Annual Report
and Accounts 2021
Innovating for
Innovating for
the future
the future
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Financial highlights
Contents
Profit before
tax
£446.0m
(2020: £451.4m)
Combined
operating ratio1,2
90.1%
(2020: 91.0%)
Operating
profit1
£581.8m
(2020: £522.1m)
Return on
tangible equity1
23.6%
(2020: 19.9%)
Solvency
capital ratio1,3
176%
(2020: 191%)
Dividends and
capital returns4
£401.3m
(2020: £595.2m)5
MSCI’s ESG rating for the Group
increased from ‘A’ to ‘AA’
13th on the Inclusive Top 50
UK Employers List
Notes:
1. See glossary on pages 248 to 250 for definitions and Appendix A – Alternative
performance measures on pages 251 to 255 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 248 for definitions.
3. Estimates based on the Group’s Solvency II partial internal model.
4. See pages 38 to 39 for the dividend policy.
5. Includes £195.5m special dividend in 2020 to replace the cancelled 2019
final dividend.
Strategic Report
Innovating for the future
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
Task Force on Climate-Related
Financial Disclosures
Streamlined Energy and Carbon
Reporting
Non-financial information
statement
Risk management
Viability statement
Governance
Chair’s introduction
– Our Governance
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
Shareholder information
Glossary and Appendices
Forward-looking Statements
Disclaimer
Contact information
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For more information please visit
www.directlinegroup.co.uk
Innovating for
the future
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.
In 2021 we continued transforming
our business by using technology, data
and digital tools to deliver more for our
customers, backed by powerful brands,
great service and market-leading
claims capabilities.
As we build an insurance company of
the future we are putting sustainability
at the heart of how we do business
because it allows great people to thrive,
creates a better corporate culture,
drives competitiveness and provides
a foundation for long-term rewards for
our shareholders.
www.directlinegroup.co.uk
1
Innovating for the future
Our core strengths
Our core strengths
Our core strengths,
combined with new
technology are designed to
deliver sustainable growth.
Insurance customers value strong
brands, great service and a claims
operation that delivers what it
promises. These are the core
strengths of Direct Line Group.
> For more information, see page
21 for the CEO’s review
In an increasingly digital world, future
success requires a relentless focus on
customer needs, efficiency and
innovation, combined with pricing
and claims expertise to deliver an
exceptional insurance experience.
Our diversified business model
ensures that we remain focused on
reaching customers through the four
main routes to market: direct, price
comparison websites, partnerships
and brokers. To read more on our
channels and powerful brands, see
our business model on page 16.
Customer
focus
With customers at the heart of all we
do, we are passionate about offering
great service, unique customer
propositions and a highly efficient
claims operation. Our powerful brands
enable our customers to choose the
right cover for their circumstances
in order to protect their homes,
cars, holidays, businesses and
pets. It’s why our customer
retention rates are high
and our net promoter
scores (NPS) are
strong.
Pricing
sophistication
We are transforming our
competitiveness with our new tech
platforms enabling greater accuracy
in pricing in our chosen markets. Our
pricing and underwriting teams now
have the systems and sophisticated
data techniques designed to get
products to market faster and
target a broader pool of
potential customers.
2
Direct Line Group Annual Report and Accounts 2021
Strategic Report and capabilities
and capabilities
£581.8m
Operating profit
+1.0%
Direct own brands
portfolio growth
2.5%
Reduction in operating
expenses before
restructuring and one-offs
Claims
expertise
Our vertically integrated claims model
differentiates us and adds value giving
the business a competitive advantage.
We are fully focused on data, artificial
intelligence (“AI”) and digital as these
are the key capabilities needed to get
results. As we further digitalise our
claims journey we are aiming for
increased simplicity and speed
to give our customers peace
of mind when they make
an insurance claim and
need us most.
Efficient
cost base
The implementation of our
transformation programme is already
reducing our cost to serve customers,
while at the same time improving
customer outcomes. As the business
increasingly utilises the new
technology we are becoming more
efficient, pricing with greater
speed and responding to
changing market dynamics
with greater agility.
Innovating
for success
We’re innovating across our business
– be it offering attractive customer
propositions, introducing green
solutions to achieve our net zero
ambitions or creating our flagship
Motor technology centre that puts us
at the forefront of repairing advanced
car technology. Customers are
already benefiting from our
technology transformation,
receiving enhanced
self-service options.
www.directlinegroup.co.uk
3
Strategic Report
Innovating for the future
Innovating for
Innovating for
the future
the future
During 2021 Direct Line Group
(the “Group”) delivered a strong
financial performance and
completed the main elements
of its technology build to deliver
greater pricing and data capability
across the business.
Financially, our combined operating ratio figure for the year was 90.1% and
we have launched a new share buyback programme of up to £100 million.
We have also declared a final dividend of 15.1 pence per share, a 2.7% increase
over 2020, highlighting our long track record of delivering strong returns
to shareholders.
Due to our technology transformation we are deploying pricing with greater
accuracy, bringing new offers to market and digitalising our claims operations
to better serve our customers at the point when they need us most and by
being clearsighted about our sustainability priorities, we are implementing
solutions to better position the Group for the long term.
As we embed our tech capability it leaves the Group well positioned to build
on our strong 2021 performance to deliver successful outcomes through 2022
and beyond.
4
Direct Line Group Annual Report and Accounts 2021
Strategic Report Our Stechford accident
repair centre
We continued to expand our claims capabilities with
the acquisition of our 22nd centre this year supporting
our competitive advantage in vehicle repair.
www.directlinegroup.co.uk
5
Innovating for the future
Innovating for the future
Deploying our
new Motor platform
100%
of Motor claims can now be
registered online
Enhancing our
pricing capability
The successful launch of a new Motor
platform for our biggest brands –
Direct Line, Churchill and Privilege
– has improved customer experience
and allows greater pricing
sophistication. Being cloud-based
enables the platform to connect to
a greater variety of data sources,
enabling us to update our pricing
engines at speed.
Delivering
customer benefits
With the major elements of our
Motor tech transformation complete,
the new platform means:
– choice and efficiency for customers
with month-on-month growth in
the number of own brand
customers using the greater
self-service opportunities
– more tasks are now automated,
freeing up time for our consultants
to focus on customers
– new products get to market faster,
books of business can be onboarded
quickly and we can focus on new
commercial opportunities
Customers are already rating
our new platform positively.
72%
of all Motor sales are now
completed directly online
92%
of customers who responded score our
new Motor platform 9 or 10 out of 10
when rating their customer service
experience on a sales or renewal
interaction
6
Direct Line Group Annual Report and Accounts 2021
Strategic Report www.directlinegroup.co.uk
7
Innovating for the future
Strengthening
Partnerships
Major motor partnership win
In July the Group was delighted to
announce a 10-year partnership, from
H2 2023, with Motability Operations
to provide insurance to customers on
the Motability Scheme. The Scheme
serves over 640,000 people and is
forecast to increase Motor gross
written premium by around £500
million each year. The partnership
will provide us with extra insight into
their fleet of modern vehicles and
build further scale to our expert
claims management service.
£500m
Motor gross written premium forecast
each year from H2 2023
Giving our travel
customers flexibility
We extended our Aquarium travel
platform this year to reach an extra
1.7 million customers through our
partnership with Nationwide.
Customers can now manage their
insurance digitally and register some
claims whilst still abroad, without
having to speak to an adviser.
1.7m
travel customers can now manage
their insurance digitally
NatWest Group home
insurance contract
We have extended our long-term
home insurance partnership with
NatWest Group to 2027. Building
on the success of our existing
partnership, we will continue to look
after close to half a million of their
customers’ home insurance needs.
2027
home insurance contract with NatWest
Group extended until 2027
Supporting Metro Bank’s
small and medium-sized
enterprises (“SME”)
customers
In February 2021 Metro Bank
announced they would be partnering
with Churchill Expert to launch the
Bank’s first ever insurance offering,
a suite of products for their SME
customers. Metro Bank said they
had chosen to partner with us
because of our excellent track record
on customer service, as well as our
offering of a wide range of 4 and 5
star Defaqto rated products.
SME
partner
Metro Bank’s partnership with Churchill
Expert offers a suite of products for their
SME customers
8
Direct Line Group Annual Report and Accounts 2021
Strategic Report
www.directlinegroup.co.uk
9
Innovating for the future
Improving online
customer experience
Commercial lines success
Our diversified business model
means we aim to reach customers
however and wherever they shop.
We pride ourselves on offering SMEs
tailored insurance so they have the
insurance cover they need. This year:
– We continued the rollout of a new
pricing and underwriting system
across Commercial combined and
Fleet, alongside the launch of
machine learning pricing models,
improving pricing accuracy
– Direct Line for Business continued
to deliver double-digit growth
within the SME market, supported
by 64% growth in Churchill for
business
– NIG delivered the highest gross
written premium growth in the last
10 years
Overall, during 2021 our Commercial
business grew gross written
premium by 15%.
15%
gross written premium growth
for our Commercial business
Digital support for our
customers
We are increasingly using digital
tools to interact with customers.
This year we resolved 30% of over
2 million online enquiries with our
virtual assistant and our webchat
channel dealt with around 1.3 million
interactions.
30%
of online enquiries resolved via our
virtual assistant
Start-up success
Our insurance start-up motor brand
Darwin has gone from strength to
strength, growing its policy count to
over 135,000 by the end of 2021, an
increase of over 150% in just a year.
Part of its success is based on
machine learning which enables
competitive pricing to be deployed
into the market at speed. It is live on
four PCWs and Darwin is already one
of the highest-rated motor insurers in
the UK on Trustpilot.
+150%
Darwin in-force policy
count up by over 150% compared to 2020
Motor claims efficiency
Using our unique damage evaluation
calculator we can quickly assess if a
customer’s vehicle can be repaired
before it arrives at one of our garages,
by utilising customer supplied
images we can order the necessary
parts to start repairs immediately.
Additionally we have the option to
deploy our AI technology that has
been trained to use a database of
over 2 million images to identify
repair issues, which has helped our
engineers to settle total loss cases
faster, providing certainty for
customers on what will happen with
their vehicle.
2m+
our AI technology has been trained to use
a database of over 2 million images to
identify motor repair issues
10
Direct Line Group Annual Report and Accounts 2021
Strategic Report www.directlinegroup.co.uk
11
Innovating for the future
Building a
sustainable business
Going green
The Group joined the Race to
Zero campaign, committing to set
Science-Based Targets, to achieve net
zero emissions by 2050. This year
we started:
– Testing hydrogenated
vegetable fuel oil (“HVO”) in our
recovery trucks
– Trialling electric spray paint booths
– A new Supply Chain Sustainability
Programme
Race
To Zero
we joined the Race To Zero campaign to
achieve net zero emissions by 2050
Electric made easy
The future of UK motoring is electric
and in November we were delighted
to launch a new electric vehicle (“EV”)
offer for our Direct Line brand, aimed
at making the transition to electric
easy for our Motor insurance
customers. It offers all new business
customers access to a bundle of
electric vehicle charging essentials,
as well as an EV concierge service
and insurance that covers batteries
and charging cables. Using our agile
working model, it took less than eight
weeks to take the concept off the
drawing board and into the market.
22nd
we continue to invest in our capability
to repair more advanced and electric
vehicles with the acquisition of our
22nd accident repair centre this year
New flagship car
technology centre
To prepare for a world of rapidly
changing car technology, the Group
completed the build of its new tech
centre in Stechford, Birmingham.
The facility will develop the tools,
skills and training to benefit its
network, including the ability to test
various ADAS (Advanced Driver
Assistance Systems) calibration tools
and electric vehicle repair methods.
As we have the largest insurer-owned
garage network in the UK, it will
enable the Group to meet evolving
customer repair needs particularly as
the UK transitions to a green future.
£2m
investment in new car technology centre
Promoting Diversity
and Inclusion
In 2021 our Executive Committee
has been transformed; for the first
time ever a majority of its members
are women and two members are
from a minority ethnic background.
Across the business we are working
to drive diversity and inclusion,
including this year our first ever social
mobility action plan and Black
Inclusion report. We know there is
much more to do, and were proud
to be named 13th most inclusive
employer in the UK.
Over
50%
of our ExCo are now women
12
Direct Line Group Annual Report and Accounts 2021
Strategic Report www.directlinegroup.co.uk
13
Investment case
Improving our competitiveness while
delivering strong shareholder returns
Delivering strong shareholder returns
We have a track record of delivering strong returns to shareholders, having distributed £2.1 billion1 over the past five
years. In early 2020, we took the difficult decision to cancel the 2019 final ordinary dividend due to the impact of the
Covid-19 pandemic at that time; however, this was subsequently paid to shareholders as a special interim dividend in
the second half of 2020.
Capital returns (£m)
484.3
205.3
279.0
401.3
113.7
287.6
2017
2018
£2.1bn1
capital returns in the
last five years
595.2
100
195.5
401.3
100
299.7
301.3
128.6
30
98.6
20192
20202
2021
Buyback programmes
Special dividends
Ordinary dividends
Gross written premiums (£m)
Operating profit (£m)
2021: £3,171.6m (2020: £3,180.4m)
2021: £581.8m (2020: £522.1m)
20.6%
(17.9%)
12.0%
(13.1%)
18.2%
(18.2%)
10.4%
(9.7%)
11.1%
(1.3%)
24.4%
(19.4% )
49.2%
(50.8%)
54.1%
(69.6%)
Motor
Home
Rescue and other
personal lines
Commercial
Notes:
1. Represents capital returns paid and proposed as at the date of publication. Includes 2016 final dividend paid in May 2017.
2. The 2019 dividends and capital returns have been adjusted to remove the cancelled 14.4 pence per share final dividend and
£120 million of the share buyback programme as announced in March/April 2020. (The reported number was dividends and capital
returns of £447.0 million.) The cancelled 14.4 pence per share dividend was paid as an special interim dividend in the second half
of 2020.
14
Direct Line Group Annual Report and Accounts 2021
Strategic Report Transformation has enabled us to improve the quality
of our earnings
Over the last few years we have been transforming our technology and changing the way we work to increase the
competitiveness of our business.
This has helped us improve the quality of our earnings and, in 2021, over 50% of our operating profit1,2 was from
current-year business, in line with the target we set out in 2019, with older reserving years no longer such a significant
part or our annual profits.
We are driving to achieve this through
our six strategic objectives
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.
Nimble and cost efficient
To transform into an agile,
cost-effective business to drive
efficiency and simplicity for us and
our customers.
Great people
A home for empowered people who
celebrate difference, and challenge
the status quo to deliver for
our customers.
Our financial targets
Costs
Normalised current-
year operating profit1,2
Normalised combined
operating ratio1,4
Return on tangible
equity (RoTE)1
Expense ratio1,3 of 20%
in 2023
At least 50% contribution
to total operating profit
by 2021
Between 93-95%
throughout the medium
term
At least 15% per annum
over the long term
2021 actual:
23.9%
Notes:
2021 actual:
53.3%
2021 actual:
91.1%
2021 actual:
23.6%
1. See glossary on pages 248 to 250 for definitions and Appendix A – Alternative performance measures on pages 251 to 255
for reconciliation to financial statement line items.
2. Normalised for weather. Reported contribution 55.6%.
3. Applies to operating expenses excluding restructuring and one-off costs.
4. Normalised for weather. Reported COR 90.1%.
www.directlinegroup.co.uk
15
Business model
Delivering for all
our stakeholders
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 its heart.
Motor
Britain’s leading private motor
insurer represented through our
well-known brands Direct Line,
Churchill, Privilege and Darwin and
also through our partners1.
Home
One of Britain’s leading personal
home insurers, represented through
our well-known brands Direct Line,
Churchill and Privilege, and our
partners, including NatWest Group1..
> Read more about our business
segments on pages 46 to 53
Giving customers a choice of brands and channels
We know how to build brand
value and have some of the most
well-known brands in the UK;
these are available direct, through
PCWs, or via specialist brokers. We
also partner with some of the UK’s
most well-known banks.
This is how we create value
We have a number of strengths,
from strong brands to rich data
and expert 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.
Notes:
Diversified model
Our diversified model
enables us to generate
premiums from a range of
brands, products and
distribution channels.
Investment return
The premiums we collect
from customers are
invested in a diversified
investment portfolio whilst
also ensuring we can
support our long-term
claim commitments.
> See page 43
A win for customers
100%
of Motor and Home claims can now
be registered online
1. © Ipsos 2022, Financial Research Survey (FRS), 6 months ended Jan 2022. 14,218 adults (aged 16+) surveyed across Great Britain with
motor insurance, 13,280 with home insurance. Interviews were conducted online and telephone, and weighted to reflect the overall
profile of the adult population. Includes Direct Line, Churchill, Privilege, Darwin and partner brands: NatWest, RBS.
2. Mintel Vehicle Recovery – September 2021.
3. Mintel Pet Insurance – 2021.
16
Direct Line Group Annual Report and Accounts 2021
Strategic Report Rescue and other personal lines
We are one of the leading providers
of rescue and pet insurance in the UK.
Green Flag is the third largest
roadside recovery provider2 and we
are the fourth largest pet insurer3.
Commercial
We protect commercial businesses
through our brands, including NIG
and Direct Line for Business.
DLG PARTNERSHIPS
Accident repair
centres
We own 22 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 advanced
counter-fraud capability.
Costs
We’re improving our
efficiency through greater
use of digital processes and
by targeting cost reduction
measures to increase our
competitiveness.
Tax
We manage our tax
obligations responsibly and
contributed, either directly
or indirectly, £885.1 million
in tax to the Exchequer
this year.
> See page 45
A win for our people
and shareholders
£3.8m
Invested in free
shares for our people
£2.1bn
Capital returns in the last
five years
A win for society
and the planet
£1.5m
Donated to charities and good causes
from our Community Fund
Race to Zero
Joined the Race to Zero
campaign to achieve net zero
emissions by 2050
www.directlinegroup.co.uk
17
Strategic Report
Chair’s statement
Working for all our stakeholders
Dear Shareholder,
I am pleased to report that 2021 saw Direct
Line Group make significant progress on its
strategic transformation at the same time
as delivering strong operating profit. We
achieved profit before tax of £446.0 million
(2020: £451.4 million) and a combined
operating ratio of 90.1% (2020: 91.0%).
The work we undertook in 2020 to adapt our operations
and evolve the way we do business in response to the
Covid-19 pandemic meant that we were well positioned to
continue to provide our customers with excellent service,
support our people, and push ahead with key strategic
initiatives despite entering 2021 in another lockdown and
seeing a continuation of pandemic-related restrictions
during the year. The Board oversaw the business’s
preparations for the implementation of the FCA’s new
general insurance Pricing Practices Review regulations,
which came into force on 1 January 2022, which involved a
large-scale programme of activity and the deployment of
considerable resources to meet the requirements of the
new regulations within an ambitious timeframe during
2021. We believe that our multi-brand, multi-channel
strategy places the Group in a strong position to deliver
sustainable growth under the new pricing rules.
Danuta Gray
Chair of the Board
We have also made good progress on key sustainability
initiatives, details of which are set out in this report,
that we believe will contribute to the long-term
sustainability of the business and its ability to deliver
for our many stakeholders.
Dividend and capital management
The Board has recommended a final ordinary dividend of
15.1 pence per share, making a total of 22.7 pence per share,
an increase of 2.7% over the 2020 total ordinary dividend.
Following the £100 million share buyback programme in
2021 and reflecting the strength of our capital position,
we intend to commence a further share buyback
programme of up to £100 million split into two tranches
of up to £50 million each, the first in H1 and the second
scheduled for H2.
After the proposed final dividend and £100 million share
buyback programme, the estimated solvency capital ratio
was 176% as at 31 December 2021. We have outstanding
Tier 2 debt issued in 2012 with nominal value of
£250 million which can first be called from 27 April 2022.
Excluding this debt, the adjusted solvency ratio after the
proposed final dividend and share buyback would be 160%
which is in the middle of our stated risk appetite range of
140% to 180% of solvency capital requirement.
We have a track record of returning capital to shareholders,
with £2.1 billion returned over the last five years, whilst also
improving our capital structure with issues of Restricted
Tier 1 and Tier 2 debt. Furthermore, over the last two Motor
reinsurance renewals we have reduced the amount of
excess of loss reinsurance purchased as increasing
reinsurance prices has made it less effective economically.
Looking forward, we have a strong balance sheet with
further opportunities to reduce capital intensity and
increase flexibility.
Board and leadership changes
There have been several changes in our Board and leadership
teams since the time of our last Annual Report. In May, we
announced that Tim Harris had decided to retire as Chief
Financial Officer (“CFO”) in order to prioritise supporting a
family member who was undergoing medical treatment. On
behalf of the Board and all our colleagues, I would like to
thank Tim for the exceptional contribution he made as CFO
since 2019 and to wish him and his family the very best.
Following Tim’s decision, Neil Manser (who had performed
the role of Acting CFO since January 2021) was appointed as
CFO on a permanent basis. Neil has a proven track record in
the business, previously having held the roles of Chief
Strategy Officer, Managing Director of our commercial
business, NIG, and Director of Investor Relations. I am pleased
that our strong internal talent pipeline and succession
planning enabled a smooth transition of the finance
leadership to such a high-calibre, capable candidate and am
delighted by the invaluable contribution that Neil has already
made to the Board during the year.
18
Direct Line Group Annual Report and Accounts 2021
Strategic Report In November, we were also delighted to welcome Tracy
Corrigan to the Board as a Non-Executive Director. Tracy’s
broad understanding of capital markets and the digital
economy, and first-hand experience of driving digital
transformation, cultural change and customer-focused
innovation, has put her in a strong position to support
the Board and our executive team in delivering our
ambitious strategy.
There were also some exciting appointments to our Executive
Committee. Promotion of internal talent resulted in the
appointment of Jessie Burrows as Managing Director,
Customer Sales, Service & Claims and Jazz Gakhal as
Managing Director, Motor. In addition, Aurore Lecanon joined
us as Chief Risk Officer and Ash Jokhoo as Chief Information
Officer. These appointments strengthen our capabilities in
the key areas of data, customer and technology and support
our drive to increase the diversity of our workforce at all levels.
More information about leadership changes in 2021 can be
found on page 96.
Sustainability and culture
Our vision is to create a world where insurance is personal,
inclusive and a force for good. This means we want to do
business in a way that benefits all our stakeholders and has a
positive impact on society. We have lots of exciting and
ambitious initiatives in place to help us achieve this, but just
as importantly, we have a culture that places huge value on
“doing the right thing” and encourages and empowers our
people to do so. The Sustainability section of the Strategic
report shows how we are embedding sustainability into our
business with greater confidence, in a way that underpins our
strategy and is reflected in the way we behave. In the
Corporate Governance report, we show how the Board has
engaged with our stakeholders, including our shareholders,
and how it has adapted its own ways of working to support
and sustain the Group’s culture and connect with our wider
management team.
Our customers
During the year, our strategic technology transformation
delivered some material improvements to the way we
interact with our customers. We successfully rolled out our
new Motor platform to our biggest brands (Direct Line and
Churchill) and we continued to find new opportunities for
innovation, including an online customer claims portal, which
enables digital claims management, and a new cloud-based
telephony system in Green Flag, which enables enhanced
customer service and more efficient claims handling.
2021 also saw us announce a new partnership with Motability,
made possible by our investment in business and technology
transformation, which has created the capability for us to be
a service provider of scale. We will provide insurance and
vehicle repairs to the Motability scheme, supporting its more
than 640,000 customers. The scheme helps people with
disabilities achieve greater independence by leasing a new
car, scooter or powered wheelchair in exchange for their
mobility allowance. This partnership aligns with our purpose
of helping people carry on with their lives, giving them peace
of mind now and in the future, and I look forward to seeing
how Motability’s customers can benefit from our investments
in vehicle repair and customer service.
Planet
During 2021, we continued to make good progress in respect
of the “planet” pillar of our sustainability strategy. Our
Sustainability report and Climate Change Action report for
2021 are available on the Group’s corporate website.
Highlights during 2021 included joining the “Race to Zero”
Campaign and the launch of our first electric vehicle bundle
for new Direct Line customers. More information about these
initiatives can be found on pages 70 to 75.
In this report we also publish our second Task Force on
Climate-related Financial Disclosures report, which sets out
the progress the Group has made in setting Science-Based
Targets, which will strengthen our disclosures across Scope 1,
Scope 2 and Scope 3 emissions.
Society
We aim to use our expertise to improve outcomes for society
and the communities we serve. One of the key ways we see
that we can make a positive impact on society is through
promoting social mobility through the Opportunity Action
Plan that we have launched in partnership with the Social
Mobility Pledge. This year, we have looked to harness the
benefits of remote working by targeting recruitment in social
mobility cold spots and holding insight days for bright
students from less-advantaged backgrounds. We have
continued to use our Community Fund to prioritise social
causes, including marginalised groups and loneliness, mental
health and wellbeing and food poverty. More information on
this work can be found on page 67.
People
In 2021 we continued to support our people through the
pandemic and look for ways to support our colleagues’
wellbeing and safety in the new hybrid working environment.
Our flexible approach to remote working has proven valuable
in enabling us to access a wider and more diverse talent pool.
We have listened to our colleagues’ views, expressed through
our regular engagement surveys and our Employee
Representative Body, and taken action where we have seen
opportunities to make things better (see pages 64 and 111).
We continued to show strong commitment to our diversity
and inclusion agenda, publishing our first Black Inclusion
report and committing that from 2022 we will voluntarily
publish our ethnicity pay gap. We hope this transparency will
lead us to understand better where to focus future diversity
and inclusion initiatives, because we know there is always
much more to do.
I would like to end my statement by thanking our people for
their continued commitment and dedication to our business.
It is through their hard work that we enter 2022 with a
sustainable business, ready to compete under new pricing
rules and poised to use our new data and technology
capabilities to grow the business, deliver great outcomes for
customers and achieve our purpose of helping people carry
on with their lives, giving them peace of mind now and in
the future.
DANUTA GRAY
Chair of the Board
www.directlinegroup.co.uk
19
Chair’s statement continued
Section 172(1) statement
The Board of Direct Line Insurance Group plc
(“Direct Line”) confirms that during the year under
review, it has acted in the way it considers would be
most likely to promote the long-term success of the
Company for the benefit of its members as a whole,
whilst having regard to the matters set out in Section
172(1)(a)-(f) of the Companies Act 2006 (“Section 172(1)”).
Purpose and Vision
The matters set out in Section 172(1) underpin Direct
Line’s purpose and vision and form the foundation for
the Board’s considerations and decision making. Our
purpose – to help people carry on with their lives, giving
them peace of mind now and in the future – is centred
on customers and their long-term interests. Our vision
– to create a world where insurance is personal,
inclusive and a force for good – reflects our desire to do
business in a way that benefits all stakeholders, the
environment and wider society.
Stakeholders
Information on Direct Line’s key stakeholders is set out
in the Sustainability section of the Strategic report on
the following pages: Customers, 58 to 60; People, 61 to
65; Society, 66 to 69 and Environmental, 70 to 75. The
diagram on page 55 sets out factors that we have
assessed as being important to our stakeholders.
Engagement
The Board recognises that our stakeholders have
diverse and sometimes competing interests that need
to be finely balanced, and that these interests need to
be heard and understood in order for them to be
effectively reflected in decision making. Information
about how the Board has engaged with stakeholders
during the year and outcomes of that engagement can
be found on pages 109 to 110 in the table titled “How
the Board engages with stakeholders”.
Board decisions and oversight
Examples of how stakeholder engagement and Section
172(1) matters have influenced Board discussion and
decision making during the year can be found in the
table titled “Consideration of Section 172(1) factors by
the Board” on page 108. The table covers a number of
key topics including: the return of capital to
shareholders; the future of Direct Line’s workplace and
culture; and the implementation of rules resulting from
the FCA’s Pricing Practices Review. The metrics and
processes which the Board looks at to ensure that
business practices and behaviours reflect the
Company’s culture, purposes and values, including the
impact of decisions on key stakeholders, are set out
under “Culture and purpose” on page 105. Information
about Board oversight of environmental matters can be
found on page 76 in the TCFD Report.
The below table sets out where key disclosures in respect of each of the Section 172(1) matters can be found.
Section 172(1) factor
Relevant disclosures
a
the likely consequences of any
decision in the long term
a b
the interests of the
company’s employees
b c
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
Innovating for the future (pages 1 to 13)
Vision, purpose, strategic objectives (page 23)
Consideration of Section 172(1) factors by the Board (page 108)
Key Performance Indicators – Colleague engagement scores
(page 31)
Outcome of employee engagement surveys (page 65)
Diversity and Inclusion (pages 61 to 64)
Employee Representative Body (page 111)
How the Board engages with stakeholders (pages 109 to 110)
Key Performance Indicators – NPS and customer complaints
metrics (page 31)
Supporting customers (pages 58 to 60)
Supply Chain Sustainability Programme (page 82)
How the Board engages with stakeholders (pages 109 to 110)
External ratings, memberships and benchmarks (page 57)
Social Mobility Action Plan (page 67)
Community Fund 2021 (page 68)
Science-Based Targets setting (page 86)
TCFD disclosures (pages 76 to 87)
How the Board engages with stakeholders (pages 109 to 110)
Sustainability Committee Report (pages 130 to 131)
d e
e f
the desirability of the company
maintaining a reputation for high
standards of business conduct
Our values (page 62)
Internal controls (pages 117 to 118)
The role of the Board – Culture and Purpose (page 105)
the need to act fairly between
members of the company
Capital returns (page 14)
How the Board engages with stakeholders (pages 109 to 110)
Annual General Meeting (page 97)
Shareholder voting rights (pages 161 to 162)
20
Direct Line Group Annual Report and Accounts 2021
Strategic Report Chief Executive Officer’s review
An exciting point for the business
As I reflect on 2021, I am delighted by
the Group’s strong performance. I feel
proud of the way we have navigated the
complexities and uncertainties of a
challenging market, impacted by the
pandemic. Commercial, Home own brands
and Rescue have grown, benefiting from
the investments we have made in recent
years in technology and pricing, whilst in
Motor we have prepared for future growth
while steering a smart path through a
period of falling premium and uncertain
claims frequency as the market seeks to
predict the shape of the pandemic and its
effect on customer driving behaviour.
Penny James
Chief Executive Officer
At the same time we have made brilliant strategic
progress. After several years replacing the technology
across the business, introducing agile ways of working
and building our data foundations, we are nearing the
completion of our technology transformation phase.
Through that transformation we have improved the
profitability of the business we write, with releases from
older reserve years no longer such a significant part of our
annual profits. We have delivered performance across the
business, including the quality of claims management,
pricing and improvements in our cost efficiency. We
anticipate further progress in all these areas through 2022
and 2023.
So, as I look ahead, I see 2022 as the year we pivot to
focusing on driving the business forward. 2021 has been
dominated by delivering the transformation to enable
future growth and preparing for one of the biggest
changes the market has seen with the introduction of the
FCA’s new Pricing Practices Review regulations. As we
tune and embed the systems we have built and plan for
Home to join Motor on them, we also look ahead with
excitement as we are able to focus on driving our
performance in this new market.
As we look to make this shift, I have focused on making
sure we have the right leadership to make us successful.
Several members of our executive team have changed
and we now have a team brimming with the customer
and insurance experience that has driven our past
success, but also the technology, digital and data skills
we want to become the data- and technology-driven
insurance company of the future.
We start from a position of strength, of course, with a track
record of strong returns, having delivered a return on
tangible equity of over 19% for each of the last five years
and having returned over £2.1 billion of capital to
shareholders over the same period, including the final
dividend and share buyback programme announced
today. This is possible due to our scale and expertise across
our diversified business model, with market-leading
brands across multi-products and multi-channels. These
sustained returns, combined with our new tech capability,
give us a platform for future success.
www.directlinegroup.co.uk
21
We believe passionately that delivering sustainable
growth in the long run means our customers, society and
the planet need to thrive and we have a role to play in
helping to ensure that is the case. In essence we need to
do the right thing for our customers, our people and the
planet. We are making our business an inclusive and
rewarding place to work, where brilliant, skilled people can
deliver in a high-performance culture. We are investing in
the skills that our business will need for its future success
and are offering training programmes to enable people
who want to reskill to do so.
We have also made further strides to embed sustainability
initiatives by prioritising actions which are good for the
long-term interests of the business and which bring wider
societal benefits. You can see this most strongly in the
steps we are taking to protect our business from the
impact of climate change and to give back more to the
planet than we take out. Our decision this year to join the
Race to Zero – committing to set Science-Based Targets to
reduce emissions based on a 1.5°C pathway – reflects that
ambition. But we also recognise our role in supporting
customers to go green and delivering our new Direct Line
electric vehicle proposition is another sign of our ability to
innovate in an agile way.
This is a business I love, brimming with people who share
my view and go the extra mile to support customers and
one another. 2021 has been far from an easy year. Change
is never comfortable and is rarely predictable. The results
and progress are the outcome of the sheer dedication of
our amazing people and their determination to succeed
despite the challenges and strains of a pandemic. So, the
most important thing I can do here is thank each one of
them for sharing this journey with me.
Strategic Report
Chief Executive Officer’s review continued
Our customer-obsessive mindset is intent on delivering
long-term sustainable growth. We are a business that puts
data at the heart of what it does and we are working to
have it at everyone’s fingertips – with the agility to create
and tailor innovative solutions and give customers the
flexible, modular and on-demand insurance products that
give them control. It is why I am so excited by the progress
we have made, having now rolled out our largest brands,
Direct Line and Churchill, onto our new Motor platform.
This transformation builds on our existing core strengths
of great customer service, strong brands and expert
claims capability which look to harness the best of
technology to make every customer interaction effortless,
instant and transparent, however customers come to us.
Our diversified business model gives us the platform to be
the best at direct and win through price comparison
websites (“PCWs”), partners and brokers. The technology
transformation enables a step change in our pricing
capability and operational efficiency which is designed to
further increase our competitiveness.
As we move to embed and leverage what we have built,
we believe there is plenty more to come:
– Step changes in our use of pricing and data, which are
already beginning to improve our competitiveness in
Motor, and we will continue to refine and enhance our
pricing models and capabilities as we move through
the year.
– The next sweep of our brand advertising, building on
the success of the ‘superheroes’ and Churchill
campaigns.
– Improvements in our customer service and costs
efficiency through material increases in straight-
through processing.
– Over 640,000 Motability Operations customers who are
scheduled to join us in 2023 in a deal focused on
providing brilliant customer service and claims in a
capital-efficient manner with 80% reinsured.
– And we are delighted to have extended our contract
with NatWest Group to continue looking after their
customers’ Home insurance needs, a contract built on
our ability to deliver great service for their customers
through brilliant use of digital and data capability.
So, as we enter 2022, we are initially focused on
understanding the new dynamics in the marketplace,
where renewal and new business pricing are linked. It’s
early days but the market appears to be responding
rationally and we are taking time to understand how
customers will behave in the new pricing practices world
and how to balance product, pricing and distribution to
the best effect. The next phase is optimising for growth as
we embed and tune the technology we’ve built.
22
Direct Line Group Annual Report and Accounts 2021
Strategic Report Forging ahead with
our strategy
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
Our values
Do the right
thing
Aim higher
Take
ownership
Say it like
it is
Work
together
Bring all
of yourself
to work
Our strategic objectives
Best at direct
Win on price comparison
websites
Extend our reach
Technical edge
Nimble and cost efficient
Great people
> See pages 15 and 26 for further information
Our sustainability pillars
Customers
People
Society
Planet
Governance
> See page 54 for further information
Our brands
DLG PARTNERSHIPS
www.directlinegroup.co.uk
23
Strategic Report
Chief Executive Officer’s review continued
Preparing for the future
As one of the largest motor insurers in the UK we have
22 garages. As car technology rapidly changes, we are
continuing to invest in our repair capability so we can
meet future customer needs with the aim of achieving
efficient repair.
This is why we possess the ability to test and calibrate
ADAS (Advanced Driver Assistance Systems) and are
training more of our technicians in electric vehicle
repair, as this is expected to be a growing market
and we need to be ready. Our new technology centre
is a further sign of our repair capability and is designed
to help build in-house knowledge and inspire the
next generation.
New Motor insight
We are delighted to announce a new 10-year Motor
partnership with Motability Operations from 2023.
It is expected to give the Group further insight on a
fleet of modern vehicles as the scheme serves some
640,000 people, and is further evidence of the quality
of our customer service, vehicle repair expertise and
digital claims capability.
New car technology centre
As the largest insurer-owned garage networks in the
UK we pride ourselves in efficient repair. To strengthen
the Group’s repair capability further we have invested
in a new car technology centre in Birmingham.
£2m
investment in new car technology centre
The combined operating ratio at 90.1%, normalised for
weather at 91.1%, was better than our medium-term target
of 93% to 95% and in line with our mid-year stated revised
expectation of between 90% and 92%. We achieved an
excellent underwriting profit for the year with increased
prior-year reserve releases and Motor claims frequency
remaining below pre-pandemic levels in H1 2021.
This, together with a strong investment result, meant
operating profit increased from £522.1 million in 2020
to £581.8 million in 2021. We have been focusing
on improving the amount of our operating profit that
comes from the current year and in 2021 met our target
of at least 50%.
Business performance
We are already beginning to see some financial benefits
of our transformation, with another strong financial
performance in 2021, growing our own brand policy
count, delivering a combined operating ratio of 90.1%
and increasing operating profit year on year by 11.4% to
£581.8 million. This has enabled us to declare a final
dividend of 15.1 pence, a 2.7% increase over 2020, and
announce a share buyback programme of up to
£100 million.
We grew direct own brand in-force policies by 1.0% driven
by Commercial direct and Green Flag Rescue, our two
divisions furthest through their transformation, and Home
where we traded well in a buoyant new business market.
We continued to make progress on our cost agenda, with
operating expenses reducing £18 million to £706 million
and the expense ratio falling 0.6 percentage points to
23.9%. Whilst we saw levies increase by 11% during 2021,
alongside heightened inflation in wage costs, these
impacts were more than offset by lower technology costs,
savings from our property strategy and a 9% reduction in
headcount. We also incurred lower Covid-19 related costs.
24
Direct Line Group Annual Report and Accounts 2021
Strategic Report Impact of Covid-19
Whilst in 2020 we saw a modest indirect economic benefit
from the Covid-19 pandemic in our results, during 2021 the
impact was less marked. Within Motor we saw similarly low
levels of claims frequency across the first half of 2020 and
2021 and with restrictions easing across H2 2021 we saw
claims frequency increase back to expected levels.
Throughout 2021 motor market premiums reduced, in part
reflecting this trend and offsetting the financial impact.
Outside of Motor the impact of Covid-19 was even less
significant. Rescue saw lower new business shopping
during lockdown restrictions, whilst claims experience in
Home and Commercial was not significantly affected.
In our Travel business, lower customer travel levels
continued to reduce gross written premium below
pre-pandemic levels and claims volumes reduced in 2021
following the non-repeat of Covid-19 related claims in 2020.
Strategy update
Valuable customer relationships
Following the implementation of the FCA Pricing
Practices regulatory changes at the start of 2022, the
importance of strong customer relationships has never
been higher.
Strong brands and great customer service have always
been core strengths of our business and that has been
consistently demonstrated by our high Net Promoter
Scores and retention rates across both Home and Motor.
Throughout our technology transformation, we have
always started with the customer. Our new technology
architecture has delivered a step change in our digital
capabilities, enabling our customers to deal with us
however they wish. We have seen customer use of our
digital channels increasing month on month throughout
2021, with 100% of Motor and Home claims now able to be
registered online.
Our diversified business model also means that customers
can deal with us through a range of recognised brands
across a number of products. This enables us to support
a real breadth of different customers.
Darwin, a new brand we set up in 2019, is a great example
of our diversified approach. It uses machine learning to
leverage our existing data resource and counter-fraud
expertise to offer customers a low-cost digital product. In
just two years it has increased to over 135,000 policies, is
ranked in the top 10 on TrustPilot and provides us another
powerful brand in the PCW channel.
Finally, our transformation has enabled us to improve our
competitiveness through increased accuracy and agility
in our pricing, as well as increasing the breadth of
propositions that we can offer. During 2021 we rolled out
our new electric vehicle proposition, building on our
expertise in this growing market and helping our
customers make the switch to electric vehicles.
“Our diversified business model also
means that customers can not only
deal with us through whichever
channel they wish, but also via a
range of recognised brands across
a number of products.”
Growing the portfolio
Commercial and Green Flag Rescue are the areas of our
business that are furthest through their transformation
and they demonstrate what can be achieved when we
combine our existing strengths in claims management,
customer service and strong brands, with a new
technology infrastructure and agile ways of working.
Between them they drove strong gross written premium
growth of 13.9% in 2021 and gained share in their
respective markets. We are adopting similar approaches
in Motor and Home and are seeking to grow our share
over time.
Longer term, we believe our brand strength enables us
to extend into broader products and services to meet
customers' needs. Direct Line has recently launched a
standalone cyclist product to take advantage of this
growing market and to attract new customers to other
more established products; our electric vehicle proposition
is designed to help customers transition to electric vehicles
and is only one part of a wider ecosystem; and Green Flag,
by changing its operating model, can now offer more
assistance to customers during a vehicle recovery. These
are all examples of how we are broadening our
propositions and products to deliver for more customers.
www.directlinegroup.co.uk
25
Chief Executive Officer’s review continued
Strategic objectives
Overall, in 2021, we made great progress on our path to building the insurance company of the future – technology and
data led but with a customer-obsessive mindset. We not only completed the main elements of our technology build but
have also made great progress against our six strategic objectives;
Objective
Progress to date
Best at direct
– Launched a new Direct Line proposition helping to make the transition to electric
vehicles easier for customers by providing free access to a bundle of electric vehicle-
related services, including discounted home charging installation.
– Green Flag delivered a new cloud-based policy platform for online sales and relaunched
the way it operates, enabling it to offer more services alongside roadside recovery.
– Launch of Direct Line cyclist product as we extend our products and services in order to
meet broader customer needs.
Win on PCWs
– Successfully rolled out our new Motor platform, which delivers greater pricing
Extend our reach
Nimble and cost
efficient
sophistication using third-party data and speed to market. We saw the benefits of this in
improved Motor competitiveness in the second half of the year.
– Continued to deliver strong growth in Darwin as we enhanced pricing across the four
main PCWs, growing policy count to over 135,000, an increase of over 150% compared to
the end of 2020.
– Churchill business delivered 64% growth in gross written premiums in 2021.
– We announced our new partnership with Motability Operations, demonstrating our core
strengths in delivering great customer service and efficient car repairs. The partnership
is anticipated to increase Motor gross written premiums by around £500 million each
year from H2 2023.
– Agreed a long-term extension to our Home partnership with NatWest Group.
– U K Insurance Business Services Limited expanded into subscription insurance with a
new partnership with Cazoo.
– Green Flag renewed partnerships with Caravan and Motorhome Club, Zurich and Virgin
Money.
– Progressed our site strategy, purchasing our head office and rationalising our footprint
at two regional offices, overall reducing our site footprint by 30% since 2019 and
delivering savings in excess of £10 million per year.
– Expanded digital customer journeys, including 100% of all Home and Motor claims now
able to be registered online and with end-to-end digital journeys for certain claims
types, delivering reduced demand into our contact centres.
– Technology transformation reducing ongoing run costs through rationalisation of legacy
systems, including the decommissioning of two data centres and reducing system
support costs.
Technical edge
– We continued to expand our claims capabilities through the acquisition of our 22nd DLG
Great people
Auto Services accident repair centre. This acquisition supports our competitive
advantage in vehicle repairs and we continued to invest in capability to repair more
advanced and electric vehicles.
– Commercial continued the rollout of its new pricing and underwriting system across
Commercial combined and Fleet, alongside the launch of machine learning pricing
models, dramatically improving pricing accuracy.
– Integration of digital journeys into our new fraud decision engine.
– We have refreshed our leadership, with an Executive Committee team which has the
brilliant mix of digital, customer, data, insurance and agile skills we need to grow our
business, leveraging the technology we have built.
– The Group ranked 13th in The Inclusive Top 50 UK Employers list for 2021/22.
– Published our Black Inclusion report and signed up to 10,000 Black interns programme.
– Continued to embed Agile operating models across our trading and technology teams,
enabling increased pace and efficiency of change.
26
Direct Line Group Annual Report and Accounts 2021
Strategic Report “We take our environmental
obligations seriously and this
year joined the Race to Zero –
committing to set Science-Based
Targets to reduce emissions based
on a 1.5°C pathway.”
Sustainability strategy progress
We have continued to make progress on our sustainability
strategy this year, improving our MSCI ESG rating from an ‘A’
to ‘AA’, and have published our second Task Force on
Climate-related Financial Disclosures ("TCFD") report
outlining our strategic response to climate change in this
Annual Report. We have also participated in the Bank of
England’s Climate Biennial Exploratory Scenario (“CBES”),
providing a clearer assessment of climate-related
implications for the Group. We take our environmental
targets seriously and this year joined the Race to Zero –
committing to set Science-Based Targets to reduce
emissions based on a 1.5°C pathway. While we finalise our
submission to the Science Based Target Initiative (“SBTi”) for
approval, we are clear-sighted that setting ambitious targets
requires practical measures to help reduce our emissions.
Colleagues have been innovating and trialling solutions to
guide our emission reduction strategy, including
launching a Supply Chain Sustainability Programme and
piloting measures in our garage network because these
are some of our most carbon-intensive operations. Part of
our strategic response also means helping to make it easy
for our customers to go green so that we can both
contribute to and benefit from accelerating the transition.
As a major motor insurer we are determined to make it
easy for customers to insure electric vehicles, while aiming
to fix them in the most energy-efficient repair network in
the UK. That’s why our new electric vehicle proposition for
Direct Line customers is such an exciting development
and a sign of how we can take long-term sustainable
decisions which are good for the planet and our business.
UK weather
During February 2022, the UK experienced three
significant storms: Dudley, Eunice and Franklin. To date,
we have already helped over 10,000 customers across
Home and Commercial and estimate claims to be
between £30 million and £40 million. This is an early
estimate and is within our annual weather budget
assumption for 2022.
Ukraine conflict
We are deeply saddened and shocked by the conflict in
Ukraine and have made an immediate donation from the
Group's Community Fund to the UK's DEC Ukraine
Humanitarian Appeal. As a UK-based business, there has
been no direct impact from the conflict in Ukraine that
started in February 2022. The investment portfolio has no
direct exposure to Russia or Ukraine.
Outlook
Our strong strategic progress and disciplined approach to
trading throughout 2021 meant we were well placed as we
entered 2022 and began the implementation of the FCA
Pricing Practices regulatory changes.
These are early days but we have seen positive new
business premium inflation across the Home and Motor
markets in January and February 2022, with search
volumes higher but with switching reduced when
compared to the same period in 2021. Our retention levels
in Motor and Home have remained strong. These
movements are within the range of outcomes we had
projected and prepared for.
Our initial focus was on aiming to safely land the changes
compliantly, while seeking to understand both market
and consumer behaviour in the new environment. Our
multi-brand portfolio sets us up well as it enables us to
both protect value and be competitive in new business.
This will enable us, as we move through the year, to
optimise for growth and shareholder value whilst all the
time delivering great outcomes for customers.
There are a range of inflationary pressures currently being
seen within our market. Our claims expertise, including
our repair cost advantage in Motor, puts us in a good
position to manage these. Elsewhere, we have delivered
absolute reductions in our overall cost base and we plan to
reduce costs further during 2022.
Reflecting this, as well as our long-term confidence
underpinned by our strategic transformation, we reiterate
our combined operating ratio target range of 93% to 95%,
normalised for weather, in 2022 and over the medium
term. We also reiterate our expense ratio target of 20% for
2023, assuming modest premium growth, and our
ongoing target of achieving at least a 15% return on
tangible equity each year.
Having completed the main elements of our technology
build we have complemented our strengths in strong
brands, fantastic customer service and market-leading
claims capabilities with a step change in our pricing
capability, greater digitalisation and improved efficiency.
Whilst we are already seeing some of the benefits of this
new capability coming through, the full benefits are yet to
be realised, which leaves us well positioned to build on
this strong performance through 2022 and beyond.
Penny James
Chief Executive Officer
www.directlinegroup.co.uk
27
Chief Executive Officer’s review continued
Market overview
Consumer trends
In 2021 we witnessed consumer trends further align with
our strategy, consistent with our technology
transformation:
– More customers taking advantage of our digital
capability where we are providing greater flexibility for
people to manage their insurance how they want,
whether it is amending policy cover or making a claim.
It is part of our aim to use the best technology to make
every customer interaction effortless, instant and
transparent however customers come to us.
– A desire for trusted, famous brands offering distinctive
customer offers and insurance propositions. We want to
create and tailor solutions and give customers the
flexible, modular and on-demand products that give
them control. We were delighted to launch our new
electric vehicle proposition for our Direct Line brand
in 2021.
– Car technology is increasingly sophisticated and as the
green transition picks up pace, electric vehicles are
becoming more popular in the UK. Owning our garage
network gives us beneficial commercial insights on
vehicle technology, alongside upskilling our technicians
in electric vehicle repair.
– The Covid-19 pandemic has changed consumer travel
patterns, as more people work from home meaning
fewer people are using cars in peak commuting hours,
impacting claims behaviour. Insurers will need to adapt
to this new environment and our ability to deploy more
sophisticated pricing, as a result of our new motor
platform, gives the Group greater competitiveness as
the UK emerges from the pandemic.
– Increasingly people are taking advantage of
partnerships where they can access insurance products.
We are aiming to be the insurance partner of choice
because it allows us to reach new sets of customers,
which is why we are delighted to be partnering with
Motability. Our new Direct Line electric vehicle
proposition offers a free bundle of services from our
partner, Zoom EV, and our Commercial business is
working with Cazoo, providing motor insurance to
customers within their monthly car subscription.
Financial Conduct Authority Pricing
Practices Review
In May 2021 the FCA published its General Insurance
Pricing Practices Final Policy Statement outlining the
implementation timetable for the reforms. Following the
Final Policy Statement, the Group successfully met the
product governance deadline at the end of September
2021, as well as implementing the pricing reforms which
came into effect on 1 January 2022.
We have been supportive of the reforms since the FCA
announced its intention for firms to equalise customer
prices by offering a renewal price no higher than the
equivalent new business price through the same sales
channel for motor and home policies.
28
Direct Line Group Annual Report and Accounts 2021
For several years, before the FCA announced its intention
to reform the market, we have taken a proactive approach
to reduce the pricing differential between new business
and renewal customers, including reviewing customers’
renewal prices when they reach their five-year anniversary.
As the market rebalances, in line with the FCA’s rule
changes, we believe customers will continue to look for
both value for money and trusted brands, especially
those with a reputation for excellent customer service,
market-leading customer offers in terms of what people
receive with their cover and a strong track record in
claims handling, which are where we have fundamental
strengths. We remain confident that our core strengths
will assist in helping the Group to navigate this new
market with the aim of delivering the right outcomes for
our customers and shareholders.
“We have been supportive of the
reforms since the FCA announced
its intention for firms to equalise
customer prices by offering a
renewal price no higher than the
equivalent new business price
through the same sales channel
for motor and home policies.”
Inflation
The Group is not immune from global inflationary
pressures which became more pronounced in the UK
during the second half of 2021. Like other insurers,
heightened inflation in construction materials such as
concrete and lumber has impacted home claims.
Meanwhile, motor claims inflation has trended upwards
largely due to the limited global supply of new vehicles
increasing costs for second-hand vehicles, impacting total
loss settlements. In Motor we continued to focus on
maintaining the quality of our book and continued to
price for claims inflation at a time when we believe market
pricing was not reflective of observed claims inflation.
While inflation is expected to persist throughout 2022 we
believe the Group has strengths which can help navigate
an increasingly inflationary environment. Owning the
largest garage network of any insurer allows us to repair
vehicles effectively and economically, enabling us to
mitigate some inflationary pressures. Whilst we have a
large home business, construction materials only make up
a small amount of our claims costs, with a greater
proportion relating to labour costs and decorating
materials meaning we are insulated from certain
inflationary pressures partially caused by supply chain
disruption. If supply chain delays reverse as a result of a
relaxation of Covid-19 restrictions we could see some of
these impacts unwind.
Strategic Report Understanding climate-related risks is important because
we manage insurance risks presented by weather-related
events, such as flooding and storm damage. The Group
continues to evaluate the risks presented by climate
change and last year we participated in the Bank of
England’s Climate Biennial Exploratory Scenario (“CBES”).
Alongside our climate change scenario analysis we are
focused on supporting customers to make sustainable
choices. In 2021 we launched our electric vehicle offer for
our Direct Line brand and our commercial business
partnerships are offering customers the flexibility to try
electric vehicles.
UK economy and Brexit
The UK's new international trading relationships may have
had an impact on claims inflation and may still do so,
although the Covid-19 pandemic continues to mask the
effects of these relationships. Certain risks related to Brexit
could still occur or be exacerbated and we continue to be
alert to possible developments.
“While inflation is expected to
persist throughout 2022 we believe
the Group has strengths which can
help navigate an increasingly
inflationary environment.”
Climate
Climate change affects the Group in several ways and, like
other companies, the Group is focusing its efforts on how
to manage the transition to a low-carbon future. In
October 2021 the Chancellor published the ‘Greening
Finance’ roadmap, setting out plans for new Sustainability
Disclosure Requirements to create a framework for
sustainability disclosures across the economy, building on
TCFD to integrate global standards.
The Group has taken a number of steps in recent years to
publish its energy usage and emissions transparently. It
continues to develop risk-mitigation measures to reduce
operational emissions and has enhanced its assessments
of climate-related risks to our business.
This year the Group has published its second TCFD-
aligned disclosure (see page 76) which sets out our
strategic response to climate change. We have also
continued to publish our Scope 1 and 2 emissions as well
as Scope 3 emissions1 with greater clarity of the activities
under our direct control. We are now also publishing our
Scope 3 supply chain emissions as well as, for the first
time, our homeworking emissions following the Group's
adoption of a mixed (remote and site-based) working
model (see page 64).
In 2021 the Group joined the Race to Zero committing to
set Science-Based Targets to reduce our emissions based
on a 1.5°C pathway. We are in the process of setting
Science-Based Targets, which will guide the Group to
reduce our emissions as part of the Science Based Target
initiative (“SBTi”), where we are aiming for a validated set of
targets in 2022. This will cover our operational emissions
(Scope 1 and 2 emissions), as well as our Scope 3 emissions
including our supply chain and investments. In recognition
that our carbon reduction strategy will take time we
remain a carbon neutral business through offsetting.
“Alongside our climate change
scenario analysis we are focused
on supporting customers to make
sustainable choices.”
1. Excluding investments
www.directlinegroup.co.uk
29
Strategic Report
Our key performance indicators
Definition
6
.
1
9
.
8
0
9
.
2
2
9
0
.
1
9
1
.
0
9
Aim
.
.
.
.
.
.
.
1
.
7
1
.
9
1
.
8
5
6
6
8
2
3
2
2
3
2
7
5
2
9
3
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.
17
0
6
5
9
7
5
9
.
1
6
9
.
1
6
1
.
8
5
20
18
19
21
.
.
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.
> For additional performance
information see page 35
Remuneration
We base part of the Annual
Incentive Plan (“AIP”)
awards on profit before tax.
The COR is closely linked
to this.
> For additional information
see pages 135 and 141
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.
We have not set a target.
However, growing earnings
per share is considered
an indicator of a healthy
business.
> For additional performance
information see page 38
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.
> For additional information
see pages 135 and 141
2
.
5
9
5
.
0
0
1
3
.
1
0
4
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 213 for
dividend breakdown).
3
.
1
0
3
3
5
0
2
5
5
9
1
7
3
1
1
0
0
1
.
.
.
.
.
.
.
6
8
2
1
7
9
9
2
6
7
8
2
0
9
7
2
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.
20
21
> For additional performance
information see page 38
0
3
.
6
8
9
19
17
18
Buybacks
Special
Ordinary
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 information
see pages 135 and 145
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 achieve at least
a 15% RoTE per annum over
the long term.
> For additional performance
information see page 38
We base the LTIP awards
partly on adjusted RoTE
over a three-year
performance period.
> For additional information
see pages 135 and 145
Combined operating
ratio1 (“COR”) (%)
.
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
1
.
0
9
.
9
3
2
1
.
8
1
.
8
5
17
18
19
20
21
Expense ratio
Commission ratio
Basic earnings
Loss ratio
per share1 (pence)
.
3
3
3
8
.
1
3
.
5
9
2
.
8
5
2
.
5
4
2
17
18
19
20
21
Capital returns2
(£m)
.
3
4
8
4
.
3
5
0
2
.
0
9
7
2
3
.
1
0
4
.
7
3
1
1
.
6
7
8
2
17
18
.
6
8
2
1
0
3
.
6
8
9
19
2
.
5
9
5
0
0
1
.
5
5
9
1
.
7
9
9
2
3
.
1
0
4
0
0
1
3
.
1
0
3
20
21
Buybacks
Special
Return on tangible
Ordinary
equity1 (%)
.
0
3
2
6
.
1
2
.
6
3
2
.
8
0
2
.
9
9
1
17
18
19
20
21
Notes:
1. See glossary on pages 248 to 250 and Appendix A – Alternative performance measures on pages 251 to 255 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 represented 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%.)
30
Direct Line Group Annual Report and Accounts 2021
Strategic Report
Solvency capital
ratio3,4 (%)
0
.
1
9
1
.
0
9
8
1
.
0
6
7
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%.
> For additional performance
information see page 39
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.
> For additional information
page 135
17
18
19
20
21
Colleague engagement
(%)
0
.
1
8
.
0
8
7
.
0
8
7
.
0
4
7
.
0
6
6
Engagement is about
being proud to work for
the Group and helping us
to succeed. It means that
colleagues are not just
happy or satisfied, but
doing something to help us
achieve our Company goals.
The AIP awards include
a weighting to a balance
of employee metrics,
including engagement.
> For additional information
see pages 135 and 143
To make the Group best
for our customers and best
for our colleagues. We
gauge employee
engagement through our
colleague opinion surveys
and we aim for high
colleague engagement
scores each year.
> For additional performance
information see page 61
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.
We aim to increase our
NPS over time.
> For additional performance
information see page 58
The AIP awards include
a weighting to a balance
of customer metrics,
including NPS.
> For additional information
see pages 135 and 142
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 135 and 142
17
18
19
20
21
Net Promoter Score5,6
(points)
.
0
5
5
1
.
0
8
5
1
.
0
6
5
1
.
0
4
4
1
.
6
5
4
1
17
18
19
20
21
Customer complaints6
(%)
8
7
0
.
7
7
0
.
3
6
0
.
1
5
0
.
6
4
0
.
17
18
19
20
21
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.
www.directlinegroup.co.uk
31
Finance review
A strong financial performance
Financial highlights
Direct own brands in-force policies grew 1.0% with growth
across Commercial direct (7.5%), Green Flag Rescue (5.8%)
and Home (2.3%). Motor direct own brands in-force
policies were stable in H2 2021 with a reduction of 1.9%
over the year. Direct own brands gross written premium
was 0.8% lower and grew 0.7% in H2 2021.
Combined operating ratio improved to 90.1% (2020: 91.0%).
Normalised for weather, the combined operating ratio was
91.1%, ahead of our medium-term target of 93% to 95% and
in line with the expectation of between 90% and 92% for
2021 we stated at half year.
Operating profit increased to £581.8 million (2020: £522.1
million) driven by an increase in underwriting profit and a
strong investment return result. Current-year contribution
to operating profit, normalised for weather, was 53% (2020:
65%), in line with the Group’s 2021 target of at least 50%.
Profit before tax of £446.0 million was £5.4 million lower
than 2020 as the increase in operating profit was offset by
a £62.1 million increase in restructuring and one-off costs
primarily reflecting restructuring of the property portfolio,
including the purchase of the Bromley office in early 2021
as previously announced.
Proposed final ordinary dividend of 15.1 pence per share,
making a total of 22.7 pence per share, an increase of 2.7%
over the 2020 total ordinary dividend, and announcing a
£100.0 million share buyback programme. Strong capital
position with an adjusted solvency capital ratio of 160%.
Neil Manser
Chief Financial Officer
32
Direct Line Group Annual Report and Accounts 2021
Strategic report Financial summary
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 one-off costs
Operating profit after restructuring and 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
Return on tangible equity2
Investment income yield2
Net investment income yield2
Investment return yield2
Basic earnings per share (pence)
Diluted earnings per share (pence)
Return on equity
Dividend per share – interim (pence)
– final (pence)
– total ordinary (pence)
– special (pence)3
Share buyback
Net asset value per share (pence)
Tangible net asset value per share (pence)
Solvency capital ratio post-dividends and share buyback4
Adjusted solvency capital ratio5
Notes:
FY 2021
£m
14,565
7,529
3,171.6
2,207.6
2,957.4
291.5
144.0
146.3
581.8
(101.5)
480.3
(34.3)
446.0
(102.3)
343.7
65.5%
58.1%
8.1%
23.9%
90.1%
23.6%
1.9%
1.7%
2.4%
24.5
24.1
12.5%
7.6
15.1
22.7
–
100.0
FY 2021
193.6
131.2
176%
160%
FY 2020
£m
14,615
7,454
3,180.4
2,225.6
2,960.5
267.8
159.2
95.1
522.1
(39.4)
482.7
(31.3)
451.4
(84.2)
367.2
62.3%
57.9%
8.6%
24.5%
91.0%
19.9%
2.1%
1.8%
1.6%
25.8
25.5
13.1%
7.4
14.7
22.1
14.4
100.0
FY 2020
199.7
141.5
191%
172%
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. See glossary on pages 248 to 250 for definitions.
2. See glossary on pages 248 to 250 for definitions and appendix A – Alternative performance measures on pages 251 to 255 for
reconciliation to financial statement line items.
3. 2020 special dividend paid in lieu of the cancelled 2019 final dividend.
4. Estimates based on the Group’s Solvency II partial internal model.
5. Adjusted solvency capital ratio excluding Tier 2 debt which can first be called from 27 April 2022. See appendix A – Alternative
performance measures on page 251 for definition and on page 255 for reconciliation to financial statement line items.
www.directlinegroup.co.uk
33
Finance review continued
Performance
Operating profit
FY 2021
£m
FY 2020
£m
Underwriting profit
Instalment and other operating income
Investment return
Operating profit1
2020
£173.8m (33.3%)
291.5
144.0
146.3
267.8
159.2
95.1
522.1
581.8
£348.3m (66.7%)
2021
2020
£173.8m (33.3%)
£258.1m (44.4%)
£348.3m (66.7%)
£323.7m (55.6%)
2021
2020
0
£173.8m (33.3%)
£258.1m (44.4%)
200
100
300
£348.3m (66.7%)
400
£323.7m (55.6%)
500
600
Current-year operating profit
2021
Prior-year reserve releases
0
£258.1m (44.4%)
200
100
300
400
£323.7m (55.6%)
500
600
Current-year operating profit
Prior-year reserve releases
0
200
100
300
400
500
600
Current-year operating profit
Prior-year reserve releases
Note:
1. See glossary on pages 248 to 250 for definitions and appendix A
– Alternative performance measures on pages 251 to 255 for
reconciliation to financial statement line items.
In 2021 we delivered a strong financial performance,
growing our own brand policy count, delivering a
combined operating ratio of 90.1% and increasing
operating profit year on year by 11.4%. This enabled us to
declare a final dividend of 15.1 pence, a 2.7% increase over
2020, and announce a further share buyback programme
of up to £100 million.
We delivered operating profit of £581.8 million, an increase
of £59.7 million over 2020, driven by increased
underwriting profit and a strong investment return,
partially offset by lower instalment and other operating
income. Current-year contribution to operating profit,
normalised for weather, was 53% (2020: 65%), in line with
our target of at least 50%.
Underwriting profit increased by £23.7 million, with
increases in prior-year reserve releases and lower
operating costs being partially offset by higher claims
frequency in Motor. Increases in prior-year reserve releases
benefited from favourable development across several
perils in Home and large bodily injury reserves
development in Motor as uncertainty arising from Covid-19
and Brexit reduced. The combined operating ratio at
90.1%, normalised for weather at 91.1%, was better than our
medium-term target of 93% to 95% and in line with our
stated mid-year revised expectation for 2021 of between
90% and 92%.
Lower average premiums in Motor and lower claims
volumes across the whole year drove a reduction in
instalment and other income to £144.0 million (2020:
£159.2 million).
Investment return increased by £51.2 million in 2021
following £43.6 million of realised and unrealised gains
across our investment property and credit portfolios
(2020: £11.7 million of net realised and unrealised losses).
34
Direct Line Group Annual Report and Accounts 2021
During 2021, the impact of Covid-19 was less significant
than in the previous year where it caused a modest overall
indirect economic benefit. Whilst Motor claims frequency
remained below pre-pandemic levels in H1, it increased
back to expected levels during H2 and Motor saw elevated
severity inflation in damage claims throughout the year.
In-force policies and gross written premium
In-force policies (thousands)
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
2021
3,869
102
3,971
1,879
788
2,667
3,417
3,445
138
56
7,056
1,179
602
269
871
14,565
7,529
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
Direct own brand policies grew 1.0% to 7.5 million with
growth in Commercial, Green Flag Rescue and Home
offsetting declines in Motor. Total in-force policies were
broadly stable at 14.6 million (31 December 2020: 14.6 million)
as the increases in direct own brand and Commercial NIG
in-force policies were offset by lower partnership and
Travel volumes.
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 2021
£m
1,515.2
45.6
1,560.8
FY 2020
£m
1,567.6
49.3
1,616.9
416.7
161.1
577.8
170.0
92.3
71.4
46.3
380.0
88.3
411.6
166.3
577.9
166.7
134.0
72.8
44.3
417.8
83.1
Direct own brands
NIG and other
Commercial
Total gross written premium
Of which: direct own brands
187.4
465.6
653.0
3,171.6
2,207.6
163.3
404.5
567.8
3,180.4
2,225.6
Strategic report
Direct own brands gross written premium reduced by
0.8% to £2,207.6 million (2020: £2,225.6 million) where
strong growth in Commercial and Green Flag Rescue was
offset by lower volumes and lower average premiums in
Motor. Total gross written premium of £3,171.6 million
(2020: £3,180.4 million) reduced by 0.3% with strong
growth in Commercial NIG offset by the small reduction
in own brands and a reduction in Travel.
Underwriting profit and combined operating ratio1
FY 2020
FY 2021
Underwriting profit (£ million)
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Note:
291.5
58.1%
8.1%
23.9%
90.1%
267.8
57.9%
8.6%
24.5%
91.0%
1. See glossary on pages 248 to 250 for definitions and appendix A
– Alternative performance measures on pages 251 to 255 for
reconciliation to financial statement line items.
Ratio analysis by division
Overall underwriting profit increased to £291.5 million
(2020: £267.8 million) with an improvement in the
combined operating ratio to 90.1% (2020: 91.0%).
The loss ratio edged up slightly to 58.1% (2020: 57.9%)
driven by increases across Motor and Commercial more
than offsetting improvements in Home and Rescue and
other personal lines.
The small deterioration in the loss ratio was more than
offset by a lower commission ratio. The commission ratio
reduced primarily due to reduced profit share payments,
particularly on packaged bank accounts and Home
partnerships, partially offset by increased commission
payments in Commercial.
The expense ratio reduced by 0.6 percentage points to
23.9% as operating expenses reduced following progress
on our cost saving initiatives, partially offset by increased
levies and depreciation and amortisation charges relating
to the launch of our new technology platforms.
For the year ended 31 December 2021
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 ratio2
Current-year combined operating ratio2
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 ratio2
Current-year combined operating ratio2
Notes:
Notes
Motor
£m
Home
£m
Rescue and
other
personal lines
£m
Commercial
£m
4
4
35
4
4
4
4
4
4
35
4
4
4
4
1,473.3
947.0
127.1
n/a
1,074.1
72.9%
(8.6%)
n/a
64.3%
3.3%
24.8%
92.4%
101.0%
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%
553.4
280.4
45.8
(18.3)
307.9
55.7%
(8.3%)
3.3%
50.7%
6.9%
22.5%
80.1%
88.4%
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%
369.5
185.3
23.8
n/a
209.1
56.5%
(6.4%)
n/a
50.2%
11.4%
25.3%
86.9%
93.3%
422.9
261.1
5.6
n/a
266.7
63.0%
(1.3%)
n/a
61.7%
16.4%
23.9%
561.2
306.0
61.4
(19.2)
348.2
62.0%
(10.9%)
3.4%
54.5%
20.0%
21.7%
96.2%
107.1%
497.0
255.3
56.8
(16.0)
296.1
59.6%
(11.4%)
3.2%
51.4%
18.7%
25.4%
102.0%
103.3%
95.5%
106.9%
Total
Group
£m
2,957.4
1,718.7
258.1
(37.5)
1,939.3
65.5%
(8.7%)
1.3%
58.1%
8.1%
23.9%
90.1%
98.8%
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%
1. Home and Commercial claims for major weather events, including inland and coastal flooding and storms.
2. See glossary on pages 248 to 250 for definitions and appendix A – Alternative performance measures on pages 251 to 255 for
reconciliation to financial statement line items.
www.directlinegroup.co.uk
35
Finance review continued
Ratio analysis by division (%)
120
120
105
105
101.0%
94.5%
24.7%
3.2%
24.8%
3.3%
64.3%
59.8%
90
90
75
75
60
60
45
45
30
30
15
15
0
0
88.4%
89.0%
23.4%
8.1%
22.5%
6.9%
103.3%
23.9%
16.4%
93.3%
25.3%
11.4%
107.1%
106.9%
21.7%
25.4%
20.0%
18.7%
98.8%
96.9%
23.9%
24.5%
8.1%
8.6%
50.7%
55.6%
61.7%
50.2%
54.5%
51.4%
58.1%
57.9%
2021
2020
Motor
2021
2020
Home
2021
2020
RoPL
2021
2020
Commercial
2021
2020
Total
■ Loss ratio ■ Commission ratio ■ Expense ratio ■ Current-year combined operating ratio
We continued to reduce our operating expenses as we
move towards our target of a 20% expense ratio in 2023.
Overall operating expenses before restructuring and
one-off costs reduced by £18.1 million to £706.3 million
(2020: £724.4 million) and resulted in a decrease in the
expense ratio of 0.6 percentage points to 23.9%
(2020: 24.5%).
Costs before insurance levies, depreciation and
amortisation were 6.7% (£37.5 million) lower at
£520.7 million reflecting lower costs in relation to the
Covid-19 response and reductions arising from the Group’s
cost-saving initiatives. We have also made good progress
on our property strategy, completing the acquisition of
our Bromley office and we have disposed of a further
property in 2022.
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 2021
£m
97.3
FY 2020
£m
109.3
7
7
7
7
19.7
24.0
13.1
7.2
6.7
46.7
12.2
8.8
4.9
49.9
144.0
159.2
1. Other income includes mainly fee income from insurance
intermediary services.
The current-year attritional loss ratio excludes prior-year
reserve releases and claims costs from major weather
events and is therefore an indicator of underlying accident
year performance. Our current-year attritional loss ratio of
65.5% increased by 3.2 percentage points compared to
2020, with increases in loss ratio in Motor, Home and
Commercial partially offset by a reduction in Rescue and
other personal lines.
Prior-year reserve releases increased in 2021 to
£258.1 million (2020: £173.8 million), equivalent to 8.7% of
net earned premium (2020: 5.9%) and were concentrated
towards more recent accident years. Prior-year reserve
releases were higher across all categories, including in
Home, which benefited from favourable experience across
several perils, in line with expectations, and Motor, which
benefited mainly from large bodily injury reserve
development as uncertainty arising from Covid-19 and
Brexit reduced.
Our current-year combined operating ratio increased
by 1.9 percentage points to 98.8% (2020: 96.9%) as a
3.2 percentage point increase in the current-year
attritional loss ratio was partially offset by a 0.6 percentage
point improvement in the expense ratio, a 0.5 percentage
point decrease in the commission ratio and a
0.2 percentage point reduction in claims due to
major weather.
Operating expenses before restructuring
and one-off costs
Staff costs1
IT and other operating expenses1,2
Marketing
Sub-total
Insurance levies
Depreciation and amortisation3,4
Total operating expenses before
restructuring and one-off costs
Notes:
Note
FY 2021
£m
FY 2020
£m
10
10
10
261.0
147.7
112.0
520.7
89.0
96.6
255.6
196.0
106.6
558.2
80.4
85.8
706.3
724.4
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. For the year ended 31 December 2021, depreciation and
amortisation includes a £2.1 million impairment charge (2020:
£6.6 million), which relates to capitalised software development
costs for ongoing IT projects primarily relating to the
development of new systems. and a £0.5 million impairment
charge (2020: £nil), which relates to ROU property assets.
4. Includes depreciation on right-of-use assets of £10.8 million
(2020: £14.8 million).
36
Direct Line Group Annual Report and Accounts 2021
Strategic report Instalment and other operating income, which is primarily
driven by premium and claims volumes, decreased by
£15.2 million to £144.0 million. Instalment income fell
primarily due to lower Motor gross written premium,
whereas other operating income reduced due primarily
to a reduction in external Motor repair income and lower
recovery after accident volumes.
Investment return
Investment income
Hedging to a sterling floating
rate basis
Net investment income
Net realised and unrealised
gains/(losses) excluding
hedging
Total investment return
6
Investment yields
Investment income yield1
Net investment income yield1
Investment return yield1
Note:
Note
FY 2021
£m
116.0
FY 2020
£m
127.1
(13.3)
(20.3)
102.7
106.8
43.6
146.3
(11.7)
95.1
FY 2021
FY 2020
1.9%
1.7%
2.4%
2.1%
1.8%
1.6%
1. See glossary on pages 248 to 250 for definitions and appendix A
– Alternative performance measures on pages 251 to 255 for
reconciliation to financial statement line items.
Total investment return increased by £51.2 million to
£146.3 million (2020: £95.1 million) primarily reflecting
positive fair value adjustments in investment properties in
2021 versus write downs in 2020, as well as increasing the
gains from debt security disposals year on year. Lower
investment rates, driven by central banks' policy actions in
2020, led to a lower net investment income yield of 1.7%
(2020: 1.8%).
In 2021 net investment income has been modestly ahead
of expectations mainly due to good performance on the
high yield portfolio and rising risk-free rates. For 2022 we
expect net investment income yield to be in the region of
1.7%, increasing to between 1.8% and 1.9% in 2023, based on
current yield curves.
Our 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 (“PPO”) and non-PPO
liabilities in an optimal manner; and
– to deliver a suitable risk-adjusted investment return
commensurate with our risk appetite.
Reconciliation of operating profit
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
4
11
4
12
FY 2021
£m
314.8
141.8
64.8
60.4
581.8
(101.5)
(34.3)
446.0
(102.3)
FY 2020
£m
363.5
101.4
6.8
50.4
522.1
(39.4)
(31.3)
451.4
(84.2)
343.7
367.2
Operating profit by segment
All divisions contributed significant profit in 2021,
demonstrating the diversity of our multi-product, multi-
brand and multi-channel portfolio. Motor operating profit
decreased as claims frequency increased back to expected
levels as Covid-19 lockdown measures have been
progressively relaxed across H2 2021, partially offset by an
increase in prior-year reserve releases following favourable
development of large bodily injury reserves as uncertainty
arising from Covid-19 and Brexit reduced. Home operating
profit increased primarily due to lower weather-related
costs and higher prior-year reserve releases on escape of
water, flood and fire perils. Rescue and other personal lines
profit increased significantly following the non-repeat of
the 2020 impact of the Covid-19 pandemic on Travel.
Commercial operating profit increased due to
improvements in underlying motor and liability claims
costs, offsetting higher property claims costs, and
increased gross written premium. Rescue operating profit
of £55.0 million (2020: £51.2 million) is included in the
Rescue and other personal lines result.
Restructuring and one-off costs
We incurred £101.5 million of restructuring and one-off
costs in 2021, with £89 million of these costs relating to our
site strategy, including £83.9 million in relation to the
purchase of the lease of our Bromley office. The remainder
are in respect of redundancy programmes and one-off
costs. The Group may incur additional costs in 2022 if
further opportunities are found as part of the Group's
site strategy.
Finance costs
Finance costs increased to £34.3 million
(2020: £31.3 million) primarily due to the full-year effect of
interest payments on the £260 million Tier 2 subordinated
debt issued in June 2020 included in the 2021 figure,
partially offset by reductions of lease interest payable
following the purchase of the lease of our Bromley office.
Effective corporation tax rate
The effective tax rate for 2021 was 22.9% (2020: 18.7%),
higher than the standard UK corporation tax rate of 19.0%
(2020: 19.0%) driven primarily by the non-deductible
payment to terminate the lease on the Bromley property,
and other disallowable expenses partly offset by tax relief
for the Tier 1 coupon payments. The Effective Tax Rate is
higher than for 2020 due to the Bromley lease payment
and is expected to return to a more normal level in future
years, subject to any future one-off disallowable items.
www.directlinegroup.co.uk
37
Finance review continued
Profit for the year and return on tangible equity1
Profit before tax of £446.0 million was £5.4 million lower
than for 2020 as the increase in operating profit was offset
by a £62.1 million increase in restructuring and one-off
costs as we continued to make progress in our property
site strategy.
Profit for the year ended 31 December 2021 decreased by
£23.5 million to £343.7 million (2020: £367.2 million) as an
increase in operating profit was partially offset by a £62.1
million increase in restructuring and one-off costs and
finance costs.
Return on tangible equity increased to 23.6% (2020: 19.9%)
due primarily to the higher operating profit. 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 248 to 250 for definitions and appendix A
– Alternative performance measures on pages 251 to 255 for
reconciliation to financial statement line items.
Earnings per share
Basic earnings per share decreased by 5.0% to 24.5 pence
(2020: 25.8 pence). Diluted earnings per share decreased
by 5.5% to 24.1 pence (2020: 25.5 pence) mainly reflecting a
reduction in profit after tax.
Cash flow
The Group’s cash and cash equivalents reduced by
£271.7 million during the year (2020: £271.9 million
increase) to £896.5 million.
The Group generated operating cash flows before
movements in working capital of £435.9 million
(2020: £394.5 million), an increase of £41.4 million; a
reduction in profit for the year was more than offset by an
increase in adjustments for non-cash movements. After
taking into account movements in working capital, the
Group generated £390.1 million (2020: £402.6 million), a
decrease of £12.5 million. The Group has considerable
assets under management; the cash generated from
these reduced by £148.7 million to £167.2 million following
reductions in the Group’s assets under management, as a
result of dividend payments. Net cash generated from
operating activities was £439.0 million
(2020: £584.7 million).
Net cash used in investing activities of £138.7 million
reflected the Group's continuing investment in its major IT
programmes (2021: £109.4 million, 2020: £140.7 million).
Net cash used in financing activities of £572.0 million
included £317.4 million (2020: £312.5 million) in dividends
and Tier 1 capital coupon payments in the year,
£101.0 million in share buybacks (2020: £30.0 million) and
£101.9 million (2020: £12.5 million) lease principal payments.
The amount in 2020 included net proceeds of £257.2
million relating to Tier 2 subordinated debt issued in June
2020. Dividends paid in the year comprised the 7.6 pence
first interim dividend announced in the half-year results in
2021 and the 14.7 pence per share final dividend
announced in March 2021.
Net cash used in financing and investing activities more
than offset the £439.0 million generated from operating
activities and resulted in a net decrease in cash and cash
equivalents of £271.7 million (2020: £271.9 million increase)
to £896.5 million (2020: £1,168.2 million). The levels of cash
and other highly liquid sources of funding that the Group
holds to cover its claims obligations are continually
monitored to ensure that the levels remain within the
Group’s risk appetite.
Net asset value
At 31 December
Net assets1
Goodwill and other intangible
assets
Tangible net assets
Closing number of Ordinary
Shares (millions)
Net asset value per share
(pence)
Tangible net asset value per
share (pence)
Note:
Note
2021
£m
2020
£m
16
16
16
16
16
16
2,550.2
2,699.7
(822.5)
1,727.7
(786.8)
1,912.9
1,317.3
1,351.8
193.6
199.7
131.2
141.5
1. See glossary on pages 248 to 250 for definitions and appendix A
– Alternative performance measures on pages 251 to 255 for
reconciliation to financial statement line items.
Net assets at 31 December 2021 decreased by
£149.5 million to £2,550.2 million (31 December 2020:
£2,699.7 million) and tangible net assets decreased to
£1,727.7 million (31 December 2020: £1,912.9 million)
following the payment of the 2020 final dividend, 2021
interim dividend and the completion of the share buyback
programme, a reduction in available-for-sale reserves and
additional expenditure on intangible assets as we
continued to invest in the business.
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 intends 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.
38
Direct Line Group Annual Report and Accounts 2021
Strategic report 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
15.1 pence per share (2020: 14.7 pence), an increase of 0.4
pence per share (2.7%). This reflects the Board’s continued
confidence in the Group’s capital position and the
sustainability of its earnings.
After the dividend and proposed share buyback
programme, the estimated solvency capital ratio was 176%
as at 31 December 2021. The Group has outstanding Tier 2
debt issued in 2012 with nominal value of £250 million
which can first be called from 27 April 2022. Excluding this
debt, the Group’s adjusted solvency ratio would have been
160% as at 31 December 2021.
The final dividend will be paid on 17 May 2022 to
shareholders on the register on 8 April 2022. The ex-
dividend date will be 7 April 2022.
The Group uses reinsurance extensively to mitigate the
impact of individual large claims and the aggregation of
claims. At the 1 January 2022 renewal for its Motor excess
of loss reinsurance, the Group chose to retain additional
risk and increased the retention for each individual claim
to £5 million (2021: £1 million with 75% placement).
Looking forward, we have a strong balance sheet with
further opportunities to reduce capital intensity and
increase flexibility.
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 2021.
Capital position
At 31 December 2021, the Group held a Solvency II capital
surplus of £1.03 billion above its regulatory capital
requirements, which was equivalent to an estimated
solvency capital ratio of 176%, after the proposed final
dividend and share buyback programme. Excluding the
Group's outstanding Tier 2 debt the Group would have
had a Solvency II capital surplus of £0.81 billion, equivalent
to a solvency capital ratio of 160%.
Movement in capital surplus (£bn)
The Group’s SCR and solvency capital ratio are as follows:
At 31 December
Solvency capital requirement (£ billion)
Capital surplus above solvency capital
requirement (£ billion)
Solvency capital ratio after proposed final
dividend and share buyback
Adjusted solvency capital ratio1
2021
1.35
2020
1.34
1.03
1.22
176%
191%
160% 172%
Note:
1. Adjusted solvency capital ratio excluding Tier 2 debt which can
first be called from 27 April 2022.
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
Ineligible Tier 3 capital3
Net surplus movement
Capital surplus at 31 December
Notes:
2021
£bn
1.22
0.40
(0.03)
0.37
(0.01)
0.36
(0.12)
–
–
(0.10)
(0.20)
(0.10)
(0.03)
(0.19)
1.03
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
1. Relates to the cancellation of the 2019 cash dividend (£197
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.
3. The amount of Tier 2 and Tier 3 capital permitted under the
Solvency II regulations is 50% of the Group's SCR.
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
1.22
Capital
surplus at 1
January
0.03
0.01
0.12
0.40
0.40
0.03
1.03
Capital
generation
excluding
market
movements
Market
movements
Change in
solvency
capital
requirement
Capital
expenditure
Dividends
and share
buyback
Ineligible
Tier 3
capital
Capital
surplus at
31 December
www.directlinegroup.co.uk
39
Finance review continued
In 2021, the Group generated £0.37 billion of Solvency II
capital, of which £0.06 billion related to a change in the
Group's deferred tax rate, following the change to the UK
corporation tax rate from 19% to 25% with effect from
1 April 2023. Restructuring costs in relation to the purchase
of the Bromley office lease reduced capital generation by
£83.9 million. This was offset by a £0.01 billion change in
the SCR, £0.12 billion of capital expenditure, dividends of
£0.30 billion and share buybacks of £0.10 billion. At
31 December 2021 there was £0.03 billion of ineligible
capital relating to deferred tax assets. Capital expenditure
levels are expected to remain around £120 million in 2022.
Change in solvency capital requirement
Solvency capital requirement at 1 January
Model and parameter changes
Exposure changes
Solvency capital requirement at 31 December
2021
£bn
1.34
(0.05)
0.06
1.35
The Group’s SCR has increased by £0.01 billion in the year.
Exposure changes resulted in a £0.06 billion increase,
which was partially offset by a decrease of £0.05 billion
relating to model and parameter changes.
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 2021. The impact on
the Group’s solvency capital ratio arises from movements
in both the Group’s SCR and own funds.
Impact on solvency
capital ratio1
31 Dec
2021
31 Dec
2020
(5pts)
(6pts)
(9pts)
(8pts)
(9pts)
(8pts)
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
Increase in Solvency II inflation
assumption for PPOs by 100 basis
points2
100bps increase in credit spreads3
100bps decrease in interest rates
with no change in the PPO real
discount rate
Notes:
Own funds
The following table splits the Group’s eligible own funds
by tier on a Solvency II basis.
At 31 December
Tier 1 capital before foreseeable
distributions
Foreseeable dividend and share buyback
Tier 1 capital – unrestricted
Tier 1 capital – restricted
Less reclassified restricted Tier 1 debt1
Tier 1 capital
Tier 2 capital – reclassified restricted Tier
1 debt and Tier 2 subordinated debt1
Tier 3 capital – deferred tax
Ineligible Tier 3 capital2
Total eligible own funds
Notes:
2021
£bn
2020
£bn
1.66
(0.30)
1.36
0.36
(0.02)
1.70
0.53
0.18
(0.03)
2.38
1.84
(0.30)
1.54
0.38
–
1.92
0.53
0.11
–
2.56
1. As at 31 December 2021 £19 million (2020: £nil) of the Group's
restricted Tier 1 capital was reclassified as Tier 2 due to
Solvency II tiering restrictions.
2. The amount of Tier 2 and Tier 3 capital permitted under the
Solvency II regulations is 50% of the Group's SCR.
During 2021, the Group’s eligible own funds reduced from
£2.56 billion to £2.38 billion. Eligible Tier 1 capital after
foreseeable distributions represents 71% of own funds and
126% of the estimated SCR. Tier 2 capital relates to the
Group’s £0.51 billion subordinated debt and
£0.02 billion of ineligible Tier 1 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.
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%. The Group has Tier 2 plus
Tier 3 ineligible own funds of £0.03 billion.
Reconciliation of IFRS shareholders’ equity
to Solvency II own funds (£bn)
(9pts)
(8pts)
(10pts)
(9pts)
2.55
(2pts)
(2pts)
0.82
0.01
0.06
0.30
2.38
0.15
0.53
0.34
1.36
1. 2021 figures exclude from own funds the value of the £250
million Tier 2 subordinated debt which can first be called from
27 April 2022. The comparative period has been represented on
this basis, with the only change being the interest rate
sensitivity which was reported as (3pts) at 31 December 2020.
2. The PPO inflation assumption used is an actuarial judgement
which is reviewed annually based on a range of factors
including the economic outlook for wage inflation relative to
the PRA discount rate curve.
3. Only includes the impact on AFS assets (excludes illiquid assets
such as infrastructure debt) and assumes no change to
the SCR.
Total share-
holders’
equity
Goodwill
and
intangible
assets
Change in
valuation of
technical
provisions
Other asset
and liability
adjustments
Fore-
seeable
capital
distributions
Total
own
funds
■ Tier 1 capital - unrestricted ■ Tier 1 capital - restricted
■ Tier 2 capital
■ Tier 3 capital
40
Direct Line Group Annual Report and Accounts 2021
Strategic report Reconciliation of IFRS shareholders’ equity to
Solvency II eligible 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
Less reclassified restricted Tier 1 debt1
Tier 1 capital
Tier 2 capital – reclassified restricted
Tier 1 debt and Tier 2 subordinated debt1
Eligible Tier 3 capital – deferred tax
Ineligible Tier 3 capital2
Total eligible own funds
Notes:
2021
£bn
2.55
(0.82)
(0.01)
(0.06)
(0.30)
1.36
0.36
(0.02)
1.70
0.53
0.18
(0.03)
2.38
2020
£bn
2.70
(0.79)
0.04
(0.11)
(0.30)
1.54
0.38
–
1.92
0.53
0.11
–
2.56
We seek 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.
Claims reserves net of reinsurance 2021 (£m)
£2,548.4m
547.3
95.4
1. As at 31 December 2021 £19 million (2020: £nil) of the Group's
restricted Tier 1 capital was reclassified as Tier 2 due to
Solvency II tiering restrictions.
2. The amount of Tier 2 and Tier 3 capital permitted under the
297.8
Solvency II regulations is 50% of the Group's SCR which resulted
in ineligible capital of £31 million.
1,607.9
Leverage
The Group’s financial leverage increased by 1.0 percentage
point to 25.2% (2020: 24.2%). The increase was primarily
due to a decrease in shareholder's equity following the
payment of the 2020 final dividend, 2021 interim dividend
and the Group's £100 million share buyback programme,
partially offset by 2021 profits.
At 31 December
Shareholders’ equity
Tier 1 notes
Financial debt – subordinated debt
Total capital employed
Financial-leverage ratio1
Note:
2021
£m
2,550.2
346.5
513.6
3,410.3
25.2%
2020
£m
2,699.7
346.5
516.6
3,562.8
24.2%
Motor
Home
Rescue and other personal lines
Commercial
Claims reserves net of reinsurance 2020 (£m)
£2,591.7m
518.5
1. Total IFRS financial debt and Tier 1 notes as a percentage of
total IFRS capital employed.
Credit ratings
Moody’s Investors Service provides insurance financial-
strength ratings for U K Insurance Limited, our principal
underwriter. Moody’s rates U K Insurance Limited as ‘A1’ for
insurance financial strength (strong) with a stable outlook.
104.8
289.5
1,678.9
Reserving
We make provision for the full cost of outstanding claims
from the 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. We consider 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.
Motor
Home
Rescue and other personal lines
Commercial
www.directlinegroup.co.uk
41
Finance review continued
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 minus 0.75% in
Northern Ireland.
We reserve our large bodily injury claims at the relevant
discount rate for each jurisdiction, with the overwhelming
majority now case 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 for the 2014 to
2020 underwriting years. We have reduced the level of
Motor reinsurance purchased from 2021 which will have
an impact on future reserving.
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
we make assumptions about the likelihood that claimants
will opt for a PPO. This is known as the PPO propensity.
Higher claims inflation remains a risk, given the
continuing rise in consumer prices and wage inflation.
Consumer prices inflation is at its highest level for the past
decade and is not expected to decline until 2023. Pressure
is likely to remain strong on wages, with potential
implications for the cost of care. Global supply chain issues
remain problematic, resulting in a risk of price increases
for products and components in short supply. A range of
general and specific claims inflation scenarios for goods
and services have therefore been considered in the
reserving process.
Prior-year reserve releases were £258.1 million (2020: £173.8
million) concentrated towards more recent accident years,
with good experience in Home and with Motor large
bodily injury claims in later accident years also being a
key contributor as uncertainty arising from Covid-19 and
Brexit reduced.
Looking forward, we expect to continue setting our 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.
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.
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% (2020: 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% (2020:
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
Impact of an increase in claims
inflation by 100 basis points for two
consecutive years
Notes:
Increase / (decrease)
in profit before tax1,2
2021
£m
2020
£m
43.0
45.9
(58.9)
(62.7)
42.5
43.7
(59.4)
(61.1)
37.3
32.4
(37.6)
(32.2)
1. These sensitivities are net of reinsurance and exclude the
impact of taxation.
2. These sensitivities reflect one-off impacts at the balance sheet
date 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. We will consider the statutory discount rate when
setting the 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 2021. It does not
take into account any second order impacts such as
changes in PPO propensity or reinsurance bad debt
assumptions.
42
Direct Line Group Annual Report and Accounts 2021
Strategic report 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:
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
– Catastrophe reinsurance to protect against an
manner; and
– to deliver a suitable risk-adjusted investment return
commensurate with the Group’s risk appetite.
accumulation of claims arising from a natural perils
event. The retained deductible is £150 million and cover
is placed annually on 1 July up to a modelled 1-in-200
year loss event of £1,150 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 £5 million per claim 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 2022.
– Commercial property risk reinsurance to protect against
large individual claims with a retained deductible of
£4 million which renews annually on 1 July.
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
Tier 2 sub-debt (swapped fixed to
floating)
Commercial real estate loans and
cash
Fixed
Floating
Tier 2 sub-debt fixed
Investment-grade credit and cash
Fixed or floating
Surplus – tangible equity
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 benchmarks for U K Insurance Limited are detailed in the following table:
Investment-grade credit1
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
2021
66.0%
3.0%
6.0%
75.0%
3.0%
78.0%
4.0%
6.5%
6.0%
5.5%
Actual
holding
2021
65.7%
1.7%
6.1%
73.5%
0.6%
74.1%
4.5%
3.6%
12.1%
5.7%
Benchmark
holding
2020
66.0%
6.0%
3.0%
75.0%
3.0%
78.0%
4.0%
6.5%
6.0%
5.5%
Actual
holding
2020
63.8%
6.0%
1.8%
71.6%
0.4%
72.0%
4.5%
3.5%
15.0%
5.0%
100.0%
100.0%
100.0%
100.0%
www.directlinegroup.co.uk
43
Finance review continued
Investment holdings and yields
Investment-grade credit1
High yield
Investment-grade private placements
Credit
Sovereign
Total debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents2
Investment property
Equity investments3
Total Group
Notes:
Allocation
(£m)
3,721.1
342.1
91.2
4,154.4
35.7
4,190.1
250.8
200.8
896.5
317.0
6.2
5,861.4
2021
Income
(£m)
70.9
17.5
2.4
90.8
0.1
90.9
4.4
6.1
0.1
14.5
–
116.0
Yield
(%)
1.9%
5.1%
2.5%
2.2%
0.2%
2.2%
1.7%
2.9%
0.0%
4.8%
0.0%
1.9%
Allocation
(£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
2020
Income
(£m)
76.2
18.7
2.7
97.6
0.7
98.3
5.8
6.7
2.6
13.7
–
127.1
Yield
(%)
2.1%
5.1%
2.6%
2.3%
1.1%
2.3%
2.1%
3.3%
0.2%
4.7%
0.0%
2.1%
1. Asset allocation at 31 December 2021 includes investment portfolio derivatives, which have a mark-to-market asset value of £14.2
million included in investment-grade credit and £0.1 million in sovereign debt (31 December 2020: mark-to-market asset value of £7.7
million and £0.3 million 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. An insurtech-focused equity fund which is valued based on external valuation reports received from a third-party fund manager.
At 31 December 2021, total investment holdings of £5,861.4
million were 4.7% lower than at the start of the year. Total
debt securities were £4,190.1 million (31 December 2020:
£4,215.0 million), of which 2.1% were rated as ‘AAA’ and a
further 54.7% were rated as ‘AA’ or ‘A’. The average
duration at 31 December 2021 of total debt securities was
2.5 years (31 December 2020: 2.8 years).
At 31 December 2021, total unrealised gains, net of tax, on
available-for-sale (“AFS”) investments were £9.0 million
(31 December 2020: £83.9 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:
www.directlinegroup.co.uk/en/sustainability/reports-
policies-and-statements.html
Total tax contribution
The Group’s direct and indirect tax contribution to the UK
Exchequer is significantly higher than the UK corporation
tax that the Group pays on its profits. The Group collects
taxes relating to employees and customers on behalf of
the UK Exchequer and other national governments. It also
incurs a significant amount of irrecoverable value added
tax relating to overheads and claims. 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 2021, the sum of taxes either paid or collected
across the Group was £885.1 million. The composition of
this between the various taxes borne and collected by the
Group is shown below.
44
Direct Line Group Annual Report and Accounts 2021
Strategic report Total taxes borne
At 31 December
Current-year Corporation Tax charge
Irrecoverable Value Added Tax incurred on
overheads
Irrecoverable Value Added Tax embedded within
claims spend
Employers’ National Insurance contributions
Other taxes
Total
2021
£m
102.6
83.5
149.1
41.0
8.5
384.7
Total taxes collected
At 31 December
Insurance Premium Tax
Value Added Tax
Employees’ Pay As You Earn and National
Insurance contributions
Total
2021
£m
391.1
10.1
99.2
500.4
Total taxes borne by tax type (£m)
Total taxes collected by tax type (£m)
£384.7m
£500.4m
8.5
41.0
102.6
99.2
10.1
232.6
Corporation tax
Irrecoverable VAT
Employer’s NIC
Other taxes
391.1
Insurance premium tax
VAT
Employee’s PAYE and NIC
Neil Manser
Chief Financial Officer
www.directlinegroup.co.uk
45
Strategic Report
Operating review
MotorMotor
“I've got an electric
vehicle and need
an insurer who will
continue to offer
a good deal.”
Jane, Motor customer
Motor: key highlights
Gross written premium by channel
Own brand in-force policies reduced
by 1.9% with an overall reduction in
in-force policies of 2.2% to 4.0 million.
Own brand gross written premium
reduced by 3.3%, overall gross written
premium reduced by 3.5%.
Operating profit of £314.8 million was
£48.7 million lower than the prior
year, as claims frequency increased to
more normal levels, partially offset by
stronger prior-year reserve releases.
59.8% Direct
37.5% Price comparison websites
2.7% Partnerships
46
Direct Line Group Annual Report and Accounts 2021
Strategic Report In-force policies (thousands)
Of which direct own brands
Gross written premium
Of which direct own brands
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Operating profit
2021
2020
3,971
3,869
4,061
3,943
£1,560.8m £1,616.9m
£1,515.2m £1,567.6m
59.8%
3.2%
24.7%
87.7%
£363.5m
64.3%
3.3%
24.8%
92.4%
£314.8m
Overview
In 2021 the UK motor market continued to experience
disruption driven by Covid-19 lockdowns. Claims frequency
remained below pre-pandemic levels and there were
fewer new drivers entering the market. Alongside the
implementation of the Government’s Whiplash reform in
May 2021, these trends resulted in deflationary market
conditions. According to the ABI1, average motor
premiums fell by 7% in 2021.
New car registrations were relatively flat year-on-year, with
vehicle manufacture being impacted by a global shortage
of semiconductors. However, there was an acceleration in
registrations of plug-in hybrid and fully electric vehicles
which is good for the industry, the consumer, and the
environment.
Claims severity inflation increased in 2021, particularly for
damage claims, reflecting the increasing sophistication
of car technology as well as the UK’s new international
trading relationships and Covid-19 related effects, such
as second-hand car prices and additional cleaning costs.
Note:
1. https://www.abi.org.uk/news/news-articles/2022/02/2021-motor-
premium-tracker/
Performance
Motor in-force policies reduced by 2.2% to 4.0 million
compared to 2020, with own brand in-force policies down
by 1.9% at 3.9 million. Gross written premium reduced by
3.5% to £1,560.8 million in the same period, with Motor
own brand average premium reducing 2.5% during 2021.
There were two major trends in the motor market during
2021. Firstly, against the backdrop of deflationary market
conditions driven by claims frequency remaining below
pre-pandemic levels and the impact of the Whiplash
reforms, we remained disciplined and focused on
maintaining target loss ratios. Secondly, following the
implementation of the Motor platform we saw improved
competitiveness, enabling us to hold policy count flat
across H2 despite our average premiums2 reducing 2.5%
in 2021 compared to the market reducing 7%.
We offered premium refunds to customers where miles
driven were expected to be lower than anticipated at
policy inception. In particular, we continued our "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.
Motability: Strengthening our
Motor capabilities
We are planning for providing insurance to
customers of the Motability scheme from H2
2023. The scheme provides mobility to over
640,000 disabled people and their families
allowing them to lease a new car, powered
wheelchair or scooter. Our digital capabilities
and strength in vehicle repair, particularly our
focus on being able to repair electric vehicles
and future motor technologies, are a great fit
for Motability Operations’ fleet of around
625,000 modern vehicles.
Motor's current-year attritional loss ratio rose 6.3 percentage
points to 72.9% (2020: 66.6%) driven predominantly by a
reduction in the severity of lockdowns in 2021 compared to
2020. Whilst the Motor current-year loss ratio in H1 2021 was
modestly higher than for H1 2020, it increased in H2 as
lockdown restrictions were eased and claims frequency
increased back to expected levels. In addition, claims
severity inflation was slightly above our medium-term 3% to
5% per year inflation expectations during 2021, due to high
levels of inflation in second-hand vehicles and additional
Covid-19 related cleaning costs. Our vertically integrated
business, including the largest insurer-owned networks of
vehicle repair centres, has continued to provide us with a
competitive advantage and mitigate some of this
inflationary pressure.
In total, prior-year reserve releases were £26.5 million
higher year-on-year at £127.1 million reflecting, primarily,
favourable development of large bodily injury claims
reserves as uncertainty arising from Covid-19 and
Brexit reduced.
Overall, Motor's reported combined operating ratio
increased by 4.7 percentage points to 92.4% (2020: 87.7%).
A 1.8 percentage point increase in prior-year reserve
releases was offset by a 6.3 percentage point increase in
the current-year attritional loss ratio. There were marginal
increases in the expense ratio and the commission ratio.
Note:
2. Average incepted written premium excluding IPT for Motor
direct own brands for the year ending 31 December 2021.
www.directlinegroup.co.uk
47
Strategic Report
Operating review continued
HomeHome
“Policy was
a great price
and website
very easy
to follow.”
Michelle, Home customer
Home: key highlights
Gross written premium by channel
Total in-force policies 1.1% higher at
2.7 million. Own brand policies were
2.3% higher at 1.9 million, as retention
remained high whilst new business
grew across both direct and
PCW channels.
Total gross written premium was
stable at £578 million. Own brand
gross written premium was
1.2% higher.
Total operating profit was £40.4
million higher than 2020, following
a reduction in claims from weather
events and an increase in prior-year
reserve releases.
55.0% Direct
17.8% Price comparison websites
27.2% Partnerships
48
Direct Line Group Annual Report and Accounts 2021
Strategic Report In-force policies (thousands)
Of which direct own brands
Gross written premium
Of which direct own brands
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Operating profit
2021
2020
2,667
1,879
£577.8m
£416.7m
50.7%
6.9%
22.5%
80.1%
£141.8m
2,638
1,837
£577.9m
£411.6m
55.6%
8.1%
23.4%
87.1%
£101.4m
Overview
In the first half of 2021, the stamp duty holiday on property
sales led to a buoyant new business market in home
insurance. The shift towards buying home insurance
through price comparison websites continued.
Towards the end of 2021, the market became increasingly
competitive in advance of the implementation of the new
FCA Pricing Practices Review regulations. This led to
premium deflation as many insurers attempted to grow
policy count ahead of the new rules coming into force on 1
January 2022.
According to the ABI1 the average premium for combined,
buildings only and contents only cover were stable in 2021.
There were a couple of named weather events in 2021.
Storm Christoph brought exceptionally wet weather to
North Wales and Northern England in January. In
November a windstorm, Storm Arwen, affected thousands
of homes across Scotland, Northern England and parts of
Wales, leaving many homes without power.
Note:
1. https://www.abi.org.uk/news/news-articles/2022/02/2021-
motorpremium-tracker/
Performance
In-force policies for Home’s own brands increased by 2.3%
compared to 2020 to 1.9 million policies. Retention levels
remained high, whilst new business sales grew across our
direct channels reflecting improved competitiveness in a
strong new business market in H1. The market became
increasingly competitive across H2 as we approached the
implementation of the Pricing Practices Review
regulations. Against this deflationary backdrop, we
maintained our discipline in relation to new business
particularly in the PCW channel.
Own brands gross written premium increased by 1.2%,
whilst overall gross written premium remained stable
between 2020 and 2021. Partnership volumes reduced by
1.6%; Prudential and Sainsbury’s partnerships are closed
to new business and continued to run off in line with
expectations.
Own brands average premium1 reduced by 1.6% compared
to 2020, reflecting a change in mix towards lower risk
policies, alongside risk-adjusted prices reducing by 1.0%.
This followed pricing actions earlier in the year to
capitalise on a buoyant new business market and to
support retention, more than offsetting underlying
inflationary price increases.
The current-year attritional loss ratio, excluding major
weather event claims, was 3.0 percentage points higher
than prior year at 55.7% as we took pricing actions to
Supporting customers during
Storm Arwen
Storm Arwen brought widespread disruption
across the UK at the end of 2021 and we
responded to those who needed assistance,
increasing the number of call centre agents
available and on one day during this period
answering close to 3,500 calls, which was
eight times as many as the number of calls
usually received.
support retention and to capitalise on a buoyant new
business market in H1, alongside some large fire claims
and freeze events. The reported loss ratio was 4.9
percentage points better than 2020, with increases in
prior-year reserve releases, following favourable
experience on escape of water, flood, storm and fire perils,
and a reduction in major weather claims more than
offsetting the increase in attritional loss ratio. Claims
severity inflation remained within our 3% to 5% medium-
term expectations and claims frequency remained within
normal levels.
The commission ratio of 6.9% was 1.2 percentage points
lower than in 2020 due to lower profit share payments
to partners.
Home’s combined operating ratio improved by 7.0
percentage points to 80.1% (2020: 87.1%). This was driven
primarily by a 6.4 percentage point improvement as a
result of higher prior-year reserve releases and a 1.5
percentage point improvement resulting from fewer major
weather events, as well as improvements in commission
and expense ratios, offset in part by an increase in the
current-year attritional loss ratio. Normalised for weather,
the combined operating ratio was 5.1 percentage points
better than for 2020 at 85.2% (2020: 90.3%).
For 2022, it is expected that the normalised combined
operating ratio will return to levels similar to the 2020
normalised performance.
Note:
1. Average incepted written premium excluding IPT for Home
own brands for the year ending 31 December 2021.
www.directlinegroup.co.uk
49
Strategic Report
Operating review continued
Rescue and other
Rescue and other
personal lines
personal lines
“Once I reported
the breakdown I was
frequently kept updated.
A mechanic arrived
in a short time and
sorted the problem.”
Geoffrey, Rescue customer
Rescue and other personal lines:
key highlights
Gross written premium by product
The Group’s direct Rescue brand,
Green Flag, grew in-force policies
by 5.8% and gross written premiums
by 6.3% in the year.
Total in-force policies and gross
written premium reduced by 0.7%
and 9.0% respectively, primarily
reflecting lower premium from
Travel, offset by higher premium
in Green Flag.
Operating profit of £64.8 million
included £55.0 million (2020:
£51.2 million) profit for Rescue.
44.7% Rescue
24.3% Travel
18.8% Pet
12.2% Other personal lines
50
Direct Line Group Annual Report and Accounts 2021
Strategic Report In-force policies (thousands)
Of which Green Flag direct
Gross written premium
Of which Green Flag direct
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Operating profit
2021
2020
7,056
1,179
£380.0m
£88.3m
50.2%
11.4%
25.3%
86.9%
£64.8m
7,105
1,114
£417.8m
£83.1m
61.7%
16.4%
23.9%
102.0%
£6.8m
Overview
Rescue
The new business market remained below pre-pandemic
levels throughout 2021, in part due to Covid-19 related
lockdowns.
Claims frequency also remained below pre-pandemic
levels, benefiting from benign weather and was broadly in
line with 2020.
Travel
As a result of the Covid-19 pandemic, non-essential
international travel from the UK was illegal between
January and May 2021. However, the demand for travel
insurance increased during the second half of 2021 as
travel restrictions were eased, although the volume of
travel remained below pre-pandemic levels.
Pet
It has been reported that at least 3.2 million households1
have acquired a pet since the start of the pandemic, with
around 12 million dogs and 12 million cats1 now living in UK
homes. This has driven increased demand in the Pet
Insurance market.
Note:
1. https://www.bbc.co.uk/news/business-56362987
Performance
The combined operating ratio for Rescue and Other
personal lines improved by 15.1 percentage points to 86.9%
(2020: 102.0%) due to the non-repeat of the 2020 Covid-19
related claims in Travel and to improvements in Rescue.
Rescue
Rescue in-force policies increased by 0.5% to 3.4 million
and gross written premium increased by 2.0% to £170.0
million compared to 2020.
Green Flag Rescue continued to grow its higher average
premium direct business during 2021, increasing in-force
policies by 5.8% to 1.2 million and gross written premium
by 6.3% to £88.3 million compared to 2020. 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 2.1% and 2.3% respectively.
In 2022, Green Flag is developing its customer proposition.
As a result, the amount new customers pay will be split
between premium and a service fee, which could result in
up to approximately £10 million being recognised as other
income instead of premium.
Making travel insurance
digital
Since March an additional 1.7 million of our
travel customers have been offered the
convenience of managing their insurance
digitally as our partner Nationwide was
switched over to our Aquarium travel system.
Amongst the advantages offered to those
choosing to upgrade their policy is the ability
to make a claim for items such as a lost bag
whilst still abroad without having to speak to
an adviser.
The combined operating ratio for Rescue of 74.8% was
1.7 percentage points better than 2020’s ratio of 76.5%.
This reflected an improved expense ratio, due
predominantly to reduced marketing expenditure, and
a lower commission ratio following lower profit shares
with partners.
Other personal lines
Other personal lines (comprising Travel, Pet and other)
in-force policies reduced by 1.8% to 3.6 million compared
to 2020 primarily due to reductions in travel partnerships
volumes. Gross written premium for Other personal lines
decreased by 16.4% with reductions across all lines except
policies tailored to mid- to high-net worth customers,
where premium levels grew by 7.0%. In Travel, gross
written premium was down 31.1% reflecting lower upgrade
premium, lower partnership volumes and reduced
partnership pricing that reflected lower claim
expectations in 2021.
Other personal lines combined operating ratio improved
by 21.7 percentage points compared to 2020 to 96.8%. The
improvement is primarily due to the non-repeat of 2020
Covid-19 related claims in Travel.
www.directlinegroup.co.uk
51
Strategic Report
Operating review continued
Commercial
Commercial
“The main reason I
renewed my policy
was the way my
claim was dealt with.”
Peter, Commercial customer
Commercial: key highlights
Gross written premium by channel
Total gross written premium
increased by 15.0%, with direct own
brands increasing by 14.8%.
Strong performance in both Direct
Line for Business and Churchill as
they continued to focus on micro
business tailored propositions.
NIG and other gross written premium
grew by 15.1%, continuing to benefit
from improvements arising from
re-platforming of its products,
including Vans, on its electronic
trading platform.
28.7% Direct
71.3% NIG & other
52
Direct Line Group Annual Report and Accounts 2021
Strategic Report In-force policies (thousands)
Of which direct own brands
Gross written premium
Of which direct own brands
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Operating profit
2021
2020
871
602
811
560
£653.0m £567.8m
£163.3m
£187.4m
51.4%
54.5%
18.7%
20.0%
25.4%
21.7%
95.5%
96.2%
£50.4m
£60.4m
Overview
The SME commercial market saw premium increases
across all property and casualty products, with significant
increases in certain sectors, while motor rates stayed low.
There was an increase in risk sharing between insurers as
they sought to limit exposures alongside strong market
conditions and high inflation. Consolidation in the broker
market showed no signs of abating and brokers continued
to seek out good service and efficiencies from key partners.
Small, entrepreneurial businesses were more aware of the
need for insurance following the disruption caused by the
Covid-19 pandemic. Insurance demand from tradespeople
began to grow as pandemic-related restrictions were lifted.
There was a marked increase in home-based start-ups and
the continued move towards buying insurance online,
which helped to drive growth in the direct channel.
The commercial market was also impacted by the storms
that swept across the UK during 2021 (see Home section
for more details).
Performance
Commercial in-force policies of 871,000 increased by 7.4%
compared with 2020, reflecting strong growth in both
Commercial direct own brands and NIG and other.
Commercial gross written premium grew by 15.0% to
£653.0 million (2020: £567.8 million).
Commercial direct own brands grew in-force policies by
7.5% and gross written premium increased by 14.8% to
£187.4 million, with increases across all Commercial direct
product lines. We continued to see the benefits of our
technology transformation driving growth in SME trading
on both the Direct Line for Business platform and
Commercial’s Churchill brand.
NIG and other in-force policy numbers were 7.2% higher
than in 2020 and gross written premium grew by 15.1% to
£465.6 million. This reflected growth across all major
categories as the book continued to benefit from
improvements arising from the re-platforming of its
products, improved pricing sophistication and growth
on its award-winning electronic trading platform.
The current-year attritional loss ratio in Commercial
increased by 2.4 percentage points to 62.0% in 2021 due,
predominantly, to elevated large fire claims partially offset
by an improvement in underlying loss ratio in motor
and liability.
Commercial growth
Our Commercial business has introduced new
systems architecture delivering a step change
in the way our business performs. Our data and
modelling teams have reduced the amount of
time spent on data collation and preparation,
focusing more on pricing analysis and insight.
We have increased the suite of models
available from 15 to over 90, improving pricing
accuracy and driving the growth seen in 2021.
Total prior-year reserve releases increased by 8.1% to
£61.4 million (2020: £56.8 million).
Overall, the combined operating ratio for Commercial
increased by 0.7 percentage points to 96.2% (2020: 95.5%),
with the 3.1 percentage point increase in reported loss
ratio and a 1.3 percentage point increase in commission
ratio partially offset by a 3.7 percentage point decrease in
expense ratio reflecting good cost control.
www.directlinegroup.co.uk
53
Sustainability
Building a sustainable business
In 2021 we continued to embed initiatives with greater confidence across our five-pillar
sustainability strategy. We are aiming to take the long-term decisions that deliver
benefits for our business and wider society. Looking after customers, employing great
people and ensuring they flourish, tackling climate change, operating within a strong
society and having a reputation for high standards of governance are not nice-to-haves,
they are foundations of our future success.
Planet
Protect our business
from the impact of
climate change and
give back more to
the planet than we
take out.
Governance
Look to the long term
for our stakeholders,
build a reputation for
high standards of
business conduct
and a sustainable
business.
Tackling climate
change requires
everyone to play their
part. As an insurer we
are passionate about
our role, whether it is
reducing our carbon
footprint as the UK
economy transitions
to a net zero future,
providing insight on
weather-related
events such as
flooding and storm
damage, or
developing products
that make it easier
for customers to
go green.
Being able to
demonstrate
exemplary
governance is of
increasing
importance in
attracting both
customers and
investors. In the
future, maintaining
our reputation for
high standards of
business conduct,
meeting our legal
obligations and
behaving ethically
will be essential to
doing business
successfully.
Sustainability pillars
Customers
Earn our
customers’ trust
by demonstrating
how we are acting
in their interests.
People
Encourage a culture
that celebrates
difference and
empowers people so
that they can thrive.
Society
Use our expertise to
improve outcomes
for society and the
communities
we serve.
Our customers are
at the heart of
everything we do.
Our reputation for
excellent customer
service contributes
to winning new
business, and
delivering on that
customer service
year-on-year is why
we have high rates
of customer
retention. Ensuring
we continue to see
the high levels of
customer satisfaction
in the interactions
they have with us is
critical to our future
success.
Our business
depends on having
the best people
delivering the best
service for customers.
Our increasingly
diverse workforce
gives us insights and
perspectives that
allow us to
understand and
serve our diverse
customer base.
Having a reputation
for excellence as an
employer, that is
matched by the
experience of
working for the
Group, allows us to
attract, recruit and
retain the people
we need.
As a business, we
benefit from strong
local communities
where people and
businesses flourish.
Our stakeholders
want us to make a
positive contribution
to the society around
us. Our vision is to be
a force for good; the
ways in which we
deliver on this area
include the tax
contribution we
make, the charitable
donations we give,
the volunteering we
undertake and the
campaigns and
policy debates to
which we lend our
expertise.
Transforming our business for the better
We are very proud to have produced our second
ever Sustainability Report in 2021, highlighting the
progress made across our five sustainability pillars.
> Read our 2021 Sustainability Report
at https://www.directlinegroup.co.uk/2021_Sustainability_Report
54
Direct Line Group Annual Report and Accounts 2021
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Train and develop our people
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Strategic Report
The sustainability priorities of our stakeholders and business
When we created our sustainability strategy two years
ago, our work was informed by an analysis of the issues
affecting our business and a survey of our stakeholders’
opinions as to the relative importance of each of those
issues. The stakeholders included customers, suppliers,
investors, commercial partners, non-governmental
organisations and policymakers. The diagram below
highlights the priorities identified within each
sustainability pillar.
Our sustainability strategy is always evolving to meet
future challenges and we are committed to enhancing our
approach, so that we take into account the expectations of
external stakeholders and the needs of the business.
e
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www.directlinegroup.co.uk
55
Sustainability continued
United Nations Sustainable
Development Goals
The United Nations created a number of Sustainable Development Goals (“SDGs”) in 2015 focused on achieving a better
and more sustainable future for all. The goals address numerous global issues such as fighting inequality, helping to end
poverty and tackling climate change.
Aligned with our sustainability pillars, we contribute to several of the SDGs through our work across the Group.
Customers
People
Society
Planet
Governance
56
Direct Line Group Annual Report and Accounts 2021
Strategic Report External ratings,
memberships and benchmarks
We support various initiatives aligned to our five pillar sustainability strategy, including a range of external partnerships
where we play an active role and also receive performance ratings.
The Carbon Disclosure Project is
a globally recognised platform
measuring reporting
performance and this year the
Group achieved a B- rating
based on 2021 activity.
We were again ranked as an
ESG leader out of all companies
assessed in the Property and
Casualty insurance sector and
maintained our top decile
position in the broader
insurance industry group of 261
companies.
Our rating was upgraded from
‘A’ to ‘AA’ in 2021. We were
recognised for our
improvement in underwriting
practices, our focus on climate
change as an emerging risk and
climate risk modelling, our
efforts to integrate ESG
principles into our investment
decisions, alongside some of our
HR initiatives.
We were awarded the EcoVadis
Gold medal for Sustainability
Performance in 2021. The Group
is in the top 10% of companies
rated by EcoVadis in the
Insurance, reinsurance and
pension funding (except
compulsory social security)
industry.
We support the Get Nature
Positive campaign, focused
on restoring nature and
biodiversity. In line with this aim,
we announced a partnership
with the nature recovery charity
Heal, providing a £3 million loan
facility that can support the
purchase of two initial sites.
As part of HRH The Prince of
Wales’s Sustainable Markets
Initiative, we signed up to the
Terra Carta Charter, supporting
a roadmap towards a sustainable
future, harnessing the power of
nature, innovation and resources
of the private sector. We are
an active participant in the
Sustainable Markets Initiative
Insurance Taskforce.
We support the UN-backed
Race To Zero campaign and are
committed to tackling climate
change by setting Science-
Based Targets to a 1.5ºC
emissions scenario.
We are a supporter of the Social
Mobility Pledge which
encourages organisations to
support social mobility through
access, outreach and
recruitment initiatives.
We are a signatory to HM
Treasury’s Women in Finance
Charter. We are proud that the
majority of our Executive
Committee are women.
www.directlinegroup.co.uk
57
Sustainability continued
Customers
Earn our customers’
trust by demonstrating
how we are acting in
their interests
We are one of the UK’s leading insurers,
providing general insurance products to
millions of customers through our well-
known brands, including Direct Line,
Churchill, Privilege and Green Flag.
Our aim has always been to understand customer
expectations, anticipate future trends and deliver
exceptional service, underpinned by a quality claims
service, because this is how we hope to earn trust and
customer loyalty. It is one part of how we are striving to
make a sustainable business.
Net Promoter Score
We maintained a strong Net Promoter Score in 2021 and
our performance over the last few years has shown that
customers are willing to recommend our Direct Line
brand to others.
Net Promoter Score1 – Direct Line brand
2018
2019
2020
2021
145.6
155.0
158.0
156.0
Customer Pillars
Expectations
Manage and exceed my
expectations
Ease
Make it as effortless as
possible for me
Fix-it
Identify the issue,
own it and fix it
Trust
Earn my trust
Personalisation
Treat me like a real
person and not like a
process
Empathy
Understand me and
work hard to build a
relationship
0
50
100
150
200
Note:
1. Please see Net Promoter Score KPI on page 31 for
further information.
58
Direct Line Group Annual Report and Accounts 2021
Strategic Report Mileage refunds
From the start of Covid-19 we have been clear we wanted
to do right by our customers, so we have taken a number
of steps in response to the changes we’ve seen in
driving behaviour.
During the first lockdown in 2020 we offered refunds to all
Motor customers, recognising significantly reduced
driving levels due to the restrictions and in 2021 we did the
same again.
Our Direct Line customers continue to benefit from our
Mileage MoneyBack offer, where they can get money back
if they drive less than the expected mileage they
registered when taking out the policy1.
For our other Motor brands, Churchill, Privilege and
Darwin, customers have been offered refunds which
could either be paid to them or donated to charity.
Our customers were outstandingly generous and
their combined donations led to significant sums
being donated to NSPCC, Mind and UK Sepsis Trust.
£411k
£381k
NSPCC
Mind
£167k
Sepsis Trust
Supporting customers
CONNECT training
We have an established training programme called
CONNECT to help our consultants respond with empathy
to differing customer needs, while also taking
responsibility and accountability. This is particularly
important for customers who may be experiencing issues
such as illness, bereavement or vulnerability. Based on the
CONNECT training, those people who successfully
demonstrate high levels of customer service receive a
certificate of accreditation from the Institute of Customer
Service. In 2021, over 1,700 of our customer-facing and
support staff have received new additional training to
recognise, engage and support our vulnerable customers.
“In 2021, over 1,700 of our customer-
facing and support staff have
received new additional training
to recognise, engage and support
our vulnerable customers.”
Bereavement team
We are proud of our established team of consultants
who are skilled in dealing with queries when someone
loses a loved one because we know that managing
financial matters can be the last thing on people’s minds
following a death. All queries are dealt with sensitively and
in one place, to provide peace of mind at a difficult time
for customers.
Recognising differing customer needs
We know some customers find it difficult, upsetting or
simply time consuming to disclose their vulnerability each
time they are in contact with us. That’s why we ask them if
they are happy to have details of how best we can support
them recorded on our system. If they agree, we tag their
record with a heart, so colleagues dealing with that
individual in the future know to read the details of the
specific case and the support that may be required. If
someone says they do not want it recorded on their file,
we don’t record it.
Green Flag
In our Green Flag business we offer roadside rescue
and recovery services, recognising that some customers
require assurance that we are on the way. Our customer-
facing teams therefore actively prioritise customers
who might need immediate support, such as lone or
vulnerable travellers on the roadside at night or families
with young children.
Building a quality claims experience
In a normal year, we handle around 1 million claims,
fix approximately 200,000 cars and pay out claims
totalling in the region of £1.8 billion.
To make claiming easier we are increasingly
digitalising the customer journey, providing peace
of mind when our customers need it most:
– 100% of Motor and Home claims can now be
registered online
– Reducing the time to settle total loss claims in
our Motor business by developing our own
in-house damage evaluation tool that identifies
how best to support customers by either fixing
their vehicle or providing a cash settlement
– Whole process online for simple Home claims so
customers can complete their claim without
needing to call us if they don’t want to
Note:
1. At the end of the policy year, once they are sent their renewal invite, the customer is required to submit a new mileage reading. The
mileage driven is then compared to the estimated mileage on the policy with a 2% refund for every 1,000 miles driven under the
estimate up to a maximum of 20%.
www.directlinegroup.co.uk
59
Sustainability continued
Communicating clearly with customers
In line with our company behaviour to ‘Encourage
simplicity’, this year we collaborated with Plain Numbers,
an organisation which aims to change the way numbers
are presented to improve comprehension, particularly for
vulnerable customers.
In the Plain Numbers trial alongside the Bank of England
and other major companies, we used the Plain Numbers
approach to reduce technical language, define complex
terms more simply, and place numbers that were less
important further down a page to avoid confusion.
The trial showed that using the approach improved the
number of people who could understand individual
communications.
We are now reviewing the results and beginning to
consider how some of the changes can be added into the
current design of documents to help customer
understanding and will be looking to train staff in the
Plain Numbers approach.
We are also evaluating changes across the multiple
channels we use and the online content we produce, to
ensure that communications and language are clear
across the Group.
60
Direct Line Group Annual Report and Accounts 2021
Strategic Report People
Encourage a culture
that celebrates
difference and
empowers people
so that they can
thrive
At DLG we believe that the best way to
serve our customers is by having the best
possible people. Our millions of customers
have individual needs and we know that
we will understand them better if our
workforce reflects that diversity.
It’s why we work hard to attract, develop and retain
excellent people from a diverse range of backgrounds. We
do this by offering rewarding and enjoyable careers, with
the scope to learn new skills, contribute new ideas and
work with great colleagues.
We look after our people and reward them for their hard
work with a generous range of benefits.
Supporting our people through
the pandemic
Across 2021 we continued to support our people through
the pandemic. From working at home, to ensuring as safe
an environment as possible for those colleagues who
continued to physically come into work, from allowing
people time off for vaccinations, to offering flexibility for
those having to home-school and then working to make
time in the office feel secure. We’ve been supporting and
caring for each other every step of the way.
A diverse workforce
We are proud to be one of only four companies in the
FTSE 350 that has both a female CEO and a female Board
Chair1. This year the diversity of our Executive Committee
has been transformed; its composition is now six women
and five men. Two of our Executive Committee are from a
minority ethnic background. You can’t be what you can’t
see, so we hope our diverse leadership team will inspire
more colleagues to aspire to the top roles.
But we know that inspiration is not enough, which is why
we are offering our people the practical support they need
to succeed and removing barriers to their success.
We have introduced new recruitment principles for senior
roles, including anonymised CVs2, a stronger focus on
diverse shortlists and panel-based assessment to help
protect against bias.
“This year the diversity of our
Executive Committee has been
transformed; its composition
is now six women and five men.”
Notes:
1. Source: https://www.gov.uk/government/news/sea-change-in-uk-boardrooms-as-women-make-up-nearly-40-of-ftse-100-top-table-roles
2. Anonymised CVs do not apply to Executive Committee and Board Roles.
www.directlinegroup.co.uk
61
Sustainability continued
Our values
Do the right thing
Build sustainable outcomes not processes. Think
commercially and choose the right path for our
customers, our people and wider stakeholders.
Say it like it is
Challenge drives progress. Your input matters so have
the courage to say what you think and the patience to
listen to others. Keep it simple and customer-focused.
Aim higher
Be ambitious to achieve even better results. Have
confidence, innovate and try new things. Embrace
change to deliver for each other, our customers and
our shareholders.
Work together
Nobody has all the answers. Collaborate and draw upon
the diverse skills across our business. Trust each other
and focus on customer outcomes to win against our
competitors.
Take ownership
Own our success by getting things done. Take the
initiative and be accountable. Be curious and own your
development and performance.
Bring all of yourself to work
Diversity delivers better outcomes. Be the real you
and celebrate difference. Respect others, have fun
and make this a great place to be.
The Inclusive Top 50 UK Employers List
This year we were listed 13th on the Inclusive Companies
Top 50 UK Employers List, which recognises those
companies that promote inclusion throughout each level
of employment within their organisation.
The Charter for Faith & Belief Inclusion
In 2021 we signed up to The Charter for Faith & Belief
Inclusion, which aims to help create understanding
between people of different faiths and beliefs and a
society which is fair to people of all backgrounds –
religious and non-religious.
Bring your whole self to work
We know we will never be an inclusive and diverse
workforce if people don’t feel free to be themselves.
That’s why “bring all of yourself to work” is one of our
core values. To bring this to life we have a thriving
Diversity Network Alliance (DNA), run by our people,
with communities of colleagues that champion
diversity and inclusion within our business.
This year each strand has delivered an extensive
programme of activity to build greater empathy and
understanding around the things that matter to the
communities they represent.
This has included people stories, vodcasts, panel
discussions and external speakers, which have
helped to raise awareness of issues and drive more
open conversations.
REACH (Race,
ethnicity, and
cultural heritage)
Belief
LGBT+
Life (working
families and carers)
Neurodiversity
and Disability
Social Mobility
Thrive (gender)
62
Direct Line Group Annual Report and Accounts 2021
Strategic Report Gender
Our long-term focus on investing in women means we
have been able to significantly strengthen representation
at the most senior levels of our business. Our Women in
Finance figures, FTSE Leaders figures and breakdown by
levels within the organisation each cut the data in
different ways.
Women in Finance
Having achieved our Women in Finance target for 30% of
women in senior leadership roles back in 2019 we chose to
push ourselves further by targeting reaching 35% by the
end of 2022. At the end of 2021, representation of women
in senior leadership roles has risen to 32.8%.
FTSE Women Leaders Review
Last year we exceeded the Hampton-Alexander Review’s
2020 target for FTSE 350 companies to have at least 33%
representation of women on their Board and in their
Executive Committee and direct reports. We are pleased
that for 2021, we have reported 40% women on our Board
and 40.5% women in leadership roles in the FTSE Women
Leaders Review, placing us 18th in the FTSE 250 and 3rd in
life and non-life insurance sector1 and meeting the new
FTSE Women Leaders Review recommendations on
gender balance and women in the most senior board and
leadership roles.
Senior women representation (%)
Board
ExCo
ExCo-12
ExCo-23
54.5%
40.0%
43.1%
42.4%
0
20
40
60
Pay Gap Reporting
Our gender pay gap continues to be low compared with
the broader financial services sector, but we know there is
still more to do. We’re comfortable that we don’t pay
people differently because of their gender and believe
that the way to reduce the gap in the medium- to
long-term is to take concerted action now to address the
disproportionate representation of women across certain
areas and levels of the business.
This year we announced that from 2022 we will also
voluntarily publish our ethnicity pay gap, showing the
difference in average pay between our ethnic minority
and white colleagues across the whole organisation.
Notes:
1. Board representation at 10 January 2022 and Executive
Committee & direct report representation at 31 October 2021
as per FTSE Women Leaders Review data sourcing
2. Percentage of women in roles reporting directly to ExCo,
excluding administrative and support staff.
3. Percentage of women in roles two reporting levels below ExCo,
excluding administrative and support staff.
Ethnicity
Across 2021 we have continued to focus on delivering the
targets we set ourselves in 2020 to increase ethnic
minority and Black representation in leadership by the
end of 2022 (leadership roles are defined and fixed as
those above a certain level in our internal grading
structure). We know more needs to be done and are
committed to building on progress year on year:
– Growing ethnic minority representation from 10% to
13% – increasing roles at this level by around a third
At the end of 2021, representation of ethnic minority
colleagues in leadership roles has risen to 11.7%.
– Growing Black representation from 0.5% to 1.5%
– quadrupling roles at this level
At the end of 2021, representation has increased to 0.9% of
Black colleagues in leadership roles.
To hold ourselves to account internally, we produced a
specific report detailing the steps the Group has taken
across 2020-21 towards “Building a diverse business;
improving Black inclusion” in October to coincide with
Black History Month.
In addition we have signed up to:
Business in the Community’s Race at Work Charter,
which commits us to act and take
positive action towards supporting
ethnic minority representation and
inclusion.
The If Not Now, When? campaign for Black inclusion
within business, calling for organisations to
commit to sustainable and long-term actions
on Black inclusion in the workplace.
The 10,000 Black interns programme, which aims to
transform the prospects of young Black people
across the UK through paid internships across
a range of industries. We will be welcoming
our first interns in Summer 2022.
The 5% Club
This year we joined the 5% Club, committing
that within five years 5% of our workforce will
be apprentices, graduates and sponsored
students.
www.directlinegroup.co.uk
63
Looking after our people
Mixed model working
During the pandemic, the Group moved quickly to enable
over 9,000 of its staff to work from home. Over the
following 18 months we learnt that we can serve our
customers effectively and deliver big transformation
projects while giving our people the flexibility they’ve told
us they want.
Therefore we have chosen to move to a mixed model that
combines remote working with using our offices in a
different way. Trusting our people to get the job done
wherever they are working from. From September 2021,
our people have been able to come into the office for
collaboration, training and team building and continue to
log on from home to do computer and phone work. We
believe this offers our people the best of both worlds and
it helps to maintain the culture our people enjoy.
Early careers
We have always been a great place for people to start their
career. We now want to build on the early career
opportunities it offers, playing our part in improving the
career prospects and enhancing the skills of the UK’s
young people.
Making Flexible Work Charter
This year we signed up to the
Association of British Insurers
’Making Flexible Work’ Charter
because we know one size does not
fit all. We are actively looking at
how we can build on the flexible options we already offer.
Mental health
We strongly encourage our people to be open about how
they feel and that’s never been more important than
during Covid-19 with all the additional pressures and
concerns that have arisen. We have a cohort of colleagues
who are trained as mental health first aiders that people
can reach out to, as well as a confidential external service
that they can call for help, support and advice.
Employee Representative Body (ERB)
Our ERB meets regularly, has an engaged membership
and is much valued by our people. It brings colleagues
together from across the business to discuss and input
into proposals and initiatives that may affect our future
and impact our people. It also offers the opportunity for
individuals, via their ERB reps, to feed in their views and
suggestions. More information on the work of the ERB
can be found in the Corporate Governance report on
pages 109 and 111.
Pensions
We want to support our people to save for their
retirement. That’s why all our people are offered an
additional 9% on top of their salary a year to go into their
pension.
Sustainability continued
Gender diversity of our board
40.0%
Women (4)
60.0%
Men (6)
Gender diversity of senior leadership
32.8%
Women (40)
67.2%
Men (82)
Gender diversity of senior leadership figures based on 2021
Women in Finance reporting
Gender diversity of all employees
45.8%
Women (4,519)
54.2%
Men (5,342)
Excludes an estimated 0.5% colleagues who identify as
non-binary, gender-fluid or other gender due to data
reporting constraints
Ethnicity of all employees
10.3%
Asian (927)
2.7%
Black (244)
4.8%
Minority Ethnic
(437)
75.8%
White (6,852)
6.4%
Prefer not say
(575)
Excludes 8.4% of colleagues who have not submitted
an option for ethnicity
> For more information on leadership gender diversity,
including gender diversity of the Board see page 114
64
Direct Line Group Annual Report and Accounts 2021
Strategic Report Listening and responding to our
people
It’s important to us to understand how our people
are feeling so we can take action, which is why we
conduct regular employee engagement surveys.
This year we have improved our capability by
bringing in a new survey platform which provides
enhanced functionality. This has made it even easier
for colleagues to give feedback and for people
leaders to understand the results.
In response to 2021 survey findings, we have focused
on supporting a successful transition to mixed
model working by:
– Creating an intranet hub which provides our
people access to all the practical guidance and
support materials they need for a successful
transition to mixed model working. It is regularly
updated with new information in response to
colleagues’ requirements
– Delivering new technology bundles, direct to
colleagues’ homes, equipping them with the right
tools to work at their best, both at home or when
on the move
– Keeping people involved and in touch and
building a real sense of connectivity with ExCo
members, participating in regular interactive “ask
anything” sessions including virtual townhalls,
business update calls and getting to know you
online ‘cuppas’.
Rewarding our people
Our people work hard on behalf of our customers so it’s
only right they should receive proper financial reward for
their contribution. In 2021 salary increases were awarded
of between 1.5% to 2% and, in addition, a £400 one-off
“thank you” bonus was given in April 2021 to everyone who
is not usually eligible for a bonus.
In April 2021 all eligible colleagues received £350 of free
shares, making this our sixth award of free shares since
2012. These shares are now worth £2,059 or £2,888
inclusive of dividends received1.
Minimum salaries
We strive to ensure that our colleagues are rewarded for
the contribution they make to our success. While we seek
to ensure the pay proposition is good for all our people, we
have shown a clear commitment to lifting the salaries of
our lowest-paid colleagues. We have done this through
ensuring the minimum pay ranges are ahead of the
National Living Wage and the Real Living Wage.
During 2021 the minimum salary was £19,500 for a
37.5 hour week. This was 11% above the Government’s
statutory National Living Wage (April 2021 figure for those
aged 23 or over), and 5% above the Living Wage
Foundation’s Real Living Wage (November 2020 figure for
roles outside London).
The business has announced that from 1 April 2022 our
minimum salary will rise by 6.7%, seeing pay for a 37.5 hour
week rise to £20,8002. This will be 12.3% above the
Government’s statutory National Living Wage (April 2022
figure for those aged 23 or over), and 7.7% above the Living
Wage Foundation’s Real Living Wage (November 2021
figure for roles outside London). In keeping with our
learning culture the decision has also been taken that
apprentices will be paid our minimum salary rate from
that date3.
Human rights
As we work to become increasingly sustainable we want
our people to both flourish and to build a reputation for
ethical business and this drives our commitment to have
employment practices and policies that exceed those in
the Universal Declaration of Human Rights. We are
committed to ensuring modern slavery is not present in
our supply chain. Our risk profiling, including specific
requirements within our due diligence and assurance
processes, incorporates the Modern Slavery Act 2015.
Notes:
1. Based on the share price at 31 December 2021.
2. Subject to satisfactory performance and excluding apprentices
in DLG Auto Services who receive different rates of pay.
3. DLG Auto Services apprentices will receive a different level of
pay for the course of their apprenticeship.
www.directlinegroup.co.uk
65
Sustainability continued
Society
Use our expertise to
improve outcomes
for society and
the communities
we serve
We know that being a force for good
means more than just providing great
customer service. Our stakeholders expect
us to make a positive contribution to the
society around us and we do this in many
ways, whether it is the causes our
Community Fund supports, the campaigns
we run on issues like social mobility, or
the tax contribution we make.
As a business we aim to have a wider impact on the
communities we serve and society as a whole. This has
been particularly important in 2021, as many people
continued to live with the impact of Covid-19. In response,
colleagues across the business have found new ways to
support families and individuals via our Community Fund,
driven by our Diversity Network Alliance (“DNA”) and
Community and Social Committees (“CASCs”).
“Our colleagues across the business
have found new ways to support
families and individuals via our
Community Fund, driven by our
Diversity Network Alliance and
Community and Social
Committees.”
66
Direct Line Group Annual Report and Accounts 2021
This year we have made further progress on our social
mobility journey and in driving inclusion for left-behind
groups. We have provided chances for young people still
at school to broaden their understanding of the
opportunities available within financial services, offering
more apprenticeships as a route in, and helping our Social
Mobility Employee Network to provide support, broaden
understanding and advocate for change.
Strategic Report Social Mobility
Action Plan
Getting In, Getting On, Getting Ahead
In partnership with the Social Mobility Pledge, we
launched our Opportunity Action Plan setting out a
series of recommendations the Group can implement
to strengthen our contribution to addressing social
mobility within the UK. Recommendations included:
– Targeting efforts towards areas around the Group’s
sites with the widest inequalities and maximising
remote working opportunities
– Utilising our Community Fund to prioritise social
mobility causes in partnership with charities and
organisations that aim to make positive change
– Monitoring and tracking employee data to
understand potential barriers for colleagues and
gain better insight into how people are progressing
to senior positions within the Company
– Evaluating over time how the Group’s actions can be
measured to quantify impact
Targeting social mobility cold spots
Coming out of the pandemic we want to harness the
benefits of remote working, because we recognise we can
offer opportunities in areas of the country where we have
traditionally been unable to recruit. At the start of the year
we piloted a remote customer service apprentice scheme,
targeting social mobility cold spots in Derby, Mansfield,
Hastings and Crawley where we relaxed traditional
recruitment criteria so that we assessed candidates on
panel-based assessment, rather than on professional
experience.
Social mobility insight days
Building on the success of last year, we held two insight
days in 2021 in conjunction with the Social Mobility
Business Partnership and the Social Mobility Foundation,
for bright students from less-advantaged backgrounds, to
break down barriers around careers in insurance and to
develop their skills.
We’ve also partnered with Teach First and Envision to
support training and provide mentoring through
colleagues across our business.
Read more about our Opportunity Action plan at
www.directlinegroup.co.uk/en/sustainability/
our-society/
Our 2021 tax contribution
We ensure that we are compliant with all applicable tax laws and regulations and that we meet our responsibilities both
as a contributor of corporate taxes and as a collector of taxes on behalf of HMRC. For 2021, our total tax contribution was
£885.1 million which included the Group’s direct and indirect taxation.
IPT
VAT
Our
customers
Our
suppliers
Our people PAYE NIC
Our
operations
Other taxes
including
business rates
Irrecoverable
VAT
Employers’
NIC
Corporation
Tax
Our profits
£391.1m
HM Treasury
Society
£10.1m
£99.2m
£8.5m
£232.6m
£41.0m
£102.6m
£885.1m1
total tax contribution
Public services
Healthcare
Infrastructure
Welfare
Education
Defence
Note:
1. The Group’s total tax contribution in 2021, including direct and indirect tax contributions.
www.directlinegroup.co.uk
67
Sustainability continued
Community Fund 2021
Our Community Fund has gone from strength to strength in 2021. We continued to work
with a number of the charities where we had pre-existing relationships and forged new
partnerships by addressing three priority areas:
13%
56%
1. Marginalised Groups
and Loneliness
2. Mental Health
and Wellbeing
3. Food Poverty
31%
Some of the charities and
organisations we have
donated to are:
Kids Out
We delivered over 300 laptops and tablets for 100
refuges throughout the UK. The funding supports
vulnerable schoolchildren, many of whom have fled
domestic violence and on average spend at least three
to four months in refuge accommodation where over
50% do not attend school for fear of meeting their
abuser. Colleagues also dedicated their time to call
refuges and identify what individual sites’ needs were
so they could receive the right equipment.
56% Marginalised Groups and Loneliness
31% Mental Health and Wellbeing
13% Food Poverty
Sepsis Trust
We helped raise awareness of the condition sepsis
through our customer newsletter which reached over
2 million people. Amazingly, one of our customers
recognised the signs in her partner after reading the
newsletter and he managed to receive lifesaving
treatment as a result of our partnership.
DNA strands
We empowered our DNA network to nominate several
charity partners to support, helping us to bring to life the
‘personal and inclusive’ element of our vision. In total,
£100,000 was distributed to a number of organisations.
> Read more about our DNA Strands on page 62
Sprintathon
We continued to support Stand up to Cancer with
colleagues completing as many 100m legs of a 400 metre
track as possible within an hour. In total, we raised over
£125,000 to help accelerate life-saving research and
cancer treatments.
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Direct Line Group Annual Report and Accounts 2021
Strategic Report £1.5mgiven out in 2021
£225k
donated for laptops
and tablets
£120k
for emergency funding
and equipment supplies
in UK hospices
Community Fund 2022
We are incredibly proud of what the Community
Fund has managed to achieve over the last
two years. It has been a huge success from
delivering immediate support to those who needed
it the most to empowering colleagues to be at the
heart of decision making.
Looking to 2022, we want to capitalise on these
building blocks and focus the Community Fund on
improving social mobility and driving inclusion in
the UK.
NSPCC
During the pandemic, through our Mileage MoneyBack
scheme, we offered customers the opportunity to donate
their mileage refund to a number of charities including
NSPCC. Over the last year our customers gave £411,000 to
NSPCC, helping to keep children safe across the country.
Mind
Building on the great work of our partnership from last
year, we continued to train mental health first aiders and
break down barriers so that colleagues feel empowered to
discuss mental health issues. We additionally delivered
pro-bono support for Mind’s operations and ran a
graduate fundraising initiative.
Community and Social Committees
Our employee-led CASCs, which involve colleagues across
all of our sites to co-ordinate local volunteering and
charitable giving, delivered over £100,000 in funding for
IT equipment to schools during the height of lockdown
and £100,000 to food banks and local causes during
Christmas time.
Green Flag community deliveries
From March 2021, with the support of Business in the
Community, our Green Flag recovery drivers have
helped to deliver food parcels, laptops and other
essential items to families, children, and local councils
across the country.
www.directlinegroup.co.uk
69
Sustainability continued
Planet
Protect our business
from the impact of
climate change and
give back more to
the planet than we
take out
We view the climate emergency as
a race to find solutions. Across the
business we are focused on climate risk
mitigation and playing our part in
accelerating the transition to a low-
carbon future. There are three steps
to our plan:
Greenhouse gas emissions (tCO2e)1,2,3
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
9
6
,
1
1
2
5
1
,
1
1
13
14
15
16
17
18
19
20
21
Energy consumption (kWh)2,3
Electricity
Gas
Total
2021
14,856,315
24,286,023
39,142,338
2020
16,669,842
21,699,765
38,369,607
Step 1
Disclose to track progress
We have done a lot of work to understand where the most
carbon-intensive areas of our business are, because only
by understanding and reporting our carbon footprint can
we find solutions.
We have measured and disclosed our Scope 1 and 2
emissions and certain Scope 3 emission categories since
2013. In recent years, we have expanded the categories we
report under Scope 3 to include some of the Green House
Gas Protocol categories which are material to our business
operations. We have also measured and disclosed our
Supply Chain emissions since 2020 and this year, for the
first time, we are disclosing our Homeworking emissions
in recognition of more colleagues working from home.
In regards to progress made, we have:
– Reduced our energy consumption by 45% since 20134
– Procured 100% renewable electricity for our operations
since 2014
– Diverted 100% of our office waste from landfill
We are focused on providing greater transparency and
want to now go further in our disclosures which is why
we report our office, accident repair centre and supply
chain emissions to guide our carbon reduction strategy
going forward.
70
Direct Line Group Annual Report and Accounts 2021
Strategic Report
Step 2
Commit to tangible actions
Target setting
We have committed to set Science-Based Targets for
Scope 1, 2 and 3 emissions via the Science Based Targets
initiative (“SBTi”) and this year joined the Race to Zero
because we recognise our role in taking a leadership
position as we reduce emissions. It means we will set
targets in line with a 1.5°C emissions scenario where we
are aiming to achieve net zero emissions by 2050 at
the latest.
As we work to set targets, the most carbon-intensive
areas of our business – our accident repair centres, supply
chain and investments – are already starting to put in
place plans.
Establishing Strategic Management Actions
In 2021, we established the following Strategic
Management Actions which business areas are now
prioritising:
– Electric vehicles – improving our capability and
understanding to support the transition to EVs.
– Supply chain – implementing a Supply Chain
Sustainability Programme to engage and influence
suppliers.
– Flood resilience – engaging with policymakers on the
importance of flood defences and helping to shape
thinking around resilient repairs.
– Underwriting footprint – evaluating the impact of
climate change on our underwriting footprint so that
we can manage risks to our business and help inform
strategic decision making.
Step 3
Offset while we reduce
We know that it will take time to reduce emissions and
facilitate the transition to net zero, whilst we enhance our
approach to sustainability across the Group and set
Science-Based Targets.
Last year we took the step to become a carbon neutral
business by offsetting our Scope 1 and 2 emissions as well
as elements of our Scope 3 emissions under our direct
control by partnering with ClimateCare, an organisation
that is dedicated to tackling climate change and
improving lives by financing, developing and managing
carbon reduction projects across the world.
From November 2020 to November 2023, we’ve pledged
support to carbon offsetting projects which will deliver
high social impact benefits to communities and
environments in three countries.
> Read more about DLG Auto Services on page 74
> See page 73 for more information on our offsetting projects
Notes:
1. Total Scope 1 and 2 emissions. The 2020 result of 11,697 tCO2e differs from the reported result of 12,137 tCO2e in the 2020 Annual Report
and Accounts following recalculation.
2. 100% of the GHG emissions and energy consumption reported relates to operations all of which are based in the UK.
3. Data is reported in compliance with the SECR requirement to disclose annual global GHG emissions and annual global energy
consumption (see page 87).
4. Reduction in energy consumption is reported on a like-for-like basis.
www.directlinegroup.co.uk
71
Sustainability continued
Group emissions
We believe accurate measurement and transparency can guide the business in making targeted interventions as part
of our carbon reduction strategy. We implemented a number of test and learn activities, and continue to innovate and
explore a range of solutions. We have provided a comparison of emissions data for Scope 1, 2 and 3 with greater clarity of
the activities under our direct control, as well as our supply chain emissions. 100% of the emissions reported relates to
operations all of which are based in the UK. The data is reported in compliance with the SECR requirement to disclose
annual global GHG emissions (see page 87 for more information).
Definitions
Scope 1: This covers direct emissions from owned or controlled sources. For example, our office sites throughout the UK
using gas boilers, the paint booths in our Auto Services sites currently relying on gas powered processes and our fleet
vehicles.
Scope 2: These are indirect emissions. They are emissions associated with the production and transmission of energy we
eventually use as a company across our office and Auto Services sites. For example, the production of the electricity we
buy to heat and cool our buildings generates emissions.
Scope 3: These are indirect emissions that occur in the value chain to support our company operations. For example,
employee commuting, activities related to the disposal of waste and the goods and services we purchase to fulfil
customer claims as part of our supply chain. It will also include our investment portfolio which we are currently
evaluating as we work to set Science-Based Targets.
Reporting methodology
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.
Our carbon emissions are calculated by an external third party and reviewed internally. The calculation method used for
2021 remains consistent with prior periods and with the reporting standards stated above.
Scope 1
Office sites1
Auto Services1
Total (tCO2e)1
Scope 2
Office sites
Auto Services
Total (tCO2e)
Total Scope 1&2 (tCO2e)1
Of which: office sites (tCO2e)1
Of which: Auto Services (tCO2e)1
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 commuting3,4
Of which: homeworking emissions4
Upstream leased assets5
Upstream transportation and distribution of auctioned
vehicles
Total (tCO2e)
Total emissions under our direct control (tCO2e)1,6
Scope 3 – supply chain
Total procured goods and services (tCO2e)7
Direct Line Group carbon footprint (operational control)
Total (tCO2e)1
Of which: under our direct control1,4
Notes:
2021
1,220
6,777
7,997
2021
2020
1,339
6,472
7,811
2020
2019 baseline
1,881
7,838
9,719
2019 baseline
Location-
Based2
1,372
1,783
Market-
Based2
0
0
Location-
Based2
2,176
1,710
Market-
Based2
0
0
Location-
Based2
4,516
2,093
Market-
Based2
0
0
3,155
11,152
2,592
8,560
2021
2,586
474
28
34
29
5,962
5,501
110
655
9,878
21,030
2021
217,062
2021
238,092
21,030
3,886
11,697
3,515
8,182
2020
2,332
413
198
75
63
1,450
–
63
625
5,219
16,916
2020
144,114
2020
161,030
16,916
6,609
16,328
6,397
9,931
2019 baseline
2,465
1,245
928
469
410
4,599
–
193
912
11,221
27,549
2019 baseline
249,929
2019 baseline
277,478
27,549
1. The 2020 Scope 1 total of 7,811 tCO2e (office sites: 1,339 tCO2e, Auto Services: 6,472 tCO2e) differs from our previously reported figures of
8,251 tCO2e (office sites: 1,432 tCO2e, Auto Services: 6,819 tCO2e) in the 2020 Annual Report and Accounts following recalculation.
2. 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.
3. 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.
4. In line with the GHG Protocol standards our homeworking emissions are reported under the Scope 3 category ‘Employee
Commuting’. Prior period measurement is not available.
5. 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.
6. Total of Scope 1 & 2 emissions and Scope 3 emissions under our direct control.
72
Direct Line Group Annual Report and Accounts 2021
Strategic Report Intensity metric
We monitor the intensity metric of emissions1 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.
Year
2021
20203
2019
2018
2017
2016
2015
2014
2013
Notes:
Emissions per £ million of net earned premium2
3.8
4.0
5.5
5.4
5.5
6.4
7.7
9.1
9.5
1. Scope 1 and 2 emissions.
2. 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.
3. The 2020 result of 4.0 differs from the previously reported result of 4.1 in the 2020 Annual Report and Accounts following recalculation
of our Scope 1 emissions (see footnote 1, page 72).
Offsetting projects
We supported three high-impact projects in Kenya, Bangladesh and Brazil to reduce carbon and support
communities for a cleaner future. Over the last year, activity has progressed on all these projects, as they have not
only reduced emissions, but delivered a range of benefits for people and planet.
Water filters, Kenya
We have provided funding which has helped the continued
manufacture and distribution of Aqua Clara water filters.
Our support has contributed to the provision of over 8 million
litres of safe water to Kenyan schools and households and is
enabling future growth of the programme through further
training and expanding distribution.
Clean cookstoves, Bangladesh
Through our support of this Gold Standard-verified project, we
have contributed financing to subsidise the manufacture,
distribution and after-sales support of Bondhu Chula cookstoves
throughout local communities in Bangladesh, improving air
quality and lowering household costs.
Our help has contributed to the distribution of almost 6,000
cookstoves, lowering fuel costs and improving household air
quality for over 25,000 people.
Rainforest protection, Brazil
Our financial assistance for this project is helping to provide benefits
to the local ecosystem by providing jobs in forest conservation and
training in agroforestry techniques, in addition to protecting
multiple vulnerable species that live within the region.
Local communities are empowered by offering land use and
tenure rights in exchange for positive conservation results. This
provides access to loans from development banks in Brazil, which
can deliver a transformative impact on the area.
Notes (continued):
7. In accordance with the GHG Protocol under which we report, the following are excluded from the total:
a. operational control activities already detailed under ‘Scope 3 emissions under our direct control’;
b. cash payments to customers or other insurance companies / legal firms as compensation;
c.
intragroup transfers between our operating companies for financial accounting purposes as the actual purchase of goods and
services to our third-party suppliers is already captured; and
d. reinsurance costs to third-party reinsurers as this is a financing transaction.
www.directlinegroup.co.uk
73
Sustainability continued
DLG Auto Services
Direct Line Group writes close to 4 million in-force motor
insurance policies, and customers are supported by our 22
Auto Services accident repair centres throughout the UK.
We have the largest insurer-owned body shop business in
the UK, and operate a partnership network with other
body shop suppliers around the country.
Our Auto Services are fundamental to our claims and supply
chain operation, but we also recognise they are one of the
most carbon-intensive areas of the business. We are
exploring a range of solutions to embed our environmental
goals as part of our emissions reduction strategy:
Green parts
Offering customers the option of ‘green’ parts could
reduce the need for new replacement parts. It could also
provide confidence about what can be recycled from
salvage operations if motorists select this option when
fitting parts to their vehicle.
Using alternative fuels
Testing the viability of alternative fuels, such as
hydrogenated vegetable oil (“HVO”), to power recovery
trucks which play an important part in servicing customer
motor claims.
Moving away from reliance on gas powered
repair processes
Paint booths that currently rely on gas could be switched
to electricity derived from renewable sources. We are
trialling this in our Birmingham site.
Taking advantage of innovative products
Working collaboratively with commercial partnerships can
realise environmental benefits. For instance, new paint
technologies might reduce or remove the need to cure paint
used on vehicles, thereby reducing energy consumption.
“As a major UK motor insurer we
believe our ‘green’ USP should be
to insure and fix electric vehicles,
while aiming to do this in the most
energy-efficient repair network
in the UK.”
Energy-efficient lighting
Introducing LED lighting is more energy efficient and is
preferred by our technicians who can see jobs more
clearly. Our Weybridge site is enabling energy savings of
up to 60% and a reduction in maintenance costs over a
projected lifespan of 10 to 20 years.
74
Direct Line Group Annual Report and Accounts 2021
Strategic Report Our investments
All external investment managers are signatories of the
United Nations Principles for Responsible Investment
(“UN PRI”), which ensures that Environmental, Social,
and Governance criteria is integrated into the investment
process. For investment-grade corporate bond portfolios,
as an added measure we require that managers maintain
an average MSCI ESG rating of “A” or higher.
As part of our Group commitment to set Science-Based
Targets, we are also required to set targets for in-scope asset
classes in the investment portfolio which is a key initiative for
2022. We have committed that the investment portfolio will
be net zero emissions by 2050 and have developed a climate
framework for corporate bond portfolios that was initiated in
2021 and includes the below criteria and commitments:
– A 50% reduction in weighted average greenhouse gas
emission intensity for corporate bond portfolios by 2030
versus a FY2020 baseline;
– A requirement for portfolios to be tilted towards
companies taking Positive Climate Action (“PCA”)1;
– The exclusion of any companies with a low-carbon
transition score indicating assets could be economically
stranded;
– The exclusion of companies involved in thermal coal
activity, either mining or power generation at greater
than 5% of revenues2;
– In support of our RE100 membership, no investment in
firms opening new thermal coal mines or power
stations; and
– Managers instructed to prefer investments in green
bonds where the risk return characteristics are similar
to conventional bonds.
In setting Science-Based Targets, we recognise that some
of the existing investment portfolio targets may need to
be amended, or new targets added, in order to meet the
criteria set.
Using our influence
Using our influence to be a force for good, we played
an active role in a number of climate-related groups
where we contributed to a number of cross-sector
solutions. These include:
– Electric Vehicle Fleet Accelerator
– ABI Climate Change Roadmap
– Sustainable Markets Initiative
Continuing with our energy efficiency
activities
This year we continued to invest in energy-efficient
measures in both our office estate and our Auto
Services sites. In particular:
– We’ve continued with the project to replace the
gas heating system in Bromley with a new
Variable Refrigerant Flow (“VRF”) and Smart Cool
Energy-saving devices. The VRF system is a fully
electric heating and cooling system delivering a
36% energy efficiency compared to the old gas
boilers and electric chillers;
– Replaced the Fan Coil Units (“FCUs”) in our Leeds
Wharf office with new energy-efficient FCUs
delivering an improved energy efficiency of 57%;
– Installed Power Factor Correctors in our Crawley
Auto Services site to maximise the efficiency of our
electrical supply onsite, delivering energy
efficiency of 13%. This was a successful trial, and
the plan is to assess the power efficiency of the
rest of the Auto Services sites this year; and
– We’re trialling hydrogenated vegetable oil (“HVO”)
in our recovery trucks at our Stechford Auto
Services site delivering a GHG emissions reduction
of over 90% compared to diesel.
In comparison, last year the delivery of energy-efficient
activities in our office and Auto Services sites was
heavily impacted by the Covid-19 pandemic. However,
we delivered the following energy efficiency projects
in 2020:
– New air conditioning and LED lighting systems
and environmental sensors in the Bromley office
enabling a reduction in gas usage and better
maintainability; and
– New and more efficient LED lighting systems in
our Birmingham and Glasgow offices, as well as
sections of our Doncaster office, and at the
Weybridge Auto Services site.
Giving back to the planet
This year we became a supporter of the Get Nature
Positive campaign where we will play our part,
alongside other likeminded companies, to restore
nature and biodiversity.
We also announced a partnership with the nature
recovery charity Heal, providing a £3 million loan
facility that can support the purchase of their initial
two sites.
Notes:
1. PCA firms are those that have either committed to set Science-Based Targets for emissions reduction or have a 2 degree or better
carbon performance alignment from the Transition Pathway Initiative. Portfolio tilt refers to a requirement that the market weight of
portfolios to companies taking PCA should be greater than respective benchmark weight and is a requirement for all portfolios except
two active strategies where a slightly lower threshold is required.
2. Waivers are granted for issuers that generate greater than 5% of revenue from thermal coal activity if they are taking PCA or if the
particular bond issuance is defined as a green bond.
www.directlinegroup.co.uk
75
Strategic Report
Task Force on Climate-related
Financial Disclosures
2021 highlights
– Joined the Race to Zero, committing to set
Science-Based Targets that reduce our emissions
based on a 1.5°C pathway.
– Launched our first electric vehicle insurance
package, supporting the transition to a low-
carbon economy and making it easier for
customers to insure electric vehicles.
– Announced our Supply Chain Sustainability
Programme, outlining our plan for the next ten
years to engage and influence suppliers so we can
make the transition to a pathway consistent with a
1.5°C scenario.
Committees
– The Audit Committee meets a minimum of four times
a year and is responsible for overseeing the Group’s
financial statements and non-financial disclosures,
including any climate-related financial disclosures.
– The Board Risk Committee oversees all aspects of
financial, regulatory and operational risk, including
the long-term risk to the Group from climate change.
It meets a minimum of four times a year and receives
reports on stress testing of long-term climate change
scenarios, discusses strategies for managing the
associated risks and considers emerging risks twice
a year, recently involving a review of climate change.
– The Sustainability Committee supports the strategy
by scrutinising progress against the plan to ensure that
our Planet, People and Society pillars’ activity continues
moving forward. It meets a minimum of four times a year.
– The Investment Committee meets a minimum of four
times a year and considers the strategy for
incorporating ESG factors into the Group’s investment
management which has seen our credit portfolios tilted
to issuers with higher sustainability weightings.
– The Nomination and Governance Committee meets a
minimum of three times a year, monitoring the Board’s
overall structure, size, composition, and balance of skills.
This Committee also works to understand and integrate
investors’ ESG expectations.
Introduction
We welcome the reporting framework established by the
Task Force on Climate-related Financial Disclosures
(“TCFD”). The framework continues to enhance our
reporting as we make further progress on our approach
to evaluating and managing climate-related risks and
opportunities and as we strengthen our strategic response
to one of the biggest challenges facing the world today.
The Group has complied with the requirements of Listing
Rule 9.8.6R by including climate-related financial
disclosures consistent with the TCFD recommendations
and recommended disclosures including the
supplemental guidance for all sectors and insurance
companies (see pages 76 to 87).
Governance
Our approach
The Group’s approach to the governance of its
sustainability strategy is underpinned by our Vision and
Purpose (see page 23) and a clear commitment from the
Board and senior management to align sustainability
goals with the Group’s strategy and encourage
accountability across the business.
Our five-pillar sustainability strategy, endorsed by the
Board, aims to foster the highest standard of
Environmental, Social and Governance 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”).
Boards 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 requiring robust
governance to empower business areas in the
management of climate-related risks and opportunities.
It starts with the Group’s Board, which seeks to underpin
all of the Group’s activities with the highest standards of
corporate governance. The Board has oversight on two
key aspects of the Group’s approach:
– 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.
– 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.
76
Direct Line Group Annual Report and Accounts 2021
Strategic Report Strategy
There is strong empirical evidence and scientific
consensus that human activity is causing an increase in
global temperature. The impact has far-reaching
implications for economies and societies around the
world. If further warming was to continue the physical and
economic impacts that could result may be significant,
with the extent of these impacts dependent on the action
taken to tackle climate change.
The insurance industry is not immune and for general
insurers there are specific risks and opportunities at play.
We want to contribute to a long-term sustainable future
and know that through our actions as a business we can
contribute to climate risk mitigation.
As a major motor insurer, we recognise our position in
the motor eco-system and that we have a part to play
in reducing the impact motor vehicles have on
climate change.
The adoption of electric vehicles continues to increase
and we are providing our customers access to insurance
solutions that support this transition. In 2021, we released
our first ever electric vehicle insurance package for new
Direct Line policyholders (see page 81), a proposition that
makes it easier for customers to insure electric vehicles,
while aiming to fix them in the most energy-efficient
repair network in the UK.
Our new electric vehicle proposition is only one of a
number of initiatives that are now underway across the
organisation, supporting our aim of protecting our
business from climate change and giving back more
to the planet than we take out.
Climate change risks and opportunities
We recognise that the long term and forward-looking
nature of climate-related risk is complex to manage, and
that the risk the Group is exposed to could vary in
materiality depending on product, business area or
investment. The specific impacts of climate change on our
business fall into three broad categories:
– physical risks and opportunities resulting from the
physical effects of climate change;
– transition risks and opportunities arising from the
transition to a lower-carbon economy; and
– liability risks arising when parties who have suffered
losses from climate change seek to recover them from
those they believe may have been responsible.
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.
The Group’s Sustainability Committee considers the
work of the Planet pillar, alongside the Group’s wider
sustainability strategy. The Committee has taken a
keen interest in the process towards setting Science-
Based Targets, external activity undertaken by the
Group to influence climate debates including the
ABI’s Climate Change Roadmap and the Sustainable
Markets Initiative Insurance Task Force. The
Committee has also discussed prominent public
policy challenges such as flooding and accelerating
the transition to electric vehicles.
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 CFO is responsible for overseeing the
implementation of 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 Investment Committee and the CEO,
CRO and the Director of Investment Management &
Treasury are attendees.
To support the Sustainability Committee’s oversight and
in recognition of the Group’s increased focus on climate-
related activity the Group formed a Climate Executive
Steering Group which reports into the Sustainability
Committee. Chaired by Tim Harris, our former CFO, the
Climate Executive Steering Group consists of members
representing various teams from across the business to
assess potential impacts of climate change with the aim of
ensuring risks are identified and managed effectively. The
Steering Group’s responsibilities include:
– prioritising the Group’s focus on preparation for
submitting Science-Based Targets;
– overseeing input in the Group’s business development
and strategic processes to make sure climate is given
appropriate consideration in long-term strategy and
planning; and
– considering the risk management challenges presented
by climate change including financial risk related to
underwriting and investments.
Group Audit
Group Audit provides 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 climate-related reviews.
www.directlinegroup.co.uk
77
Task Force on Climate-related Financial Disclosures continued
Whilst such risks can create uncertainty that we must
continue to manage, we also recognise the transition to a
low-carbon future creates opportunities to help accelerate
the transition and contribute to a sustainable economy.
For more information on how we are mitigating risks and
harnessing opportunities across our underwriting,
operational and investment activities see pages 81 to 83.
During 2021, we took action to examine how we define
the time horizons relating to climate risk and opportunity.
We consider the following to broadly describe the climate-
related risks and opportunities impacting the Group over
the short, medium and long term. We have aligned the
time frames closely to pathways representing possible
future climate-related scenarios over a thirty-year plus time
horizon. Specific issues alongside the associated time
horizons are discussed throughout the TCFD disclosure.
Short (1 – 10 years) The frequency and severity of natural
catastrophes and other weather-related events in the UK
could increase, adversely impacting insurance liabilities.
The speed of transition to a low-carbon economy could
also increase, supported by changes in technology and
policy, including the planned ban of new petrol and diesel
car sales in the UK from 2030, as announced by the UK
Government in November 2020. Throughout these initial
stages of transition, we intend to ensure product offerings
and capabilities provide insurance solutions that best
meet our customers’ evolving needs, for example, as seen
through the launch of our electric vehicle insurance
package for new Direct Line customers in November 2021.
On page 81 we report the key risks and opportunities
relating to our underwriting activities which includes how
we view the potential impacts the transition to electric-
powered vehicles could have.
Medium (10 – 30 years) The transition towards a low-
carbon economy continues to prompt a strategic and
operational response. As consumers become more widely
impacted by the transition and further changes in policy
and technology are implemented we may see changes to
risk nature and profile, and more acute weather-related
events in the UK could occur if global temperatures were
to continue rising (see page 81 for more information). We
aim to enable consumers access to insurance that
supports low-carbon choices and that reflects the green
transition shift by utilising data and capability generated
in the earlier stages of transition. We also plan to reduce
climate-related risk exposure in our investment portfolio,
which includes the target of ensuring our entire
investment portfolio is net zero emissions by 2050 (see
pages 83 and 86).
Long (30+ years) If further warming was to continue and
no action taken to curb the longer-term impacts of
climate change on our planet, the physical impacts could
intensify. If chronic risks such as changes in precipitation
patterns and extreme variability in weather-related events
were to occur, we could see significant changes in the
Group’s underwriting criteria to maintain risk appetite. We
may also see a shift in dynamics within the markets we
operate and invest in, creating both risk and opportunity.
Financial planning
We acknowledge that there are risks posed by climate
change that could potentially have impacts on financial
performance and financial position.
As an underwriter, we actively measure climate-related
risk through climate risk modelling due to the nature of
the Group’s products (see page 84). Climate risk is also
integrated into the Group’s overall approach to risk
management (see page 84). We also undertake scenario
analysis to enhance management of longer-term climate-
related financial risks (see pages 79 and 80).
We recognise our prices, products and operations will
evolve as climate change influences manifest themselves
through changing loss patterns, however, a failure to
understand the scale of change in market demand for
products and services due to climate-related policy,
technology and consumer preference, could have adverse
impacts on revenue.
We are already experiencing increased climate-related
operating costs and capital expenditure, seen, for
example, through the ongoing investments we make to
reduce the overall GHG emissions in our office estate and
repair centres. We are aware, however, of the longer-term
benefits such investments can bring in enhancing
operational efficiency and resilience whilst also reducing
impact on the environment.
Our financial investments represent one of the largest
assets on our balance sheet. The impacts of potential
physical and transition risks arising in the wider economy
could have an impact on our investment portfolio,
through their influence on the value of assets. See pages
83 and 86 for further information on how we are
integrating climate-related considerations into our
long-term investment management strategy to develop
resilience against this risk.
As the potential for increasing adverse physical impacts
due to climate change exists, we, as a general insurer, are
aware that insurance liabilities could be impacted as more
acute, and potentially more chronic, weather-related
events are experienced in the UK. Approaches to
understand this impact further are discussed throughout
the TCFD disclosure.
Establishing Strategic Management Actions
Alongside science-based target setting we have also
established Strategic Management Actions which
business areas are now prioritising. These include
actions on electric vehicles, our supply chain, flood
resilience and underwriting footprint. For more
information please see page 71.
78
Direct Line Group Annual Report and Accounts 2021
Strategic Report Stress test
During 2021, we considered the financial impacts from
three distinct climate scenarios at a ten- and thirty-year
time horizon. The analysis was applied to the Group’s
Solvency II balance sheet as at 31 December 2020. Two of
the scenarios represent routes to net zero greenhouse gas
emissions and primarily explore transition risk from
climate change:
Relative Impact – No Action to Early Action
The following graph illustrates the potential adverse
impact to the Group’s Solvency II balance sheet value
of investment assets and insurance liabilities at Year 30
under the Early Action, Late Action and No Additional
Action scenarios. The financial impact of the Early and
Late Action are shown relative to the impact of the No
Additional Action scenario which is set at 100%.
– Early Action The transition to a net zero emissions
economy started in 2021 so carbon taxes and other
policies intensify relatively gradually over the scenario
horizon. Global carbon dioxide emissions are reduced to
net zero by around 2050. Global warming is limited to
1.8°C by the end of the scenario (relative to pre-industrial
levels). Some sectors are more adversely affected by the
transition than others, but the overall impact on GDP
growth is muted, particularly in the latter half of the
scenario once a significant portion of the required
transition has occurred and the productivity benefits of
green technology begin to be realised.
– Late Action The implementation of policy to drive
%
100
80
60
40
20
0
transition is delayed until 2031 and is then more sudden
and substantial. Global warming is limited to 1.8°C by
the end of the scenario (relative to pre-industrial levels).
The more compressed nature of the transition results in
material short-term macroeconomic disruption, which
is particularly concentrated in carbon-intensive sectors.
Output contracts sharply in the UK and international
economies. The rapid sectoral adjustment associated
with the sharp fall in GDP reduces employment and
leads to some assets being stranded, with knock-on
consequences for demand and spending. Risk premia
rise across multiple assets.
The third scenario primarily explores physical risks from
climate change in the event that there are no new climate
policies introduced beyond those already implemented.
– No Additional Action The absence of transition policies
leads to a growing concentration of greenhouse gas
emissions in the atmosphere and, as a result, global
temperature levels continue to increase, reaching 3.3°C
relative to pre-industrial levels by the end of the scenario.
This leads to chronic changes in precipitation, ecosystems
and sea level. UK and global GDP growth is permanently
lower and macroeconomic uncertainty increases.
Transition scenarios
Early
Action
Year 30
Late
Action
Year 30
No
Additional
Action
Year 30
Figure 1: Year 30 impacts of scenarios relative to the largest No
Additional Action scenario
In the Late Action scenario, the delay in policy
implementation to transition to a low-carbon economy
means there are no transition impacts over the initial
ten-year time horizon. However, accelerated transition
from 2031 results in greater impacts versus the Early
Action scenario over the thirty-year time horizon. Whilst
both of these transition scenarios saw material impacts on
the investment portfolio, the most significant impacts on
both investments and insurance liabilities arose from the
physical risk effects of no transition in the No Additional
Action scenario (where no additional actions are taken
beyond those already announced).
At the thirty-year time horizon, financial impacts in the No
Additional Action scenario are nearly double those in the
Late Action scenario and physical risks also drove the largest
impact on investment results in absolute terms. However,
these impacts do not take into account the Group’s
long-term commitments within its investment strategy,
which includes the target of holding a net zero emissions
investment portfolio by 2050 (see pages 83 and 86).
All three scenarios would lead to a breach in risk appetite
and the No Additional Action Year 30 scenario would also
lead to a breach in SCR based on the Solvency II balance
sheet as at year-end 2020. However, a set of clearly defined
management actions could be deployed in each scenario
to address the risks and allow the business to recover to
above risk appetite.
www.directlinegroup.co.uk
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Task Force on Climate-related Financial Disclosures continued
Impact on insurance liabilities v investments
The graph below shows the potential adverse impact on the Solvency II balance sheet value of investment assets and
insurance liabilities under the Early Action, Late Action and No Additional Action scenarios at Year 10 and Year 30. The
total impact for each scenario is set at 100% and is split between the impact on investments and insurance liabilities.
%
100
80
60
40
20
0
Early
Action
Year 10
Early
Action
Year 30
Late
Action
Year 10
Late
Action
Year 30
No
Additional
Action
Year 10
No
Additional
Action
Year 30
Investments
Insurance liabilities
Figure 2: Share of impacts on insurance liabilities v investments
In all scenarios at the thirty-year time horizon, the impact on insurance liabilities was more limited than on investments.
However, insurance liabilities were considered gross of reinsurance and in practice the short-term nature of the
business, the ability to re-price annually and the risk mitigation provided by reinsurance arrangements is likely to limit
the impact on general insurance liabilities further.
Physical risk by peril
The following graph illustrates the potential adverse impact of physical risk on the Solvency II balance sheet value of
insurance liabilities at Year 30 under the Early Action, Late Action and No Additional Action scenarios. The total impact is
analysed by peril.
%
60
50
40
30
20
10
0
-10
-20
Early Action/Late Action
Year 30
No Additional Action
Year 30
Inland Flooding
Coastal Flooding
Windstorm
Subsidence
Figure 3: Split of physical risk impacts on insurance liabilities by peril
Figure 3 shows that, on a gross basis, the physical risk to insurance liabilities across all three scenarios was largely driven
by inland flooding and coastal flooding which included storm surge due to a rise in sea levels. Windstorm was assessed
to have a small positive benefit over all scenarios as a result of changing atmospheric conditions driven by complex
interactions of a number of variables, ultimately caused by rising temperatures.
During 2021, we also participated in the Bank of England’s CBES exercise which was designed to test the resilience
of the UK financial system to physical and transition risks from climate change and to assist banks and insurers in
enhancing their management of climate-related financial risk.
Going forward, we will continue to work towards developing scenarios specific to our own risk profile, that focus on the
most material aspects of our business. This will enable us to more effectively make use of scenario-testing output to
inform our strategic approach to mitigating these impacts.
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Direct Line Group Annual Report and Accounts 2021
Strategic Report Underwriting
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. The move to low-carbon vehicles, particularly electric-powered cars, also presents new challenges from
which the Group could benefit, for example creating innovative products that enable consumers access to insurance
solutions that support the transition to a low-carbon economy. We summarise a number of risks and opportunities in the
table below relating to our underwriting activities, and highlight key action and assessment taken in 2021 against these.
INBOUND
Impact of climate change on the Group
OUTBOUND
The Group’s impact on the environment
– The frequency and severity of natural catastrophes and
– Remaining active participants in developing solutions to
other weather-related events could be affected by
climate change and impact insurance liabilities.
– The way we price property underwriting risk due to
changes in building codes or standards could be
affected.
– Liability loss could arise as people suffer losses from
climate change.
influence the debate on weather-related events
provides 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.
– Issuing communications on preventative measures
customers can take could reduce claims numbers.
– The transition to electric-powered vehicles could have
– Developing further insight into electric-powered
significant strategic and operational impacts, including
fundamental changes to the profile of accidents and the
nature of risks, supply chain and repair processes.
– Understanding the transition to 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 commercial opportunities.
vehicles provides an opportunity to contribute to and
benefit from the transition to a greener future. This will
ensure optimum risk assessments influence pricing
decisions, safeguard efficient repair process in our
accident repair centres and help develop new products
and propositions for our customers.
– Climate change creates an opportunity to enhance our
risk-modelling expertise and help strengthen our
pricing decisions.
– Integrating electric vehicles into our fleet of courtesy
cars to support customer awareness of electric vehicle
capability.
– Developing products and propositions that could
encourage a reduction in emissions and open up
potential commercial opportunities, for example our
“Mileage MoneyBack” proposition.
– Monitoring consumer attitudes to green products and
develop insurance solutions that best meet our
customers’ evolving needs and accelerate the transition
to a low-carbon future.
Key Group action 2021
In 2021, we continued to explore the potential longer-term climate-related underwriting risk, and how we can support
the transition to a low-carbon economy through underwriting activities.
As a participant in the Bank of England’s 2021 CBES exercise, we gained extensive insight into the potential impact of
modelled climate scenarios on our insurance liabilities over a thirty-year period; this has also expanded our capabilities
to enhance in-house scenarios specific to our own risk profile and most material aspects of our business (see pages 79
and 80).
In our Motor business, we announced a new partnership with Motability Operations Ltd which is due to take effect
from 2023 (see page 8). The Motability Scheme helps over 640,000 individuals gain access to mobility with lease terms
on most vehicles being three years. Over the course of the 10-year partnership we expect the number of electric
vehicles we insure to grow significantly, providing valuable underwriting data, insight and capability into the future of
vehicle technology and repair, crucial for building long-term strategic resilience against key transition risks.
Demonstrating our commitment to developing insurance products that can support the transition to a low-carbon
economy, in Q4 2021 we announced our first ‘green’ motor insurance solution, launching a fully electric vehicle
insurance package to new Direct Line customers (see below).
Making electric easy
Our Direct Line brand is working to make electric easy for our
motor insurance customers, offering all new business customers
access to a bundle of electric vehicle essentials as well as
insurance that covers batteries and charging cables. The bundle
includes discounted access to public and community charging,
discounted home charger installation, help with grants and
discounted parking for electric vehicles*. Our customers also
benefit from our repair expertise via our network of body shops.
* One bundle per Direct Line motor policy, available to new customers
only who buy between 28/10/2021 and 31/10/2022. Free bundle provided
by Zoom EV for 12 months from activation and validation of Zoom
EV account.
www.directlinegroup.co.uk
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Task Force on Climate-related Financial Disclosures continued
Operations
Given the scale of our operations we are all the more determined to ensure action is taken to reduce our impact on the
environment. To support this, we are setting clear, transparent and science-based emission reduction targets,
improving the way individual business areas operate and exploring the way we leverage our relationship with suppliers.
Our operations are also exposed to physical and transition risks, such as possible disruption to direct operations due to
the physical impacts of climate change, and we could also see a rise in operating costs through carbon cost increases
and regulatory requirements designed to limit GHG emissions. We summarise a number of risks and opportunities in
the table below relating to our operations, and highlight key action and assessment taken in 2021 against these.
INBOUND
Impact of climate change on the Group
OUTBOUND
The Group’s impact on the environment
– Operating costs could rise due to potential carbon cost
increases, regulatory requirements designed to limit
carbon emissions and as a result of failure to improve
operational efficiencies. This would drive the need for
more aggressive energy reduction measures across
the Group.
– Frequency and severity of natural catastrophes and
other weather-related events could impact direct
operations leading to business interruption.
– 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.
– A failure to set long-term emission reduction targets
for business operations could see energy consumption
increase.
– Investing in energy-efficient features and equipment
across our office estate and accident repair centres
provides the opportunity to reduce energy
consumption, which could otherwise increase.
– Improving operational efficiencies can save on energy
consumption particularly in our roadside rescue and
recovery business and in our repair centres.
– Encouraging employees to make environmentally
conscious decisions can enhance education, increase
recycling rates and save on consumption over the
long term.
– Once validated, our new Science-Based Targets will
ensure we have a clear and transparent route to further
reduce and monitor our Scope 1, 2 and 3 emissions.
Key Group action 2021
In 2021, we remained committed to reducing the impact of our operations on the environment and continued to make
progress to mitigate the impact physical and transition risk could have on our operations.
At the end of 2020 we announced our commitment to set science-based reduction targets for our Scope 1, 2 and 3
emissions via the SBTi and in 2021 we continued to make progress against this. Working with environmental
consultancy Carbon Intelligence, we plan to submit the targets to the SBTi for their independent validation in 2022.
We also joined the Race to Zero in 2021, taking a leadership position as we reduce GHG emissions. It means we will set
targets in line with a 1.5°C emissions scenario where we are aiming to achieve net zero emissions by 2050 at the latest.
We have also continued to offset the carbon emissions from our operations we can’t yet avoid, see pages 71 and 73 for
further information.
Throughout 2021, we continued to implement further operational efficiencies and improve long-term operational
resilience against climate-related matters, key action included:
– Launching our Supply Chain Sustainability Programme, which outlines our plan for the next ten years to support
the reduction of Scope 3 emissions in our supply chain (see below); and
– Embedding new solutions in our Auto Services repair centres by making use of alternative fuels, offering customers
the option of choosing ’green’ parts in vehicle repairs and moving away from reliance on gas powered repair
processes (see page 74 for more information).
Supply Chain Sustainability Programme
We are using our established relationships and
purchasing capabilities through procurement to
mitigate our risks by seeking to reduce the emissions in
our supply chain. The Group’s Ethical Code already sets
out our expectations of suppliers that they should
support a precautionary approach to environmental
challenges, promote greater environmental
responsibility and encourage the development of
environmentally friendly technologies.
We have launched our Supply Chain Sustainability
Programme which outlines our plan for the next ten
years. We recognise this will be a gradual process but by
acting now we can work with suppliers by signalling our
expectations so that we can make the transition to a
pathway consistent with a 1.5°C emissions scenario.
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Direct Line Group Annual Report and Accounts 2021
Our approach means:
– Engaging with our largest emitting suppliers to
encourage them to sign up to SBTi targets or an
equivalent.
– Requesting information on what efforts firms have
made to measure their carbon footprint across
Scopes 1, 2 and 3 and their plans to reduce emissions,
including targets.
– Changing our sourcing approach on appropriate
contracts by introducing a sustainability rating that
will increase over the next ten years, which could
exclude prospective suppliers if they have no plans
to reduce emissions.
Strategic Report 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 will have an impact on our investment
portfolio, through their influence on the value of assets. For example, our portfolio is exposed to physical risks through
our investment in companies that are exposed to disruption from adverse weather events across their supply chain. It is
also exposed to transition risks, where companies that we are invested in are not adapting their strategy to a low-carbon
future. However, the transition to a low-carbon economy also creates significant investment opportunities.
We have committed to ensuring our entire investment portfolio is net zero emissions by 2050. In the table below,
against the inbound and outbound impacts our investment portfolio brings regarding climate risk, we summarise key
climate initiatives started in 2021.
INBOUND
Impact of climate change on the Group
OUTBOUND
The Group’s impact on the environment
– The impacts of physical and transition risks arising in the
wider economy could have an impact on our investment
portfolio, through their influence on the value of assets
and the potential for certain carbon-intensive assets to
become stranded.
– Working to ensure our climate strategy is aligned with
the Race to Zero campaign on climate change, we can
reduce the impact of climate risk on our financial assets.
The transition to a low-carbon economy will require
large scale public and private market investment. This
creates opportunities for institutional investors like
ourselves to ensure capital is directed to help with
the transition.
Key Group action 2021
At the beginning of 2021 we implemented our climate strategy for corporate bond portfolios which represent around
two-thirds of assets held. The initiatives are summarised below:
– We have committed that by 2030 the Group will have reduced by 50% the weighted average carbon intensity of
corporate bond portfolios (from a 2020 base year).
– Given the need for a phaseout of thermal coal power production (since it’s one of the most carbon-intensive forms
of energy generation), bond issuers that generate >5% of revenues from thermal coal activity (mining or power
production) have been divested unless the company is taking positive climate action1.
– We do not invest in companies opening new thermal coal mines or thermal coal power plants.
– Investment within corporate bond portfolios will increasingly be tilted towards companies evidencing they are
taking the transition to a low-carbon economy most seriously. These will be companies that have committed to
setting Science-Based Targets, or those with a 2°C or better carbon performance alignment from the transition
pathway initiative.
– The exclusion of companies with an MSCI Low Carbon Transition Category of “asset stranding”.
The actions detailed in the table above form part of the
ongoing development of the wider ESG framework
underpinning investments. In terms of holding
investments in other companies, those with higher
reported ESG credentials have more sustainable practices
which better align to our investment, environmental and
social goals. As such, a requirement of all investment-grade
corporate bond portfolios is that each portfolio must
maintain a minimum MSCI ESG rating of ‘A’ or better.
Looking through the climate lens, we also have in place
the following current initiatives:
– Within our investment property portfolio all assets must
have an Energy Performance Certificate of ‘D’ or better,
or a plan and funds in place to achieve that level. The
property portfolio also has a tailored set of end 2022
ESG targets covering, inter alia, carbon, energy, water
and waste.
A key objective to enhance further our climate objectives
in 2022 is to submit Science-Based Targets for the
investment portfolio. The setting and validation of
investment targets will form part of our wider application
with the SBTi.
– We actively encourage 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 corporate bond mandate guidelines
now direct the portfolio manager to purchase a green
bond where the risk return characteristics are similar to
those of a comparable non-green bond.
Using our influence
We are committed to using our influence to drive wider
change. For example, we expect all of our investment
managers to be signed up to the UN Principles for
Responsible Investment. We also talk regularly to our
external asset managers to understand (and where
necessary, challenge) how they are using their global
presence, size and leverage to engage and encourage
corporations to tackle climate change.
Note:
1. Companies taking positive climate action are defined as those
that are committed to setting Science-Based Targets or have
a 2°C or better carbon performance alignment from the
transition pathway initiative.
www.directlinegroup.co.uk
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Task Force on Climate-related Financial Disclosures continued
We continue to monitor future developments and reviews
are summarised and distributed to relevant stakeholders,
and, where necessary, responses are co-ordinated and
overseen by members of Second Line of Defence.
Emerging risk process
In addition to the annual risk review process, the Group
has in place an emerging risks process which facilitates
the identification, management and monitoring of new or
developing risks which are difficult to quantify or are
highly uncertain. The Group records emerging risks within
an Emerging Risk Register. An update on emerging risk is
presented to the Risk Management Committee twice a
year, and the Board Risk Committee annually, and is
supplemented by deep dives on selected emerging risks.
Climate change is one of the Group’s most prominent
emerging risks and is owned by the Executive Committee
with regular oversight provided by the Climate Executive
Steering Group, consisting of First Line of Defence subject
matter experts from around the business where the
impact of climate change is the highest, in addition to
Second Line of Defence subject matter experts who
provide oversight and challenge of risk management
activity relating to this.
Each emerging risk is owned by an Executive sponsor to
help ensure alignment of how it is managed to the
strategic objectives and priorities.
Climate risk modelling
The predominant direct physical drivers of risk to the
Group’s capital position are major UK floods and
windstorms. Whilst additional risks such as freeze 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
Management 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 Management
Enterprise Risk Management Strategy
and Framework
The Enterprise Risk Management Strategy and
Framework sets out the Group’s approach to setting risk
strategy and for managing risks to the strategic objectives
and day-to-day operations of the business. Further
information can be found in the Risk management
section of the Strategic report on page 89.
Risk taxonomy
The effects of climate change are wide-ranging, affecting
many risks across the risk universe. For this reason, the
Group reflects the effects of climate change in the drivers
of those risks which are defined in the Group Risk
Taxonomy rather than adding climate change as a
separate risk category. For example, the effects of climate
change would be a driver of meteorology risk, which is a
subset of underwriting risk.
Risk impact
The impacts of all risks, events and action plans are rated
using the Impact Classification Matrix which facilitates a
consistent approach to the sizing and categorisation of
risk across the Group. This includes those risks relating to
climate change, and allows the Group to determine the
relative significance of climate-related risks in relation to
other risks.
Climate-related risk identification process
Annual risk identification process
Each year, the business is required to review all current
and developing risks which could impact on the
achievement of strategic objectives. This process includes
assessing risk drivers, such as those due to climate
change, and their potential impact and likelihood of risk
crystallisation on both an inherent and residual basis, in
addition to identifying the position which aligns with
risk appetite.
Regulatory monitoring
The Group monitors and reviews relevant outputs from
the FCA, the PRA, European supervisory authorities
(including the European Insurance and Occupational
Pensions Authority (“EIOPA”)), the European Commission
and Her Majesty’s Treasury, to consider existing and
emerging regulatory requirements.
During 2021, this included reviewing:
– the PRA’s launch of the 2021 Climate Biennial
Exploratory Scenario on financial risks from climate
change;
– the FCA’s Policy Statement confirming the introduction
of a new comply or explain listing rule requiring
companies with a UK premium listing to include a
statement in their annual report for accounting periods
beginning on or after 1 January 2021 which sets out
whether they have made disclosures consistent with the
recommendations of the TCFD;
– the HM Treasury roadmap ‘A new chapter for financial
services’, which confirms that the UK Government will
implement an integrated Sustainability Disclosures
Requirement which will require businesses to disclose
their risks and opportunities from, and impact on, the
climate and the environment; and
– the minutes of the PRA and FCA’s joint Climate
Financial Risk Forum.
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Direct Line Group Annual Report and Accounts 2021
Strategic Report 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. In addition, we purchase risk
covers to protect against large individual commercial
losses and we make extensive use of Flood Re to cede
high flood risk residential properties.
Metrics and targets
We use a variety of indicators across the different lines of
our business to assess, monitor and manage our climate-
related risks and opportunities.
Underwriting
Weather-related loss impact
The predominant direct physical drivers of catastrophe
weather risk from a capital perspective are major UK
floods and windstorms. The last peak of windstorm activity
was in the late 1980s and early 1990s; the last decade
being particularly benign in comparison, by contrast, flood
has seen more elevated activity.
Catastrophe reinsurance is purchased annually to protect
against event losses greater than £150 million and
additional reinsurance cover protects against large
individual commercial losses (see page 43). Use of the
Flood Re scheme mitigates against the highest individual
residential flood risks.
The Group uses sophisticated modelling techniques to
determine the expected losses from severe weather
events and uses these to set a weather load for budgeting
purposes. The following graph shows the impact of severe
weather events relative to the weather load; the trend is
downwards reflecting recent benign activity, although
there is significant variability. The 2018 peak was driven by
the ‘Beast from the East’ freeze event whilst the 2015 peak
was a result of a number of weather events in December
which caused severe flooding across the UK.
Severe weather losses
(actual % of expected loss)
%
160
140
120
100
80
60
40
20
0
2013
2014 2015
2016
2017
2018 2019
2020
2021
Actual weather
Expected
Impact of severe weather on combined operating
ratio (pt)
pt
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
2013
2014 2015
2016
2017
2018 2019
2020
2021
Severe weather impacts
Expected
These results can be translated to impacts on the Group’s
combined operating ratio1; the relatively benign 2019 year
for example improved the Group’s combined operating
ratio by nearly two percentage points against plan.
The frequency and severity of extreme weather events will
be affected by climate change, which in turn will affect our
view of risk, how we price severe weather risk, and the
type and level of reinsurance we purchase to protect our
balance sheet.
Home
Key risk indicators are produced by Underwriting and
reviewed quarterly through relevant business forums. The
key climate change-related activities are flood, subsidence
and weather incidents. For flood and subsidence perils, we
monitor the Group’s market share for risks deemed to be
in the high- or very high-risk segments. We also monitor
and review the proportion of policies ceded to Flood Re.
Each peril is monitored against set tolerances, with
movements in amber or red ratings generating
investigation and action as required. We maintain a view
of trends and look to take action where a trend is likely to
result in a breach of tolerance.
Note:
1. See glossary on page 248 for definition.
www.directlinegroup.co.uk
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Task Force on Climate-related Financial Disclosures continued
Subsidence
Subsidence as a peril is a relatively low overall cost,
however a subsidence event can be very costly. We
monitor this risk via our subsidence market share by geo
risk classification. This risk classification aims to give a
market view of geographic risk of having a subsidence
claim. This enables us to understand the proportion of
subsidence risk that we write compared to our estimate of
the total in the market.
The classifications take the geographic factors in the
subsidence buildings models and not the individual
property estimated sums insured.
Flooding
Governments have been working with insurers since 2000
to help make flood risk insurance more affordable. In 2016,
a previous solution was replaced with a longer-term plan,
called Flood Re. Every insurer that offers home insurance
in the UK, the Group included, must pay into the Flood Re
scheme. This levy has raised £180 million every year which
is used to cover the flood risks in home insurance policies.
To ensure the Group and its customers benefit from the
levy and guard against the highest of flood risks, we
monitor the volume and proportion of policies we are
ceding to Flood Re. Properties are eligible to be ceded to
Flood Re when they meet certain criteria. Since early 2019,
the cost to cede policies to Flood Re has dropped, driving
an increase in ceded volumes.
Motor
The Group’s motor market is diversified throughout the
UK, and weather-related claims make up a very small part
of total motor claims. As such we do not currently consider
there to be any valuable climate-related risk indicators
that can be tracked for this portfolio.
In order to track the transition towards electric and
alternatively fuelled vehicles (such as hybrids), we monitor
both the number and proportion of policies we underwrite
for these types of vehicles as well as electric vehicle and
alternatively fuelled vehicle registration data from The
Society of Motor Manufacturers and Traders.
Operational
Our performance to date
We are proud of the progress we have made on reducing
emissions and have a record of setting targets to hold the
business to account. In 2013 we set two Group-wide
environmental targets for our Scope 1 and 2 GHG
emissions which we have tracked, reported against and
successfully met in 2020. The two targets we set were:
– a 57% reduction in emissions (Scope 1 and 2) on a
like-for-like basis by the end of 2020 against a 2013
baseline. In 2021, we saw a 61% reduction in energy-
related emissions, which takes into account the impact
of Covid-19 where mixed model working measures
altered our energy usage; 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 delivered a 45% reduction in energy
consumption, which takes into account the continued
impact of Covid-19.
Overall, in 2021, we saw an increase in emissions under our
direct control compared to 2020, which is explained by an
increase in activity in vehicles being repaired in our Auto
Services business as a result of Covid-19 restrictions being
eased during the year. We have also for the first time this
year calculated and included our homeworking emissions
under the Scope 3 ’Employee Commuting’ category in
recognition of more colleagues working from home.
Holding ourselves to account in the future: Setting
Science-Based Targets across Scopes 1, 2 and 3
We are pleased with the success we have made in
reducing our Scope 1 and 2 emissions having met the two
targets we set as planned. We now want to go further
because we believe transparency can guide the business
in making targeted interventions as part of our carbon
reduction strategy:
– We continue 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, as well as our supply chain
emissions. See page 72 for our 2021 emissions data.
– Throughout 2021, we continued to place an increasing
focus on calculating and validating our emissions data
across all areas of the business, including our
Operations, Supply Chain and our Investments which
are embedding plans to reduce carbon footprint.
We are undertaking this activity because we want to
enhance our carbon reduction strategy. To go further we
are committed to setting Science-Based Targets for Scope
1, 2 and 3 emissions via the SBTi and this year we joined
the Race to Zero because we recognise our role in taking a
leadership position as we reduce emissions. It means we
will set targets in line with a 1.5°C emissions scenario
where we are aiming to achieve net zero emissions by
2050 at the latest. We will submit our science-based
reduction targets for validation by the SBTi in 2022.
Investments
More than 100 financial institutions have publicly
committed to set emissions reduction targets through the
SBTi. In 2018, the SBTi launched a project to help financial
institutions align their lending and investment portfolios
with the ambitions of the Race to Zero campaign. The
project audience includes universal banks, pension funds,
insurance companies and public financial institutions.
Our long-term goal is for our entire investment portfolio to
be net zero emissions by 2050, in line with the aims of the
Race to Zero campaign. To support this aim we have an
interim target of a 50% reduction in weighted average
carbon emissions intensity by 2030 (from a 2020 base
year) within our corporate bonds portfolio, the largest
asset class within the investment portfolio.
Carbon intensity is the GHG emissions intensity per
$1 million of sales. Normalising by sales allows the investor
to compare carbon efficiency of different-sized firms
within the same industry and has become a standard
metric used in the investment industry.
We will continue to progress towards setting Science-
Based Targets for the investment portfolio in line with
SBTi’s guidance and plan to submit these targets for
validation to the initiative in 2022.
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Direct Line Group Annual Report and Accounts 2021
Strategic Report
Future Group Activity
We want to continue gaining a deeper understanding of how climate change might affect the business, and below
we outline the future Group activity to support this.
Governance
We plan to maintain strong Board oversight, ensuring the Planet pillar, as part of our sustainability
strategy, continues to take a lead. We will also continue setting the Board’s strategic debates in a
climate change context, which will be supported by periodic debates on climate-related risks
and opportunities.
Strategy
Risk
management
Metrics &
Targets
In 2022 we will also incorporate ESG-related metrics into executive management
remuneration plans (see page 155).
We intend to build further understanding around how we systematically consider climate-related
issues from a risk and opportunity perspective across business areas and in our strategic decision
making; a key part of how we can achieve this includes driving forward the Strategic
Management Actions set in 2021 that business areas are already prioritising (see page 71).
Alongside these actions, we also plan to enhance central scenario planning and testing by
developing climate-related scenarios specific to our own risk profile. We are also considering how
these scenarios could be incorporated into the development of the Group’s business plan.
We will also be taking part in a second round of the Bank of England’s CBES exercise in Q1 2022.
This is expected to further explore participants’ strategic responses to the climate scenarios
published as part of the first round and the associated implications for their business models.
During 2022, the Climate Executive Steering Group will maintain its oversight into the Group's
business development and strategic processes to make sure climate is given appropriate
consideration in long-term strategy and planning. It will also continue to consider the risk
management challenges presented by climate change including oversight of the modelling
of climate change risk and financial risk related to underwriting and investments.
We will continue our robust approach towards the management of physical risk and intend
examining in more depth inbound and outbound impacts in order to enhance understanding of
transition risks. This includes through the use of central scenario planning as discussed above. 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.
In 2022, we plan to submit our Science-Based Targets to the SBTi for their independent validation.
The structured and measurable nature of the emission reduction targets will mean that, once
validated, they will formulate the path we must take to ensure we meet our commitment of
achieving net zero emissions by 2050 at the latest, which is in line with a 1.5°C emissions scenario.
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
The proportion of GHG emissions and energy consumed relating to the UK and
offshore area1
Methodology used to calculate emissions and energy consumption
At least one intensity metric in relation to emissions
Description of energy efficiency actions taken
Pages
70 and 72
70 and 72
70
70
71 and 72
72
73
75 and 86
(‘operational’ section)
Note:
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.
www.directlinegroup.co.uk
87
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.
Environment
Journey to net zero
Recycling and waste management
Science-Based Target initiatives
Scope 1, Scope 2 & Scope 3 emissions
Sustainable Development Goals
Sustainability report
TCFD report
Pages
12, 71
70, 82
71
72
56
54
76
Anti-bribery
and anti-corruption
Code of Business Conduct
Ethical Code for Suppliers
Fraud and money laundering
Tax contribution
Whistleblowing
Pages
20, 106
82, 110
121, 125
44, 67
125
Employees
Diversity and inclusion
Employee share incentive scheme
Flexible working policy
Gender pay gap
FTSE Women Leaders Review
Health and safety
Pages
12, 61, 115, 128
161, 232
64, 108
63
63
64, 69
Parker Review
Performance, pay and recognition
Training and development
Workforce engagement
114, 128
63, 65, 134
59, 114
31, 65, 111
Business model
Customer complaints
Net Promoter Score
Pricing Practices Review
Prompt payment code
Risk management
Talent pipeline
UK Corporate Governance Code
Values, strategy
and corporate culture
Pages
31
31, 58
27, 28, 94, 108
110
89
18, 114
96, 104
23, 62, 105
Social and
community matters
Our Community Fund
Social mobility action plan
Volunteering
Pages
68
67
69
Human rights
Living wage
Mental wellbeing
Modern Slavery Statement
Pages
65, 135
64, 68
65, 110, 131
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Direct Line Group Annual Report and Accounts 2021
Strategic Report Risk management
Risk management
Our aim is to make risk management simple, well understood and embedded. Risk will
provide oversight which is pro-active, proportionate and commercial to help the business
make good risk-based decisions and to move quickly whilst understanding the risks.
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 risks arising from the
strategic plan.
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 rest
of 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 has led significant cultural change to
drive ownership of risks across the Group. The Group has a
strong risk culture, and a mature and embedded
Enterprise Risk Management 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 112 for governance structure
Risk appetite
Our risk appetite statements define the opportunities and
associated 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 Enterprise Risk Management Framework 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. The risk
management framework is designed to manage the
Group’s risk proactively and to enable dynamic risk-based
decision making.
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 pages 84 to
85 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.
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89
Risk management continued
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.
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.
Risky Road Campaign
Having a good risk culture is critical to the organisation,
and we use the Risk Communications Plan to influence
a positive risk culture by driving a consistent
understanding of risk management and the concept
of risk ownership throughout the Group.
Our flagship risk campaign, Risky Road, built on the
success of our previous campaigns by exploring
risk-based decision making in a novel way, while
continuing to remind our colleagues about the
important part they play in managing risk.
We created an online computer game that challenged
colleagues to guide their Risk Hero though myriad
mazes and respond to risk-based questions for a
chance to earn points and compete via league tables
with people right across the business.
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Direct Line Group Annual Report and Accounts 2021
Three strategic risk objectives
1. Maintain capital adequacy
The Group seeks to hold capital resources in the range
of 140%-180% of the partial internal model solvency
capital requirement.
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.
During the year, Risk has worked collaboratively across the
Group to support the embedding of the new ways of
working, including working closely with HR, the Agile
Centre of Expertise and Group Audit. This activity included
ensuring the Enterprise Risk Management Framework
remained fit for purpose and efficient, whilst still enabling
sufficient Board and Senior Manager oversight.
We used a number of communications channels to
promote the game and risk management, including
a launch video from the Chief Risk Officer, supporting
intranet articles, digital advertising and interactive
social media posts on Yammer.
The campaign reached a great number of staff across
the Group, garnering over 7,000 click throughs
and online interactions, and more than 1,500
individual users.
Strategic Report 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
Relative size of risk
Trend over next 12
months – increasing
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.
Market Risk
Relative size of risk
Market risk
Trend over next 12
months – stable
The risk of loss
resulting from
fluctuations in the
level and in the
volatility of market
prices of assets,
liabilities and financial
instruments.
Operational
Risk
Relative size of risk
Operational risk
Trend over next 12
months – stable
The risk of loss due to
inadequate or failed
internal processes or
systems, human error
or from external
events.
The key risks within
this category are
Cyber, Technology &
Infrastructure,
Operational
Resilience, Change,
People, Information
Management,
Outsourcing,
Partnerships and
Fraud
Key drivers of the outlook for insurance
risk across our strategic plan include
reserve, underwriting, distribution, pricing
and reinsurance risks. Issues relating to
Covid-19, the Pricing Practices Review and
claims inflation risk have been a key area
of focus for the Group in 2021 and the
main driver of the increasing trend in
insurance risk.
Claims trends have been significantly
impacted by Covid-19, leading to
uncertainty in claims reserving and pricing.
In addition, in 2022 and beyond there is
a risk of higher than expected claims
inflation driven by customer behaviour,
a rebound in global growth and supply
chain disruption from the UK's new
trading relationships.
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.
Global geopolitical, economic and other
uncertainty 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.
Operational risks can arise within all areas
of the business and can become manifest
as a result of inadequate or failed internal
processes or systems, human error or
because of external events.
Our approach is to proactively manage our
operational risks to mitigate potential
customer harm, regulatory or legal
censure, and financial or reputational
impacts. The stable trend in operational
risk is driven mainly by the progress
demonstrated by the business in delivering
key strategic technology improvements
that strengthen resilience and have
enabled the Group’s transition to a more
flexible operating model, utilising both
virtual and office-based working solutions.
We have in place robust operational
processes and systems, including
prevention and detection measures, that
seek to ensure the Group is well placed to
absorb and/or adapt to internal or external
events that have the potential to impact
our customer operations and the wider
business more generally.
Uncertainty following the implementation
of the FCA Pricing Practices Regulations
will continue to have financial impacts on
the market in 2022.
We have used scenario testing to
understand the potential financial impacts
of these risks and continue to monitor
these risks closely.
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 and Motor.
To address this, we have an investment
strategy which is approved by the Board
and includes limiting exposure to
individual asset classes and the amount of
illiquid investments we hold. We also use
risk reduction techniques such as hedging
foreign currency exposures with forward
contracts.
With large numbers of staff working mainly
from home, significant progress has been
made to improve the performance and
ability of our IT systems, focusing on
delivering system stability and optimising
capability.
Streamlining change implementation and
ensuring we drive effective prioritisation in
our investment decisions has remained a
key area of management focus, to support
the Group in achieving its strategic aims,
whilst also actively strengthening its
controls to further mitigate impacts from
potential risk events.
Finally, the Cyber threat landscape has
continued to remain volatile globally,
including the increase in ransomware
attacks, and we have introduced new
controls, strengthened existing ones,
and enhanced our suite of automated
monitoring and reporting, to enable us
to respond to malicious and unintended
threats from both internal and external
entities.
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91
Risk management continued
Principal risks and uncertainties continued
Principal risk
Description
Risk commentary
Regulatory &
Compliance Risk
Relative size of risk
Trend over next 12
months – 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 maintain a constructive and open
relationship with our regulators and
have a strong culture of delivering on
our commitments to our customers.
Pricing practices within the general
insurance market has remained a key
area of focus for the FCA and for the
Group. We have devoted a lot of
attention and resource with the
intention of enabling the Group to
meet the FCA’s Pricing Practices
Review requirements within the
challenging deadlines prescribed by
the FCA, and to be in a position to
deliver the intended customer
outcomes. Focus has also been given to
the ability of the Group to trade
effectively post the implementation of
the FCA’s Pricing Practices Review
requirements.
For product lines which sit outside of
the FCA’s pricing remedies, the Group
continues to operate to a set of
conduct pricing principles which
enable the fair pricing of business
across our book and the provision of
fair outcomes for our customers.
We have maintained regular and open
dialogue with both the FCA and PRA
on our responses to climate change
and the Covid-19 pandemic.
We have also engaged with HM
Treasury and participated in the PRA’s
Quantitative Impact Study on the UK
review of the Solvency II framework.
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..
Credit Risk
Relative size of risk
Credit
Trend over next 12
months – 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 material counterparty
and actively monitor credit exposures.
In addition, we only purchase
reinsurance from reinsurers with at
least 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
Relative size of risk
Credit
Trend over next 12
months – stable
The risk of direct or indirect
adverse effects resulting
from strategies not being
optimally chosen,
implemented or adapted
to changing conditions.
Strategic risk is influenced by internal
and external developments such as the
Covid-19 pandemic, the UK's new
trading relationships and FCA’s Pricing
Practice Review. In addition, the
adoption of agile ways of working
allows 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.
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Direct Line Group Annual Report and Accounts 2021
Strategic Report Potential effects of Covid-19 and the UK's new
international trading relationships on inflation
The UK's new international trading relationships may have
had an impact on claims inflation and may still do so,
although the Covid-19 pandemic continues to mask the
effects of these relationships. Certain risks related to Brexit
could still occur or be exacerbated and we continue to be
alert to possible developments.
Ethical use of data
The insurance industry is gathering and processing
greater volumes of data than ever before. The adoption of
artificial intelligence and machine learning introduces the
potential to create unfair outcomes if data is not
processed responsibly. The use of technology to automate
decisions could magnify the impact of problems caused
by inaccurate or biased data.
The Group has developed a Data Ethics Framework which
introduces a set of principles to drive the ethical use of
data and a new governance model to ensure appropriate
visibility and escalation of ethical concerns. Furthermore,
the Group has an established Data Ethics Steering Group
which gathers internal and external views on data ethics,
reviews business propositions on data use and helps to
drive the embedding of the data ethics framework across
the Group.
Global financial instability
Global financial instability can occur through unexpected
or unpredictable external events that affect fundamental
macroeconomic variables, such as GDP growth,
consumption, inflation or unemployment. As markets
worldwide continue to recover from the impact of
Covid-19, there is a risk that global financial instability
could be triggered and/or worsened by numerous external
events, including natural disasters, war, terrorism, natural
resource or fuel shortages and global technological
failures. Should the Russia-Ukraine situation continue to
deteriorate, there is a likelihood that the impact on global
financial instability will increase.
The principal impacts of global financial instability would
likely be felt on the Group’s investment portfolio, through
changes in credit spreads and sovereign yields.
Depending on the cause, there may also be operational
and insurance risk impacts to consider.
The Group’s investment portfolio is already positioned
relatively defensively, reducing the potential exposure to
global financial instability. However, if global financial
instability were to materialise, further steps could be
taken, such as shifting the portfolio further towards
‘defensive’ sectors, pausing reinvestment or increasing the
allocation to cash and sovereign debt.
Emerging risks
Emerging risks are defined by the Group as newly
developing or changing threats or opportunities, external
to the Group, that are subject to a high degree of
uncertainty but have the potential to materially impact
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
emerging risks; and
– mitigate the impact of emerging risks that could impact
the delivery of the strategic plan.
The Group records emerging risks within an Emerging
Risk Register. An update on emerging risks is presented to
the Board Risk Committee annually and is supplemented
by deep dives on selected emerging risks.
The most notable emerging risks currently being
monitored via the emerging risks process are outlined
below:
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 risk can be divided into physical
and transition risks. Both of these categories can manifest
themselves through a range of existing financial and
non-financial risks, including insurance, market,
operational, strategic and reputational risks.
In 2021, we participated in the Bank of England’s Climate
Biennial Exploratory Scenario (‘CBES’), which was
designed to test the resilience of the financial system to
the physical and transition risks from climate change. The
CBES covered both quantitative scenario analysis,
spanning a 30-year time horizon, and qualitative
assessment of management actions and the sustainability
of different business models.
We continue to monitor these risks closely and to develop
our climate change modelling capability. Further details
on our risk management approach to climate change are
included on pages 84 to 85, in our TCFD report.
www.directlinegroup.co.uk
93
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 95, 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 91 to 92. Note 3 to the consolidated financial
statements starts on page 192 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
(“the 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. By its nature, a strategic plan
comprises a series of underlying assumptions which can
be uncertain in nature and rely on judgement. Each year,
the Group’s Risk Function assesses the Plan and provides
the ORSA to the Board which supports the Board in
concluding on the Group’s viability.
When reviewing the 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 Plan. The Board has
assessed the principal risks of the Group over the duration
of the planning cycle. All of the Group’s principal risks, as
outlined on pages 91 to 92 were reviewed as part of the
preparation of the ORSA and the outlook of those risks
over the period covered by the Plan was taken into
account (i.e. whether the outlook for each risk was
increasing, broadly static or decreasing over the period of
the Plan). The Plan did not introduce any new material
risks other than those already contained within the
Group’s Material Risk Register. This review also included
reviews of the Group’s solvency and liquidity position, up
to 31 December 2023 with a further two years of indicative
planning from 2024 to 2025. The first year following
approval of the Plan has greater certainty, so it was used
to set detailed budgets across the Group. Outcomes for
the subsequent years in the Plan are less certain. However,
the Plan provides a robust planning tool for strategic
decisions. The Board recognises that, in a Strategic Plan,
uncertainty increases over time and, therefore, future
outcomes cannot be guaranteed or accurately predicted.
As the Plan and the ORSA are used for planning over a
timeframe of four years, to 31 December 2025, this has
been selected as the most suitable period for the Board to
review the Group’s viability.
The Group’s Risk Function has carried out an assessment
of the risks to the Plan and the dependencies for the
success of the Plan. The key scenarios considered were in
relation to the impact of the FCA’s Pricing Practices
Review (“PPR”) on customer behaviour, the legislative and
regulatory environment and the likely time period of
continued Covid-19 related effects including the impact on
the underwriting cycle, motor claims frequency, travel and
supply chain disruption and claims inflation. The key
judgements and assumptions applied were as follows:
PPR: the Group’s Plan includes a scenario for the impact
of PPR from 2022 onwards based on assumptions made
on how new business and renewal prices equalise and
new business premium inflation in the Motor and Home
markets. The Group has made a judgement on the impact
of PPR, whilst acknowledging that there are inherent
limitations, such as limited historical data on which to
base assumptions. Stress testing has been performed on
the assumptions, included on the Plan, with a focus on
premium inflation being lower than that assumed.
Legislative and regulatory environment: the Plan is
consistent with the current Ogden discount rate of minus
0.25%. The table on page 42 in the Finance review
quantifies the impact on the Group of a change in the
Ogden discount rate of plus or minus 1.0 percentage
points. Other scenarios considered included an increase in
levies and tax rates.
Covid-19 pandemic: in addition to the scenarios for the
implementation of PPR, the Plan has been stress tested
for market premium inflation assumptions, following
deflation during the Covid-19 pandemic, as well as the
impact of a deep UK recession triggered by the end of
furlough and a spike in unemployment leading to a
reduction in the market for certain insurance products.
Although there have been a number of significant
developments in 2021, such as the success of the
vaccination programme, these scenarios remain relevant
in quantifying severe but plausible business impacts. The
stress tests have focused on scenarios where premium
inflation is lower than the Plan. In addition, there is
uncertainty in future claims costs. The risks associated
with Covid-19 include frequency of Motor claims, travel
disruption, increased demand for building supplies and
labour, and reduced supply as a result of increased global
competition for products or production shortages. The
scenarios applied have focused on claims inflation and
claims frequency.
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Direct Line Group Annual Report and Accounts 2021
Strategic Report The scenarios have been used to challenge the Group’s
contingent management actions, which are a series of
actions designed to restore the solvency ratio to within
our stated risk appetite range after suffering an event
which results in a solvency ratio that is lower than our risk
appetite range. These actions include short-term actions,
such as restriction of dividends or other capital
distributions, which can return or preserve capital surplus
quickly at certain times of the year, to longer-term actions,
such as reducing reinsurance retention levels or reducing
marketing or investment spend.
Climate change: during the year, the Group undertook a
number of stress and scenario tests, designed to reflect
the potential impact of short- and long-term climate
change risk on the Group’s balance sheet and solvency
position. The tests are discussed in more detail on pages
79 to 80. The overall conclusion of these tests was that
there could be breaches in the Group’s risk appetite,
however a combination of contingent management
actions could be deployed in each scenario to address the
risks and allow the business to recover to above risk
appetite.
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 2025.
The capital and solvency requirements of the Group have
been subject to stress tests over the duration of the Plan
using the above inputs. 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 (2021 to 2025).
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 U K
Insurance Limited, the Group’s principal underwriter, i.e. a
reduction of own funds to below the solvency capital
requirement. The purpose of this reverse stress test was to
assess the coverage and scope of the internal economic
capital model and there were no findings that invalidate
the internal model.
The results of the key sensitivities that have been applied
to the Group’s Solvency II balance sheet at 31 December
2021 in respect of the solvency capital ratio are shown on
page 40, and applied to profit before tax in respect of
claims reserves on page 42 of the Finance review.
Statement of the Directors in respect
of the Strategic report
The Board reviewed and approved the Strategic report
on pages 1 to 95 on 7 March 2022.
By order of the Board
Penny James
Chief Executive Officer
7 March 2022
www.directlinegroup.co.uk
95
Chair’s introduction
Our Governance
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 2021. This report sets out how we have
applied the principles of the UK Corporate Governance
Code (the “Code”) throughout the year. It provides
information on changes to your Board of Directors
and information about progress we have made in
our corporate governance agenda, particularly in
the areas of diversity and inclusion, stakeholder
engagement and the environment.
Board changes and effectiveness
As I explained in my statement on page 18, during the
year, Tim Harris decided to retire as an Executive Director
and Chief Financial Officer (“CFO”). Neil Manser assumed
the role of Acting CFO in January 2021, when Tim first took
leave of absence, and in May, when Tim stood down from
the Board, the Board appointed Neil to the position of CFO
on a permanent basis, regarding him to be an excellent
candidate for the reasons given in my statement and in
the Nomination and Governance Committee Report.
As planned, Jane Hanson stepped down as an
independent Non-Executive Director of the Board at our
AGM in May 2021, having served a nine-year term. As Jane
was Chair of our Board Risk Committee, we took the
opportunity to refresh our Committee Chairships. Mark
Gregory, independent Non-Executive Director, was
appointed Chair of the Board Risk Committee, Richard
Ward, Senior Independent Director, took over as Chair of
the Remuneration Committee and Fiona McBain,
independent Non-Executive Director became Chair of the
Investment Committee. I believe these changes support
our aim of ensuring fresh perspectives and challenge at
our Committee meetings.
In November 2021, we welcomed Tracy Corrigan to the
Board as an independent Non-Executive Director. The
Board benefits from Tracy’s experience in the media
industry, spanning financial journalism, digital media and
corporate strategy. More information on Tracy’s
recruitment can be found on page 128.
As reported last year, in January 2021, Adrian Joseph was
appointed as an independent Non-Executive Director.
Adrian has brought insight and challenge to our Board
and Sustainability Committee discussions, as we benefit
from his expertise in data analytics and Artificial
Intelligence and his passion for promoting diversity and
inclusion.
This year, the effectiveness of the Board was assessed
through an internal evaluation that I conducted with
assistance from our Company Secretary. On page 115 we
have set out progress against the actions arising from last
year’s evaluation and new actions arising from this year’s
review. Key focus areas for 2022 include the alignment of
the Board’s rolling agenda with our prioritised Objectives
and Key Results, seeking further opportunities for the
Board to engage with the wider management team and
workforce and the fresh medium- to long-term approach
to Board and executive succession planning to be led by
the Nomination and Governance Committee.
Stakeholders
Engagement with our stakeholders is one of the key ways
we monitor our culture and ensure that their needs and
priorities are taken into consideration when making our
decisions. I held a number of meetings with some of our
institutional shareholders to listen to their priorities and to
discuss topical themes, including how we are already
benefiting from investment in technology transformation
Danuta Gray
Chair of the Board
96
Direct Line Group Annual Report and Accounts 2021
Governance and the resulting enhanced capability, and how we were
preparing to comply with, and trade under, the FCA’s new
Pricing Practices Review regulations. Details about how
the Board has engaged with all stakeholders during 2021
can be found on pages 109 and 110.
“Engagement with our stakeholders
is one of the key ways we monitor
our culture and ensure that their
needs and priorities are taken
into consideration when making
our decisions.”
Audit
The introduction of accounting standard IFRS 17
represents a significant change to insurance accounting
and our Audit Committee has been highly engaged in
overseeing the implementation of this standard, receiving
both regular updates and deep dive sessions to ensure
that they have the necessary information and insight to
support this important change. During the year the Audit
Committee also oversaw the launch of an external audit
tender process that will see us appointing a new auditor
for the financial year commencing on 1 January 2024.
More information about these activities can be found on
page 121.
Sustainability
Sustainability is an integral part of our strategy and
underpins much of our activity at Board level. Our
Sustainability Committee oversees activity under the five
pillars of our sustainability strategy and during the year
had the important job of monitoring our progress towards
achieving Science-Based Target validation status. Our
Investment Committee has been highly focused on
monitoring the greenhouse gas emissions intensity of our
investment portfolios and considering how we can align
investment activity with the transition to a low-carbon
economy. Our Board Risk Committee reviewed our
submission to the Bank of England’s Climate Biennial
Exploratory Scenario and our Climate Risk Management
report which sets out management actions for managing
climate risk. Our Audit Committee reviewed our Task
Force on Climate-related Financial Disclosures report and,
as I mentioned above, our Remuneration Committee
introduced the use of a climate change-related metric for
our LTIP. More information on all of these activities can be
found in the respective Committee report pages.
Annual General Meeting
Our 2022 AGM will be held on Tuesday, 10 May 2022
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
Board members attended a number of Employee
Representative Board meetings at which colleagues had
the opportunity to share their thoughts on how we are
doing as a business and what we can do better. I continue
to be impressed by the level of insight and vision brought
to these sessions by our colleagues, which include
discussion on key strategic initiatives and how change
programmes are affecting our people. Matters discussed
at these sessions are fed back to the wider Board and help
inform discussion and decision making. See pages 109 and
111 for more information.
Diversity
As you will have seen in the People section on page 61,
diversity and inclusion remains high on our agenda and
we have made some positive progress on this during the
year, including the publication of our first Black Inclusion
report and committing to voluntarily disclose our ethnicity
pay gap from 2022. Whilst we are pleased to have met
some key industry targets in respect of Board, Executive
Committee and senior leadership diversity, particularly in
respect of gender, we know we still have a lot to do to
achieve similar results in our ethnic diversity ambition.
Through our continued succession planning and focus on
creating a strong and diverse internal pipeline, we aim to
ensure diverse Board and senior management
representation both now and in the future. More
information on the Board’s approach to diversity can be
found on page 114.
Remuneration
2021 was the second year of operating under the
Remuneration Policy that shareholders approved at our
2020 AGM. As you will see in our Remuneration Report on
pages 134 to 159, the outcomes of our Long Term Incentive
Plan (“LTIP”) and Annual Incentive Plan (“AIP”) reflect
strong profitability and good progress on key strategic
metrics in line with our pay for performance principles.
Our AIP includes non-financial metrics which measure
and reward executives and colleagues for progress in
areas that reflect the culture of our business, including
customer satisfaction, customer complaints, employee
engagement and workforce diversity and inclusion, as well
as key strategic objectives relating to growth,
competitiveness and technology improvements. For 2022
onward, the Committee approved the introduction of an
emissions-related metric for our LTIP, reflecting our
commitment to embedding sustainability into our
long-term thinking.
www.directlinegroup.co.uk
97
Board of Directors
Danuta Gray
Chair of the Board
Appointed
Penny James
Chief Executive Officer
Appointed
Independent Non-Executive Director in
February 2017
Chair of the Board since August 2020
Executive Director in November 2017
Chief Financial Officer in March 2018
Chief Executive Officer since May 2019
Committees
Committees
Neil Manser
Chief Financial Officer
Appointed
May 2021
Committees
Key Skills and Experience:
– Extensive experience leading and
Key Skills and Experience:
– Deep knowledge of the financial services
Key Skills and Experience
– Strong background in financial and
strategic leadership roles.
– Extensive corporate finance and capital
and insurance sector.
markets knowledge.
– Deep understanding of the operation
of strategy and culture in the insurance
industry.
Neil was appointed as CFO in May 2021.
Since he joined the Group in 2011, Neil has
held several roles in Finance and Strategy
from Director of Investor Relations, to
Managing Director of NIG and Chief
Strategy Officer. Neil was instrumental in
the Group’s successful IPO in 2012. He
brings extensive industry and capital
markets experience to the Board having
previously worked at Brit Insurance, Merrill
Lynch and Fox-Pitt, Kelton. Neil is an
Associate of the Institute of Chartered
Accountants in England and Wales.
External Appointments
– None.
– Strong leadership skills with a focus on
cultural and stakeholder alignment.
– Strategic mindset with proven track
record in business transformation.
Penny has extensive financial services
experience, having been Group Chief Risk
Officer and Executive Director at Prudential
plc, where she was responsible for leading
risk oversight globally. Before this, Penny
was Director of Group Finance at
Prudential. She had previously been Group
CFO at Omega Insurance Holdings Limited
and CFO, UK General Insurance, at Zurich
Financial Services. Penny was also a NED
of Admiral Group plc from January 2015 to
September 2017.
Penny is an Associate of the Institute of
Chartered Accountants in England and
Wales.
External Appointments
– Member of the Association of British
Insurers Board.
– Chair of the FCA Practitioner Panel.
– Senior Independent Director and
member of the Risk and Nomination
Committees of Hargreaves Lansdown plc.
transforming large, consumer-focused
businesses.
– Deep understanding of governance and
remuneration requirements affecting
listed companies gained from previous
Chair roles.
– Expertise in sales, marketing, and
technology.
Danuta was Chair of Telefónica in Ireland
until 2012 having previously been its Chief
Executive between 2001 and 2010. During
her tenure as Chief Executive she increased
the customer base from just under 1 million
to 1.7 million. Earlier in her career, Danuta
held a variety of senior positions within
the BT Group between 1984 and 2001.
Additionally, Danuta has been Senior
Independent Director of the Aldermore
Group, Non-Executive Chair of St Modwen
Properties and a Non-Executive member
of the Ministry of Defence Board. She was
also NED and Chair of the Remuneration
Committee at both PageGroup plc and
Old Mutual plc until 2018.
External Appointments
– Chair of the Board of North SP Limited.
– Non-Executive Director and Nomination
and Remuneration committee member
of Burberry Group plc.
Key for Committee membership
Audit Committee
Board Risk Committee
Investment Committee
Nomination and Governance Committee
Remuneration Committee
Sustainability Committee
Chair of the Committee
98
Direct Line Group Annual Report and Accounts 2021
Governance Tracy Corrigan
Independent Non-Executive Director
Mark Gregory
Independent Non-Executive Director
Sebastian James
Independent Non-Executive Director
Appointed
November 2021
Committees
Appointed
March 2018
Committees
Appointed
August 2014
Committees
Key Skills and Experience
– Deep understanding of the development
Key Skills and Experience
– Extensive experience in both life and
of corporate and digital strategy.
– International experience with broad
perspective of business and capital
markets.
– Expertise in digital transformation,
customer analytics and stakeholder
communications.
Tracy’s professional background spans
financial journalism, digital media and
corporate strategy in the media industry.
Most recently Tracy was Chief Strategy
Officer for Dow Jones where she oversaw
the digital transformation of the business
and was responsible for global strategy,
customer insight and commercial policy.
Earlier in her career, Tracy was Editor in
Chief of The Wall Street Journal Europe and
Digital Editor of The Wall Street Journal.
She also held various positions at the
Financial Times, including Editor of FT.com
and Editor of the Lex Column.
External Appointments
– None.
general insurance.
– Deep understanding of capital markets.
– Strategically orientated with a detailed
understanding of the retail sector.
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 & Wales.
Key Skills and Experience
– Extensive experience in retail and
consumer practice with large retail
groups.
– Strong track record of business
transformation and change.
– Detailed understanding of UK consumer
markets, products and brands.
Sebastian is Managing Director of Boots
UK, a subsidiary of Walgreens Boots
Alliance, Inc. Until 2018, he 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, Sebastian was CEO of Synergy
Insurance Services Limited, a private equity
backed insurance company, and was
previously Strategy Director at Mothercare
plc. He began his career at The Boston
Consulting Group.
External Appointments
– Non-Executive Director and Chair of
External Appointments
– Managing Director of Boots UK, a
Remuneration Committee of Entain plc.
subsidiary of Walgreens Boots Alliance, Inc.
– Senior Vice President of Walgreen Boots
Alliance, Inc.
– Trustee of the Museum of Modern Art
Limited.
www.directlinegroup.co.uk
99
Board of Directors continued
Adrian Joseph OBE
Independent Non-Executive Director
Fiona McBain
Independent Non-Executive Director
Gregor Stewart
Independent Non-Executive Director
Appointed
January 2021
Committees
Appointed
September 2018
Committees
Appointed
March 2018
Committees
Key Skills and Experience
– Leading expertise in digital, data science
Key Skills and Experience
– Extensive global experience in retail
and analytics.
financial services.
– Track record of using data and AI to drive
– Strong background in M&A and
business transformation.
– Recognised Diversity and Inclusion
leader and a passionate advocate on
this topic.
developing strategic partnerships.
– Expertise in audit having worked as an
auditor and served as Audit Committee
Chair of other listed companies.
Adrian is Managing Director, Group Data
and Artificial Intelligence at BT Group.
Before this he held senior roles at EY and
Google and has significant industry and
consultancy experience. He was a NED at
the Home Office (2016-2020) where he sat
on the Data Board advising on data
science, digital transformation, and
diversity and inclusion. A former Chair of
the Race Equality Board, Adrian was
appointed to the main Board of Business in
the Community in 2014 and continues to
act as an adviser to them. In 2019, Adrian
was awarded an OBE for services to
equality and diversity in business. In 2018,
he was announced as the most influential
black, Asian and minority ethnic
technology leader in the UK by the
Financial Times and Inclusive Boards.
External Appointments
– Member of HM Government’s AI Council.
– Managing Director, Group Data and
Artificial Intelligence at BT Group.
Fiona’s experience in retail financial
services, both in the industry and as an
auditor, was gained in the UK and the USA.
Fiona qualified as an accountant early in
her career at Arthur Young (now EY). 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. Fiona is an Associate of the
Institute of Chartered Accountants in
England & Wales.
External Appointments
– Chair of Audit Committee and Non-
Executive Director of Currys 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.
Key Skills and Experience
– Strong audit background having worked
as a partner in Ernst & Young’s Financial
Services practice.
– Extensive experience in the insurance
and investment management industry.
– Deep knowledge and understanding of
financial services regulation and practice.
Gregor worked at Ernst & Young for 23
years, 10 of which were as partner in the
financial services practice. Between 2009
and 2012, he was Finance Director for the
insurance division of Lloyd’s Banking Group
plc which included Scottish Widows.
Gregor is a Member of the Institute of
Chartered Accountants of Scotland.
External Appointments
– Chair and Non-Executive Director of
Alliance Trust plc.
– Chair and Non-Executive Director of
FNZ (UK) Limited.
– Chair of the Risk Committee and
Non-Executive Director of FNZ Group.
Key for Committee membership
Audit Committee
Board Risk Committee
Investment Committee
Nomination and Governance Committee
Remuneration Committee
Sustainability Committee
Chair of the Committee
100
Direct Line Group Annual Report and Accounts 2021
Governance Dr. Richard Ward
Senior Independent Director
Appointed
January 2016
Committees
Key Skills and Experience
– Highly experienced financial services
professional with expertise in dealing
with complex stakeholder groups.
– Extensive knowledge of the insurance
industry with deep insight into
prudential regulation.
– Background of delivering business
transformation and change in
challenging circumstances.
Richard was previously Executive Chair of
Ardonagh Specialty and was Chief
Executive of Lloyd’s of London and the
International Petroleum Exchange. He also
held the role of Non-Executive Chair at Brit
Syndicates Limited and Executive Chair of
Cunningham Lindsey. Richard also held
NED roles at the Partnership Assurance
Group plc and the London Clearing House.
Earlier in his career he held a range of
senior positions at British Petroleum and
was a research scientist for the Science
and Engineering Council. Richard has also
been a member of the PwC Advisory Board,
the PRA Practitioner Panel and of the
Geneva Association.
External Appointments
– Non-Executive Chair of CFC Group
Limited.
– Non-Executive Chair of Mrald Limited.
Board independence
10% Chair (1)
20% Executive Directors (2)
70% Independent Non-Executive Directors (7)
Chair and NED tenure
62% 0-3 Years (5)
25% 4-6 Years (2)
13% 7-9 Years (1)
Board gender
40% Women (4)
60% Men (6)
www.directlinegroup.co.uk
101
Executive Committee
Penny James chairs the Executive Committee. In addition to Penny James and Neil Manser, the Committee comprises
the following:
Mark Evans
Managing Director, Marketing & Digital
Jazz Gakhal
Managing Director, Motor
Experience and Qualifications
Experience and Qualifications
Mark joined Direct Line Group in 2012 and
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.
External Appointments
– Non-Executive Director of Learn Et Al
Jazz joined Direct Line Group in 2005.
Before stepping into the Managing
Director, Motor role she was Chief Strategy
Officer, having previously been Managing
Director of Direct Line for Business, leading
the growth of the direct Commercial
Insurance business.
Prior to this Jazz held roles leading the Pet
Insurance portfolio, Head of Direct Line
Home and across the Partnerships
business. Before joining Direct Line Group,
Jazz was a maths teacher.
External Appointments
– Non-Executive Director of Auto Trader
Group Plc.
Jessie Burrows
Managing Director, Customer Sales, Service
& Claims
Experience and Qualifications
Jessie joined Direct Line Group in 2016. She
is responsible for all aspects of personal
lines and commercial lines claims;
customer sales and service; and the
Group’s counter-fraud activities. Her focus
is very much about creating value for
customers by providing them with an
exceptional service and value for money,
through controlling claims spend.
Prior to joining Direct Line Group, Jessie
was at Aviva plc for 13 years, holding a
number of senior Finance Director roles
at both the Group and in the UK general
Insurance business. Jessie joined Aviva
from KPMG and is an associate Member
of the Institute of Chartered Accountants
in England and Wales.
External Appointments
– Non-Executive Director of The Motor
Insurers’ Bureau.
– Advisory Board member of the CII
Society of Claims Professionals.
Kate Syred
Managing Director of Household,
Partnerships, Data, Pricing and
Underwriting
Experience and Qualifications
Kate joined Direct Line Group in 2000. She
has over 20 years’ experience of the
insurance industry and 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.
Humphrey Tomlinson
General Counsel
Vicky Wallis
Chief People Officer
Experience and Qualifications
Experience and Qualifications
Humphrey joined the Group in 2011 and 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.
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.
Vicky joined the Group in April 2020. She
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 CIPD qualified and holds a Master’s
degree in Organisational Leadership.
102
Direct Line Group Annual Report and Accounts 2021
Governance Jon Greenwood
Managing Director, Commercial
Ash Jokhoo
Chief Information Officer
Aurore Lecanon
Chief Risk Officer
Experience and Qualifications
Experience and Qualifications
Experience and Qualifications
Jon joined the Group in 2000. He 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.
Jon 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, Jon held roles at HBOS, MBNA
and Pinnacle.
Ash joined the Group in 2021. He has over
20 years’ experience of delivering
technological transformation that
underpins growth with a focus on the
customer journey. He is passionate about
technology and diversity.
Aurore joined the Group in 2021. She has
over 18 years’ experience with global
insurers and investment banks and has
deep technical, market and commercial
knowledge of the insurance and savings
industry.
Ash was previously CIO at Virgin Atlantic
where he oversaw technology and data
strategy. Prior to this he was UK & Ireland
CIO at Centrica, British Gas and Bord Gáis.
Additionally, he has 10 years’ experience in
Telecommunications, holding roles at
TalkTalk, Tiscali and British Telecom.
Ash holds a degree in Engineering Product
Design. He is a guest speaker and visiting
lecturer at London South Bank University.
Before joining the Group, she held several
Risk roles at M&G / Prudential including
Chief Risk and Compliance Officer of
Prudential International Assurance,
Transformation Risk Director, and Financial
Risk Director of the UK insurance business.
Aurore was Head of Asset Liability
Management at Old Mutual plc and
worked in investment banking at Credit
Suisse and Société Générale. She holds a
Masters in Stochastic Mathematics and
Financial Engineering from Princeton
University and the University of Paris VI and
is a graduate of the Ecole Polytechnique
and the Ecole Nationale Superieure of
Economics and Statistics in France.
ExCo Gender breakdown
Senior Management and
Direct Reports
Gender breakdown1
55% Women (6)
45% Men (5)
45.9% Women
54.1% Men
Notes:
1. Senior Management is defined as
the Executive Committee, Company
Secretary and direct reports
(excluding administrative and
support staff) as at 31 December 2021.
www.directlinegroup.co.uk
103
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 2021. 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 160 to 163.
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 and 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
and Accounts.
Pages
105
105
106-107
108
109-111
112
113
113
114
114
114-115
115-116
117
117
117-118
119-122
123-126
134-159
Board leadership
and company
purpose
– The role of the Board
– Culture and purpose
– Board activities and meeting attendance
– Consideration of S172(1) factors
– Stakeholder engagement
Division of
responsibilities
– Governance framework and structure
– Structure of the Board, Board Committees and executive
management
– Roles and responsibilities of the Board
Composition,
succession
and evaluation
– Board composition
– Induction, training and support
– Diversity, inclusion and succession planning
– Board and Committee effectiveness review
Audit, risk and
internal control
– Preparation of the Annual Report and Accounts
– Assessing emerging and principal risks
– Risk management and internal control systems
– Audit Committee report
– Board Risk Committee report
Remuneration
– Directors’ Remuneration report
104
Direct Line Group Annual Report and Accounts 2021
Governance Board leadership and company purpose
Culture and purpose
The Board monitors culture and seeks to ensure that
business practices and behaviours are aligned with
the Company’s culture, purpose and values. Below are
examples of reports, metrics and activities which assist
the Board in its ongoing monitoring and assessment:
– The Board closely monitors customer metrics
including the Company’s Net Promotor Score
(“NPS”) (which is an index that measures the
willingness of customers to recommend products
or services to others) and customer complaints
data. These measures are important indicators of
how Company actions affect customers.
– The Board closely monitors the Company’s
employee engagement survey results and
workforce diversity statistics. It monitors the
Company’s gender pay gap and actions being
taken to address this gap. Going forward it will also
be monitoring the Company’s ethnicity pay gap.
These data points provide useful insight into the
wellbeing of the workforce and the extent to
which objectives around diversity and inclusion
are being met.
– Board members regularly attend meetings of the
Employee Representative Body (“ERB”) in order to
hear first-hand from colleagues about how
strategic initiatives are working in the business.
More information about the work of the ERB can
be found on pages 109 and 111.
– The Board Risk Committee reviews issues raised
via RightCall, the Group’s independent and
confidential whistleblowing telephone helpline. In
doing so, it considers whether there are any trends
in reporting that indicate behavioural or cultural
issues in a particular area of the business.
– The Audit Committee receives regular reports from
the Internal Audit function which include insights
into culture and behaviour in the business.
The Board
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 134.
The role of the Board
Pages 112 and 113 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’s responsibility
are summarised in the following paragraphs, these are not
intended to be an exhaustive list.
Leadership
The Board 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.
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.
www.directlinegroup.co.uk
105
Corporate Governance Report continued
Board meetings and activity in 2021
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
Financial
performance
and investor
relations
Strategic alignment
external brand metrics;
– reviewing and approving key projects aimed at developing the business or rationalising costs;
– considering growth opportunities; and
– reviewing the individual strategy of key business lines.
– 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;
– reviewing broker reports on the Group, alongside feedback from investor meetings;
– considering and approving the Group’s share repurchase programme; and
– declaring a 2020 final dividend of 14.7 pence and a 2021 interim dividend of 7.6 pence.
Risk
management,
regulatory and
other related
governance
Strategic alignment
– Reviewing and agreeing the Group’s policies;
– setting risk appetite;
– 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; and
– approving the Company’s Code of Business Conduct and conducting an annual review of the
Group’s governance framework.
In addition to its scheduled Board meetings, the Board held a number of ad hoc meetings to deal with urgent or arising
matters and in June 2021, the Board held a strategy day to set and monitor progress against the Group’s strategy and to
discuss the Group’s future opportunities.
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
106
Direct Line Group Annual Report and Accounts 2021
Governance
Board and Committee meeting attendance
The Board and its Committees held a number of scheduled meetings in 2021 at which senior executives,
external advisers and independent advisers were invited to attend and present on business developments and
governance matters.
Only in exceptional circumstances did Directors not attend such Board and Committee meetings. In such
circumstances, papers were circulated to all Directors before the meetings so that those unable to attend could raise
issues and give comments to the Chair in advance of the meeting.
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 2021. 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.
Additional Board and Committee meetings were convened during the year to discuss ad hoc business development,
governance and regulatory matters.
Chair
Danuta Gray
Senior Independent Director
Richard Ward
Non-Executive Directors
Tracy Corrigan1
Mark Gregory2
Jane Hanson3
Sebastian James
Adrian Joseph OBE4
Fiona McBain5
Gregor Stewart6
Executive Directors
Penny James
Tim Harris7
Neil Manser8
Notes:
Board
Audit
Committee
Board Risk
Committee
Sustainability
Committee
Investment
Committee
Nomination and
Governance
Committee
Remuneration
Committee
9 of 9
9 of 9
2 of 2
9 of 9
4 of 4
9 of 9
8 of 9
6 of 9
8 of 9
9 of 9
–
5 of 5
–
–
–
7 of 7
4 of 4
–
–
5 of 7
7 of 7
–
–
–
–
5 of 5
–
3 of 3
2 of 2
–
–
3 of 5
3 of 5
–
–
–
–
–
1 of 1
–
1 of 1
4 of 4
3 of 4
–
–
4 of 4
–
–
–
–
–
4 of 4
2 of 2
–
–
2 of 4
–
–
–
2 of 2
3 of 3
3 of 3
3 of 3
3 of 3
–
–
–
3 of 3
–
–
–
–
–
–
–
3 of 3
–
3 of 3
–
–
–
–
–
–
1. Tracy Corrigan joined the Board on 1 November 2021 and the Sustainability Committee on 4 November 2021.
2. Mark Gregory joined the Board Risk Committee on 13 May 2021.
3. Jane Hanson stepped down from the Board on 13 May 2021.
4. Adrian Joseph was unable to attend certain meetings due to illness.
5. Fiona McBain was unable to attend certain meetings due to a bereavement and illness.
6. Gregor Stewart was unable to attend certain meetings due to illness.
7. On 11 January 2021, Tim Harris took a leave of absence to support a family member who was undergoing medical treatment. On 13 May
2021, Tim retired as CFO.
8. Neil Manser joined the Board and the Investment Committee on 13 May 2021. He also attended Board and Investment Committee
meetings during his time as Acting CFO.
www.directlinegroup.co.uk
107
Corporate Governance Report continued
Consideration of section 172(1) factors by the Board
The Group’s section 172(1) statement can be found in the Strategic report on page 20.
The table below sets out how factors under section 172(1) of the Companies Act 2006 and engagement with
stakeholders have fed into Board discussion and decision making on key topics. More information about Board
engagement with stakeholders can be found in the table on pages 109 to 110.
Section 172(1)
The Board has a duty to act in the way it considers, in good faith, would be most likely to promote the
long-term success of the Company for the benefit of its members as a whole, whilst having regard to
(amongst other matters):
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
Topic
The future of Direct Line’s workplace
and culture
Following the fundamental change in our ways of
working during the pandemic, the Board
considered what this meant for the future of the
DLG workplace and culture. They considered what
office space would be required in the future, what
this should be used for and how best to foster a
culture of collaboration and flexibility whilst
maintaining productivity. These considerations
resulted in a decision to reduce the square footage
of Group’s office space, invest in repurposing
remaining office space and move to a mixed
model of home and office working.
Section 172(1) considerations
a b Consultation with workforce on flexible working via surveys which showed a
clear desire from colleagues to retain the flexibility to work from home
where possible once social distancing had eased.
a Financial analysis and projections showing long-term cost benefits of
reducing the property portfolio and undertaking work to repurpose existing
office space.
d e Security arrangements and policies to ensure the Company can
continue to protect our customers, data and reputation in the home
working environment.
d Predicted lower carbon emissions achieved through reduced travel and a
smaller office footprint.
a b The promotion of social mobility through access to a recruitment pool that is
less geographically restricted and the promotion of gender equality through
flexible working practices.
Return of capital to shareholders
During the year the Board approved a distribution
of surplus capital of up to £100 million by way of a
share buyback programme.
e f
Shareholder expectations set through the Group’s published dividend policy
and feedback received from shareholders as part of the Group’s investor
relations programme which expressed a preference for a return of capital via
a share buyback over a special dividend.
The Board also approved a final dividend of 14.7p
per share in respect of 2020 and an interim
dividend of 7.6p per share in respect of the first
half of 2021.
a
b c
The strength of the Group’s capital position, taking into consideration
regulatory and policy holder requirements and the long-term investment
needs of the business.
The Company’s initiatives to support staff, customers and local communities
in times of hardship and the absence of reliance on Government support
schemes during the pandemic supported the position that a return of
capital to shareholders was not inequitable to the Company’s other
stakeholders.
e f
a b
b c
d
Implementation of Pricing Practices
Review rules
During the year, the Board oversaw work being
undertaken to ensure the business was ready to
comply with new rules brought in for the pricing
of home and motor insurance as a result of the
FCA’s Pricing Practices Review.
a Monitoring the preparation of new pricing models, the objective of which is
to seek to thrive under the new Pricing Practices Review rules in the long
term.
d e The need to ensure full compliance with new rules to maintain a reputation
for high standards of business conduct.
a b How additional work required to implement necessary changes within a
short timescale was affecting colleagues and the Group’s business priorities.
b c How changes could drive positive outcomes for customers.
Delivery of the sustainability strategy
The Sustainability Committee oversaw
work to deliver against and develop the
Company’s sustainability strategy and embed
sustainability at every level of the business.
d Repositioning the Company’s Community Fund to help ‘left-behind’ groups
access financial services careers in support of the ‘Society’ pillar of the
sustainability strategy.
d Reports of the Climate Executive Steering Group, which aims to align
thinking across areas of the business which could be affected by climate
change, under the ‘Planet’ pillar of the sustainability strategy.
a b How the Company’s first Black Inclusion Report could further the
Company’s diversity and inclusion strategy under the ‘People’ pillar of
the sustainability strategy.
b c How involvement in the ‘Plain Numbers’ social enterprise initiative
supports fair outcomes for customers under the ‘Customer’ pillar of the
sustainability strategy.
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Direct Line Group Annual Report and Accounts 2021
Governance How the Board engages with stakeholders
The table below sets out how the Board has engaged with various stakeholders or received information about
engagement with stakeholders throughout the year.
Stakeholder
Board engagement and oversight
Our Shareholders The Investor Relations team runs a
comprehensive programme of engagement
with a broad range of the Company’s
shareholders, which includes meetings
with the Chair and Executive Directors,
presentations and conference calls to discuss
performance and strategy. The Chair of the
Remuneration Committee also meets with
shareholders when appropriate to discuss
remuneration-related issues. During the year,
the Executive Directors hosted investor insight
webinars on the Group’s claims strategy and
the commercial business.
During the year the Board also received
presentations by its brokers on shareholder
sentiment regarding the Group’s strategy
and performance.
The AGM provides both institutional and retail
shareholders with the opportunity to ask the
Board questions either live or by submitting
questions in advance. Due to restrictions in
place as a result of Covid-19, in 2021 the
Company held a hybrid/virtual AGM, which
allowed shareholders to participate remotely
and included the facility to ask questions via
phone or webchat.
Non-Executive Directors periodically attend
meetings of the Group’s formal workforce
advisory panel, the Employee Representative
Body (“ERB”). These meetings are also
attended by Executive Directors. Attendance
and information on matters discussed at ERB
meetings during the year and action taken in
response to issues raised can be found on
page 111.
Executive Directors host interactive sessions
with colleagues to understand their views and
answer questions. These sessions have been
adapted to accommodate the Group’s new
ways of working and held in various formats in
order to encourage maximum participation in
the virtual environment e.g. video conference
town halls which include live Q&As and ‘virtual
cuppas’ enabling colleagues to have a more
informal discussion with senior managers.
Our People
Feedback received from shareholders regarding
a return of capital via a share buyback was
considered in Board decision making on
this matter (see page 108).
In response to feedback from investors
expressing a desire for more information about
the Company’s environmental activities, a
dedicated sustainability hub on our corporate
website was created during the year with the
aim of making it easier to find key
environmental content.
The Board receives regular updates on people
matters from the Chief People Officer and
reviews the results and key outcomes of the
Group’s colleague engagement survey
‘DiaLoGue’. More information about the
outcomes of these surveys can be found on
page 65.
During the year, the CEO visited the Group’s
operations in Doncaster to discuss new ways of
working with colleagues and to get a better
understanding of how colleagues from different
areas of the business were feeling. The CEO also
undertook a number of virtual site visits where
visiting in person was not possible due to Covid
restrictions.
www.directlinegroup.co.uk
109
Corporate Governance Report continued
How the Board engages with stakeholders (continued)
Stakeholder
Board engagement and oversight
Our Customers
Our Suppliers
Our Planet and
Our Society
The Board closely monitors customer conduct
and satisfaction. It considers a Customer
Conduct Report at each of its scheduled
meetings, which includes data in respect of
a number of customer experience metrics
including Net Promoter Scores and customer
complaints data relating to sales, service and
claims. It also reviews data in respect of digital
service interactions.
During the year, the Board received detailed
updates on the impact of various key strategic
matters on customers including the
implementation of the FCA’s Pricing Practices
Review regulations and the rollout of the Best
For Customer technology platform.
The Board reviews and approves the Group’s
Ethical Code for Suppliers and Modern Slavery
statement on an annual basis . The Code
states that the Company encourages and
welcomes feedback from suppliers on the
Group as a customer and on how policies and
procedures can be improved. This feedback
can be given as part of regular review
meetings with management. The Board
receives regular updates on key issues with
strategic suppliers.
During the year, the Board received updates
on the Group’s Supply Chain Sustainability
Programme which encourages suppliers to
sign up to the Science-Based Targets initiative
(“SBTi”) and involved communication with
suppliers about the Group’s planned sourcing
approach over the next 10 years.
The Sustainability Committee is a key vehicle
through which the Board receives updates on
engagement with key community and
environmental stakeholders. More information
on the work of the Sustainability Committee
can be found on pages 130 to 131.
As part of the CEO’s ongoing programme of
meeting and engaging with different areas of
the business during the year, she visited the
Company’s contact centre in Doncaster. She
spoke with customer-facing colleagues about
customer engagement to learn about the
challenges of supporting customers in the
hybrid working environment.
The Board are customers of the business
themselves and therefore regularly experience
the key touch points in the customer journey
first hand.
The Group is a long-standing signatory of the
Prompt Payment Code. Key performance
indicators in respect of prompt payment are
reported internally and there are mechanisms
in place for any significant issues regarding
prompt payment to be escalated to the Board.
The CEO was a member of the Build Back Better
Business Council and represented the Company
at various climate-related events during the year
(including COP26) and fed back the outcomes of
this engagement to the Board. Among the
initiatives discussed by the Build Back Better
Council was the Electric Vehicle Fleet
Accelerator (“EVFA”), which brings together the
CEOs of seven companies, including DLG, that
own and operate some of the largest van fleets
in the UK and companies involved with
infrastructure, EV charging, retail and insurance
and repair. EVFA companies have pledged to
convert, and to support the conversion of, their
van fleets to EVs by 2030.
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Direct Line Group Annual Report and Accounts 2021
Governance Employee Representative Body
DLG has an established Employee Representative Body (“ERB”), meetings of which are attended by elected
representatives from the different areas of the business, the CEO, the Chief People Officer and members of the senior
leadership team. Non-Executive Directors also attend some meetings on a rotational basis. Output from the meetings
attended by Directors is reported to the full Board so they can consider relevant colleague views in their decision making.
The Board considers that this arrangement fulfils the recommendation under Provision 5 of the Code to provide a
mechanism for engaging with the workforce, being an enhanced version of the “formal workforce advisory panel”
method referred to in Provision 5. The Board considers this arrangement to be highly effective as it provides a formal
framework through which a wide variety of views can be represented and provides colleagues the opportunity to
express these views directly to both Executive and Non-Executive Directors. It also means Director attendance can be
tailored so that colleagues can engage with the most appropriate Board member on a particular topic. For example,
during the year, the Chair of the Remuneration Committee attended the meeting at which workforce pay was
discussed. The Board will continue to keep the effectiveness of this arrangement under review and seek the views of the
ERB on this in the coming year.
Information about Board representation at ERB meetings, topics discussed and outcomes of this engagement is
summarised below:
Meeting
March
Board Representation
Key Topics
Outcomes in response to feedback received
Penny James (CEO)
– CEO update on business and
– Post-Covid Repair Centre shift
strategic projects.
– DiaLoGue survey results.
– The future of Direct Line’s
workplace and culture including
mixed model home and
office working.
arrangements reviewed, to ensure
safe working arrangements are
balanced with individual wellbeing.
June
Penny James (CEO)
– CEO update on business and
– New employee communication
strategic projects.
– Implementation of the Pricing
Practices Review.
– DiaLoGue survey results.
– DLG’s People strategy focusing
on: skills needed for the future;
culture; wellbeing; diversity and
inclusion.
channels piloted to ensure effective
information flow under new ways
of working.
September
Penny James (CEO)
– CEO update on business and
– Focus given to providing greater
Danuta Gray
(Chair of the Board)
Mark Gregory
(Non-Executive
Director)
strategic projects.
– Role of the Non-Executive
transparency for promotion
opportunities.
Director.
– Discussion with NEDs on: change
programmes; Pricing Practices
Review; and the impact of the
pandemic.
– How mixed model working is
– Prioritisation exercise to ease pressure
on certain areas of the organisation.
– DiaLoGue survey moved from monthly
to quarterly in response to concerns
about survey fatigue affecting
response rates.
bedding in.
– Strategy for growing and
developing People.
December
Penny James (CEO)
– CEO update on business and
– Approach to all-employee pay review
Richard Ward
(Remuneration
Committee Chair)
strategic projects.
revisited.
– CEO presentation on strategic
– Additional wellbeing support targeted
to certain areas of the business.
direction of DLG for 2022
and beyond.
– Implementation of Pricing
Practices Review.
– DiaLoGue survey results.
– Executive Remuneration.
– All-employee pay review.
www.directlinegroup.co.uk
111
Corporate Governance Report continued
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 89.
The Group’s governance framework is detailed in the
Group’s High-Level Control and System of Governance
Framework document. This document also 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
89;
– Enterprise Risk Management Strategy and Framework,
which is described on page 89;
– Group policies, which address specific risk areas, are
aligned to the Group’s risk appetite, and inform the
business on 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
High-Level Control and System of Governance
Framework document
Overarching risk appetite
statements
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).
Enterprise Risk
Management Strategy
and Framework
Group policies
Policy risk appetite
statements
Policy owner approves
Minimum standards, subject to non-
objection from the Risk Management
Committee.
Minimum standards
112
Direct Line Group Annual Report and Accounts 2021
Governance 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.
The Board and Board Committees are satisfied that, in
2021, 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 and Accounts. The terms of reference for
each Committee can be found on the corporate website
at: www.directlinegroup.co.uk/en/who-we-are/leadership/
board-committees
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 98 to 101.
Board Committees
Full details of membership, responsibilities and activity
of each Committee throughout the year can be found
on pages 119 to 136.
Audit
Committee
Investment
Committee
Remuneration
Committee
Board Risk
Committee
Nomination
and Governance
Committee
Sustainability
Committee
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 102 to 103.
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 areas and functions
Company Secretary
– Ensures the Directors receive accurate, timely
and clear information
– Alongside the Chair, oversees the governance
framework
www.directlinegroup.co.uk
113
Corporate Governance Report continued
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.
Biographical details of the Directors of the Company as at
the date of this report are set out on pages 98 to 101. Full
details of dates Directors who have served throughout the
year can be found on page 160.
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 127 to 129.
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 of 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 included competition law, 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, including:
– Claims strategy;
– DLG Auto Services;
– Technology transformation;
– Expense management;
– DLG Vision;
– Electric vehicles;
– Data ethics and governance;
– Megatrends;
– Price Comparison Websites; and
– Pricing strategy.
Non-Executive Director (“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 2022 AGM. You can find out more about
the activities of the Nomination and Governance
Committee’s work during the year on pages 127 to 129.
Information and support
The Board accesses assistance and advice from the
Company Secretary. The Board, and each member of the
Board, may seek external independent professional
advice at the Company’s expense, if required, to discharge
its duties.
Board’s approach to diversity and inclusion
The UK Corporate Governance Code promotes, and the
Board supports, diversity of gender, social and ethnic
backgrounds, cognitive and personal strengths in Board
and senior management appointments.
During the year the Company made progress in
improving the gender and ethnic diversity of its Board,
Executive Committee and workforce as a whole. More
information on this and statistics in respect of diversity
can be found on page 64 of the Strategic report and pages
101 and 103 of the Corporate Governance report.
The Company has met or exceeded key external targets
including the Hampton-Alexander Review’s target to have
33% representation of women on FTSE 350 Boards,
Executive Committees and their direct reports by 2020;
and the Parker Review’s target to have at least one director
from an ethnic minority background by 2024. The Group,
having achieved its Women in Finance Charter target to
have 30% of women in senior finance positions by 2019, has
increased this target to 35% by the end of 2022.
Senior management succession planning
The Board recognises that in order to maintain and
improve on diversity levels, it must ensure that senior
management succession planning is focused on
promoting diverse leadership and that workforce diversity
is achieved at all levels in order to secure a diverse pipeline
of talent. During the year, the Board has overseen
succession planning that has driven deeper into the
organisation to identify talent.
In order to put further focus on diversity in succession
planning, the Company’s Annual Incentive Plan includes
targets for Executive Directors, the Executive Committee
and senior management in respect of improving gender
and ethnic diversity of the workforce in the context of
leadership succession planning (more information on this
can be found on page 143 of the Remuneration report).
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Direct Line Group Annual Report and Accounts 2021
Governance 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 2021 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 2021 evaluation focused on both the preservation of
the strengths identified in the 2020 and earlier
evaluations, and on themes for sustaining effectiveness
suggested in 2019 by Professor Robert Goffee, who was
the external facilitator for the evaluation that year,
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.
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.
External directorships
During the year, Penny James, CEO, joined the Board of
Hargreaves Lansdown plc as Senior Independent Director
and a member of its Nomination and Risk Committees.
Before Penny accepted the appointment, the Board
reviewed the time commitment likely to be required for
the role. The Board was satisfied that the time
commitment would not affect Penny’s ability to carry out
her role as CEO and that she and the Board would be
likely to benefit from the additional external perspective to
be gained. The Board therefore approved the
appointment.
The Board also reviewed and approved, in advance, Mark
Gregory’s appointment as a Non-Executive Director of
Entain plc, Danuta Gray’s appointment as Non-Executive
Director of Burberry Group plc and North SP Limited, and
Richard Ward’s appointment as Non-Executive Director of
CFC Group Limited. Again, the Board was satisfied that, in
taking on the new positions, Mark, Danuta and Richard
would continue to have sufficient time to dedicate to their
roles with the Group.
Board appointments
The Board has in place a Board Diversity Policy which is
reviewed annually and can be found on the Group’s
website. The policy sets out the key principles to be
followed in respect of the Board appointment process.
When using executive search firms, the Board will only
engage those who are signatories to the Voluntary Code
of Conduct for Executive Search Firms, which aims to
promote diversity in the executive search process. More
information on the Board appointment process can be
found in the Nomination and Governance Committee
report on pages 127 to 129.
Workforce diversity and inclusion
The Board continues to support Group-wide diversity and
inclusion activities and initiatives, many of which are
outlined on pages 61 to 64. This includes the work of
Company’s Diversity Network Alliance (“DNA”) which
champions diversity and inclusion in the Group through
its ‘DNA strands’: REACH; Belief; LGBT+; Life (working
families and carers); Neurodiversity and Disability; Social
Mobility; and Thrive (gender). More information about the
work of the DNA during the year can be found on page 62.
Board skills, experience and knowledge
The Nomination and Governance Committee has an
active and dynamic process of assessing and monitoring
the skill set, experience and knowledge of Board
members. The principles of the UK Corporate Governance
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.
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115
Corporate Governance Report continued
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) and provided constructive feedback to
the Chair. No Director was involved in the review of their
own individual 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 2020 review, as
summarised in the table below. Suggestions for utilising
the Independent Non-Executive Directors’ experience,
strengthening the Board’s agenda and information flow,
and engaging with external experts, were addressed
during the year.
Focus areas from the
2020 review
Use of Non-Executive Directors’
experience
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 Board’s agenda
and information flow
The sequence of strategic topics on the
Board’s agenda should be aligned with
the executive programme, to allow for
deeper and more regular strategic
discussion.
External expertise
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.
Action taken during 2021
Due to continuing pandemic-related restrictions and the Group’s
adoption of a hybrid (remote and site-based) working model, a
number of virtual deep-dive sessions were held during the year, in the
context of which the Board was able to interact with the wider
management team.
The Board’s agenda was more effectively aligned with the executive
programme, which enhanced the quality of the Board’s strategic
discussion and its ability to provide timely insight and support.
During the year, the Board received regular updates from brokers
and, at the Board’s annual strategy day in June 2021, external
speakers from a range of backgrounds presented on key topics
including: megatrends, technology platforms and electric vehicles.
Focus areas from
the 2021 review
Proposed action for 2022
Strategic topics
The Board proposes to align its agenda during 2022 with the Group’s
prioritised Objectives and Key Results and to include thematic
debates including: people, culture and the talent pipeline; growth
and innovation; sustainability; and delivering the benefits of
investment in technology.
Engaging more effectively
with the wider executive team
Opportunities will continue to be sought for the Board to engage
with the wider management team and workforce, both in and around
Board and Committee meetings and, as sites reopen, locally and in
the context of divisional town hall sessions.
Preserving and refreshing
skills and experience in
future Board composition
The Nomination and Governance Committee will take a medium- to
long-term view of pipeline development and succession planning,
seeking to define the combination of Non-Executive Directors’
experience, expertise, diversity and functional role fulfilment required
to address future challenges and opportunities faced by the business.
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Direct Line Group Annual Report and Accounts 2021
Governance 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 and 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 94 and page 162;
– the Board’s 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
Audit Committee report which starts on page 119.
Responsibility for preparing the Annual Report
and Accounts
The Board’s objective is to give shareholders a fair,
balanced and understandable assessment of the Group’s
position, performance, 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 163. The
Group’s External Auditor explains its responsibilities on
page 173.
The Directors confirm that they consider that the Annual
Report and Accounts, taken as a whole, are fair, balanced
and understandable and provide the information that
shareholders need to assess the Group’s position,
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 and 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 and Accounts;
– the Company’s Disclosure Committee reviewed an
advanced draft of the Annual Report and Accounts; and
– the Audit Committee reviewed the substantially final
draft of the Annual Report and 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 91 to 92.
This determination 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 greater based on a 1-in-200 year
likelihood period. The quantifications are produced
through stress and scenario analysis, and our 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, with the assistance of the Board Risk
Committee and the Audit Committee, and support from
the Risk and Group Audit functions 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 Risk function annually produces an Internal Risk and
Control Assessment Statement to support the Board in
monitoring the effectiveness of the Group’s risk
management and internal control systems. Each function
completes a self-assessment of its risks and key controls
and an Executive Sponsor, responsible for the function,
attests to the status of the effectiveness of the risk
management and internal control systems. The Risk
function reviews and challenges these findings and the
Group Audit function provides an independent
assessment of the overall effectiveness of the governance
and risk and control framework of the Group. The overall
findings are combined into a Group-level assessment.
The 2021 Internal Risk and Control Assessment process did
not identify any material control weaknesses; however, it
did identify areas where further enhancements could be
made to the Group’s risk and control environment. Actions
being taken in these areas of enhancement include:
ongoing activities related to the Group’s technology,
information and system security, change and resilience
controls; and the significant programme of activity of
designing and embedding controls in relation to the
delivery of the FCA’s Pricing Practices remedies.
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117
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.
In his report on pages 134 to 159, 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 139.
Corporate Governance Report continued
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. Group Audit’s 2021 annual assessment of the
risk management, governance and control environment
did not identify any matters that conflict with the 2021
Internal Risk and Control Assessment Statement.
On behalf of the Board, the Board Risk Committee
reviewed the 2021 Internal Risk and Control Assessment
Statement and was satisfied with the conclusion that the
Group’s risk management systems were fit for purpose for
managing all material risks and that its internal control
systems were effective for managing all key controls,
including financial, operational and compliance controls.
The Board Risk Committee also 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.
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.
The Board confirms that there is an ongoing process for
assessing the Company’s risk management and internal
control systems and identifying, evaluating and managing
the significant risks faced by the Group, which has been in
place throughout the period and up to the date of this
report. The Board takes the view that, on the basis of the
assessment carried out in and in respect of 2021, it would
be reasonable to conclude that the Group’s risk
management and internal control systems are effective.
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.
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Direct Line Group Annual Report and Accounts 2021
Governance Audit Committee Report
Audit Committee Report
Areas of focus in the reporting period
– Financial reporting: reviewing and challenging
the key accounting and actuarial estimates and
judgements made by management to support the
financial statements.
– Insurance reserves: reviewing the Group’s insurance
reserves to obtain assurance that they remain
appropriate for discharging expected liabilities.
– IFRS 17 implementation under the Actuarial and
Finance Transformation programme.
– Reviewed and challenged the Group’s second Task
Force on Climate-related Financial Disclosures Report.
– Overseeing the beginning of the external audit tender
process.
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.
The Committee Chair, Gregor Stewart, is a member of the
Institute of Chartered Accountants of Scotland. Fiona
McBain and Mark Gregory are members of the Institute of
Chartered Accountants in England and Wales.
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 various
matters including IFRS 17 and the Actuarial Financial
Transformation programme.
Main activities during the year
At each of its scheduled meetings, the Committee
received reports on financial and non-financial reporting,
insurance reserves, internal controls and Group Audit.
Financial reporting
The Committee followed a review process before
recommending the Annual Report and 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 120. In the
context of the Covid-19 pandemic, the Committee
reviewed in detail the impact on the Group’s financial
performance, in particular on the level of Motor claims
frequency, the development of prior-year reserves and
specific areas of critical accounting estimates and
judgements including on investment asset valuations.
Each member has recent and relevant financial
experience gained in a number of different financial
services businesses, including insurance, enabling them to
In addition, the Committee considered the Group’s use of
alternative performance measures in explaining its
financial performance.
Gregor Stewart
Chair of the Audit Committee
Committee membership1
– Gregor Stewart
Chair
– Mark Gregory
Independent Non-Executive Director
– Fiona McBain
Independent Non-Executive Director
Committee meeting attendance can be found
on page 107.
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 climate-related financial
disclosures
Note:
1. Jane Hanson was a member of this Committee until she
retired from the Board on 13 May 2021.
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Audit Committee Report continued
The Committee reviewed papers prepared by
management on the use of alternative performance
measures in the financial statements and was satisfied
that an explanation of both the alternative performance
measure and why it was used was clearly communicated
to users of the financial statements. Furthermore, the
Committee also considered the estimates and
judgements used to prepare the Group’s capital position
under Solvency II, including focusing on the level of
technical provisions held. Specific matters considered
included judgements made in respect of events not in
data, and the risk margin. The Committee reviewed the
Group’s Solvency and Financial Condition Report and
Regular Supervisory Reports and the quantitative
reporting templates on behalf of the Board before
submission to the PRA, and concluded that the processes
to produce and review the Group’s regulatory reports had
operated satisfactorily.
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. During the year, inflation risks were
discussed in detail, taking account of the end of the Brexit
transition period, the continuing impact of Covid-19,
supply chain constraints, as well as care cost, parts and
general labour inflation affecting different lines of
business. The Actuarial Director presented scenario
analyses for various inflationary drivers, supporting the
booking of the claims reserves. The impact on investments
and pricing were also considered with comprehensive
asset liability matching. 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 Committee by
PricewaterhouseCoopers LLP (“PwC”).
IFRS 17 implementation under the Actuarial
and Finance Transformation programme
During the year, the Committee was highly engaged in
overseeing the Group’s Actuarial and Financial
Transformation programme. The programme is charged
with the design and implementation of the changes
required to be made to accounting and reserving
processes and systems to ensure compliance with the
new reporting standard IFRS 17. The Committee: reviewed
and approved key design decisions underpinning the
proposed solution; monitored the build of systems against
key milestones; reviewed assurance updates in respect of
the progress of the programme from Group Audit; and
approved and monitored resourcing and budgetary
requirements. The Committee held deep-dive training
sessions on: the requirements of IFRS 17; accounting policy
choices under IFRS 17; and changes to the reserving
process as a result of the programme.
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 41 to 42.
Valuation of
investments not
held at fair value
and investment
property
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. 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.
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Direct Line Group Annual Report and Accounts 2021
In 2021, the Committee reviewed and
challenged the approach, methodology and
key assumptions used by management in
setting the level of insurance reserves, and
monitored developing trends that could have
a material impact on them. On an ongoing
basis it received updates from the Actuarial
Director on how actual claims experience
compared to expectations. Particular points of
discussion in 2021 were the changes in
frequency and severity trends due to Covid-19,
care cost and damage claims inflation, as well
as the impact of the Whiplash reform. The
Committee also obtained insight and
reviewed results from an independent
actuarial review of the reserves. The
Committee was satisfied that management
had exercised appropriate control and
judgement in estimating insurance liabilities.
In 2021, 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 concluded
that the carrying values in the accounts were
reasonably stated.
Governance TCFD Report
The Committee reviewed the TCFD Report on behalf of
the Board as part of its review of the Annual Report and
Accounts. The TCFD Report can be found on page 76.
Going concern, viability and fair, balanced and
understandable
The Committee considered the going concern
assumptions and viability statement in the 2021 Annual
Report and 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 and Accounts taken
as a whole were fair, balanced and understandable and
provided sufficient information to enable the reader to
assess the Group’s position, performance, business model
and strategy.
When considering the 2021 Annual Report and Accounts,
the Committee considered the significant judgements
and issues which could be material to the financial
statements. These included the matters set out in the
table on page 120. 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 94.
Internal control
During the year, the Committee reviewed the adequacy
and effectiveness of the controls that underpin the
Group’s financial reporting control framework which 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 2021, the Committee received regular reports
on any control deficiencies, compensating controls and
the mitigating actions taken by management. There were
no material control issues reported to the Committee in
the year. The Committee also considered management’s
processes and controls for identifying and responding to
the risk of fraud. The Committee noted that there were no
fraud-related events or actions to suggest that fraud
might have a material impact on the financial statements.
The Committee also monitored management’s responses
to the control insights and observations raised by the
External Auditor in its annual management letter during
the year, and were satisfied that management was taking
appropriate and timely action to resolve the issues raised.
Group Audit
The Committee is responsible for overseeing the work of
Group Audit and for ensuring industry best practice is
adopted appropriately. The Group Head of Audit’s primary
reporting line is to the Chair of the Committee. The
secondary reporting line, for day-to-day administration, is
to the CEO.
During the year the Committee oversaw key
developments in the Group Audit function, including the
adoption of a new structure to provide clearer stakeholder
alignment and enable more dynamic audit delivery which
has led to improved productivity. Group Audit also
established a Centre of Expertise to enable and drive the
delivery of Group Audit’s continuous improvement
activities in conjunction with their external performance
partner, PwC. PwC continued to provide independent
quality assurance activity and reported to the Committee
on a regular basis.
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. Group Audit
performed continuous oversight of the change portfolio
and completed a number of reviews of major
programmes during the year. The Committee approved
Group Audit’s plan on a rolling quarterly basis and
confirmed the audit plan coverage on an annual basis. The
Committee received quarterly reports detailing internal
audit activity, key findings, management responses, and
proposed action plans. There were no significant failings
or weaknesses reported to the Committee in the year.
Following assessment by the Committee during the year,
it was concluded that the Group Audit function was
effective. The Committee approved the Group Audit
Charter, which is reviewed annually.
Additional information
The Committee has unrestricted access to management
and external advisers to help discharge its duties. It is
satisfied that in 2021 it received sufficient, reliable and
timely information to perform its responsibilities
effectively.
During the reporting period the External Auditor and
Group Head of Audit met privately with the Audit
Committee, in the absence of management. The Chair of
the Committee reported on matters dealt with at each
Committee meeting to the subsequent Board meeting.
During the year, the FRC carried out a review of the
Group’s report and accounts for the year ended 31
December 2020. No substantive questions or queries were
raised as a result of the review. It is noted that the FRC’s
review was limited to considering compliance with
reporting requirements and it is not the FRC’s role to verify
the information provided.
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 work of the
External Auditor and agreeing the audit fee, as well as
approving the scope of the External Auditor’s annual plan.
To ensure the continuing independence of Deloitte as
External Auditor, and in compliance with the Group’s
minimum standard on independence of the External
Auditor, this year Adam Addis, ACA, took over as lead
partner for the 2021 audit.
External Auditor tenure
The Committee is responsible for conducting the external
audit tender process. During 2021, it discussed the options
for tendering the external audit contract. Under the
reforms of the audit market by the Competition and
Markets Authority, Deloitte could 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 relevant legislation, the firm may not re-engage for
the audit after 17 June 2023.
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Audit Committee Report continued
When considering the timing of the external audit tender
and what would be in the best interests of shareholders,
the Committee took into account relevant regulation, the
Group’s change programmes, the implementation of IFRS
17 and the objective of securing the participation of a
broad range of firms in the tender. The Committee
concluded that the most appropriate timing would be to
undertake an initial request for information from audit
firms in the fourth quarter of 2021, before moving to a
formal competitive tender process in the second quarter
of 2022, with a view to appointing the successful firm for
the audit of the financial year commencing 1 January
2024. The Committee has initiated the request for
information to potential audit firms, ensuring that firms
outside the ‘Big 4’ audit firms were included in the
invitation to participate, based on their general insurance
industry capability and experience. It will continue to lead
the process with the intention of making a
recommendation to the Board later in 2022.
There are no contractual obligations restricting the
Group’s choice of External Auditor.
The Company has complied with the provisions of the
Statutory Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive Tender
Processes and Audit Committee Responsibilities) Order 2014.
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 services
by the External Auditor. The minimum standard is
compliant with the Financial Reporting Council’s review
of its Ethical Standard for Auditors which was published
in December 2019.
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 £0.3
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 2021.
Audit fees
Audit-related assurance services
Non-audit services
Total fees for audit and
other services
Fees
£m
Proportion
%
2.1
0.2
0.3
2.6
83
7
10
100
Audit-related assurance services were in respect of the
Group’s Solvency II reporting and the review of the Half
Year Report 2021 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 ended during the year. To guard
against any independence issues, appropriate safeguards
were discussed and agreed by the Committee and
Deloitte. The Committee determined that the services
provided would not affect the independence of the
External Auditor. Further information in respect of audit
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Direct Line Group Annual Report and Accounts 2021
fees paid to Deloitte is disclosed in note 10 to the
consolidated financial statements.
Effectiveness of the external audit process and
re-appointing Deloitte as External Auditor
In 2021, the Committee conducted its annual review of the
External Auditor’s effectiveness. 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 2022 AGM.
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, provides the right degree of
challenge, and interacts well with other Committees and
the Board. Further information on the Board effectiveness
review can be found on pages 115 to 116.
In addition, the Committee’s terms of reference were
reviewed against the activity of the Committee during the
year. The terms of reference were found to be suitable,
comprehensive and of appropriate scope.
The Committee’s terms of reference can be found on the
corporate website:
www.directlinegroup.co.uk/en/who-we-are/leadership/
board-committees
The Board reviewed and approved this report on 7 March
2022.
Gregor Stewart
Chair of the Audit Committee
Governance Board Risk Committee Report
Board Risk Committee Report
Areas of focus in the reporting period
– Reviewed and challenged compliance with the FCA’s
new Pricing Practice Review rules.
– Challenged and supported the Group’s approach to fair
pricing and outcomes for all of our customers, including
those that are vulnerable.
– Oversaw change risk arising from the Group’s multi-year
transformation programmes.
– Examined and monitored the embedding of climate-
related financial risk management.
– Monitored progress on our operational resilience
programme.
Further detail on these areas can be found in the body
of the Committee report.
Customer and conduct
Customer and conduct risks are a principal focus of the
Committee. The Committee devotes significant time to
challenging and supporting management on its approach
to managing these risks and seeking assurance that fair
pricing and outcomes are being achieved for customers
across all Direct Line Group products. In addition, the
Group has a management-level Customer Conduct
Committee which reviews, challenges and oversees
customer and conduct matters across the business. The
Customer Conduct Committee’s findings and any
recommendations for improvement are regularly reported
both to the Board and the Committee.
The Committee received reports on the actions taken
during the year to support vulnerable customers. The
Committee challenged management on the Group’s
vulnerable customer strategy to ensure that: regulatory
expectations were being met; the work that had been
undertaken to define, identify and understand vulnerable
customers was sufficient; and appropriate and timely
vulnerable customer training was being provided to our
customer facing and support staff.
In respect of the Pricing Practices Review, the Committee
received assurance reports from management at each of
its meetings throughout the year to ensure that customer
and conduct risks were being carefully managed and
mitigated and that the Group was in a position to deliver
the intended customer outcomes. Focus was also given to
the ability of the Group to trade effectively following the
implementation of Pricing Practices Review requirements.
In addition, the Committee reviewed the Group’s annual
pricing report, pricing strategy and pricing governance
and control framework. The Committee also received
updates and challenged management on the data ethics
framework which had been deployed for the Group, and
on the activities undertaken to complete and embed the
framework into governance and business processes.
Mark Gregory
Chair of the Board Risk Committee
Committee membership1
– Mark Gregory – appointed as Chair on 13 May 2021
Committee 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 107.
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
– 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
Note:
1. Jane Hanson was Chair of this Committee until she
retired from the Board on 13 May 2021.
www.directlinegroup.co.uk
123
Through receipt of a cyber risk update, the Committee
challenged management on the lessons learned from a
real-world highly sophisticated supply chain attack on
another organisation during the year and sought
assurance that Direct Line Group had appropriate
technical expertise and mitigating controls and actions in
place to respond and recover in the event of a
ransomware incident . The Committee also probed to
ensure that management was satisfied with its approach
to managing cyber risk in relation to home working
arrangements.
Financial risk
During the year, through a technical briefing and regular
climate-related updates, the Committee examined and
monitored management on its progress to embed
climate-related financial risk management in the business.
The Committee reviewed and challenged updates on key
deliverables such as the completion of the Bank of
England Climate Biennial Exploratory Scenarios (“CBES”)
and the full implementation of the PRA’s supervisory
statement requirements relating to climate change. The
Committee reviewed the Climate Risk Management
Report, which included the Group’s climate change
strategy and the CBES model results, and approaches to
evolving the strategy through management actions.
Further details on the risks due to climate change faced
by the Group can be found on pages 84 to 85 and 93.
At each meeting, the Committee monitored the Group’s
performance against its capital risk appetite through the
CRO’s report. Committee members also reviewed and
challenged the ORSA process and key content before the
report was submitted for approval to the Board.
Committee challenges on elements of the ORSA during
the year included those in relation to stress testing of the
strategic plan, the prioritisation of change resource and
activities to deliver the strategic plan, pricing and
underwriting risk, internal model validation activity and
the appropriateness of contingent management actions.
The Committee monitored and challenged the stress and
scenario testing plan with a particular focus on areas of
uncertainty such as further lockdown periods leading to
continued global disruption and customer behaviour
changes, the potential economic implications resulting
from the end of the furlough scheme and adverse Brexit
consequences. In addition, the Committee reviewed the
potential contingent management actions which
management could consider taking in times of stress to
restore the Group’s capital strength to within an
acceptable risk appetite range. Further details on the risks
due to climate change faced by the Group can be found
on pages 84 to 85 and 93.
Board Risk Committee Report continued
Compliance and regulatory risk
During the year, the Committee regularly received reports
on the Group’s interpretation of and compliance with the
new Pricing Practices Review rules. The Committee
sought assurance that management: was on track and
had adequate resource to meet the challenging
regulatory deadlines; had developed robust and
reasonable rule interpretations; and had managed
regulatory risks appropriately.
During the year, the Committee considered the Group’s
compliance with other regulatory requirements including
those relating to conduct and financial crime. The
Committee approved the annual Compliance Plan which
sets out compliance activities to be undertaken in the
coming year, with a view to ensuring compliance with
regulation, 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 2021. 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.
Operational risk
During the year, through receipt of regular operational
resilience programme 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, systems and processes for
identifying important business services. Committee
members also attended a deep-dive session on the
Group’s operational resilience self-assessment, important
business services and impact tolerances.
The Committee supported the significant progress that
management has made in completing the majority of the
Group’s transformation agenda to deliver greater
technology and data capability across the business and
further embed sustainable outcomes. The Committee
reviewed and challenged summaries from management
on the transitioning and embedding of new systems into
business operations and the development of the Group’s
remaining technological transformation releases. The Risk
function also provided updates to the Committee on its
assurance activity, which included reviewing and
challenging programme plans and processes to ensure
the safe delivery of new systems and the mitigation of
customer impacts. In addition, third-party assurance was
provided to the Committee by Deloitte, who had been
engaged to conduct a deep-dive review on technical
readiness for business volume increases and programme
closedown. KPMG also carried out a readiness assessment
which was presented to the Board and Committee.
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Direct Line Group Annual Report and Accounts 2021
Governance The Committee regularly reviewed and challenged reports
on our internal model for determining regulatory capital
requirements in the year, including model changes and
future management actions assumed by our internal
model such as continuing to buy reinsurance, selling
downgraded bonds and hedging of currency risks. The
Committee also reviewed the independent validation
results which outlined the scope of our internal capital
model, key outputs, risk drivers, significant parameters,
expert judgements and key assumptions. In addition, the
Committee reviewed the internal model owners’ report
with a particular focus on the model insights relating to
sources of profit.
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
summarised the outputs of regular risk monitoring and
details of specific risk matters. Areas that the Committee
focused on in particular included Covid-19 impacts and
risks, financial impacts and risks of the FCA’s Pricing
Practices Review, motor market trading challenges, Brexit
uncertainties, climate change, strategic plan key
assumption and dependencies, cyber risk, lessons learned
from the technology transformation, key ongoing
regulatory developments and interactions and the Group’s
current and forward-looking solvency position.
The Committee received regular reports regarding our
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 Group’s 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. Further detail on the
outcome of these assessments can be found on page 117.
Principal and emerging risks
The Committee assessed the principal risks facing the
Group, which are listed on pages 91 and 92, 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 Committee meeting.
The Committee assessed the Group’s emerging risks. It
challenged management on the identification of all
possible significant emerging risks during the year and on
the Risk function’s role in ensuring that such emerging
risks were being monitored and managed appropriately.
The most notable emerging risks identified included those
relating to climate change, ethical use of data and global
financial instability.
Further details regarding such risks can be found on
pages 91 to 93.
Whistleblowing
As delegated by the Board, the Committee routinely
reviews 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. As Committee Chair, I
am responsible for oversight of the independence,
autonomy and effectiveness of the Group’s policies and
procedures on whistleblowing including the procedures
for protection of staff who raise concerns from detrimental
treatment. During the period, the Committee 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.
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 to ensure that employees act responsibly
and ethically at all times when conducting business.
The Committee considered the Group’s actions to prevent
financial crime through its review of the annual financial
crime report and recognised the additional monitoring
controls that had been implemented to manage remote
working fraud risk. 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. 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.
www.directlinegroup.co.uk
125
Board Risk Committee Report continued
Appointment of new CRO
Following Jose Vazquez’s decision to retire as CRO, a
search was launched by management, who appointed
Rice Search Partners to assist in the search for his
successor. Members of the Committee were invited to
interview shortlisted candidates and supported
management’s choice to appoint Aurore Lecanon as CRO
to succeed Jose. Aurore was previously Chief Risk and
Compliance Officer of Prudential International Assurance
and her DLG appointment was effective from 2 December
2021.
Risk governance
During the reporting period, the Committee received
assurance from management on the process for policy
review and reviewed material changes to 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 as appropriate. The Committee
considered, challenged and approved the annual Risk
Operational Plan which set out the Risk function’s
priorities aligned to the strategic plan.
The Committee has unrestricted access to management
and external advisers to help discharge its duties. It is
satisfied that in 2021 it received sufficient, reliable and
timely information to perform its responsibilities
effectively. In addition to one-to-one meetings with the
Chair, the Chief Risk Officer also met privately with the
Committee without the Executive Directors. 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 by the Chair of the
Board as part of the wider review of the Board and the
Board Committees. The review found that the
Committee’s agenda was well-aligned with the Group’s
strategic priorities and that the Committee Chair
transition had been managed seamlessly. Further
information on the Board effectiveness review can be
found on pages 115 to 116.
In addition, the Committee’s terms of reference were
reviewed against the activity of the Committee during the
year. The terms of reference were found to be suitable,
comprehensive and of appropriate scope.
The Committee’s terms of reference can be found on the
corporate website:
www.directlinegroup.co.uk/en/who-we-are/leadership/
board-committees
The Board reviewed and approved this report on 7 March
2022.
Mark Gregory
Chair of the Board Risk Committee
126
Direct Line Group Annual Report and Accounts 2021
Governance Nomination and Governance Committee Report
Nomination and Governance
Committee Report
Areas of focus in the reporting period
– Oversaw the appointment of the new CFO.
– Reviewed the skills and experience needed by the Board
and its Committees to oversee the Group’s strategy and
led the search for a new Non-Executive Director.
– Monitored progress on executive succession planning,
both for members of the Executive Committee and for
the Senior Management talent pipeline below Executive
Committee level.
Main activities during the year
Board changes
One of the key matters that the Committee considered
during the year was the appointment of the new CFO
following Tim Harris’s decision to retire as CFO for personal
reasons. In reaching its CFO succession recommendation,
the Committee reviewed the benchmarking that had
been carried out during the previous CFO search and
considered Neil Manser’s strong contribution and
performance while he acted as CFO both immediately
before Tim’s appointment and in Tim’s absence.
The Committee took into account Neil’s deep strategic
understanding of the Group, his strong background in the
insurance sector and capital markets, and his excellent
working relationship with Penny James, CEO. The
Committee concluded, for those reasons, that the
strength of Neil’s candidacy was such that a formal
executive search was unnecessary and, regulatory
approval having been obtained, recommended to the
Board that Neil be appointed as CFO on a permanent
basis. Neil’s appointment as CFO was announced on 13
May 2021. More information about Neil’s experience can
be found on page 98.
In May 2021, Jane Hanson, Non-Executive Director,
stepped down from the Board as planned, having served
a full nine-year term. The Committee took the opportunity
to review and refresh the Chairship of its Committees
which resulted in a recommendation that Mark Gregory
be appointed as Chair of the Board Risk Committee
and relinquish the Chairship of the Remuneration and
Investment Committees, that Richard Ward be
appointed Chair of the Remuneration Committee, and
that Fiona McBain be appointed as Chair of the
Investment Committee.
Danuta Gray
Chair of the Nomination
and Governance Committee
Committee membership
– Danuta Gray
Chair
– Sebastian James
Independent Non-Executive Director
– Dr Richard Ward
Independent Non-Executive Director
Committee meeting attendance can be found
on page 107.
Key responsibilities
– Review composition of the Board and its
Committees
– 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
– Set diversity objectives and strategies
– Oversee and monitor the corporate governance
framework of the Group
– Monitor developments in governance and investor
ESG expectations
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127
Nomination and Governance Committee Report continued
Following Jane Hanson’s departure, the Committee
reviewed the composition and balance of the Board and
identified a requirement for an additional independent
Non-Executive Director. 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 individual Director, was engaged to assist
in a search for a candidate with experience of digital
transformation, cultural change and customer-focused
innovation. Shortlisted candidates were interviewed by
members of the Committee and the preferred candidate
met other members of the Board before the Committee
made its final recommendation. This process resulted in
the Committee’s recommendation to the Board that Tracy
Corrigan be appointed as an independent Non-Executive
Director with effect from 1 November 2021. In early
November 2021, the Committee also recommended, and
the Board agreed, to appoint Tracy as a member of the
Sustainability Committee. More details on Tracy’s
experience and skills can be found on page 99.
Board and Senior Management succession
planning
The Committee keeps the composition of the Board and
its Committees under continual review 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 Committees’ responsibilities effectively. For
example, in appointing Tracy Corrigan as an additional
member of the Sustainability Committee, we have
recognised the expanded remit of that Committee,
including its oversight of the establishment of Science-
Based Targets, the Group’s approach to supporting
vulnerable customers and our community support and
social mobility initiatives.
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.
Electing and re-electing Directors
Before recommending the proposed election or re-
election of Directors at the 2021 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 UK
Corporate Governance Code. The Chair of the Board was
independent on appointment.
The Committee also carefully considered Directors’
external responsibilities and concluded that all Directors
had sufficient time to dedicate to their respective roles.
The Committee recommended to the Board and
shareholders that all serving Directors, except Jane
Hanson, who would be stepping down from the Board, be
submitted for election or re-election at the Company’s
2021 AGM. Tim Harris made his decision to step down as
CFO for personal reasons following the circulation of the
Notice of the 2021 AGM and the AGM resolution to re-elect
him was withdrawn accordingly.
All current Directors will submit themselves for election or
re-election at the Company’s 2022 AGM.
Diversity and inclusion
The Committee believes that an effective Board with a
broad strategic perspective embraces a diversity of
gender, ethnicity, skills, experience and cognitive diversity,
as well as diversity of regional, socio-economic,
educational and professional backgrounds.
The Board’s Diversity Policy is available to view on the
Company’s website at www.directlinegroup.co.uk/en/
sustainability/reports-policies-and-statements. This policy,
which is monitored and reviewed annually by the
Committee, is made available 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’s Diversity Policy and initiatives can be found in
the Corporate Governance report on page 114 which
includes progress against Hampton-Alexander and Parker
review targets.
The Committee is also engaged in promoting diversity at a
Senior Management and Group-wide level. 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, which includes the objectives
both of encouraging diversity in succession planning and
of fostering a culture of growing inclusivity. Further
information on the Group’s diversity policy and initiatives
can be found in the People section of the Strategic report
on page 61.
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Direct Line Group Annual Report and Accounts 2021
Governance Corporate governance
The Committee monitors emerging governance matters,
compliance with the UK Corporate Governance Code,
observance of ESG standards and subsidiary governance.
It will continue to monitor consultations, developments
and reforms which affect the Group’s adherence to
corporate governance best practice.
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, involves the wider Board in search
processes as necessary and strikes an appropriate balance
between Committee and Board discussions about the
executive talent pipeline and succession planning. Further
information on the Board effectiveness review can be
found on pages 115 to 116.
In addition, the Committee’s terms of reference were
reviewed against the activity of the Committee during the
year. The terms of reference were found to be suitable,
comprehensive and of appropriate scope.
The Committee’s terms of reference can be found on the
corporate website:
www.directlinegroup.co.uk/en/who-we-are/leadership/
board-committees
The Board reviewed and approved this report on
7 March 2022.
Danuta Gray
Chair of the Nomination and Governance Committee
www.directlinegroup.co.uk
129
Sustainability Committee Report
Sustainability Committee Report
Areas of focus in the reporting period
– Monitored the Group’s activity under the five pillars of
the Group’s sustainability strategy.
– Oversaw the Group’s involvement in environmental
initiatives, including progress towards achieving
Science-Based Target initiative (“SBTi”) validation status.
– Considered decision making on ethical matters,
including the Group’s Modern Slavery Statement.
– Reviewed performance and approach on ethical
matters, including customer and supply chain issues.
– Reviewed the Group’s people plans, including any
impact of a move to a hybrid working model.
Main activities during the year
Customer
During the year, the Committee oversaw the team’s work
to drive positive customer outcomes and to align business
practices with the Group’s purpose: “to help people carry
on with their lives, giving them peace of mind now and in
the future.” The Committee reviewed work being
undertaken to implement changes required by the FCA’s
Pricing Practices Review and considered how this could
be used as an opportunity to achieve even better
outcomes for customers, as well as ensuring regulatory
compliance.
Additional opportunities to deliver further improvements
in outcomes for customers were reviewed. This included
an action plan laying out how the Group ensured fair
treatment of vulnerable customers. In addition, the
Group’s involvement in the Plain Numbers trial was
recognised as an important way to further enhance clarity
for customers. The Committee welcomed the Group’s
engagement in the initiative and supported commitment
to use lessons learned in future customer
communications and to allocate dedicated resource to
this area.
People
Over the course of 2021, the Committee oversaw work to
encourage a culture that helps people thrive through
celebrating difference. The Committee additionally
considered the use of engagement tools to understand
how colleagues’ wellbeing had been affected by the
Covid-19 pandemic. It examined, in depth, the Group’s
transition to a mixed working model and reviewed the
Group’s strategy to create meaningful engagement in a
context of remote working. The Committee reviewed the
Group’s approach to future skills development, which
supported the Group’s work to ensure a sustainable
business for the future.
Sebastian James
Chair of the Sustainability
Committee
Committee membership1
– Sebastian James
Chair
– Tracy Corrigan – appointed on 4 November 2021
Independent Non-Executive Director
– Penny James
Chief Executive Officer
– Adrian Joseph
Independent Non-Executive Director
Committee meeting attendance can be found
on page 107.
Key responsibilities
– Provide oversight of and advice to the Group on
conducting its business in a responsible and
sustainable manner
– Monitor the progress of the Group against its five
sustainability pillars
Note:
1. Jane Hanson and Tim Harris were members of this
Committee until they retired from the Board
on 13 May 2021.
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Direct Line Group Annual Report and Accounts 2021
Governance In the latter part of the year, the Committee reviewed
management’s shortlist of potential strategic partners to
deliver the new vision for the Fund and monitored
progress made under the Fund Steering Group.
Governance
The Committee is committed to its role in supporting
ethical and sustainable business practice across the Group
and challenging management’s approach to delivering
outcomes in line with the Group’s vision and purpose.
In December 2021, the Committee reviewed the Group’s
policy on compliance with the Modern Slavery Act 2015
(the “MSA”) and how third-party suppliers complied with
the Act’s requirements.
The Committee reviewed the Procurement function’s
activity in relation to the MSA and concluded that
processes and policies in connection with the MSA were
robust, effectively embedded in supply chain processes,
and reflected the Procurement function’s updated
sustainability processes.
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’s
scope had evolved effectively during the year and allowed
a range of sustainability issues to be addressed
strategically and in suitable depth. Further information on
the Board effectiveness review can be found on
pages 115 to 116.
In addition, the Committee’s terms of reference were
reviewed against the activity of the Committee during the
year. The terms of reference were found to be suitable,
comprehensive and of appropriate scope.
The Committee’s terms of reference can be found on the
corporate website:
www.directlinegroup.co.uk/en/who-we-are/leadership/
board-committees
The Board reviewed and approved this report on
7 March 2022.
Sebastian James
Chair of the Sustainability Committee
The Committee reviewed steps taken to address feelings
of isolation reported by some colleagues as a result of
lockdown measures and advocated for the alignment of
the Group’s vision and strategy at every level of the
business.
Since the inclusivity survey conducted in 2020, a number
of minority groups reported that they felt less
marginalised. This was welcomed by the Committee, with
the publication of the Group’s first Black Inclusion report
identified as an important step as part of the Group’s
wider aim to facilitate social mobility.
Planet
Throughout 2021, the Committee oversaw work to protect
the business from the impact of climate change and to
achieve the goal of “giving more back to the planet than
the Group takes out.” The Committee oversaw the Group’s
involvement in external engagement initiatives, including
the Group’s commitment to setting Science-Based
Targets (“SBTs”) by August 2022. To this end, the
Committee received insights into challenges facing the
three most carbon-intensive areas of the business, namely,
Auto Services, procurement and investments. For further
details on alignment of our investment portfolio with
initiatives which will support the transition to a low-carbon
economy, see the Investment Committee report for 2021
on pages 132 to 133.
During the year, a Climate Executive Steering Group was
set up to actively monitor progress towards sustainability
across the business. The Committee received its first
report from the Steering Group in September 2021 and will
continue to engage with the Steering Group moving into
2022.
The Committee received updates on additional activities
undertaken by the Group as part of its commitment to the
environment, most notably:
– participation in the Electric Vehicle Fleet Accelerator
(“EVFA”), a pledge to convert the Company’s van fleets
to electric vehicles by 2030;
– co-sponsorship of one of the workstreams in HRH the
Prince of Wales’ Sustainable Markets Initiative Insurance
Taskforce; and
– a commitment to the Get Nature Positive campaign to
restore nature and biodiversity.
Updates on the Group’s involvement in the Bank of
England’s Climate Biennial Exploratory Scenario (“CBES”)
were received and noted by the Committee. Further detail
regarding the Group’s CBES submission can be found in
the Board Risk Committee report on pages 123 to 126.
Society
Over the course of the year, the Committee reviewed the
allocation of the Group’s £1.5 million Community Fund (the
“Fund”), which had been launched as part of the Group’s
response to the Covid-19 pandemic in 2020. In 2021,
funding priority was given to addressing problems arising
from: marginalised groups; loneliness; food poverty; and
mental health and wellbeing. Resource has been allocated
to continue the Fund into 2022 and the Committee
reviewed a refreshed purpose for the Fund: to help build a
more inclusive and equitable Britain by improving social
mobility and accelerating inclusion.
www.directlinegroup.co.uk
131
Investment Committee Report
Investment Committee Report
Main areas of focus in the reporting period
– Monitored the financial consequences for the Group’s
investment assets as global economies started to
recover during 2021 from the economic downturn
driven by the Covid-19 global pandemic.
– Ensured investment activities continued to provide
sufficient access to liquidity to meet a stress insurance
or market event and remain within risk tolerances and
other agreed parameters.
– Considered future possible developments to asset
strategy as the Group continued to align its investment
activity with the transition to a low-carbon economy
and possible future investment into areas such as
carbon sequestration.
– Considered how the investment portfolio is responding
proactively to the global challenge to reduce
greenhouse gas emissions.
– Received updates on the Group’s progress to finalise
identified actions to be ready for the discontinuation of
the London Inter-Bank Offered Rate (“LIBOR”) in 2022.
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 and key data points in the UK, the
US and the Eurozone as economies exited lockdowns; 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 market consensus views and guidance on the
development of interest rate policies set by the Bank of
England, the US Federal Reserve, and the European
Central Bank.
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 holdings. During the year, the Committee
agreed amendments to the existing strategic benchmark
which entailed exiting a dedicated euro fixed income
benchmark allocation with corresponding increases in
allocations to specialist subordinated financial debt and
global fixed income benchmarks.
Fiona McBain
Chair of the Investment Committee
Committee membership1
– Fiona McBain – appointed as Chair on 13 May 2021
Committee Chair
– Mark Gregory
Independent Non-Executive Director
– Neil Manser – appointed on 13 May 2021
Chief Financial Officer
Committee meeting attendance can be found
on page 107.
Key responsibilities
– Provide oversight of the Group’s investment
strategy
– Oversee the management and performance of the
Group’s investment portfolio
Note:
1. Tim Harris was a member of this Committee until he
retired from the Board on 13 May 2021. Mark Gregory was
Chair of this Committee until 13 May 2021.
132
Direct Line Group Annual Report and Accounts 2021
Governance 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. Further information on
the Board effectiveness review can be found on
pages 115 to 116.
In addition, the Committee’s terms of reference were
reviewed against the activity of the Committee during the
year. The terms of reference were found to be suitable,
comprehensive and of appropriate scope.
The Committee’s terms of reference can be found on the
corporate website:
www.directlinegroup.co.uk/en/who-we-are/leadership/
board-committees
The Board reviewed and approved this report on 7 March
2022.
Fiona McBain
Chair of the Investment Committee
Note:
1. Greenhouse gas emissions intensity = metric tonnes CO2e (CO2
equivalent) GHG emissions/million $ sales.
The Committee considered the Group’s strategy and use
of Money Market Funds (“MMFs”) for cash investments. It
looked at the requirements set for using such funds, the
diversification within such funds and across the MMFs
invested into, and what could potentially limit DLG’s
access to liquidity (from MMFs) in a period of market
stress.
Responsible investing – climate change
Following Committee approval in 2020 to set a target to
reduce greenhouse gas (“GHG”) emissions intensity1 across
corporate bond portfolios by 50% before the end of 2030
(benchmarked against the end of 2020 position), the
Committee received confirmation and analysis of the end
2020 GHG emissions intensity calculations. The analysis
studied the top contributors to the Group’s 2020 year-end
emissions by sector, currency, and single name, and
detailed the findings from the Audit function’s
independent assessment of management’s emissions
calculation. At each subsequent meeting, the Committee
received updated GHG emissions intensity calculations.
The Committee received updates from the CRO and
Director of Financial Risk on progress and results from the
Bank of England’s Climate Biennial Exploratory Scenario
(“CBES”).
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; the
alignment of the investment portfolio with an agreed
climate framework; and compliance with an agreed
framework of risk and liquidity limits. During the year, the
Committee invited the team managing the internal
pound sterling fixed income portfolios and two external
managers responsible for managing other investment-
grade fixed income portfolios to present updates on their
respective portfolios and their assessments of conditions
and the outlook for fixed income markets.
www.directlinegroup.co.uk
133
Directors’ Remuneration Report
Directors’ Remuneration Report
Dear Shareholders,
I am pleased to introduce my first Directors’ Remuneration
Report (the “Report”) as Chair of the Remuneration
Committee (the “Committee”), for the 2021 financial year.
I would like to thank Mark Gregory for his interim
stewardship of the Committee since October 2020.
The remuneration of our Executive and Non-Executive
Directors for 2021 is based on the Directors’ Remuneration
Policy which was approved with 97.55% shareholder support
at the AGM in May 2020. Consistent with the regulations,
the Directors’ Remuneration Policy is next due to be
submitted to the Company’s 2023 AGM for approval.
The Group delivered significant strategic progress, at the
same time as delivering strong financial performance
during 2021 whilst navigating the complexities and
uncertainties of a challenging market impacted by the
pandemic. It completed the majority of its planned
technology transformation and built data capability across
the business. The increase in underwriting profit from
growing own brand policy count and a strong investment
return results in a strong profit before tax.
This has been a busy year for the Group with the progression
of our transformation. In the context of remuneration, the
Committee considered the following items:
– Neil Manser’s appointment to CFO on 13 May 2021. The
Committee considered the appropriate remuneration
that would motivate him in the context of market
practice and wider workforce remuneration.
– The arrangements for the retirement of Tim Harris and
appointments of new Executive Committee members.
More information is in the Annual Report on
Remuneration in relation to the departing CFO.
– Refining the indicators used within the Annual Incentive
Plan (“AIP”) and Long Term Incentive Plan (“LTIP”) to
optimise the links to our strategic agenda to deliver
long-term sustainable growth with a customer-
obsessed mindset as well as emphasising our net zero
commitment.
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.
Richard Ward
Chair of the Remuneration
Committee
Committee membership
– Dr Richard Ward
Chair – appointed 13 May 2021
– Danuta Gray
Chair of the Board
– Sebastian James
Independent Non-Executive Director
– Mark Gregory
Independent Non-Executive Director
Key responsibilities
– Determine the policy for rewarding Directors and
senior leadership for results that are generated
within the risk appetite set by the Board and
oversee how the Group implements its
Remuneration Policy
– Oversee the level and structure of remuneration
arrangements for senior executives, approve share
incentive plans, and recommend them to the
Board and shareholders
– Review workforce remuneration and related
policies and the alignment of incentives and
rewards with culture
Note:
Mark Gregory was Chair of the Committee until Richard
Ward’s appointment on 13 May 2021.
134
Direct Line Group Annual Report and Accounts 2021
Governance 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 2021 and covering how the
Group will implement remuneration in 2022
Summary of the Policy approved at
the 2020 AGM
Page
134 to 136
137
138 to 155
156 to 159
AIP
We have achieved a strong set of results in 2021, having
grown our own brand policy count, increased operating
profit with higher prior year reserving releases and a
strong investment return result, alongside incredible
efforts whilst supporting our customers, people and
local communities which has helped us to achieve
strong results in 2021. This has led to a profit before tax
of £547.5 million (before restructuring and one-off costs),
significantly above the maximum performance level set
at the start of the financial year.
“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.”
Wider workforce engagement and pay
considerations for 2021
As part of the wider Committee oversight on all-employee
pay matters, the Committee (following a detailed review) is
delighted to confirm that the Group will apply an increase
to our minimum salary of £1,300 (6.7%) bringing the
Group-wide minimum salary from £19,500 to £20,800 for
full-time colleagues on 37.5hrs from 1 April 2022, subject to
satisfactory performance. This is 7.8% above the Living
Wage Foundation’s National Real Living Wage (November
2021) and 12.3% higher than the Government’s statutory
National Living Wage (April 2022 figure for those aged 23 or
over). In addition, a £400 special payment will be awarded
in April 2022 to everyone who is not usually eligible for a
bonus as part of their contract, to recognise their
contribution to the business during 2021.
The Committee regularly and carefully considers wider
employee pay as context for the decisions it makes. For
the ways in which this is achieved, including further
information relating to the matters discussed at the
Group’s Employee Representative Body (“ERB”) relating
to executive pay and how internal relativities have been
monitored, see page 138 for further information.
Performance and incentive outcomes for 2021
During 2021, we continued to balance the needs of our
stakeholders, supporting our people through the pandemic,
looking after our customers, protecting the business for the
long term, and supporting our local communities. 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. The Group embraced a mixed
working model during 2021, ensuring a safe, supportive and
caring environment for each other every step of the way.
The management team has made good progress this year,
completing much of our technology transformation
and delivered good results despite the complexities and
uncertainties of a challenging market. The Group
has achieved a strong capital position supported by our
successful customer-focused strategy and our investment in
sustainable future capabilities. This performance is reflected
in the incentive outcomes for our Executive Directors.
Performance across the Customer measures (including
Net Promoter Score, complaints, and customer
experience) was also strong, and the Committee awarded
an 80% of maximum outturn for this element. The People
measures were assessed as being between target and
maximum, at 70% of maximum because of strong
improvements in inclusion, but moderated engagement
scores. Although management has made significant
progress by completing much of its transformation
agenda to deliver greater technology and data capability
across the business, there has been lower in-force policies
growth and the Committee therefore awarded an outturn
of 50% of maximum for this element.
There have been no adjustments to the performance
targets set at the beginning of the year. The Committee
determined that the formulaic outturn of the 2021 AIP was
appropriate based on the Group’s strong performance in
the year, noting that the employee bonus pool is based on
the same performance measures as the Executive
Directors to ensure consistency of performance outcomes.
The Committee therefore agreed that no discretionary
adjustments were required.
The overall AIP outcome for the Executive Directors for 2021
was therefore 84% of maximum which resulted in a payout
of £1,200,990 for the CEO and £479,465 for the CFO (relating
to the period as an Executive Director), which the
Committee believes is appropriate in the context of the
Group’s performance in 2021. 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 141 to 144.
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. The March 2018 and August 2018 LTIP
awards (which vested during 2021) were granted before
the appointment of Tim Harris; however, the outcomes of
these awards are relevant to Penny James, Neil Manser,
and certain former Directors.
In accordance with the remuneration reporting
regulations, the reported figures in the single figure table
for 2021 include:
The RoTE element of the 2019 LTIP awards (performance
period ending 31 December 2021):
– average RoTE performance of 21.4% over 2019, 2020 and
2021, is above the maximum performance level of 20.5%
and therefore this element will vest at the maximum
level (subject to the above underpins).
www.directlinegroup.co.uk
135
Directors’ Remuneration Report continued
The relative TSR element of the 2018 LTIP (performance
period from grant to vesting date):
– relative TSR performance was above the threshold
performance level for both the March and August 2018
LTIP awards (based on performance over the three-year
period from the date of grant of each award).
The overall outcome of the March and August 2018 LTIP
wards (including the RoTE outcomes disclosed last year)
were 74.8% and 68.0% of maximum respectively.
The relative TSR elements of the 2019 LTIP awards will be
disclosed in next year’s report once the performance
period is complete.
No discretion was exercised in respect of LTIP awards
vesting during the year, which reflects the Group’s
exceptional RoTE performance and TSR outcomes in a
challenging market over the last three years.
Remuneration Policy
In accordance with the regular shareholder voting cycle, we
intend to review the Directors’ Remuneration Policy during
2022 and we will put forward a new Directors’ Remuneration
Policy for shareholder approval at the 2023 AGM.
Executive Director changes
On 11 January 2021, Tim Harris commenced a leave of
absence for personal reasons. However, for the reasons
explained in the RNS announcement published on 13 May
2021, Tim retired as CFO and stepped down from the
Board with immediate effect. Tim’s employment with DLG
will cease at the end of his 12-month notice period on 12
May 2022. During this period, he continues to receive his
contractual entitlement to salary, pension, and benefits. In
accordance with the Directors’ Remuneration Policy, our
incentive plan rules and our standard treatment for
retirees, the Remuneration Committee determined that
Tim would be treated as a “good leaver”. As such, Tim’s
unvested share awards will continue to vest on their usual
vesting dates (with time pro-rating applied to his LTIP
awards). To reflect the period worked as an Executive
Director to 10 January 2021, Tim is also eligible to receive
a 2021 AIP award (with 40% deferred in shares for three
years). Further details are set out on pages 151-152.
Neil Manser was appointed to the Board as CFO and a
member of the Investment Committee with effect from the
conclusion of the 2021 AGM. In setting Neil’s remuneration,
the Committee considered market data in respect of FTSE
51-150 companies and other FTSE 350 Insurers, the previous
CFO’s remuneration package, our Directors’ Remuneration
Policy and the pay and conditions of the wider workforce.
Neil’s salary was set at £515,000, slightly below that of the
previous CFO (£535,000). Neil’s maximum opportunity
under the AIP and LTIP is 175% and 200% of salary
respectively, consistent with the CEO and previous CFO. In
line with the wider workforce, Neil’s pension contribution is
9% of salary. Details of Neil’s remuneration, which took
effect from 13 May 2021, are set out on page 152.
Approach to pay in 2022
Salary increases will be awarded for the wider workforce
population distributed from a budget of 2.5% of current
salary. Neither the CEO nor CFO will be awarded a salary
increase. No change is proposed to the overall weightings of
the financial and strategic elements under the AIP, however
the underlying categories and sub-weightings within the
136
Direct Line Group Annual Report and Accounts 2021
strategic element have been reviewed. The Committee
carefully considered how best to align remuneration to
delivering profitable growth, realising cost savings, alongside
supporting customers and great people and has amended
the categories and weightings appropriately to reflect these
strategic priorities. The performance measures within the
new categories are aligned with the Group’s Objectives and
Key Results, reflecting a series of stretching, long-term
objectives, with one-year targets set on an annual basis, at
the start of the year to ensure continued progress towards
each long-term goal. Further details are set out on page 154.
We are introducing an emissions measure (10% weighting)
based on greenhouse gas reduction targets, certified by the
Science Based Target Initiative (“SBTi”). The Group is
currently in the process of seeking certification of its
long-term emissions targets with the SBTi and expects this
to be completed later in 2022. The emissions targets for the
LTIP will be set by the Committee based on the certified
SBTi targets and disclosed in next year’s Directors’
Remuneration Report. The target RoTE scale of 17.5% to
20.5% will remain at the same level as in 2021 and reflects
an appropriate performance range in the context of the
Group’s planned underlying RoTE performance. The RoTE
weighting will reduce from 60% to 50%. The Relative TSR
weighting will remain at 40% and continue to be measured
against the FTSE 350 (excluding investment trusts) peer
group. Vesting for median TSR performance (threshold)
remains at 20% and for upper quintile TSR performance
(maximum) is 100% with straight-line vesting in between
these points. Further details are set out on page 155.
Committee performance
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. Further information on the Board
effectiveness review can be found on pages 115-116.
In addition, the Committee’s terms of reference were
reviewed against the activity of the Committee during the
year. The terms of reference were found to be suitable,
comprehensive and of appropriate scope, subject to some
minor clarifications, which were incorporated.
The Committee’s terms of reference can be found on the
corporate website: www.directlinegroup.co.uk/en/
who-we-are/leadership/board-committees
Your AGM vote
The Committee welcomes investor feedback on an
ongoing basis and this Report seeks to describe and
explain our remuneration decisions clearly. I hope that
having read the information in this report, and considering
the performance of the Group during 2021, you will vote in
support of the Remuneration Report at the AGM.
Should you have any questions about my Committee’s
Report please email our AGM email address
shareholderenquiries@directlinegroup.co.uk and I or one
of my colleagues at Direct Line Group will respond to you.
Yours sincerely,
Dr Richard Ward
Chair of the Remuneration Committee
Governance Remuneration at a glance
Remuneration outcomes for 2021
Penny James
(CEO)
Neil Manser
(CFO)
Total pay (£’000)
£3,235
£1,023
£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 140
AIP achievement
This chart illustrates the actual amounts earned from the AIP reflecting performance in 2021. 60% of the amount
is payable in March 2022 and 40% will be deferred into shares for three years.
Penny James
(CEO)
Neil Manser
(CFO)
£479k
147%
175%
£1,201k
147%
175%
£0m
£0.2m
£0.4m
£0.6m
£0.8m
£1.0m
£1.2m
£1.4m
£1.6m
> Find out more on pages 141-144
Actual (% of salary)
Maximum (% of salary)
Actual (£)
LTIP
Release of value under the LTIP
This chart illustrates the total value of the 2018 LTIP
awards that vested in 2021.
Shareholding at 31 December 2021
This chart illustrates the number of shares held at the
end of 2021 by the Executive Directors against the share
ownership guidelines of 250% of salary for the CEO and
200% of salary for the CFO.
Penny James (CEO)
Penny James (CEO)
Grant
Vesting
£0m
£1.0m
£2.0m
Shares under award
Reinvested dividends
Neil Manser (CFO)
Grant
Vesting
£0m
£0.25m
£0.5m
Shares under award
Reinvested dividends
> Find out more on pages 145-146
£0m
£1.0m
£2.0m
£3.0m
£4.0m
Neil Manser (CFO)
£0m
£1.0m
£2.0m
£3.0m
£4.0m
2021
Guideline
> Find out more on pages 148
www.directlinegroup.co.uk
137
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 UK 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 2021. You can find information about each member’s
attendance at meetings on page 107. You can find their biographies on pages 98-101.
Committee Chair
Dr Richard Ward1
Non-Executive Directors
Danuta Gray
Mark Gregory2
Sebastian James
Notes:
1. Dr Richard Ward joined the Committee with effect from 1 January 2021 and was appointed as Chair of the Committee with effect from
the conclusion of the AGM on 13 May 2021.
2. Mark Gregory stepped down as Chair of the Committee with effect from the conclusion of the AGM on 13 May 2021.
Advisers to the Committee
The Committee consults with the Chief Executive Officer,
Chief Financial 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, Chief Financial 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 2021. 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.
During the year, PwC advised on market practice,
corporate governance and regulations, incentive plan
design and target-setting, recruitment, 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 2021. PwC is a member of the Remuneration
Consultants Group and a signatory to its Code of Conduct
and the Committee is therefore satisfied that the advice
PwC provided was objective and independent.
PwC’s total fees for remuneration-related advice in 2021
were £90,900 excluding VAT. PwC charged its fees on a
time and expenses basis.
Wider workforce engagement and pay
considerations for 2021
The Committee carefully and regularly considers wider
employee pay as context for the decisions it makes.
The Group’s ERB is a valued forum for having a two-way
dialogue on many important matters, and since 2018, at
appropriate times during the year the Committee Chair
has attended meetings. The Committee Chair attended
the ERB in December 2021 where there was a Q&A session
around executive pay, covering topics such as alignment
of incentives to strategic objectives, an explanation of how
pay is set for Executive Directors and a debate over the
purpose of elements within the executive package.
The outcome of our DiaLoGue People Survey is an
important factor for the Committee to reflect on and it has
been kept abreast of matters by the Chief People Officer
and Chief Executive Officer throughout the year. Our
existing workforce engagement is strengthened through
“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. This standing agenda item provides
valuable insight and context for framing executive pay
and policies.
The Committee considers it important to monitor and
assess internal pay relativities, including the CEO pay
ratio disclosure, and takes these into account when
determining Executive Director remuneration. During
2021, neither the CEO nor CFO was awarded a salary
increase, consistent with the approach we took across
our senior leadership population given the challenging
economic climate. Salary increases were awarded to the
wider workforce population, in recognition of their hard
work. They received increases of between 1.5% to 2%.
Through continued focus on building an inclusive
organisation, the Group have maintained female
representation in senior jobs in line with the Women in
Finance Charter target of 30.0% since 2019, and as of
31 December 2021, 32.8% representation of women in our
senior leadership has been achieved. We will continue with
the programmes underway to further reduce the gender
pay gap. We are also pleased that we will voluntarily
disclose the Group’s Ethnicity Pay Gap for the first time.
Both reports can be found at www.directlinegroup.co.uk
138
Direct Line Group Annual Report and Accounts 2021
Governance 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 Chair of the Remuneration Committee attended an ERB
meeting in December 2021. Further details are set out on pages 111 and 138.
– During 2021 in conversations with investors, a few shareholders asked clarification questions about
the executive remuneration arrangements, and some enquired about how we align our executive
remuneration with ESG priorities, explaining the importance to them. When the Committee further
considered our approach to ESG metrics, taking into account our business strategy priorities,
shareholder feedback and market practice, it concluded that it would be appropriate to include the
emissions-based target in our LTIP from 2022 onwards.
– 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. For example, when deciding to introduce the emissions targets
to the 2022 LTIP, the Committee determined that these should be linked to the SBTi-certified targets
to ensure simplicity and consistency with the Group’s broader emissions targets.
– The ability to mitigate potential risks is within in 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. No such
adjustments were made in 2021.
– At the time of approving the Policy full information on the potential values of the AIP and LTIP are
provided, with strict maximum opportunities and minimum, and target and maximum performance
scenarios. An indication of the potential impact of a 50% share price appreciation on the value of LTIP
awards is also included.
– The 2021 AIP and LTIP award opportunities were in line with the maximum opportunity in the Policy.
– Payments under variable incentive schemes require robust performance against challenging
conditions over the short and longer term. For example, 55% of the AIP is based on Profit Before Tax
and from 2022, 50% of the LTIP awards granted during the year are based on RoTE – both measures
are Key Performance Indicators for the Group.
– 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.
– 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 them in the following ways:
– 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. For example, the Committee felt introducing an emissions target
to the 2022 LTIP furthers this ambition.
– Work together – the Strategic element of the AIP requires our Executive Directors and senior
leadership to work together to deliver key results to our stakeholders. For example, the Committee
has amended the underlying categories and sub-weightings of the strategic elements under the
AIP to better align with delivering profitable growth, realising cost savings alongside supporting
customers and great people .
– Take ownership – financial targets under the AIP are the same for all eligible 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
139
Directors’ Remuneration Report continued
Implementing policy and pay outcomes relating to 2021 performance
Single figure table (Audited)
Salary1
Benefits2
Annual
bonus3
Long-term
Incentives4,5
All-employee
share plans6
Pension
contributions
and cash
allowance
in lieu of
pension
Fixed pay
and benefits
sub-total
Variable
remuneration
sub-total
817
813
326
–
134
535
36
26
1
–
5
14
1,201
1,166
479
–
19
768
1,107
1,208
187
–
–
–
–
–
1
–
0
–
74
73
29
–
18
48
927
912
357
–
157
597
2,308
2,374
666
–
19
768
Total
3,235
3,286
1,023
–
176
1,365
£’000
Penny James
Neil Manser7
Tim Harris8
Notes:
2021
2020
2021
2020
2021
2020
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 148. These deferred awards are normally subject to continuous employment. However, awards remain subject
to malus and clawback.
4. The expected vesting outcome figures for the RoTE portion of the awards granted under the LTIP in 2018 and reported in 2020 have
been updated. These updates are based on the actual vesting of the RoTE portion of the awards and a share price of £3.20 and £3.09
on 26 March 2021 and 31 August 2021 respectively, compared to the three-month average share price of £2.91 used in reporting this
figure in the 2020 report. The revised figures include the actual number of dividends accrued on this portion of the award at vesting.
This results in an adjusted reportable increase of approximately £97,794 for Penny James, with a corresponding increase of the single
figure in 2020 reflected in the table above. Further information on LTIP awards can be found on pages 145-146.
5. The 2021 LTIP figure for Penny James reflects the relative TSR element of her 2018 LTIP awards and the RoTE element of her 2019
awards. The value is calculated based on the share price at the date of vesting for the 2018 LTIP awards, of £3.20 and £3.09, and a
three-month average share price to 31 December 2021 of £2.78 for the 2019 awards. The same approach is used for Neil Manser, but
the value of the relative TSR element of his March 2018 LTIP award is not included as the performance period was completed prior to
his appointment to the Board. Further information on LTIP awards can be found on pages 145-146.
6. The value of matching shares under the SIP for Tim Harris is a de minimis amount of £198.
7. Neil Manser was appointed to the Board on 13 May 2021. His salary, bonus, benefits, and pension for 2021 have been pro rated
accordingly.
8. Tim Harris stepped down from the Board on 13 May 2021, following a period of paid compassionate leave from 11 January 2021 to 31
March 2021, and unpaid leave 1 April 2021 to 12 May 2021. His remuneration for the purposes of this table has been pro-rated. Details of
Tim’s salary, pension and benefits paid following his cessation as an Executive Director on 13 May 2021 until 31 December 2021 can be
found on pages 151-152.
Each Executive Director has confirmed they have not received any other form of remuneration, other than that already
disclosed in the single figure table.
140
Direct Line Group Annual Report and Accounts 2021
Governance Annual Incentive Plan outcomes for 2021 (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 2021
Outcome 2021
84%
Total
55%
12%
7%
10%
Financial
Customer
People
Shared
50%
100%
80%
70%
55% Financial
15% Customer
10% People
20% Shared
Executive Director
Penny James
Neil Manser1
Tim Harris2
Notes:
Achievement under the 2021 AIP
2021 AIP payment3
84% of maximum
84% of maximum
84% of maximum
£1,200,990
£479,465
£18,725
1. The AIP for Neil Manser is pro-rated to reflect the period from 13 May 2021, being the date he was appointed as an Executive Director.
2. Tim Harris’ AIP is pro-rated to reflect the period of 1 January 2021 to 10 January 2021, before his period of paid compassionate leave.
3. 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 for 2021 is profit before tax (excluding restructuring costs of £101.5 million).
The Committee established threshold and maximum performance levels at the start of the year considering internal
budgets and analysts’ consensus forecasts and did not adjust the targets during the year.
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.
The table below sets out the threshold and maximum performance targets for the year, and the actual
performance achieved.
Measure
Profit before tax
Threshold 10%
£392.4m
Maximum 100%
£479.6m
2021 Actual
£547.5.m
2021 Achievement
100%
www.directlinegroup.co.uk
141
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 Remuneration Committee sets challenging target
and stretch performance levels with reference to customer-centric KPIs. These are intended to ensure that
remuneration is aligned with and supports continuous improvement.
A detailed assessment of the Customer measures is set out below.
Measure
Assessment
Net promoter score (“NPS”)
Improvement of customer
advocacy across the Group
– Our NPS scores measure the likelihood of our customers recommending one of
our brands. We set on-target and stretch performance levels for each NPS score.
– Strong brand NPS scores on Direct Line and Churchill continued with motor
Complaints
Reduction in complaints volume
and process improvements
MyCustomer
Transaction customer experience
performance measuring our
people/calls
claims and renewals journeys showing particularly positive performance, with
two NPS scores above on-target and one score above stretch.
– Rescue claims NPS performance ended the year below on-target levels for 2021,
in part due to pressure on our recovery network due to high volumes of UK-based
‘staycation’ holidays during the summer.
– 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 further reduced during 2021 to lowest-ever levels.
– Focus on continual improvement and taking learnings from dissatisfied
customers helped ensure that our customer outcomes continued to be positive.
– There was a small increase in complaints in the summer holidays for Rescue due
to significant increase in road traffic against a stretched network, but overall, the
complaints measure was above stretch performance.
– MyCustomer performance in Customer Operations and Claims Operations
achieved strong levels during 2021 and was above stretch and above on-target
respectively, despite the challenges we faced, including handling digital
transformation and headcount levels.
– Over 1 million responses from customers across the Group have provided
feedback on the experience delivered by our people; 89.3% of customers rated
our people as 9 or 10 out of 10.
Good performance has been delivered against Customer metrics during 2021 whilst continuing to provide support
in a continued challenging time with a relentless focus on customer needs, efficiency, and innovation.
Having considered performance against targets and an assessment of the quality of performance achieved, the
Committee judged the performance against the Customer element to be above target, giving a total of 12% out of 15%
attributable to this element.
Measure
Customer
2021 Achievement
80%
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Direct Line Group Annual Report and Accounts 2021
Governance 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. The
Committee judged the performance against the People element to be above on-target, giving a total of 7% out of 10%
attributable to this element. A detailed assessment of the People measures is set out below.
Measure
Assessment
Leadership
effectiveness
and 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
– Our 2021 Leadership index final position is below on-target level landing at 74%. In 2020, we
set up a leadership index to measure progress in leadership effectiveness. It indicates the
extent to which colleagues feel positive about our leaders and decisions they make.
– In part, we were unable to meet these ambitions because of operating in a high-change
landscape with minimal opportunity for in-person interactions, and because of the
significant changes to some of our biggest leadership roles.
– To prepare future successors, we made several internal talent moves in 2021 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 extremely strong, continuing
to improve in 2021.
– 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 14 graduates and
40 apprentices in 2021.
– Since signing the Women in Finance Charter five years ago, we have recruited, developed
and promoted more women into senior roles. Women now account for 32.8% of our senior
leadership, above our on-target level and up from 22.2% in 2016. We are working towards our
next milestone of 35% by the end of 2022.
– We have grown our senior diversity profile across ethnic minority and Black professionals in
leadership, to 11.7% and 0.9% respectively, which is above and at our on-target levels, making
good progress towards our milestones of 13% and 1.5% by the end of 2022.
– We are pleased that our inclusivity score for our most marginalised communities (Black,
Non-Binary/Gender Fluid and Sikh) have increased ahead of our on-target threshold.
– We have grown empathy and understanding across our senior leaders through our reverse
mentoring programme and a comprehensive campaign led by our employee networks to
educate colleagues on issues affecting our most marginalised communities. Storytelling has
been hugely effective to allow colleagues to share their experiences on sensitive topics such
as racism, gender identity, what religion means to them, ’coming out’ and living with a
disability.
– During 2021, we introduced an even stronger focus on inclusive recruitment for senior roles,
including anonymised CVs, diverse shortlists, and panel-based assessment to help protect
against bias.
– As a result of our focus, we were delighted to be placed 13th on the Inclusive Companies Top
50 UK Employers List which recognises leading companies that promote inclusion within
their organisations.
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 roles
– To bolster our listening capabilities further, we transitioned to a new engagement platform
during 2021 with better functionality. The surveys gather a mix of quantitative and
qualitative data across a range of topics including overall sentiment, wellbeing, leadership,
empowerment, and inclusion.
– We have settled into a quarterly survey cadence. 78% of our employees took the time to
share their views in November, our highest response rate in over two years. This was a 20%
uplift on the prior survey and reversed the previous trend of declining responses.
– At the end of 2021, as uncertainty over a further wave of lockdowns hit, increased external
pressures and increased workload alongside ambitious technology change resulted in a fall
in our engagement score to 66%, which was below the required on-target level. Our biggest
declines related to Pride and Advocacy. Although we are ahead of the Financial Services
external benchmark (61%), we are behind the upper quartile (high performing) and are
therefore below our threshold target.
– Alongside engagement surveys, we continued to run All Colleague Calls, Town Hall events,
Q&As and Coffee and Chat sessions with ExCo leadership, which all provided a great
opportunity to sense the mood of the business and allow tailored responses, such as
measures to emphasise work and personal boundaries, and colleague vouchers to
encourage teams or individuals to meet up because of feedback that they were feeling
disconnected.
– We also continued to re-invent many of our Group-wide high-profile engagement activities,
such as our coveted Chief Executive Awards programme, to be delivered in an even more
engaging format.
Measure
People
2021 Achievement
70%
www.directlinegroup.co.uk
143
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 growth, business
transformation and cost savings, with the aim of ensuring the Group has the capabilities and cost base to ensure its
sustained success. Although the Group’s multi-brand, multi-channel strategy places the Group in a strong position to
deliver sustainable growth under the pricing rules, the specific stretching Group objectives were met in part. Therefore,
the Committee agreed an outturn of 50% for the Shared measures, giving a total of 10% out of 20% attributable to this
element. A detailed assessment is set out below.
Measure
Assessment
Best at Direct
Grow Direct Line materially,
sustainably, and profitably
Best at Direct / Win on Price
Comparison Websites / Extend
our reach
Turn renewal and new business
price equalisation into an
advantage for us and value for our
customers
Technical Edge
Become market leaders in pricing
and underwriting and continue to
deliver in-year claims cost savings
Nimble and cost efficient
Deliver a step change in our
competitiveness by reducing our
Cost per in-force policy
– Direct own brands in-force policies grew 1.0% with growth across Commercial
direct (7.5%), Green Flag Rescue (5.8%) and Home (2.3%) offsetting declines in
Motor. Motor direct own brands in-force policies were stable in H2 2021 with a
reduction of 1.9% over the year. The lower in-force policies growth was partly
attributable to underwriting discipline in a deflating Motor market. This was lower
than the on-target level.
– Overall Group Loss Ratio was 58.1% in 2021 (2020: 57.9%), which exceeded the
on-target level. This was partly attributable to benign weather but also to good
underwriting performance across Motor and Rescue in particular.
– The Group implemented the FCA’s Pricing Practices Review requirements within
the challenging deadlines prescribed by the FCA.
– The business’s preparations involved a large-scale programme of activity and the
deployment of considerable resources to meet the requirements of the new
regulations within an ambitious timeframe during 2021 which exceeded the
on-target level.
– In our Motor business, we announced a new partnership with Motability
Operations Ltd which is due to take effect from 2023 (see page 8). It will provide
valuable underwriting data, insight, and capability into the future of vehicle
technology and repair, crucial for building long-term strategic resilience against
key transition risks. The partnership is anticipated to increase Motor gross written
premium by around £500 million each year from H2 2023.
– During the year, our strategic technology transformation delivered material
improvements to the way we interact with our customers.
– We’ve achieved step changes in our use of pricing and data, which are already
beginning to improve our competitiveness in Motor, and we will continue to refine
and enhance our pricing models and capabilities.
– Commercial continued the rollout of its new pricing and underwriting system
across Commercial combined and Fleet, alongside the launch of machine
learning pricing models, dramatically improving pricing accuracy.
– Motor's current-year attritional loss ratio rose 6.3 percentage points to 72.9%
(2020: 66.6%) driven predominantly by a reduction in the severity of lockdowns in
2021 compared to 2020. Whilst the Motor current-year loss ratio in H1 2021 was
modestly higher than for H1 2020, it increased in H2 as lockdown restrictions were
eased and claims frequency increased closer to expected levels. In addition,
claims severity inflation was slightly above our medium-term 3% to 5% per year
inflation expectations during 2021, due to high levels of inflation in second-hand
vehicles and additional Covid-19 related cleaning costs.
– We continued to make progress on our cost agenda, with operating expenses
reducing £18 million to £706.3 million (2020: £724.4 million) and the expense ratio
falling 0.6 percentage points to 23.9%. Whilst we saw levies increase by 11% during
2021, alongside heightened inflation in wage costs, these impacts were more
than offset by lower technology costs, savings from our property strategy and 9%
reduction in headcount. We also incurred lower Covid-19 related costs.
Moderate performance has been delivered against Shared metrics during 2021. Having considered performance against
targets and an assessment of the quality of performance achieved, the Committee judged the performance against the
Shared element to be around target, giving a total of 10% out of 20% attributable to this element.
Measure
Shared
2021 Achievement
50%
144
Direct Line Group Annual Report and Accounts 2021
Governance LTIP outcomes for 2021 (Audited)
2018 LTIP awards (vesting in 2021)
Awards under the LTIP granted in March and August 2018 vested during 2021. They were subject to relative TSR
performance over the three-year period from the date of grant, and RoTE performance in 2018, 2019 and 2020.
Consistent with the Regulations, the expected RoTE vesting outcomes for the year ended 31 December 2020 (together
with the TSR elements from the 2017 awards) are included in the 2020 LTIP column of the single figure table. The
performance outcomes of these elements are included in the table below.
The 2021 single remuneration figure includes the value of the 2018 TSR elements and the awards vested shortly after.
Details of the targets and performance achieved are set out in the table below.
The Committee was satisfied that the financial and risk underpins were met at the end of the vesting period and
therefore the performance achieved against the targets and the vesting of the awards is as follows.
Award
Performance measure
Weighting
Threshold (20%
of maximum)
March 2018
August 2018
RoTE
(2020 single figure)
Relative TSR
(2021 single figure)
RoTE
(2020 single figure)
Relative TSR
(2021 single figure)
60%
15.0%
40%
Median
60%
15.0%
40%
Median
Maximum
(100% of
maximum)
18.0%
Actual
performance
Achievement
Outcome
20.7%
100.0%
60.0%
Upper
quintile
18.0%
Between median
and upper quintile
20.7%
Upper
quintile
Between median
and upper quintile
36.9%
14.8%
100.0%
60.0%
20.7%
8.0%
2019 LTIP awards (vesting in 2022)
Awards under the LTIP granted in March and August 2019 (for Penny James and Neil Manser) and October 2019 (for
Tim Harris, granted on joining DLG) will vest, subject to Remco approval, during 2022. They are subject to relative TSR
performance over the three-year vesting period, and RoTE performance in 2019, 2020 and 2021. The RoTE performance
period for these awards ended on 31 December 2021 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 2022,
August 2022, and October 2022 respectively and will be disclosed in the 2022 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 2019 LTIP awards (together with the TSR
elements from the 2018 awards) are included in the 2021 single remuneration figures for Penny James and Neil Manser
based on the three-month average share price to 31 December 2021. You can find details of this on page 140. The RoTE
element of the October 2019 award for Tim Harris is not included in the single figure table because the performance
period was completed after he stepped down from the Board.
Award
March 2019
August 2019
October 2019
Performance measure
Weighting
Threshold (20%
of maximum)
RoTE
(2021 single figure)
Relative TSR
(2022 single figure)
RoTE
(2021 single figure)
Relative TSR
(2022 single figure)
RoTE
(2021 single figure)
Relative TSR
(2022 single figure)
60%
17.5%
40%
Median
60%
17.5%
40%
Median
60%
17.5%
40%
Median
Maximum
(100% of
maximum)
20.5%
Upper
quintile
20.5%
Upper
quintile
20.5%
Upper
quintile
Actual
performance
Achievement
Outcome
21.4%
100%
60%
Performance period not yet complete
21.4%
100%
60%
Performance period not yet complete
21.4%
100%
60%
Performance period not yet complete
www.directlinegroup.co.uk
145
Directors’ Remuneration Report continued
Summary of the 2021 LTIP single remuneration figure outcomes
Number of shares
awarded (inc. dividends)
subject to this
performance condition
Percentage vested by
reference to
performance
achieved
Number of
shares vested
Total value
of shares (inc.
dividends) vested
£’000
March 2019
LTIP – RoTE1
August 2019
LTIP – RoTE1
March 2018
LTIP – TSR2,3
August 2018
LTIP – TSR2
Total single
figure LTIP4
Notes:
Penny James
Neil Manser
Penny James
Neil Manser
Penny James
Penny James
Neil Manser
Penny James
Neil Manser
144,178
28,835
191,976
33,610
91,296
101,448
20,289
100%
100%
100%
100%
36.9%
20.7%
20.7%
144,178
28,835
191,976
33,610
33,688
21,000
4,200
401
80
534
93
108
65
13
1,107
187
1. 2019 RoTE elements are based on the three-month average share price to 31 December 2021 of £2.78.
2. 2018 TSR element is based on share price on the date of vesting on 26 March 2021 and 31 August 2021 of £3.20 and £3.09 respectively.
3. The value of the relative TSR element of his March 2018 LTIP award is not included in the single figure disclosure for Neil Manser as the
performance period was completed prior to his appointment to the Board. It is however displayed above for completeness.
4. The vesting outcome for the RoTE and TSR elements of Tim Harris’ October 2019 LTIP will be disclosed as a payment to past directors
in the 2022 Directors’ Remuneration Report, in line with the requirements of the remuneration reporting regulations.
Directors’ share interests (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 2021 to the date of this report.
At 31 December 2021
Share plan interests exercised during
the year to 31 December 2021
Share plan
awards subject
to performance
conditions1,2,3
Share plan
awards subject
to continued
service1
Share plan
interests vested
but unexercised1
Shares held
outright4
Number of
options
exercised1
Share price on
date of exercise5,6
Penny James
1,573,519
392,706
778,619
783,169
Neil Manser
Tim Harris7
Notes:
466,548
741,647
188,468
185,478
–
–
177,728
5,912
137,156
58,870
100,178
34,487
–
3.11
3.11
3.07
3.10
–
1. These awards take the form of nil-cost options over the Company’s shares. Such awards accrue dividend entitlement from the grant
date to the date on which an award vests, or the end of the applicable holding period. Dividends added post-vesting are shown to
31 December 2021 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. These awards include beneficial share interests acquired under the SIP. At 7 March 2022, the number of shares beneficially held by
Neil Manser had increased to 177,828.
5. Penny James exercised options on 29 March 2021.
6. Neil Manser exercised options on 29 March 2021, 6 August 2021, and 1 September 2021.
7. The above share plan interests for Tim Harris are at 13 May 2021, being the date he stepped down from the Board.
146
Direct Line Group Annual Report and Accounts 2021
Governance The table below shows the Non-Executive Directors’ beneficial interests in the Company’s shares1.
Director
Danuta Gray
Tracy Corrigan2
Mark Gregory
Jane Hanson3
Sebastian James
Fiona McBain
Gregor Stewart
Richard Ward
Adrian Joseph4
Notes:
Shares held at
31/12/2021
Shares held at
31/12/2020
26,500
–
–
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. Tracy Corrigan joined the Board on 1 November 2021.
3. Jane Hanson stepped down from the Board on 13 May 2021 and her beneficial interests are as at this date.
4. Adrian Joseph joined the Board on 1 January 2021.
LTIP awards granted during 2021 (Audited)
The table below shows awards granted under the LTIP to Executive Directors in 2021 in the form of nil-cost options.
Director
Position
Award as % of salary
Number of shares granted
Face value of awards (£)
Awards granted in 2021 under the LTIP1
Penny James
Chief Executive Officer
Neil Manser2
Chief Finance Officer
Notes:
100%
100%
62.5%
100%
259,365
262,700
65,476
165,594
817,000
817,000
206,250
515,000
1. The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £3.15 in March
2021 and £3.11 in August 2021.
2. The LTIP award made to Neil Manser in March was made before he was an Executive Director.
The performance conditions that apply to the LTIP awards granted in 2021 are set out below:
Performance Measure
RoTE
TSR
Performance conditions for awards granted in 2021 under the LTIP
Proportion of award
Performance for threshold
vesting (20%)
Performance for maximum
vesting
60%
40%
17.5%
Median
20.5%
Upper quintile
The RoTE targets for awards granted in 2021, 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 26 March 2021 will end on 31 December 2023 for the RoTE element
and 25 March 2024 for the TSR element. The performance period for the awards granted on 31 August 2021 will also end
on 31 December 2023 for the RoTE element and 30 August 2024 for the TSR element.
Direct Line Group 2012 Share Incentive Plan (“SIP”) (Audited)
During 2021, all employees, including Executive Directors, were eligible to invest from £10 to £150 a month from their
pre-tax pay into the scheme, and receive one matching share for every two shares they purchased. This table details the
number of shares held by Neil Manser and Tim Harris under the SIP. Penny James does not participate in the plan.
Neil Manser
Tim Harris
Notes:
Matching shares
granted during
the year
Matching shares
cancelled during
the year
Value of matching
shares granted (£)1
Balance of
matching shares at
31 December 20212
304
63
–
–
901
198
895
63
1. The accumulated market value of matching shares at the time of each award. Purchase of the matching shares takes place within
30 days of the contributions being deducted from salary.
2. Matching shares which are subject to forfeiture.
www.directlinegroup.co.uk
147
Directors’ Remuneration Report continued
DAIP awards granted during 2021 (Audited)
The table below shows the deferred share awards granted under the DAIP to Executive Directors on 26 March 2021 in
respect of the 2020 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
Neil Manser2
Tim Harris
Notes:
Chief Executive Officer
Chief Financial Officer
Chief Financial Officer (former)
Awards granted in 2021 under the DAIP
Value of deferred bonus (£)
Number of shares granted1
466,519
135,300
307,090
148,101
42,952
97,488
1. The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £3.15.
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.
2. The DAIP award made to Neil Manser was made before he became an Executive Director.
Shareholdings (Audited)
This table sets out the Executive Directors’ share ownership guidelines and actual share ownership levels:
Name
Position
Penny James
Neil Manser
Tim Harris4
Notes:
Chief Executive Officer
Chief Financial Officer
Chief Financial Officer (former)
Share ownership guideline1
(% of salary)
Value of shares held at
31 December 20212,3
(% of salary)
250%
200%
200%
490%
159%
62%
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 unvested DAIP awards, all vested but unexercised awards,
or awards unvested but after the performance period and in the holding period. Holdings of Ordinary Shares are 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 2021 share price of £2.79.
4. Shareholding for Tim Harris is calculated based on the 13 May 2021 share price of £2.93, being the date he stepped down from the Board.
Non-Executive Directors (Audited)
Fees were the only remuneration paid to Non-Executive Directors in 2020 and 2021. 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
Tracy Corrigan3
Danuta Gray
Mark Gregory
Jane Hanson4
Sebastian James
Fiona McBain
Gregor Stewart
Richard Ward5
Adrian Joseph6
Notes:
2021
£’000
13
350
125
44
100
101
115
143
80
Fees
2020
£’000
–
209
109
120
96
95
115
120
–
Taxable benefits2
2021
£’000
2020
£’000
–
–
–
–
–
–
–
0
–
–
–
–
3
–
3
2
0
–
2021
£’000
13
350
125
44
100
101
115
143
80
Total
2020
£’000
–
209
109
123
96
98
117
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. Tracy Corrigan joined the Board on 1 November 2021.
4. Jane Hanson stepped down from the Board on 13 May 2021.
5. The value of benefits for Richard Ward in 2021 totals £222, compared to £76 in 2020, these values are rounded to 0 for consistency
within the table above.
6. Adrian Joseph joined the Board on 1 January 2021.
148
Direct Line Group Annual Report and Accounts 2021
Governance CEO pay ratio
The table below compares the single total figure of remuneration for the CEO since 2019 with that of the Group
employees who are paid at the 25th percentile (lower quartile), 50th percentile (median) and 75th percentile (upper
quartile) of its employee population.
Year
2021
20201
20192
Notes:
Method
25th percentile pay ratio
Median pay ratio
75th percentile pay ratio
Option A
Option A
Option A
126:1
132:1
123:1
98:1
108:1
101:1
67:1
73:1
67:1
1. The 2020 figures have been updated for Penny James’ updated 2020 single figure value (see page 140 note 4).
2. 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 James’ service as CFO
excluded.
The UK employees included are those employed on 31 December 2021 and remuneration figures are determined with
reference to the financial year ending on 31 December 2021 (consistent with the approach taken in previous years).
Option A, as set out under the reporting regulations, was used to calculate remuneration for 2021 as we continue to
believe that that 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. No other adjustments were made.
Salary
Total pay and benefits
25th percentile (P25)
Median (P50)
75th percentile (P75)
£19,720
£25,691
£29,326
£32,900
£32,987
£48,302
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 28:1 (2020:
31:1). 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.
The 2021 ratios are slightly lower than last year. This is partly attributable to the CEO’s single figure of remuneration
being lower for 2021 due to a lower value of the LTIP vesting outcome, partially offset by a higher AIP outcome.
Employees have similarly experienced higher bonus outcomes (consistent with the CEO’s AIP result), and this combined
with broader salary increases has led to an increase in the total pay and benefits for 2021 compared to last year. The
median ratio has remained reasonably consistent since 2019, moving broadly in line with the CEO’s single figure of
remuneration, as explained above.
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 a 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 remuneration of Executive Directors and the wider workforce are set out on page 138. The
Committee is satisfied that these policies drive the right behaviours and reinforce the Group’s values which in turn
drives the correct culture, and, for the reasons given above, believes that the ratios are consistent with the Group’s
reward policies.
www.directlinegroup.co.uk
149
Directors’ Remuneration Report continued
Percentage change in Executive Directors’ and Non-Executive Directors’ pay for
2020 to 2021
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.
Executive Directors
Chief Executive Officer
Chief Finance Officer
Chief Finance Officer (former)4
Non-Executive Directors5,6
Tracy Corrigan
Danuta Gray
Mark Gregory
Jane Hanson
Sebastian James
Fiona McBain
Adrian Joseph
Gregor Stewart
Richard Ward
All employees (average)
Notes:
Salary/Fees1
2020
2021
2020
7.6%
n/a
0.0%
n/a
90.1%
7.2%
0.0%
1.0%
14.6%
n/a
0.0%
0.0%
3.5%
0.5%
n/a
0.0%
n/a
67.4%
15.0%
0.0%
4.2%
6.7%
n/a
0.0%
18.9%
2.7%
(24.6%)
n/a
0.5%
n/a
(100.0%)
(100.0%)
(69.3%)
0.0
(79.9%)
n/a
(87.2%)
(5.7%)
(1.4%)
Benefits2
2021
37.3%
n/a
(0.3%)
n/a
0.0%
0.0%
(100.0%)
0.0%
(100.0%)
n/a
(100.0%)
193.3%
(18.6%)
Bonus (including
deferred amount)3
2020
2021
16.1%
n/a
7.9%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
3.9%
3.0%
n/a
2.4%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
8.8%
1. Based on the change in average pay for employees employed in the year ended 31 December 2021 and the year ended 31 December
2020. The increase to the CEO salary in 2019 reflected her being CFO for part of the year before promotion to CEO. 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. Non-Executive Director fee levels were unchanged between 2020 and
2021, any changes above relate to individual changes in committee membership through the year.
2. For the CEO, the decreased value of benefits from 2019 to 2020 relate to the car service used by the CEO, for which usage was reduced
due to the Covid-19 pandemic. The increase in 2021 reflects increased usage of the car service, of which the Group also pays for any
associated tax liability that arises on this benefit. For all employees, there were no changes in benefits provision between 2020 and
2021. 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 2021 figure for Tim Harris is based on an annualised amount as he stepped down as an Executive Director on 13 May 2021.
5. The decreased value of benefits in 2020 related to a decrease in travel expenses due to the Covid-19 pandemic. Jane Hanson stepped
down from the Board on 13 May 2021, the 2021 figure in the table is based on an annualised amount to compare to the prior year.
6. Adrian Joseph, Neil Manser and Tracy Corrigan have no figures shown in the table above as they joined the Board during 2021.
150
Direct Line Group Annual Report and Accounts 2021
Governance Chief Executive Officer’s pay between 2012 and 2021 and historical performance of TSR
The table below shows historical levels of the CEO’s pay between 2012 and 2021. 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
31 Dec
2021
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
20204
20215
Paul Geddes
Penny James
1,908
2,536
5,356 4,795
4,071 4,039
3,250
774
2,773
3,286
3,235
65%
30%
63%
55%
75%
88%
83%
96%
43%
86%
88%
99%
68%
71%
76%
0%
76%
100%
82%
80%
84%
74%
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 2020 single figure has been revised to reflect the actual vesting of the 2018 awards under the LTIP.
5. The 2021 single figure reflects the estimated vesting of the RoTE portion of the LTIP granted in March and August 2019. Any shares
under the LTIP granted in 2019 will not be delivered until the end of the applicable vesting periods in March and August 2022.
However, they have been included in the single figure, as the performance period in respect of the RoTE portion has now been
completed.
Payment for loss of office (Audited)
Tim Harris
Tim Harris retired as Chief Financial Officer and stepped down from the Board on 13 May 2021 for reasons explained in
the RNS announcement published on 13 May 2021. During 2021 Tim worked as an Executive Director to 10 January 2021
only and took paid compassionate leave from 11 January to 31 March 2021 during which he continued to receive salary,
pension, and benefits. This was followed by a period of unpaid leave from 1 April 2021 to 12 May 2021, during which time
he continued to be eligible for benefits only (in line with the Group’s employee policies). Following his cessation as a
Director of the Company with effect from the conclusion of the 2021 AGM on 13 May 2021, Tim’s contractual salary,
pension and benefits will be paid in monthly instalments until the end of his 12-month notice period on 12 May 2022.
The Remuneration Committee determined that Tim will be treated as a good leaver in relation to outstanding awards
under the Company’s Share Schemes and the AIP by reason of his retirement, in accordance with the plan rules and the
Directors’ Remuneration Policy.
Salary (£’000)
340
Benefits (£’000)
Pension (£’000)
9
31
Total (£’000)
380
www.directlinegroup.co.uk
151
Directors’ Remuneration Report continued
AIP
The 2021 AIP was subject to the satisfaction of the gateway criteria and relevant performance criteria. The award was
also pro-rated to reflect the period worked until he commenced compassionate leave (10 January 2021). 40% of the
award will be deferred into shares. Further detail is set out on pages 141-144.
DAIP
The 2019, 2020 and 2021 DAIP awards will continue to vest on their third anniversaries of award and remain subject to all
scheme rules, including malus and clawback provisions. Awards will be exercisable for 12 months after they vest.
LTIP
Awards made under the Restricted Share Plan pursuant to Listing Rule 9.4.2 (“RSP”), to compensate Tim for
remuneration arrangements forfeited on leaving his former employer, will continue to vest on the normal vesting dates
and will be time pro-rated to reflect the period from their date of grant to the end of employment and remain subject to
all scheme rules, including malus and clawback provisions.
The October 2019, March 2020 and August 2020 LTIP awards will be time pro-rated to reflect the period from their date
of grant to the end of his employment. The awards will vest on the third anniversary of their grant, subject to their
original performance conditions and to all scheme rules, including malus and clawback provisions. Furthermore, if Tim
secures a new role which the Committee considers is comparable with his role with the Group, and which it considers
should reasonably compensate him for the loss of any unvested awards, then such unvested awards will be forfeited.
Both Tim’s LTIP and RSP awards will continue to be subject to a further two-year holding period after vesting (and then
there will be a 12-month exercise period).
Furthermore, any LTIP or RSP awards which are unvested or still in the holding period will be forfeited if Tim takes up
employment with another organisation which compensates him, and or which the Committee considers should
reasonably compensate him for the loss of any unvested awards.
No LTIP awards have been made to Tim since August 2020.
SIP
In accordance with the Rules of the Share Incentive Plan (“SIP”), as a good leaver, all Tim’s Plan shares will be released to
him, which follows legislation and HMRC guidance for tax advantaged plans in the UK.
Share Ownership Guideline
Tim is to comply with the Company’s post-cessation shareholding requirements; maintaining his current shareholding
for a period of two years after he has left the Company. Tim’s current shareholding includes shares owned outright, as
well as his unvested DAIP and RSP awards (on a net of tax basis). Tim will be permitted to sell sufficient shares to cover
any tax liability on exercise of these awards.
Payments to Past Directors (Audited)
March and August 2018 LTIP
The table below sets out the awards which vested during the year to Paul Geddes (former CEO) and Mike Holliday-Williams
(former MD, Personal Lines), who exited the Group on 31 July 2019 and 30 September 2019 respectively:
Award
March 20182
August 20183
Notes:
Executive Director
Paul Geddes
Mike Holliday-Williams
Mike Holliday-Williams
Number of share
options awarded
(inc. dividends)
Vesting proportion
(inc. performance
and pro-rata)
Number of share
options vested1
Total value of share
options (including
dividends) vested (£)
260,887
179,580
188,657
35.4%
39.0%
24.9%
92,289
70,103
46,960
295,602
224,540
145,106
1. 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.
2. Based on closing share price of £3.20 on the vesting date (26 March 2021).
3. Based on closing share price of £3.09 on the vesting date (31 August 2021).
The March 2018 LTIP award vested overall at 74.8%, with the RoTE element (60% weighting) achieving 100%, and relative
TSR (40% weighting) at 36.9%. The August 2018 LTIP award vested at 68.0%, with the RoTE element (60% weighting)
achieving 100% and relative TSR (40% weighting) at 20.7% . 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.
New Executive Director
On 13 May 2021, following the conclusion of the AGM Neil Manser, the then current Chief Strategy Officer, joined the
Board as an Executive Director and was appointed CFO. Neil’s annual salary is £515,000. This salary is in line with the
FTSE 51-150 CFO benchmark and below the previous CFO’s salary level. Neil’s pension allowance will continue to be 9%
of salary, in line with that of the wider workforce. He also participates in the Group’s Annual Incentive Plan up to a
maximum of 175% of salary and the Long-Term Incentive Plan of up to 200% of salary.
152
Direct Line Group Annual Report and Accounts 2021
Governance Distribution statement
This chart shows the overall pay expenditure across all Group employees compared with the total dividend value paid to
shareholders in 2020 and 2021.
Dividend (£m)
Overall expenditure on pay (£m)
% change
1.6%
Special
Ordinary
300.8
195.5
100.4
% change
(0.1%)
479.9
481.8
21
20
21
20
Note:
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 2020 Directors’ Remuneration Report which was put to shareholders
at the 2021 AGM.
The resolution approving the Directors’ Remuneration Report was passed by 97.69% of the votes cast in favour of the
resolutions.
Approval of Directors’ Remuneration Policy
(2020 AGM)
Approval of Directors’ Remuneration Report
(2021 AGM)
For
Against
Number
Percentage
Number
Percentage
Number of
votes withheld
(abstentions)
1,051,904,620
97.55%
26,440,027
2.45%
60,251
1,038,647,888
97.69%
24,537,644
2.31%
117,721
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.
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)
Exit payment policy
Penny James
01-Nov-17
12 months
Neil Manser
13-May-21
12 months
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.
www.directlinegroup.co.uk
153
Directors’ Remuneration Report continued
Implementing the Policy in 2022
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 2022
– The CEO’s salary remains appropriate at £817,000
– The CFO’s salary remains appropriate at £515,000
Pensions
– Pension contributions are paid only in respect of base
– CEO and CFO pension contribution remains at 9% (in
salary
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
– At least 50% of the AIP is based on financial measures.
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
– No change to the maximum opportunity
– No change from the weightings used for 2021
– There will be a straight-line vesting between AIP
threshold and maximum performance
– Financial measures (55%): Profit before tax
– Non-financial measures (45%): The assessment will be
against a set of Group Objectives and Key Results
relating to delivering profitable growth and great
customer experience (20%), realising cost savings (15%),
alongside supporting great people (10%)
– The performance targets will be set following the usual
process, considering internal and consensus forecasts
and the key strategic priorities for the Group in 2022
– 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
154
Direct Line Group Annual Report and Accounts 2021
Governance Key feature
Implementation in 2022
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
200% of base salary per financial year
– Performance is measured over three years
– Awards vest subject to financial underpin and
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
– No change to the maximum annual award levels
– Nil-cost options will continue to be used for the grants
– A new emissions metric will be applied for 2022
onwards; 50% will be based on RoTE; 40% on TSR and
10% on emissions
– A RoTE target range of 17.5% (threshold) to 20.5%
(maximum) is required for the 2022 awards to vest.
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 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
– The Group is currently in the process of seeking
certification for our long-term emissions targets from
the SBTi. The emissions targets for the 2022 LTIP
awards will be set based on the SBTi certified targets
once this process is completed later in the year. The
emissions performance targets will be disclosed in
next year’s Directors’ Remuneration Report.
Non-Executive Directors’ fees
The fees for the Chair and Non-Executive Directors for 2022 are set out below.
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, Investment or Nomination)
Fees for 2022
£’000
350
75
30
30
15
10
5
The Board determined that a small increase to the fee for the Chair of Sustainability and Investment Committees, as
well as introducing a fee for member of the Investment Committee would apply following a review of market practice
and to reflect the additional duties that the Committee is undertaking.
www.directlinegroup.co.uk
155
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 2022 on pages 154-155.
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 what 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
156
Direct Line Group Annual Report and Accounts 2021
Governance 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
– This is the core element
Committee may undertake an out-of-cycle review if it determines this to be appropriate
of pay that reflects the
– 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
calibre executives with
in considering, in its judgement, the appropriate salary level, while regarding other relevant
– The Committee does not follow market data strictly. However, it uses it as a reference point
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
individual’s role and
position within the
Group
– Staying competitive
in the market allows
us to attract, retain
and motivate high-
the skills to achieve
our key aims while
managing costs
retirement planning
and retain flexibility
for individuals
flexible benefits
package is offered,
emphasising
Maximum opportunity
– When determining salary increases, the Committee
will consider the factors outlined in this table under
‘Operation’
Performance measures
– 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
Benefits
– Executive Directors receive a benefits package generally set by reference to market practice
– The costs of benefits provided may fluctuate from
– Not applicable
– A comprehensive and
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
individuals being able
The Executive Directors are eligible to receive such additional benefits as the Committee
– The Committee may periodically amend the benefits available to some or all employees.
to choose the
considers appropriate having regard to market norms
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 what the Committee considers to be
appropriate in all the circumstances
combination of cash
– In line with our approach to all employees, certain Group products are offered to Executive
– Additionally, the limit for any employee share plans
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
in which the Executive Directors participate will be in
line with the caps permitted by HMRC from time to
time
– The Executive Directors may be entitled to retain fees
received for any directorships held outside the Group
– Similarly, while not benefits in the normal usage of
that term, certain other items such as hospitality or
retirement gifts may also be provided
www.directlinegroup.co.uk
157
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
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
– 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
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 or
– Outcomes for performance between threshold and
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 the
implementation of policy
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
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 the
of the performance period, which may be set by referring to
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
158
Direct Line Group Annual Report and Accounts 2021
Governance 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 the
motivate and
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
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
guidelines
– To align the
interests of
Executive
Directors with
those of
shareholders
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
159
Directors’ Report
Directors’ Report
The Board of Directors present their report for the financial
year ended 31 December 2021 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 256.
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 95
as permitted by the Companies Act 2006. These matters,
and all matters referenced in the table below, are
incorporated into this Directors’ report:
Pages
37, 43, 44
18 to 27
27
31, 65, 108, 109,
111, 143
58 to 59, 110
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
Branches outside the UK
Subject
Page
Not applicable
Interest capitalised by the Group
Note 3.5
Unaudited financial information
145 to 147
Details of long-term incentive schemes
Directors’ waivers of emoluments
Not applicable
Directors’ waivers of future emoluments Not applicable
Non pro-rata allotments for cash (issuer) Not applicable
Not applicable
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
161
Not applicable
Not applicable
Not applicable
Not applicable
Dividends
The Board recommends a final dividend of 15.1 pence per
share to shareholders. Subject to shareholder approval at
the Company’s 2022 AGM, this will become payable on 17
May 2022 to all holders of Ordinary Shares on the Register
of members at close of business on 8 April 2022.
2, 6, 19, 26
70 to 75
242
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 2022.
Disclosure of information required by Disclosure
Guidance and Transparency Rule 7.2
The FCA’s Disclosure Guidance and Transparency Rule 7.2
requires 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 into the Directors’ report by reference.
Disclosure of information under Listing Rule
9.8.4C
In accordance with Listing Rule 9.8.4C, the table below
sets out the location of the information required to be
disclosed under LR 9.8.4R, where applicable.
The Board also recommends a new share buyback
programme of up to £100 million split into two tranches
of £50 million in H1 2022 and H2 2022.
You can find information on dividend and capital
management, including the share buyback programme,
in the Finance review, on pages 32 to 45.
Directors
The names of all current Directors and their biographies
are set out on pages 98 to 101. All Directors will retire and
those wishing to continue to serve will be submitted for
election or re-election at the 2022 AGM. 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 98 to 101 were the Directors
of the Company throughout the year under review, except:
– Adrian Joseph was appointed as an independent
Non-Executive Director with effect from 1 January 2021.
– Tim Harris retired from the Board with effect from
13 May 2021.
– Neil Manser was appointed as CFO with effect from
13 May 2021.
– Jane Hanson stepped down from the Board with effect
from 13 May 2021.
– Tracy Corrigan was appointed as an independent
Non-Executive Director with effect from 1 November 2021.
160
Direct Line Group Annual Report and Accounts 2021
Governance 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 134 to 159.
The Articles of Association of the Company permit it to
indemnify the Company’s officers, and officers of any
associated company, against liabilities arising from
conducting Company business, to the extent permitted by
law. As such, the Company has executed deeds of
indemnity for each Director’s benefit, regarding liabilities
that may attach to them in their capacity as Directors of
the Company or associated companies.
These indemnities are qualifying third-party indemnities
as defined by section 234 of the Companies Act 2006. No
amount was paid under any of these indemnities during
the year. The Company maintains directors’ and officers’
liability insurance. This provides appropriate cover for legal
actions brought against its Directors. The Company has
also provided the Directors of DLG Pension Trustee
Limited with qualifying pension scheme indemnities. This
is in accordance with section 235 of the Companies Act
2006. DLG Pension Trustee Limited acts as trustee for two
of the Company’s occupational pension schemes.
Secretary
Roger Clifton is the Company Secretary of Direct Line
Insurance Group plc and can be contacted at the
Company’s Registered Office, details of which are on
page 257.
Share capital
The Company has a premium listing on the London Stock
Exchange. As at 31 December 2021, the Company’s share
capital comprised 1,330,713,012 fully paid Ordinary Shares
of 10 10⁄11 pence each.
At the Company’s 2021 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 £49,536,818, and to allot
further shares up to an aggregate nominal amount of
£49,536,818 for the purpose of a rights issue;
– allot shares having a nominal amount not exceeding in
aggregate £7,430,523 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 £7,430,523 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 136,226,250 shares in
the Company, representing 10% of the Company’s
issued share capital at the time (this authority, which
expires at the conclusion of the AGM being held on 10
May 2022, was used to purchase 22,515,414 shares (the
Company used the similar authority granted at the
Company's 2020 AGM to purchase 11,323,179 shares
between 9 March 2021 and 13 May 2021). Further
information can be found below); 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 2021, with the exception of the authority to
make market purchases of shares, as described below. At
the 2022 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 2021 in notes 31 and 37 of the
consolidated financial statements.
On 9 March 2021, the Company announced the launch of a
share buyback programme of up to £100 million, which
was undertaken during 2021 in two tranches of up to £50
million (a previous share buyback programme, launched
on 3 March 2020, was terminated on 19 March 2020 as a
result of the volatile conditions arising from the Covid-19
pandemic). In line with the Group’s capital management
approach of growing the regular dividend in line with
business growth and distributing surplus capital, the share
buyback programme was designed to return surplus
capital to shareholders and move the Group’s solvency
capital coverage ratio towards the middle of its solvency
risk appetite range. During 2021, a total number of
33,838,593 ordinary shares of 10 10⁄11 pence each were
repurchased under the share buyback programme
representing 3% of the called up share capital of the
Company as at 31 December 2021. The aggregate
consideration paid across the two tranches was
£99,910,742.39. The effect of the share buyback has been
to: reduce the weighted average number of Ordinary
Shares in issue during 2021, which is used to calculate
earnings per share, from 1,356.5 million in 2020 to 1,335.8
million in 2021 (see note 15 to the consolidated financial
statements for more details); and reduce the closing
number of Ordinary Shares at 31 December 2021 to 1,317.3
million from 1,351.8 million at 31 December 2020 (see note
16 to the consolidated financial statements for more
details).
Further information on the Company’s share buyback
programme can be found in the Finance Review on pages
32 to 45.
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 which 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 37 on page 232. The
Company is not aware of any other dividend waivers or
voting restrictions in place.
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.
www.directlinegroup.co.uk
161
Directors’ Report continued
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 (which may exclude non-working days)
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.
Use of financial instruments
Information regarding the Company’s use of financial
instruments, financial risk management objectives and
policies can be found in the Risk Management section of
the Strategic Report on page 89 and note 3 of the
Consolidated Financial Statements.
Articles of Association
Unless expressly specified to the contrary in the Articles of
Association, they may only be amended by a special
resolution of the Company’s shareholders at a general
meeting.
Significant agreements affected by a change
of control
A number of agreements may take effect, alter or
terminate upon a change of control of the Company. None
of these agreements is considered significant in terms of
its impact on the Group’s business as a whole. All the
Company’s employee share incentive plans contain
provisions relating to a change of control. Outstanding
awards would typically vest and become exercisable. This
is subject to satisfying any performance conditions, and
normally with an additional time-based pro-rata reduction
where performance conditions apply, and approval from
the Remuneration Committee.
Substantial shareholdings
The table below shows the holdings of the major
shareholders in the Company’s ordinary issued share
capital, as at 31 December 2021 and as at 7 March 2022, 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
Majedie Asset Management Limited
T.Rowe Price Associates, Inc
Norges Bank
abrdn plc
APG Asset Management N.V
31 December
2021
7 March
2022
9.92% 9.92%
5.07% 5.07%
4.99% 4.99%
4.94% 4.94%
4.91% 4.91%
4.57% 4.57%
2.99% 2.99%
Political donations
The Group made no political donations during the year
(2021: nil).
Employees with disabilities
The Group is committed to promoting diversity and
inclusion across every area of the business through
initiatives such as the Diversity Network Alliance (“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 61 to 65.
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 describes the Group’s capital
management strategy, including the capital actions taken
in the last twelve months 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 starts on page 192 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 exposure to these risks.
The Directors have assessed the principal risks of the
Group over the duration of the planning cycle. The
assessment included the impact of the Covid-19 pandemic
on the underwriting cycle, including motor claims
frequency, travel disruption and supply chain disruption,
and the possible impacts of the FCA’s Pricing Practices
Review (“PPR”). The key judgements and assumptions
applied were in relation to the likely time period of
continued Covid-19 related effects and the impact on the
general insurance market, the economic recovery and the
impact of the PPR on customer behaviour. The 2021
Strategic Plan (the “Plan”) indicates that the Group will
continue to maintain levels of solvency in line with its risk
appetite across the planning cycle (to 31 December 2025).
In addition, the Group’s Risk function has carried
out an assessment of the risks to the Strategic Plan
and the dependencies for the success of the Plan.
162
Direct Line Group Annual Report and Accounts 2021
Governance This included running stress tests on the Plan to consider
the 1-in-8 years and 1-in-25 years loss simulations based
on our partial internal economic capital model. In both
scenarios, it was concluded that the Group’s solvency
capital requirement would not be breached following
the implementation of management actions.
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.
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 U K
Insurance Limited, the Group’s principal underwriter, i.e.
a reduction of own funds to below the solvency capital
requirement. The purpose of this reverse stress test was to
assess the coverage and scope of the internal economic
capital model and there were no findings that invalidate
the internal model.
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 7 March 2022 (the date of approval of the
consolidated 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 and 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 pages 121 to 122.
Conflicts of interest
Each Director has a duty to avoid conflicts of interest and
must declare any conflict of interest that could interfere
with their ability to act in the Group’s best interests. In
accordance with the Companies Act 2006, 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. As a matter of course, the Board
authorises certain potential conflicts of interest in this way
including Directors’ external directorships and their
interests in securities of other financial service institutions.
The Company Secretary maintains a register of potential
conflicts which the Board reviews at each scheduled
Board meeting.
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.
In preparing these financial statements, IAS 1 requires that
Directors: properly select and apply accounting policies;
present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information; provide additional
disclosures when compliance with the specific
requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, other
events and conditions on the entity’s financial position
and financial performance; and assess the Company’s
ability to continue as a going concern.
The Directors are responsible for keeping adequate
accounting records that: are sufficient to show and explain
the Company’s transactions and disclose, with reasonable
accuracy, the Company’s financial position at any time;
and enable them to ensure the financial statements
comply with the Companies Act 2006. Additionally, the
Directors are responsible for safeguarding the Company’s
assets and, hence, taking reasonable steps to prevent and
detect fraud and other irregularities. The Directors are
responsible for maintaining and ensuring the integrity of
the corporate and financial information included on the
Company’s website at www.directlinegroup.co.uk.
Legislation in the UK governing preparing and
disseminating financial statements may differ from
legislation in other jurisdictions.
Each of the Directors, whose names and functions are
listed on pages 98 to 101, 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 95) and Directors’
report (on pages 160 to 163) include a fair review of: (i)
the business’s development and performance; and (ii)
the position of the Company and the undertakings
included in the consolidation taken as a whole, together
with a description of the principal risks and
uncertainties they face; and
– 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, performance, business
model and strategy.
This report was approved by the Board on 7 March 2022
and signed on its behalf by:
Roger C. Clifton
Company Secretary
Registered address: Churchill Court, Westmoreland Road,
Bromley, BR1 1DP
Registered number: 02280426
www.directlinegroup.co.uk
163
Contents
Contents
Financial Statements
31. Share capital
Independent Auditor's Report
165
32. Other reserves
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. Assets held for sale
176
177
178
179
180
181
190
192
206
209
209
210
210
210
210
212
212
213
213
214
214
215
217
218
219
219
220
220
220
221
221
221
224
225
225
225
226
226
227
228
231
232
233
233
234
235
235
236
238
238
239
240
33. Tier 1 notes
34. Subordinated liabilities
35.
Insurance liabilities
36. Unearned premium reserve
37. Share-based payments
38. Provisions
39. Trade and other payables, including
insurance payables
40. Notes to the consolidated cash flow
statement
41. Commitments and contingent liabilities
42. Leases
43. Fair value
44. Related parties
45. Post balance sheet events
Parent Company Financial Statements
Parent Company Balance Sheet
Parent Company Statement of Comprehensive
Income
Parent Company Statement of Changes in Equity 240
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
241
242
243
243
243
243
243
244
244
244
244
244
244
245
245
245
245
164
164
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
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 (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 2021 and of
the Group's profit for the year then ended;
the Group financial statements have been properly prepared in accordance with United Kingdom adopted
international accounting standards and International Financial Reporting Standards ("IFRSs") as issued by the
International Accounting Standards Board ("IASB");
the Parent Company financial statements have been properly prepared in accordance with United Kingdom ("UK")
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 45 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 that are marked as unaudited.
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable
law, and UK adopted international accounting standards and IFRSs 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. The non-audit services provided to the Group for the year are disclosed in note 10 to the consolidated
financial statements. We confirm that we have not provided any non-audit services prohibited by the FRC's Ethical
Standard 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.
WWW.DIRECTLINEGROUP.CO.UK
www.directlinegroup.co.uk
165
165
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
3. Summary of our audit approach
Key audit matters
valuation of insurance liabilities:
The key audit matters that we identified in the current year were:
–
1) The frequency and severity assumptions for large bodily injury claims;
2) The inflation and discount rate assumptions for 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; and
2) Investment property;
valuation of illiquid investments:
Within this report, key audit matters are identified as follows:
Newly identified;
Increased level of risk;
Similar level of risk; and
Decreased level of risk.
Materiality
Scoping
Significant
changes in our
approach
The materiality that we used for the Group financial statements was £28 million, which
approximates to 5.9% of the three-year average profit before tax, excluding the impact of the Ogden
discount rate change to minus 0.25% in the 2019 results which we elected to exclude due to the
non-recurring nature of this event.
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 97% of the Group's net assets, 100% of the Group's gross
earned premium and 92% 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.
During the year we have made the following changes to our audit approach:
a. We took into account the further implementation of the Group's new underwriting, claims
and data technologies;
b. We addressed the risk arising from a new actuarial calculation model and associated
processes; and
c. We addressed the risks arising from the Group's change to an agile finance operating
model and continued implementation process of IFRS 17.
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:
– We obtained an understanding of the internal controls relating to management's going concern assessment process;
– We assessed management's Strategic Plan and challenged management's underlying business plans and forecasts to
support key forward-looking assumptions such as the Group's growth rate and discount rate given our understanding of
the Group and its industry;
– We evaluated the historical accuracy of forecasts prepared by management; and
– We evaluated management's reverse stress testing and assessed the likelihood of various scenarios that could adversely
impact upon the Group's liquidity and solvency headroom.
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's 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.
166
166
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
Financial Statements
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 119 (Audit Committee Report), page 183 (Accounting policies), page 191 (Notes to the consolidated
financial statements - note 2.3) and page 228 (Financial statements).
The Group's gross insurance liabilities total £3.7 billion (2020: £3.6 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.
There is additional inherent uncertainty underlying the estimation of the ultimate number of non-large bodily injury claims
for the 2020 and 2021 accident claims cohort. This arises from the consequences of the Covid-19 pandemic and
associated travel and lockdown restrictions, which affect traffic volumes and subsequently claim numbers.
Furthermore, the current UK inflationary environment results in inherent uncertainty regarding the severity of bodily injury
claims.
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 cost per claim 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
We have concluded that the assumptions used in the calculation of the bodily injury claims reserves are reasonable.
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 £757.8 million (2020: £814.8
million) on a discounted gross basis as detailed in note 35.
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. The PPOs are sensitive to economic assumptions selected and as at
31 December 2021, the Group valued PPOs using an inflation rate of 3.5% (2020: 3.5%) and a discount rate of 3.5% (2020:
3.5%). 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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GROUP PLC — CONTINUED
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, namely the
challenge and approval of these assumptions by the reserving 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 valuation.
We have worked with our actuarial specialists to challenge:
– The PPO inflation assumption through inquiries with the Actuarial Director, assessing 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 nominal 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 reasonable.
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 and the ongoing uncertainty with regard to the rates of inflation in the UK economy, 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 existed at each respective reporting date.
Key observations
We have determined that the margin remains appropriate. In combination with the conclusions drawn in relation to
bodily injury claims and PPO assumptions above, we have observed that the booked reserves are in line with the Group's
prudent accounting policy.
5.2 Valuation of illiquid investments
Refer to page 119 (Audit Committee Report), pages 185 and 186 (Accounting policies) and pages 219 and 224 (Financial
statements).
In the current year, we continue to identify the valuation of illiquid investments, specifically the commercial real estate
loans, infrastructure debt, private placement bonds and investment property investments as a key audit matter as
described below.
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 £542.8 million (2020: £575.1 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 the Covid-19 pandemic.
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Financial Statements 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 banks 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 management's conclusion was 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, retail warehouse, supermarkets and foodstores, industrial,
hotel and alternative properties. As noted in disclosure note 20, the total value as at 31 December 2021 is £317.0 million
(2020: £292.1 million). Given the impact of the Covid-19 pandemic 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, hotel and alternative sector properties held, where tenants have experienced an increased exposure to the
persistent impacts of the Covid-19 pandemic; these may accelerate the long term downwards trend of property valuation
in these sectors. These properties total £103.2 million (2020: £101.6 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 the Covid-19 pandemic and long-term trends in
the use of various types of property. Valuation methodologies for investment properties are subjective in nature and involve
various key assumptions. The use of different valuation methodologies and assumptions could produce significantly
different estimates of fair value. With the persistent impact of the Covid-19 pandemic, 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 of and tested the relevant control related to the annual meeting with management's
external valuation expert; this is where management review and challenge the assumptions and methodologies used in
determining the fair value. This 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 misstatements within the investment property portfolio fair value.
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Group plc continued
GROUP PLC — CONTINUED
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 (2020: £28.0 million)
Parent Company financial statements
£25.2 million (2020: £25.2 million)
Basis for
determining
materiality
The materiality approximates to 5.9% (2020: 5.6%) of
the three year average profit before tax, excluding the
impact of the Ogden discount rate change to minus
0.25% in the 2019 results.
Materiality equates to less than 1% (2020: 1%)
of shareholders' equity and is capped at 90%
(2020: 90%) of Group materiality.
Rationale
for the
benchmark
applied
We determined that the critical benchmark for the
Group was average profit before tax. This measure uses
a three-year average of profit before tax, which was
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 minus 0.25% in the 2019 results due to the non-
recurring nature of this event.
We also considered this measure suitable having
compared to other benchmarks: our materiality
equates to 6.3% (2020: 6.2%) of statutory profit before
tax, 0.9% (2020: 0.9%) of gross earned premium and
1.1% (2020: 0.9%) of total equity.
We determined that the critical benchmark for
the Parent Company was shareholders' 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 components proportion of the chosen benchmark. This is capped at the lower
of 90% of Group materiality and the component materiality determined for a standalone audit. The main UK insurance
trading entity, U K Insurance Limited, which makes up 100% of Group gross earned premium and 75% of Group statutory
profit before tax, is scoped to a component materiality of £25.2 million (2020: £25.2 million). Component materiality for
other entities within the scope of our Group audit ranged from £0.9 million to £8.5 million (2020: £0.8 million to £8.8
million).
TBU
Group materiality £28m
£446m
£28m
Component materiality range
£0.9m to £25.2m
Audit Committee reporting
threshold £1.4m
PBT
Group materiality
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Direct Line Group Annual Report and Accounts 2021
Financial Statements 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.
Group financial statements
Parent Company financial statements
70% (2020: 67.5%) of Parent Company
materiality
For consistency within the Group, the same
percentage of 70% of materiality has been
applied to the Parent Company.
Performance
materiality
Basis and
rationale for
determining
performance
materiality
70% (2020: 67.5%) of Group materiality
In 2020, we adjusted down performance materiality
after assessing the potential impact of the Covid-19
pandemic.
In 2021, when determining performance materiality,
we considered the following factors:
– We have audited the Group for a number of years
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, and our assessment that these were not
likely to recur in the current period; and
– We did not identify any significant changes in the
Group's control environment due to the Covid-19
pandemic.
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
(2020: £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 97% (2020: 99%) of
the Group's net assets, 100% (2020: 100%) of the Group's gross earned premium and 92% (2020: 95%) of the Group's profit
before tax. They were also selected to provide an appropriate basis for undertaking audit work to address the risks of
material misstatement identified above.
Gross Earned Premium
Net Assets
Profit before tax
8%
7%
TBU
85%
3%
12%
85%
Full audit scope
Specified audit procedures
Review at group level
Full audit scope
Specified audit procedures
Review at group level
100%
Full audit scope
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Group plc continued
GROUP PLC — CONTINUED
7. An overview of the scope of our audit continued
7.1.Identification and scoping of components continued
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.
7.2 Our consideration of the control environment
IT Controls
In planning our 2021 audit, we identified 19 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 19 systems identified.
Business processes and financial reporting controls
In planning our 2021 audit, we identified 22 business processes that were material to the Group's financial reporting
processes. These processes spanned the Group's material transactions and account balances including the premiums,
claims, reinsurance, expenses, payroll, investments and intangibles processes and part of the reserving process relating to
reconciliation of data, and we intended to rely on the business controls associated with all of these processes. Having
completed our testing over the operating effectiveness of business controls associated with these processes, through a
combination of current period testing and reliance on prior period testing, we concluded that we are able to rely upon the
business controls associated with all 22 processes.
7.3 Our consideration of climate-related risks
We have gained an understanding of management's processes to address climate-related risks, including management's
implementation of the Sustainability Committee and Group Sustainability Framework. We have assessed whether these
initiatives undertaken by management are aligned with the Climate Change Roadmap developed by the Association of
British Insurers. We have performed a risk assessment of the financial impact of climate risks on the financial statements
and concluded the risks of material misstatement due to climate risk factors are remote. In doing so we considered the
estimates and judgements applied to the financial statements and how climate risks impact their valuation. We
challenged management’s disclosure relating to climate risks in the Planet section of the Annual Report and note 3 of the
financial statements. We have considered whether information included in the climate related disclosures in the Annual
Report were consistent with our understanding of the business and the financial statements.
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.
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Financial Statements 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.
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
reviewed by the Audit Committee on 1 November 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 relevant internal specialists, including actuarial, tax, real
estate, valuations, pensions, IT, forensic 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 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, FCA and environmental regulations.
11.2 Audit response to risks identified
As a result of performing the above, we identified the valuation of insurance liabilities a key audit matter 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 that key audit matter.
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 the 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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Group plc continued
GROUP PLC — CONTINUED
Report on other legal and regulatory requirements
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.
In our opinion, based on the work undertaken in the course of the audit:
–
–
the information given in the Strategic report and the Directors' report for the financial year for which the financial
statements are prepared is consistent with the financial statements; and
the Strategic report and the Directors' report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and the Parent Company and their environment obtained
in the course of the audit, we have not identified any material misstatements in the Strategic report or the Directors'
report.
13. Corporate governance statement
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 163;
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 94;
the Directors' statement on fair, balanced and understandable set out on page 117;
the Board's confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page
118;
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 192; and
the section describing the work of the Audit Committee set out on page 119.
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 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 Insurance Group plc, 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. The period of total
uninterrupted engagement including previous renewals and reappointments of the firm is 22 years, covering the years
ending 31 December 2000 to 31 December 2021. 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).
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Financial Statements 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.
As required by the Financial Conduct Authority ("FCA") Disclosure Guidance and Transparency Rule ("DTR") 4.1.14R, these
financial statements form part of the European Single Electronic Format ("ESEF") prepared Annual Financial Report filed
on the National Storage Mechanism of the UK FCA in accordance with the ESEF Regulatory Technical Standard ("ESEF
RTS"). This auditor's report provides no assurance over whether the annual financial report has been prepared using the
single electronic format specified in the ESEF RTS.
ADAM ADDIS, ACA
SENIOR STATUTORY AUDITOR
FOR AND ON BEHALF OF DELOITTE LLP
LONDON, UNITED KINGDOM
7 March 2022
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Consolidated Income Statement
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2021
For the year ended 31 December 2021
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
8
8
9
10
11
12
2021
£m
3,168.0
(210.6)
2,957.4
146.3
97.3
46.7
3,247.7
(1,915.3)
196.6
(1,718.7)
(240.9)
(807.8)
(1,048.7)
(34.3)
446.0
(102.3)
343.7
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
15
15
24.5
24.1
25.8
25.5
The attached notes on pages 181 to 238 form an integral part of these consolidated financial statements.
176
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
Financial Statements
Consolidated Statement of Comprehensive Income
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2021
For the year ended 31 December 2021
Profit for the year attributable to the owners of the Company
Other comprehensive (loss)/income
Items that will not be reclassified subsequently to the income statement:
Remeasurement gain/(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 (loss)/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 (loss)/income for the year net of tax
Total comprehensive income for the year attributable to the owners of the
Company
Notes
2021
£m
343.7
2020
£m
367.2
27
13
32
32
32
3.8
(0.8)
3.0
(0.3)
(84.1)
(7.9)
17.1
(75.2)
(72.2)
(0.4)
0.3
(0.1)
(0.1)
47.4
(1.1)
(9.9)
36.3
36.2
271.5
403.4
The attached notes on pages 181 to 238 form an integral part of these consolidated financial statements.
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177
177
Consolidated Balance Sheet
CONSOLIDATED BALANCE SHEET
As at 31 December 2021
As at 31 December 2021
Assets
Goodwill and other intangible assets
Property, plant and equipment
Right-of-use assets
Investment property
Reinsurance assets
Current tax assets
Deferred acquisition costs
Insurance and other receivables
Prepayments, accrued income and other assets
Derivative financial instruments
Retirement benefit asset
Financial investments
Cash and cash equivalents
Assets held for sale
Total assets
Equity
Shareholders' equity
Tier 1 notes
Total equity
Liabilities
Subordinated liabilities
Insurance liabilities
Unearned premium reserve
Borrowings
Derivative financial instruments
Provisions
Trade and other payables, including insurance payables
Lease liabilities
Deferred tax liabilities
Current tax liabilities
Total liabilities
Total equity and liabilities
Notes
2021
£m
2020
£m
17
18
19
20
22
23
24
25
26
27
28
29
30
33
34
35
36
29
26
38
39
40
13
822.5
113.8
76.1
317.0
1,211.8
14.4
186.6
762.8
125.1
35.9
12.1
4,633.6
955.7
41.2
9,308.6
786.8
146.1
137.8
292.1
1,129.2
—
172.2
848.2
126.0
73.4
9.0
4,681.4
1,220.1
—
9,622.3
2,550.2
346.5
2,896.7
2,699.7
346.5
3,046.2
513.6
3,680.5
1,500.7
59.2
19.5
96.4
457.3
84.2
0.5
—
6,411.9
9,308.6
516.6
3,617.0
1,497.1
51.9
57.2
114.8
549.9
152.4
8.7
10.5
6,576.1
9,622.3
The attached notes on pages 181 to 238 form an integral part of these consolidated financial statements.
The financial statements were approved by the Board of Directors and authorised for issue on 7 March 2022.
They were signed on its behalf by:
NEIL MANSER
CHIEF FINANCIAL OFFICER
178
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
Financial Statements
Consolidated Statement of Changes in Equity
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2021
For the year ended 31 December 2021
Balance at 1 January 2020
Profit for the year
Other comprehensive
income/(loss)
Total comprehensive income
for the year
Dividends and appropriations
paid (note 14)
Shares acquired by employee
trusts
Shares cancelled following
buyback (note 31)
Credit to equity for equity-
settled share-based payments
(note 37)
Shares distributed by
employee trusts
Tax on share-based payments
Total transactions with equity
holders
Balance at 31 December 2020
Profit for the year
Other comprehensive (loss)/
income
Total comprehensive income
for the year
Dividends and appropriations
paid (note 14)
Shares acquired by employee
trusts
Shares cancelled following
buyback (note 31)
Credit to equity for equity-
settled share-based payments
Shares distributed by
employee trusts
Tax on share-based payments
Share
capital
(note 31)
Employee
trust shares
Capital
reserves
(note 32)
AFS
revaluation
reserve
(note 32)
Foreign
exchange
translation
reserve
Retained
earnings
Shareholders'
equity
Tier 1
notes
(note 33)
£m
£m
£m
£m
£m
£m
£m
£m
Total
equity
£m
150.0
(30.2) 1,450.0
47.5
0.1 1,026.2
2,643.6 346.5 2,990.1
—
—
—
— 367.2
367.2
— 367.2
—
—
36.4
(0.1)
(0.1)
36.2
—
36.2
—
—
36.4
(0.1) 367.1
403.4
— 403.4
—
—
—
—
—
—
—
(23.8)
—
(1.1)
—
1.1
—
—
—
—
—
13.7
—
—
—
—
—
—
—
—
—
—
(312.5)
(312.5)
—
(312.5)
—
—
(23.8)
—
(23.8)
—
(30.0)
(30.0)
—
(30.0)
—
18.5
18.5
—
18.5
—
(13.7)
—
0.5
—
0.5
—
—
—
0.5
(1.1)
(10.1)
1.1
—
—
(337.2)
(347.3)
—
(347.3)
148.9
(40.3) 1,451.1
83.9
— 1,056.1
2,699.7 346.5 3,046.2
—
—
—
—
—
(3.7)
—
—
—
—
—
—
—
(20.3)
—
—
19.2
—
—
—
—
—
—
3.7
—
—
—
—
—
343.7
343.7
—
343.7
(74.9)
(0.3)
3.0
(72.2)
(74.9)
(0.3) 346.7
271.5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(317.4)
(317.4)
—
(20.3)
(101.0)
(101.0)
17.0
17.0
(19.2)
0.7
—
0.7
(419.9)
(421.0)
—
—
—
—
—
—
—
—
—
(72.2)
271.5
(317.4)
(20.3)
(101.0)
17.0
—
0.7
(421.0)
Total transactions with equity
holders
(3.7)
(1.1)
3.7
Balance at 31 December 2021
145.2
(41.4) 1,454.8
9.0
(0.3) 982.9
2,550.2
346.5
2,896.7
The attached notes on pages 181 to 238 form an integral part of these consolidated financial statements.
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179
179
Consolidated Cash Flow Statement
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2021
For the year ended 31 December 2021
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 paid
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 (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Notes
40
40
17
18
14
14
40
31
29
29
2021
£m
271.8
167.2
439.0
(109.4)
(29.3)
—
(138.7)
(300.8)
(16.6)
(31.4)
(101.9)
(20.3)
—
(101.0)
(572.0)
(271.7)
1,168.2
896.5
2020
£m
268.8
315.9
584.7
(140.7)
(20.1)
(0.2)
(161.0)
(295.9)
(16.6)
(30.2)
(12.5)
(23.8)
257.2
(30.0)
(151.8)
271.9
896.3
1,168.2
The attached notes on pages 181 to 238 form an integral part of these consolidated financial statements.
180
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
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, the Group's
consolidated financial statements are prepared in
accordance with IFRSs issued by the IASB as adopted by the
UK. 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 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 scenarios, it was concluded that the Group's
SCR would not be breached following the implementation
of management actions.
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 U K Insurance
Limited, the Group's principal underwriter, i.e. a reduction of
own funds to below the SCR. The purpose of this reverse
stress test was to assess the coverage and scope of the
internal economic capital model and there were no findings
that invalidate the internal model.
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 43) and assets held for sale which are
measured at the lower of carrying amount and fair value less
costs to sell.
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 7 March 2022 (the date of approval of the consolidated
financial statements). Accordingly, the Directors have
adopted the going concern basis in preparing the
consolidated financial statements.
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 2021 and
31 December 2020 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 describes the Group's capital management strategy,
including the capital actions taken in the last 12 months 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. The financial
disclosures relating to the Group's principal risks are set out
in note 3. This covers insurance, market and credit risk; and
the Group's approach to monitoring, managing and
mitigating exposures to these risks.
The Directors have assessed the principal risks of the Group
over the duration of the planning cycle. The assessment
included the impact of the Covid-19 pandemic on the
underwriting cycle, including motor claims frequency, travel
disruption and supply chain disruption, and the possible
impacts of the FCA's Pricing Practices Review ("PPR").
The key judgements and assumptions applied were in
relation to the likely time period of continued Covid-19
related effects and the impact on the general insurance
market, the economic recovery and the impact of the PPR
on customer behaviour.
The 2021 Strategic Plan ("the Plan") indicates that the Group
will continue to maintain levels of solvency in line with its
risk appetite across the planning cycle (to 31 December
2025).
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 2021.
In August 2020, the IASB issued 'Interest Rate Benchmark
Reform Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS
4 and IFRS 16)' which was effective from 1 January 2021 and
was adopted by the UK in January 2021. The key
considerations are as follows:
The Phase 2 amendments provide practical relief from
certain requirements in IFRS standards. These reliefs relate
to modifications of financial instruments and lease contracts
or hedging relationships triggered by a replacement of a
benchmark interest rate in a contract with a new alternative
benchmark rate. If the basis for determining the contractual
cash flows of a financial asset or financial liability measured
at amortised cost changed as a result of interest rate
benchmark reform, then the Group updated the effective
interest rate of the financial asset or financial liability to
reflect the change that is required by the reform. A change
in the basis for determining the contractual cash flows is
required by interest rate benchmark reform if the following
conditions are met:
–
–
the change is necessary as a direct consequence of the
reform; and
the new basis for determining the contractual cash flows
is economically equivalent to the previous basis – i.e. the
basis immediately before the change.
When changes were made to a financial asset or financial
liability in addition to changes to the basis for determining
the contractual cash flows required by interest rate
benchmark reform, the Group first updated the effective
interest rate of the financial asset or financial liability to
reflect the change that is required by interest rate
benchmark reform. After that, the Group applied the
policies on accounting for modifications to the additional
changes.
The amendments also provide an exception to use a revised
discount rate that reflects the change in interest rate when
remeasuring a lease liability because of a lease modification
that is required by interest rate benchmark reform. The
Group has no lease contracts where changes to rental
amounts are affected by the interest rate benchmark
reform.
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181
181
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Adoption of new and revised standards continued
The Phase 2 amendments provide a series of temporary
exceptions from certain hedge accounting requirements
when a change required by interest rate benchmark reform
occurs to a hedged item and/or hedging instrument. The
temporary exceptions permit the hedging relationship to be
continued without interruption. The Group applied the
following reliefs as and when uncertainty arising from
interest rate benchmark reform was no longer present with
respect to the timing and amount of the interest rate
benchmark-based cash flows of the hedged item or
hedging instrument:
–
the Group amended the designation of a hedging
relationship to reflect changes that were required by the
reform without discontinuing the hedging relationship;
and
– when a hedged item in a cash flow hedge was amended
to reflect the changes that were required by the reform,
the amount accumulated in the cash flow hedge reserve
was deemed to be based on the alternative benchmark
rate on which the hedged future cash flows are
determined.
Further details on the implementation of the reform are
reported in note 3.3.2 Market risk.
The IASB issued 'Covid-19-related Rent Concessions beyond
30 June 2021 (Amendment to IFRS 16)' in March 2021
which was adopted by the UK in May 2021. The
amendment extends, by one year, the original May 2020
amendment that 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. The Group
has not needed to apply this practical expedient.
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 2021 and
31 December 2020. 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.
1.2 Foreign currencies
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 and equity
investments, 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, a
monthly 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.
182
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued 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 include both
arrangement and administration services. Arrangement
services are provided at a point in time as the benefits from
obtaining the insurance policy occur at a specific time. The
customer benefits from administration services throughout
the policy period; as the Group performs its obligation on an
as-needed basis, the allocated element of administration
services are spread evenly over the term of the policy.
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.
Revenue from any goods provided are accounted for at the
point of sale.
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.
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 which are
wholly or partly to take the form of PPOs. These are covered
in more detail in note 2.3. 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 the value of incurred claims
(gross and net) at the balance sheet date. Also included in
the estimation of incurred 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
reserves based on a management best estimate, which
includes a prudence margin that exceeds the internal
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 and claims are generally accounted for in the
same accounting period as the direct business 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.
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183
183
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
1.6 Reinsurance continued
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. Changes in the provision affect the Group
by changing the carrying value of the net reinsurance asset
with the movement being recognised in the income
statement.
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:
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 are 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.
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.
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Financial StatementsNotes to the Consolidated Financial Statements continued 1.11 Right-of-use assets ("ROU") 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 ROU 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 ROU 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
ROU 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 ROU 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
completed quarterly by independent registered valuers and
in accordance with guidance issued by the Royal Institution
of Chartered Surveyors. 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.
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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
1.13 Financial assets continued
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 at
fair value on the date the derivative contract is entered into,
and subsequently remeasured to their fair value at the end
of each reporting period. Derivative fair values are
determined from quoted prices in active markets where
available. Where there is no active market for an instrument,
fair value is derived from prices for the derivative's
components using appropriate pricing or valuation models.
Gains and losses arising from changes in the fair value of a
derivative are recognised as they arise in the income
statement unless the derivative is the hedging instrument in
a qualifying hedge. The Group enters into fair value hedge
relationships and a small amount of cash flow hedges.
Hedge relationships are formally documented at inception.
The documentation identifies the hedged item and the
hedging instrument and details the risk that is being
hedged and the way in which effectiveness will be assessed
at inception and during the period of the hedge. If the
hedge is not highly effective in offsetting changes in cash
flows and fair values attributable to the hedged risk,
consistent with the documented risk management strategy,
or if the hedging instrument expires or is sold, terminated or
exercised, hedge accounting is discontinued.
In a cash flow hedge, the effective portion of the gain or loss
on the hedging instrument is recognised 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 Assets held for sale
Non-current assets, including investment property, are
classified as held for sale if their carrying amount will be
recovered principally through a sale transaction rather than
through continuing use and a sale is considered highly
probable. Investment property is measured at fair value less
costs to sell. Other non-current assets are measured at the
lower of their carrying amount and fair value less costs to
sell.
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Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued An impairment loss is recognised in the income statement
for any initial or subsequent write down of the asset to fair
value less costs to sell. A gain is recognised for any
subsequent increase in fair value less costs to sell of an asset
but not in excess of any cumulative impairment loss
previously recognised. A gain or loss not previously
recognised by the date of the sale is recognised at the date
of derecognition.
Non-current assets classified as held for sale are presented
separately from the other assets in the balance sheet and
are not depreciated or amortised.
1.16 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.
1.17 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.
1.18 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.
1.19 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".
1.20 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.
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.
1.21 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).
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
1.21 Share-based payment continued
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.
1.22 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.
1.23 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.
1.24 Accounting developments
New IFRS standards and amendments that are issued, but
not yet effective for the 31 December 2021 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 EU1 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 EU1 in November 2017.
Note:
1. On 31 December 2020, all EU-adopted international accounting standards
became UK-adopted international accounting standards.
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 its annual reporting date immediately
preceding 1 April 2016, providing an option to defer
adoption of IFRS 9 if liabilities connected to insurance
comprised a predominant proportion of its total liabilities as
at that date. The Group concluded that it satisfied the
criteria 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 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 43.
The amount of change in the fair value during the period for
these financial assets was:
– AFS debt securities £94.5 million decrease (2020: £96.7
million increase);
– HTM debt securities £1.7 million decrease (2020: £0.2
–
million decrease);
infrastructure debt £2.1 million decrease (2020: £1.1
million increase); and
– commercial real estate loans £0.5 million decrease (2020:
£3.8 million decrease).
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 43
and the amount of change in the fair value during the
period was an increase of £26.9 million (2020: £64.5 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 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 £366.0 million (2020: £374.6 million). The carrying value
of these financial assets at 31 December 2021 was £368.1
million (2020: £377.2 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, and adopted by the UK in January
2021, which delays the effective date of IFRS 9 so as to
remain in line with IFRS 17.
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued 'Amendments to IFRS 9: Prepayment Features with
Negative Compensation' was issued in October 2017 and is
endorsed by the UK 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.
As the vast majority of the Group's insurance contracts have
a coverage period that is 12 months or less, the Group
intends to adopt the premium allocation approach ("PAA")
for all insurance and reinsurance contract groups. Applying
the PAA, an entity measures the liability for remaining
coverage ("LRC") of a group of insurance contracts on initial
recognition as the premiums received less any insurance
acquisition cash flows paid. Subsequently, the liability for
remaining coverage of a group of insurance contracts
increases with premiums received and decreases to reflect
an allocation of the total amount of the expected premiums
receipts to profit or loss on a straight-line basis as insurance
services are provided. The measurement of the Group's
liability for incurred claims ("LIC") will require the Group to
determine a probability-weighted best estimate of future
fulfilment cash flows, discounted to reflect the time value of
money with a risk adjustment to compensate for non-
financial risk.
A dedicated programme of activity throughout the year has
ensured the Group remains on track to complete the
necessary data and technology changes required to
transition to IFRS 17 and IFRS 9 from 1 January 2023, with a
period of parallel run planned for 2022.
The Group also continues to refine its accounting policy
choices and accounting judgements under IFRS 17 and
therefore it is not possible to accurately estimate the likely
impact of IFRS 17 to the Group's financial statements at this
stage.
The standard is yet to be endorsed by the UK.
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 if 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 settlement of a liability.
In July 2020 a further amendment was made: 'Classification
of Liabilities as Current or Non-current – Deferral of Effective
Date (Amendments 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.
The new guidance is effective for annual periods starting on
or after 1 January 2023 but is yet to be adopted by the UK.
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.
– 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 but are yet to be adopted by the UK.
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 from 1 January 2022 but are
yet to be adopted by the UK.
The following amendments are effective from 1 January
2023 but have not yet been adopted by the UK.
In February 2021 the IASB issued 'Definition of Accounting
Estimates (Amendments to IAS 8)' which introduces a new
definition of 'accounting estimates'. The amendments are
designed to clarify the distinction between changes in
accounting estimates and changes in accounting policies
and the correction of errors.
Also, in February 2021 the IASB issued 'Disclosure of
Accounting policies (Amendments to IAS 1 and IFRS
Practice Statement 2)' to help entities to provide accounting
policy disclosures that are more useful by:
–
replacing the requirement for entities to disclose their
'significant' accounting policies with a requirement to
disclose their 'material' accounting policies; and
– adding guidance on how entities apply the concept of
'materiality' in making decisions about accounting policy
disclosures.
In May 2021 the IASB issued 'Deferred Tax related to Assets
and Liabilities arising from a Single Transaction
(Amendments to IAS 12)' which narrows the scope of the
initial recognition exception under IAS 12 'Income Taxes' so
that it no longer applies to transactions that give rise to
equal taxable and deductible temporary differences.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
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 181 to 189.
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.
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.
It has been determined, following the successful implementation of the Group's new Motor platform, that 'Impairment
provisions - intangible assets' is no longer a critical accounting judgement or source of estimation uncertainty. This is
because the Group's most significant intangible asset, the Motor IT platform, has begun amortisation over the period of its
expected useful economic life.
2.1 Impairment provisions – financial assets
Accounting judgement
The Group's financial assets are classified as AFS or HTM debt securities or loans and receivables. 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.
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.
The majority of the Group's financial assets are classified as AFS debt securities (31 December 2021: £4,084.6 million;
31 December 2020: £4,103.1 million). Impairment losses and exchange differences arising from translating the amortised
cost of foreign currency monetary AFS financial assets are recognised in the income statement. Other changes in fair value
are recognised in a separate component of equity. No impairments have been recognised in the AFS portfolio.
Had all the declines in AFS debt securities asset values met the criteria above at 31 December 2021, the Group would have
suffered a loss of £24.8 million (2020: £3.0 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.
The Group has a small portfolio of investments classified as HTM (31 December 2021: £91.2 million; 31 December 2020:
£103.9 million). These assets are measured at amortised cost and there have been no impairment losses.
The Group has a portfolio of investments classified as loans and receivables, comprising infrastructure debt and
commercial real estate loans (total 31 December 2021: £451.6 million; 31 December 2020: £471.2 million). There was an
impairment of £2.1 million within the loans and receivables portfolio in the year ended 31 December 2021 (2020: £2.7
million).
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 2021 of £317.0 million (2020: £292.1
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 43).
Sensitivity analysis for the investment property portfolio has been independently calculated by our register valuers by
flexing inputs of internal models to a reasonable alternative yield to ascertain the impact on property valuations (see note
20).
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued 2.3 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 2021 amounted to £2,548.4
million (2020: £2,591.7 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 minus 1.75% in Northern Ireland.
The Group reserves its large bodily injury claims at the relevant discount rate for each jurisdiction, with the overwhelming
majority now case 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. Sensitivities for the impact of a potential change in the Ogden
discount rate are shown in note 3.3.1.
The Group settles some large bodily injury claims as PPOs rather than lump sum payments. The 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 expected
return on the assets backing these long-term liabilities.
Higher claims inflation remains a risk, given the continuing rise in consumer price and wage inflation. CPI is at its highest
level for the past decade and is not expected to decline until 2023. Pressure is likely to remain strong on wages, with
potential implications for the cost of care. Global supply chain issues remain problematic, resulting in a risk of price
increases for products and components in short supply. A range of general and specific claims inflation scenarios for goods
and services have therefore been considered in the reserving process.
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 as well as input costs and replacement costs for damage claims. The
sensitivity analysis in note 3.3.1 continues to look at a 100 basis point change in the claims inflation assumed in the
actuarial best estimate over the next two years and therefore continues to remain relevant and within the Group's booked
reserve margin.
The table in note 35 to the financial statements provides an analysis of outstanding PPO claims provisions on a discounted
and an undiscounted basis at 31 December 2021 and 31 December 2020 and further details on sources of estimation
uncertainty. Details of sensitivity analysis to the discount rate applied to PPO claims are shown in note 3.3.1.
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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 89.
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 the 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 2.3.
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 & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued 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% (2020:
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%
(2020: 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
Impact of an increase in claims inflation by 100 basis points for two consecutive years
Increase/(decrease) in profit
before tax1,2
2021
£m
2020
£m
43.0
45.9
(58.9)
(62.7)
42.5
43.7
(59.4)
(61.1)
37.3
(37.6)
32.4
(32.2)
Notes:
1. These sensitivities are net of reinsurance and exclude the impact of taxation.
2. These sensitivities reflect one-off impacts at the balance sheet date 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 the 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 2021. 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 adjusters 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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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 continue to develop its risk management systems and
monitoring tools over 2022 for physical risk building on the work undertaken to complete the Climate Biennial Exploratory
Scenario ("CBES") in 2021. 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 78 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 windstorm/storm surge loss. The programme renews annually on 1 July and has a retention of
£150 million and an upper limit of £1,150 million;
– product concentration risk – the Group's business is heavily concentrated in the UK general insurance market. However,
the Group offers a diversified portfolio of products and a variety of brands sold through a range of distribution channels
to its customers; and
sector concentration risk – the concentration of the Group to any given industry sector is monitored and analysed in
respect of commercial customers.
–
It is important to note that none of these risk categories is independent of the others and that giving due consideration to
the relationship between these risks is an important aspect of the effective management of insurance risk.
Distribution risk
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 2021
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued 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.
The Investment Committee has 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 zero emissions by 2050 in
line with the aims of the Race to Zero campaign; 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, compared to a 2020 baseline.
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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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
3. Risk management continued
3.3.2 Market risk
The table below analyses the distribution of debt securities by geographical area (commercial real estate loans and
infrastructure debt are all within the UK).
At 31 December 2021
Australia
Austria
Belgium
Canada
Cayman Islands
China
Czech Republic
Denmark
Finland
France
Germany
Ireland
Italy
Japan
Mexico
Netherlands
New Zealand
Norway
Portugal
South Africa
South Korea
Spain
Sweden
Switzerland
United Arab Emirates
United Kingdom
USA
Zambia
Supranational
Total
Corporate
Local
government
Sovereign
Supranational
Debt securities
total
£m
£m
£m
215.0
17.7
31.6
99.1
4.0
1.0
1.0
15.6
29.4
301.6
243.3
1.4
21.0
48.6
13.1
125.1
11.0
17.9
4.9
10.6
3.0
74.3
65.8
57.3
3.5
1,134.0
1,546.1
1.2
—
—
—
—
—
—
—
—
—
12.1
5.9
—
—
—
—
—
—
—
10.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
29.7
5.9
—
—
4,098.1
28.1
35.6
£m
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
14.0
14.0
£m
215.0
17.7
31.6
99.1
4.0
1.0
1.0
15.6
41.5
307.5
243.3
1.4
21.0
48.6
13.1
125.1
11.0
28.0
4.9
10.6
3.0
74.3
65.8
57.3
3.5
1,163.7
1,552.0
1.2
14.0
4,175.8
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
The table below analyses the distribution of debt securities by geographical area (commercial real estate loans and
infrastructure debt are all within the UK).
At 31 December 2020
Australia
Austria
Belgium
Canada
Cayman Islands
Czech Republic
Denmark
Finland
France
Germany
Ireland
Italy
Japan
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Peru
South Africa
South Korea
Spain
Sweden
Switzerland
United Arab Emirates
United Kingdom
USA
Supranational
Total
Corporate
Local
government
Sovereign
Supranational
Debt securities
total
£m
£m
£m
£m
205.7
17.1
38.0
127.6
1.8
1.1
11.9
27.7
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
—
—
—
—
—
—
—
—
12.3
13.1
—
—
—
—
—
—
—
—
10.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1.3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15.1
8.8
—
4,124.9
35.6
25.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
21.3
21.3
£m
205.7
17.1
38.0
127.6
1.8
1.1
11.9
40.0
324.1
200.9
7.1
27.1
48.2
4.4
14.0
155.3
8.1
25.2
1.9
10.0
3.1
75.8
61.4
33.1
3.6
1,216.2
1,523.0
21.3
4,207.0
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197
197
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
3. Risk management continued
3.3.2 Market risk
The table below analyses the distribution of debt securities by industry sector classifications.
At 31 December
Basic materials
Communications
Consumer, cyclical
Consumer, non-cyclical
Diversified
Energy
Financial
Industrial
Sovereign, supranational and local government
Technology
Transport
Utilities
Total
2021
2020
£m
82.6
203.4
410.3
361.4
19.2
152.8
2,050.2
250.5
77.7
121.5
13.4
432.8
4,175.8
%
2%
5%
10%
9%
0%
4%
49%
6%
2%
3%
0%
10%
100%
£m
104.5
212.2
358.0
426.7
20.8
184.2
1,897.0
280.3
82.1
103.9
13.4
523.9
4,207.0
The table below analyses the distribution of infrastructure debt by industry sector classifications.
At 31 December
Social, of which:
Education
Health
Other
Transport
Total
2021
£m
110.3
67.2
49.0
24.3
250.8
%
44%
26%
20%
10%
100%
2020
£m
115.7
70.3
50.7
27.8
264.5
%
3%
5%
9%
10%
0%
4%
45%
7%
2%
3%
0%
12%
100%
%
44%
26%
19%
11%
100%
The Group uses its internal economic capital model to determine its capital requirements and market risk limits and
monitors its market risk exposure based on a 99.5% value-at-risk measure. The Group also applies market risk 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
interest rate risk exposures.
Spread risk
This is the risk of loss from the sensitivity of the value of assets and investments to changes in the level or in the volatility of
credit spreads over the risk-free interest rate term structure. The level of spread is the difference between the risk-free rate
and actual rate paid on the asset, with larger spreads being associated with higher-risk assets. The Group is exposed to
spread risk through its asset portfolio, most notably through its investment in corporate bonds.
Net interest rate risk
This is the risk of loss from changes in the term structure of interest rates or interest rate volatility which impact assets and
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 has subordinated guaranteed dated Tier 2 notes with fixed coupon rates which were issued on 27 April 2012 at
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
rates. This was treated as a designated hedging instrument.
Of the £500 million notes issued, the Group has bought back a total nominal value of £250 million.
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.
198
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
The market value of the Group's financial investments with fixed coupons is affected by the movement of interest rates. For
the majority of debt securities investments in US dollar and Euro debt securities, the Group hedges its exposure to US
dollar and Euro interest rate risk using swaps, excluding £348.6 million of US dollar short-duration, high-yield bonds (2020:
£361.8 million), £123.9 million of US dollar subordinated financial debt and £96.2 million of Euro subordinated financial
debt (2020: £99.9 million and £71.4 million, respectively) and £nil million short-duration Euro credit (2020: £58.7 million).
The Group is exposed to the following interest rate benchmarks within its hedging relationships: GBP SONIA, USD SOFR
and EURIBOR. The first two have been subject to interest rate benchmark reform during 2021 (historically both LIBOR).
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 2021. 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 throughout 2021.
In the course of 2020 and 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 documentation for infrastructure debt and commercial real estate loans was amended in 2021 to include
LIBOR fall-back clauses to the existing loan agreements in line with Loan Market Association guidance; and
these fall-back clauses will be added to any new agreements.
–
–
In November 2021, the transition from USD LIBOR interest rate swaps to SOFR swaps for all US dollar hedge exposures was
completed in line with accounting standards.
All legacy commercial real estate loans (issuance pre-April 2021) transitioned on the Q4 2021 interest payment date to
GBP SONIA.
Not all the infrastructure loans as at 31 December 2021 have transitioned away from GBP LIBOR over to GBP SONIA.
Where legal documentation has yet to be completed, in the immediate future reference of rates will be linked to synthetic
GBP LIBOR.
The table below discloses in more detail for the transition from LIBOR to GBP SONIA for all sterling illiquid assets.
Non-derivative floating rate financial
instruments prior to transition
Maturing in
Number of
instruments
Nominal
exposure
(£m) Transition progress
Private placement linked to
LIBOR
Commercial real estate loans
linked to LIBOR
Infrastructure debt linked to
LIBOR
2025
1
13.5 Transitioned to SONIA
2022 - 2026
27
200.8 Transitioned to SONIA
2025 - 2040
29
250.8 – 6 loans completed transition to SONIA;
– 10 loans on which arrangements to transition to
SONIA are agreed and awaiting execution;
– 12 loans are in the process of agreeing
documentation to transition to SONIA; and
– one loan will be prepaid in full in the first quarter
of 2022 and will not transition to SONIA.
The Group's designated interest rate hedging instruments and hedged items as at 31 December 2021 are set out in the
table below.
Hedge type
Instrument type
Maturing in Nominal
Hedged item
Fair value
hedges
Pay USD fixed, receive USD SOFR
interest rate swaps
2023 - 2032 US$1,108 million Portfolio fair value hedge of the USD
Pay Euro fixed, receive 6-month
EURIBOR interest rate swaps
2024 - 2042 €109 million
SOFR 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
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 2021, the value of these property investments was £317.0
million (2020: £292.1 million). The property investments are located in the UK.
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199
199
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
3. Risk management continued
3.3.2 Market risk continued
Currency risk
This is the risk of loss from changes in the level or volatility of currency exchange rates.
Exposure to currency risk is generated by the Group's investments in US dollar and Euro denominated debt bonds.
The Group maintains exposure to US dollar securities through £1,376.5 million (2020: £1,331.9 million) of investments in US
dollar bonds and Euro securities through £197.7 million (2020: £231.1 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.
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 2021
Derivative assets
At fair value through the income statement
Foreign exchange contracts (forwards)
Interest rate swaps
Designated as hedging instruments
Foreign exchange contracts (forwards)
Interest rate swaps
Total
At 31 December 2021
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
At 31 December 2020
Derivative assets
At fair value through the income statement
Foreign exchange contracts (forwards)
Interest rate swaps
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
Over 5 years
£m
£m
£m
£m
1,695.4
250.0
10.0
901.0
27.8
2.4
—
(0.9)
2,856.4
29.3
—
—
—
3.6
3.6
—
—
—
3.0
3.0
Notional
amounts
Maturity and fair value
Less than 1
year
1 – 5 years
Over 5 years
£m
£m
£m
£m
1,318.9
19.1
—
4.1
9.1
0.1
—
1,332.1
19.2
0.1
—
0.1
—
—
0.2
0.2
Notional
amounts
Maturity and fair value
Less than 1
year
1 – 5 years
Over 5 years
£m
£m
£m
£m
2,182.8
250.0
4.1
150.3
63.5
1.0
0.1
—
2,587.2
64.6
—
7.2
—
—
7.2
—
—
—
1.6
1.6
Total
£m
27.8
2.4
—
5.7
35.9
Total
£m
19.1
0.2
0.2
19.5
Total
£m
63.5
8.2
0.1
1.6
73.4
200 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
200 Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
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
Over 5 years
£m
£m
£m
£m
Total
£m
696.4
12.3
—
—
12.3
785.1
1,481.5
2.4
14.7
17.7
17.7
24.8
24.8
44.9
57.2
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
Increase/(decrease)
in profit before tax1
Decrease
in total equity1
at 31 December
2021
£m
2020
£m
2021
£m
2020
£m
—
—
(144.3)
(151.2)
11.8
12.5
(100.6)
(114.1)
(47.5)
(43.8)
(47.5)
(43.8)
Notes:
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, commercial real estate loans and HTM debt securities
that would not be recorded in the financial statements under IFRSs as they are classified as loans and receivables and HTM respectively, which are carried at
amortised cost. It is estimated that a fair value reduction in these asset categories resulting from a 100 basis points increase in spreads would have been £13.7
million (2020: £15.1 million) and a 100 basis points increase in interest rates would have been £4.8 million (2020: £4.4 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 2021, the Group has pledged £26.3
million in cash (2020: £65.8 million) to cover initial margins and out-of-the-money derivative positions. At 31 December
2021, counterparties have pledged £5.4 million in cash and £2.2 million in UK Gilts (2020: £12.0 million in cash and £8.1
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.
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201
201
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
3. Risk management continued
3.3.3 Credit risk continued
Counterparty default risk continued
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.
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.
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 2021
Reinsurance assets
Insurance and other receivables
Derivative assets
Debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents1
Total
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
Note:
Neither past
due nor
impaired
Past due 1 – 90
days
Past due more
than 90 days
Carrying value
in the balance
sheet
£m
1,205.1
762.4
35.9
4,175.8
250.8
200.8
955.7
7,586.5
£m
—
0.3
—
—
—
—
—
0.3
£m
6.7
0.1
—
—
—
—
—
£m
1,211.8
762.8
35.9
4,175.8
250.8
200.8
955.7
6.8
7,593.6
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
—
—
—
—
—
£m
0.1
0.6
—
—
—
—
—
£m
1,129.2
848.2
73.4
4,207.0
264.5
206.7
1,220.1
45.0
0.7
7,949.1
1. This represents money market funds with no notice period for withdrawal and cash at bank and in hand.
Within the analysis of debt securities above are bank debt securities at 31 December 2021 of £1,366.2 million (2020:
£1,282.8 million) that can be further analysed as: secured £15.5 million (2020: £16.2 million); unsecured £1,193.7 million
(2020: £1,125.2 million); and subordinated £157.0 million (2020: £141.4 million).
202 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
202 Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
The tables below analyse the credit quality of debt securities that are neither past due nor impaired.
At 31 December 2021
Corporate
Supranational
Local government
Sovereign
Total
At 31 December 2020
Corporate
Supranational
Local government
Sovereign
Total
AAA
£m
58.5
14.0
10.1
5.9
AA+ to AA-
A+ to A-
BBB+ to BBB- BB+ and below
£m
£m
£m
334.7
—
18.0
29.7
1,913.3
1,439.4
—
—
—
—
—
—
£m
352.2
—
—
—
Total
£m
4,098.1
14.0
28.1
35.6
88.5
382.4
1,913.3
1,439.4
352.2
4,175.8
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
£m
Total
£m
400.9
1,842.3
1,447.1
366.5
4,124.9
—
25.4
15.1
—
—
—
—
—
—
—
—
—
21.3
35.6
25.2
109.7
441.4
1,842.3
1,447.1
366.5
4,207.0
The tables below analyse the credit quality of financial and insurance assets that are neither past due nor impaired
(excluding debt securities analysed above). The tables include reinsurance exposure, after provision. The Group's approach
to reinsurance counterparty default risk is detailed on page 201.
At 31 December 2021
Reinsurance assets
Insurance and other
receivables1
Derivative assets
Infrastructure debt
Commercial estate loans
Cash and cash equivalents2
AA+ to AA-
A+ to A-
BBB+ to BBB- BB+ and below
Not rated
AAA
£m
£m
£m
—
660.1
528.2
—
—
—
17.7
792.9
37.6
7.9
—
73.3
26.2
27.3
9.9
67.9
66.9
133.0
£m
1.9
13.0
18.1
175.9
34.1
3.6
£m
—
—
—
7.0
8.8
—
£m
14.9
684.5
—
—
—
—
Total
£m
1,205.1
762.4
35.9
250.8
200.8
955.7
Total
810.6
805.1
833.2
246.6
15.8
699.4
3,410.7
At 31 December 2020
Reinsurance assets
Insurance and other
receivables1
Derivative assets
Infrastructure debt
Commercial 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
—
766.9
359.7
—
—
—
1.2
995.2
996.4
17.3
8.5
—
44.7
55.7
893.1
40.2
64.9
71.7
117.8
169.2
823.5
£m
1.9
16.4
—
192.8
32.3
—
£m
—
—
—
—
10.7
—
Total
£m
£m
0.6
1,129.1
728.7
—
—
—
—
802.6
73.4
264.5
206.7
1,220.1
243.4
10.7
729.3
3,696.4
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 business 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.
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203
203
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
3. Risk management continued
3.3.4 Operational risk continued
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.
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 2021
Debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents1
Within
1 year
£m
1 – 3 years
3 – 5 years
5 – 10 years
£m
£m
£m
507.0
972.7
1,293.2
1,281.0
14.6
87.0
955.7
34.4
54.0
—
34.2
59.8
—
101.7
—
—
Over
10 years
£m
121.9
65.9
—
—
Total
£m
4,175.8
250.8
200.8
955.7
Total
1,564.3
1,061.1
1,387.2
1,382.7
187.8
5,583.1
At 31 December 2020
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
407.7
1,053.8
1,133.6
1,492.8
119.1
4,207.0
14.0
35.0
31.4
106.3
34.9
65.4
98.1
—
1,220.1
1,676.8
—
1,191.5
—
1,233.9
—
1,590.9
86.1
—
—
205.2
264.5
206.7
1,220.1
5,898.3
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.
Less than 1
year
1 – 3 years
3 – 5 years
5 – 10 years
Over 10 years
Total
Carrying value
£m
£m
£m
£m
£m
At 31 December 2021
Subordinated liabilities
Insurance liabilities1
Borrowings
Lease liabilities
Provisions
Trade and other payables,
including insurance payables
272.0
20.8
20.8
52.0
1,182.2
995.1
480.1
385.8
59.2
11.2
95.8
—
17.9
0.5
—
14.6
0.1
450.6
6.4
0.3
—
31.7
—
—
265.2
1,549.1
—
32.8
—
£m
630.8
4,592.3
59.2
108.2
96.4
£m
513.6
3,680.5
59.2
84.2
96.4
—
457.3
457.3
Total
2,071.0
1,040.7
515.9
469.5
1,847.1
5,944.2
4,891.2
204 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
204 Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
At 31 December 2020
Subordinated liabilities
Insurance liabilities1
Borrowings
Lease liabilities
Provisions
Trade and other payables,
including insurance payables
Total
Note:
Less than 1
year
£m
33.5
1,053.5
51.9
17.6
108.2
1 – 3 years
3 – 5 years
5 – 10 years
Over 10 years
Total
Carrying value
£m
£m
£m
£m
£m
£m
282.4
953.8
—
29.6
6.5
20.8
52.0
280.8
669.5
516.6
456.8
371.6
1,817.6
4,653.3
3,617.0
—
25.9
0.1
—
57.1
—
—
—
75.4
—
51.9
205.6
114.8
51.9
152.4
114.8
—
549.9
549.9
543.6
6.1
0.2
1,808.3
1,278.4
503.8
480.7
2,173.8
6,245.0
5,002.6
1.
Insurance liabilities exclude unearned premium reserves as there are no liquidity risks inherent in them.
The following table analyses the undiscounted cash flows of derivative financial instruments, by contractual maturity.
At 31 December 2021
Derivative assets
Derivative liabilities
Total
At 31 December 2020
Derivative assets
Derivative liabilities
Total
Within
1 year
£m
27.4
(19.4)
8.0
Within
1 year
£m
69.2
(24.6)
44.6
1 – 3 years
3 – 5 years
5 – 10 years
£m
3.1
(0.1)
3.0
£m
3.2
—
3.2
£m
2.8
—
2.8
1 – 3 years
3 – 5 years
5 – 10 years
£m
2.3
(18.2)
(15.9)
£m
0.1
(10.8)
(10.7)
£m
1.9
(3.6)
(1.7)
Over
10 years
£m
—
—
—
Over
10 years
£m
—
(0.1)
(0.1)
Total
£m
36.5
(19.5)
17.0
Total
£m
73.5
(57.3)
16.2
Carrying
value
£m
35.9
(19.5)
16.4
Carrying
value
£m
73.4
(57.2)
16.2
3.4 Capital management
At 31 December 2021, the Group's capital position was comprised of shareholders' equity of £2,550.2 million (31 December
2020: £2,699.7 million) and Tier 1 notes of £346.5 million (31 December 2020: £346.5 million). In addition, the Group's
balance sheet also included £513.6 million of subordinated loan capital (31 December 2020: £516.6 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 £1.03 billion above an estimated SCR of
£1.35 billion as at 31 December 2021 (31 December 2020: £1.22 billion and £1.34 billion respectively). The Group's capital
requirements and solvency position are produced and presented to the Board on a regular basis.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
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 2021 (2020: £nil). If any transaction were to occur,
transfer prices between operating segments would be set on an arm's-length basis in a manner similar to transactions with
third parties. Segment income, expenses and results will include those transfers between business segments which will
then be eliminated on consolidation.
For each operating segment, there is no individual policyholder or customer that represents 10% or more of the Group's
total revenue.
206 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
206 Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
The table below analyses the Group's revenue and results by reportable segment for the year ended 31 December 2021.
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 ratio
Commission ratio
Expense ratio
Combined operating ratio
Rescue
and other
personal lines
Commercial
£m
£m
Motor
£m
1,560.8
1,597.8
(124.5)
1,473.3
99.8
69.4
33.9
Home
£m
577.8
579.8
(26.4)
553.4
12.5
18.3
1.0
380.0
372.5
(3.0)
369.5
3.7
3.0
9.7
1,676.4
585.2
385.9
(1,086.8)
(287.7)
(177.2)
139.8
7.3
(8.1)
(947.0)
(280.4)
(185.3)
(48.2)
(38.1)
(42.3)
(366.4)
(124.9)
(93.5)
(414.6)
(163.0)
(135.8)
314.8
141.8
64.8
653.0
617.9
(56.7)
561.2
30.3
6.6
2.1
600.2
(363.6)
57.6
(306.0)
(112.3)
(121.5)
(233.8)
60.4
111.7
64.3%
3.3%
24.8%
92.4%
110.0
50.7%
6.9%
22.5%
80.1%
48.4
50.2%
11.4%
25.3%
21.4
54.5%
20.0%
21.7%
86.9%
96.2%
The table below analyses the Group's assets and liabilities by reportable segment at 31 December 2021.
Goodwill
Assets held for sale
Other segment assets
Segment liabilities
Segment net assets
Motor
£m
130.4
29.2
Home
£m
45.8
3.5
Rescue
and other
personal lines
£m
28.7
1.1
6,467.2
750.1
268.4
(4,551.2)
(550.3)
(166.5)
2,075.6
249.1
131.7
Commercial
£m
10.1
7.4
1,566.7
(1,143.9)
440.3
Total
Group
£m
3,171.6
3,168.0
(210.6)
2,957.4
146.3
97.3
46.7
3,247.7
(1,915.3)
196.6
(1,718.7)
(240.9)
(706.3)
(947.2)
581.8
(101.5)
(34.3)
446.0
291.5
58.1%
8.1%
23.9%
90.1%
Total
Group
£m
215.0
41.2
9,052.4
(6,411.9)
2,896.7
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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207
207
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
4. Segmental analysis continued
The table below analyses the Group's revenue and results by reportable segment for the year ended 31 December 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
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
Rescue
and other
personal lines
Commercial
£m
£m
Total
Group
£m
417.8
425.6
567.8
3,180.4
546.5
3,189.3
(2.7)
(49.5)
(228.8)
422.9
497.0
2,960.5
3.4
3.0
8.9
18.6
7.0
2.4
95.1
109.3
49.9
1,666.1
585.5
438.2
525.0
3,214.8
(889.2)
(316.5)
(279.1)
(245.6)
(1,730.4)
1.1
7.4
18.0
(9.7)
16.8
(888.1)
(309.1)
(261.1)
(255.3)
(1,713.6)
(47.4)
(45.0)
(69.4)
(92.9)
(254.7)
(367.1)
(414.5)
363.5
(130.0)
(175.0)
101.4
(100.9)
(170.3)
(126.4)
(219.3)
(724.4)
(979.1)
6.8
50.4
522.1
182.2
71.7
(8.5)
22.4
59.8%
3.2%
24.7%
87.7%
55.6%
8.1%
23.4%
87.1%
61.7%
16.4%
23.9%
102.0%
51.4%
18.7%
25.4%
95.5%
(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
Commercial
£m
Total
£m
10.1
214.2
6,874.0
765.5
304.2
1,464.4
9,408.1
(4,771.6)
(558.7)
(196.2)
(1,049.6)
(6,576.1)
2,232.0
252.6
136.7
424.9
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.
208 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
208 Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes 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
Cash and cash equivalents
Infrastructure debt
Commercial real estate loans
Interest income
Rental income from investment property
Net realised gains/(losses):
AFS debt securities
Derivatives
Investment property (note 20)
Net unrealised gains/(losses):
Impairment of loans and receivables
Derivatives
Investment property (note 20)
Total
2021
£m
2020
£m
3,171.6
(3.6)
3,168.0
(186.4)
(24.2)
(210.6)
2,957.4
3,180.4
8.9
3,189.3
(231.0)
2.2
(228.8)
2,960.5
2021
£m
2020
£m
90.9
0.2
4.4
6.0
101.5
14.5
116.0
7.9
(5.2)
0.2
2.9
(2.1)
(8.1)
37.6
27.4
146.3
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
The table below analyses the realised and unrealised gains and losses on derivative instruments included in investment
return.
Derivative (losses)/gains:
Foreign exchange forward contracts1
Associated foreign exchange risk
Net 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
2021
£m
2021
£m
39.9
(22.8)
17.1
(26.3)
4.0
(22.3)
(5.2)
(42.5)
24.7
(17.8)
48.9
(39.2)
9.7
(8.1)
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)
1. All foreign exchange forward contracts and certain interest rate swaps are measured at fair value through the income statement. There are also interest rate
swaps designated as hedging instruments.
WWW.DIRECTLINEGROUP.CO.UK
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209
209
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
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 includes fee income from insurance intermediary services.
8. Net insurance claims
2021
£m
19.7
13.1
7.2
6.7
46.7
2020
£m
24.0
12.2
8.8
4.9
49.9
Current accident year claims paid
Prior accident year claims paid
Movement in insurance liabilities
Total
Gross
Reinsurance
2021
£m
1,058.6
793.2
63.5
1,915.3
2021
£m
(1.1)
(88.7)
(106.8)
(196.6)
Net
2021
£m
1,057.5
704.5
(43.3)
1,718.7
Gross
Reinsurance
2020
£m
1,056.4
2020
£m
(18.1)
876.6
(123.0)
(202.6)
124.3
Net
2020
£m
1,038.3
753.6
(78.3)
1,730.4
(16.8)
1,713.6
Claims handling expenses for the year ended 31 December 2021 of £188.4 million (2020: £208.2 million) have been
included in the claims figures above.
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, amortisation and impairment of intangible and ROU assets1,4
Loss on termination of property lease1,5
Total other operating expenses (including restructuring and one-off costs)
Of which restructuring and one-off costs1,5
Total excluding restructuring and one-off costs
2021
£m
201.2
39.7
240.9
2021
£m
268.8
157.0
112.0
89.0
97.1
83.9
807.8
101.5
706.3
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
Notes:
1. Restructuring and one-off costs of £101.5 million (2020: £39.4 million) are included as follows: staff costs of £7.8 million (2020: £14.7 million), other operating
expenses of £9.3 million (2020: £24.2 million), depreciation of £0.5 million (2020: £0.5 million) and loss on termination of property lease of £83.9 million (2020:
£nil).
2. Staff costs and other operating expenses attributable to claims handling activities are allocated to the cost of insurance claims.
3.
4. For the year ended 31 December 2021, depreciation and amortisation includes a £2.1 million impairment charge (2020: £6.6 million), which relates to
IT and other operating expenses include professional fees and property costs.
capitalised software development costs for ongoing IT projects primarily relating to the development of new systems, and a £0.5 million impairment charge
(2020: £nil), which relates to ROU property assets.
5. As part of the review of the Group's office site property strategy 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 loss on terminating the lease was £83.9 million
and the value of the fixed asset capitalised was £19.8 million.
210
210
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
The table below analyses the number of people employed by the Group's operations.
At 31 December
Average for the year
Insurance operations
Repair centre operations
Support
Total
2021
6,976
1,408
1,402
9,786
2020
8,022
1,441
1,344
10,807
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
2021
7,502
1,432
1,382
10,316
2021
£m
392.8
42.6
26.1
18.4
479.9
2021
£m
0.2
1.9
2.1
0.2
0.3
2.6
2020
8,010
1,454
1,388
10,852
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
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
2021
£m
3.5
0.8
4.3
2020
£m
3.8
—
3.8
Further information about the remuneration of individual Directors is provided in the Directors' Remuneration Report.
At 31 December 2021, no Directors (2020: no Directors) had retirement benefits accruing under the defined contribution
pension scheme in respect of qualifying service. During the year ended 31 December 2021, two Directors exercised share
options (2020: one Director).
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211
211
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
11. Finance costs
Interest expense on subordinated liabilities1
Net interest received on interest rate swap2
Unrealised losses on interest rate swap²
Unrealised gains on designated hedging instrument²
Unrealised losses 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:
2021
£m
33.6
(5.3)
5.8
—
—
(3.0)
3.2
34.3
2020
£m
29.1
(4.1)
1.9
(1.2)
0.9
(1.3)
6.0
31.3
1. On 5 June 2020, the Group issued subordinated Tier 2 notes at a fixed rate of 4.0%. See note 34.
2. As described in note 34, 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 designated 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.
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-provision in respect of prior year
Current taxation
Deferred taxation (note 13)
Tax charge for the year
2021
£m
102.6
(8.3)
94.3
(1.1)
9.1
8.0
94.3
8.0
102.3
2020
£m
95.2
(0.5)
94.7
(11.1)
0.6
(10.5)
94.7
(10.5)
84.2
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 (2020: 19.0%).
Profit before tax
Expected tax charge
Effects of:
Disallowable expenses
Lease surrender
Non-taxable items
Effect of change in corporation taxation rate1
Under 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:
2021
£m
446.0
84.7
5.0
17.3
(0.6)
(1.7)
0.8
—
(3.2)
102.3
22.9%
2020
£m
451.4
85.8
1.3
—
—
0.1
0.1
0.1
(3.2)
84.2
18.7%
1.
In the Finance Act 2021 the UK Government enacted, on 10 June 2021, an increase in the UK corporation tax rate from 19% to 25% effective from 1 April 2023.
As a consequence the closing deferred tax assets and liabilities have been recognised at the tax rates expected to apply when the temporary differences
reverse. The impact of these changes on the tax charge for the year is set out in the table above.
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
13. Current and deferred tax
The aggregate current and deferred tax relating to items that are credited to equity is £0.7 million (2020: £0.2 million).
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
4.3
£m
(1.8)
5.9
(0.3)
—
—
10.2
0.3
—
(1.8)
£m
4.0
0.2
—
—
4.2
£m
(8.8)
3.9
—
—
(4.9)
£m
2.1
0.8
—
0.2
3.1
£m
(9.4)
Total
£m
(9.6)
—
10.5
(10.1)
—
(19.5)
(9.8)
0.2
(8.7)
(4.0)
(0.5)
(8.9)
4.9
0.5
—
(8.0)
—
—
6.2
(0.8)
—
(3.1)
—
—
(4.7)
—
—
—
—
(0.1)
3.5
17.1
—
(2.4)
16.3
(0.1)
(0.5)
At 1 January 2020
Credit/(charge) to the income
statement
Credit/(charge) to other
comprehensive income
Credit direct to equity
At 31 December 2020
(Charge)/credit to the income
statement
(Charge)/credit to other
comprehensive income
Charge direct to equity
At 31 December 2021
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 2021 of £12.8 million (2020: £5.0 million) in
relation to capital losses of which £10.4 million (2020: £5.0 million) relates to realised losses and £2.4 million (2020: £nil)
relates to unrealised losses.
14. Dividends and appropriations
Amounts recognised as distributions to equity holders in the period:
2021 interim dividend of 7.6 pence per share paid on 3 September 2021
2020 final dividend of 14.7 pence per share paid on 20 May 2021
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
Coupon payments in respect of Tier 1 notes1
Proposed dividends:
2021 final dividend of 15.1 pence per share
2020 final dividend of 14.7 pence per share
Note:
2021
£m
101.9
198.9
—
—
300.8
16.6
317.4
199.4
—
2020
£m
—
—
100.4
195.5
295.9
16.6
312.5
—
199.3
1. Coupon payments on the Tier 1 notes issued in December 2017 are treated as an appropriation of retained profits and, accordingly, are accounted for when
paid.
The proposed final dividends for 2021 have not been included as a liability in these financial statements.
On 7 March 2022, the Board approved a share buyback programme of up to £100 million to be completed during 2022.
On 8 March 2021, the Group announced that the Board had approved a share buyback programme of up to £100 million
which was completed on 15 November 2021 in accordance with its terms.
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 2021 by £1.7 million (2020: £1.6 million).
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
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.
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)
Basic earnings per share (pence)
Diluted earnings per share (pence)
2021
£m
343.7
(16.6)
327.1
1,335.8
20.8
1,356.6
24.5
24.1
2020
£m
367.2
(16.6)
350.6
1,356.5
18.6
1,375.1
25.8
25.5
On 8 March 2021, the Group announced that the Board had approved a share buyback programme of up to £100 million,
which was completed on 15 November 2021 in accordance with its terms. Across the programme, the Group repurchased
and cancelled 33,838,593 ordinary shares for an aggregate consideration of £101,043,742 (including related transaction
costs).
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.
Net assets
Goodwill and other intangible assets1
Tangible net assets
Number of Ordinary Shares (millions)
Shares held by employee trusts (millions)
Closing number of Ordinary Shares (millions)
Net asset value per share (pence)
Tangible net asset value per share (pence)
Note:
2021
£m
2,550.2
(822.5)
1,727.7
1,330.7
(13.4)
1,317.3
193.6
131.2
2020
£m
2,699.7
(786.8)
1,912.9
1,364.6
(12.8)
1,351.8
199.7
141.5
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.
214
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements 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 2020
Acquisitions and additions
At 31 December 2020
Acquisitions and additions
Disposals and write-off1
At 31 December 2021
Accumulated amortisation and impairment
At 1 January 2020
Amortisation charge for the year
Impairment losses2
At 31 December 2020
Amortisation charge for the year
Disposals and write-off1
Impairment losses2
At 31 December 2021
Carrying amount
At 31 December 2021
At 31 December 2020
Notes:
2021
£m
343.7
(16.6)
327.1
2,699.7
2,550.2
2,625.0
12.5%
2020
£m
367.2
(16.6)
350.6
2,643.6
2,699.7
2,671.7
13.1%
Goodwill
£m
Other
intangible
assets
£m
Total
£m
214.2
944.8
1,159.0
—
140.7
140.7
214.2
1,085.5
1,299.7
0.8
—
108.6
(12.0)
109.4
(12.0)
215.0
1,182.1
1,397.1
—
—
—
—
—
—
—
—
456.5
456.5
49.8
6.6
49.8
6.6
512.9
512.9
71.6
(12.0)
2.1
574.6
71.6
(12.0)
2.1
574.6
215.0
214.2
607.5
572.6
822.5
786.8
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 £72.8 million (2020: £370.7 million). The reduction
of £297.9 million is primarily due to the launch of the Group's Motor platform in H1 2021. The assets still in development at
31 December 2021 relate mainly to finance and core technology projects which are expected to be ready for use in 2022.
These assets are tested for impairment during the Group's annual impairment review at each reporting date.
Other intangible assets relate mainly to internally generated software. For year ended 31 December 2021 other intangible
assets additions, which are internally generated, are £105.9 million (2020: £140.7 million).
Goodwill arose on the acquisition of U K Insurance Limited (£141.0 million), Churchill Insurance Company Limited (£70.0
million) and accident repair networks (£4.0 million) and is allocated to reportable segments. The addition to goodwill in
the year ended 31 December 2021 of £0.8 million arose from the purchase of the business and assets of a vehicle repair
workshop on 21 February 2021. The acquisition is to further expand the Group's wholly owned DLG Auto Services network.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
17. Goodwill and other intangible assets continued
The fair value of the identifiable assets and liabilities of the acquisition are presented in the table below.
ROU assets
Property, plant and equipment
Lease liabilities
Goodwill
Total consideration paid in cash
Fair value
recognised on
acquisition
£m
1.1
0.1
(1.1)
0.8
0.9
Goodwill represents the value attributed to the business by the Group as part of its ongoing strategy of developing its
repair network. The Group measured the acquired lease liabilities and matching ROU asset using the present value of the
remaining lease payments at the date of acquisition. No disclosure has been made for revenue and profit before tax
generated as the Group does not manage its business at this level.
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
2021
£m
130.4
45.8
28.7
10.1
215.0
2020
£m
129.6
45.8
28.7
10.1
214.2
There is no goodwill impairment for the year ended 31 December 2021 (2020: £nil).
The recoverable amount is the higher of the CGU fair value less the costs to sell and its value-in-use. Value-in-use is the
present value of expected future cash flows from the CGU. Fair value is the estimated amount that could be obtained from
the sale of the CGU in an arm's-length transaction between knowledgeable and willing parties.
The recoverable amounts of all CGUs were based on the value-in-use test, using the Group's Strategic Plan. The long-term
growth rates have been based on gross domestic product rates adjusted for inflation. The risk discount rates incorporate
observable market long-term government bond yields and average industry betas adjusted for an appropriate risk
premium based on independent analysis.
The table below details the recoverable amounts in excess of carrying value for the CGUs where goodwill and other
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
have resulted in an impairment of goodwill and other intangible assets.
Assumptions
Sensitivity: impact on recoverable amount of a:
Terminal
growth rate
Pre-tax
discount rate
Recoverable
amount in
excess of
carrying value
1% decrease in
terminal
growth rate
1% increase in
pre-tax
discount rate
1% decrease in
forecast pre-
tax profit¹
%
1.5
1.5
1.5
1.5
%
11.3
11.3
11.3
11.3
£m
£m
£m
1,754.8
(259.1)
(370.5)
754.7
629.1
397.0
(68.3)
(55.9)
(52.9)
(97.9)
(79.7)
(76.0)
£m
(377.9)
(100.8)
(80.3)
(79.7)
CGU
Motor
Home
Rescue and other personal lines
Commercial
Note:
1. Reflects a 1% decrease in the profit for each year of the Group's Strategic Plan, which is five years.
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
18. Property, plant and equipment
Cost
At 1 January 2020
Additions
Disposals
At 31 December 2020
Additions
Disposals
Assets held for sale
At 31 December 2021
Accumulated depreciation and impairment
At 1 January 2020
Depreciation charge for the year
Disposals
At 31 December 2020
Depreciation charge for the year
Disposals
Assets held for sale
At 31 December 2021
Carrying amount
At 31 December 2021
At 31 December 2020
Land and
buildings
Other
equipment
£m
£m
79.8
189.2
—
—
20.1
(13.4)
79.8
195.9
19.8
—
(42.9)
56.7
6.4
1.1
—
7.5
1.2
—
(4.3)
4.4
9.5
(7.4)
(12.7)
185.3
119.2
14.0
(11.1)
122.1
10.9
(5.1)
(4.1)
Total
£m
269.0
20.1
(13.4)
275.7
29.3
(7.4)
(55.6)
242.0
125.6
15.1
(11.1)
129.6
12.1
(5.1)
(8.4)
123.8
128.2
52.3
72.3
61.5
73.8
113.8
146.1
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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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
19. Right-of-use assets
Cost
At 1 January 2020
Additions
Modifications1
Disposals
At 31 December 2020
Additions
Modifications
Disposals
At 31 December 2021
Accumulated depreciation and impairment
At 1 January 2020
Depreciation charge for the year
Modifications1
Disposals
At 31 December 2020
Depreciation charge for the year
Disposals
Impairment losses
At 31 December 2021
Carrying amount
At 31 December 2021
At 31 December 2020
Note:
Property Motor vehicles
IT equipment
£m
£m
£m
Total
£m
209.9
14.0
1.2
225.1
4.2
(16.1)
(2.6)
195.4
4.5
27.8
(111.1)
116.6
68.7
11.0
(13.5)
(2.6)
63.6
7.3
(27.2)
0.5
44.2
1.8
—
(3.2)
12.6
1.2
—
(2.9)
10.9
6.7
3.6
—
(3.2)
7.1
3.2
(2.9)
—
7.4
—
—
—
6.0
(16.1)
(5.8)
1.2
209.2
—
—
—
1.2
0.5
0.2
—
—
0.7
0.3
—
—
1.0
5.7
27.8
(114.0)
128.7
75.9
14.8
(13.5)
(5.8)
71.4
10.8
(30.1)
0.5
52.6
72.4
131.8
3.5
5.5
0.2
0.5
76.1
137.8
1. Modifications were previously reported in disposals. Comparative data for the year ended 31 December 2020 has been re-presented accordingly.
218
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DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
20. Investment property
Retail
£m
Retail
Warehouse
Supermarkets
Office
Industrials
£m
£m
£m
£m
Hotels
£m
Alternative
sector
£m
Total
£m
31.5
19.9
52.0
10.0
105.3
55.5
17.9
292.1
(1.5)
—
2.7
—
(3.4)
—
—
0.1
4.9
—
—
—
(0.4)
(9.6)
28.9
—
—
—
—
—
2.9
—
—
—
0.3
—
—
—
37.8
(9.6)
(3.4)
0.1
26.6
22.7
56.9
—
134.2
58.4
18.2
317.0
Retail
£m
Retail
Warehouse
Supermarkets
Office
Industrials
£m
£m
£m
£m
Hotels
£m
Alternative
sector
£m
Total
£m
37.6
24.3
49.7
12.9
88.0
59.4
19.8
291.7
—
—
—
—
10.5
—
—
10.5
(6.1)
(4.4)
2.3
(2.9)
6.8
(3.9)
(1.9)
(10.1)
31.5
19.9
52.0
10.0
105.3
55.5
17.9
292.1
At 1 January
2021
Fair value
adjustments
Disposals
Transferred to
assets held for
sale (note 30)
Capitalised
expenditure
At 31 December
2021¹
At 1 January
2020
Acquisitions at
cost
Fair value
adjustments
At 31 December
2020¹
Note:
1. The cost included in the carrying value at 31 December 2021 is £215.8 million (2020: £233.4 million).
The investment properties are measured at fair value derived from valuation work carried out at the balance sheet date by
independent property valuers.
The valuation conforms to international valuation standards. The fair value was determined using a methodology based on
recent market transactions for similar properties, which have been adjusted for the specific characteristics of each property
within the portfolio. This approach to valuation is consistent with the methodology used in the year ended 31 December
2020.
Lease agreements with tenants are drawn up in line with local practice and the Group has no exposure to leases that
include contingent rents.
The following table provides a sensitivity analysis for +/- 5 basis points and +/- 50 basis points movement in tenants' rental
income and impact on property valuation in sterling.
Equivalent yield
Value
21. Subsidiaries
-50bp
-5bp
Baseline as at
31 December
2021
%
£m
3.749
236.6
3.749
308.6
4.549
317.0
+5bp
3.749
325.1
+50bp
4.904
399.9
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
The Group did not acquire or dispose of any subsidiaries in the year ended 31 December 2021 (31 December 2020: one
acquisition).
For the years ended 31 December 2021 and 31 December 2020, Brolly UK Technology Limited was exempt from the
requirements of the Companies Act 2006 relating to the audit of individual accounts by virtue of section 479 A(2)(d).
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
22. Reinsurance assets
Reinsurers' share of general insurance liabilities
Impairment provision1
Total excluding reinsurers' unearned premium reserves (note 35)
Reinsurers' unearned premium reserve (note 36)
Total
Note:
2021
£m
1,169.6
(37.5)
1,132.1
79.7
1,211.8
2020
£m
1,071.6
(46.3)
1,025.3
103.9
1,129.2
1.
Impairment provision relates to reinsurance debtors, allowing for the risk that reinsurance assets may not be collected, or where one or more reinsurers' 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
Released 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 policyholders1
Impairment provision of policyholder receivables
Due from agents, brokers and intermediaries1
Impairment provision of agent, broker and intermediary receivables
Amounts due from reinsurers
Other debtors
Total
Note:
2021
£m
(46.3)
(3.2)
12.0
(37.5)
2021
£m
172.2
400.7
(386.3)
186.6
2021
£m
609.2
(1.7)
81.3
(0.1)
41.0
33.1
762.8
2020
£m
(40.5)
(13.7)
7.9
(46.3)
2020
£m
176.2
361.6
(365.6)
172.2
2020
£m
655.8
(2.2)
94.8
(0.3)
51.8
48.3
848.2
1. For the year ended 31 December 2020, there has been no net impact to the total of insurance and other receivables of £848.2 million. Following an exercise to
re-present certain debtor balances, the comparatives for receivables due from policyholders and due from agents, brokers and intermediaries have been re-
presented by £41.2 million (2020 as originally reported: receivables due from policy holders £614.6 million; receivables due from agents, brokers and
intermediaries: £136.0 million).
Movement in impairment provisions during the year
At 1 January 2021
Additional provision
Released to income statement
At 31 December 2021
Policyholders
Agents,
brokers and
intermediaries
£m
2.2
3.6
(4.1)
1.7
£m
0.3
0.2
(0.4)
0.1
Total
£m
2.5
3.8
(4.5)
1.8
220 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
220 Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
25. Prepayments, accrued income and other assets
Prepayments
Accrued income and other assets
Total
26. Derivative financial instruments
Derivative assets
At fair value through the income statement:
Foreign exchange contracts (forwards)
Interest rate swaps
Designated as hedging instruments:
Foreign exchange contracts (forwards)1
Interest rate swaps
Total
Derivative liabilities
At fair value through the income statement:
Foreign exchange contracts (forwards)
Designated as hedging instruments:
Foreign exchange contracts (forwards)1
Interest rate swaps
Total
Note:
2021
£m
89.1
36.0
125.1
2021
£m
27.8
2.4
—
5.7
35.9
2020
£m
95.1
30.9
126.0
2020
£m
63.5
8.2
0.1
1.6
73.4
19.1
12.3
0.2
0.2
19.5
—
44.9
57.2
1. Foreign exchange contracts (forwards) are designated as cash flow hedges in relation to supplier payments.
27. Retirement benefit obligations
Defined contribution scheme
The pension charge in respect of the defined contribution scheme for the year ended 31 December 2021 was £26.1 million
(2020: £26.2 million).
Defined benefit scheme
The Group's defined benefit pension scheme was closed in 2003, although the Group remains the sponsoring employer for
obligations to current and deferred pensioners based on qualifying years' service and final salaries. The defined benefit
scheme is legally separated from the Group with a trustee who is required by law to act in the interests of the scheme and
of all the relevant stakeholders. The trustee of the pension scheme is responsible for the investment policy with regard 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
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
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
inflation and duration risks against its liabilities.
The weighted average duration of the defined benefit obligations at 31 December 2021 is 20 years (2020: 20 years) using
accounting assumptions.
The table below sets out the principal assumptions used in determining the defined benefit scheme obligations.
Rate of increase in pension payment
Rate of increase in deferred pensions
Discount rate
Inflation rate
2021
%
2.6
2.6
2.0
3.3
2020
%
2.2
2.2
1.4
2.9
No assumption has been made for salary growth as there are no obligations in the scheme that are linked to future
increases in salaries.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
27. Retirement benefit obligations continued
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
Dynamic bond fund2
Defined contribution section funds3
Other
Total
Notes:
2021
2020
87.5
89.4
89.3
91.2
2021
£m
32.3
27.9
0.5
41.6
5.4
0.5
108.2
87.5
89.3
89.3
91.1
2020
£m
30.0
33.6
1.5
42.3
—
0.3
107.7
1. The liquidity fund is an investment in an open-ended fund incorporated in the Republic of Ireland which targets capital stability and income in the UK. It is
invested in short-term fixed income and variable rate securities (such as treasury bills) listed or traded on one or more recognised exchanges.
2. The dynamic bond fund targets positive returns on a three-year rolling basis. It is invested to maximise the total return from a globally diversified portfolio,
predominantly comprising high-yielding corporate and government bonds.
3. The defined contribution section funds relate to members in that section who have a defined benefit underpin that exceeds the value of the defined
contribution funds. The investments are largely in a diversified growth fund. The corresponding liability is included in the defined benefit scheme obligation (see
the movement in net pension surplus table on page 223).
The majority of debt instruments held directly or through the liquidity fund have quoted prices in active markets.
222 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
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Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
Movement in net pension surplus
At 1 January 2020
Income statement:
Net interest income/(cost)1
Administration costs
Statement of comprehensive income:
Remeasurement losses
Fair value of
defined benefit
scheme assets
Present value of
defined benefit
scheme
obligations
Net pension
surplus
£m
£m
100.0
(90.3)
1.9
(0.4)
(1.8)
—
£m
9.7
0.1
(0.4)
Return on plan assets excluding amounts included in the net interest on the
defined benefit asset
9.0
—
9.0
Actuarial losses of defined benefit scheme
Experience gains
Losses from change in demographic assumptions
Losses from change in financial assumptions
Benefits paid
At 31 December 2020
Income statement:
Net interest income/(cost)1
Administration costs
Statement of comprehensive income:
Remeasurement gains
Return on plan assets excluding amounts included in the net interest on the
defined benefit asset
Actuarial gains of defined benefit scheme
Experience losses
Gains from change in demographic assumptions
Gains from change in financial assumptions
Benefits paid
At 31 December 2021
Note:
—
—
—
(2.8)
107.7
1.5
(0.8)
2.4
(1.7)
(10.1)
2.8
(98.7)
(1.4)
—
2.4
(1.7)
(10.1)
—
9.0
0.1
(0.8)
2.2
—
2.2
—
—
—
(2.4)
108.2
(5.8)
(5.8)
0.2
7.2
2.4
(96.1)
0.2
7.2
—
12.1
1. The net interest income/(cost) in the income statement has been included under other operating expenses.
The table below details the history of the scheme for the current and prior years.
Present value of defined benefit scheme obligations
Fair value of defined benefit scheme assets
Net pension surplus
Experience (losses)/gains on scheme liabilities
Return on plan assets excluding amounts included in
the net interest on the defined benefit asset
2021
£m
(96.1)
108.2
12.1
(5.8)
2.2
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
4.4
(3.5)
1.0
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
27. Retirement benefit obligations continued
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
2021
£m
—
0.2
—
—
0.1
(0.1)
2020
£m
(0.1)
0.1
—
—
0.1
(0.1)
2021
£m
(4.8)
4.8
2.4
(2.4)
3.0
(3.0)
2020
£m
(4.9)
4.9
2.5
(2.5)
3.6
(3.6)
The most recent funding valuation of the Group's defined benefit scheme was carried out as at 1 October 2020. This
showed an excess of assets over liabilities. The Group agreed with the trustee to make contributions of up to £1.5 million
per annum in 2022, 2023 and 2024, 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 2022 (2021: £nil).
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:
2021
£m
2020
£m
4,006.9
14.0
28.1
35.6
4,084.6
4,021.0
21.3
35.6
25.2
4,103.1
91.2
4,175.8
103.9
4,207.0
4,158.3
17.5
4,175.8
250.8
200.8
451.6
6.2
4,633.6
4,184.5
22.5
4,207.0
264.5
206.7
471.2
3.2
4,681.4
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 2021 was £1,005.6 million (2020: £971.1 million).
2. An insurtech-focused equity fund which is valued based on external valuation reports received from a third-party fund manager.
224 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
224 Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
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:
2021
£m
162.8
792.9
955.7
(59.2)
896.5
2020
£m
224.9
995.2
1,220.1
(51.9)
1,168.2
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 2021 was 0.16%
(2020: 0.25%) and average maturity was 10 days (2020: 10 days).
30. Assets held for sale
Property, plant and equipment
Investment property
Total assets held for sale
2021
£m
36.8
4.4
41.2
2020
£m
—
—
—
The Group is able to reduce the number of head office sites it needs by changing the way it uses its premises so that they
support collaboration, training and teamwork rather than being an everyday place of work for most people.
Assets held for sale at 31 December 2021 relate to head office sites in Birmingham, Ipswich and Leeds (including retail
space within the Leeds property) that is no longer required.
A net impairment loss of £9.4 million is included within operating expenses (as part of restructuring and one-off costs) for
the write down of the carrying value of these three properties to their held for sale values.
31. Share capital
Issued and fully paid: equity shares
Ordinary Shares of 10 10/11 pence each1
At 1 January
Shares cancelled following buyback2,3
At 31 December
Notes:
2021
2020
Number of
shares
Share capital
millions
1,364.6
(33.9)
1,330.7
£m
148.9
(3.7)
145.2
Transfer to
capital
redemption
reserve
£m
1.1
3.7
4.8
Number of
shares
Share capital
millions
£m
1,375.0
(10.4)
1,364.6
150.0
(1.1)
148.9
Transfer to
capital
redemption
reserve
£m
—
1.1
1.1
1. The shares have full voting dividend and capital distribution rights (including on wind-up) attached to them; these do not confer any rights of redemption.
2. On 8 March 2021, the Group announced that the Board had approved a share buyback programme of up to £100 million, which was completed on 15
November 2021 in accordance with its terms. Across the programme, the Group repurchased and cancelled 33,838,593 ordinary shares for an aggregate
consideration of £101,043,742 (including related transaction costs) as reflected in retained earnings. The shares have subsequently been cancelled giving rise to
a capital redemption reserve of an equivalent amount as required by the Companies Act 2006.
3. 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 (including transaction costs) 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.
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 2021, 13,442,422 Ordinary Shares (2020: 12,753,755 Ordinary Shares) were owned by the employee share
trusts at a cost of £41.4 million (2020: £40.3 million). These Ordinary Shares are carried at cost and at 31 December 2021
had a market value of £37.5 million (2020: £40.7 million).
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225
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
32. 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:
2021
£m
83.9
(84.1)
15.1
(7.9)
2.0
9.0
2020
£m
47.5
47.4
(10.1)
(1.1)
0.2
83.9
2021
£m
100.0
1,354.8
1,454.8
2020
£m
100.0
1,351.1
1,451.1
1. Arose on the cancellation of a debt payable to a shareholder.
2. £1,350.0 million arose on the reduction of nominal value of each share in issue with a corresponding transfer to capital redemption reserve. Further additions of
£3.7 million in 2021 and £1.1 million in 2020 were made when shares repurchased through buyback were cancelled.
33. Tier 1 notes
Tier 1 notes
2021
£m
346.5
2020
£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.
226 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
226
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
34. Subordinated liabilities
£250 million 9.25% subordinated Tier 2 notes due 2042
£260 million 4.0% subordinated Tier 2 notes due 2032
Subordinated Tier 2 notes
2021
£m
255.2
258.4
513.6
2020
£m
258.5
258.1
516.6
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.
£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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
35. Insurance liabilities
Insurance liabilities
Gross insurance liabilities
2021
£m
2020
£m
3,680.5
3,617.0
Accident year
Estimate of ultimate
gross claims costs:
At end of
accident year
One year later
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Total
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
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 1,955.8
(163.3) (117.6)
20.7
(30.0)
(86.7) (116.2)
(62.3)
(67.2) (116.8)
Two years later
(118.9) (153.0)
(38.4) (143.5)
(53.3) (103.1)
(52.0)
(56.1)
Three years later
(49.3)
(21.0) (144.9)
(62.4)
(82.8)
(42.4)
(9.5)
Four years later
(9.9) (102.1)
(50.2)
(22.9)
(46.1)
(21.0)
Five years later
(79.2)
(50.8)
(51.6)
(22.0)
(16.7)
Six years later
(36.2)
(27.4)
(33.6)
(9.0)
Seven years later
(23.8)
(14.0)
(6.5)
Eight years later
(1.6)
(0.3)
Nine years later
(1.3)
Current estimate of
cumulative claims
Cumulative
payments to date
Gross liability
recognised in
balance sheet
2011 and prior
Claims handling
provision
Total
1,889.2 1,697.8 1,790.0 1,828.3 1,872.1 1,934.6 2,176.3 1,987.1 1,730.5 1,955.8
(1,876.7) (1,686.1) (1,708.4) (1,713.7) (1,745.0) (1,748.3) (1,832.2) (1,582.0) (1,230.7) (907.7)
12.5
11.7
81.6
114.6
127.1
186.3
344.1
405.1
499.8
1,048.1
2,830.9
770.9
78.7
3,680.5
228 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
228 Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
Net insurance liabilities
Accident year
Estimate of ultimate
net claims costs:
At end of
accident year
2012
£m
2013
£m
2014
£m
2015
£m
2016
£m
2017
£m
2018
£m
2019
£m
2020
£m
2021
£m
Total
£m
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 1,791.8
One year later
(146.7) (123.6)
(29.7)
(67.0)
(18.9)
(79.7)
(41.4)
(34.5)
(88.1)
Two years later
(107.8) (134.4)
(42.0)
(77.8)
(38.2)
(65.3)
(27.1)
(54.5)
Three years later
(35.6)
(27.8) (100.7)
(30.4)
(43.7)
(14.0)
(27.6)
Four years later
(11.6)
(64.3)
(41.3)
(24.1)
(16.9)
(39.7)
Five years later
(54.2)
(38.9)
(52.5)
(20.7)
(12.4)
Six years later
(30.3)
(17.7)
(8.3)
(4.6)
Seven years later
(14.6)
(10.6)
(8.0)
Eight years later
Nine years later
(1.2)
(1.5)
0.4
Current estimate of
cumulative claims
Cumulative
payments to date
Gross liability
recognised in
balance sheet
2011 and prior
Claims handling
provision
Total
1,868.3 1,677.0 1,688.5 1,702.1 1,792.1 1,818.2 2,029.8 1,852.2 1,586.4 1,791.8
(1,859.2) (1,667.2) (1,666.8) (1,656.0) (1,716.6) (1,699.5) (1,814.5) (1,560.5) (1,208.6) (906.6)
9.1
9.8
21.7
46.1
75.5
118.7
215.3
291.7
377.8
885.2
2,050.9
418.8
78.7
2,548.4
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229
229
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
35. Insurance liabilities continued
Movements in gross and net insurance liabilities
Claims reported
Incurred but not reported
Claims handling provision
At 1 January 2020
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
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 2021
Claims reported
Incurred but not reported
Claims handling provision
At 31 December 2021
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
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
(182.5)
78.0
—
594.5
78.0
3,617.0
(1,025.3)
2,591.7
(1,851.8)
89.8
(1,762.0)
2,142.9
(166.1)
1,976.8
(227.6)
(30.5)
(258.1)
3,680.5
2,840.0
761.8
78.7
(1,132.1)
2,548.4
(885.2)
1,954.8
(246.9)
—
514.9
78.7
3,680.5
(1,132.1)
2,548.4
2021
£m
(127.1)
(45.8)
(23.8)
(61.4)
(258.1)
2020
£m
(100.6)
(10.8)
(5.6)
(56.8)
(173.8)
230 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
230 Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements 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 2021 and 31 December 2020. 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
2021
£m
564.4
193.4
757.8
2021
£m
2020
£m
2020
£m
1,260.9
408.7
1,669.6
561.1
1,289.5
253.7
561.6
814.8
1,851.1
(316.2)
(142.1)
(458.3)
(731.4)
(313.8)
(1,045.2)
(309.3)
(186.9)
(743.6)
(435.8)
(496.2)
(1,179.4)
248.2
51.3
299.5
529.5
94.9
624.4
251.8
66.8
318.6
545.9
125.8
671.7
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% (2020: 3.5%).
The Group has estimated a rate of interest used for the calculation of present values as 3.5% (2020: 3.5%), which results in a
real discount rate of 0% (2020: 0%). The Group will continue to review the inflation and discount rates used to calculate
these insurance reserves.
36. Unearned premium reserve
Movement in unearned premium reserve
At 1 January 2020
Written in the period
Earned in the period
At 31 December 2020
Written in the period
Earned in the period
At 31 December 2021
Gross
Reinsurance
£m
£m
Net
£m
1,506.0
(101.7)
1,404.3
3,180.4
(3,189.3)
(231.0)
228.8
2,949.4
(2,960.5)
1,497.1
(103.9)
1,393.2
3,171.6
(186.4)
2,985.2
(3,168.0)
210.6
(2,957.4)
1,500.7
(79.7)
1,421.0
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
37. 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 Executive
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 2021 over 3.6 million Ordinary Shares with an estimated fair value of
£11.3 million at the 2021 grant dates (2020: 4.7 million Ordinary Shares with an estimated fair value of £13.2 million).
The estimated fair value of the LTIP share awards with market-based performance conditions was calculated using a
Monte Carlo simulation model.
The table below details the inputs into the model.
Weighted average assumptions during the year:
Share price (pence)
Exercise price (pence)
Volatility of share price
Average comparator volatility
Expected life
Risk-free rate
2021
2020
315
0
26%
40%
3 years
0.16%
290
0
34%
48%
3 years
0.02%
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 of 1.1 million Ordinary Shares (2020: 1.0 million Ordinary Shares) with an
estimated fair value of £3.2 million (2020: £2.9 million) using the market value at the date of grant.
Deferred Annual Incentive Plan
To incentivise delivery of performance over a one-year operating cycle, Executive Directors and certain members of senior
management are eligible for awards under the 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 1.4 million Ordinary Shares (2020: 1.8 million Ordinary Shares) under this plan with an estimated fair value
of £4.5 million (2020: £4.6 million) using the market value at the date of grant.
The awards outstanding at 31 December 2021 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 2021, the Group offered all eligible employees a Free Share award granting 112 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 2020. 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 1.2 million Ordinary Shares with an
estimated fair value of £3.7 million using the market value at the date of grant.
In 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.
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.
232 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
232
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
In the year ended 31 December 2021, matching share awards were granted over 0.6 million Ordinary Shares (2020: 0.6
million Ordinary Shares) with an estimated fair value of £1.8 million (2020: £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.
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
2021
millions
2020
millions
26.9
9.4
(2.9)
(5.0)
28.4
2.6
21.6
11.3
(1.9)
(4.1)
26.9
1.5
1.
In accordance with the rules of the LTIP, Restricted Shares Plan and DAIP, additional awards of 1.5 million shares were granted during the year ended
31 December 2021 (2020: 1.3 million) in respect of the equivalent dividend.
In respect of the outstanding options at 31 December 2021, the weighted average remaining contractual life is 1.64 years
(2020: 1.61 years). No share awards expired during the year (2020: nil).
The weighted average share price for awards exercised during the year ended 31 December 2021 was £3.06 (2020: £2.86).
The Group recognised total expenses in the year ended 31 December 2021 of £18.4 million (2020: £18.5 million) relating to
equity-settled share-based compensation plans.
Further information on share-based payments, in respect of Executive Directors, is provided in the Directors' Remuneration
Report.
38. Provisions
Movement in provisions during the year
At 1 January 2021
Additional provision
Utilisation of provision
Released to income statement
At 31 December 2021
Regulatory
levies
Restructuring
£m
41.6
67.7
£m
25.9
16.1
Other
£m
47.3
31.2
Total
£m
114.8
115.0
(61.1)
(20.6)
(40.3)
(122.0)
—
48.2
(7.7)
13.7
(3.7)
34.5
(11.4)
96.4
Of the above, £nil (2020: £6.0 million) 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.
39. 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
2021
£m
230.9
99.1
73.6
45.4
4.0
3.2
1.1
457.3
2020
£m
293.5
100.4
89.1
60.2
2.5
3.3
0.9
549.9
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233
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
40. 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 intangible and ROU assets
Impairment provision movements on reinsurance contracts
Unrealised gain on assets held for sale
Loss on disposal of property, plant and equipment and ROU assets
Operating cash flows before movements in working capital
Movements in working capital:
Net decrease in net insurance liabilities including reinsurance assets, unearned
premium reserves and deferred acquisition costs
Net decrease/(increase) in insurance and other receivables
Net decrease/(increase) in accrued income and other assets1
Net (decrease)/increase 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
Proceeds from maturity of HTM 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
Note:
Notes
6
11
27
12
17/19
22
30
2021
£m
343.7
(146.3)
(97.3)
34.3
(3.1)
18.4
102.3
94.5
2.6
(8.8)
9.4
86.2
435.9
(21.1)
85.4
0.9
(111.0)
390.1
(118.4)
0.1
2020
£m
367.2
(95.1)
(109.3)
31.3
0.7
18.5
84.2
79.7
6.6
5.8
—
4.9
394.5
(91.3)
(1.6)
(5.8)
106.8
402.6
(134.0)
0.2
6
20
20
271.8
268.8
234.6
14.5
(0.1)
9.6
1,170.1
22.4
(44.3)
63.2
(1,291.4)
(1.5)
(9.9)
167.2
260.0
13.7
(10.5)
—
1,614.0
—
(46.3)
56.7
(1,568.5)
(3.2)
—
315.9
1. For the year ended 31 December 2020, the movement in prepayments of £4.1 million was disclosed in operating cash flows before movements in working
capital. This movement has been included in cash generated from operations within the net decrease/(increase) in accrued income and other assets for the year
ended 31 December 2021 and the comparative figure has been re-presented accordingly.
234 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
234 Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
The table below details changes in liabilities arising from the Group's financing activities.
Lease liabilities
Subordinated liabilities
Interest rate swap associated
with subordinated debt1
At 1 January
Proceeds on issue of subordinated
liabilities2
Interest paid on subordinated liabilities
Interest rate swap cash settlement
Lease repayments
Financing cash flows
Additions/disposals of leases
Modifications of leases
Interest on lease liabilities3
Amortisation of arrangement costs and
discount on issue of subordinated liabilities
Amortisation of fair value hedging
Accrued interest expense on subordinated
liabilities
Unrealised loss 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:
2021
£m
(152.4)
—
—
—
105.1
105.1
(5.9)
(27.8)
(3.2)
—
—
—
—
2020
£m
(164.4)
—
—
—
18.5
18.5
(6.0)
5.5
(6.0)
—
—
—
—
2021
£m
(516.6)
—
33.5
—
—
33.5
—
—
—
(0.6)
3.6
(33.5)
2020
£m
(259.0)
(257.2)
28.3
—
—
(228.9)
—
—
—
(0.5)
1.8
(29.1)
—
(0.9)
—
—
(36.9)
(84.2)
—
—
(6.5)
(152.4)
—
—
(30.5)
(513.6)
—
—
(28.7)
(516.6)
2021
£m
8.2
—
—
(5.3)
—
(5.3)
—
—
—
—
—
—
—
(0.1)
(0.5)
(0.6)
2.3
2020
£m
9.0
—
—
(4.1)
—
(4.1)
—
—
—
—
—
—
—
0.3
3.0
3.3
8.2
1. As described in note 34, 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 34, 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.
Interest on lease liabilities were previously reported in financing cash flows. Comparative data for the year ended 31 December 2020 has been re-presented
accordingly.
3.
41. Commitments and contingent liabilities
The Group did not have any material commitments and contingent liabilities at 31 December 2021 (2020: none).
42. 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 year inclusive
After five years
Total1
Note:
2021
£m
13.1
38.4
70.0
121.5
2020
£m
13.7
38.6
66.5
118.8
1. At year ended 31 December 2021: £114.4 million of the total operating lease commitments where the Group is the lessor relates to the lease of investment
properties detailed in note 20 (2020: £116.6 million).
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235
235
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
42. Leases continued
Other lease disclosures
The following table analyses the amounts that have been included in the income statement for leases.
Depreciation of ROU assets
Gain on modification of leases
Loss on disposal of leases
Interest on lease liabilities
Short-term leases2
Low-value leases2
Impairment on ROU assets
Income from subleasing ROU assets
Total
Notes:
2021
£m
10.8
—
83.9
3.2
0.8
0.8
0.5
(0.1)
99.9
2020
£m
14.8
(2.6)
—
6.0
0.8
0.2
—
(0.2)
19.0
1. Total cash outflows in respect of leases was £106.7 million (2020: £18.7 million).
2. At years ended 31 December 2021 and 31 December 2020, expenses relating to short-term leases and leases of low-value assets were not included in the
measurement of lease liabilities as they were not considered significant.
43. 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.
236 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
236
Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
Comparison of carrying value to fair value of financial instruments and assets where fair value is
disclosed
At 31 December 2021
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 34)
Total
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 34)
Total
Carrying Value
£m
Level 1
£m
Level 2
£m
Level 3
£m
Fair Value
£m
317.0
35.9
4,084.6
6.2
91.2
250.8
200.8
—
—
—
35.9
35.6
—
4,049.0
—
—
—
—
24.3
—
—
4,986.5
35.6
4,109.2
19.5
—
19.5
513.6
533.1
—
—
543.7
563.2
317.0
—
—
6.2
69.1
257.8
198.3
848.4
—
—
—
317.0
35.9
4,084.6
6.2
93.4
257.8
198.3
4,993.2
19.5
543.7
563.2
Carrying Value
£m
Level 1
£m
Level 2
£m
Level 3
Fair Value
£m
£m
292.1
73.4
—
—
—
292.1
73.4
4,103.1
25.2
4,077.9
3.2
103.9
264.5
206.7
—
—
—
—
—
14.2
—
—
292.1
73.4
4,103.1
3.2
—
—
3.2
93.7
273.6
202.9
107.9
273.6
202.9
5,046.9
25.2
4,165.5
865.5
5,056.2
57.2
—
57.2
—
57.2
516.6
573.8
—
—
589.0
646.2
—
—
589.0
646.2
Differences arise between carrying value and fair value where the measurement basis of the asset or liability is not fair
value (for example; 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 was one HTM debt security with fair value of £10.7 million (2020: £11.2 million) transferred from level 3 to level 2 due
to market-observable valuation inputs. There were no other changes in the categorisation of assets between levels 1, 2 and
3 for assets and liabilities held by the Group since 31 December 2020.
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237
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
43. Fair value continued
The table below shows the unobservable inputs used by the Group in the fair value measurement of its investment
property.
31 December 2021
Fair value
£m
Valuation
technique
Unobservable
input
Range
(weighted average)
Investment property
317.01
Income
capitalisation
Equivalent yield
3.38% – 7.97%
(average 4.55%)
Estimated rental value
per square foot
£1.81 – £35.00
(average £12.71)
Note:
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 2021
Additions at cost
Increase in fair value in the period through profit and loss (notes 6 & 20)
Disposals (note 20)
Transferred to assets held for sale (note 30)
Capitalised expenditure (note 20)
At 31 December 2021
44. Related parties
Investment
property
(note 20)
Equity
investment
£m
292.1
—
37.8
(9.6)
(3.4)
0.1
317.0
£m
3.2
1.5
1.5
—
—
—
6.2
Transactions between the Group's subsidiary undertakings, which are related parties, have been eliminated on
consolidation and accordingly are not disclosed.
Subject to the preceding sentence, there were no sales or purchases of products and services to or from related parties in
the year ended 31 December 2021 (2020: £nil).
Compensation of key management
Short-term employee benefits
Post-employment benefits
Share-based payments
Total
45. Post balance sheet events
2021
£m
11.9
0.1
7.2
19.2
2020
£m
11.9
0.1
7.6
19.6
As part of the Group's ongoing change of the core operational real estate portfolio, on 28 February 2022, the freehold
interest in the Birmingham property with a carrying value of £24.4 million and impaired by £5.0 million to reflect the costs
of remediation and estimated realisable value, was sold for £19.4 million.
On 4 March 2022, the Group’s principal underwriter, U K Insurance Limited, entered into an agreement to extend its
contract with NatWest Group until 2027 to continue to provide home insurance for its customers.
238 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
238 Direct Line Group Annual Report and Accounts 2021
Financial StatementsNotes to the Consolidated Financial Statements continued
PARENT COMPANY BALANCE SHEET
As at 31 December 2021
Parent Company Balance Sheet
As at 31 December 2021
Assets
Investment in subsidiary undertakings
Other receivables
Current tax assets
Derivative financial instruments
Financial investments
Cash and cash equivalents
Total assets
Equity
Shareholders' equity
Tier 1 notes
Total equity
Liabilities
Subordinated liabilities
Borrowings
Derivative financial instruments
Trade and other payables
Deferred tax liabilities
Total liabilities
Total equity and liabilities
Notes
2021
£m
2020
£m
2
3
4
5
6
7
9
10
11
5
12
4
3,322.9
342.5
6.4
0.2
45.2
204.6
3,921.8
3,305.9
335.7
5.5
0.1
—
266.1
3,913.3
2,937.9
346.5
3,284.4
2,936.6
346.5
3,283.1
512.4
123.9
0.2
—
0.9
637.4
3,921.8
511.9
116.4
0.1
1.1
0.7
630.2
3,913.3
The attached notes on pages 241 to 245 form an integral part of these separate financial statements.
The profit for the year net of tax was £421.9 million (2020: £343.0 million).
The financial statements were approved by the Board of Directors and authorised for issue on 7 March 2022.
They were signed on its behalf by:
NEIL MANSER
CHIEF FINANCIAL OFFICER
Direct Line Insurance Group plc
Registration No. 02280426
WWW.DIRECTLINEGROUP.CO.UK
www.directlinegroup.co.uk
239
239
PARENT COMPANY STATEMENT OF COMPREHENSIVE INCOME
PARENT COMPANY STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2021
For the year ended 31 December 2021
Parent Company Statement of Comprehensive Income
For the year ended 31 December 2021
Profit for the year attributable to the owners of the Company
Profit for the year attributable to the owners of the Company
Other comprehensive loss
Other comprehensive loss
Items that may be reclassified subsequently to the income statement:
Items that may be reclassified subsequently to the income statement:
Loss on fair value through other comprehensive income investments
Loss on fair value through other comprehensive income investments
Other comprehensive loss for the year net of tax
Other comprehensive loss for the year net of tax
Total comprehensive income for the year attributable to the owners of the Company
Total comprehensive income for the year attributable to the owners of the Company
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
Parent Company Statement of Changes in Equity
For the year ended 31 December 2021
For the year ended 31 December 2021
For the year ended 31 December 2021
2021
2021
£m
£m
421.9
421.9
—
—
—
—
421.9
421.9
2020
2020
£m
£m
343.0
343.0
(0.1)
(0.1)
(0.1)
(0.1)
342.9
342.9
Share-
Share-
based
based
payment
payment
reserve
reserve
Capital
Capital
reserves
reserves
Fair value
Fair value
through other
through other
comprehensive
comprehensive
income
income
revaluation
revaluation
reserve
reserve
Retained
Retained
earnings
earnings
Shareholders
Shareholders
equity
equity
Tier 1 notes
Tier 1 notes
Total equity
Total equity
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Share
Share
capital
capital
£m
£m
150.0 1,450.0
150.0 1,450.0
2.4
2.4
— 1,329.0
— 1,329.0
2,931.4
2,931.4
346.5 3,277.9
346.5 3,277.9
—
—
—
—
—
—
(0.1)
(0.1)
343.0
343.0
342.9
342.9
—
—
342.9
342.9
—
—
—
—
—
—
—
—
(312.5)
(312.5)
(312.5)
(312.5)
—
—
(312.5)
(312.5)
(1.1)
(1.1)
1.1
1.1
—
—
—
—
(30.0)
(30.0)
(30.0)
(30.0)
—
—
(30.0)
(30.0)
—
—
—
—
—
—
18.5
18.5
—
—
(13.7)
(13.7)
—
—
—
—
—
—
18.5
18.5
—
—
18.5
18.5
—
—
(13.7)
(13.7)
—
—
(13.7)
(13.7)
(1.1)
(1.1)
1.1
1.1
148.9 1,451.1
148.9 1,451.1
4.8
4.8
7.2
7.2
—
—
(342.5)
(342.5)
(337.7)
(337.7)
—
—
(337.7)
(337.7)
(0.1) 1,329.5
(0.1) 1,329.5
2,936.6
2,936.6
346.5 3,283.1
346.5 3,283.1
—
—
—
—
—
—
—
—
(3.7)
(3.7)
3.7
3.7
—
—
—
—
—
—
—
—
—
—
—
—
—
—
17.0
17.0
(19.2)
(19.2)
(3.7)
(3.7)
3.7
3.7
(2.2)
(2.2)
—
—
—
—
—
—
—
—
—
—
—
—
421.9
421.9
421.9
421.9
(317.4)
(317.4)
(317.4)
(317.4)
(101.0)
(101.0)
(101.0)
(101.0)
—
—
—
—
17.0
17.0
(19.2)
(19.2)
(418.4)
(418.4)
(420.6)
(420.6)
—
—
—
—
—
—
—
—
—
—
—
—
421.9
421.9
(317.4)
(317.4)
(101.0)
(101.0)
17.0
17.0
(19.2)
(19.2)
(420.6)
(420.6)
Balance at 1 January 2020
Balance at 1 January 2020
Total comprehensive income
Total comprehensive income
for the year
for the year
Dividends and
Dividends and
appropriations paid
appropriations paid
(note 13)
(note 13)
Shares cancelled following
Shares cancelled following
buyback
buyback
Credit to equity for equity-
Credit to equity for equity-
settled share-based
settled share-based
payments
payments
Shares distributed by
Shares distributed by
employee trusts
employee trusts
Total transactions with
Total transactions with
equity holders
equity holders
Balance at 31 December 2020
Balance at 31 December 2020
Total comprehensive income
Total comprehensive income
for the year
for the year
Dividends and
Dividends and
appropriations paid
appropriations paid
(note 13)
(note 13)
Shares cancelled following
Shares cancelled following
buyback
buyback
Credit to equity for equity-
Credit to equity for equity-
settled share-based
settled share-based
payments
payments
Shares distributed by
Shares distributed by
employee trusts
employee trusts
Total transactions with
Total transactions with
equity holders
equity holders
Balance at 31 December 2021
Balance at 31 December 2021
145.2
145.2
1,454.8
1,454.8
5.0
5.0
(0.1)
(0.1)
1,333.0
1,333.0
2,937.9
2,937.9
346.5
346.5
3,284.4
3,284.4
The attached notes on pages 241 to 245 form an integral part of these separate financial statements.
The attached notes on pages 241 to 245 form an integral part of these separate financial statements.
240 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
240 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
240 Direct Line Group Annual Report and Accounts 2021
Financial Statements
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 '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 corporate 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.
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.
WWW.DIRECTLINEGROUP.CO.UK
www.directlinegroup.co.uk
241
241
Notes to the Parent Company Financial Statements continued
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS — CONTINUED
2. Investment in subsidiary undertakings
At 1 January
Additional investment in subsidiary undertakings
At 31 December
2021
£m
3,305.9
17.0
3,322.9
2020
£m
3,137.4
168.5
3,305.9
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 Limited2
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
Dormant7
Motor vehicle repair services
Dormant7
Insurance intermediary services
01179980
United Kingdom
General insurance
JE109119
Jersey
10134039
United Kingdom
02258947
United Kingdom
01810801
United Kingdom
See
footnote 6
India
Dormant8
Insurance intermediary services
General insurance
Dormant7
Support and operational services
08302561
United Kingdom
08911044
United Kingdom
03207393
United Kingdom
02622895
United Kingdom
Legal services
Dormant7
Dormant7
Intermediate holding company
03577191
United Kingdom
Intermediate holding company
01003081
United Kingdom
03315786
United Kingdom
02479300
United Kingdom
01316805
United Kingdom
Breakdown recovery services
Dormant7
Dormant7
Dormant7
00042133
United Kingdom
Dormant7
03034263
United Kingdom
Dormant7
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 year ended 31
December 2021, Brolly UK Technology Limited is exempt from the requirements of the Companies Act 2006 relating to the audit of individual accounts by
virtue of section 479 A(2)(d).
6. Registered office at: ESC House, 155, 1st & 2nd Floor, Okhla Industrial Area Phase-3, New Delhi, 110020, India. Company registration number:
U74140DL2014FTC265567.
7. These entities have not been audited, in accordance with the exemptions available for dormant entities under section 480 of the Companies Act 2006.
8. Under the Companies (Jersey) Law 1991, there is no requirement to file individual accounts and audit a private limited company.
242 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
242 Direct Line Group Annual Report and Accounts 2021
Financial Statements
3. Other receivables
Loans to subsidiary undertakings1
Trade receivables due from subsidiary undertakings
Total
Current
Non-current
Total
Note:
2021
£m
337.1
5.4
342.5
92.5
250.0
342.5
2020
£m
322.2
13.5
335.7
85.7
250.0
335.7
1.
Included in loans to subsidiary undertakings is a £250 million unsecured subordinated loan to U K Insurance Limited. 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
2021
£m
6.4
(0.9)
2020
£m
5.5
(0.7)
Derivative assets
Designated as hedging instruments:
Foreign exchange contracts2
Total
Derivative liabilities
Designated as hedging instruments:
Foreign exchange contracts2
Total
Notes:
Notional
amount
2021
£m
Fair value
2021
£m
Notional
amount
2020
£m
Fair value
2020
£m
14.1
14.1
14.1
14.1
0.2
0.2
0.2
0.2
4.1
4.1
4.1
4.1
0.1
0.1
0.1
0.1
1. The derivative assets and liabilities are both classified as level 2 within the Group's fair value hierarchy set out in note 43 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:
2021
£m
45.2
2020
£m
—
1. At 31 December 2021, the fair value through other comprehensive income debt securities are corporate debt securities of £45.2 million classified as level 2
within the Group's fair value hierarchy which is set out in note 43 of the consolidated financial statements.
7. Cash and cash equivalents
Cash at bank and in hand
Short-term deposits with credit institutions1
Total
Note:
1. This represents money market funds.
2021
£m
—
204.6
204.6
2020
£m
—
266.1
266.1
WWW.DIRECTLINEGROUP.CO.UK
www.directlinegroup.co.uk
243
243
Notes to the Parent Company Financial Statements continued
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS — CONTINUED
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 31 and 32 to the consolidated
financial statements.
Of the Company's total equity, £1,333.0 million (2020: £1,329.5 million), being the total of its retained earnings less
unrealised losses of £0.1 million (2020: £0.1 million), 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 33 to the consolidated financial statements.
10. Subordinated liabilities
£250 million 9.25% subordinated Tier 2 notes due 2042
£260 million 4.0% subordinated Tier 2 notes due 2032
Total
2021
£m
254.1
258.3
512.4
2020
£m
253.7
258.2
511.9
£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 2021 was £543.7 million (2020: £589.0
million).
11. Borrowings
Loans from fellow subsidiaries within the Group1
Note:
2021
£m
123.9
2020
£m
116.4
1.
Included in the above is a loan of £93.8 million (2020: £71.4 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.
12. Trade and other payables
Total payables to third parties
13. Dividends
2021
£m
—
2020
£m
1.1
Full details of the dividends paid and proposed by the Company are set out in note 14 to the consolidated financial
statements.
244
244 Direct Line Group Annual Report and Accounts 2021
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Financial Statements
14. Share-based payments
Full details of share-based compensation plans are provided in note 37 to the consolidated financial statements.
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 44 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
and Accounts.
WWW.DIRECTLINEGROUP.CO.UK
www.directlinegroup.co.uk
245
245
Shareholder Information
SHAREHOLDER INFORMATION
Financial calendar1
Share ownership
2022
Date
08 March
07 April
08 April
25 April
04 May
10 May
17 May
02 August
11 August
12 August
18 August
09 September
08 November
Event
Preliminary Results 2021
announcement
"Ex-dividend" date for 2021 final
dividend
Record date for 2021 final dividend
Final date for election under the
Dividend Reinvestment Plan
Trading update for the first quarter
of 2022
Annual General Meeting
Payment date for 2021 final
dividend
Half-year report 2022
"Ex-dividend" date for 2022 interim
dividend
Record date for 2022 interim
dividend
Final date for election under the
Dividend Reinvestment Plan
Payment date for 2022 interim
dividend
Trading update for the third quarter
of 2022
Annual General Meeting
The 2022 AGM will be held at No 1 Minster Court,
Mincing Lane, London, EC3R 7AA on 10 May 2022,
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 31 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 257. 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.
246 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
246 Direct Line Group Annual Report and Accounts 2021
Financial Statements 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 and 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.
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247
247
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.
Adjusted solvency capital
ratio
The ratio of Solvency II own funds to the solvency capital requirement, which excludes the
Tier 2 subordinated debt which can first be called on 27 April 2022 from the Group's own
funds.
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")
Available-for-sale ("AFS")
investments
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
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 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.
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 liabilities 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 253 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 251 alternative
performance measures.)
Company
Current-year attritional
loss ratio
Current-year combined
operating ratio
Current-year normalised
operating profit
Deferred Annual
Incentive Plan ("DAIP")
Direct own brands
Direct Line Insurance Group plc.
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
251 alternative performance measures.)
This is calculated using the combined operating ratio less movement in prior-year reserves.
(See page 251 alternative performance measures.)
This is calculated using the normalised operating profit adjusted for prior-year reserve
movements. (See page 251 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.
248 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
248 Direct Line Group Annual Report and Accounts 2021
Financial Statements 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 251 alternative
performance measures).
The cost of servicing the Group's external borrowings and including the interest on ROU
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 insurance contracts that were incepted during the period.
Group
The UK's regulator for the accounting, audit and actuarial professions, promoting
transparency and integrity in business.
Direct Line Insurance Group plc and its subsidiaries.
Incremental borrowing
rate ("IBR")
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 ROU asset in a similar
economic environment.
Incurred but not
reported ("IBNR")
In-force policies
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
Investment return
Investment return
yield
Long-Term Incentive
Plan ("LTIP")
Loss ratio
Malus
Management's best
estimate ("MBE")
Minimum capital
requirement ("MCR")
Net asset value
Net earned premium
Net insurance claims
Net investment income
yield
Net promoter score
("NPS")
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
251 alternative performance measures.)
The investment return earned from the investment portfolio, including unrealised and
realised gains and losses, impairments and fair value adjustments.
The investment return divided by the average AUM. The average AUM derives from the
period’s opening and closing balances. (See page 251 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 251 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 minimum amount of capital that an insurer needs to hold to cover its risks under the
Solvency II regulatory framework. If an insurer's capital falls below the MCR then
authorisation will be withdrawn by the regulator unless the insurer is able to meet the MCR
within a short period of time.
The difference between the Group's total assets and total liabilities, calculated by subtracting
total liabilities (including Tier 1 notes) from total assets.
The element of gross earned premium less reinsurance premium ceded for the period where
insurance cover has already been provided.
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.
This is calculated in the same way as investment income yield but includes the cost of
hedging. (See page 251 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.
Ogden discount rate
The discount rate set by the Lord Chancellor and used by courts to calculate lump sum
awards in bodily injury cases.
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249
249
Glossary and Appendices continued
GLOSSARY AND APPENDICES – CONTINUED
Term
Definition and explanation
Operating expenses
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")
These are the expenses relating to business activities excluding restructuring and one-off
costs. (See page 252 alternative performance measures.)
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 254 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 252 alternative performance measures.)
Right-of-use ("ROU")
asset
A lessee's right to use an asset over the life of a lease, calculated at initial recognition as the
present value of the lease payments, plus any initial direct costs less any incentives received.
The ROU asset is depreciated over the lease term and is subject to impairment testing.
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 curb global
temperature rise to well below 2°C above pre-industrial levels.
Scope 1, Scope 2, Scope 3
under our direct control
and Total Scope 3
Solvency II
Solvency capital ratio
Solvency capital
requirement ("SCR")
Tangible equity
Please refer to the glossary definition for carbon emissions on page 248.
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.
The SCR is the amount of capital the regulator requires an insurer to hold to meet the
requirements under the Solvency II regulatory framework. The Group uses a partial internal
model to determine SCR.
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
252 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 252 alternative performance measures).
Task Force on Climate-
related Financial
Disclosure ("TCFD")
Established by the Financial Stability Board, the TCFD developed a set of disclosure
recommendations on the risks and opportunities presented by climate change. The TCFD
aims to improve and increase climate-related disclosure by organisations and promotes the
provision of clear, comprehensive and high-quality information.
Total Shareholder
Return ("TSR")
Underwriting result
profit/(loss)
Compares share price movement with reinvested dividends as a percentage of the
share price.
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.
250 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
250 Direct Line Group Annual Report and Accounts 2021
Financial Statements 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 248 to 250 and reconciled to the most directly
reconcilable line items in the financial statements and notes. Note 4 on page 206 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 181 to 238.
Group APM
Adjusted
solvency
capital ratio
Closest equivalent
IFRS measure
This measure is
based on the
Group's
Solvency II
balance sheet
and therefore
there is no
IFRS
equivalent
Definition and/or reconciliation
Rationale for APM
Adjusted solvency capital ratio is
defined in the glossary on page 248
and reconciled on page 255.
This is a measure that shows the Group's
solvency ratio excluding the Tier 2
subordinated debt which can first be called on
27 April 2022.
Combined
operating ratio
Profit before
tax
Combined operating ratio is defined in
the glossary on page 248 and
reconciled in note 4 on page 206.
Commission
ratio
Commission
expense
Current-year
attritional loss
ratio
Net insurance
claims
Commission ratio is defined in the
glossary on page 248 and is reconciled
in note 4 on page 206.
Current-year attritional loss ratio is
defined in the glossary on page 248
and is reconciled to the loss ratio
(discussed below) on page 35.
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.
Current-year
combined
operating ratio
Profit before
tax
Current-year combined operating ratio
is defined in the glossary on page 248
and is reconciled on page 35.
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 248 and reconciled on page 254.
Expresses a relationship between current-year
normalised operating profit and normalised
operating profit.
Current-year
normalised
operating
profit ratio
Expense ratio
Total
expenses
Investment
income yield
Investment
income
Expense ratio is defined in the glossary
on page 249 and is reconciled in note
4 on page 206.
Investment income yield is defined in
the glossary on page 249 and is
reconciled on page 253.
Investment
return yield
Investment
return
Investment return yield is defined in
the glossary on page 249 and is
reconciled on page 253.
Loss ratio
Net insurance
claims
Loss ratio is defined in the glossary on
page 249 and is reconciled in note 4
on page 206.
Net investment
income yield
Investment
income
Net investment income yield is defined
in the glossary on page 249 and is
reconciled on page 253.
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.
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251
251
Glossary and Appendices continued
GLOSSARY AND APPENDICES – CONTINUED
Group APM
Normalised
combined
operating ratio
Closest equivalent
IFRS measure
Profit before
tax
Definition and/or reconciliation
Rationale for APM
Combined operating ratio and
normalised combined operating ratio
are defined in the glossary on page 248
and reconciled on page 253.
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 250 and reconciled in
note 4 on page 206.
This shows the expenses relating to business
activities excluding restructuring and one-off
costs.
Operating
profit
Profit before
tax
Operating profit is defined in the
glossary on page 250 and reconciled in
note 4 on page 206.
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 250 and is
reconciled on page 255.
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 250 and is reconciled
in note 16 on page 214.
This shows the equity excluding Tier 1 notes
and intangible assets for comparability with
companies which have not acquired
businesses or capitalised intangible assets.
Tangible net
asset value per
share
Net asset value
per share
Tangible net asset value per share is
defined in the glossary on page 250
and reconciled in note 16 on page 214.
Underwriting
profit
Profit before
tax
Underwriting profit is defined in the
glossary on page 250 and is reconciled
in note 4 on page 206.
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.
252 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
252
Direct Line Group Annual Report and Accounts 2021
Financial Statements Investment income and return yields1
Investment income
Hedging to a sterling floating rate basis3
Net investment income
Net realised and unrealised gains/(losses) excluding hedging
Total 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:
Notes2
6
6
6
20
28
29
29
2021
£m
116.0
(13.3)
102.7
43.6
146.3
292.1
4,681.4
1,220.1
(51.9)
8.0
6,149.7
317.0
4,633.6
955.7
(59.2)
14.3
5,861.4
6,005.6
1.9%
1.7%
2.4%
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%
1. See glossary on page 249 for definitions.
2. See notes to the consolidated financial statements.
3.
4. See footnote 1 on page 44 (Investment holdings).
5. Mean average of opening and closing balances.
Includes net realised and unrealised gains/(losses) on derivatives in relation to AUM.
Normalised combined operating ratio1
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Effect of weather
Loss ratio
Commission ratio
Home
2021
50.7%
6.9%
22.5%
80.1%
Home
2020
55.6%
8.1%
23.4%
87.1%
5.5%
(0.4%)
3.4%
(0.2%)
Commercial
Commercial
2021
54.5%
20.0%
21.7%
96.2%
0.1%
—
2020
51.4%
18.7%
25.4%
95.5%
0.4%
—
Combined operating ratio normalised for
weather
85.2%
90.3%
96.3%
95.9%
Note:
1. See glossary on page 248 for definition.
Total
2021
58.1%
8.1%
23.9%
90.1%
1.1%
(0.1%)
91.1%
Total
2020
57.9%
8.6%
24.5%
91.0%
0.7%
—
91.7%
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253
253
Glossary and Appendices continued
GLOSSARY AND APPENDICES – CONTINUED
Normalised operating profit1
Operating profit
Effect of:
Normalised weather – claims
Normalised weather – profit share
Normalised operating profit
Prior-year adjustments
Prior-year reserve movement
Prior-year normalised operating profit
Current-year normalised operating profit
Current-year normalised operating profit ratio
Note:
1. See glossary on page 250 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 250 for definition.
2. See notes to the consolidated financial statements.
Total
2021
£m
581.8
(31.1)
2.0
552.7
258.1
258.1
294.6
53%
Total
2020
£m
522.1
(20.8)
1.3
502.6
173.8
173.8
328.8
65%
Note2
10
10
10
2021
£m
807.8
(101.5)
706.3
2020
£m
763.8
(39.4)
724.4
254
254 Direct Line Group Annual Report and Accounts 2021
DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
Financial Statements
Return on tangible equity1
Profit before tax
Add back restructuring and other one-off costs
Coupon payments in respect of Tier 1 notes
Adjusted profit before tax
Tax charge (2021 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 250 for definition.
2. Mean average of opening and closing balances.
Adjusted solvency capital ratio1
Total eligible own funds
Less: Tier 2 subordinated debt which can first be called towards the end of April 2022
Add back: ineligible Tier 3 capital
Solvency capital requirement
Adjusted solvency capital ratio
Note:
1. See glossary on page 248 for definition.
2021
£m
446.0
101.5
(16.6)
530.9
(100.9)
430.0
2,699.7
(786.8)
1,912.9
2,550.2
(822.5)
1,727.7
1,820.3
23.6 %
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 %
2021
£bn
2.38
(0.25)
0.03
2.16
1.35
160 %
WWW.DIRECTLINEGROUP.CO.UK
www.directlinegroup.co.uk
255
255
– the impact of the FCA pricing practices report and the
rules and regulations arising as a result of that report and
of responses by insurers, customers and other third
parties and of interpretations of such rules by any
relevant regulatory authority;
– market-related risks such as fluctuations in interest rates,
exchange rates and credit spreads;
– the policies and actions and/or new principles, rules and/
or changes to, or changes to interpretations of principles,
rules and/or regulations, of regulatory authorities and
bodies (including changes made directly or indirectly as a
result of Brexit or related to capital and solvency
requirements or related to the Ogden discount rate or
rates or made 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;
– 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,
enforcements, fines and requirements and of court,
arbitration, regulatory or ombudsman decisions,
judgements and awards (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
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.
Forward-looking Statement
FORWARD-LOOKING STATEMENT
This Annual Report & Accounts has been prepared for, and
only for, the members of the Company as a body, and no
other persons. The Company, its Directors, employees,
agents or advisers do not accept responsibility to any other
person to whom this document is shown, or into whose
hands it may come, and any such responsibility or liability is
expressly disclaimed.
Certain information contained in this document, including
any information as to the Group's strategy, plans or future
financial or operating performance, constitutes "forward-
looking statements". These forward-looking statements
may be identified by the use of forward-looking
terminology, including the terms "aims", "ambition",
"anticipates", "aspire", "believes", "continue", "could",
"estimates", "expects", "guidance", "intends", "may", "mission",
"outlook", "over the medium term", "plans", "predicts",
"projects", "propositions", "seeks", "should", "strategy",
"targets", "will" or "would" 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, the industry in which the
Group operates and the Group's approach to climate-
related matters. 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, reduction in expense ratio,
investment income yield, net realised and unrealised gains,
capital expenditure and, risk appetite range; and targets,
goals and plans relating to climate and the Group's
approach and strategy in connection with climate-related
risks and opportunities. 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 and/or they rely on assumptions that may or may
not transpire to be correct. 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
coronavirus 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 Trade and Cooperation 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;
– the terms of trading and other relationships between the
UK and other countries following Brexit;
256 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2021
256
Direct Line Group Annual Report and Accounts 2021
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
1 New Street Square
London
EC4A 3HQ
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
WWW.DIRECTLINEGROUP.CO.UK
www.directlinegroup.co.uk
257
257
258 Direct Line Group Annual Report and Accounts 2021
This report is printed on mixed source
paper which is FSC® certified (the standards
for well-managed forests, considering
environmental, social and economic issues).
Designed and produced by Black Sun Plc
Printed by Pureprint Group
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Direct Line Insurance Group plc©
Registered in England & Wales No. 02280426
Registered Office: Churchill Court,
Westmoreland Road, Bromley, BR1 1DP