165.5
57.2
—
57.2
516.6
573.8
—
—
589.0
646.2
292.1
—
—
3.2
93.7
273.6
202.9
865.5
—
—
—
292.1
73.4
4,103.1
3.2
107.9
273.6
202.9
5,056.2
57.2
589.0
646.2
Carrying value
£m
Level 1
£m
Level 2
£m
Level 3
Fair value
£m
£m
291.7
121.5
—
—
121.5
—
291.7
4,085.6
99.5
3,986.1
291.7
121.5
4,085.6
—
—
104.0
278.1
205.7
—
—
—
14.1
—
—
94.0
285.6
203.0
108.1
285.6
203.0
5,086.6
99.5
4,121.7
874.3
5,095.5
30.5
—
30.5
—
30.5
259.0
289.5
—
—
297.8
328.3
—
—
297.8
328.3
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213
213
Financial Statements
Notes to the Consolidated Financial Statements continued
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
42. Fair value continued
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.
The movements in assets held at fair value and classified as level 3 in the fair value hierarchy relate to investment property
and equity investments. Investment property is analysed in note 20 along with further details on the Group’s valuation
approach. A summary of realised and unrealised gains or losses in relation to investment property at fair value are
presented in note 6. Sensitivity analysis in respect of investment property has been provided in note 3. 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 2019.
The table below shows the unobservable inputs used by the Group in the fair value measurement of its investment
property.
31 December 2020
Fair value
£m
Valuation
technique
Unobservable
input
Range
(weighted average)
Investment property
Note:
288.81
Income
capitalisation
Equivalent yield
3.88% - 7.97%
(average 5%)
Estimated rental value
per square foot
£1.81 - £35.00
(average £12.34)
1. The methodology of valuation reflects commercial property held within U K Insurance Limited.
The table below analyses the movement in assets carried at fair value classified as level 3 in the fair value hierarchy.
At 1 January 2020
Additions at cost
Decrease in fair value in the period through profit or loss (note 6)
At 31 December 2020
43. Related parties
Investment
property
(note 20)
Equity
investment
£m
291.7
10.5
(10.1)
292.1
£m
—
3.2
—
3.2
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 or purchases of products and services to or from related parties in the year ended 31 December 2020
(2019: £nil).
Compensation of key management
Short-term employee benefits
Post-employment benefits
Share-based payments
Total
44. Post balance sheet event
2020
£m
11.9
0.1
7.6
19.6
2019
£m
11.6
—
7.9
19.5
On 10 February 2021, U K Insurance Limited signed a contract in relation to its Bromley site to surrender the current lease
and DL Insurance Services Limited signed a contract to purchase the head lease. The cost of surrendering the lease was
£91 million and the value of the fixed asset capitalised will be in the region of £17 million. This will reduce the Group’s
Solvency II own funds by around £85 million.
214
214
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Direct Line Group Annual Report and Accounts 2020
PARENT COMPANY BALANCE SHEET
As at 31 December 2020
Parent Company Balance Sheet
PARENT COMPANY BALANCE SHEET
As at 31 December 2020
As at 31 December 2020
Assets
Investment in subsidiary undertakings
Other receivables
Assets
Current tax assets
Investment in subsidiary undertakings
Derivative financial instruments
Other receivables
Financial investments
Current tax assets
Cash and cash equivalents
Derivative financial instruments
Financial investments
Total assets
Cash and cash equivalents
Equity
Total assets
Shareholders’ equity
Tier 1 notes
Equity
Shareholders’ equity
Total equity
Tier 1 notes
Liabilities
Total equity
Subordinated liabilities
Borrowings
Liabilities
Derivative financial instruments
Subordinated liabilities
Trade and other payables
Borrowings
Deferred tax liabilities
Derivative financial instruments
Trade and other payables
Total liabilities
Deferred tax liabilities
Total equity and liabilities
Notes
Notes
2
3
4
2
5
3
6
4
7
5
6
7
9
9
10
11
5
10
12
11
4
5
12
4
Total liabilities
The attached notes on pages 217 to 221 form an integral part of these separate financial statements.
Total equity and liabilities
The profit for the year net of tax was £343.0 million (2019: £143.3 million).
2020
£m
2020
3,305.9
£m
335.7
5.5
3,305.9
0.1
335.7
—
5.5
266.1
0.1
3,913.3
—
266.1
3,913.3
2,936.6
346.5
3,283.1
2,936.6
346.5
3,283.1
511.9
116.4
0.1
511.9
1.1
116.4
0.7
0.1
630.2
1.1
3,913.3
0.7
630.2
3,913.3
2019
£m
2019
3,137.4
£m
299.1
3.5
3,137.4
0.6
299.1
85.0
3.5
124.2
0.6
3,649.8
85.0
124.2
3,649.8
2,931.4
346.5
3,277.9
2,931.4
346.5
3,277.9
253.4
116.3
0.6
253.4
1.0
116.3
0.6
0.6
371.9
1.0
3,649.8
0.6
371.9
3,649.8
The financial statements were approved by the Board of Directors and authorised for issue on 5 March 2021.
The attached notes on pages 217 to 221 form an integral part of these separate financial statements.
They were signed on its behalf by:
The profit for the year net of tax was £343.0 million (2019: £143.3 million).
The financial statements were approved by the Board of Directors and authorised for issue on 5 March 2021.
They were signed on its behalf by:
PENNY JAMES
CHIEF EXECUTIVE OFFICER
Direct Line Insurance Group plc
PENNY JAMES
Registration No. 02280426
CHIEF EXECUTIVE OFFICER
Direct Line Insurance Group plc
Registration No. 02280426
WWW.DIRECTLINEGROUP.CO.UK
www.directlinegroup.co.uk
WWW.DIRECTLINEGROUP.CO.UK
215
215
215
Financial Statements
PARENT COMPANY STATEMENT OF COMPREHENSIVE INCOME
Parent Company Statement of Comprehensive Income
For the year ended 31 December 2020
For the year ended 31 December 2020
PARENT COMPANY STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2020
Profit for the year attributable to the owners of the Company
Other comprehensive loss
Items that may be reclassified subsequently to income statement:
Profit for the year attributable to the owners of the Company
Loss on fair value through other comprehensive income investments
Other comprehensive loss
Other comprehensive loss for the year net of tax
Items that may be reclassified subsequently to income statement:
Total comprehensive income for the year attributable to the owners of the Company
Loss on fair value through other comprehensive income investments
Other comprehensive loss for the year net of tax
Parent Company Statement of Changes in Equity
Parent Company Statement of Changes in Equity
Total comprehensive income for the year attributable to the owners of the Company
For the year ended 31 December 2020
For the year ended 31 December 2020
Parent Company Statement of Changes in Equity
Share-
based
payment
reserve
For the year ended 31 December 2020
Retained
earnings
Capital
reserves
Share
capital
Fair value
through other
comprehensive
income
revaluation
Fair value
reserve
through other
£m
comprehensive
income
revaluation
reserve
Shareholders’
equity
£m
£m
— 1,606.4
Retained
earnings
3,205.8
Shareholders’
equity
143.3
£m
Balance at 1 January 2019
Total comprehensive income
for the year
£m
£m
150.0 1,450.0
Share
capital
Capital
reserves
£m
Share-
based
(0.6)
payment
reserve
—
£m
—
£m
—
£m
—
£m
143.3
£m
—
—
2.4
18.4
—
—
—
—
—
—
—
—
—
—
—
—
(0.6)
—
—
18.4
—
(15.4)
143.3
18.4
143.3
—
(420.7)
—
3,205.8
(420.7)
150.0 1,450.0
—
— 1,606.4
—
(420.7)
150.0 1,450.0
—
Dividends and appropriations
Balance at 1 January 2019
paid (note 13)
Total comprehensive income
Credit to equity for equity-
for the year
settled share-based payments
Dividends and appropriations
Shares distributed by
paid (note 13)
employee trusts
Credit to equity for equity-
Balance at 31 December 2019
settled share-based payments
Total comprehensive income
Shares distributed by
for the year
employee trusts
Dividends and appropriations
Balance at 31 December 2019
paid (note 13)
Total comprehensive income
Shares cancelled following
for the year
buyback
Dividends and appropriations
Credit to equity for equity-
paid (note 13)
settled share-based payments
Shares cancelled following
buyback
Shares distributed by
employee trusts
Credit to equity for equity-
settled share-based payments
Balance at 31 December 2020
Shares distributed by
The attached notes on pages 217 to 221 form an integral part of these separate financial statements.
employee trusts
(13.7)
(30.0)
(13.7)
18.5
2,936.6
— 1,329.0
—
(312.5)
(15.4)
342.9
2,931.4
(312.5)
(1.1)
—
—
148.9
(15.4)
—
2.4
—
—
(13.7)
18.5
7.2
1.1
—
—
1,451.1
—
—
—
(0.1)
150.0 1,450.0
—
—
1,329.5
(420.7)
(15.4)
— 1,329.0
—
—
(312.5)
18.5
343.0
(30.0)
342.9
(30.0)
(0.1)
—
2,931.4
18.4
—
(1.1)
—
18.5
(312.5)
(30.0)
—
(0.1)
(13.7)
343.0
—
1.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2020
£m
343.0
2020
£m
343.0
(0.1)
(0.1)
342.9
(0.1)
(0.1)
342.9
2019
£m
143.3
2019
£m
143.3
—
—
143.3
—
—
143.3
Tier 1
notes
£m
Total
equity
£m
Tier 1
notes
346.5 3,552.3
Total
equity
143.3
£m
—
£m
346.5 3,552.3
(420.7)
—
—
—
—
—
143.3
18.4
(420.7)
(15.4)
346.5 3,277.9
18.4
—
—
—
(15.4)
342.9
346.5 3,277.9
(312.5)
—
—
—
—
—
—
—
—
346.5
342.9
(30.0)
(312.5)
18.5
(30.0)
(13.7)
18.5
3,283.1
—
(13.7)
Balance at 31 December 2020
148.9
1,451.1
7.2
(0.1)
1,329.5
2,936.6
346.5
3,283.1
The attached notes on pages 217 to 221 form an integral part of these separate financial statements.
216
216
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Direct Line Group Annual Report and Accounts 2020
216
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS
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.
The address of the Company’s registered office is Churchill Court, Westmoreland Road, Bromley, BR1 1DP.
The Company’s financial statements are prepared on the historical cost basis except for financial investments and
derivative financial investments, which are measured at fair value.
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 FRS 101 ‘Reduced Disclosure Framework’.
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 IFRS 13 ‘Fair Value Measurement’;
– FRS 101.8 (g): the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B, 38C, 111 and 134 – 136 of IAS 1 ‘Presentation of
Financial Statements’ to produce a cash flow statement 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.
Adoption of new and revised standards
Full details of the new and revised standards adopted by the Company are set out in note 1 to the consolidated financial
statements.
1.2 Investment in subsidiaries
Investment in subsidiaries is stated at cost less any impairment.
1.3 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.
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 classified as financial assets held at
amortised cost. The Company initially measures financial assets held at amortised cost at fair value plus transaction costs.
They are subsequently measured using the effective interest method where applicable 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. The
Company’s financial assets at fair value through other comprehensive income relate to UK sovereign debt securities.
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
At initial recognition of a financial asset measured at amortised cost or fair value through other comprehensive income an
expected credit loss assessment is conducted with an impairment loss booked if material. 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.
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. 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 at initial recognition, 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.
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS - CONTINUED
The Company applies the simplified impairment approach to trade receivables due from subsidiary undertakings.
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.
WWW.DIRECTLINEGROUP.CO.UK
217
2. Investment in subsidiary undertakings
Additional investment in subsidiary undertakings
At 1 January
At 31 December
www.directlinegroup.co.uk
217
2020
£m
2019
£m
3,137.4
3,119.0
168.5
18.4
3,305.9
3,137.4
On 27 March 2020, the Company provided additional funding to its subsidiary, U K Insurance Limited. It purchased one
Ordinary Share of £1 nominal value for a consideration of £150 million.
The subsidiary undertakings of the Company are set out in the table below. Their capital consists of Ordinary Shares which
are unlisted. In all cases, the Company owns 100% of the Ordinary Shares, either directly or through its ownership of other
subsidiaries, and exercises full control over their decision-making.
Name of subsidiary
Directly held by the Company:
Direct Line Group Limited1
DL Insurance Services Limited1
Finsure Premium Finance Limited1
Company
registration
number
Place of incorporation
and operation
Principal activity
02811437
United Kingdom
Intermediate holding company
03001989
United Kingdom
Management services
01670887
United Kingdom
Non-trading company
Inter Group Insurance Services Limited1
02762848
United Kingdom
Dormant8
UK Assistance Accident Repair Centres Limited1
02568507
United Kingdom
Motor vehicle repair services
UK Assistance Limited1
02857232
United Kingdom
Dormant8
U K Insurance Business Solutions Limited1
05196274
United Kingdom
Insurance intermediary services
01179980
United Kingdom
General insurance
10-15 Livery Street, Birmingham UK Limited4
JE109119
Jersey
Dormant9
U K Insurance Limited2,3
Indirectly held by the Company:
Brolly UK Technology Limited1,5
Churchill Insurance Company Limited1
Direct Line Insurance Limited1
DL Support Services India Private Limited6
DLG Legal Services Limited7
DLG Pension Trustee Limited1
Farmweb Limited1
Green Flag Group Limited2
Green Flag Holdings Limited1
Green Flag Limited2
10134039
United Kingdom
Insurance intermediary services
02258947
United Kingdom
General insurance
01810801
United Kingdom
Dormant8
See
footnote 6
India
Support and operational services
08302561
United Kingdom
Legal services
08911044
United Kingdom
03207393
United Kingdom
Dormant8
Dormant8
02622895
United Kingdom
Intermediate holding company
03577191
United Kingdom
Intermediate holding company
01003081
United Kingdom
Breakdown recovery services
Intergroup Assistance Services Limited1
03315786
United Kingdom
National Breakdown Recovery Club Limited1
02479300
United Kingdom
Nationwide Breakdown Recovery Services
01316805
United Kingdom
The National Insurance and Guarantee
00042133
United Kingdom
Dormant8
Dormant8
Dormant8
Dormant8
UKI Life Assurance Services Limited1
03034263
United Kingdom
Dormant8
Limited1
Corporation Limited1
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 and a branch in the Republic of Ireland.
4. Registered office at: 22 Grenville Street, St Helier, JE4 8PX, Jersey.
5. On 15 September 2020, DL Insurance Services Limited acquired 100% of the issued share capital of Brolly UK Technology Limited. For the period ended 31
December 2020, it is expected that Brolly UK Technology Limited will be exempt from the requirements of the Companies Act 2006 relating to the audit of
6. Registered office at: ESC House, 155, 1st & 2nd Floor, Okhla Industrial Area Phase-3, New Delhi, 110020, India. Company registration number:
individual accounts by virtue of section 479 A(2)(d).
U74140DL2014FTC265567.
218
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Financial Statements
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS - CONTINUED
Notes to the Parent Company Financial Statements continued
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
At 31 December
2020
£m
3,137.4
168.5
3,305.9
2019
£m
3,119.0
18.4
3,137.4
On 27 March 2020, the Company provided additional funding to its subsidiary, U K Insurance Limited. It purchased one
Ordinary Share of £1 nominal value for a consideration of £150 million.
The subsidiary undertakings of the Company are set out in the table below. Their capital consists of Ordinary Shares which
are unlisted. In all cases, the Company owns 100% of the Ordinary Shares, either directly or through its ownership of other
subsidiaries, and exercises full control over their decision-making.
Name of subsidiary
Directly held by the Company:
Direct Line Group Limited1
DL Insurance Services Limited1
Finsure Premium Finance Limited1
Inter Group Insurance Services Limited1
UK Assistance Accident Repair Centres Limited1
UK Assistance Limited1
U K Insurance Business Solutions Limited1
U K Insurance Limited2,3
Indirectly held by the Company:
10-15 Livery Street, Birmingham UK Limited4
Brolly UK Technology Limited1,5
Churchill Insurance Company Limited1
Direct Line Insurance Limited1
DL Support Services India Private Limited6
DLG Legal Services Limited7
DLG Pension Trustee Limited1
Farmweb Limited1
Green Flag Group Limited2
Green Flag Holdings Limited1
Green Flag Limited2
Intergroup Assistance Services Limited1
National Breakdown Recovery Club Limited1
Nationwide Breakdown Recovery Services
Limited1
The National Insurance and Guarantee
Corporation Limited1
UKI Life Assurance Services Limited1
Notes:
Company
registration
number
Place of incorporation
and operation
Principal activity
02811437
United Kingdom
Intermediate holding company
03001989
United Kingdom
Management services
01670887
United Kingdom
02762848
United Kingdom
02568507
United Kingdom
02857232
United Kingdom
05196274
United Kingdom
Non-trading company
Dormant8
Motor vehicle repair services
Dormant8
Insurance intermediary services
01179980
United Kingdom
General insurance
JE109119
Jersey
10134039
United Kingdom
02258947
United Kingdom
01810801
United Kingdom
See
footnote 6
India
Dormant9
Insurance intermediary services
General insurance
Dormant8
Support and operational services
08302561
United Kingdom
08911044
United Kingdom
03207393
United Kingdom
02622895
United Kingdom
Legal services
Dormant8
Dormant8
Intermediate holding company
03577191
United Kingdom
Intermediate holding company
01003081
United Kingdom
03315786
United Kingdom
02479300
United Kingdom
01316805
United Kingdom
Breakdown recovery services
Dormant8
Dormant8
Dormant8
00042133
United Kingdom
Dormant8
03034263
United Kingdom
Dormant8
1. Registered office at: Churchill Court, Westmoreland Road, Bromley, BR1 1DP.
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS
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 and a branch in the Republic of Ireland.
4. Registered office at: 22 Grenville Street, St Helier, JE4 8PX, Jersey.
5. On 15 September 2020, DL Insurance Services Limited acquired 100% of the issued share capital of Brolly UK Technology Limited. For the period ended 31
December 2020, it is expected that Brolly UK Technology Limited will be exempt from the requirements of the Companies Act 2006 relating to the audit
of individual accounts by virtue of section 479 A.
6. Registered office at: ESC House, 155, 1st & 2nd Floor, Okhla Industrial Area Phase-3, New Delhi, 110020, India. Company registration number:
U74140DL2014FTC265567.
7. Registered office at: 42 The Headrow, Leeds, LS1 8HZ.
8. These entities have not been audited, in accordance with the exemptions available for dormant entities under section 480 of the Companies Act 2006.
9. Under the Companies (Jersey) Law 1991, there is no requirement to file individual accounts and audit a private limited company.
218
3. Other receivables
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
1.
Included in loans to subsidiary undertakings is a £250 million unsecured subordinated loan to U K Insurance Limited. A loan of £500 million was advanced on 27
April 2012 at a fixed rate of 9.5% with a repayment date of 27 April 2042. On 7 March 2019, £250 million was repaid. All loans are neither past due nor impaired.
The deferred tax liability is in respect of provisions and other temporary differences.
5. Derivative financial instruments1
Direct Line Group Annual Report and Accounts 2020
218
Loans to subsidiary undertakings1
Trade receivables due from subsidiary undertakings
Other debtors
Total
Current
Non-current
Total
Note:
4. Current and deferred tax
Per balance sheet:
Current tax assets
Deferred tax liabilities
Derivative assets
Designated as hedging instruments:
Foreign exchange contracts2
Derivative liabilities
Designated as hedging instruments:
Foreign exchange contracts2
Total
Total
Notes:
6. Financial investments
2020
£m
322.2
13.5
—
335.7
85.7
250.0
335.7
2019
£m
298.6
—
0.5
299.1
49.1
250.0
299.1
2020
£m
5.5
(0.7)
2019
£m
3.5
(0.6)
Notional
amount
2020
£m
Fair value
2020
£m
Notional
amount
2019
£m
Fair value
2019
£m
4.1
4.1
4.1
4.1
0.1
0.1
0.1
0.1
18.2
18.2
18.2
18.2
0.6
0.6
0.6
0.6
1. The derivative assets and liabilities are both classified as level 2 within the Group’s fair value hierarchy set out in note 42 of the consolidated financial statements.
2. The foreign exchange cash flow hedges have been entered into on behalf of the Group’s subsidiary companies.
Fair value through other comprehensive income debt securities1
Note:
statements.
1. At 31 December 2019, the fair value through other comprehensive income debt securities are corporate debt securities of £79.9 million classified as level 2 and
fixed interest UK sovereign debt of £5.1 million classified as level 1 within the Group’s fair value hierarchy which is set out in note 42 of the consolidated financial
2020
£m
—
2019
£m
85.0
WWW.DIRECTLINEGROUP.CO.UK
219
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS
7. Registered office at: 42 The Headrow, Leeds, LS1 8HZ.
8. These entities have not been audited, in accordance with the exemptions available for dormant entities under section 480 of the Companies Act 2006.
9. Under the Companies (Jersey) Law 1991, there is no requirement to file individual accounts and audit a private limited company.
3. Other receivables
Loans to subsidiary undertakings1
Trade receivables due from subsidiary undertakings
Other debtors
Total
Current
Non-current
Total
Note:
2020
£m
322.2
13.5
—
335.7
85.7
250.0
335.7
2019
£m
298.6
—
0.5
299.1
49.1
250.0
299.1
1.
Included in loans to subsidiary undertakings is a £250 million unsecured subordinated loan to U K Insurance Limited. A loan of £500 million was advanced on 27
April 2012 at a fixed rate of 9.5% with a repayment date of 27 April 2042. On 7 March 2019, £250 million was repaid. All loans are neither past due nor impaired.
4. Current and deferred tax
Per balance sheet:
Current tax assets
Deferred tax liabilities
The deferred tax liability is in respect of provisions and other temporary differences.
5. Derivative financial instruments1
2020
£m
5.5
(0.7)
2019
£m
3.5
(0.6)
Derivative assets
Designated as hedging instruments:
Foreign exchange contracts2
Total
Derivative liabilities
Designated as hedging instruments:
Foreign exchange contracts2
Total
Notes:
Notional
amount
2020
£m
Fair value
2020
£m
Notional
amount
2019
£m
Fair value
2019
£m
4.1
4.1
4.1
4.1
0.1
0.1
0.1
0.1
18.2
18.2
18.2
18.2
0.6
0.6
0.6
0.6
1. The derivative assets and liabilities are both classified as level 2 within the Group’s fair value hierarchy set out in note 42 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:
2020
£m
—
2019
£m
85.0
1. At 31 December 2019, the fair value through other comprehensive income debt securities are corporate debt securities of £79.9 million classified as level 2 and
fixed interest UK sovereign debt of £5.1 million classified as level 1 within the Group’s fair value hierarchy which is set out in note 42 of the consolidated financial
statements.
WWW.DIRECTLINEGROUP.CO.UK
219
www.directlinegroup.co.uk
219
Financial Statements
Notes to the Parent Company Financial Statements continued
NOTES TO THE PARENT COMPANY 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.
2020
£m
—
266.1
266.1
2019
£m
(0.2)
124.4
124.2
8. Share capital, capital reserves and distributable reserves
Full details of the share capital and capital reserves of the Company are set out in notes 30 and 31 to the consolidated
financial statements.
Of the Company's total equity, £1,329.5 million (2019: £1,329.0 million), being the total of its retained earnings, is
considered to be distributable reserves.
9. Tier 1 notes
Full details of the Tier 1 notes of the Company are set out in note 32 to the consolidated financial statements.
10. Subordinated liabilities
Subordinated Tier 2 notes
2020
£m
511.9
2019
£m
253.4
£250 million 9.25% subordinated Tier 2 notes due 2042
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. 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 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 terms of the notes provide that the rate of
interest will be reset at a rate of 6-month LIBOR plus 7.91%. If LIBOR has been discontinued by this time, the terms of the
notes provide for an ultimate fall-back rate of interest of 9.25% for subsequent interest periods. The terms of the notes do
not automatically provide for the transition of LIBOR to SONIA, which would require a separate agreement between the
Group and the noteholders.
The notes are guaranteed by U K Insurance Limited, a principal subsidiary of the Company.
£260 million 4.0% subordinated Tier 2 notes due 2032
On 5 June 2020, the Company issued subordinated Tier 2 notes at a fixed rate of 4.0%. The notes have a redemption date
of 5 June 2032 and may be redeemed at the option of the Company commencing on 5 December 2031 until the maturity
date.
The Company has the option, in certain circumstances, to defer interest payments on the notes but to date has not
exercised this right.
The 2032 and 2042 notes are unsecured, and subordinated obligations of the Company and rank pari passu and 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 and will rank at least pari passu with the claims of holders of other Tier 2
capital.
The aggregate fair value of subordinated guaranteed dated notes at 31 December 2020 was £589.0 million (2019: £297.8
million).
11. Borrowings
Loans from fellow subsidiaries within the Group¹
Note:
2020
£m
116.4
2019
£m
116.3
1.
Included in the above is a loan of £71.4 million (2019: £84.4 million) from UK Assistance Accident Repair Centres Limited. All loans from fellow Group
subsidiaries are repayable by 31 December 2024 and are subject to interest on outstanding balances based on the average 3-month LIBOR rate.
220 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
220 Direct Line Group Annual Report and Accounts 2020
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS - CONTINUED
7. Cash and cash equivalents
12. Trade and other payables
2020
£m
—
266.1
266.1
2019
£m
(0.2)
124.4
124.2
Total payables to third parties
13. Dividends
2020
£m
1.1
2019
£m
1.0
Full details of the dividends paid and proposed by the Company are set out in note 14 to the consolidated financial
statements.
8. Share capital, capital reserves and distributable reserves
14. Share-based payments
Full details of the share capital and capital reserves of the Company are set out in notes 30 and 31 to the consolidated
Full details of share-based compensation plans are provided in note 36 to the consolidated financial statements.
Of the Company's total equity, £1,329.5 million (2019: £1,329.0 million), being the total of its retained earnings, is
15. Contingent liabilities
The Company will guarantee the debts and liabilities of its UK subsidiary, Brolly UK Technology Limited, at the balance
sheet date in accordance with section 479C of the Companies Act 2006. The Company has assessed the probability of loss
under this guarantee as remote.
16. Risk management
The risks faced by the Company, arising from its investment in subsidiaries, are considered to be the same as those in the
operations of the Group. Details of the key risks and the steps taken to manage them are disclosed in note 3 to the
consolidated financial statements. The Company also holds, on behalf of its subsidiaries, designated hedging instruments
which relate to foreign currency supplier payments.
17. Directors and key management remuneration
The Directors and key management of the Group and the Company are the same. The aggregate emoluments of the
Directors are set out in note 10 to the consolidated financial statements, the compensation for key management is set out
in note 43 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.
Cash at bank and in hand
Short-term deposits with credit institutions1
Total
Note:
1. This represents money market funds.
financial statements.
considered to be distributable reserves.
9. Tier 1 notes
10. Subordinated liabilities
Full details of the Tier 1 notes of the Company are set out in note 32 to the consolidated financial statements.
2020
£m
511.9
2019
£m
253.4
Subordinated Tier 2 notes
£250 million 9.25% subordinated Tier 2 notes due 2042
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. 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 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 terms of the notes provide that the rate of
interest will be reset at a rate of 6-month LIBOR plus 7.91%. If LIBOR has been discontinued by this time, the terms of the
notes provide for an ultimate fall-back rate of interest of 9.25% for subsequent interest periods. The terms of the notes do
not automatically provide for the transition of LIBOR to SONIA, which would require a separate agreement between the
Group and the noteholders.
The notes are guaranteed by U K Insurance Limited, a principal subsidiary of the Company.
£260 million 4.0% subordinated Tier 2 notes due 2032
On 5 June 2020, the Company issued subordinated Tier 2 notes at a fixed rate of 4.0%. The notes have a redemption date
of 5 June 2032 and may be redeemed at the option of the Company commencing on 5 December 2031 until the maturity
The Company has the option, in certain circumstances, to defer interest payments on the notes but to date has not
The 2032 and 2042 notes are unsecured, and subordinated obligations of the Company and rank pari passu and 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 and will rank at least pari passu with the claims of holders of other Tier 2
The aggregate fair value of subordinated guaranteed dated notes at 31 December 2020 was £589.0 million (2019: £297.8
Loans from fellow subsidiaries within the Group¹
1.
Included in the above is a loan of £71.4 million (2019: £84.4 million) from UK Assistance Accident Repair Centres Limited. All loans from fellow Group
subsidiaries are repayable by 31 December 2024 and are subject to interest on outstanding balances based on the average 3-month LIBOR rate.
2020
£m
116.4
2019
£m
116.3
date.
exercised this right.
11. Borrowings
capital.
million).
Note:
220 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
221
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
www.directlinegroup.co.uk
221
Financial Statements
Additional Information
ADDITIONAL INFORMATION
Financial calendar1
Share ownership
2021
Date
08 March
08 April
09 April
05 May
05 May
13 May
20 May
03 August
12 August
13 August
19 August
03 September
09 November
Event
Preliminary Results 2020
announcement
“Ex-dividend” date for 2020 final
dividend
Record date for 2020 final dividend
Final date for election under the
Dividend Reinvestment Plan
Trading update for the first quarter
of 2021
Annual General Meeting
Payment date for 2020 final
dividend
Half-year Report 2021
"Ex-dividend" date for 2021 interim
dividend
Record date for 2021 interim
dividend
Final date for election under the
Dividend Reinvestment Plan
Payment date for 2021 interim
dividend
Trading update for the third quarter
of 2021
Annual General Meeting
The 2021 AGM will be held at, and broadcast live from,
the registered office of the Company at Churchill Court,
Westmoreland Road, Bromley, BR1 1DP on 13 May 2021,
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.
The Articles of Association of the Company and the
letters of appointment of the Executive Directors, the
Chair and the Non-Executive Directors are available for
inspection at the Company’s registered office and at the
offices of Allen & Overy LLP.
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.
Note:
1. These dates are subject to change.
Share capital
You can find details of the Company’s share capital in
note 30 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 232. 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.
Corporate website
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.
Shareholder warning
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.
222 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
222
Direct Line Group Annual Report and Accounts 2020
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/register.
– 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/register.
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/unauthorised-firms-
individuals.
– Remember that if you buy or sell shares from an
unauthorised firm, you cannot access the Financial
Ombudsman Service or Financial Services
Compensation Scheme.
– Get independent financial and professional advice
before handing over any money.
If it sounds too good to be true, it probably is.
–
Report a scam
If fraudsters approach you, tell the FCA using the share
fraud reporting form at www.fca.org.uk/consumers/
report-scam-unauthorised-firm. 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.
Tips on protecting your shares
– Keep all your certificates in a safe place. Alternatively,
consider holding your shares in the UK’s electronic
registration and settlement system for equity, called
CREST, or via a nominee;
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, such
as 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 6.00 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 Chair.
Dividend tax allowance
The dividend tax-free allowance is £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.
–
– 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.
WWW.DIRECTLINEGROUP.CO.UK
www.directlinegroup.co.uk
223
223
Financial Statements Glossary and Appendices
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.
Annual Incentive Plan
(“AIP”)
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.
Assets under
management (“AUM”)
Association of British
Insurers (“ABI”)
This represents all assets managed or administered by or on behalf of the Group, including
those assets managed by third parties.
The trade body that represents the insurance and long-term savings industry in the UK.
Available-for-sale (“AFS”)
investments
Available-for-sale investments are non-derivative financial assets that are designated as such,
or are not classified as loans and receivables, held-to-maturity, or financial assets at fair value
through profit or loss.
Average written
premium
Bootstrapping
Buy-As-You-Earn Plan
Capital
Carbon emissions
Claims frequency
Claims handling
provision (provision for
losses and loss-
adjustment expense)
Clawback
Combined operating
ratio
The total written premium at inception divided by the number of policies.
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 Tier 1 notes. In
addition, the subordinated liability in the Group’s balance sheet is classified as Tier 2 capital
for Solvency II purposes.
Scope 1 – covers direct emissions from owned or controlled sources, including fuels used in
office buildings, accident repair centres and owned vehicles.
Scope 2 – covers indirect emissions from the generation of purchased electricity, steam,
heating and cooling for office buildings and accident repair centres.
Scope 3 under our direct control – includes indirect emissions that occur in the Group’s value
chain, under its direct control, such as waste disposal and business travel.
Total Scope 3 – includes all other indirect emissions that occur in the Group’s value chain and
purchased goods and services, excluding investments.
The number of claims divided by the number of policies per year.
Funds set aside by the Group to meet the estimated cost of settling claims and related
expenses that the Group considers it will ultimately need to pay.
The Group's ability to claim repayment of paid amounts both cash and 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 weather and changes to
the Ogden discount rate. (See page 227 alternative performance measures.)
Commission expenses
Commission ratio
Payments to brokers, partners and price comparison websites for generating business.
The ratio of commission expense divided by net earned premium. (See page 227 alternative
performance measures.)
Company
Direct Line Insurance Group plc.
Current-year attritional
loss ratio
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. (See page
227 alternative performance measures.)
Current-year combined
operating ratio
Current-year normalised
operating profit
Deferred Annual
Incentive Plan (“DAIP”)
Direct own brands
This is calculated using the combined operating ratio less movement in prior-year reserves.
(See page 227 alternative performance measures.)
This is calculated using the normalised operating profit adjusted for prior-year reserve
movements. (See page 227 alternative performance measures.)
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, Darwin and
Privilege brands, Rescue under the Green Flag brand and Commercial under the Direct Line
for Business and Churchill brands.
224 Direct Line Group Annual Report and Accounts 2020
224 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Term
Definition and explanation
Earnings per share
The amount of the Group’s profit after deduction of the Tier 1 coupon payments allocated to
each Ordinary Share of the Company.
Employee Representative
Body (“ERB”)
The forum that represents all employees, including when there is a legal requirement to
consult employees.
Expense ratio
Finance costs
Financial Conduct
Authority (“FCA”)
Financial leverage ratio
The ratio of operating expenses divided by net earned premium. (See page 227 alternative
performance measures.)
The cost of servicing the Group’s external borrowings and including the interest on right-of-
use assets.
The independent body responsible for regulating the UK's financial services industry.
Tier 1 notes and financial debt (subordinated Tier 2 notes) as a percentage of total capital
employed.
Financial Reporting
Council
Gross written premium The total premiums from contracts that were incepted during the period.
The UK's regulator for the accounting, audit and actuarial professions, promoting
transparency and integrity in business.
Group
Incremental borrowing
rate (“IBR”)
Incurred but not
reported (“IBNR”)
In-force policies
Direct Line Insurance Group plc and its subsidiaries.
The rate of interest that a lessee would have to pay to borrow, over a similar term and
security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a
similar economic environment.
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.
Insurance liabilities
This comprises insurance claims reserves and claims handling provision, which the Group
maintains to meet current and future claims.
International
Accounting Standards
Board (“IASB”)
Investment income
yield
A not-for-profit public interest organisation that is overseen by a monitoring board of public
authorities. It develops International Financial Reporting Standards ("IFRSs") 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 (excluding unrealised and realised gains and losses, impairments and fair
value adjustments) divided by the average assets under management (“AUM”). The average
AUM derives from the period’s opening and closing balances for the total Group. (See page
227 alternative performance measures.)
Investment return
The investment return earned from the investment portfolio, including unrealised and
realised gains and losses, impairments and fair value adjustments.
Investment return
yield
Long-Term Incentive
Plan (“LTIP”)
Loss ratio
Malus
Management’s best
estimate (“MBE”)
Net asset value
The investment return divided by the average AUM. The average AUM derives from the
period’s opening and closing balances. (See page 227 alternative performance measures.)
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. (See page 227 alternative performance
measures.)
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 difference between the Group’s total assets and total liabilities, calculated by subtracting
total liabilities (including Tier 1 notes) from total assets.
Net earned premium
The element of gross earned premium less reinsurance premium ceded for the period where
insurance cover has already been provided.
Net insurance claims
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.
Net investment income
yield
Net promoter score
(“NPS”)
This is calculated in the same way as investment income yield but includes the cost of
hedging. (See page 227 alternative performance measures.)
This 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.
WWW.DIRECTLINEGROUP.CO.UK
www.directlinegroup.co.uk
225
225
Financial Statements Glossary and Appendices continued
GLOSSARY AND APPENDICES – CONTINUED
Term
Definition and explanation
Ogden discount rate
The discount rate set by the Lord Chancellor and used by courts to calculate lump sum
awards in bodily injury cases.
Operating expenses
These are the expenses relating to business activities excluding restructuring and one-off
costs. (See page 227 alternative performance measures.)
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”)
The pre-tax profit that the Group’s activities generate, including insurance and investment
activity, but excluding finance costs, restructuring and one-off costs. Normalised operating
profit is operating profit adjusted for weather and changes to the Ogden discount rate. (See
page 229 alternative performance measures.)
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
certain 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.
These are costs incurred in respect of the business activities where the Group has a
constructive obligation to restructure its activities.
This 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.
This is adjusted profit after tax divided by the Group’s average shareholders’ equity less
goodwill and other intangible assets. Profit after tax is adjusted to exclude restructuring and
one-off costs and to include the Tier 1 coupon payments. It is stated after charging tax using
the UK standard rate of 19%. (See page 228 alternative performance measures.)
Right-of-use (“ROU”)
asset
A lessee's right to use an asset over the life of a lease, calculated as the initial amount of the
lease liability, plus any lease payments made to the lessor before the lease commencement
date, plus any initial direct costs incurred, minus any lease incentives received.
Science-Based Targets
(“SBT”)
Science-Based Targets are a set of goals developed by a business to provide it with a clear
route to reduce greenhouse gas emissions. An emissions reduction target is defined as
"science-based" if it is developed in line with the scale of reductions required to keep global
warming below 2°C from pre-industrial levels.
Scope 1, Scope 2, Scope 3
under our direct control
and total Scope 3
Solvency II
Solvency capital ratio
Tangible equity
Please refer to the glossary definition for carbon emissions on page 224.
The capital adequacy regime for the European insurance industry, which became effective
on 1 January 2016. It establishes 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.
This shows the equity excluding Tier 1 notes and intangible assets (for comparability with
companies which have not acquired businesses or capitalised intangible assets). (See page
228 alternative performance measures).
Tangible net assets per
share
This shows the amount of tangible equity allocated to each ordinary share (for comparability
with companies which have not acquired businesses or capitalised intangible assets). (See
page 228 alternative performance measures).
Total Shareholder
Return (“TSR”)
UK Endorsement Board
Compares share price movement with reinvested dividends as a percentage of the
share price.
The UK Endorsement Board endorses and adopts new or amended International Financial
Reporting Standards issued by the International Accounting Standards Board.
Underwriting result
profit / (loss)
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,
excluding restructuring and one-off costs.
226
226 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
Direct Line Group Annual Report and Accounts 2020
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 the IFRS
measures, to aid the user of the annual report and accounts in understanding the activity taking place across the Group.
These APMs are contained within the main narrative sections of this document, outside 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 224 to 226 and reconciled to the most directly
reconcilable line items in the financial statements and notes. Note 4 on page 185 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 162 to 214.
Group APM
Closest equivalent
IFRS measure
Combined
operating ratio
Profit before
tax
Definition and / or reconciliation
Rationale for APM
Combined operating ratio is defined in
the glossary on page 224 and
reconciled in note 4 on page 185.
Current-year
combined
operating ratio
Profit before
tax
Current-year combined operating ratio
is defined in the glossary on page 224
and is reconciled on page 24.
This is a measure of underwriting profitability,
excluding the effect of prior-year reserve
movements.
Profit before
tax
Current-year normalised operating
profit ratio is defined in the glossary on
page 224 and reconciled on page 229.
Expresses a relationship between current-year
normalised operating profit and normalised
operating profit.
Commission
ratio
Commission
expense
Current-year
attritional loss
ratio
Net insurance
claims
Commission ratio is defined in the
glossary on page 224 and is reconciled
in note 4 on page 185.
Current-year attritional loss ratio is
defined in the glossary on page 224
and is reconciled to the loss ratio
(discussed below) on page 24.
Current-year
normalised
operating
profit ratio
Expense ratio
Total
expenses
Investment
income yield
Investment
income
Expense ratio is defined in the glossary
on page 225 and is reconciled in note
4 on page 185.
Investment income yield is defined in
the glossary on page 225 and is
reconciled on page 228.
Investment
return yield
Investment
return
Investment return yield is defined in
the glossary on page 225 and is
reconciled on page 228.
Loss ratio
Net insurance
claims
Loss ratio is defined in the glossary on
page 225 and is reconciled in note 4
on page 185.
Net investment
income yield
Investment
income
Net investment income yield is defined
in the glossary on page 225 and is
reconciled on page 228.
Normalised
combined
operating ratio
Profit before
tax
Combined operating ratio and
normalised combined operating ratio
are defined in the glossary on page 224
and reconciled on page 229.
This is a measure of underwriting profitability
and excludes non-insurance income, whereby
a ratio of less than 100% represents an
underwriting profit and a ratio of more than
100% represents an underwriting loss.
Expresses commission expense, in relation to
net earned premium.
Expresses claims performance in the current
accident year in relation to net earned
premium.
Expresses underwriting and policy expenses 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.
Expresses a relationship between the
investment return and the associated opening
and closing assets adjusted for portfolio
hedging instruments.
Expresses claims performance in relation to
net earned premium.
Expresses a relationship between the net
investment income and the associated
opening and closing assets adjusted for
portfolio hedging instruments.
This is a measure of underwriting profitability
excluding the effects of weather, Ogden
discount rate changes and restructuring and
one-off costs. It also excludes non-insurance
income. A ratio of less than 100% represents
an underwriting profit and a ratio of more than
100% represents an underwriting loss.
Operating
expenses
Total
expenses
Operating expenses are defined in the
glossary on page 226 and reconciled in
note 4 on page 185.
This shows the expenses relating to business
activities excluding restructuring and one-off
costs.
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227
227
Financial Statements Glossary and Appendices continued
GLOSSARY AND APPENDICES – CONTINUED
Appendix A – Alternative performance measures continued
Group APM
Operating
profit
Closest equivalent
IFRS measure
Profit before
tax
Definition and / or reconciliation
Rationale for APM
Operating profit is defined in the
glossary on page 226 and reconciled in
note 4 on page 185.
This shows the underlying performance
(before tax and excluding finance costs and
restructuring and one-off costs) of the business
activities.
Return on
tangible equity
Return on
equity
Return on tangible equity is defined in
the glossary on page 226 and is
reconciled on page 230.
This shows performance against a measure of
equity that is more easily comparable to that
of other companies.
Tangible equity Equity
Tangible equity is defined in the
glossary on page 226 and is reconciled
in note 16 on page 193.
Tangible net
asset value per
share
Net asset value
per share
Tangible net asset value per share is
defined in the glossary on page 226
and reconciled in note 16 on page 193.
Underwriting
profit
Profit before
tax
Underwriting profit is defined in the
glossary on page 226 and is reconciled
in note 4 on page 185.
This shows the equity excluding Tier 1 notes
and intangible assets for comparability with
companies which 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 which have not
acquired businesses or capitalised intangible
assets.
This shows underwriting performance
calculated as net earned premium less net
claims and operating expenses, excluding
restructuring and one-off costs.
Notes2
6
6
6
20
28
29
29
2020
£m
127.1
(20.3)
106.8
(11.7)
95.1
291.7
4,673.4
948.6
(52.3)
81.8
5,943.2
292.1
4,681.4
1,220.1
(51.9)
8.0
6,149.7
6,046.5
2.1%
1.8%
1.6%
2019
£m
146.4
(22.1)
124.3
10.3
134.6
322.1
4,737.8
1,154.4
(62.0)
11.8
6,164.1
291.7
4,673.4
948.6
(52.3)
81.8
5,943.2
6,053.7
2.4%
2.1%
2.2%
Investment income and return yields1
Investment income
Hedging to a sterling floating rate basis3
Net investment income
Net realised and unrealised (losses) / gains excluding hedging
Investment return
Opening investment property
Opening financial investments
Opening cash and cash equivalents
Opening borrowings
Opening derivatives asset4
Opening investment holdings
Closing investment property
Closing financial investments
Closing cash and cash equivalents
Closing borrowings
Closing derivatives asset4
Closing investment holdings
Average investment holdings5
Investment income yield1
Net investment income yield1
Investment return yield1
Notes:
1. See glossary on page 225 for definitions.
2. See notes to the consolidated financial statements.
3.
4. See footnote 1 on page 34 (Investment holdings).
5. Mean average of opening and closing balances.
Includes net realised and unrealised gains / (losses) on derivatives in relation to AUM.
228 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2020
228 Direct Line Group Annual Report and Accounts 2020
Normalised combined operating ratio1
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Effect of weather
Loss ratio
Commission ratio
Combined operating ratio normalised for
weather
Effect of Ogden discount rate
Loss ratio
Combined operating ratio normalised for
weather and Ogden discount rate
Note:
1. See glossary on page 224 for definition.
Normalised operating profit1
Operating profit
Effect of:
Ogden discount rate
Normalised weather – claims
Normalised weather – profit share
Normalised operating profit
Prior-year adjustments
Prior-year reserve movement
Ogden discount rate
Prior-year normalised operating profit
Current-year normalised operating profit
Current-year normalised operating profit ratio
Note:
1. See glossary on page 226 for definition.
Operating expenses1
Operating expenses (including restructuring and one-off costs)
Less restructuring and one-off costs
Operating expenses
Notes:
1. See glossary on page 226 for definition.
2. See notes to the consolidated financial statements.
Home
2020
55.6%
8.1%
23.4%
87.1%
3.4%
(0.2%)
Home
Commercial
Commercial
2019
46.8%
9.7%
23.8%
80.3%
7.2%
(0.6%)
2020
51.4%
18.7%
25.4%
95.5%
0.4%
—
2019
52.7%
18.5%
24.5%
95.7%
3.7%
—
Total
2020
57.9%
8.6%
24.5%
91.0%
0.7%
—
Total
2019
61.9%
7.1%
23.2%
92.2%
2.0%
(0.1%)
90.3%
86.9%
95.9%
99.4%
91.7%
94.1%
—
—
—
(0.2%)
—
(0.6%)
90.3%
86.9%
95.9%
99.2%
91.7%
93.5%
Total
2020
£m
522.1
—
(20.8)
1.3
502.6
173.8
—
173.8
328.8
65%
Total
2019
£m
546.9
16.9
(59.0)
3.7
508.5
294.5
16.9
311.4
197.1
39%
Note2
10
10
10
2020
£m
763.8
(39.4)
724.4
2019
£m
704.9
(11.2)
693.7
WWW.DIRECTLINEGROUP.CO.UK
www.directlinegroup.co.uk
229
229
Financial Statements
GLOSSARY AND APPENDICES – CONTINUED
Glossary and Appendices continued
Return on tangible equity1
Profit before tax
Add back: restructuring and one-off costs
Coupon payments in respect of Tier 1 notes
Adjusted profit before tax
Tax charge (2019 and 2020 UK standard tax rate of 19%)
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 equity2
Return on tangible equity
Notes:
1. See glossary on page 226 for definition.
2. Mean average of opening and closing balances.
2020
£m
451.4
39.4
(16.6)
474.2
(90.1)
384.1
2,643.6
(702.5)
1,941.1
2,699.7
(786.8)
1,912.9
1,927.0
19.9 %
2019
£m
509.7
11.2
(16.6)
504.3
(95.8)
408.5
2,558.2
(566.8)
1,991.4
2,643.6
(702.5)
1,941.1
1,966.3
20.8 %
230 Direct Line Group Annual Report and Accounts 2020
WWW.DIRECTLINEGROUP.CO.UK
231
FORWARD-LOOKING STATEMENTS DISCLAIMER
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.
– the trade and co-operation agreement between the UK
and the European Union (“EU”) regarding the terms,
following the end of the Brexit transition period, of the
trading relationships between the UK and the EU and its
implementation, and any subsequent trading and other
relationship arrangements between the UK and the EU
and their implementation;
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 several 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, percentage targets for current-
year contribution to operating profit, prior-year reserve
releases, cost reductions, reductions in expense and
commission ratios, investment income yield, net realised
and unrealised gains, capital expenditure 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 and/or are beyond the Group’s control.
Forward-looking statements are not guaranteeing 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 direct and indirect impacts and implications of the
Covid-19 pandemic on the economy, nationally and
internationally, on the Group, its operations and
prospects, and on the Group’s customers and their
behaviours and expectations;
– the terms of trading and other relationships between the
UK and other countries following Brexit;
– market-related risks such as fluctuations in interest rates
and exchange rates;
– the policies and actions of regulatory authorities and
bodies (including changes related to capital and solvency
requirements or to the Ogden discount rate or rates in
response to the Covid-19 pandemic and its impact on
the economy and customers) and changes to law and/or
understandings of law and/or legal interpretation
following the decisions and judgements of courts;
– regulations and requirements arising out of the FCA
pricing practices review and changes in customer and
market behaviours and practices arising out of that
review and such regulations and requirements;
– the impact of competition, currency changes, inflation
and deflation;
– the timing, impact and other uncertainties of future
acquisitions, disposals, partnership arrangements, joint
ventures or combinations within relevant industries; and
– the impact of tax and other legislation and other
regulation and of regulator expectations, interventions
and requirements and of court, arbitration, regulatory or
ombudsman decisions and judgements (including in any
of the foregoing in connection with the Covid-19
pandemic) 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 because of new information,
future events or otherwise, unless required to do so by
applicable law or regulation. Nothing in this document
constitutes or should be construed as a profit forecast.
Neither the content of Direct Line Group’s website nor the
content of any other website accessible from hyperlinks on
the Group’s website is incorporated into, or forms part of,
this document.
WWW.DIRECTLINEGROUP.CO.UK
www.directlinegroup.co.uk
231
231
Financial Statements Contact information
CONTACT INFORMATION
Registered office
Direct Line Insurance Group plc
Churchill Court
Westmoreland Road
Bromley
BR1 1DP
Principal banker
Natwest Group plc
250 Bishopsgate
London
EC2M 4AA
Telephone: +44 (0)20 7833 2121
Registered in England and Wales No. 02280426
Website: www.natwestgroup.com
Corporate brokers
Goldman Sachs International
Plumtree Court
25 Shoe Lane
London
EC4A 4AU
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")
100 Bishopsgate
London
EC2N 4AA
Telephone: +44 (0)20 7653 4000
Website: www.rbccm.com
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
Website: www.computershare.com
Investor Centre
To find out more about Investor Centre, go to
www.investorcentre.co.uk/directline
Auditor
Deloitte LLP
2 New Street Square
London
EC4A 3BZ
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
232
Direct Line Group Annual Report and Accounts 2020
UAL
REP
This report is printed on mixed source paper
which is FSC® certified (the standards for
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Direct Line Insurance Group plc©
Registered in England & Wales No. 02280426
Registered Office: Churchill Court, Westmoreland Road, Bromley, BR1 1DP