Annual Report and Accounts 2022
Brilliant for
customers
every day
Contents
Strategic Report
Brilliant for customers every day
Strategy
Business model
Chair’s statement
Section 172(1) statement
Chief Executive Officer’s review
Market overview
Our key performance indicators
Chief Financial Officer’s review
Operating review
Non-financial information statement
Sustainability
Task Force on Climate-related
Financial Disclosures
Streamlined Energy
and Carbon Reporting
Risk management
Viability statement
Governance
Chair’s introduction
Board of Directors
Executive Committee
Corporate Governance report
Committee reports
Directors’ Remuneration report
Directors’ report
Financial Statements
Contents
Independent Auditor’s Report
Consolidated Financial Statements
Notes to the Consolidated
Financial Statements
Parent Company Financial Statements
Notes to the Parent Company
Financial Statements
Other information
Shareholder Information
Glossary and Appendices
Forward-looking statements disclaimer
Contact information
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10
12
14
16
17
20
22
24
40
49
50
72
85
86
92
94
96
100
102
116
130
162
167
168
179
184
242
244
249
251
259
260
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.
Our mission is to be brilliant for
customers every day.
The Group’s financial results fell
significantly below expectations
in 2022 as we navigated a volatile
trading environment, with heightened
inflation and severe weather events.
In response, we are taking action to
restore the Group’s capital resilience
and improve business performance.
Looking ahead, we believe that our
customer focus, powerful brands and
claims expertise can drive long-term
value for customers and shareholders.
To read more about our strategy, see pages 10-11
www.directlinegroup.co.uk
1
Strategic reportGovernanceFinancial statements Brilliant for
customers
every day
2
Direct Line Group Annual Report and Accounts 2022
We reach customers wherever they
shop and whatever their insurance
needs. We want to be known for
insurance excellence from point
of sale through to resolving claims.
By delivering easy digital-first journeys
we make it simple for customers and
are there for them when they need us.
We operate across four market
segments, delivering value
and great customer experiences.
Motor
We are Britain’s leading private motor insurer, represented through our
well-known brands Direct Line, Churchill, Privilege, Darwin, and also
through our partners1
Home
We are one of Britain’s leading private home insurers’, represented
through our well-known brands Direct Line, Churchill, Privilege, and
also through our partners1
Rescue and other personal lines
We are one of the leading providers of rescue, including through our
Green Flag brand2, travel and pet insurance in the UK3
Commercial
We protect commercial businesses through our brands NIG, Direct Line
for Business and Churchill
Notes:
1. © Ipsos 2023, Financial Research Survey (FRS),
6 months ended Jan 2023. 14,318 adults (aged
16+) surveyed across Great Britain with motor
insurance, 13,942 with home insurance. Interviews
were conducted online and via telephone,
and weighted to reflect the overall profile of
the adult population. Includes Direct Line,
Churchill, Privilege, Darwin and partner brands:
RBS and NatWest.
2. Mintel Vehicle Recovery report – September 2022.
3. Mintel Pet Insurance report – 2022.
In 2022 we made our claims
process simpler – customers can
now register 100% of claims types
across the vast majority of our
brands and partners online
See more on page 54
We are set to welcome over
600,000 new customers in H2 2023
as part of our 10-year partnership
with Motability Operations
Find out more on page 41
www.directlinegroup.co.uk
3
Strategic reportGovernanceFinancial statements
Powerful
brands
4
Direct Line Group Annual Report and Accounts 2022
We have some of the strongest and
most recognisable insurance brands
in the UK. They enable customers to
pick the cover that best suits them
to protect their cars, homes, holidays,
businesses and pets.
Our brands
We extended our EV bundle for
another year to support our Direct
Line motor customers making the
switch to electric vehicles
See page 67
We launched a new
Churchill Essentials product
for motor customers
Find out more on page 53
www.directlinegroup.co.uk
5
Strategic reportGovernanceFinancial statements Reaching
customers
however it
suits them
6
Direct Line Group Annual Report and Accounts 2022
Reaching
customers
however it
suits them
Whether customers access our
products and services digitally,
through a broker, or on the phone,
our aim is to provide peace of mind
now and in the future. We offer
insurance through the four main
routes to market so customers can
choose what works best for them.
Direct
Customers come to us direct because of our powerful brands and
propositions which offer great value
Price comparison websites
We offer a variety of products across our brands on price comparison
websites to meet different customer needs
Partnerships
We partner with a number of well-known brands to give more
customers excellent insurance
Brokers
Using our established NIG broker network we meet a variety of
specialist insurance needs for both large and small businesses
In 2022 our Commercial business
again delivered strong growth
across all channels, continuing
to realise the benefits of
its transformation
Find out more on page 46
We extended our partnership with
NatWest Group to continue to look
after close to half a million of their
customers’ home insurance needs
until 2027
Page 43 for more detail
www.directlinegroup.co.uk
7
Strategic reportGovernanceFinancial statements We’re a
force for
good
8
Direct Line Group Annual Report and Accounts 2022
We believe that by working sustainably
we strengthen Direct Line Group
for the better and create value for
our customers, people, society and
the planet.
Sustainability pillars
Customers
We stand for insurance excellence because positive customer
outcomes mean we can grow our business
People
We stand for being a diverse and inclusive employer because
attracting and retaining talented people powers our business forward
Society
We stand for being rooted in our communities because, when they
flourish, so does our business
Planet
We stand for a greener planet because we’re all in it together, it’s our
responsibility, and tackling climate change benefits our business, our
people and society
Governance
We stand for a competitive and strong financial services sector
because it’s essential to being successful
Our 2022 Community Fund focused
on building a more inclusive and
equitable Britain
See more on pages 62 to 63
We became one of the first personal
lines insurers in the UK to have carbon
reduction plans approved by the Science
Based Targets initiative
Find out more on page 66
www.directlinegroup.co.uk
9
Strategic reportGovernanceFinancial statements Strategy
Mission
To be brilliant for customers every day
Our strategic
objectives
Best at direct
Vision
We want to create a world where
insurance is personal, inclusive and
a force for good
Win on price
comparison
websites
Extend our
reach
Nimble and
cost efficient
Purpose
We help people carry on with their
lives, giving them peace of mind now
and in the future
Technical edge
Great people
10
Direct Line Group Annual Report and Accounts 2022
Governance
Financial statements
Our core strengths and capabilities drive
our strategy
We are always looking to innovate for future success be it developing new products, services and digital tools,
to understanding the latest car tech or tackling climate change.
Growth opportunities
Enhanced capability
We are delivering easy
digital-first journeys so if
customers want the simplicity
of managing their insurance
online, they can. If they
prefer the phone, we’re
there for them.
We can price at speed and with
greater accuracy thanks to the
combination of our historical
data and new pricing systems.
Innovating
for success
Data,
technology
and agile
ways of
working
Efficient
cost
base
Customer
focus
Pricing
sophistication
Claims
expertise
Core strengths
We have powerful, trusted
brands with unique
propositions and high
customer retention.
We provide customers
with a claims experience that
combines leading capabilities
and repair expertise which
uses our network of 22
accident repair centres, the
largest network of any insurer.
Our values
Do the right
thing
Aim
higher
Take
ownership
Say it
like it is
Work
together
Bring all of
yourself to
work
Our brands
www.directlinegroup.co.uk
11
Strategic report
Business model
Delivering for all
our stakeholders
Our
customers
Servicing
Our people and
capabilities
Premiums
Claims
Costs
Investment and
other income
Managing
finances
Reinvest in the business
Profit
Capital
Dividends
Our
shareholders
Managing risk
12
Direct Line Group Annual Report and Accounts 2022
How we
create value
We have a number of strengths,
from strong brands to rich data
and expert claims skills which
provide real long-term value
Diversified model
Our diversified model enables us to generate
premiums from a range of brands, products and
distribution channels.
Balanced investment
portfolio
The premiums we collect from customers are
invested in a diversified investment portfolio designed
to meet our long-term claims commitments whilst
also generating investment returns.
See page 33 for more information.
Accident repair centres
We own 22 accident repair centres, the largest
network of any insurer, delivering lower repair costs
and providing data-led insights, enabling us to react
to emerging trends and helping inform pricing.
Claims management
We have a deep specialism in claims handling,
including advanced fraud capabilities.
Cost control
We’re focused on improving efficiency through
greater use of digital processes across the business.
Capital management
We aim to manage capital efficiently and generate
long-term sustainable returns for shareholders, while
balancing operational, regulatory, rating agency, and
policyholder requirements.
www.directlinegroup.co.uk
13
Strategic reportGovernanceFinancial statements Chair’s
statement
“ We are renewing our
determination to leverage
our diversified business model
and well-recognised brands to
trade competitively in our core
markets, restore capital strength
and focus on providing value for
our customers.”
Danuta Gray
Chair of the Board
Navigating a
challenging
year
14
Direct Line Group Annual Report and Accounts 2022
Dear Shareholders,
In 2022, Direct Line Group faced a unique combination
of factors and challenges, including exceptional inflation,
severe weather events, a volatile investment market and
significant regulatory change. These made for a tough
trading environment during the year. We have worked
hard to support our customers and colleagues in these
challenging circumstances, but I acknowledge that the
impact on the Group’s trading and financial performance
has been deeply disappointing and, in Motor, well below
our expectations.
The UK motor insurance market remains challenging at
the beginning of 2023 and we have adjusted our pricing
to mitigate the effect of claims inflation. Our priority is to
deploy the resources needed by our Motor business to
price with accuracy and speed to restore margins and
improve performance both in the direct channel and
on price comparison websites. We are determined to
leverage the strength of our diversified business model
and well-recognised brands to trade competitively in
our core markets, restore capital resilience and focus
on providing value for our customers.
Dividend and capital management
During the first half of 2022, we returned £50 million of
capital to shareholders by way of a share buy-back and in
September we paid an interim dividend of 7.6 pence per
share (£99.0 million).
However, against a background of heightened inflation in
the UK motor insurance market throughout 2022 and the
year’s severe weather events, the Board took the decisions
respectively in July not to launch the second £50 million
tranche of the £100 million share buy-back programme
and more recently not to recommend a final dividend
for 2022. I recognise that these decisions have come as a
severe disappointment to our shareholders, many of whom
I have spoken with over the last few months. Restoring
capital resilience is among our urgent priorities for 2023.
We have already made progress, having entered into a
quota share reinsurance programme covering 10% of
our book, which has improved our solvency position by
around 6 percentage points and we continue to explore
further capital management options. Since the beginning
of 2023, positive credit movements affecting our bond
portfolio and a reduction in ineligible capital on adoption
of the new accounting standard, IFRS 17, have improved
our solvency coverage ratio by approximately a further
5 percentage points.
Board and leadership
In January 2023, Penny James stepped down from the
Board, having served as CEO from May 2019 and formerly
having joined the Board in late 2017 to become our CFO.
I would like to thank Penny for the contribution she
made during her time on the Board. She led significant
strategic progress and evolved the Group’s culture to be
increasingly focused on providing value and excellent
service for customers.
While the Board conducts a process to appoint a
permanent successor, I am grateful that Jon Greenwood
has agreed to serve as Acting Chief Executive Officer. Jon
has a successful track record in leading our Commercial
Lines division and, as Chief Commercial Officer, has a deep
understanding of all the Group’s businesses. The Board and
I will work closely with Jon as he focuses on our priorities of
driving growth and restoring capital resilience.
During the year, we also took the decision to appoint
Tracy Corrigan, independent Non-Executive Director, as
the Board’s Consumer Duty Champion. In this role, Tracy
will ensure that the voice of the customer is brought into
the boardroom and that good customer outcomes are
central to the Board’s agenda.
Since the end of the year, we have announced the
appointment of Mark Lewis, a former Chief Executive
of MoneySupermarket Group, as an independent Non-
Executive Director with effect from 30 March 2023. Mark
will contribute his deep understanding of the regulated
aggregator marketplaces in which our brands operate, as
well as his experience of digital marketing strategy and
driving improved multichannel customer experience in
retail and financial services.
Customers
Strong retention levels during 2022 demonstrate that
our customers trust us with their business at a time when
every penny counts. On page 53 we have set out action
that we have taken to support our customers during the
cost of living crisis and we explain how we are responding
to our customers’ changing demands with new products.
2023 will see us welcome some 600,000 new customers
under our ten-year partnership with Motability and we look
forward to providing them with the same great service that
our customers have come to expect from us.
People, Diversity and Inclusion
The impact of the cost of living crisis on our people
has been at the forefront of our minds throughout the
year. Page 56 sets out what we have done to support
our colleagues, with action targeted at the lowest paid
in the organisation.
We have continued to drive forward our Diversity and
Inclusion programme, voluntarily publishing our ethnicity
pay gap alongside our gender pay gap for the first time.
We are confident that we pay people fairly, irrespective of
gender and ethnicity and can see that both pay gaps are
driven by the levels of representation of women and those
from ethnic minority backgrounds at certain levels of the
business, which we are focused on improving. Details of
the representation of women and ethnic minorities in
leadership can be found on pages 57 to 58.
Recognising the need to provide our people with
development opportunities, and to ensure our colleagues
are equipped with the skills the business will need in
order to thrive in the future, during the year we launched
our Ignite academies, incorporating apprenticeships in
Technology, Customer Service and Data, as well as our
Data Academy, with which over 1,000 of our colleagues
have engaged. More information about this can be
found on page 56.
Planet
During the year we met a significant milestone in our
journey to becoming a net-zero business, when our
plans to reduce our greenhouse gas emissions were
approved by the Science Based Targets initiative (“SBTi”).
We have set five emissions reduction targets focused
on the most carbon intensive areas of the business, with
one target covering operational emissions and a further
four targets covering our investment portfolio. As part
of our Sustainable Sourcing approach, we have also set
our own voluntary emissions target for our supply chain.
Of course, now the hard work really begins on the action
needed to meet these targets. We have a robust plan and
our colleagues are passionate about, and committed to,
achieving our targets.
Conclusion
I would like to take the opportunity to thank our hard-
working colleagues, loyal customers and shareholders
for their continued support during the year. Following
the challenges we faced in 2022, I am confident that we
are focused on the right immediate strategic priorities,
that the business is fundamentally resilient, and that our
people are determined to use our strong brands and
technological capability to deliver value to our customers
and shareholders.
Danuta Gray
Chair of the Board
www.directlinegroup.co.uk
15
Strategic reportGovernanceFinancial statements 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, 52 to 54; People, 55 to 59;
Society, 60 to 63; and the Planet, 64 to 70.
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
page 107 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 pages 105 to 106. The table covers a number of
key topics including: the return of capital to shareholders;
Consumer Duty implementation; the cost of living crisis;
the relocation of the London Hub; and Science-Based
Target setting. The metrics and processes which the Board
looks at to ensure that business practices and behaviours
reflect the Company’s culture, purpose and values,
including the impact of decisions on key stakeholders, are
set out on page 103. Information about Board oversight of
environmental matters can be found on pages 72 to 73 in
the TCFD Report.
The table below sets out where key disclosures in respect of each of the Section 172(1) matters can be found.
Section 172(1) factor
Relevant disclosures
the likely consequences of any
decision in the long-term
Brilliant for our customers every day (pages 1 to 9)
Mission, vision, purpose and strategic objectives (page 10)
Consideration of Section 172(1) factors by the Board
(pages 105 to 106)
the interests of the
company’s employees
Key performance indicators – Colleague engagement scores (page 23)
Outcome of employee engagement (page 56)
Diversity and Inclusion (pages 57 to 59)
How the Board engages with stakeholders (page 107)
Employee Representative Body (page 108)
the need to foster the company’s
business relationships with
suppliers, customers and others
Key performance indicators – NPS and customer complaints metrics (page 23)
Customer support (page 53)
Supply Chain (page 80)
How the Board engages with stakeholders (page 107)
the impact of the company’s
operations on the community
and the environment
Community Fund 2022 (page 62)
Science-Based Targets (page 66)
External ratings, memberships and benchmarks (page 71)
TCFD disclosures (pages 72 to 85)
How the Board engages with stakeholders (page 107)
Sustainability Committee Report (pages 126 to 127)
the desirability of the company
maintaining a reputation for high
standards of business conduct
Our values (page 11)
The role of the Board in the Company’s culture (page 103)
Internal controls (pages 114 to 115)
the need to act fairly between
members of the company
Capital management (page 19)
How the Board engages with stakeholders (page 107)
Shareholder voting rights (page 163)
Annual General Meeting (page 249)
16
Direct Line Group Annual Report and Accounts 2022
CEO’s
review
“ Despite the setbacks in Motor
in 2022, the long-term earnings
potential of the Group remains
robust. Our diversified business
model and fundamental
strengths remain a significant
asset in the highly competitive
UK insurance market.”
Jon Greenwood
Acting Chief Executive Officer
Looking ahead
to 2023
2022 was a difficult year for the Group. Our performance in
Motor fell well below our expectations and did not reflect
our previous track record of delivering strong returns for
shareholders. Rising claims inflation and new regulatory
changes, along with severe weather events, resulted in a
material fall in the Group operating profit and solvency
ratio, and the Board’s decision not to recommend a
final dividend.
This is deeply disappointing and we have already taken
and continue to take actions designed to strengthen our
solvency position and improve our Motor pricing in this
difficult trading environment. Enhancing how we price
in the motor market will be a key focus for the Group
throughout 2023.
All of our other businesses performed broadly in line with
our expectations when normalised for weather.
Despite the setbacks in Motor in 2022, the long-term
earnings potential of the Group remains robust. Our
diversified business model and fundamental strengths
remain a significant asset in the highly competitive UK
insurance market. We have a strong franchise, some of the
most recognisable insurance brands in the UK and strong
customer service delivered by a high-quality workforce.
With a determination to enhance our pricing capability
and better leverage the benefits of our integrated business
model, I firmly believe that we can restore our performance
in Motor, enabling the Group to get back to delivering
attractive returns for shareholders.
www.directlinegroup.co.uk
17
Strategic reportGovernanceFinancial statements CEO’s review continued
Improving performance in Motor
Our main operational focus during 2023 will be on restoring
performance in Motor, in order to drive profitability and
build capital resilience, and we are pushing ahead in four
main areas.
First, we have already taken pricing action to restore written
margins based on our rebased inflation assumptions, and
we will continue to prioritise maintaining margins over
volume as we progress through 2023.
Secondly, we will focus on utilising our new pricing tools
to their full potential and enhancing the sophistication
of our risk pricing models. This will include deployment
of substantial additional resource to ensure that Motor
has the capability and capacity it needs to price with
greater precision.
Thirdly, we will better leverage the wealth of claims insight
that we have available through our vertically-integrated
model. We want to move from being an efficient claims
processor and repairer, into a data-driven claims operation,
utilising all our data to enhance our pricing capability.
Finally, we will align our model more closely to the price
comparison website (“PCW”) channel, which accounts
for around 90% of new business motor sales in the market.
We will do this through new propositions, such as our new
Churchill Essentials product, which has demonstrated how
we can expand our PCW channel footprint and offer value
to our customers.
Restoring the resilience of our
balance sheet
In addition to the capital benefits from improving our
Motor performance, we have a range of levers aimed at
helping us build back our capital strength.
Reinsurance
We have always used reinsurance through our motor
excess of loss reinsurance and our property catastrophe
programmes to manage our risk profile.
We have now built on this with a new 10% quota share
reinsurance arrangement effective from 1 January 2023.
This not only strengthened our solvency position as at
year end 2022 by six percentage points, but it is also the
foundation for an efficient long-term source of capital
for the Group. We continue to explore further strategic
reinsurance options.
Portfolio actions
At the 2022 half-year results we flagged our review of where
we deploy our capital in order to deliver the highest returns.
As a result we have decided to exit certain partnerships,
reducing our exposure to low margin insurance within
packaged bank accounts. In the second half of 2023 we
plan to begin our new 10-year partnership with Motability
Operations, which brings 600,000 new customers. We
believe these changes to our portfolio will be positive
from both a financial and strategic perspective.
18
Direct Line Group Annual Report and Accounts 2022
Investment portfolio
With investment yields having increased substantially
over the last 12 months, we are rebalancing our target asset
allocations in order to deliver the correct balance between
return and capital allocation. This should release further
capital over time.
In addition to management actions, we expect the
unrealised loss position on our investment-grade debt
security portfolio to unwind due to the pull to par effect
as bonds mature.
Organic capital generation
We believe the Group will be capital generative in 2023
supported by Home, Commercial and Rescue and other
personal lines, although it will take some time to restore
earnings in Motor.
Continuing to deliver for customers
Excluding Motor and elevated weather claims, all other
business traded broadly in line with expectations.
Commercial delivered another strong performance, with
the benefits of the technology transformation enhancing
Commercial’s already strong product and service offering
and sophisticated pricing. In 2022, Commercial delivered
double-digit growth across both its main businesses,
NIG and Commercial direct own brands. Over the past
10 years this business has doubled in size and improved
its combined operating ratio to 94.2% from over 100%.
Home successfully navigated the implementation of
the FCA’s Pricing Practices Review (“PPR”) regulations and
elevated inflation by focusing on maintaining margins and
leveraging its diversified business model. Home also made
progress with its new technology platform, which remains
on track for roll out in 2023.
Green Flag successfully diversified its product portfolio,
providing further value for customers by offering accessories
via the Green Flag shop. This gives customers the convenience
of booking maintenance and repair services, or providing
a competitive price to check a vehicle’s history before they
decide to make a purchase. In January 2023, Green Flag
patrol was launched, with its own network of recovery
vehicles, in order to enhance network efficiency,
improve customer experience and increase sales.
A key pillar of our strategy is reducing our carbon footprint
and helping our customers make the green transition.
Alongside expanding our electric vehicle propositions,
in 2022 the Group became one of the first personal lines
general insurers in the UK to have its Science-Based
Targets approved by the Science Based Targets initiative.
Business performance
In 2022, there is a clear distinction between the results of
Motor and those of the Group’s other business lines.
Gross
written
premium
£m
Gross
written
premium
%
Normalised
combined
operating
ratio
%
1,432.7
48.2
114.7
Motor
Home, Commercial, Rescue
and other personal lines –
ongoing operations
Total ongoing operations
2,969.8
100.0
1,537.1
51.8
92.2
103.3
Motor delivered a poor result, with a combined operating
ratio of 114.7%. Claims inflation over the course of the year
was greater than we expected, and not reflected in our
pricing. This was compounded by higher claims frequency
in the fourth quarter. This coincided with the introduction
of the FCA’s PPR regulations which reduced new business
growth opportunities. Retention remained strong at 81.6%.
Our normalised combined operating ratio for ongoing
operations across our Home, Commercial and Rescue
and other personal lines was 92.2%. In Commercial, we
combined strong growth with an improved current-
year loss ratio following several years of pricing ahead of
estimated claims inflation. We also priced ahead of claims
inflation in Home, which saw a challenging new business
market following the implementation of the FCA’s PPR
regulations. Rescue did not see the same growth as
previous years but its margins remained strong.
Weather
During 2022, we experienced our highest level of weather-
related claims since before our IPO in 2012, including our
highest individual event from the freeze in December.
Overall claims from weather-related events were £149
million, more than double our 2022 annual assumption of
£73 million. This was made up of three events – storms in
February, extremely dry weather over the summer which
resulted in subsidence and the freeze in December. The
freeze event was the most significant, with £95 million
of claims costs across Home and Commercial following
prolonged sub-zero temperatures, especially across
Scotland and North West England. With relatively large
shares of Home and Commercial insurance in Scotland,
we experienced a significant number of large claims.
Implementation of IFRS 17
‘Insurance Contracts’ and IFRS 9
‘Financial Instruments’
IFRS 17 and IFRS 9 are effective from 1 January 2023. These
new accounting standards will improve alignment between
IFRS earnings and capital generation under Solvency II and
will not affect the economics of our business or its dividend
paying capacity. Overall, we believe the new standards
should improve comparability between companies.
We will change our headline key performance measure
from combined operating ratio to net insurance margin
(“NIM”) under IFRS 17, which we believe is a better measure
of how we run our business.
The key reconciling items when moving from a combined
operating ratio to a NIM are the inclusion of instalment
and other income within revenue, alongside the additional
benefit from discounting more of our insurance liabilities.
As a result, the NIM is expected to be around six percentage
points better than the margin implied by the equivalent
combined operating ratio. For example, a 100% combined
operating ratio, implying a 0% margin, under the previous
accounting standard would translate into around a 6% NIM
under IFRS 17.
Capital management
The Group’s capital position was affected by the
combination of significantly weaker levels of Motor
profitability, adverse investment experience and well above
average claims from major weather events. These factors
reduced the Group’s own funds during the year, whilst the
weaker Motor outlook and higher inflation also contributed
to an increased capital requirement, which was only partly
offset by higher than expected investment income.
During H2 and into 2023, the Group took several actions
which increased the Group’s solvency capital ratio by 14
percentage points, including reducing the risk in the
investment portfolio and agreeing a 10% whole account
quota share reinsurance arrangement. As at the end of
2022, the Group’s estimated solvency capital ratio was
147% which is within the Group’s risk appetite range,
albeit towards the bottom end of that range.
At the end of February 2023, the Group’s solvency capital
ratio has increased by approximately five percentage points
due to the positive movements on the bond portfolio as
well as a reduction in ineligible capital. We are pursuing
a range of actions designed to bring the Group’s solvency
position back towards the middle of the range. The Group
expects positive organic capital generation in 2023.
The Group paid an interim dividend of 7.6 pence per share
in 2022; however, given the year-end solvency ratio, as
indicated at the January trading update, the Board is not
recommending a final dividend. The Board understands
the importance of dividends to shareholders and will
update the dividend outlook at the half-year results.
Outlook
Higher than expected claims inflation on business written
during 2022 and in early 2023 will continue to affect Motor
earnings during 2023. Furthermore, the outlook for claims
inflation remains uncertain given, for example, capacity
constraints in the repair industry, continued settlement
delays in third party claims and potential care cost inflation.
In our other businesses, trading conditions in Commercial
have remained favourable with continued growth in
2023 to date. In Home, market conditions in early 2023
have improved and Green Flag direct has continued to
perform well.
The Group believes it continues to have a fundamentally
strong business and has an ambition over time to generate
a NIM of above 10%, normalised for weather.
Jon Greenwood
Acting Chief Executive Officer
www.directlinegroup.co.uk
19
Strategic reportGovernanceFinancial statements Market overview
Motor premium and claims inflation
The Group was affected by global inflationary pressures in
2022, creating a volatile trading environment, particularly in
our Motor business, which faced complex market conditions.
The UK motor market saw market premium lag behind
significant levels of claims severity inflation. Supply chain
dislocation caused parts delays, and the limited supply
of new vehicles continued to increase the cost of second-
hand vehicles, impacting total loss settlements. We also
witnessed elevated third-party claims inflation across the
year, particularly in the fourth quarter, and second-hand
vehicle prices increased compared to the previous year.
In response, we continue to use our accident repair centres
to repair cars as efficiently and economically as possible. We
are also responding swiftly to volatile inflationary pressures
in motor claims.
Financial Conduct Authority Pricing
Practices Review
The FCA’s reforms to general insurance pricing came into
effect on 1 January 2022. The reforms equalised customer
prices by requiring a renewal price to be no higher than
the equivalent new business price through the same sales
channel for motor and home policies.
Throughout the year, we saw competitive pressures as the
new business market reduced, while retention levels for
renewal customers remained high. We believe the Group
is well positioned in the medium-term due to our large
customer base and because consumers will continue
to value trusted brands, excellent customer service and
claims expertise. These are attributes where the Group
has fundamental strengths.
Consumer trends
During 2022, we witnessed a number of consumer trends.
The market saw product diversification in response to cost
of living pressures which caused customers to be more
price sensitive. Other trends include increased electric
vehicle adoption and customers’ desire to self-serve online
by using digital journeys. We responded to these trends,
supported by our technology transformation and agile
capabilities, by:
– A new PCW Essentials motor product using our Churchill
brand, which offers an alternative product for customers
who may be looking for a stripped-back motor insurance
policy, particularly given cost of living pressures, while still
covering vehicle and third-party damage. Delivering our
Essentials product highlights our improving capability
to get products out to market quickly and expand our
product footprint in the PCW channel.
– We extended our Electric Vehicle bundle for another year
to support our Direct Line Motor customers in making
the switch. By partnering with ZoomEV we offer benefits
and discounts, alongside cover for batteries and charging
cables. The bundle also includes a discounted home
charger by Zaptec and the opportunity for customers to
access EV help and guidance. It’s another example of how
we are giving customers valued insurance propositions.
– Our electric vehicle capability is supported by our
repair expertise in our network of 22 accident repair
centres. As electric vehicle adoption increases in the UK,
it is an integral part of our strategy to be equipped to
repair sophisticated car technology where we can gain
commercial insights that support our underwriting and
claims operations.
– Greater options for customers to access easy digital-first
journeys where Motor customers can now register 100%
of claims types online across the vast majority of our
brands and partners. In 2023, we are aiming for Motor
customers to be able to track their claim online from start
to finish, whether waiting for a repair or cash settlement.
“We believe the Group is well
positioned due to our large customer
base and because consumers will
continue to value trusted brands,
excellent customer service and
claims expertise.”
20
Direct Line Group Annual Report and Accounts 2022
Climate change
In 2022, the Group experienced its highest level of weather-
related claims since we listed over a decade ago. We are
proud of how we supported customers throughout the
year. Three events – storms in February, extremely dry
weather over the summer causing subsidence and the
freeze in December led to claims totalling £149 million,
more than twice our annual assumption for weather-
related claims of £73 million. Whilst we have experienced
significant weather-related claims in 2022, we expect the
physical risks related to climate change to materialise
over the long-term which we have defined as more
than 30 years.
The Group continues to respond to climate change.
We take our responsibilities seriously in our assessment
of climate-related risks to our business and continue to
assess what steps we can take to enhance our approach
and reducing the emissions under our direct control.
We expect increased regulatory scrutiny of climate-related
risks, including how firms are assessing and managing
insurance risks from severe weather, and the potential
for more frequent mid-sized events, such as flood, storm,
freeze and prolonged hot weather causing subsidence. As a
result, the Group continues to assess how it can improve its
approach, particularly regarding quantitative modelling.
In April 2022, the UK Government launched The Transition
Plan Taskforce (“TPT”) to develop a ‘gold standard’ for
private sector firms to produce climate transition plans.
The Group this year became one of the first personal lines
insurers in the UK to receive approval by the Science Based
Targets initiative (“SBTi”) for its plans to reduce greenhouse
gas (“GHG”) emissions (see page 66).
Our third Task Force on Climate-related Financial
Disclosures (“TCFD”) report (see pages 72 to 85) sets out our
strategic response to climate change and we publish the
Group’s carbon emissions (see page 69) in which, for the
second year running, we publish our Scope 3 supply chain
emissions and homeworking emissions now that our mixed
(remote and site-based) working model is established.
Whiplash reform developments
Whiplash injuries are a common feature of motor insurance
claims. The Civil Liability Act 2018, implemented in 2021,
introduced reforms governing the valuation of whiplash
injuries, with a specific tariff for back and neck injuries
expected to last a period of 24 months or less. Other injuries
associated with a claim are subject to common law. The
intention of the Act was to reduce fraudulent claims by
using medical evidence to settle claims within a clear
tariff framework.
A recent Court of Appeal judgment has endorsed a
valuation methodology that differs from the original
reforms and is expected to increase the tariff awarded
to non-whiplash related injuries. As a result, the costs
of motor personal injuries could increase more than
previously anticipated. The Group is assessing its bodily
injury forecasts to reflect the Court of Appeal judgment
and is expected to increase the amount awarded for
some non-whiplash related injuries. An allowance for the
estimated increase in claims costs has been included in
the Group’s year end reserves.
Solvency II reforms
In November 2022, HM Treasury confirmed, in its response
to the Solvency II review consultation, that it is expected to
legislate to reform the risk margin calculations leading to
an expected reduction of approximately 30% for general
insurance business and an expected reduction of 65%
for long-term life insurance business, which will include
Periodic Payment Orders (“PPOs”). Secondary legislation
is expected to follow the passage of the Financial Services
and Markets Bill. The indication is that the Group will
benefit from the reforms, although PRA consultations on
rule changes needed to implement Solvency II reforms
are expected in June and September 2023 and these
may provide more detail on the extent of any benefit.
www.directlinegroup.co.uk
21
Strategic reportGovernanceFinancial statements Our key performance indicators
Combined operating ratio1,2 (“COR”) (%)
Basic (loss)/earnings per share1 (pence)
.
8
5
0
1
.
8
3
2
.
3
7
.
7
4
7
6
.
1
9
.
2
3
2
.
5
6
.
2
2
9
.
2
3
2
1
.
7
0
.
1
9
.
5
4
2
.
6
8
.
5
9
8
.
8
3
2
.
3
7
9
.
1
6
9
.
1
6
.
9
7
5
.
4
8
5
18
19
20
21
22
Expense ratio
Commission ratio
Loss ratio
Definition
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.
Aim
We aim to make an underwriting
profit. This KPI will be updated to
reflect the Group’s transition to
reporting under IFRS 17.
For additional performance
information see page 26
Remuneration
We base part of the Annual Incentive
Plan (“AIP”) awards on profit before
tax. The COR is closely linked to this.
For additional performance
information see pages 131 and 138
.
3
3
3
.
5
9
2
.
8
5
2
.
5
4
2
.
)
3
4
(
18
19
20
21
22
Definition
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.
Aim
We have not set a target. However,
our aim is to grow earnings per share.
For additional performance
information see page 29
Remuneration
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 performance
information see pages 131 and 138
Return on tangible equity1 (%)
Solvency capital ratio3,4 (%)
.
6
3
2
6
.
1
2
.
8
0
2
.
9
9
1
Definition
The return generated on the capital
that shareholders have in the business.
This is calculated by dividing adjusted
earnings by average tangible equity.
Aim
We aim to achieve at least
a 15% RoTE per annum.
For additional performance
information see page 29
Remuneration
We base the LTIP awards partly on
adjusted RoTE over a three-year
performance period.
For additional performance
information see pages 131 and 140
.
)
9
0
(
0
.
1
9
1
.
0
9
8
1
.
0
6
7
1
.
0
0
7
1
.
0
7
4
1
18
19
20
21
22
18
19
20
21
22
Definition
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.
Aim
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 30
Remuneration
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 performance
information see pages 131 and 140
Notes:
1. See glossary on pages 251 to 253 and Appendix A – Alternative performance measures on pages 254 to 257 for reconciliation
to financial statement line items.
2. The 2022 combined operating ratio is for ongoing operations (see footnote 1 on page 25). 2021 has been restated accordingly
(reported as 90.1% in the 2021 Annual Report and Accounts).
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%).
4. Estimates based on the Group’s Solvency II partial internal model.
22
Direct Line Group Annual Report and Accounts 2022
Changes to our KPIs in 2022
Our metrics are reviewed annually and updated as appropriate to ensure they remain an effective measure of delivery
against our objectives. For 2022, the review of these metrics resulted in the following change:
– Operational emissions is a new KPI that reflects the importance of and aligns with our aim to become a Net Zero business
by 2050. Following a review of the LTIP metrics, an emissions measure was introduced to the LTIP from 2022 awards
onwards. See page 141.
– The five-year record of capital returns chart can be found in the CFO Review adjacent to a section describing the Group’s
dividend policy.
Colleague engagement5 (%)
Net Promoter Score6 (points)
0
.
1
8
.
0
8
7
.
0
4
7
.
0
2
0 7
6
6
.
18
19
20
21
22
Definition
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.
Aim
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 56
Remuneration
The AIP awards include a weighting
to a balance of employee metrics,
including engagement.
For additional performance
information see pages 131 and 139
Definition
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.
Aim
We aim to increase our NPS over time.
For additional performance
information see page 53
Remuneration
The AIP awards include a weighting
to a balance of customer metrics,
including NPS.
For additional performance
information see pages 131 and 139
.
0
5
5
1
.
0
8
5
1
.
0
6
5
1
.
6
5
4
1
.
0
2
4
1
18
19
20
21
22
Customer complaints7 (%)
Operational emissions (tCO2e)
7
7
0
.
3
6
0
.
1
6
0
.
1
5
0
.
6
4
0
.
18
19
20
21
22
Definition
The number of complaints we received
during the year as a proportion of the
average number of in-force policies.
Aim
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.
Remuneration
The AIP awards include a weighting
to a balance of customer metrics,
including complaints.
For additional performance
information see page 131 and 139
Definition
Operational emissions are defined as
the Scope 1 and 2 emissions across our
buildings and accident repair centres.
Aim
We aim to reduce Scope 1 and 2
emissions by 46% by 2030 from a
2019 base year.
For additional performance
information see pages 66 and 69
Remuneration
From 2022, the LTIP awards have an
emissions performance condition
which includes a targeted reduction
in emissions and temperature score.
For additional performance
information see pages 131 and 141
8
0
0
6
1
,
9
0
6
6
,
9
9
3
9
,
7
9
6
,
1
1
6
8
8
3
,
1
1
8
7
,
7
8
1
,
0
1
5
5
1
,
3
2
3
0
7
,
2
8
9
8
,
3
5
4
,
2
9
2
5
6
,
19
20
21
22
Scope 1
Scope 2
5. The methodology for determining colleague engagement changed in 2022 as a result of a change of survey provider. Engagement scores
for the years 2018 to 2021 are presented on a consistent basis. The 2022 score was assessed against a benchmark score of 75% and is not
directly comparable to the scores in 2021 and prior years.
6. Direct Line brand. On an aggregated 12-month rolling basis, with 2013 rebased to 100.
7. For the Group’s principal underwriter, U K Insurance Limited.
www.directlinegroup.co.uk
23
Strategic reportGovernanceFinancial statements CFO
review
Neil Manser
Chief Financial Officer
Financial summary
– Group operating profit from ongoing operations fell to £32.1 million
(2021: £590.3 million) reflecting a volatile operating environment with
elevated motor claims inflation, higher than expected weather event
claims, new regulatory changes and challenging investment markets.
Total Group operating profit was £20.6 million (2021: £581.8 million).
– Claims inflation was most acute in Motor, where severity inflation
of around 14% was above the levels assumed in the Group’s pricing.
Alongside disruption to supply chains causing delays in third party
claims, this led to a Motor combined operating ratio of 114.7% (2021:
92.4%). In our other businesses, pricing kept pace with claims inflation
and combined operating ratios were broadly in line with expectations,
when normalised for weather.
– 2022 saw the highest weather event costs since the Group listed
over a decade ago with £149 million of claims, well above the 2022
£73 million budget assumption. The largest event was December’s
freeze, which delivered around £95 million of claims costs due to
prolonged periods of sub-zero temperatures across Scotland and
North West England.
– Group combined operating ratio for ongoing operations was
105.8% and 103.3% when normalised for weather. The Group’s total
combined operating ratio including run-off partnerships was 106.0%.
– Solvency capital ratio reduced during 2022 as a result of lower profit
as well as unrealised losses on investments. A new 10% quota share
reinsurance arrangement was agreed with effect from 1 January
2023 and, including the benefit from this, the solvency capital
ratio was 147%. At the end of February, the Group solvency ratio
has further improved by approximately 5 percentage points due to
positive credit movements on the bond portfolio and a reduction
in ineligible capital on adoption of IFRS 17 ‘Insurance Contracts’.
– In line with the expectation previously disclosed, the Group is not
proposing a final dividend for 2022, resulting in a total dividend for
2022 of 7.6 pence per share.
24
Direct Line Group Annual Report and Accounts 2022
Group financial performance
Ongoing operations1
In-force policies (thousands)
Of which: direct own brands (thousands)2
Ongoing operations1
Adjusted gross written premium3
Of which: direct own brands2
Net earned premium
Underwriting (loss)/profit – ongoing operations1
Loss ratio3,4
Commission ratio3,4
Expense ratio3,4
Combined operating ratio3,4
Current-year attritional loss ratio3,4
Normalised combined operating ratio3,4
Instalment and other operating income
Investment return
Operating profit – ongoing operations1,3
Of which:
Current-year operating (loss)/profit3
Prior-year reserve releases
Restructuring and one-off costs
Run-off partnerships1
Operating (loss)/profit after restructuring and one-off costs3
Finance costs
(Loss)/profit before tax
Tax credit/(charge)
(Loss)/profit for the period attributable to the owners of the
Company
Profitability metrics
Return on tangible equity³
Basic (loss)/earnings per share (pence)
Diluted (loss)/earnings per share (pence)
Return on equity³
Investments metrics
Investment income yield³
Net investment income yield³
Investment return yield³
Capital and returns metrics
Net asset value per share (pence)
Tangible net asset value per share (pence)
Solvency capital ratio post dividend and share buyback5
Solvency capital ratio (as above)/adjusted solvency capital ratio3,5,6
FY 2022
FY 2021
Change
9,689
7,245
FY 2022
£m
2,974.0
2,087.1
2,844.4
(166.6)
74.7%
7.3%
23.8%
105.8%
74.4%
103.3%
147.7
51.0
32.1
(108.7)
140.8
(45.3)
(11.5)
(24.7)
(20.4)
(45.1)
5.6
10,014
7,529
FY 2021
£m
3,072.7
2,207.6
2,860.2
300.9
58.4%
7.3%
23.8%
89.5%
65.6%
90.5%
143.9
145.5
590.3
347.2
243.1
(101.5)
(8.5)
480.3
(34.3)
446.0
(102.3)
(3.2%)
(3.8%)
Change
(3.2%)
(5.5%)
(0.6%)
(155.4%)
(16.3pts)
0.0pts
0.0pts
(16.3pts)
(8.8pts)
(12.8pts)
2.6%
(64.9%)
(94.6%)
(131.3%)
(42.1%)
55.4%
(35.3%)
(105.1%)
40.5%
(110.1%)
105.5%
(39.5)
343.7
(111.5%)
(0.9%)
23.6%
(24.5pts)
(4.3)
(4.3)
24.5
24.1
(117.6%)
(117.8%)
(2.5%)
12.5%
(15.0pts)
2.3%
2.2%
1.0%
149.0
85.6
147%
147%
1.9%
1.7%
2.4%
193.6
131.2
176%
160%
0.4pts
0.5pts
(1.4pts)
(23.0%)
(34.8%)
(29pts)
(13pts)
Notes
4
4
4
4
4
4
4
4
4
4
4
4
11
4
15
15
16
16
16
Notes:
1. Ongoing operations and run-off partnerships – See glossary on pages 251 to 253 for definitions and appendix A – Alternative performance
measures on pages 254 to 257 for reconciliation to financial statement line items.
2. Direct own brands include in-force policies for Home and Motor under the Direct Line, Churchill, Darwin and Privilege brands, Rescue
policies under the Green Flag brand and Commercial under the Direct Line for Business and Churchill brands.
3. See glossary on pages 251 to 253 for definitions and appendix A – Alternative performance measures on pages 254 to 257 for reconciliation
to financial statement line items.
4. 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 251 to 253 for definitions.
5. Estimates based on the Group’s Solvency II partial internal model.
6. Adjusted solvency capital ratio as at 31 December 2021 excluded £250 million Tier 2 debt which was redeemed on 27 April 2022. See
appendix A – Alternative performance measures on pages 254 to 257 for reconciliation to financial statement line items.
www.directlinegroup.co.uk
25
Strategic reportGovernanceFinancial statements
CFO review continued
Group financial performance1
In-force policies (thousands)2
Of which direct own brands3
Adjusted gross written premium2
Of which direct own brands3
Underwriting (loss)/profit
Instalment and other operating income
Investment return
Operating profit4
Loss ratio4
Commission ratio4
Expense ratio4
Combined operating ratio4
Current-year attritional loss ratio4
Normalised combined operating ratio4
Combined operating ratio
2021
2022
31 Dec
2022
9,689
7,245
30 Sep
2022
9,771
7,304
30 Jun
2022
9,911
7,417
31 Mar
2022
9,952
7,459
FY 2022
£m
2,974.0
2,087.1
(166.6)
147.7
51.0
32.1
74.7%
7.3%
23.8%
105.8%
74.4%
103.3%
31 Dec
2021
Year-on-year
change
10,014
7,529
FY 2021
£m
3,072.7
2,207.6
300.9
143.9
145.5
590.3
58.4%
7.3%
23.8%
89.5%
65.6%
90.5%
(3.2%)
(3.8%)
Change
(3.2%)
(5.5%)
(155.4%)
2.6%
(64.9%)
(94.6%)
(16.3pts)
0.0pts
0.0pts
(16.3pts)
(8.8pts)
(12.8pts)
58.4% 7.3%
23.8% 89.5%
74.7% 7.3%
23.8% 105.8%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
Loss ratio
Comission ratio
Expense ratio
Combined Operating Ratio
2022 was a challenging year for the Group. The aggregate
effect of continued high inflation in Motor, regulatory
change in personal lines, twice the assumed level of
weather claims, as well as adverse investment conditions,
reduced operating profit for ongoing operations by
94.6% to £32 million. Despite the headline reduction in
profit, underlying underwriting performance in Home,
Commercial and Rescue and other personal lines was
broadly in line with expectations.
Ongoing operations and
run-off partnerships
The Group has exited, or has initiated termination of three
partnerships which will reduce its exposure to low margin
packaged bank accounts so it can redeploy capital to
higher return segments. The run-off partnerships relate
to a Rescue partnership with NatWest Group that expired
in December 2022 and Travel partnerships with NatWest
Group and Nationwide Building Society which expire in
2024, and which the Group has indicated to the partner
that it will not be seeking to renew.
The Group has excluded the results of these three run-off
partnerships from its ongoing results and has restated
all relevant comparatives across this review. Results
relating to ongoing operations are clearly referenced.
Note 4 (Segmental analysis) has also been amended to
reflect the change. The operating loss relating to run-off
partnerships in 2022 was £11.5 million (2021: £8.5 million).
In-force policies and adjusted gross
written premium1,2
In-force policies from ongoing operations were 9.7 million
at the end of December, 3.2% lower than prior year with
reductions across all segments except Commercial which
continued to deliver strong growth. Adjusted gross written
premium from ongoing operations experienced a similar
reduction, falling by 3.2% to £2,974.0 million. Growth in
Commercial was offset by reductions in Motor and Home
arising from the combination of challenging market
conditions together with the impact of regulatory change.
Total Group in-force policies were 11.9 million and total
adjusted gross written premium was £3,098.4 million.
26
Direct Line Group Annual Report and Accounts 2022
Investment return1
Investment income
Hedging to a sterling
floating rate basis
Net investment income
Net realised and unrealised
(losses)/gains excluding
hedging
Total investment return –
ongoing operations
Total investment return –
run-off partnerships
Total investment return
Investment yields
Investment income yield4
Net investment income yield4
Investment return yield4
Note
FY 2022
£m
124.0
FY 2021
£m
115.1
(5.9)
118.1
(13.2)
101.9
(67.1)
43.6
4
51.0
145.5
0.6
51.6
0.8
146.3
FY 2022
FY 2021
2.3%
2.2%
1.0%
1.9%
1.7%
2.4%
Total investment return from ongoing operations
decreased by £94.5 million to £51.0 million (2021: £145.5
million) primarily driven by realised and unrealised losses
resulting from write-downs in fair value adjustments of
commercial property (£39.1 million) and £24.9 million
of realised losses from disposals of our debt securities
holdings, predominantly relating to actions taken to
reduce our longer duration USD credit holdings. The
Group’s investment return including run-off partnerships
was £51.6 million (2021: £146.3 million).
Despite assets under management declining 16.1% year-
on-year, investment income from ongoing operations was
up £8.9 million, driven by a yield improvement in variable
rate asset classes following eight UK base rate increases
during 2022, when rates rose from 0.25% to 3.5%. This
resulted in a net investment income yield improvement
of 0.5 percentage points to 2.2%. The investment income
yield is expected to increase to 3.2% in 2023 as maturing
assets are invested at higher yields together with higher
yields on floating assets. The total return yield for 2023 is
expected to be around 4.0%, once pull to par effects are
taken into account. Given this measure includes unrealised
movements as well, the outcome will depend on market
movements during the year.
Underwriting result1
The Group made an underwriting loss from ongoing
operations of £167 million (£179 million loss including run-off
partnerships), a reduction of £468 million compared to 2021.
This was predominately due to a £259 million reduction
in current-year profitability in Motor, due to pricing not
reflecting claims inflation, alongside £112 million higher
weather costs in Home and Commercial. In Motor, 2022 did
not see a repeat of low claims frequency experienced during
the lockdowns in the first half of 2021, together with elevated
claims inflation and the impact of regulatory reforms in 2022.
Prior-year reserve releases from ongoing operations reduced
from £243 million in 2021 to £141 million in 2022, with the
reduction primarily driven by lower Motor and Home
releases. Our claims reserves include specific allowance
for inflation over the next few years to be higher than
recently experienced for longer-tail lines of business.
The loss ratio from ongoing operations increased to 74.7%
(2021: 58.4%) driven predominantly by Motor and weather
events in Home and Commercial, although an improved
current-year attritional loss ratio in Commercial offset an
increased current-year attritional loss ratio in Home.
Weather-related claims in the year were £149 million, more
than twice our 2022 annual assumption of £73 million and
the highest since the Group’s IPO in 2012. Our weather-
related claims assumption for Home and Commercial
combined for 2023 is £80 million.
The combined operating ratio from ongoing operations
increased to 105.8% (2021: 89.5%) and 103.3%, when
normalised for weather (2021: 90.5%).
The underwriting result including run-off partnerships
was a loss of £179 million (2021: £292 million profit) and the
combined operating ratio including run-off partnerships
was 106.0% (2021: 90.1%).
Instalment and other operating income1
Instalment income
Other operating income
Total instalment and
other operating income –
ongoing operations
Total instalment and other
operating income – run-off
partnerships
Note
4
4
FY 2022
£m
92.4
55.3
FY 2021
£m
97.3
46.6
147.7
143.9
–
0.1
Instalment income from ongoing operations of
£92.4 million was £4.9 million lower than 2021, largely
reflecting lower volumes written in Motor and Home
in 2022.
Other operating income from ongoing operations
increased 18.7% to £55.3 million in 2022, primarily
due to the introduction in 2022 of arrangement and
administration fees in Rescue together with higher claims
frequency in Motor, driving increased revenue from vehicle
recovery and repair services and higher salvage income.
www.directlinegroup.co.uk
27
Strategic reportGovernanceFinancial statements CFO review continued
Operating expenses before restructuring
and one-off costs1
Staff costs5
IT and other operating
expenses5,6
Marketing
Sub-total
Insurance levies
Depreciation, amortisation
and impairment of
intangible and fixed assets7
Total operating expenses –
ongoing operations
Operating expenses –
run-off partnerships
Total operating expenses
Expense ratio –
ongoing operations
Expense ratio – total Group
4
4
4
677.9
682.0
21.6
699.5
23.8%
23.6%
24.3
706.3
23.8%
23.9%
Operating expenses from ongoing operations in 2022
were £677.9 million (£699.5 million including run-off
partnerships), in line with our target of around £700
million, and £4.1 million lower than 2021. This reflected a
continued focus on improving efficiency and cost control.
Despite inflationary pressures, controllable costs reduced by
£27.6 million, more than offsetting a £23.5 million increase
in amortisation, depreciation and levies.
The reduction in controllable costs was driven by a range of
cost saving initiatives, including reducing the Group’s office
footprint, reducing technology run costs and increased
customer adoption of digital and self-service channels.
The Group’s full-time equivalent headcount reduced by
4.1% to 9,387 in 2022.
Looking ahead, the Group remains focused on driving cost
efficiency, but is not immune to inflationary pressures in
the market.
28
Direct Line Group Annual Report and Accounts 2022
Note
FY 2022
£m
232.9
143.2
93.5
469.6
92.6
FY 2021
£m
246.7
138.5
112.0
497.2
88.2
Motor
Home
Rescue and other personal lines
– ongoing operations1
Commercial
Operating profit –
ongoing operations1
Operating loss –
run-off partnerships1
115.7
96.6
Restructuring and one-off costs
Operating profit – total Group
Finance costs
Notes
4
4
4
4
4
4
4
4
11
FY 2022
£m
(77.2)
(8.7)
59.7
58.3
FY 2021
£m
314.8
141.8
73.3
60.4
32.1
590.3
(11.5)
20.6
(45.3)
(20.4)
(8.5)
581.8
(101.5)
(34.3)
Tax credit/(charge)
12
5.6
(102.3)
(Loss)/earnings attributable to
the owners of the Company
Basic (loss)/earnings per
share (pence)
(39.5)
343.7
15
(4.3)
24.5
Return on tangible equity4
(0.9%)
23.6%
Restructuring and one-off costs
The Group incurred £45.3 million of restructuring and one-
off costs in 2022, principally due to an impairment of an IT
system of £15.2 million following the decision to exit Travel
packaged bank account partnership business1 and write-
offs in relation to property fixtures and fittings. The majority
of these restructuring costs are non-cash and therefore
have no impact on the Group’s solvency ratio.
Finance costs
Finance costs fell to £20.4 million (2021: £34.3 million)
primarily as interest payments reduced following the
redemption of the Group’s £250 million 9.25% Tier 2
subordinated notes on 27 April 2022.
Effective corporation tax rate
The effective tax rate (“ETR”), which is calculated as total
tax charge divided by (loss)/profit before tax was 12.4% for
2022 (2021: 22.9%). Unusually, due to the overall loss position
the ETR is lower than the standard UK corporation tax rate
of 19.0% (2021: 19.0%) as tax relief for the accounting loss is
reduced by disallowable expenses which are only partly
offset by tax relief for the Tier 1 coupon payments (which
are accounted for as a distribution rather than expense),
together with the tax effect of a property revaluation.
Further details can be found in the tax reconciliation in
Note 12 to the financial statements.
Whilst the quantum of the disallowable expenses has
returned to a more normalised level in 2022 following
the one-off non-deductible Bromley lease payment in
2021, they have a greater impact on the ETR (calculated
as tax charge divided by profit or (loss) before tax) as
the denominator is much lower in 2022 compared with
2021. Ordinarily disallowable expenses would increase
The Group had an operating cash outflow before
movements in working capital of £24.3 million (2021:
inflow £435.9 million), a reduction of £460.2 million,
due to the loss for the year compared to a profit in the
prior year and an increase in adjustments for non-cash
movements. After taking into account movements in
working capital, the Group’s cash outflow was £16.1 million
(2021: inflow £390.1 million), a decrease of £406.2 million.
The Group has considerable assets under management,
the cash generated from these assets increased by £693.3
million to £860.5 million as proceeds from the disposal
and maturity of available-for-sale (“AFS”) debt securities
exceeded purchases, in part due to actions taken to reduce
the Group’s longer duration USD credit holding, helping
fund dividend payments and the redemption of £250
million of the Group’s subordinated Tier 2 debt. Net cash
generated from operating activities was £800.2 million
(2021: £439.0 million).
Net cash used in investing activities of £100.8 million
reflected the Group’s continuing investment in its major
IT programmes (2022: £108.4 million, 2021: £109.4 million).
Net cash used in financing activities of £657.5 million
included £314.5 million (2021: £317.4 million) in dividends
and Tier 1 capital coupon payments in the year, £50.1 million
in share buybacks (2021: £101.0 million) and £8.9 million
(2021: £101.9 million) lease principal payments. Also included
in 2022 was the redemption of the remaining £250.0
million Tier 2 subordinated debt issued in 2012. Dividends
paid in the year comprised the 7.6 pence interim dividend
announced in the half-year results in 2022 and the 15.1
pence final dividend for 2021 announced in March 2022.
The £800.2 million the Group generated from operating
activities more than offset net cash used in financing and
investing activities and resulted in a net increase in cash
and cash equivalents of £41.9 million (2021: £271.7 million
reduction) to £938.4 million (2021: £896.5 million). The levels
of cash and other highly liquid sources of funding that the
Group holds to cover its claims obligations are continually
monitored with the objective of ensuring that the levels
remain within the Group’s risk appetite.
the ETR where there is an accounting profit (such as in
2021 and previous years), as more tax is paid than would
be expected from applying the statutory tax rate to the
accounting profit. However, in a loss making year, such as
2022, disallowable expenses lead to fewer tax losses than
accounting losses, thereby leading to an overall reduction
in the ETR.
Return on tangible equity4
Return on tangible equity decreased to (0.9%)
(2021: 23.6%) due primarily to the reduction in the
Group’s operating profit.
(Loss)/earnings per share
Basic earnings per share decreased by 117.6% to a loss of
4.3 pence (2021: earnings of 24.5 pence). Diluted earnings
per share decreased by 117.8% to a loss of 4.3 pence (2021:
earnings of 24.1 pence), mainly reflecting the Group’s loss
after tax in 2022.
The financial performance of the Group is discussed in
detail on pages 26 to 29. The calculation of (loss)/earnings
per share is presented in note 15 on page 220.
Cash flow
Net cash generated from operating
activities
800.2
439.0
2022
£m
2021
£m
Of which:
Operating cash flows before
movements in working capital
Movements in working capital
Tax paid
Net cash generated from
investment of insurance assets
(24.3)
435.9
8.2
(44.5)
(45.8)
(118.4)
860.5
167.2
Net cash used in investing activities
(100.8)
(138.7)
Net cash used in financing activities
(657.5)
(572.0)
Net increase/(decrease) in cash
and cash equivalents
Cash and cash equivalents at
1 January
Cash and cash equivalents at
31 December
41.9
(271.7)
896.5
1,168.2
938.4
896.5
The Group’s cash and cash equivalents increased by £41.9
million during the year (2021: £271.7 million reduction) to
£938.4 million.
Notes:
1. Ongoing operations and run-off partnerships – See glossary on pages 251 to 253 for definitions and appendix A – Alternative performance
measures on pages 254 to 257 for reconciliation to financial statement line items.
2. See appendix B on page 258 for additional data on in-force policies and adjusted gross written premium.
3. Direct own brands include in-force policies for Home and Motor under the Direct Line, Churchill, Darwin and Privilege brands, Rescue
policies under the Green Flag brand and Commercial under the Direct Line for Business and Churchill brands.
4. See glossary on pages 251 to 253 for definitions and appendix A – Alternative performance measures on pages 254 to 257 for reconciliation
to financial statement line items.
5. Staff costs and other operating expenses attributable to claims handling activities are allocated to the cost of insurance claims.
6. IT and other operating expenses include professional fees and property costs.
7. Includes right-of-use (“ROU”) assets and property, plant and equipment. For the year ended 31 December 2022, there were impairment
charges of £16.0 million which relate solely to impairment of intangible assets (2021: £2.6 million of which, £2.1 million relates to impairment
of intangible assets and £0.5 million relates to ROU property assets).
www.directlinegroup.co.uk
29
Strategic reportGovernanceFinancial statements CFO review continued
Balance sheet management
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 2022.
Capital position
At 31 December 2022, the Group held a Solvency II
capital surplus of £0.57 billion above its regulatory capital
requirements, which was equivalent to an estimated
solvency capital ratio of 147%, after the interim dividend.
At 31 December
2022
2021
Solvency capital requirement
(£ billion)
Capital surplus above solvency capital
requirement (£ billion)
Solvency capital ratio post dividends
and share buyback
Solvency capital ratio (as above)/
adjusted solvency capital ratio1
1.21
0.57
1.35
1.03
147%
176%
147%
160%
Note:
1. Adjusted solvency capital ratio excluding Tier 2 debt which was
redeemed on 27 April 2022.
Change in solvency capital requirement
Solvency capital requirement at 1 January
Model and parameter changes
Exposure changes
Solvency capital requirement at 31 December
2022
£bn
1.35
0.05
(0.19)
1.21
During 2022, the Group’s SCR reduced by £0.14 billion to
£1.21 billion. Exposure changes resulted in a £0.19 billion
reduction partially offset by an increase of £0.05 billion
relating to model and parameter changes. These changes
were partly the result of management action to improve
the Group’s solvency ratio, including entering into a 10%
whole account quota share reinsurance arrangement
with effect from 1 January 2023 and reducing our longer
duration USD credit holdings. The Group SCR also
benefited from the impact of higher interest rates.
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.
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.
In 2022, the Board announced an interim dividend of 7.6
pence per share. The Board is not recommending a final
dividend and will update its dividend outlook at the 2023
half-year results.
In the Group’s 2021 full year results, we announced a share
buyback programme of up to £100 million, with an initial
tranche of £50 million which was completed on 28 June
2022. The Board decided, when considering the half-year
results to 30 June 2022, not to launch the second £50
million tranche of the £100 million buyback programme
announced earlier in the year.
Capital returns
(£m)
595.2
100.0
195.5
401.3
100.0
401.3
113.7
299.7
301.3
287.6
128.6
30.0
98.6
149.1
50.1
99.0
2018
2019
2020
2021
2022
Buyback programmes
Special dividends
Ordinary dividends
30
Direct Line Group Annual Report and Accounts 2022
Movement in capital surplus (£bn)
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1.03
0.06
0.12
0.14
0.12
0.25
0.10
0.05
0.57
Capital
surplus at
1 January
Capital (used)/
generated
excluding market
movements
Market
movements
Change in
solvency
capital
requirement
Capital
expenditure
Reypayment of
subordinated
Tier 2 notes
Interim
dividend
Removal of
2nd tranche of
share buyback
Capital
surplus at
31 December
Scenario and sensitivity analysis1
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 2022. The impacts
on the Group’s solvency capital ratio arise from movements
in both the Group’s SCR and own funds.
Scenario
Deterioration of small bodily injury
motor claims equivalent to that
experienced in 2008/09
One-off catastrophe loss equivalent
to the 1990 storm “Daria”
One-off catastrophe loss based
on extensive flooding of the River
Thames
Increase in Solvency II inflation
assumption for PPOs by 100 basis
points3
100bps increase in credit spreads4
100bps decrease in interest rates
with no change in the PPO real
discount rate
Impact on solvency
capital ratio1
31 Dec
2022
31 Dec
20212
(5pts)
(5pts)
(10pts)
(9pts)
(10pts)
(9pts)
(10pts)
(5pts)
(9pts)
(8pts)
1pt
(2pts)
Notes:
1. Sensitivities are calculated under the assumption full tax benefits
can be realised.
2. 2021 figures exclude from own funds the value of the £250 million
Tier 2 subordinated debt which was redeemed on 27 April 2022.
3. The periodic payment order (“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.
4. Includes only the impact on AFS assets (excludes assets held at
amortised costs) and assumes no change to the SCR.
Movement in capital surplus
Capital surplus at 1 January
Capital (used)/generated
excluding market movements
Market movements
Capital (used)/generated
Change in solvency capital
requirement
Surplus (used)/generated
Capital expenditure
Repayment of subordinated
Tier 2 notes
Interim dividend
Final dividend1
Share buyback
Removal of second tranche of
share buyback
Increase in ineligible
Tier 3 capital2
Net surplus movement
Capital surplus at 31 December
2022
£bn
1.03
(0.06)
(0.12)
(0.18)
0.14
(0.04)
(0.12)
(0.25)
(0.10)
–
–
2021
£bn
1.22
0.40
(0.03)
0.37
(0.01)
0.36
(0.12)
–
(0.10)
(0.20)
(0.10)
0.05
–
–
(0.46)
0.57
(0.03)
(0.19)
1.03
Notes:
1. 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.
2. At 31 December 2022, ineligible Tier 3 capital arose as the amount
of Tier 3 capital permitted under the Solvency II regulations is 15%
of the Group’s SCR. At 31 December 2021, ineligible Tier 3 capital
arose as the amount of Tier 2 and Tier 3 capital permitted under
the Solvency II regulations is 50% of the Group’s SCR.
During 2022, the Group repaid its then outstanding £250
million 9.25% subordinated Tier 2 notes. The Group used
£0.18 billion of Solvency II capital after market movements
and increased the surplus by £0.05 billion as the second
£50 million tranche of the share buyback programme was
not launched. Capital expenditure of £0.12 billion and the
interim 2022 dividend of £0.10 billion reduced the capital
surplus. In 2023, capital expenditure levels are expected
to be broadly in line with 2022.
www.directlinegroup.co.uk
31
Strategic reportGovernanceFinancial statements CFO review continued
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
Eligible 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
2022
£bn
2021
£bn
1.07
1.66
–
(0.30)
1.07
0.32
1.36
0.36
(0.05)
(0.02)
1.34
1.70
0.26
0.21
(0.03)
1.78
0.53
0.18
(0.03)
2.38
Notes:
1. As at 31 December 2022, £51 million (31 December 2021: £19
million) of the Group’s restricted Tier 1 capital was reclassified
as Tier 2 due to Solvency II tiering restrictions.
2. At 31 December 2022, ineligible Tier 3 capital arose as the amount
of Tier 3 capital permitted under the Solvency II regulations
is 15% of the Group’s SCR. At 31 December 2021, ineligible Tier
3 capital arose as the combined amount of Tier 2 and Tier 3
capital permitted under the Solvency II regulations is 50% of
the Group’s SCR.
During 2022, the Group’s eligible own funds reduced from £2.38 billion to £1.78 billion. Eligible Tier 1 capital after foreseeable
distributions represents 75% of own funds and 111% of the estimated SCR. Tier 2 capital relates to the Group’s £0.21 billion
subordinated debt and £0.05 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 the
amount of Tier 3 alone is 15% of the Group’s SCR. The Group has Tier 3 ineligible own funds of £0.03 billion.
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
Eligible 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
2022
£bn
1.93
(0.82)
–
(0.04)
–
1.07
0.32
(0.05)
1.34
0.26
0.21
(0.03)
1.78
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
Notes:
1. As at 31 December 2022, £51 million (31 December 2021: £19 million) of the Group’s restricted Tier 1 capital was reclassified as Tier 2 due to
Solvency II tiering restrictions.
2. At 31 December 2022, the amount of Tier 3 capital permitted under the Solvency II regulations is 15% of the Group’s SCR which resulted in
ineligible capital of £33 million. At 31 December 2021, the amount of Tier 2 and Tier 3 capital permitted under the Solvency II regulations is
50% of the Group’s SCR which resulted in ineligible capital of £31 million.
32
Direct Line Group Annual Report and Accounts 2022
Reconciliation of IFRS shareholders’ equity to Solvency II own funds (£bn)
0.82
1.93
0.0
0.04
0.0
Total share-
holders’ equity
Goodwill and
intangible assets
Change in
valuation of
technical provisions
Other asset and
liability adjustments
Foreseeable
capital distributions
■ Tier 1 capital - unrestricted
■ Tier 2 capital
■ Tier 1 capital - restricted
■ Tier 3 capital
1.78
0.18
0.26
0.27
1.07
Total
own
funds
Investment portfolio
The investment strategy aims to deliver several objectives which are summarised below:
– to ensure there is sufficient liquidity available within the investment portfolio to meet stressed liquidity scenarios;
– to match PPO and non-PPO liabilities in an optimal manner; and
– to deliver a suitable risk-adjusted investment return commensurate with the Group’s risk appetite.
Asset and liability management
The following table summarises the Group’s high-level approach to asset and liability management.
Liabilities
Assets
Characteristics
More than 10 years, for example PPOs
Property and infrastructure debt
Inflation linked or floating
Short and medium term – all other claims
Investment-grade credit
Fixed – key rate duration matched
Tier 1 equity
Investment-grade credit
Fixed
Tier 2 sub-debt (swapped fixed to floating) Commercial real estate loans and cash
Floating
Tier 2 sub-debt fixed
Surplus – tangible equity
Investment-grade credit and cash
Fixed or floating
Investment-grade credit, short-term
high yield, cash and government debt
securities
Fixed or floating
www.directlinegroup.co.uk
33
Strategic reportGovernanceFinancial statements CFO review continued
Asset allocation and benchmarks – UK Insurance Limited
The current strategic benchmarks for U K Insurance Limited are detailed in the following table:
Investment-grade credit1
High yield2
Investment-grade private placements2
Credit
Sovereign
Total debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents
Investment property
Total investment holdings
Benchmark
holding
2022
66.0%
6.0%
3.0%
75.0%
3.0%
78.0%
4.0%
6.5%
6.0%
5.5%
Actual
holding
2022
49.5%
5.8%
2.1%
57.4%
10.7%
68.1%
5.0%
4.2%
16.9%
5.8%
Benchmark
holding
2021
66.0%
6.0%
3.0%
75.0%
3.0%
78.0%
4.0%
6.5%
6.0%
5.5%
Actual
holding
2021
65.7%
6.1%
1.7%
73.5%
0.6%
74.1%
4.5%
3.6%
12.1%
5.7%
100.0%
100.0%
100.0%
100.0%
Notes:
1. Asset allocation at 31 December 2022 includes investment portfolio derivatives, which have a mark-to-market asset value of £1.6 million
which is split as an asset of £2.5 million included in investment grade credit and a liability of £0.9 million included in sovereign debt
(31 December 2021: mark-to-market asset value of £14.2 million and £0.1 million respectively). This excludes non-investment derivatives that
have been used to hedge operational cash flows.
2. In the 2021 report, benchmark and actual holding percentages for high-yield securities and investment grade private placements were
incorrectly reported as 3.0% and 1.7% for high-yield securities and 6.0% and 6.1% for investment-grade private placements respectively.
The 2021 comparatives have been restated in the asset allocation and benchmarks table, above.
At 31 December 2022, investment grade credit was below benchmark holding, following the tactical decision undertaken
in H2 to de-risk the portfolio. Surplus funds as a result of this action have been held in cash and cash equivalents or three
month sterling treasury bills.
Investment holdings and yields
Investment-grade credit1
High yield
Investment-grade private placements
Credit
Sovereign1
Total debt securities
Infrastructure debt
Commercial real estate loans
Other loans
Cash and cash equivalents2
Investment property
Equity investments3
Total Group
Allocation
(£m)
2,360.0
278.8
98.2
2,737.0
510.3
3,247.3
238.2
199.1
1.9
938.4
278.5
13.6
2022
Income
(£m)
59.1
14.9
2.7
76.7
2.0
78.7
7.9
8.8
–
14.0
15.6
–
4,917.0
125.0
Yield
(%)
1.9%
4.8%
2.9%
2.2%
0.7%
2.1%
3.2%
4.4%
0.4%
1.5%
5.3%
0.0%
2.3%
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%
0.0%
4.8%
0.0%
1.9%
Notes:
1. Asset allocation at 31 December 2022 includes investment portfolio derivatives, which have a mark-to-market asset value of £1.6 million
which is split as an asset of £2.5 million included in investment grade credit and a liability of £0.9 million included in sovereign debt
(31 December 2021: mark-to-market asset value of £14.2 million and £0.1 million respectively). This excludes non-investment derivatives that
have been used to hedge operational cash flows.
2. Net of bank overdrafts: includes cash at bank and in hand and money market funds.
3. Equity investments consist of quoted shares and insurtech-focused equity funds. The insurtech-focused equity funds are valued based on
external valuation reports received from a third-party fund manager.
34
Direct Line Group Annual Report and Accounts 2022
Credit ratings
Moody’s Investors Service provides insurance financial-
strength ratings for U K Insurance Limited, our principal
underwriter. Moody’s rate U K Insurance Limited as ‘A1’
for insurance financial strength (strong) with a negative
outlook.
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.
We seek to adopt a prudent approach to assessing
liabilities, as evidenced by the favourable development
of historical claims reserves. Reserves are based on
management’s best estimate, which includes a prudence
margin that exceeds the internal actuarial best estimate.
This margin is set by reference to various actuarial scenario
assessments and reserve distribution percentiles. It also
considers other short- and long-term risks not reflected in
the actuarial inputs, as well as management’s view on the
uncertainties in relation to the actuarial best estimate.
The most common method of settling bodily injury claims
is by a lump sum. When this includes an element of
indemnity for recurring costs, such as loss of earnings or
ongoing medical care, the settlement calculations apply
the statutory discount rate (known as the Ogden discount
rate) to reflect the fact that payment is made on a one-off
basis rather than periodically over time. The current Ogden
discount rate is minus 0.25% for England and Wales, minus
0.75% in Scotland, and minus 1.5% in Northern Ireland.
At 31 December 2022, total investment holdings of £4,917.0
million were 16.1% lower than at the start of the year,
reflecting adverse fair value movements in fixed rate debt
securities, payment of the interim dividend, repayment
of subordinated debt and share buy-back activity. Total
debt securities were £3,247.3 million (31 December 2021:
£4,190.1 million), of which 3.8% were rated as ‘AAA’ and a
further 59.0% were rated as ‘AA’ or ‘A’. The average duration
at 31 December 2022 of total debt securities was 2.3 years
(31 December 2021: 2.5 years).
At 31 December 2022, total unrealised losses, net of tax, on
AFS investments were £194.7 million (31 December 2021:
£9.0 million unrealised gains) as a result of higher credit
spreads and increased interest rates.
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
2022
£m
2021
£m
16
1,934.0
2,550.2
16
16
16
16
16
(822.2)
(822.5)
1,111.8
1,727.7
1,298.2
1,317.3
149.0
193.6
85.6
131.2
Note:
1. See glossary on pages 251 to 253 for definitions and appendix
A – Alternative performance measures on pages 254 to 257 for
reconciliation to financial statement line items.
Net assets at 31 December 2022 decreased by £616.2
million to £1,934.0 million (31 December 2021: £2,550.2
million) and tangible net assets decreased to £1,111.8
million (31 December 2021: £1,727.7 million) following
adverse movements in the Group’s AFS reserves and
the reduction in profit for the year.
Leverage
The Group’s financial leverage decreased by 1.4 percentage
points to 23.8% (2021: 25.2%). The decrease was primarily
due to a reduction in subordinated debt following the
redemption of the Group’s £250 million 9.25% Tier 2
notes on 27 April 2022, partially offset by a reduction in
shareholders’ equity, primarily due to dividends paid in
the year and the share buyback, along with a reduction
in the Group’s AFS reserves.
At 31 December
Shareholders’ equity
Tier 1 notes
Financial debt – subordinated debt
Total capital employed
Financial-leverage ratio1
2022
£m
2021
£m
1,934.0
2,550.2
346.5
258.6
346.5
513.6
2,539.1
3,410.3
23.8%
25.2%
Note:
1. Total IFRS financial debt and Tier 1 notes as a percentage of total
IFRS capital employed.
www.directlinegroup.co.uk
35
Strategic reportGovernanceFinancial statements CFO review continued
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. Since 2021, we have reduced the level
of Motor reinsurance purchased, resulting in higher net
reserves for accident years 2021 and 2022. The 2023 Motor
excess of loss (“XoL”) reinsurance contract is in line with
the 2022 Motor treaty, resulting in a similarly higher net
retention for accident year 2023.
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. In
2022, the Group reviewed the estimates used to discount
PPOs. Given the significant changes both in the current
economic environment and the longer term outlook, the
Group changed from flat rate inflation and discounting
assumption to a yield curve approach, allowing for an
increase in short-term inflation and higher long-term real
returns. This resulted overall in the application of a real
discount rate of 0.9% (2021: 0.0%), the combination of cash
flow weighted inflation and discounting of 4.2% and 5.1%
respectively, the latter driven by an expected increase in
the long-term yield of the assets backing PPO liabilities.
Higher claims inflation remains a risk, given the continuing
high level of consumer prices and wage inflation. In 2022,
consumer prices inflation was at its highest level for the
past decade and is not expected to normalise until 2024.
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 scenarios for excess inflation have
been considered in the reserving process.
Claims reserves net of reinsurance 2022 (£m)
£2,608.2m
1,546.3 Motor
409.2 Home
55.2 Rescue and other personal lines
567.5 Commercial
30.0 Run-off partnerships1
Claims reserves net of reinsurance 2021 (£m)
£2,548.4m
1,607.9 Motor
297.8 Home
53.5 Rescue and other personal lines
Prior-year reserve releases were £163.2 million (2021: £258.1
million) concentrated towards more recent accident years,
with good experience across all categories.
547.3 Commercial
41.9 Run-off partnerships1
Looking forward, the management best estimate will be
replaced under IFRS 17 by the best estimate of liabilities
(“BEL”) and a risk adjustment. The BEL will be on a
discounted basis and include an allowance for events
not in data (“ENIDs”). The risk adjustment will be set
around the 75th percentile.
Note:
1. See glossary on pages 251 to 253 for definitions and appendix
A – Alternative performance measures on pages 254 to 257 for
reconciliation to financial statement line items.
36
Direct Line Group Annual Report and Accounts 2022
Reinsurance
The objectives of the Group’s reinsurance strategy are to reduce the volatility of earnings, facilitate effective capital
management, and transfer risk outside the Group’s risk appetite. This is achieved by transferring risk exposure through
various reinsurance programmes:
– Catastrophe reinsurance to protect against an accumulation of claims arising from a natural perils event. The retained
deductible is £150 million and cover is placed annually on 1 July up to a modelled 1-in-200 year loss event of £1,350 million.
– Motor reinsurance to protect against a single large 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 £10m and the protection above
£10m is subject to an additional aggregate retention of £37.50m. This programme was renewed on 1 January 2023.
– Commercial property risk reinsurance to protect against large individual claims with a retained deductible of £4.0 million.
The contract is subject to an aggregate deductible of £2.0 million and renews annually on 1 July.
– Whole account quota share reinsurance with a 10% cession, ceded on a funds-withheld basis entered into from
1 January 2023.
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
Increase/(decrease) in profit before tax1,2
2022
£m
2021
£m
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% (2021:
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%
(2021: minus 1.25% compared to minus 0.25%)
Claims inflation5
Impact of a decrease in claims inflation by 200 basis points for two consecutive years
Impact of an increase in claims inflation by 200 basis points for two consecutive years
31.0
43.0
(42.8)
(58.9)
46.7
42.5
(64.2)
(59.4)
79.4
(80.5)
74.3
(75.5)
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 0.9% 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.
5. We have updated this sensitivity, across 2021 and 2022, to a 200 basis point increase/decrease in inflation in acknowledgment of the current
uncertain economic environment.
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 2022. It does not take into account any second order impacts such as changes in PPO
propensity or reinsurance bad debt assumptions.
www.directlinegroup.co.uk
37
Strategic reportGovernanceFinancial statements
CFO review continued
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 co-operative 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 would ordinarily pay 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.
38
Direct Line Group Annual Report and Accounts 2022
During 2022 the sum of taxes either paid or collected across the Group was £803.9 million. The composition of this between
the various taxes borne and collected by the Group is shown below.
2022
£m
(9.8)
79.9
176.5
44.8
5.9
297.3
2022
£m
389.4
14.8
102.4
506.6
Total taxes borne
At 31 December
Current-year Corporation Tax credit
Irrecoverable Value Added Tax incurred on overheads
Irrecoverable Value Added Tax embedded within claims spend
Employers’ National Insurance contributions
Other taxes
Total
Total taxes collected
At 31 December
Insurance Premium Tax
Value Added Tax
Employees’ Pay As You Earn and National Insurance contributions
Total
Total taxes borne by tax type (£m)
Total taxes collected by tax type (£m)
£297.3m
£506.6m
350
300
250
200
150
100
50
0
-50
5.9
44.8
256.4
-9.8
600
500
400
300
200
100
0
102.4
14.8
389.4
Other taxes
Employer’s NIC
Irrecoverable VAT
Corporation tax
Insurance premium tax
Employee’s PAYE and NIC
VAT
Neil Manser
Chief Financial Officer
www.directlinegroup.co.uk
39
Strategic reportGovernanceFinancial statements Operating review
Motor
Motor: performance summary
Gross written premium by channel
Own brand in-force policies reduced
by 2.9%, with an overall reduction in
in-force policies of 3.4% to 3.8 million.
Own brand gross written premium
reduced by 7.7%, overall gross
written premium reduced by 8.2%.
Operating loss of £77.2 million,
reflecting heightened claims inflation,
an increase in claims frequency, and
lower prior-year reserve releases.
56.0% Direct
41.7% Price comparison websites
2.3% Partnerships
40
Direct Line Group Annual Report and Accounts 2022
In-force policies (thousands)
Of which:
Direct own brands1
Partnerships
2022
£m
3,836
3,756
80
2021
£m
3,971
3,869
102
Gross written premium
1,432.7
1,560.8
Of which:
Direct own brands1
Partnerships
Operating (loss)/profit2
Loss ratio2
Commission ratio2
Expense ratio2
Combined operating ratio2
Current-year attritional loss ratio2
Market overview
1,398.5
34.2
(77.2)
86.2%
3.4%
25.1%
114.7%
90.9%
1,515.2
45.6
314.8
64.3%
3.3%
24.8%
92.4%
72.9%
The combination of the implementation of the FCA’s PPR
regulations, and the impact of elevated inflation, created
a challenging motor market backdrop during 2022.
The FCA’s PPR regulations reduced new business shopping
and increased retention levels across the market. The
increasingly competitive trading environment was
exacerbated by market premiums not keeping pace
with heightened claims inflation.
The increase in claims inflation was driven by the cost of
second-hand vehicles, as well as supply chain disruption,
which led to longer repair times. Claims frequency also
increased compared to 2021, which saw lower driving
levels during lockdowns.
Market premiums increased by mid-single digit percentage
points at the start of the year with the introduction of the
FCA’s PPR regulations, followed by significant increases
during the second half of the year.
Performance
In-force policies and gross written premium
Motor in-force policies reduced by 3.4% in 2022, with own
brands falling 2.9%. The majority of this reduction was in
Q3 as we increased premiums to reflect higher inflation
trends and saw a reduction in new business volumes.
Retention remained strong on average over the year at
81.6%, although reduced across the year as renewal rate
increases from higher claims inflation started to offset
premium reductions from the introduction of the FCA’s
PPR regulations.
Motor direct own brand gross written premium was 7.7%
lower in 2022. Average premiums fell 2.8% during 2022,
reflecting the impact of the FCA’s PPR regulations on
renewal average premiums, as well as a greater mix of
renewing business which tends to have lower average
premium. Furthermore, changes to the Group’s risk
pricing models in H2 reduced risk mix and therefore
average premium.
Motability Operations: Delivering
an exceptional claims service
In H2 2023, we will welcome 600,000 new customers
as part of our 10-year partnership with Motability
Operations. We were chosen to partner with Motability
Operations because of our excellent customer
service record, our modern and innovative digital
systems, and our ability to provide efficient vehicle
repairs through an integrated, aligned and effectively
managed supply chain. The partnership will help
us to gain further insight into their fleet of modern
vehicles and build additional scale in our expert
claims management service.
In H2 2023, we welcome our new partnership with Motability
Operations, which is expected to provide around £500
million of gross written premium per annum from 2024,
of which 80% is reinsured.
Underwriting
Claims inflation accelerated over the course of the year.
Entering 2022, we expected claims severity inflation
would track slightly above our medium-term 3% to 5%
expectation. Supply chain disruption, partly in response
to the war in Ukraine and resource constraints across
the market, drove an elongation in car repair cycle
times, therefore increasing average repair costs as well
as leading to longer credit hire durations. Furthermore,
used car prices, which rose strongly in 2021, remained high
throughout the year, particularly for relatively new cars.
Whilst we continue to believe we are outperforming the
industry on the cost of claims we manage through both
DLG Auto Services and our managed network, claims
inflation arising from third-party managed claims was
higher than expectations and pricing. Overall, we
estimate claims inflation for 2022 was around 14%.
The combination of lower renewal premium arising from
the FCA’s PPR regulations, as well as higher than priced-
for claims inflation and the non-repeat of 2021 Covid-
related frequency benefits, resulted in a 18.0 percentage
point increase in the current-year attritional loss ratio
to 90.9%. Prior-year reserve releases were £60.7 million
lower, resulting from delayed settlements of large claims
and higher claims inflation on third-party claims. These
factors combined resulted in an overall loss ratio of 86.2%
(2021: 64.3%).
Combined operating ratio and (loss)/profit
The combined operating ratio was 114.7% (2021: 92.4%),
primarily as a result of the higher loss ratio. The expense
and commission ratios were broadly stable at 25.1% and
3.4% respectively.
Instalment income was £4.7 million lower than prior
year due to lower Motor premiums while other operating
income increased a little due to higher salvage recoveries.
Overall, Motor reported an operating loss of £77.2 million
compared with a profit of £314.8 million in 2021.
Notes:
1. Direct own brands include in-force policies under the Direct Line, Churchill, Darwin and Privilege brands.
2. See glossary on pages 251 to 253 for definitions and appendix A – Alternative Performance Measures on pages 254 to 257 for reconciliation
to financial statement line items.
www.directlinegroup.co.uk
41
Strategic reportGovernanceFinancial statements
Operating review continued
Home
Home: performance summary
Gross written premium by channel
Total in-force policies 6.2% lower at
2.5 million. Own brand policies were
7.8% lower at 1.7 million, reflecting
a reduction in new business
sales volumes.
Total gross written premium was
10.3% lower at £518.1 million. Own
brand gross written premium was
8.4% lower at 381.5 million.
Total operating loss of £8.7 million,
primarily driven by several significant
weather events and lower prior-year
releases.
56.4% Direct
18.1% Price comparison websites
25.5% Partnerships
42
Direct Line Group Annual Report and Accounts 2022
In-force policies (thousands)
Of which:
Direct own brands1
Partnerships
Gross written premium
Of which:
Direct own brands1
Partnerships
Operating (loss)/profit2
Loss ratio2
Commission ratio2
Expense ratio2
Combined operating ratio2
Current-year attritional loss ratio2
Normalised combined operating ratio2
2022
£m
2021
£m
2,501
2,667
1,732
769
518.1
381.5
136.6
(8.7)
1,879
788
577.8
416.7
161.1
141.8
80.2%
50.7%
5.1%
21.6%
106.9%
60.9%
94.7%
6.9%
22.5%
80.1%
55.7%
85.2%
NatWest Group: Home contract
extension
We extended our longstanding partnership
with NatWest Group, continuing to provide home
insurance to close to half a million of their customers
until 2027. We were recognised for our ability to
deliver excellent service and easy, digital-first
journeys, making use of a new platform that improves
the experience for customers, pre-populating their
data and introducing our home product to Natwest
Group’s banking app, giving them access to simple
and flexible products.
Direct own brands average premiums were stable
year-on-year as pricing increases for new business
were offset by renewal decreases and risk mix changes.
Overall, Home direct own brands gross written premium
of £381.5 million was 8.4% lower than 2021.
Market overview
Underwriting
In 2022, the implementation of the FCA’s PPR regulations
had a more material impact on the Home market than
Motor, whilst claims inflation increased at a more
modest rate.
There were significantly fewer customers shopping for
insurance quotes as more customers chose to stay with
their existing insurer.
Customers that were shopping for insurance benefited
from a wider choice of policies as the reforms drove more
product diversification including “essential” style policies
at a lower price point.
Following new business market premiums increasing
at the start of the year on implementation of the FCA’s
PPR regulations, they remained broadly level throughout
much of the year despite higher claims inflation.
In February 2022, the UK experienced three significant
storms, Dudley, Eunice and Franklin. The extremely
high temperatures in the summer of 2022 led to a rise
in subsidence claims, and in December most of the UK
experienced a freeze weather event which left many
households with burst pipes.
Performance
In-force policies and gross written premium
The implementation of the FCA’s PPR regulations in
January 2022 resulted in lower premiums across the
market, with fewer customers shopping and higher
customer retention rates.
Against this backdrop, we focused on maintaining
margins and therefore saw a reduction in new business
sales volumes, in line with the broader market. Home
in-force policies fell by 6.2% to 2.5 million while direct
own brands fell by 7.8% to 1.7 million.
Claims inflation remained elevated above the Group’s long-
term average and was estimated to be around 7.5% for 2022.
This was consistent with the Group’s pricing assumptions.
Home also saw several weather events during 2022, with
floods, subsidence and freeze events totalling £119.1 million,
well above our 2022 annual assumption of £52 million.
Our weather-related claims assumption for Home for 2023
is £54 million. The freeze event in December was Home’s
most costly event since the Group listed over a decade ago.
Home’s loss ratio increased by 29.5 percentage points in
2022 to 80.2%, predominantly due to higher weather costs,
which increased 19.8 percentage points. The current-year
attritional loss ratio increased by 5.2 percentage points
following pricing action on the implementation of the
FCA’s PPR regulations and the non-repeat of positive
claims experience in 2021. Prior-year reserve releases were
£26.2 million lower following elevated releases in 2021 and
the impact of inflation on subsidence claims costs from
older years.
Combined operating ratios and (loss)/profit
Home’s focus on protecting the value of the book enabled
it to deliver a combined operating ratio normalised for
weather of 94.7%.
An improvement in the expense ratio and a lower
commission ratio helped mitigate some of the loss ratio
deterioration and, overall, Home delivered an underwriting
loss of £35.6 million (2021: profit £110.0 million) and a
headline combined operating ratio of 106.9%.
The underwriting loss was partially offset by instalment
and investment returns, leading to an operating loss of
£8.7 million (2021: £141.8 million profit).
Notes:
1. Direct own brands include in-force policies under the Direct Line, Churchill and Privilege brands.
2. See glossary on pages 251 to 253 for definitions and appendix A – Alternative Performance Measures on pages 254 to 257 for reconciliation
to financial statement line items.
www.directlinegroup.co.uk
43
Strategic reportGovernanceFinancial statements
Operating review continued
Rescue
and other
personal lines
Rescue and other personal lines:
performance summary1
Adjusted gross written premium by product1,2
Rescue in-force policies reduced
by 3.9% to 2.2 million, driven by
lower new business sales volumes
in Green Flag direct and reduced
linked opportunities from lower
sales in Motor.
Total in-force policies and adjusted
gross written premium reduced by
3.2% and 2.6% respectively, reflecting
lower premium from Rescue, partly
offset by higher premium in Travel.
Total operating profit of £59.7 million
includes £52.8 million profit
for Rescue.
53.3% Rescue
26.2% Pet
20.5% Other personal lines
44
Direct Line Group Annual Report and Accounts 2022
Ongoing operations 1
In-force policies (thousands)
Of which:
Rescue – ongoing operations
Of which Green Flag direct
Pet
Other personal lines – ongoing
operations
Adjusted gross written premium2
Of which:
Rescue – ongoing operations
Of which Green Flag Direct
Pet
Other personal lines – ongoing
operations
Operating profit2
Loss ratio2
Commission ratio2
Expense ratio2
Combined operating ratio2
Market overview
2022
£m
2021
£m
2,424
2,505
2,185
1,106
128
111
273.9
143.7
88.2
70.8
59.4
59.7
2,273
1,179
138
94
281.1
155.2
88.3
71.4
54.5
73.3
54.0%
49.9%
3.9%
27.9%
85.8%
3.6%
25.4%
78.9%
Rescue
The rescue market continued its post-pandemic recovery in
2022 as consumer searches for breakdown cover increased.
The high inflationary environment adversely affected
rescue service providers’ claims costs due to the higher
cost of fuel and insurance.
Other personal lines
The travel insurance market grew back rapidly in 2022,
following the lifting of travel restrictions early in the
year, with volumes of international leisure travel only
marginally below pre-pandemic levels during the summer
peak. European travel proved popular, with long haul
destinations recovering towards the end of the year.
2022 continued to see pet ownership grow in the UK with
an estimated 34% of households now owning a dog and
28% owning a cat3.
Performance
In-force policies and gross written premium
In-force policies from ongoing operations reduced by 3.2%,
primarily as a result of lower Rescue in-force polices, which
was partly offset by higher own brand Travel polices. Gross
written premium from ongoing operations reduced by 2.6%
and showed a similar trend to in-force policies. Total in-force
policies including run-off partnerships were 4.6 million and
total gross written premium was £398.3 million.
Rescue
Rescue’s in-force policies and gross written premium from
ongoing operations were lower in 2022 as a result of lower
Green Flag: Disrupting the rescue
market
Our Green Flag brand continues to disrupt the rescue
market. We’re delighted that this year it has been
ranked by the Institute of Customer Service Customer
Satisfaction Index as one of the top 20 brands for
customer service in the UK.4
In 2022, Green Flag, in addition to launching a new
online shop, extended its new technology ecosystem
and enhanced its pricing and renewal capabilities.
Green Flag has also diversified its product portfolio,
offering accessories via the online shop, as well
as giving customers the convenience of booking
maintenance and repair services, or providing a
competitive price to check a vehicle’s history before
deciding to make a purchase.
Motor policies, where Green Flag is sold alongside the
Motor policy, and transition effects as it rolled out its new
policy platform.
Heightened claims inflation during 2022 increased average
claims costs by 14%, driven predominantly by higher fuel
costs and resource constraints across our network of
suppliers. Claims frequency remained broadly stable
with 2021, albeit below pre-pandemic levels.
In January 2023, we launched our first Green Flag branded
patrol vehicles with repairs completed by our own mechanics.
This aims to help mitigate the impact of heightened
inflation as well as offer new revenue opportunities.
Rescue’s combined operating ratio from ongoing operations
remained attractive at 76.7%. Rescue operating profit from
ongoing operations was £52.8 million, compared to
£62.0 million in 2021.
Other personal lines
Other personal lines is made up of Pet, Travel, creditor
and mid- to high-net worth business. Pet accounts for
the majority of other personal lines profit.
Pet in-force policy count was 7.2% lower but premiums
were broadly flat and profit increased year-on-year due
to lower claims volumes and lower than expected claims
inflation.
In Travel, the recovery seen across the industry in 2022
led to growth in premiums and in-force policy count.
The mid- to high-net worth business, Direct Line Select,
reported an operating loss due primarily to weather-related
claims.
Combined operating ratios and profit
Overall, the combined operating ratio from ongoing
operations for Rescue and Other personal lines increased
by 6.9 percentage points to 85.8%. Operating profit from
ongoing operations was £59.7 million, a reduction of
18.6% and primarily related to higher Rescue claims.
Notes:
1. Ongoing operations – See glossary on pages 251 to 253 for definitions and appendix A – Alternative performance measures on pages 254 to
257 for reconciliation to financial statement line items.
2. See glossary on pages 251 to 253 for definitions and appendix A – Alternative performance measures on pages 254 to 257 for reconciliation
to financial statement line items.
3. https://www.ukpetfood.org/information-centre/statistics/uk-pet-population.html
4. Customer Satisfaction Index.
www.directlinegroup.co.uk
45
Strategic reportGovernanceFinancial statements Operating review continued
Commercial
Commercial: performance summary
Gross written premium by channel
Total in-force policies grew 6.5%, with
direct own brands and NIG and other
growing 8.1% and 3.0% respectively.
Strong growth in gross written
premium, increasing by 14.7% to
£749.3 million, driven by growing
in-force policies and higher
average premiums.
Operating profit of £58.3 million was
£2.1 million lower than 2021 due to
higher weather event claims and
lower prior-year releases.
29.2% Direct
70.8% NIG & other
46
Direct Line Group Annual Report and Accounts 2022
In-force policies (thousands)
Of which:
Direct own brands1
NIG and other
2022
£m
928
651
277
2021
£m
871
602
269
Gross written premium
749.3
653.0
Of which:
Direct own brands1
NIG and other
Operating profit2
Loss ratio2
Commission ratio2
Expense ratio2
Combined operating ratio2
Current-year attritional loss ratio2
Normalised combined operating ratio2
218.9
530.4
58.3
53.7%
19.4%
21.1%
94.2%
57.5%
92.8%
187.4
465.6
60.4
54.5%
20.0%
21.7%
96.2%
62.0%
96.3%
Market overview
Premiums remained high across the SME commercial
market throughout 2022, supported by reduced capacity in
this area. The introduction of the FCA’s PPR regulations had
a smaller impact on commercial insurance as opposed to
personal lines.
However, the van segment saw fewer customers shopping
in 2022. This was driven by a range of inflationary factors,
including higher second-hand vehicle prices and higher
premiums due to claims inflation.
There was considerable consolidation in the commercial
broker sector, while the small and micro portion of the
commercial sector continued to see a shift towards
price comparison websites.
Performance
Commercial growth
Our Commercial business delivered strong growth
across all channels, continuing to realise the benefits
of its transformation, improving margins, pricing
sophistication and growing NIG’s award-winning
electronic trading platform. Over the last year:
– Our Risk Assist proposition, which helps business
owners manage and reduce risks, has been
enhanced with updated content and new tools;
– An ‘Ask the Expert’ app has been launched,
supporting businesses to get tailored advice
for their needs; and
– Our Motor and Mini Fleet coverage has been
extended to include cables, batteries for EVs and
charge points as we aim to increase our penetration
into the growing EV segment.
Underwriting
Claims inflation remained elevated throughout 2022, and is
estimated at approximately 7% across the portfolio. Pricing
action was taken throughout the year with premiums on
average increasing slightly ahead of claims inflation.
Commercial also experienced higher weather event-
related claims in 2022, and these are currently estimated
to cost £30.2 million, above our 2022 annual assumption
of £21 million. Our weather-related claims assumption
for Commercial for 2023 is £26 million. Prior-year reserve
releases remained significant at £54.0 million, although
a 12.1% reduction on 2021.
The earning through of higher average premium from
2021 led to a 4.5 percentage point improvement in the
current-year attritional loss ratio, to 57.5%. The overall loss
ratio was 0.8 percentage points better as an improvement
in the attritional loss ratio was partially offset by higher
weather event claims compared to 2021.
In-force policies and gross written premium
Combined operating ratios and profit
During 2022, Commercial continued to deliver strong
in-force policy count growth and double digit premium
growth. This reflected benefits of its transformation
alongside a positive commercial market backdrop.
Gross written premium increased by 14.7% compared to
2021, with strong growth across both NIG and direct own
brands. This was driven by growing in-force policies by 6.5%
to 0.9 million whilst also increasing average premiums
ahead of inflation.
The expense and commission ratios improved slightly
which, coupled with positive pricing, led to a combined
operating ratio of 94.2%, 2.0 percentage points better than
prior year. Normalised for weather, the combined operating
ratio was 92.8%, an improvement of 3.5 percentage points.
Despite lower prior-year reserve releases and higher
weather-related claims, underwriting profit increased
by £15.7 million, to £37.1 million. Outside of underwriting,
there was a £20.6 million reduction in the investment
return, resulting in operating profit of £58.3 million,
£2.1 million lower than 2021.
Notes:
1. Commercial direct own brands include in-force policies for Direct Line for Business and Churchill brands.
2. See glossary on pages 251 to 253 for definitions and appendix A – Alternative Performance Measures on pages 254 to 257 for reconciliation
to financial statement line items.
www.directlinegroup.co.uk
47
Strategic reportGovernanceFinancial statements
Operating review continued
Run-off
partnerships1
In-force policies (thousands)
Gross written premium
Operating loss
Loss ratio
Commission ratio
Expense ratio
2022
£m
2,188
124.4
(11.5)
90.4%
1.8%
17.7%
2021
£m
4,551
98.9
(8.5)
51.1%
33.5%
25.0%
Combined operating ratio
109.9%
109.6%
In our H1 2022 results we disclosed that we planned to
reduce our exposure to packaged bank accounts where
they do not meet target levels of return and are no longer
required for operational scale, in order to improve our
capital efficiency. During the second half of the year,
we have decided to exit all such partnerships and are
presenting the results for this business as a separate
segment.
Rescue packaged accounts
Our contract with NatWest Group ended in December
2022 and is due to run off by the end of 2023, albeit that
claims may run off over a longer period. This partnership
represented around 1.1 million in-force policies.
Travel packaged accounts
Our partnerships with NatWest Group and Nationwide
Building Society are due to expire in 2024 and are expected
to run off in early 2025. Together, these travel partnerships
represent around 2.2 million in-force policies.
Underwriting
Gross written premium was £124.4 million (2021: £98.9
million). The operating loss relating to run-off partnerships
in 2022 was £11.5 million (2021: £8.5 million).
Notes:
1. Ongoing operations – See glossary on pages 251 to 253 for definitions and appendix A – Alternative performance measures on pages 254 to
257 for reconciliation to financial statement line items.
48
Direct Line Group Annual Report and Accounts 2022
Non-financial information
statement
This non-financial information statement highlights information necessary for an understanding of the Company’s
development, performance, position and impact of its activity, information relating to environmental, employee, social,
respect for human rights, anti-corruption and anti-bribery matters.
Where possible, the following table states where additional information can be found that supports the requirements
of sections 414CA and 414CB of the Companies Act 2006.
Reporting
Requirement
Annual Report
and Accounts
Environment
Sustainability
Task Force on Climate-related
Financial Disclosures
Page
references
Relevant policies, statements and codes
available at directlinegroup.co.uk
50 to 71
72 to 85
Environment Statement
Streamlined Energy and Carbon Reporting 85
Anti-bribery and
anti-corruption
Financial crime and anti-bribery
and corruption
Ethical Code for Suppliers
Employees
People
Business model
Brilliant for customers every day
Strategy
Business model
Operating review
Market overview
Society
Community fund
Social and
community
matters
122
127
55 to 59
1 to 9
10 to 11
12 to 13
Prevention of Financial Crime Policy
Code of Business Conduct
Ethical Code for Suppliers
Whistleblowing Policy
Flexible Working Policy
Health & Safety Policy
Prompt Payment Code
Responsible Investment Policy
Underwriting Standards
40 to 48
Tax Policy
20 to 21
60 to 63
62 to 63
Human rights
Human rights and modern slavery
61 and 127
KPIs
Our key performance indicators
Risk
management
Risk management
Principal risks and uncertainties
Emerging risks
22 to 23
86 to 91
88 to 90
91
Board Diversity Policy
Data Privacy Policy
Corporate Website Privacy Notice
Human Rights, Diversity and Inclusion
Policy
Modern Slavery Statement
Risk Behaviours and Attitudes
www.directlinegroup.co.uk
49
Strategic reportGovernanceFinancial statements Sustainability
Building a
sustainable
future
We stand for insurance
excellence because
positive customer
outcomes mean we
can grow our business
We stand for being a
diverse and inclusive
employer because
attracting and retaining
talented people powers
our business forward
We stand for being
rooted in our communities
because when they flourish
so does our business
We stand for a greener
planet because we’re
all in it together, it’s our
responsibility, and tackling
climate change benefits
our business, our people
and society
We stand for a
competitive and strong
financial services sector
because it’s essential to
being successful
ust o m e r s
C
Pe
o
p
l
e
G
o
v
e
r
n
a
n
c
e
Plan e t
y
t
e
ci
o
S
50
Direct Line Group Annual Report and Accounts 2022
In 2022, we continued to put in place sustainable initiatives to strengthen the business, whether it’s
being brilliant for customers, being an inclusive employer, giving back to our communities, protecting
the planet or maintaining high standards of governance. The wheel on the previous page highlights
how our five pillar Sustainability Strategy aligns to the United Nations Sustainable Development
Goals (“SDGs”) and the table below shows material issues which take into account our broad range
of stakeholders.
Goals
Material issues
2022 outcomes
Earn our
customers’ trust by
demonstrating how
we are acting in
their interests
– Deliver great service
– Communicate clearly and openly
– Protect customers’ data
– Harness data and technology
– Innovate sustainable products and services
All of our front-line
staff of more than 5,000
received vulnerable
customer training
which was nominated
for a Learning
and Performance
Institute award
More than
5,000
Encourage a
culture that
celebrates
difference
and empowers
people so that
they can thrive
– Develop a diverse and inclusive workforce
– Uphold good labour standards
– Support employee wellbeing
– Maximise employee engagement
– Train and develop our people
Ranked 20th on the
Inclusive Top 50 UK
Employers List
Use our expertise to
improve outcomes
for society and
the communities
we serve
– Improve social mobility
– Increase road safety
– Drive financial inclusion
– Contribute to local economic development
Through our
Community Fund
we engaged with
500 students to help
younger people with
their careers
500
Protect our
business from the
impact of climate
change and give
back more to
the planet than
we take out
Look to the
long term for our
stakeholders, build
a reputation for
high standards of
business conduct
and develop
a sustainable
business
– Reduce our climate change impact
– Reduce waste and optimise resources
– Advance the low-carbon transition
– Adapt to climate change
The Science Based
Targets initiative
approved our carbon-
reduction plans
– Control executive pay
– Build strong Board governance
– Manage our supply chain responsibly
– Tax strategy and transparent disclosure
– Invest responsibly
We were awarded
a Fast Payer
Accreditation Award
by Good Business
Pays, recognising our
role in supporting
our suppliers
www.directlinegroup.co.uk
51
Strategic reportGovernanceFinancial statements Sustainability continued
Customers
Our mission is to earn
our customers’ trust
by demonstrating how
we are acting in their
interests
This year we’ve seen customers realise
the benefits of efficient digital-first
journeys and, during a period where cost
of living challenges have impacted so
many, we introduced and implemented
support mechanisms for those facing
economic difficulty.
52
Direct Line Group Annual Report and Accounts 2022
Net Promoter Score
We pride ourselves on our Direct Line brand NPS. While
our 2022 performance experienced a dip on previous years
due to economic headwinds creating parts, labour and
hire car supply challenges, our score remains above the
industry average.1
Net Promoter Score2
– Direct Line Brand
2018
2019
2020
2021
2022
145.6
155.0
158.0
156.0
142.0
0
40
80
120
160
Customer support
Helping our customers during the cost
of living crisis
In line with our customer-first approach, we have
introduced several measures to support those facing
financial difficulty currently and for the foreseeable future.
We are asking customers to discuss with us their needs
so we can look to offer the most appropriate support; this
may include reviewing levels of cover or considering any
alternative products.
Vulnerable customer training nomination
More than
5,000
All front-line staff have received enhanced
vulnerable customer training in 2022
Building on our CONNECT training programme used
by our consultants to support customers, we have
developed enhanced training for colleagues to
support vulnerable customers.
All 5,000 of our front-line staff have completed this training
and this programme was nominated for a Learning and
Performance Institute Award in 2023.
Notes:
1. Institute of Customer Services organisation ranking score.
2. Please see Net Promoter Score KPI on page 23 for
further information.
Churchill Essentials product
This year we launched a new Essentials motor
product using our Churchill brand. Available only
on price comparison websites, the product has been
designed to meet the needs of customers looking
for a comprehensive product, but does not include
certain elements such as new car replacement, loss of
keys or personal belongings that are typically part of
a standard comprehensive product. It’s an alternative
for customers who may be looking for great value in
a stripped-back motor insurance policy.
“Working in our agile model,
a number of teams worked
collaboratively to launch our
Churchill Essentials product.”
Bhanu Shekar Gutta, Software Engineer
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Sustainability continued
Brilliant for customers
every day
Tackling fraud
We have a strong track record in identifying and dealing
with fraudulent activity, helping us deliver better outcomes
for customers. In the last five years our counter-fraud
measures have avoided £650 million being paid out
to fraudsters and we’ve been rated as the top industry
performer for personal motor fraud savings, personal
motor applications for fraud, and property application
fraud savings by the Association of British Insurers3.
Supporting rescue customers
From 2021, Green Flag enhanced its policy for actively
prioritising customers who might need immediate support,
such as lone or vulnerable travellers on the roadside at
night or families with young children. Over the course
of the year over 40,000 priority incidents were reported,
which included over 5,000 vulnerable customers. Our
drivers attended these vulnerable customers incidents in
under 49 minutes, with customers communicating with us
through the phone and on our app, where they could track
where the rescue vehicle was.
Improving the claims experience
for customers
When customers make a claim that’s when it matters
most, because we step in and support people facing
difficult moments.
That’s why we’re continuing to deliver easy digital-first
journeys to give people peace of mind. Motor customers
can now register 100% of claims types across the vast
majority of our brands and partners online. In 2023, we will
be looking to introduce the capability for motor customers
to be able to track the status of their claim online from start
to finish whether they are waiting for their car to be fixed or
waiting for a cash settlement.
Delivering an excellent motor claims experience is good for
customers and our business:
– Churchill is ranked as the leading insurance brand for
digital service and claims1.
– In Motor, over 85% of customers score us highly (8-10) on
whether they would recommend Direct Line to friends
and family2.
– Nearly 90% of motor customers score us highly
(8-10) for how easy it is to claim2.
Helping our vulnerable customers
We have developed a suite of online tools to support our
colleagues to identify and address a vulnerability when
speaking to a customer. One of these tools encompasses
a grid of vulnerabilities across headings such as life event,
financial resilience, financial capability and health. When
a customer mentions a key word, our agents can click
on the specific tile and are prompted with a number of
considerations and options on how best to interact with
them and provide the required service adjustments.
Plain Numbers
Building on our successful partnership with Plain Numbers
last year, in which we trialled their approach to reduce
technical language and clarify numbers to simplify
our communications with customers, we signed up to
a cross-industry partnership led by the Association of
British Insurers in February 2022, to further our activity and
understanding in this area and to train more colleagues
as practitioners in the Plain Numbers method.
Notes:
1. Lumivo Q2 2022.
2. Research conducted by TLF based on customer perception at end of claim.
3. Source: 2021 ABI General Insurance Fraud Benchmarking.
54
Direct Line Group Annual Report and Accounts 2022
People
Our mission is to
encourage a culture that
celebrates difference and
empowers people so that
they can thrive
Over 2022, our focus was on building
future skills, continuing to push forward
the promotion of diversity and inclusion
in the business, and engaging with our
people during the cost of living crisis.
www.directlinegroup.co.uk
55
Strategic reportGovernanceFinancial statements Sustainability continued
Building future skills
Our commitment to training people for the jobs of the future
was taken to a new level in 2022. We launched our Ignite
academies which incorporate apprenticeship programmes
to develop the vital skills needed to serve our increasingly
tech-savvy customers. 170 new apprentices are already
working across Data, Customer Service and Data, Software
Engineering, and Pricing and Underwriting, joining the 224
we already had. We also launched our Data Academy so all
colleagues can grow their data capability and learn new skills,
with over 1,000 engaging in courses, lunch and learn sessions
and using resources from the website.
Minimum salaries
While we seek to ensure a good pay proposition for all
our people, we have shown a clear focus over a number of
years on lifting the salaries for our lowest-paid colleagues.
That focus meant in April 2022 our minimum salary
rose by 6.7%, seeing pay for a 37.5 hour week rise to
£20,800 from £19,5001. During 2022, for Direct Line Group
employees, our minimum salary was 7.7% above the Living
Wage Foundation’s National Real Living Wage (as set in
November 2021 for roles outside of London) and 12.3% above
the Government’s statutory National Living Wage (effective
1 April 2022 figure for those aged 23 or over).
In August 2022, we announced a further pay increase of
5% to all our employees (excluding senior management)
from January 2023, meaning our minimum salary rose to
£21,840 p.a. (based on a 37.5hr working week). This stands
at 2.8% above the Living Wage Foundation’s National Real
Living Wage (as set in September 2022 for roles outside of
London) and will be 7.5% above the Government’s statutory
National Living Wage (effective 1 April 2023 for those aged
23 or over).
Engaging with our people
Engaging with colleagues as the key stakeholders that they
are is at the heart of how we run our business.
In addition to our Executive Committee participating
in regular “Ask Anything” sessions, both in person and
online, during which they address business performance
and issues affecting it and where any colleague can ask
a question or put forward their ideas, three of the most
important ways we engage with our people are:
1. Employee Representative Body (“ERB”) – The ERB,
which comprises colleagues from across business areas and
locations, meets regularly with the leadership of the Group,
including the CEO, to discuss issues and proposals which
have, or may have, an impact on colleagues.
2. DiaLoGue – DiaLoGue is our employee engagement
tool that we use to survey all colleagues three times a year.
Findings provide both a snapshot and trends not only of
all-colleague opinion but also findings for specific teams,
allowing solutions to be tailored to specific needs. Response
to these surveys is consistently high (over 80%).
Note:
1. Subject to satisfactory performance and excluding apprentices in DLG Auto Services who receive different rates of pay.
Examples of engagement with our people having resulted in business action include:
Issue raised
Action Taken
Cost of
living
We talked with our ERB to get
their insight on how our people
are being affected and how best
to make a meaningful difference.
Menopause Our Diversity Network Alliance
(“DNA”) strands raised the
challenges that women can
face having open conversations
and accessing support when
perimenopausal or menopausal.
Boosting the pay of lowest paid: In April we boosted the pay of our
lowest-paid colleagues, increasing the minimum salary by 6.7% to £20,800.
Earlier pay increase and one off payment
In the summer we announced a 5% pay increase for all our people with
effect from 1 January 2023, meaning colleagues received the increase
three months earlier than usual and in January 2023 a one-off cost of living
payment of £1,000 was announced for colleagues in salary bands 1 and 2
and those in other bands earning less than £40,000.
Increased visibility of help available
We promoted the broader financial support available to our people
including emergency support, everyday budgeting, and planning.
New guidance, training and internal awareness building
Our DNA strands worked with HR and The Menopause Charity to launch
new guidance on perimenopause, menopause and andropause. It
provides people managers with help on how to have good conversations
and practical information on effective workplace adjustments. This has
been embedded with training for people leaders and our HR Advisory
team, alongside internal communications activity to broaden knowledge
and end stigma.
New
London
hub
We discussed the proposed 2023
move from our site in Bromley to a
new location near London Bridge
with our ERB, DNA strands and
with individual colleagues via their
people leaders to identify both the
broad implications and the issues
for specific colleagues.
Travel assistance policy
We agreed a revised Travel Assistance Policy to help colleagues with any
increased travel costs for a period of one year.
Inclusive spaces
The different needs of colleagues have been incorporated into the design
of the new office, for example a quiet room, multi-faith prayer room and
nursing room.
56
Direct Line Group Annual Report and Accounts 2022
3. Diversity Network Alliance (DNA) – Our seven employee
networks are a key driver of diversity and inclusion across
our business. They focus on the following areas: Belief, Life
(families and carers), LGBTQ+, Neurodiversity & Disability,
REACH (race, ethnicity and cultural heritage), Social Mobility
and Thrive (gender).
Accelerating inclusion
In 2022, we developed a new Accelerating Inclusion
programme to grow the capability and skills of all our people
to be more inclusive. Over 1,000 colleagues have already
participated in the programme, which will continue over 2023.
Strength in diversity
& inclusion
We believe that improving diversity and inclusion needs
enhanced policies and practices, along with changing
mindsets and culture. Across 2022, we have continued to
address both.
Our focus on culture and behaviours builds deeper
understanding of issues, together with the commitment
to drive change, at all levels of our business.
Recruitment and promotion
Our approach to inclusive hiring aims to attract the
widest possible range of people and protect against
bias. Amongst the measures we follow, we:
– Use inclusive language analytics tools
– Remove unnecessary qualification or
experience requirements
– Use anonymised CVs for senior roles1
– Train recruiting managers on inclusive hiring
Policies and support
We want our policies and guidance to support people
to be the best they can, recognising life impacts work
and work impacts life. This year, we have updated or
introduced additional support on:
– Flexible working
– Menopause
– Anti-bullying & harassment
– Pregnancy loss
– Workplace adjustments
Reverse mentoring
This year, we concluded a year-long reverse mentoring
programme which provided senior leaders with
deep insights into the barriers faced by marginalised
communities and in turn enabled them to offer valuable
career advice and guidance.
“The Neurodiversity and
Disability network has gone
from strength to strength
this year, supporting our 350+
members with insight sessions
and a new parents network.”
Molly Welsh, Counter Fraud Intelligence Handler
and Neurodiversity & Disability Network Co-lead
Increasing the representation of women
in senior leadership
Improving the representation of women at the senior levels
of our business is ongoing but we are proud of the progress
we have made.
Note:
1. Anonymised CVs do not apply to Executive Committee and Board Roles.
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Strategic reportGovernanceFinancial statements Sustainability continued
Women in Finance
Having achieved our Women in Finance target of 30%
women in senior management1 back in 2019 we chose to
adopt an ambitious stretch target of 35% by the end of
2022. On 31 December 2022, 31.3% of our senior leadership
were women. While we missed our stretch target we
believe the process of target setting has had value and
driven our internal work to improve gender representation.
Senior women in leadership
representation %
Penny James agreed with the Board to step down as
Direct Line Group CEO in January 2023. The numbers below
reflect the representation of women in senior leadership
following this change.
Board
ExCo
ExCo-1
ExCo-2
33.3%
55.6%
44.6
40.8
Our long-term focus on investing in women means we
have strengthened representation at the most senior levels
of our business. In 2023, we will be setting our next set of
targets and our focus is on building the pipeline at the
mid-levels as we work towards gender parity.
Growing ethnic minority and Black
representation in leadership
At the end of 2020, we set ourselves a challenging deadline
of 31 December 2022 to meet our first ever set of targets
to increase ethnic minority and Black representation in
leadership. Although we missed our ethnic minority goal,
we achieved our Black representation target and we believe
the process of target setting has had value and driven our
internal work to improve representation, which is why we
will be setting new targets for this in 2023.
Pay Gap2
2022
2021
2020
Bonus Gap
2022
2021
2020
Activity we are undertaking to shift the dial includes:
– Building a stronger pipeline of ethnic minority and Black
talent, especially in areas where the jobs of the future
are, because we want to future-proof our activity. This
includes work experience, mentoring and skills building
programmes that target these communities for our
Ignite academy apprenticeship programmes.
– Investing in a new development programme focused
on supporting high-potential Black women, with diverse
role models from across sectors and a specific focus on
navigating through some of the challenges that can be
faced by Black female leaders.
Gender pay gap
Last year our mean gap widened by 3.2 percentage points
and our median gap by 6.1 percentage points. Our pay gap
continues to be low compared with the broader financial
services sector, but we want to see that gap close. We are
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 continue with our work to
address the disproportionate representation of women at
certain levels and in certain areas of our business.
Our 2022 gender pay gap showed:
Growing ethnic minority representation from
10% to 13%
% of employees receiving bonus
2022
2021
12.1
11.7
2022
2021
2020
Growing Black representation from
0.5% to 1.5%
2022
1.5
2021
0.9
Mean
Median
19.3% 20.3%
16.1%
17.2%
14.2%
15.4%
Mean
Median
46.7% 45.4%
45.9%
34.0%
47.9%
36.3%
Men Women
83.1% 82.6%
72.7%
60.6%
73.5%
62.4%
Notes:
1. Our Women in Finance Charter definition of senior management is based on our internal grading structure and represents approximately
the 1.2% most senior colleagues in our business.
2. The Gender Pay Gap shows the difference in average pay between women and men. This is different to equal pay, which is women and
men receiving the same pay for work of equal value. Our reporting is based on a snapshot date of 5 April 2022.
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Direct Line Group Annual Report and Accounts 2022
Ethnicity pay gap
This year, we are publishing our ethnicity pay gap for
the second time. We are voluntarily disclosing this data.
We have chosen to do so to hold ourselves to account
and to inform diversity and inclusion initiatives across
the business. Comparing the data of 2022 and 2021, our
mean gap decreased by 0.5 percentage points and our
median gap increased by 1.8 percentage points, with both
remaining low.
As with the gender pay gap, we are comfortable that we
don’t pay people differently because of their ethnicity and
believe that the way to reduce the gap in the medium-
to long-term is to continue with our work to address the
disproportionate representation of ethnic minority and
black colleagues at certain levels and in certain areas of
our business.
Pay Gap3
2022
2021
Bonus Gap
2022
2021
% of employees receiving bonus
2022
2021
Mean
Median
2.6%
3.1%
9.7%
7.9%
Mean
Median
40.9%
32.9%
19.1%
11.8%
White
Ethnic
minority
84.6% 74.6%
68.2%
58.6%
Our mean and median pay gaps by ethnicity
We recognise that different communities can have different
experiences, so we have further broken down the data to
understand pay gaps for our Black, Asian, Mixed and other
ethnicity colleagues versus White colleagues. It’s important
to note that when pay gap data is based on a smaller
number of individuals, it can vary significantly over time
due to colleague changes during the year.
Black
Asian
Mixed race
Other
Mean
11.2%
0.7%
0.4%
2.3%
2022
Median
11.0%
16.1%
4.9%
(6.1%)
3. The Ethnicity Pay Gap shows the difference in average pay
between ethnic minority, Black and White colleagues. This
is different to equal pay that is ethnic minority and White
colleagues receiving the same pay for work of equal value.
Our reporting is based on a snapshot date of 5 April 2022
and 87% of colleagues that have shared their ethnicity with us.
As we continue to encourage colleagues to share their ethnicity
with us, changes to disclosure will impact the numbers we report.
Gender diversity of our Board
As of 31 December 2022
40%
Women (4)
60%
Men (6)
Gender diversity of senior leadership
As of 31 December 2022
31.3%
Women (35)
68.7%
Men (77)
Gender diversity of senior leadership figures based on
2022 Women in Finance Charter reporting
Gender diversity of all employees
As of 31 December 2022
45.7%
Women (4,289)
54.3%
Men (5,106)
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
As of 31 December 2022
10.8%
Asian (963)
2.8%
Black (251)
1.8%
Mixed (157)
2.9%
Other (253)
74.2%
White (6,590)
7.5%
Prefer not say
(668)
Excludes 5.9% of colleagues who have not submitted an
option for ethnicity
For more information on leadership gender diversity,
including gender diversity of the Board see pages 99
and 100.
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Society
Our mission is to use
our expertise to improve
outcomes for society
and the communities
we serve
This year, we were excited to take the
next step in our social mobility journey,
focusing our Community Fund on the
aim of building a more inclusive and
equitable Britain. We additionally looked
to provide support to those in need at
home and abroad, with our colleague-
led donations for charitable causes
around the UK, and contributions made
to the Disasters Emergency Committee
efforts in Ukraine and Pakistan.
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Direct Line Group Annual Report and Accounts 2022
Giving back
Over the course of the year, we supported a variety of charitable causes. This included:
– Donating £150,000 in total to the Disasters Emergency Committee campaigns in Ukraine and Pakistan
– Our colleague-led Community and Social Committees (“CASCs”) distributing £100,000 to local causes
– Sponsoring the NSPCC’s Great Chefs dinner, which raised almost £300,000 to help children around the UK
– Our Diversity Network Alliance giving £90,000 to organisations aligned with their diversity and inclusion goals
Road safety
Our campaigning for improved road safety continued, working in partnership with the Parliamentary Advisory Council on
Transport Safety (“PACTS”). An updated report1 was published in 2022 which set out actions to increase seat belt wearing
rates in the UK and save preventable loss of life on roads. The report highlighted that wearing a seat belt reduced the risk
of death for drivers in a road collision by some 50%.
Prompt payment code
As a responsible business, we are a longstanding signatory of the Department for Business, Energy and Industrial Strategy’s
Prompt Payment Code, a voluntary code of practice for businesses to ensure payments are made to suppliers on time.
During the last year, when cost of living challenges were significant and the importance of swift payments were even more
recognised, we were awarded a Fast Payer Accreditation Award by Good Business Pays, recognising our role in supporting
our suppliers, big and small.
Human rights
Our aim is to be a force for good and we want to build a reputation for being an ethical business which drives our
commitment to have employment practices and policies that exceed 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.
Our 2022 tax
contribution
We act in accordance with
all applicable tax laws and
regulations and meet our
responsibilities both as a
contributor of corporate taxes
and as a collector of taxes on
behalf of HMRC. In 2022, the
Group’s net tax contribution
was £803.9 million, which
includes the Group’s direct
and indirect taxation.
Our
customers
IPT
Our suppliers VAT
Our people
PAYE NIC
Our
operations
Other taxes
including
business rates
£389.4m
£14.8m
£102.4m
£5.9m
Irrecoverable VAT
£256.4m
Employers NIC
Corporation Tax
£44.8m
£(9.8)m
Our
performance2
HM Treasury
£803.9m3
Net tax contribution
Society
– Public services
– Healthcare
– Infrastructure
– Welfare
– Education
– Defence
Notes:
1. Source: https://www.pacts.org.uk/pacts-briefing-seat-belts-time-for-action/
2. The Group made a loss before tax of £45.1 million, resulting in a corporation tax credit of £5.6 million.
3. The Group’s total tax contribution in 2022, including direct and indirect tax contributions.
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Sustainability continued
Community Fund 2022
Since the start of 2020, our Community Fund has helped over 300
charitable causes, supporting over 200,000 families and individuals facing
adversity, mental health challenges and food poverty. Building on these
achievements, and with so many of our colleagues feeling passionately
about social mobility, we were delighted to focus our Community Fund in
2022 with a new ambition: to build a more inclusive and equitable Britain.
Partnering with three organisations, Envision, Springpod and Young
Professionals, we have launched a programme of engagement, to use
our expertise across the business to help equip younger people with
key career skills.
Work experience
In-person and virtual events
focusing on employability
skills and workshops on
data and technology were
held, giving participants the
opportunity to learn about
important career skills
“It was fantastic to mentor students with
our Community Fund and give back
to younger people starting
on their career journeys.”
Timon Pryce, Principal Pricing
Analyst Developer
Mentoring
Highlighting the variety of
roles on offer at Direct Line
Group, colleagues from
Finance to Technology to
Marketing gave students
an insight into what their
day to day job entailed
100%
were eligible for free
school meals
58%
identified having a
parent/parents from a
working-class occupation
Insight events
Hosted across several office
sites across the country,
sessions on topics such as
how an insurance company
works, building a sustainable
business, and how to run
a marketing campaign
took place
Reach
of the programme
500
students engaged to
improve employment
skills
85%
were from an ethnic
minority background
150+
colleagues signed up to
be a mentor, participate
in work experience or
attend an insight event
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Direct Line Group Annual Report and Accounts 2022
Impact
after taking part in the programme
93%
felt they understood how an
insurance company operates
83%
felt more able to ask someone
for a connection to build their
professional network
74%
felt more confident to apply
for jobs
To measure the impact of the programme,
students were asked to complete a survey
prior to, and after, participating in a
Community Fund activity. A few of
the key stats are highlighted above.
In 2023, the programme will continue with the
aim of engaging with more students to help
build a more inclusive and equitable Britain.
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Sustainability continued
Planet
Our mission is to protect
our business from the
impact of climate change
and give back more
to the planet than we
take out
We believe in supporting customers
to make the transition to a low carbon
world, climate risk mitigation, and
in playing our part in reducing our
carbon footprint.
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Direct Line Group Annual Report and Accounts 2022
The business also prioritises the following Strategic
Management Actions:
– Electric vehicles – improving our capability 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.
There are three steps which guide our approach:
Step 1
Disclose to track progress
We disclose our carbon emissions because it’s how we
hold ourselves to account and helps us to find practical
solutions to reduce our footprint.
We have measured and disclosed our Scope 1 and 2
emissions since 2013 and in recent years made it clear
how these emissions are split between our office sites
and accident repair centres. We have also expanded
the categories we report under Scope 3, including
our Supply Chain, and for the second year running,
our Homeworking emissions, recognising that more
colleagues are working from home.
Step 2
Commit to tangible actions
We signed up to Race to Zero where companies set
emission reduction targets in line with limiting global
warming to 1.5 degrees.
We have set ambitious Science-Based Targets,
approved by the Science Based Targets initiative
(“SBTi”), as we aim to become a Net Zero business by
2050. The most carbon intensive areas of our business
– our accident repair centres, supply chain and
investments – all have plans in place.
Step 3
Offset while we reduce
While we transition to Net Zero, we currently offset
emissions under our direct control by investing in
three carbon reduction projects around the world.
While we transition to Net Zero, we currently offset
our Scope 1 and 2 emissions as well as elements
of our Scope 3 emissions under our direct control
by partnering with Climate Impact Partners1,
an organisation that is dedicated to tackling
climate change and improving lives by financing,
developing and managing carbon reduction projects.
What does Net Zero mean for us?
We aim to become a Net Zero business by 2050. Our
plan covers operational emissions (Scope 1 and 2) and
our investments.
Note:
1. Previously known as ClimateCare.
www.directlinegroup.co.uk
65
Strategic reportGovernanceFinancial statements Sustainability continued
Our approved SBTi plans
We have now stepped up our ambitions. In November 2022, we were delighted to become one of the first personal lines
general insurers in the UK to have our Science-Based Targets approved by the SBTi, meaning we now have ambitious
carbon reduction plans on which we will publicly report our progress each year.
We have greater understanding of our carbon footprint. A proportion of our Scope 1 and 2 carbon emissions comes from our
offices and accident repair centres, where we have the largest insurer-owned garage network in the UK supporting motor
customers.
We have five Science-Based Targets – one target covers our operational emissions and a further four targets cover our
investment portfolio. The five Science-Based Targets approved by the SBTi and which we are targeting are:
Our Science-Based Targets
Covering
Target
How we do it
Operational
emissions
(Scope 1
and 2)
Our buildings and
garage network
Including our 22 accident
repair centres, the largest
insurer-owned network in
the UK.
1. Reduce emissions 46%
across our office estate
and accident repair
centres by 20301
– Electrifying heating and cooling systems using
renewable energy.
– Replacing diesel with hydrogenated vegetable oil in
recovery trucks.
– Removing gas consumption in spray paint booths by
moving to renewable electricity.
Investment
portfolio
(Scope 3)2
Corporate Bonds
The largest asset class in
our investment portfolio
and typically short
duration holdings.
2. Align our scope 1 + 2
– Tilt reinvestment towards companies taking serious
portfolio temperature
rating to 2.08°C by 20273,4
3. Align our scope 1, 2 + 3
portfolio temperature
rating to 2.31°C by 20273,4
action to reduce emissions.
– Work with our external investment managers to
engage with investees to encourage ambitious
emission reduction target setting.
Commercial Property
A relatively small allocation
within the investment
portfolio consisting of prime
UK commercial properties.
4. Reduce emissions
from our commercial
property portfolio
58% per square metre
by 20301,5
Real Estate Loans
A small allocation within
the investment portfolio
consisting of short
dated loans backed by
UK commercial properties.
5. Reduce emissions from
our real estate loans
portfolio 58% per square
metre by 20301,5
– For commercial property, our external asset manager
aims to improve the energy efficiency of buildings,
engage with tenants to disclose energy use data
(implementing green lease clauses where possible),
encourage tenants to set emissions reduction targets,
including Science-Based Targets.
– For real estate loans, our external managers
will encourage borrowers to improve the energy
efficiency of buildings, and to take energy efficiency
of buildings into account when originating loans, and
the ability of the borrower to share tenant energy
use data.
For more information on the five Science-Based Targets approved by the SBTi which we are targeting, see pages 84 and 85.
Taking action with our supply chain
In 2021, we launched our Supply Chain Sustainability Programme, outlining our plan between now and 2030 to engage and
influence suppliers so we can make the transition to a pathway consistent with a 1.5°C scenario. This programme includes
our Sustainable Sourcing Approach, encouraging our principal suppliers within our direct control to sign up to SBTi targets
or an equivalent. We are also 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, so we can evaluate whether it is viable to
change our sourcing approach on appropriate contracts.
We have also chosen to set an internal emissions reduction target while we wait for the publication of the Science-Based
Net Zero Targets for Financial Institutions from the SBTi, which is expected later in 2023.
Notes:
1. Compared to a 2019 baseline.
2. Covering 75% of our investment and lending activities by monetary value as of 2019.
3. Using a Temperature rating method, we’ve targeted to align our scope 1 + 2 portfolio temperature score from 2.44°C in 2019 to 2.08°C
by 2027 and our scope 1 + 2 + 3 portfolio temperature score from 2.80°C in 2019 to 2.31°C by 2027.
4. The temperature score for corporate bonds is the implied level of warming above pre-industrial levels to which our corporate bond portfolio
is aligned based on the CDP’s temperature rating methodology.
5. Commercial real estate targets were set using the SBTi sectoral decarbonisation approach for real estate which uses the IEA ETP 2017
Beyond 2°C scenario.
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Direct Line Group Annual Report and Accounts 2022
Sustainability continued
Our climate journey
so far
2013
Began measuring our
carbon footprint
Since 2013, we have made progress to reduce
our carbon footprint:
– Reduced our energy consumption by 56% since 20131
– Procured 100% renewable electricity for our operations since 2014
– Diverted 100% of our office waste from landfill
Greenhouse gas emissions (tCO2e)2,3,4
2014
Electricity for all
our offices and repair
centres purchased from
renewable sources
2016
Our first electric vehicle
charging points installed
30
25
20
15
10
5
0
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
0
0
6
1
,
7
9
6
,
1
1
7
8
1
,
0
1
2
8
9
8
,
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Energy consumption (kWh)3,4
2018
New energy efficient office
opened in Bristol
Electricity
Gas
Total
2022
2021
12,686,882
14,856,315
21,485,898
24,286,023
34,172,780
39,142,338
2020
Offset all our
direct emissions
2021
Direct Line launches its first
EV bundle for customers
2022
One of the first personal
lines insurers in the UK
to have its Science-Based
Targets approved by
the SBTi
Supporting electric vehicle customers
Last year, our Direct Line brand launched a ‘Making electric easy’
campaign which included a bundle of electric vehicle charging
benefits and discounts (in partnership with Zoom EV), alongside
insurance cover for batteries and charging cables for all new
business customers. Due to successful uptake, the bundle was
extended for another year and made available to all Direct Line
Motor customers, as well as broadened to include a discounted
home charger by Zaptec and wider access to an EV help and
guidance line (run by Zoom EV).
Notes:
1. Reduction in energy consumption is reported on a like-for-like basis.
2. Total Scope 1 and 2 emissions. The 2021 and 2019 figures differ from previously
reported figures, found on page 72 of the Group’s 2021 Annual Report and
Accounts, following the validation of our Science-Based Targets.
3. 100% of GHG emissions and energy consumption reported relates to
operations, all of which are based in the UK.
4. Data is reported in compliance with the Streamlined Energy and Carbon
Reporting (“SECR”) requirements (see page 85).
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Sustainability continued
Biodiversity
This year, we funded tree planting on a flood prevention
scheme in Yorkshire to replace the trees we remove when
home insurance policyholders make subsidence claims1.
Working in partnership with nature recovery charity Heal,
we also provided a loan to acquire a 460 acre site near
Bruton in Somerset to support rewilding of the land.
Energy efficiency measures2
In 2022, we continued to invest in energy efficiency
measures and focus on the most carbon-intensive areas of
the business which will help us work towards meeting our
Science-Based Targets.
Building on last year’s activity, we have:
– Rolled out our hydrogenated vegetable oil (“HVO”) trial in
our recovery trucks to 90% of our Auto Services sites. This
has saved 543 tCO2e in 2022.
– Fitted energy-saving LED lighting to a further six repair
centres meaning nearly 70% of our Auto Services sites
have now received these upgrades.
– Installed a Power Factor Corrector in our Birmingham
Auto Services site to maximise the efficiency of our
electrical supply on-site. In 2021, installation at our
Crawley repair centre delivered a 13% improvement
in energy efficiency.
“I’m proud to be part of a team
that helped us to receive validated
Science-Based Targets. Part of our
plan involves replacing
diesel in our trucks
with sustainable,
hydrogenated
vegetable oil.”
Carrie Loftus,
Sustainability
Programme Manager
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 are 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 equivalent to or higher than
that of the ESG-weighted reference index each portfolio
is managed against.
We have set ourselves the target of achieving net zero
emissions from the investment portfolio by 2050 as part
of our alignment with the Race to Zero campaign on
climate change. During 2022, we achieved an important
milestone on this journey by having our Science-Based
Targets approved.
In addition, we are keeping our target of reducing the
GHG emissions intensity of our corporate bond portfolio
by 50% by 2030 versus a 2020 baseline as a backward-
looking indicator, to make sure emissions are reducing
at the required pace over time to achieve our long term
net zero goal.
We also require the below exclusions and preferences:
– The exclusion of any companies with a MSCI
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 revenues.
– Managers instructed to prefer investments in green
bonds where the risk return characteristics are similar
to conventional bonds.
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 in the table on page 69
relate to our 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 85 for
more information).
Notes:
1. Yorkshire Flood Alleviation Scheme at Broughton Hall Estate as part of a rewilding project to help grow the White Rose Forest.
2. Data is reported in compliance with the SECR requirements (see page 85).
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Direct Line Group Annual Report and Accounts 2022
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.
Scope 1
Office sites1
Auto Services1,2
Total (tCO2e)1,2
Scope 2
Office sites
Auto Services
Total (tCO2e)
Total Scope 1&2 (tCO2e)1,2
Of which: office sites (tCO2e)1
Of which: Auto Services (tCO2e)1,2
Scope 3 emissions under our direct control
Fuel and energy-related activities1
Waste generated in operations1,2
Business travel – air travel
Business travel – hotel night stays
Business travel – rail
Employee commuting1,4,5
Of which: homeworking emissions5
Upstream leased assets1,6
Upstream transportation and distribution
of auctioned vehicles1
Downstream leased assets7
Total (tCO2e)1,2
Total emissions under our direct control (tCO2e)1,2,8
Scope 3 – supply chain
Total procured goods and services (tCO2e)1,2,9
Direct Line Group carbon footprint
(operational control)
2022
1,023
5,506
6,529
2021
1,220
5,812
7,032
2020
1,339
6,472
7,811
2019 baseline
1,418
7,981
9,399
Location-
Based3
Market-
Based3
Location-
Based3
Market-
Based3
Location-
Based3
Market-
Based3
Location-
Based3
Market-
Based3
1,089
1,364
0
0
1,372
1,783
0
0
2,176
1,710
0
0
4,516
2,093
0
0
2,453
8,982
2,112
6,870
1,518
2,523
195
120
160
7,227
5,583
189
1,890
1,552
15,374
24,356
3,155
10,187
2,592
7,595
2,586
1,990
28
34
29
5,962
5,501
110
655
964
12,358
22,545
3,886
11,697
3,515
8,182
2,332
413
198
75
63
1,450
–
63
625
–
5,219
16,916
6,609
16,008
5,934
10,074
2,459
3,358
928
469
410
3,176
–
514
4,173
–
15,487
31,495
244,316
268,696
144,114
294,080
Total (tCO2e)1,2,8
Of which: under our direct control1,2,8
268,672
24,356
291,241
22,545
161,030
16,916
325,575
31,495
Notes:
1. The 2019 reported baseline differs from our previously reported baseline, found on page 72 of the Group’s 2021 Annual Report and Accounts,
following the validation of our Science-Based Targets.
2. The 2021 reported figures differ from our previously reported figures, found on page 72 of the Group’s 2021 Annual Report and Accounts,
following the validation of our Science-Based Targets.
3. Figures for Scope 2 use standard location-based methodology. We follow GHG Protocol to disclose both location and market-based figures;
and as we have secured our energy from 100% renewable sources since 2014, our Scope 2 market-based results are nil.
4. Employee commuting is based on estimated UK national averages, not actual individual methods of transport of Direct Line Group
employees commuting.
5. Homeworking emissions are reported under the Employee Category in line with GHG Protocol.
6. Upstream leased assets refer to (1) leased office space locations where Direct Line Group does not directly control the energy provision as
it is included in the service agreement, (2) Auto Services pods in retail car park locations and (3) Auto Services courtesy cars emissions.
7. Includes Auto Services’ courtesy cars emissions which were previously reported under Scope 1. 2021 data represented accordingly.
8. Total of Scope 1 and 2 emissions and Scope 3 emissions under our direct control.
9. In accordance with the GHG Protocol under which we report, the following are excluded from the total: operational control activities already
detailed under ‘Scope 3 emissions under our direct control’; cash payments to customers or other insurance companies/legal firms as
compensation; 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 reinsurance costs to third-party reinsurers as this is a financing transaction.
www.directlinegroup.co.uk
69
Strategic reportGovernanceFinancial statements Sustainability continued
Reporting methodology
Offsetting projects
From 2020 to 2023, we pledged support to three projects
which deliver high social impact benefits to communities,
families and the environment. During the last year, progress
has been made in all these initiatives with our support
contributing to:
– The manufacturing and distribution of water filters,
helping to provide safe drinking water to communities
and schools across Kenya. The project also reduces the
need for people to boil water to make it safe to drink,
which requires the burning of unsustainable energy
sources such as wood or charcoal.
– The production and distribution of ‘Bondhu Chula’,
a clean cookstove designed for an efficient burn to
reduce fuel use, helping to support higher air quality.
– The creation and protection of a 120,000-hectare
conservation reserve in Brazil, aiming to reduce
deforestation and assisting with employment
opportunities for local communities in forest
conservation and monitoring.
We comply with the applicable greenhouse gas reporting
requirements contained within Schedule 7, Part 7 of the
Large and Medium-sized Companies and Groups (Accounts
and Reports) Regulations 2008 (as amended) and apply
the GHG Protocol Corporate Accounting and Reporting
Standard (revised edition) to calculate our emissions, which
includes emissions associated with electricity consumption.
We use the operational control method to define the
boundary for consolidating GHG emissions.
Our carbon emissions are calculated by an external third
party and reviewed internally. The calculation method
used for our 2022 emissions reporting remains consistent
with prior periods and with the reporting standards
stated above. For the year ended 31 December 2022, we
received independent assurance for our Scope 1 and 2
emissions reporting.
Intensity metric
We monitor and report the intensity metric of emissions1
per £ million annually of net earned premium and in
2022 we expanded our reporting to include a measure
of emissions1 per average number of employees2. These
measure how efficiently we provide our insurance products
and allow us to compare our performance year-on-year and
against other insurance companies.
Year
2022
20213
2020
20193,4
2018
2017
2016
2015
2014
2013
GHG emissions (tCO2e)
per £ million of net earned
premium
GHG emissions (tCO2e)
per average number of
employees for the year2
3.0
3.4
4.0
5.4
5.4
5.5
6.4
7.7
9.1
9.5
0.9
1.0
1.1
1.4
1.5
1.6
1.8
2.1
2.4
2.4
Notes:
1. Scope 1 and 2 emissions.
2. 2022 and 2021 average number of employees for the year available on page 217.
3. The 2021 result of 3.4 and the 2019 result of 5.4 differ from the previously reported results on page 73 of the Group’s 2021 Annual Report and
Accounts, following the validation of our Science-Based Targets (also see footnote 1 and 2 on page 69).
4. 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.
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Direct Line Group Annual Report and Accounts 2022
External ratings, memberships
and benchmarks
We actively support a variety of membership organisations, and disclose information to ratings and benchmarking
authorities, as well as receive ESG performance ratings.
MCSI
We maintained an ‘AA’ rating for activity in 2022
Sustainalytics
As of October 2022, we received an ESG Risk Rating1 of 18.2 and were assessed by Sustainalytics2
to be at a low level of risk
Ecovadis
We were awarded a Silver medal in 2022
Carbon Disclosure Project
We achieved a C rating, ahead of our Science-Based Targets being approved
Science-Based Targets
We became one of the first personal lines insurers in the UK to have carbon reduction plans
approved by the SBTi
Race to Zero
As a Race to Zero pledge, we’ve signed the Business Ambition for 1.5°C future aligning with our
Science-Based Targets being approved this year
Get Nature Positive
We are a supporter of the Get Nature Positive campaign, focused on restoring nature
and biodiversity
Social Mobility Pledge
We support the Social Mobility Pledge and have focused on helping students with their careers
through our Community Fund
Women in Finance
We are a signatory to HM Treasury’s Women in Finance Charter
Race at Work Charter
We support the Race at Work charter to take positive action towards supporting ethnic minority
representation and inclusion
The Faith & Belief Forum
We are a signatory of 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
Notes:
1. Assessed to be at a low level of risk of experiencing material financial impacts from ESG factors.
2. Copyright © 2022 Morningstar Sustainalytics. All rights reserved. This section contains information developed by Sustainalytics
(www.sustainalytics.com). Such information and data are proprietary of Sustainalytics and/or its third-party suppliers (Third Party Data)
and are provided for informational purposes only. They do not constitute an endorsement of any product or project, nor an investment
advice and are not warranted to be complete, timely, accurate or suitable for a particular purpose. Their use is subject to conditions
available at https://www.sustainalytics.com/legal-disclaimers
www.directlinegroup.co.uk
71
Strategic reportGovernanceFinancial statements Task Force on Climate-related
Financial Disclosures
Introduction
Our 2022 disclosure against the recommendations of
the Task Force on Climate-related Financial Disclosures
(“TCFD”) reports on our progress to date and outlines the
actions we are taking to strengthen our strategic response
to climate change.
The Group, as at the time of publication, has complied
with the requirements of Listing Rule 9.8.6R by including
climate-related financial disclosures consistent with 9
of the 11 TCFD Recommendations and Recommended
Disclosures for all sectors including the supplemental
guidance for insurance companies. The Group has reported
against all 11 recommended disclosures and believes its
disclosure against 9 of the 11 recommendations meets
the objectives of the TCFD framework, with the two
outstanding recommendations explained below.
For metrics and targets disclosure recommendations
(a) and (b) of the TCFD framework, we aim to explore
further how we strengthen alignment to the following
specific components of these recommendations in future
reporting. We aim to:
– explore how we incorporate additional metrics within
our disclosure, including cross-industry metrics as
recommended by the TCFD, to support measurement
and management of transition risks and opportunities;
– assess disclosure of the extent to which our insurance
underwriting activities, where relevant, are aligned with
a well below 2°C scenario; and
– assess disclosure, where data and methodologies allow,
the weighted average carbon intensity or GHG emissions
associated with commercial property and specialty lines
of business.
Governance
Our approach
The Group’s approach to the governance of its sustainability
strategy is underpinned by our Vision and Purpose (see page
10) 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 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:
– Each year, the Board assesses the strategic plan (the
“Plan”) in conjunction with the Group’s Own Risk and
Solvency Assessment (“ORSA”), which considers material
risks to the Plan, including climate change-related risks.
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Direct Line Group Annual Report and Accounts 2022
Highlights in the year
– Received approval of our carbon reduction plans,
confirming that our emissions reduction targets
are in line with a 1.5°C pathway, making us one
of the first personal lines general insurers in the
UK to gain approval by the Science Based Targets
initiative (“SBTi”).
– Expanded our electric vehicle insurance
package, which is now offered to all Direct Line
Motor customers to support the transition to a
low-carbon economy and make it easier for
customers to insure electric vehicles.
– Incorporated a climate-related measure in
our LTIP, which now includes a measure of
performance against our approved science-based
emissions reduction targets.
– 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, including the establishment
and monitoring of Science-Based Targets and the
Group’s participation in the Bank of England’s
Climate Biennial Exploratory Scenario (“CBES”).
The Chair of each Committee reports to the
Board after each Committee meeting.
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 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
at least twice a year. The Committee played a key
role in reviewing and challenging the actions and
responses to the Bank of England’s CBES exercise.
– The Investment Committee meets a minimum of three
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 two times a year, monitoring the
Board’s overall structure, size, composition and balance
of skills. This Committee is also responsible for monitoring
the Group’s observance of corporate governance
best practice.
– The Sustainability Committee scrutinises progress
against the sustainability strategy to ensure that we
continue to make progress under our Customer, People,
Society, Planet and Governance pillars. The Committee
meets a minimum of four times a year and has overseen:
the setting of the Group’s Science-Based Targets;
activity undertaken by the Group to move towards
becoming a net zero business; and Group involvement
in climate debates, including the ABI’s Climate Change
Roadmap, the Partnership for Accounting Financials’
methodology for underwriting emissions disclosures
and the Sustainable Markets Initiative Insurance Task
Force. During the year, the Committee has discussed
prominent public policy challenges such as flooding and
accelerating the transition to electric vehicles. From 2023,
the Committee will also receive biannual updates on the
Group’s performance against its science-based emissions
reduction targets, following their approval by the
SBTi in 2022.
– The Remuneration Committee meets a minimum
of four times a year and considers how executive
remuneration can be used to drive progress on climate
related matters. It has introduced an emissions measure
in our LTIP based on the greenhouse gas reduction
targets approved by the SBTi.
More information on the structure of the Board and
Board Committees can be found within the Corporate
Governance report on page 110.
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 matters:
– the acting CEO has overall responsibility for climate
change and environmental matters;
– the CRO is responsible for overseeing the management
of climate change-related 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 financial 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 CRO and the Director of Investment and
Capital Management 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, in the year, 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:
– monitoring and driving performance against the Group’s
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.
Note:
1. Ongoing operations – see footnote 1 on page 25.
Further information relating to our risk identification process
and the processes by which management are informed
about climate-related issues can be found on page 81.
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.
Group Audit are represented at the Climate Executive
Steering Group.
Strategy
Climate change has far-reaching implications for economies
and societies around the world. The physical and economic
impacts that could result from further global warming may
be significant and the extent of these impacts is dependent
on the action taken to tackle climate change.
As a major UK insurer with over 9.6 million in-force
policies from ongoing operations1 we have a role to play
in supporting the transition to a low carbon economy and
we know that through our actions as a business we can
contribute to climate risk mitigation.
The following pages examine the potential impacts of
climate change on our business, in line with the TCFD
recommendations, and outline the actions we are taking
to strengthen our strategic response to one of the biggest
challenges facing the world today.
Climate change risks and opportunities
The potential impacts of climate change on organisations
are classified into the following three categories by the TCFD:
– physical risks – resulting from the physical effects
of climate change;
– transition risks – resulting from the transition
to a lower-carbon economy; and
– opportunities – arising from efforts to mitigate and
adapt to climate change.
We also recognise that litigation risks, which includes risks
arising when parties who have suffered losses from climate
change seek to recover them from those they believe may
have been responsible, could also cause adverse impact.
This could include direct climate-related litigation against
the Group or insurance risk arising from the underwriting
of liability products, for example. The Group considers the
risks associated with this to be low due to low exposure in
high-risk industry sectors.
Materiality
We recognise that assessing and quantifying the level of
impact from climate change is an emerging practice.
A greater level of estimation and assumption is required
to address the long-term and forward-looking nature
of climate-related risks and opportunities, which causes
limitations in assessing materiality. Our intention is
to explore further how we can enhance our approach
to materiality, in the context of climate change, with
more certainty.
More information on our current approach to measuring
the impact of climate-related risk, and the integration of
climate change in the Group’s overall risk management
processes, can be found on pages 74 and 81.
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Strategic reportGovernanceFinancial statements Task Force on Climate-related Financial Disclosures continued
Defining the short-, medium- and long-term
time horizons
Short
1 – 10 years
Medium
10 – 30 years
Long
30 years +
Our approach to defining the time horizons associated
with climate-related risks and opportunities is to align closely
with the scenarios considered in the Group’s quantitative
analysis of climate-related risk, which typically considers
scenarios that span thirty years or longer (see page 75).
When defining the time horizons, the useful life of assets
was considered. However, the Group’s assets are primarily
depreciated or amortised over a period of up to 10 years. As
such, from a climate-related risk perspective, this falls into
our short-term time horizon and therefore climate-related
risk is not a significant input into determining asset useful
economic lives.
The time horizons over which specific climate-related
issues will manifest themselves vary significantly. However,
in general, transition risks are likely to materialise more
rapidly than physical risks, which are likely to be gradual and
materialise over the longer term. The timing of climate-related
litigation risk is less certain due to the nature of the exposure.
The key physical and transition risks and opportunities that
could significantly impact the Group, as well as the time
horizons over which they could manifest, is available further
into our disclosure, see pages 78 to 81.
Financial planning, performance and position
Without appropriate management, the risks posed by
climate change could adversely impact the Group’s
financial performance and financial position.
To help quantify the potential impact of climate change we:
– perform scenario analysis, which enhances our
understanding of the financial risks associated with the
longer-term impacts of climate change and provides an
indication of strategic resilience (see pages 75 to 77);
– undertake climate risk modelling to assess the most
predominant physical drivers of risk in our property
insurance products, enabling us to evaluate the potential
impact to the Group’s capital position (see page 82); and
– integrate climate risk into the Group’s overall approach
to risk management. This includes measuring the relative
significance of climate-related risks to other risks in the
Group Risk Taxonomy (see page 81).
Financial planning
We have identified that limitations exist in aligning
climate change and financial planning. A key issue relates
to the modelling of climate change impact, which typically
extends out to thirty or more years, a significantly longer
period than our current financial plan.
Although limitations and uncertainties associated with
the longer-term impacts of climate change exist, the
prominence of climate-related considerations in our
most recent planning continued to grow.
The Group’s Plan reflects the strategic planning that is
ongoing across the business and therefore covers any climate-
related initiatives that are embedded within. These include:
– sustainability-related projects, such as the actions
we are taking to reduce the carbon footprint of our
accident repair centres and investment portfolio and the
associated costs. More information on these actions can
be found on page 80 and 81;
– the use of reinsurance in our property insurance business,
acknowledging that the cost to obtain catastrophe
reinsurance could be impacted by an increase in the
frequency and severity of major weather events;
– development of propositions and channel expertise to
support the transition to a low carbon economy, such
as our electric vehicle offer, which is now available to
all Direct Line Motor customers; and
– the reduction of our office footprint, seen, for example,
through our planned move from our office site in
Bromley to a smaller Central London hub in 2023.
We also monitor losses from major weather events, which
include inland and coastal flooding, storm surge, freeze
events and subsidence. We use sophisticated modelling
techniques to determine the expected losses from major
weather events in our Home and Commercial property
book to set a weather load for budgeting purposes. The
impact of major weather relative to this load for 2022 and
prior years can be found on page 83.
Financial performance and position
In preparing the financial statements, the Group has
assessed the impact of climate change. While the risks
associated with climate change remain uncertain looking
forwards, the impact of major weather events is reflected
in the Group’s historical performance and position as at 31
December 2022. The potential impact of climate change on
insurance risk is also discussed in further detail within note
3 to the consolidated financial statements (see page 200).
Areas of physical and transition risks the Group could
be exposed to are outlined in the table on page 78.
The financial impact of these risks can, if realised,
be grouped broadly into the following:
– Adverse impacts to revenue and market share due to
a failure to understand the scale of change in market
demand for products and services due to climate-related
policy, technology and consumer preference.
– Increased climate-related operating costs and capital
expenditure due to the investments we make to reduce
our carbon footprint and to progress towards our
long-term emission reduction commitments.
– Changes in the value of our financial investments due
to the influence of physical and transition risk impacting
the wider economy.
– An increase in the frequency and severity of natural
catastrophes and other weather-related events adversely
impacting insurance liabilities.
We also recognise that our access to capital can be
materially affected by factors including, but not limited to,
financial performance and investment decisions, which
have their own associated climate-related risks. In addition,
our performance is assessed externally by ESG rating
agencies, to which investors and other stakeholders are
giving increasing prominence. Adverse impacts to our debt
rating could negatively affect cost and access to sources of
debt finance and subsequent interest rates.
74
Direct Line Group Annual Report and Accounts 2022
In our approach to acquisitions and divestments, any
climate-related risks and opportunities are expected
to form part of our usual due diligence process.
Scenario analysis
Our most recent scenario analysis activity took place during
2021, followed by a smaller round of analysis in early 2022.
The analysis was designed to enhance our management
of climate-related financial risk and the scenarios used
expanded on the Network for Greening the Financial
System’s (“NGFS”) Net Zero 2050, Delayed Transition
and Current Policies scenarios by including additional risk
transmission channels and adding additional variables.
The exercise considered the financial impacts from these
three distinct climate scenarios at a ten- and thirty-year
time horizon, capturing a range of different combinations
of transition and physical risks. Two of the scenarios
represent routes to net zero greenhouse gas emissions
and primarily explore transition risk from climate change:
– 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
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 premiums
rise across multiple assets. An important indicator of the
level of transition risks in these scenarios is the carbon
price, reflecting that policymakers can induce the
transition by increasing the implicit cost of emissions.
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.
For each of the three scenarios, variable paths were
provided for the underlying physical and transition risks
and for mapping these risks onto macroeconomic and
financial variables:
– Physical and transition risks: pathways for climate
variables to represent the impact of climate risks
and opportunities at the global and regional level.
– Macroeconomic and financial market conditions: impact
of climate-related risks and opportunities at a global level,
and at the level of key countries, regions, and sectors –
reflecting the impacts of physical and transition variables
in each scenario. Financial market conditions reflect the
direct financial market consequences of the paths of the
macroeconomic variables.
Our analysis focused on changes in invested assets
and insurance liabilities, and the variables provided
formed the basis for the modelling. The stress assumed
an instantaneous shock, effectively bringing forward
the future climatic environment to today’s balance sheet,
with no allowance for changes in future premiums, asset
allocation, expenses, reinsurance programmes and other
future changes in business models.
The analysis was applied to the Group’s Solvency II
balance sheet as at 31 December 2020 and assumed
fixed balance sheets, premiums, exposures and
reinsurance arrangements.
Summary of results
The results show the most material impact on the Group’s
Solvency II own funds arises in the No Additional Action
Year 30 scenario, in which transition risk on the investment
portfolio dominates the overall impact. These large impacts
reflect the cumulative downward trend in asset values,
with no stabilisation effects observed (unlike the other two
scenarios) as extreme weather events increase in frequency
and intensity, and continue to affect economic growth
beyond the thirty-year horizon considered by the analysis.
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Strategic reportGovernanceFinancial statements Task Force on Climate-related Financial Disclosures continued
The No Additional Action Year 30 scenario also shows the
largest increases in insurance liabilities, in absolute terms,
which is consistent with estimated increases in Gross
Average Annual Losses (“AAL”) of around 150% for inland
flooding and around 370% for coastal flooding. This could
result in a material increase in weather load, reinsurance
costs and capital load. While the short-term nature of
the business, the ability to re-price annually and the risk
mitigation provided by reinsurance arrangements are
likely to limit the impact on general insurance liabilities,
the modelling has illustrated that the increased physical
effects of climate change could potentially result in some risks
and perils becoming either uninsurable or unaffordable.
Relative Impact – No Additional 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 most adverse financial impact was from the No
Additional Action scenario, which is set at 100% in the
graph. When compared to the total impact under the
No Additional Action scenario, the impact of the Late Action
scenario was around 54% of the value and the impact under
the Early Action scenario was around 39% of the value.
%
100
80
60
40
20
0
100
Transition scenarios
54
39
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
76
Direct Line Group Annual Report and Accounts 2022
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 80 and 84).
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 (see page 77).
Comparison of impact – insurance liabilities
and 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 graph outlines how the total impact for each scenario
(set at 100%) is split between the impact on investments
and insurance liabilities to illustrate their relative materiality.
For example, in the No Additional Action Year 10 scenario,
impacts are split broadly evenly, while in the corresponding
Year 30 scenario, the impact on investments dominates.
%
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 impact – insurance liabilities and investments
Except in the Late Action Year 10 scenario, where there is no
transition risk due to the assumed delay, in all scenarios the
impact on investments is more material than on insurance
liabilities. Additionally, insurance liabilities were considered
gross of reinsurance and, in practice, factors such as 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 (set at 100%) is further analysed by peril, for
example in the No Additional Action scenario around 60%
of the total impact is driven by inland flooding and 33% by
coastal flooding.
%
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. However,
the analysis shows that the changes to flood and storm
surge risk vary regionally. 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.
Management actions
Undertaking this analysis provided us with a framework
to identify and assess the climate-related transition and
physical risks that the business could be exposed to.
Taking into account the level of impacts that we have
observed as part of this climate-related modelling, we
identified a number of management actions that would
be effective to mitigate these risks and respond to
new opportunities.
Our Management Action Framework consists of three
broad categories based on the purpose and nature of
the action:
– Contingent Management Actions – These follow
the Group’s existing Contingent Management Actions
framework and would be deployed to mitigate the
scenario impacts, assuming these arise as instantaneous
shocks on the balance-sheet; potential action could
include restricting capital distributions, for example.
– Pre-emptive Management Actions – These have been
developed assuming that the business can observe
the scenarios unfolding in real time and begin to adapt
the business model in response to these emerging
impacts; they cover areas such as repricing, de-risking
of investments and reinsurance.
– Strategic Management Actions – These actions are
aligned to the Group’s ongoing strategic activity as part
of our contribution to the transition to a lower-carbon
economy. They include: taking action to progress against
our net zero ambitions and Science-Based Targets;
understanding how we can support in improving the
flood resilience of UK properties in flood-prone areas;
and evaluating the impact of climate change on our
underwriting footprint. Progress against these actions
is overseen by the Climate Executive Steering Group.
For further information on our Strategic Management
Actions, see page 65.
CBES second round
In early 2022, we participated in the second round of the
Bank of England’s CBES exercise. The initial CBES exercise,
that took place in 2021, was designed to test the resilience of
the UK financial system to physical and transition risk from
climate change to assist banks and insurers in enhancing
their management of climate-related financial risk.
For general insurers the second round focused on
management responses to the CBES scenarios and
resulting challenges to the business models. More
specifically, it probed how responses would change if
losses were higher; encouraged additional thinking about
dependencies and actions required by the government
and other associated stakeholders; and further explored
opportunities in the climate scenarios.
In response, the Group concluded that the climate-related
management actions identified in the initial analysis
would remain appropriate. However, the pre-emptive
management actions of repricing and reinsurance, as
well as the strategic management actions relating to flood
resilience and underwriting footprint, would be accelerated
after considering a scenario under which physical losses
from climate change were materially higher.
The second round of analysis was based on the modelling
outputs from the initial exercise, as in the short term
re-running the CBES scenarios is unlikely to produce
materially different results.
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 and explore the
sensitivity of potential impacts to key uncertainties. This
will enable the Group to make use of scenario-testing
output more effectively to further inform our strategic
approach to mitigating climate-related impacts.
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Task Force on Climate-related Financial Disclosures continued
Our strategic response
In order to ensure strategic resilience, we must manage the exposure against the potential risks from climate change and
harness opportunities from the transition to a low-carbon economy. Our strategy focuses on driving change across three
key areas of the business: our underwriting activities, which includes a focus on the operating segments that could be most
affected by climate change; our operations; and our approach to investments. These are considered in turn on pages 79 to 81.
The following table outlines key physical and transition risks and opportunities that could significantly impact these areas
as well as the time horizons over which they could manifest. Our definition of the time horizons can be found on page 74.
Category
Description
Examples of potential impact on the Group
Time horizon
Key area of impact
Physical risks
Acute – event
driven risks such
as flooding and
storm surge.
Chronic –
longer-term
shifts in climate
patterns, such
as a continued
rise in average
temperatures,
changes in, and
extreme variability
of, precipitation
and weather
patterns and
rising sea levels.
An increase in the frequency and severity of natural
catastrophes and other weather-related events could
adversely impact insurance liabilities.
Disruption to our direct operations, which could
include damage to our estate, impacting our ability
to serve customers.
S
S S M M L
Chronic risks could lead to significant changes in our
underwriting criteria to maintain risk appetite, and/or
higher costs to obtain catastrophe reinsurance to protect
us against an accumulation of claims arising from a
natural perils event.
S M M L
U
O
U
Reduced returns from investments in companies
whose operations are impacted by physical climate
risks, and real asset investments directly impacted
by physical climate risks.
S S M M L
U I
S S M
U O
Transition
risks
Risks arising from
the transition to
a lower-carbon
economy.
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 impact revenue and market share.
Opportunities
These are
categorised by
the TCFD as:
– policy and
legal risks;
– technology risks;
– market risks; and
– reputational risks.
Efforts to mitigate
and adapt to
climate change
can also produce
commercial
opportunities.
These could
allow us to
help accelerate
the transition
and continue
contributing to
a sustainable
economy.
Costs associated with the transition to a lower-carbon
economy may increase over time and the adoption of
new lower emissions technologies may be unsuccessful.
S S M
O
Insufficient progress against our net zero
ambitions could cause stakeholder concern
and reputational damage.
Reduced returns from investments in high carbon
intensity companies that are not taking action to
transition to a low carbon economy, and real asset
investments that are not compatible with the
transition to a low carbon economy.
Accelerating the speed of transition to a lower-carbon
economy by, for example, supporting the move to
greener transport solutions, particularly electric-powered
cars, allows us to develop new insights and capabilities
to help us build insurance solutions that best meet our
customers’ evolving needs.
Investment in energy-efficient features and equipment
across our office estate and accident repair centres
could save on energy consumption and operating
costs, reduce our footprint and improve operational
and resource efficiencies.
Potentially enhance risk-adjusted returns from our
investments by aligning the investment portfolio with
the transition to a low carbon economy whilst also
enhancing our reputation as a responsible investor.
Ensuring the investment portfolio is resilient against
the physical effects of climate change.
S S M M L
U U I O
S S M M L
U I
S S M
U
S S M M L
O
S S M M L
U I
Key
S Short-term
S M Medium-term
M L Long-term
U Underwriting
U I
Investments
O Operations
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Direct Line Group Annual Report and Accounts 2022
Underwriting
To date, our actions include:
Property
The physical risks from climate change are most likely to
manifest themselves as an insurance risk on our property
insurance products.
Recent weather events that we have responded to
highlight the importance of, and need for, insurance. In
December, the prolonged period of sub-zero temperatures
saw us help thousands of customers deal with burst pipes
and water tanks and other related damage. The record-
breaking temperatures experienced across the UK in Q3
led to a modest increase in subsidence claims in our Home
business, and in early 2022, we supported our Home and
Commercial customers following three significant storms:
Dudley, Eunice and Franklin.
The frequency and severity of natural catastrophes and
other weather-related events in the UK are key drivers in
the Group’s solvency capital requirements. The short-term
nature of the business we underwrite, the ability to re-price
annually, and the risk mitigation provided by reinsurance
arrangements are important factors in how we manage
our exposure.
However, acknowledging that, in general, the physical risks
from climate change are likely to intensify over the longer-
term, there remains a need to assess how this risk could
impact the Group over a significantly longer period.
To support our assessment of the potential impact on
insurance liabilities over the longer-term we undertake
scenario analysis (see pages 75 to 77). The analysis helps us
to quantify the financial implications of physical risk under
different possible future climate scenarios. The outputs
provide an indication of the Group’s resilience and aid
our strategic planning.
The outcomes of our most recent scenario analysis
provided a framework to identify and assess climate-related
risk and develop a set of contingent and pre-emptive
management actions (page 77). The analysis also supported
the development of our Strategic Management Actions
which span across business areas and include action on:
– engaging with policymakers on the importance of
flood defences in the UK to protect properties located
in flood-prone areas;
– exploring how we can help shape the thinking around
resilient repairs of properties affected by flooding; and
– further evaluating the impact of climate change on
our underwriting footprint and risk appetite.
For more information on our Strategic Management
Actions see page 65.
Motor
As one of the largest motor insurers in the UK, the
move to electric-powered vehicles is particularly pertinent.
Supported by changes in technology and policy, such as
Government plans to end the sale of new petrol and diesel
cars in the UK by 2030, the speed of transition to electric
continues to increase.
The transition to a low carbon economy presents new
challenges, but also new opportunities. As part of our
response, we are developing further insight into the future
of vehicle technology and repair, growing our data and
developing ‘green’ products to support our customers
who are already making the switch to electric.
– developing a full electric vehicle package which is offered
to all new and renewing Direct Line Motor customers
that provides access to electric vehicle essentials,
discounts off our Green Flag Shop and insurance that
covers batteries and charging cables (see page 67);
– establishing a dedicated Electric Vehicle Distribution and
Strategy team, focused on evolving the Group’s strategic
response to the electric shift; and
– entering into new strategic partnerships, such as our new
partnership with Motability Operations from September
2023, where we expect the number of electric vehicles
we insure to grow significantly over the course of the
ten-year partnership.
Operations
Operating in a sustainable way is key to minimising our
impact on the environment. Taking action to reduce our
carbon footprint is also good for the sustainability of our
business, and an important part of how we can mitigate
against potential climate risks that could cause disruption
to our operations.
Science-Based Targets
We previously disclosed our aim to achieve net zero
emissions by 2050 at the latest and to support our
ambition, we announced we were setting Science-
Based Targets.
In 2022, these targets were formally approved by
the SBTi. This significant milestone in our carbon
reduction strategy defines the path of how we reduce
our carbon emissions further and underpins how we
progress towards our ambition of becoming a net
zero business.
The targets include an operational emissions
target. This covers the Scope 1 and 2 GHG emissions
generated from our direct operations, where we are
aiming for a 46% reduction in absolute Scope 1 and 2
emissions from our office estate and accident repair
centres by 2030, from a 2019 baseline.
More information on our Science-Based Targets can
be found on page 66.
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Task Force on Climate-related Financial Disclosures continued
Although our journey to net zero emissions continues to
gain momentum, we acknowledge that it will take time to
facilitate the transition, which is why we continue to offset
the carbon emissions1 from our operations we cannot yet
avoid (see pages 65 and 70).
Investments
In recent years, we have begun integrating 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 calculate and report our GHG emissions annually.
Our most recent carbon emissions reporting can be
found on page 69 and further disclosure on the progress
we have made in reducing our footprint to date can be
found on page 84.
With a history of taking action to reduce our environmental
impact, we are well placed to drive down our emissions further.
In recent years we have taken steps to understand where
the most carbon-intensive areas of our operations are.
One area where we are prioritising our carbon reduction
activity is across our accident repair centres.
Fundamental to serving our motor insurance customers,
our 22 accident repair centres are embedding a range of
solutions as part of our carbon reduction strategy led by
colleagues in our Auto Services Sustainability Programme.
In support of our operational Science-Based Target
(see page 66), action taken this year has included:
– expanding the use of hydrogenated vegetable oil in
our accident repair centres as an alternative fuel for our
recovery trucks, resulting in 543 tonnes of CO2e saved
in 2022;
– fitting energy-saving LED lighting to a further six repair
centres meaning nearly 70% of our Auto Services sites
have now received these upgrades;
– installing a Power Factor Corrector in our Birmingham
Auto Services site to maximise the efficiency of our
electrical supply on-site. In 2021, installation at our
Crawley repair centre delivered a 13% improvement in
energy efficiency. We are exploring expanding this to
include installation at more repair centres in 2023; and
– further exploring the feasibility of moving from gas
powered paint booths to electric.
We are also reducing our office footprint which includes
moving our head office from Bromley to a newer smaller
Central London property in 2023.
Supply chain
Our Sustainable Sourcing Approach, launched in 2021,
aims to reduce the emissions in our supply chain. Our
approach means we are engaging with our largest emitting
suppliers to encourage them to sign up to SBTi targets or
an equivalent. We are also 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
so we can evaluate whether it is viable to change our
sourcing approach on appropriate contracts.
In 2022 we also set an internal emissions reduction target
(see page 66) and we report the GHG emissions from our
supply chain annually, these can be found on page 69.
We know that the impacts of potential physical and
transition climate-related 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 the long term goal of our entire investment
portfolio being net zero emissions by 2050 and in support
of our aims we continue to implement key climate
initiatives into our investment strategy. During 2022, we:
– received approval from the SBTi for our science-based
GHG emission reduction targets in our investment
portfolio (see below);
– became a signatory to the CDP’s science-based targets
campaign; a collective engagement campaign supported
by over 300 financial institutions with over $73 trillion in
assets which encourages high emitters to set science-
based emissions reduction targets; and
– continued to reduce the carbon intensity of our corporate
bond portfolio in line with our aim of a 50% reduction by
2030 from a 2020 base year.
Science-Based Targets
In support of our long-term goal of ensuring our
entire investment portfolio is net zero emissions
by 2050, in line with the aims of the Race to Zero
campaign, we set four science-based GHG emission
reduction targets in our investment portfolio.
In 2022, we received formal approval of these targets
from the SBTi. The targets cover corporate bonds,
commercial real estate and commercial real estate
loans which, as at the end of 2022, covered 63% of
AUM. More information on the targets can be found
on page 66.
The actions detailed 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.
Note:
1. Scope 1 and 2 emissions as well as elements of our Scope 3 emissions under our direct control (see page 69).
80
Direct Line Group Annual Report and Accounts 2022
Looking through the climate lens, we also have in place the
following current initiatives:
– Thermal coal screen whereby we restrict investment in
firms generating more than 5% of revenues from either
thermal coal mining or thermal coal power production
unless the company is taking positive climate action1.
– 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.
– 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 ESG targets
covering areas such as carbon, energy, water and waste.
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. This year we have
also signed up to the CDP’s science-based targets collective
engagement campaign which encourages high emitters
to set science-based emissions reduction targets.
Risk Management
Enterprise Risk Management Strategy and
Framework
The Enterprise Risk Management Strategy and 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. Further information
can be found in the Risk management section of the
Strategic report on page 87.
Risk taxonomy
The effects of climate change are wide-ranging, affecting
many risks across the risk universe. To allow for better
recognition of internal and external drivers of climate-
related risk and to provide a focal point for the reporting
of risks relating to climate change, the Strategic Risk
category has been broadened to include Climate Risk
within Environmental, Social and Governance 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 by using Financial, Customer,
Reputation and expert judgement inputs. This includes
those risks relating to climate change, including climate-
related litigation risks, 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.
We also use a variety of indicators across our product
segments to assess, monitor and manage climate-related
risks. A number of these key metrics can be found on pages
82 and 83.
Regulatory monitoring
The Group monitors and reviews relevant outputs from
the FCA, the PRA, and His Majesty’s Treasury, to consider
existing and emerging regulatory requirements.
During 2022, this included reviewing:
– the findings from the PRA’s 2021 Climate Biennial
Exploratory Scenario on financial risks from
climate change;
– the Bank of England’s letter from Sam Woods on the
PRA’s supervision of climate-related financial risk; and
– the minutes of the PRA and FCA’s joint Climate Financial
Risk Forum.
We continue to monitor future developments. 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. Updates on emerging risk and
the actions being taken to address them are presented
to the Risk Management Committee and the Board Risk
Committee regularly, supplemented by deep dives on
selected emerging risks. Each emerging risk is owned by
an Executive sponsor to help ensure alignment of how it is
managed to the strategic objectives and priorities; as well
as a senior business leader who is responsible for day-to-
day management of the risk.
Climate change is one of the Group’s most prominent
emerging risks, 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.
Both physical and transition risks could manifest
themselves through a range of existing financial and non-
financial risks, including insurance, market, operational and
strategic risks. For more information on emerging risk and
climate change see page 91.
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
81
Strategic reportGovernanceFinancial statements Task Force on Climate-related Financial Disclosures continued
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.
The following pages focus on the metrics and targets we
use across the three key areas of activity, as identified earlier
in our disclosure: our underwriting activities; our operations;
and our approach to investments.
Remuneration
We have now formally introduced a climate-related
metric for our LTIP. This incorporates a carbon
emissions measure based on our carbon emissions
reduction targets that were approved by the SBTi in
2022. More information can be found in the Directors’
Remuneration Report on page 141.
Our aim is to explore how we incorporate additional metrics,
including cross-industry metrics as recommended by
the TCFD, to support measurement and management
of transition risks and opportunities in future reporting.
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 37). 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. In 2022, claims
associated with severe weather exceeded our 2022 severe
weather assumption, which is set at 100% in the graph.
Climate risk modelling
The predominant direct physical drivers of risk to
the Group’s capital position are major UK floods and
windstorms and these are modelled together with less
material perils such as freeze and subsidence 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.
The majority of our policies renew annually and are priced
according to risk. Pricing algorithms use sophisticated
rating engines to account for recent trends and are
supplemented with views of catastrophic risk to seek
to ensure sufficient pricing. These prices will evolve
as climate change influences manifest themselves
through changing loss patterns, and views of catastrophic
risk develop because of rising sea levels, changes in
precipitation rates and urban resilience.
Risk pricing models are built using historical data
covering a multi-decadal time period for perils most
likely to be influenced by climate change. This allows us to
understand and incorporate long-term signals and past
trends into our modelling. These models benefit from
considerable amounts of internal and externally purchased
data. External data is reviewed and updated regularly,
and we maintain a relationship with data suppliers to
understand the methodologies and assumptions in their
work. Nevertheless, the underlying trends can be difficult
to measure as they emerge through infrequent one-off
catastrophe events and may have additional contributory
factors (for example, deforestation increasing the pace of
rainwater run-off upstream of a flood). Furthermore, future
trends are likely to differ from past projections. As such,
we recognise a range of uncertainty as to current and
future impacts.
Increases in frequency and severity of large catastrophe
weather events are mitigated by the Group’s use of
catastrophe excess of loss reinsurance. This reinsurance
covers property (Personal Lines and Commercial) and
Motor physical damage losses; in addition to significant
capital benefits, it transfers the volatility of low-frequency,
high-severity natural peril 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 typically 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.
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Direct Line Group Annual Report and Accounts 2022
Severe weather claims
(actual % of expected loss)
%
250
200
150
100
50
0
2013 2014 2015 2016 2017 2018 2019
2020
2021 2022
Actual weather
Expected
Both these graphs reflect the number of major weather
events in the year that the Group responded to, including
three significant storms in Q1, a rise in subsidence claims
from extremely high temperatures in the summer and the
December freeze event.
Impact of severe weather on combined
operating ratio1 (pt)
pt
2.5
2.0
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 2022
Severe weather impacts
Expected
Prior to 2022 the trends are reflective of relatively benign
activity, although there is significant variability as shown
in the graph. 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.
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 the Underwriting
function and reviewed quarterly through relevant business
forums. The key climate change-related activities are flood,
subsidence and other 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.
Flooding
Governments have been working with insurers since 2000
to help make flood risk insurance more affordable and in
2016 Flood Re was introduced. Every insurer that offers
home insurance in the UK, the Group included, must pay
into the Flood Re scheme. This levy raises around £135
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.
Subsidence
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.
Motor
The Group’s motor market is diversified throughout the UK,
and although weather-related factors will influence claims
frequency it is a relatively small influence compared with
other factors, for example used car prices. 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.
Note:
1. The 2022 and 2021 combined operating ratio used is for ongoing operations (see footnote 1 on page 25).
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Task Force on Climate-related Financial Disclosures continued
Supplemental guidance for insurance companies
The supplemental guidance for disclosure recommendations
(a) and (b) of the metrics and targets section within the
TCFD framework recommends that insurers:
– describe the extent to which their insurance underwriting
activities, where relevant, are aligned with a well below
2.0°C scenario; and
– disclose the weighted average carbon intensity or
GHG emissions associated with commercial property
and specialty lines of business where data and
methodologies allow.
The Group does not currently disclose information in
relation to the above guidance. Our aim is to explore how
we develop alignment to these recommendations in
future reporting.
Operational
We calculate and report our GHG emissions annually.
Our most recent reporting can be found on page 69
where we continue to break out our Scope 1 and Scope 2
emissions into separate performance figures across our
office sites and accident repair centres. We also disclose
our Scope 3 footprint, with greater clarity of the activities
under our direct control, as well as our supply chain and
homeworking emissions.
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 2022, we saw a 70% reduction in energy-
related emissions against this baseline; 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 delivered a 56% reduction in energy consumption
against this baseline.
With hybrid working well embedded across the business,
large numbers of our people continue to work from home
regularly which has contributed to a reduction in our Scope
1 and 2 emissions. In recognition of this we have again
calculated and reported homeworking emissions under
the Scope 3 ’Employee Commuting’ category (see page 69).
Overall, in 2022, we saw an increase in emissions under
our direct control when compared to 2021. This primarily
reflects an increase in activities relating to vehicle repair
which, in 2021, was less prevalent following the impact of
Covid-19 on Motor claims frequency in the first half of the
year. This increase was partly offset by a reduction in Scope
1 and 2 emissions in 2022, driven by a reduction in our office
footprint and continued investment in energy efficiency
measures across our estate. Our GHG emissions reporting
can be found on page 69.
From 2023 we will report on progress against our Science-
Based Targets which were approved in November 2022
(see below).
Science-Based Targets
We are pleased with the success we have made in reducing
our Scope 1 and 2 emissions having met the two targets we
set in 2013 and now want to enhance our carbon reduction
strategy further.
In support of our net zero ambitions, we have set five
Science-Based Targets, in line with a 1.5°C pathway, focused
on the most carbon intensive areas of our business, one of
which covering our operational emissions. These targets
were approved by the SBTi in 2022.
Scope
Operational
Target
We target reducing absolute Scope
1 and 2 GHG emissions by 46% by
2030 from a 2019 base year.
More information on these targets, including how we will
disclose progress against them can be found on page 66.
Supply chain
While we wait for the publication of the Science-Based Net
Zero Targets for Financial Institutions from the SBTi, which
is expected in 2023, we chose to set an internal emissions
reduction target for our supply chain in 2022. This target
forms part of our Sustainable Sourcing Approach, where
we continue to encourage our largest emitting suppliers
to sign up to SBTI targets or an equivalent (see page 66).
Other indicators we monitor and manage across our
operational activity include our energy sources and
consumption and the waste generated from our
office sites. See page 67 for more information.
Investments
More than 180 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, we have set
Science-Based Targets for our investment portfolio covering
corporate bonds, commercial real estate and commercial
real estate loans, these were approved by the SBTi in 2022.
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Direct Line Group Annual Report and Accounts 2022
Science-Based Targets
As at the end of 2022 our investment portfolio targets
covered 63% of AUM.
Asset Class
Target
Corporate Bonds
Commercial Real
Estate
Commercial Real
Estate Loans
Align the Scope 1 and 2 portfolio
temperature score by invested
value from 2.44°C in 2019 to 2.08°C
by 2027.
Align the Scope 1, 2 and 3 portfolio
temperature score by invested
value from 2.80°C in 2019 to 2.31°C
by 2027.
Reduce GHG emissions by 58% per
square metre by 2030 from a 2019
base year.
Reduce GHG emissions by 58% per
square metre by 2030 from a 2019
base year.
More information on these targets, including how we will
disclose progress against them can be found on page 66.
The temperature score for corporate bonds is the implied
level of warming above pre-industrial levels to which our
portfolio is aligned based on the CDP’s temperature rating
data set. For an individual company the temperature rating
is the level of warming to which a company’s publicly stated
emission reduction targets align. The targets are set on a
linear pathway for the portfolio to reach 1.5°C by 2040
as is required by the SBTi.
We aim to achieve our corporate bond target by directing
investment to companies with lower temperature scores
as these are the ones taking most serious action to reduce
emissions. We will also expect our external investment
managers to engage with portfolio companies to encourage
them to act by setting robust emissions reduction targets.
We will also continue to target an interim 50% reduction
in weighted average carbon intensity by 2030 from a 2020
base year for corporate bonds in order to ensure emissions
are reducing over time.
For commercial real estate, targets were set using the SBTi
sectoral decarbonisation approach for real estate which
uses the IEA ETP 2017 Beyond 2°C scenario. Emissions for
real estate relate to the energy use of buildings which is
largely emissions from electricity and heating use. Work
towards our real estate targets will require improving the
energy efficiency of buildings, engaging with tenants
to share energy use data and encouraging them to
set their own emissions reduction targets.
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.
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
67 and 69
67 and 69
67
67
67 and 69
70
70
68
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
85
Strategic reportGovernanceFinancial statements Risk management
Our aim is to make risk management simple, well understood and embedded. The Risk Function
will provide oversight which is pro-active, proportionate and commercial to help the business make
informed 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 continues to lead 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 109 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.
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.
Three strategic risk objectives
1. Maintain capital adequacy
The Group seeks to hold capital resources in the
range of 140% to 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’s objective is to maintain a robust and
proportionate internal control environment.
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Direct Line Group Annual Report and Accounts 2022
Our Risk Management Framework
The 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 81 and
82 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.
Our risk culture
Our risk culture underpins our business and decision-
making, and helps us embed a robust and disciplined
approach to managing risk. Our Risk Function drives
ownership of risks in the business, ensures that risk
consideration is integral to decision-making and that
activities within the business are aligned with the Risk
Management Framework. Risk also provides expert advice
and guidance to business areas, including challenging the
effectiveness of controls to manage risk and compliance, to
support the business in demonstrating the right mindset
to achieve its strategic objectives. The Board is committed
to promoting a culture of high standards of corporate
governance, business integrity, ethics and professionalism
in all our activities.
The Risk Function has worked collaboratively across the
Group to support embedding a positive risk culture, in
particular developing an approach to assessing risk culture,
to ensure risk is fully integrated within the Group’s wider
cultural ambitions and aligned on outcomes/behaviours
we expect of our people.
Aurore Lecanon
CRO
Our CRO
Aurore Lecanon joined Direct Line Group as Chief
Risk Officer in November 2021. She is responsible
for developing and driving the risk and compliance
agenda, enabling a proactive and forward-looking
function where people can collaborate, grow
and thrive.
Aurore 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. She previously
held the role of Chief Risk & Compliance Officer at
Prudential International Assurance Plc.
She is passionate about ensuring the Risk Function
continues to deliver on our responsibilities effectively,
while considering new ways of working and ensuring
we are positioned for success in a dynamic and
technology-enabled future. The past year has
shown unprecedented market and regulatory
challenges, and as a result the Risk Function had to
be focused even more on resilience and the need
to be developing constantly, to adapt to support,
challenge and add value to the business.
She sees a future for enhanced data-driven
risk management across the business using data
analytics and machine learning and to do so she is
driving the function and building a sustainable Risk
capability designed to embrace those trends. This
involves investing in our people, culture, frameworks
and processes, and technology.
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Risk management continued
Principal risks and uncertainties
We carefully assess the principal risks facing us. Principal risks are defined as having a residual risk impact of £40 million or
more on a 1-in-200 years basis, taking into account customer, financial and reputational impacts.
Our principal risks are under continuous review and assessment and, with the introductions of the FCA’s PPR regulations
and Consumer Duty, Conduct Risk is now deemed a principal risk to the Group. In addition, Insurance, Strategic and
Operational Risks are seeing increasing trends, impacted by macroeconomic changes putting pressure on strategy
and the changes in technology systems, people and processes.
Principal risk
Description
Risk commentary
Insurance Risk
Relative size
of risk
Trend –
increasing
Is the risk of loss due
to fluctuations in the
timings, amount,
frequency and
severity of an insured
event relative to the
expectations at the
time of underwriting.
Key drivers of the outlook for Insurance
risk across the Group’s strategic plan
(the “Plan”) include reserve, underwriting,
distribution, pricing and reinsurance risks.
Issues relating to claims inflation, the cost
of living crisis, the impact of the FCA’s
PPR regulations and the global political
situation, combined with supply/demand
issues following Covid-19 and Brexit, have
been key areas of focus for the Group in
2022 and have been the main drivers of
the increasing trend in insurance risk. This
includes a slow-down in the processing of
recoveries and liabilities with third party
insurers which increases the estimation
risk of these amounts.
Market Risk
Relative size
of risk
Market risk
Trend – stable
The risk of loss resulting
from fluctuations
in the level and
in the volatility of
market prices of
assets, liabilities and
financial instruments.
Key drivers of market risk are the sensitivity
of the values of our assets and investments
to changes in credit spreads, our exposure
to losses as a result of changes in interest
rate term structure or volatility, and the
key risk theme of the macroeconomic
environment & geopolitical landscape.
Market risk remains at a heightened but
stable level over the Plan due to recession
risk, volatile markets and the risk of further
property devaluations.
Unanticipated claims inflation, particularly
in the motor market, has had a significant
adverse impact on claims trends leading to
uncertainty in claims reserving and pricing in
2022 and beyond.
Key risk themes relating to this category
include Macroeconomic Environment &
Geopolitical Landscape, Organisational
Resilience & Agility, and Sales Risk in a
post FCA PPR regulations world.
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.
Concerns about the risk of a prolonged
recession and fiscal policy could affect equity
and credit markets within the global economy
leading to credit spread increases, foreign
exchange rate volatility, interest rate changes
and further devaluation of UK property assets.
To seek 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, and de-risking the
investment portfolio during volatile periods.
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Direct Line Group Annual Report and Accounts 2022
Principal risk
Description
Risk commentary
Operational
Risk
Relative size
of risk
The risk of loss due to
inadequate or failed
internal processes or
systems, human error
or from external events.
Operational risks can arise within all
areas of the business and can manifest
themselves as a result of inadequate
or failed internal processes or systems,
human error or because of external events.
Trend –
increasing
The key risks within
this category relate
to Cyber, Change,
Partnerships,
Model, Technology
& Infrastructure,
Business Interruption
and Material
Outsourcing.
Conduct Risk
Relative size
of risk
Trend – stable
The risk of failing to put
the customer at the
heart of our business,
failing to deliver on our
commitments and/or
failing to ensure that
fairness is a natural
outcome of what we
do and how we do it.
Key risk themes relating to this category
include Organisational Resilience & Agility
and People & Culture and our approach is
to manage our operational risks proactively
to mitigate potential customer harm,
regulatory or legal censure, and financial
or reputational impacts.
The increasing trend in operational
risk is driven mainly by increased risk in
the control environment as the Group
continued during 2022 and continues to
implement and embed changes in its
technology systems, data flows, pricing
models, people, and processes, whilst
operating within a more volatile external
environment. The implementation and
embedding of its motor platform and
related matters coinciding with the volatile
external environment in 2022 made the
operating environment more challenging
and increased the risk profile. We have in
place 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 have an adverse impact on
our customer operations and the wider
business more generally.
We have maintained a strong culture
of delivering on our commitments to
our customers.
Pricing practices within the general
insurance market have remained a key
area of focus for the FCA and for the Group.
Since the implementation of the FCA’s PPR
regulations, we have continued to carefully
monitor with a view to ensuring that the
right outcomes are being delivered to
customers and we have maintained regular
and close engagement and dialogue with
the FCA throughout the year including
concerning the requirements of the
FCA’s PPR regulations.
The introduction of the Consumer Duty
represents a significant shift in the FCA’s
expectations of firms and applies to all
of the Group’s regulated products.
With hybrid working well embedded across
the business, large numbers of our people
effectively continue to work from home.
The business also remains on its journey to
improve its use of data, pricing models, controls,
processes and management information and
the performance and resilience of its IT estate,
focusing on delivering system stability, using
new technologies to enhance contingency
strategies, and seeking to optimise the use
of tools and capability across the Group.
Reviewing our target operating models
across the Group, 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 the impact of potential risk events.
Finally, the external threat landscape has
continued to remain volatile globally, including
the increase in state-sponsored cyber-attacks,
more sophisticated ransomware attacks,
disruptions to supply chains and the continued
challenges associated to the cost of living crisis.
The business has continued to monitor
the external landscape closely, taking
proactive measures to introduce 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.
A comprehensive implementation plan has
been put in place to address the requirements
arising from the new Duty, which has been
approved by the Board.
Finally, the Group is aware of the impact of the
rising cost of living on our customers and we
are taking measures to help support customers
during this period, including finalisation of
the Vulnerable Customer Strategy and the
launch of Churchill Motor Essentials to adapt
to changing customer needs.
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Risk management continued
Principal risk
Description
Risk commentary
Regulatory
Compliance
Risk
Relative size
of risk
Credit
Trend –
increasing
The risk of reputational
damage, regulatory or
legal censure, fines or
prosecutions and other
types of losses arising
from non-compliance
with regulations
and legislation.
Credit Risk
Relative size
of risk
Credit
Trend –
increasing
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.
Strategic Risk
Relative size
of risk
Credit
Trend –
increasing
The risk of direct
or indirect adverse
effects resulting from
strategies not being
optimally chosen,
implemented or
adapted to changing
conditions.
The outlook for regulatory compliance
risk is increasing as financial institutions
respond to multiple regulatory change
priorities, alongside a challenging external
environment covered in Strategic risk and
Insurance risk.
Further, regulators are increasingly
expecting financial institutions to play a
broader role in resolving societal issues,
such as income inequality, climate
change, and diversity and inclusion;
creating challenges for insurers to balance
commercial and societal outcomes in
decision-making, as they seek to meet
the needs of different stakeholders.
We have maintained an open relationship
with our regulators, and we have continued
to engage with the regulators and HM
Treasury regarding the future regulatory
framework within the UK.
The outlook for credit risk is increasing due
to the potential impact on business models
from behavioural or societal changes
arising from the recession and cost of
living crisis.
The trading updates issued in July 2022 and
January 2023, the CEO stepping down also
in January 2023, and response to the FCA’s
PPR regulations has led to an increasing
strategic risk for the Group over the Plan
period and a need to rebuild balance
sheet resilience. A period of uncertainty
in leadership continuity may restrict the
Group’s ability to progress with its strategic
growth agenda. However, completing
the Group’s 10% quota share reinsurance
contract has contributed to restoring
capital resilience.
Strategic risk is also influenced by internal
and external developments, including
the risk of the UK entering a recession,
the worst cost of living crisis in decades,
high levels of inflation, and the longer-
term implications of the war in Ukraine
and other geopolitical tensions that
could crystallise.
We remain focused on the key areas of
regulatory attention, including implementation
of the the FCA’s PPR regulations, the Consumer
Duty, FCA’s ‘Dear CEO’ letter on cost of living
and insurance, FCA guidance on the fair
treatment of vulnerable customers, PRA ‘Dear
Chief Actuary’ letter on reserving and capital
modelling and inflation risk, and the PRA’s
‘Dear CEO’ letter on the PRA’s supervision
of climate related financial risk.
We have also continued our focus upon
operational resilience in accordance with the
increased regulatory requirements introduced
during the year.
Finally, we have a governance and
accountability framework in place 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.
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.
To allow for better recognition of internal and
external drivers of climate-related risk and
to provide a focal point for the reporting of
risks relating to climate change, the Strategic
risk category has been broadened to include
Climate risk within Environmental, Social and
Governance risk.
The Group takes the following steps to manage
its risks:
• 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 2022
Effects of macroeconomic and trading
environments on the Group
The UK is facing into a cost of living crisis and the
potential of a UK recession, driven by the challenging
macroeconomic environment. This, in conjunction with
a challenging trading environment, could lead to or
exacerbate existing risks for the Group and we remain
alert to possible developments across our risk universe.
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 designed
to enable it to:
– have a proactive approach to emerging
risk management;
– identify, manage and monitor a broad range of
potential emerging risks; and
– mitigate the impact of emerging risks which could
impact the delivery of the 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 investors and
regulators. 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.
During 2022, the Group has continued to embed further
controls and targets around climate change including
receiving approval of its emission targets from the Science
Based Targets initiative, whilst the Climate Executive
Steering Group has created a sub-group to provide
expertise on the reporting and governance of targets.
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 81 to 82, within the Task Force on
Climate-related Financial Disclosures (“TCFD”) report.
Changing customer needs
As consumers face intense pressure on their finances and
time, coupled with generational changes, this is expected
to generate a rapid structural shift in customer demand,
requiring the Group to innovate and adapt its product
offerings in order to remain relevant.
In 2022, in response to this emerging risk, the business
reviewed its new product approval processes to identify
opportunities to streamline the approach and enable a
faster, but still safe, route to market. It also developed an
implementation plan to embed Consumer Duty principles.
Keeping up with Digital Advancements
Developments in technology and changes in market,
regulatory and consumer trends are creating opportunities
for new entrants to profitably exploit new distribution
channels, business models and niches. Failure to keep
up with such developments could lead the Group to
fall behind.
To mitigate this, we are delivering multiple programmes
to provide the Group with the capabilities to enable future
innovation at pace.
Keeping up with digital advancements
Developments in technology and changes in market,
regulatory and consumer trends are creating opportunities
for new entrants to profitably exploit new distribution
channels, business models and niches. Failure to keep
up with such developments could lead the Group to fall
behind. To mitigate this, the Group is delivering multiple
programmes to provide the Group with the capabilities to
enable future innovation at pace.
Geopolitical Tension
Due to heightened tensions on the world stage, there is a
risk that measures are implemented by governments that
decrease political stability, erode countries’ relationships
and contribute to increasing protectionism. This could lead
to multiple impacts including on investment performance
and supply chains. The Group conducts ongoing analysis
to monitor exposure to the developing geopolitical
environment (for example, Russia/Ukraine), while
maintaining a close eye on the political risk landscape.
Automotive Technology
New car technology, such as autonomous vehicles and
hydrogen power, are in development which, once on UK
roads, is expected to be transformative. Traditional motor
policies may no longer serve the needs of customers,
requiring changes to the Group’s pricing models and
policy wordings to remain relevant. The repair networks’
capabilities will also need to be upgraded to serve this
demand effectively. The Group will focus on launching
new products that will better serve customer needs in
the future while engaging with regulators to help shape
policies and understand potential impacts for the Group.
Data Ethics
Consumers are becoming more aware of their data rights
and regulators more interested in how firms use customer
data. The industry is also gathering more data than ever
before and increasingly exploring more sophisticated
processing capabilities, such as artificial intelligence (“AI”)
and machine-learning. These trends together could lead to
data being used in ways that customers or regulators find
unacceptable, or which result in unfair customer outcomes.
The Group is embedding the Data Ethics Framework within
the Pricing & Underwriting team’s policies and procedures,
while providing guardrails to apply across the Group. As
new data capabilities are introduced, our monitoring and
oversight is designed to ensure adherence to the principles
set out in the Framework.
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Risk management continued
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 93, 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 88 to 90. Note 3 to the consolidated financial
statements starts on page 198 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”) 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 a report 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 Risk Function’s review, 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 88 to 90, were reviewed as part
of the Risk Function review of the Plan, 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). In addition, the Risk Function’s review defined a
set of key risk themes, known as top risks, grouped around
the themes of financial resilience, operational resilience
and future strategic fit in the context of the Plan. The
Plan did not introduce any new material risks other than
those already contained within the Group’s Material Risk
Register. Whilst outcomes for the later years in the Plan
are less certain, 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 is used for planning over a timeframe of
four years, to 31 December 2026, 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. This included running adverse scenarios on
the Plan to consider the downside risks to the Plan and
subsequent impact on forecast profit. The key scenarios
applied to the Plan were in relation to the impact of adverse
claims inflation, delay in pricing, increase in operating
expenses and a fall in asset values. The key judgements
and assumptions applied in these scenarios were as follows:
– Adverse claims inflation: the Group’s Plan includes
a scenario for inflation being higher than expected,
leading to claims costs increasing by 3% with the
Group and market response delayed by six months.
– Delay in pricing: future initiatives deliver 50% of
expected value.
– Increase in operating expenses: there is a delay of
12 months to achieving benefits from 2023 expense
reduction initiatives.
– Fall in asset values: an increase in credit spreads of
50 basis points in the UK and 25 basis points outside
of the UK in 2023, with spreads remaining elevated.
It is unlikely that all risks would materialise at the same
time. None of the scenarios individually were concluded to
present a threat to the Group’s expected viability across the
duration of the Plan.
The trading update that was approved by the Board of
Directors, and announced to the stock market on 11 January
2023, in respect of the Group’s trading for 2022 and outlook
for 2023, set out the challenging conditions that the Group
has faced, in particular with respect to the severe weather
in December 2022 and increases in motor claims inflation,
as well as the impact on the Group’s investment property
portfolio valuation. The CFO review describes the Group’s
capital management strategy, including the capital
actions taken in the last 12 months designed to ensure
the continued strength of the balance sheet, and sets out
management actions that the Group continues to pursue
to improve capital strength. 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.
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Direct Line Group Annual Report and Accounts 2022
In connection with the trading update released on
11 January 2023, a reforecast based on the Plan was
prepared without delay.
The Risk Function has also carried out an assessment of
the risks to the Group’s capital position over 2023 and 2024.
Two specific macroeconomic scenarios, a moderate and
a severe, have been run to assess the possible impact on
the Group’s own funds in the period to 31 December 2023
and 31 December 2024. The macroeconomic assumptions
for key parameters such as Consumer Price Index, GDP
and bank base rate for the moderate scenario reflect
the adverse end of the Bank of England November
Monetary Policy Committee forecast range. The severe
scenario adopts the key parameters from the 2022 Bank
of England Banking Stress Test, which is described as
“severe but plausible”.
A reverse stress test was also performed to identify a
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
reverse stress test combines the severe macroeconomic
stress with the impacts from a series of three natural
catastrophes from the 2022 PRA Insurance Stress Test.
In the moderate and severe scenarios, it was concluded
that the Group’s and U K Insurance Limited’s solvency
capital requirement would not be breached following
the implementation of management actions, such as
de-risking the asset portfolio, the purchase of additional
reinsurance cover, asset disposal or, if necessary,
raising equity.
Further information in relation to the sensitivity of key
factors on the Group’s financial position are included in the
CFO review. This sets out the impact on profit before tax of
an increase and a decrease in claims inflation of 200 basis
points for two consecutive years. The market risk note in the
consolidated financial statements sets out the impact on
profit before tax and equity of a 100 basis points increase
in spreads on financial investments and the impact of
a 100 basis points increase in interest rates on financial
investments and derivatives.
Climate change: during the year, the Group updated a
number of stress and scenario tests that had previously
been performed in 2021, 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 75 to 77. The overall
conclusion of these tests was that there could be breaches
in the Group’s risk appetite in the long term, however a
combination of contingent, pre-emptive and strategic
management actions could be deployed to address
the risks and allow the business to recover to above risk
appetite. Furthermore, the Group’s response to climate
change underpins its sustainability strategy and in the
year the Group has set out its Science-Based Targets to
reduce the Group’s carbon footprint.
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 2026.
Statement of the Directors
in respect of the Strategic report
The Board reviewed and approved the Strategic report
on pages 1 to 93 on 21 March 2023.
By order of the Board
Neil Manser
Chief Financial Officer
21 March 2023
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Chair’s introduction
We announced on 17 February 2023 that Mark Lewis,
former CEO of MoneySupermarket Group, will join the
Board with effect from 30 March 2023. Mark’s experience
will strengthen the Board’s oversight of aggregator and
digital marketing strategy, as well as helping the Group to
drive continuous improvement in customer experience.
The introduction of the FCA’s Consumer Duty rules
prompted us to reflect on how the voice of the customer
can be represented in the Boardroom and we took the
decision to appoint Tracy Corrigan, independent Non-
Executive Director, as Consumer Duty Champion. Tracy
will work with me and the CEO to ensure that the Consumer
Duty is raised in all relevant discussions and will help the
Board to assess whether the Group is delivering good
outcomes for customers. Tracy will apply her background
in customer analytics and insight, coupled with her passion
for customer-centricity, to carry out this important role and I
look forward to working with her on this topic.
To support me in reviewing the effectiveness of the
Board, I engaged Independent Audit Limited to conduct
an externally facilitated review. The review involved a
comprehensive evaluation of the operation of the Board
and its Committees and resulted in some useful insights
that will help the Board reflect on potential improvements
following the events of 2022, to review the information flow
to the Board and to inform our thinking about succession
planning. More information on the Board evaluation can
be found on pages 113 to 114.
Succession planning continues to be a key focus for the
Nomination and Governance Committee, who, mindful of
findings from last year’s effectiveness review, have spent
time considering the medium and long-term needs of the
Board in respect of Non-Executive Director experience,
expertise, diversity and functional role fulfilment. More
information on this can be found in the Nomination
and Governance Committee report on pages 124 to 125.
Diversity
We are pleased to have met the FCA’s new Board diversity
targets throughout 2022. However, Board changes since
the beginning of 2023 mean that, as at the date of this
report, the proportion of women on the Board has fallen
below 40% (see page 58). Board diversity, including gender
diversity, remains a key consideration in the Nomination
and Governance Committee’s succession planning.
When it came to promoting diversity and inclusion in the
wider organisation, my Board colleagues and I have looked
to support the agenda by sharing our own thoughts and
experiences and leading from the front. For example,
during the year I hosted a colleague Q&A on social mobility
and Adrian Joseph hosted a ‘Lunch and Learn’ for our Race,
Ethnicity and Cultural Heritage DNA strand to celebrate
Black History Month. The Board enjoys hearing about
what our colleagues make of diversity and inclusion in
the Group and what we, as a Board, can do to support the
organisation on its journey to becoming an increasingly
diverse and inclusive workplace.
Dear Shareholders,
On behalf of the Board, I am pleased to present the Corporate
Governance report for the year ended 31 December 2022.
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 the activity of the Board
and progress we have made in strengthening our corporate
governance practices.
Board developments and effectiveness
As I set out in my statement on page 14, Direct Line’s
former CEO, Penny James, stepped down from the Board
in January 2023 having served as CEO since May 2019.
I would like to thank Penny for her contribution in driving
progress in respect of many of our key governance topics,
including diversity and inclusion and sustainability.
The Nomination and Governance Committee is leading
the process to appoint a successor and, in the meantime,
I am grateful that Jon Greenwood has taken on the role
of Acting Chief Executive Officer. Jon has over 30 years’
experience in the insurance industry and has a deep
knowledge and understanding of the business, putting
him in a strong position to drive the Group’s performance
until a successor is appointed.
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Direct Line Group Annual Report and Accounts 2022
Stakeholders
This year, more than ever, it has been important for
us to listen to our stakeholders and hear what they are
telling us about how we, as a business, can best support
them during these challenging times. The table on page
107 sets out how we have engaged with our various
stakeholders and the table on pages 105 to 106 sets out
how this engagement has fed into Board discussion and
decision making. As I explained in my statement on page
14, supporting our colleagues and customers through the
cost of living crisis as best we can has been a key focus for
the Board.
Sustainability
During the year, the Sustainability Committee had the
important job of overseeing the setting and validation of
our greenhouse gas emissions reduction targets by the
SBTi. I know that these targets are important to many of our
key stakeholders and demonstrates our focus on a credible
plan to get to net-zero. More information on the work of the
Sustainability Committee can be found on pages 126 to 127.
Remuneration
During the year, the Remuneration Committee considered
whether to make changes to the Director’s Remuneration
Policy which is due to be presented to shareholders
for approval at our 2023 AGM. It was decided to put
forward the Remuneration Policy for approval largely
unchanged, with some minor wording clarifications.
However, the Committee intends to make some changes
to the implementation of the Policy for 2023, in respect
of performance measures in the AIP and LTIP.
In terms of remuneration outcomes for the year, whilst we
have made positive progress against some of the strategic
metrics, particularly in relation to the People measures,
the Committee agreed with the Executive Directors that
no AIP would be awarded for 2022 in the light of the
financial performance and the impact on shareholders.
Executives, including the wider senior leadership team,
will not receive a bonus for 2022 under the AIP. The
remuneration of the wider workforce and the support
provided to colleagues in the light of the cost of living
crisis have been a key consideration in all of our decision
making. More information on remuneration can be found
on pages 130 to 161.
Audit and internal control
During the year the Audit Committee led a competitive
tender process for an auditor to succeed Deloitte LLP
that resulted in a recommendation to appoint KPMG
as auditor of the Company starting with the financial
year ending 31 December 2024. A resolution in respect
of this appointment will be put forward to shareholders
seeking their approval at the Company’s 2024 AGM. More
information in respect of this process can be found on page
119. The Audit Committee also oversaw the arrangements
made to transition to IFRS 17 accounting. More information
on this activity can be found on page 117.
The review of our risk management and internal control
framework by our Risk and Group Audit functions is
referred to on page 114 and in the Audit Committee report
on page 118. Whilst control deficiencies during the year
were not considered to be material to the Group as a
whole, the Audit and Board Risk Committees will oversee
action being taken to further strengthen specific controls
and certain enhancements to provide greater resilience
against potential future stress scenarios.
AGM
Our 2023 AGM will be held on Tuesday, 9 May 2023 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
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Board of Directors
NG
RC
IC
SC
RC
Danuta Gray
Chair of the Board
Appointed
Independent Non-Executive
Director in February 2017
Chair of the Board since August 2020
Committees
Nomination and Governance Committee
(Chair)
Remuneration Committee
Key Skills and Experience:
– Extensive experience leading and
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. She was Chief Executive
between 2001 and 2010, during which time
Telefónica’s customer base increased
to 1.7 million from just under 1 million.
Between 1984 and 2001, Danuta held a
variety of senior positions within the BT
Group. Danuta has also acted as Senior
Independent Director of the Aldermore
Group, Non-Executive Chair of St Modwen
Properties and was a Non-Executive
member of the Ministry of Defence
Board. She was also NED and Chair of the
Remuneration Committee at both Page
Group plc and Old Mutual plc until 2018.
External Appointments
– Non-Executive Chair of the Board of North.
– Non-Executive Director, Chair of the
Remuneration Committee and member
of the Nomination Committee of Burberry
Group plc.
Neil Manser
Chief Financial Officer
Appointed
May 2021
Committees
Investment Committee
Key Skills and Experience
– Responsibility for overall direction on
all financial matters and oversight
of investment management and
treasury function.
– Extensive corporate finance and capital
markets knowledge.
Tracy Corrigan
Independent Non-Executive Director
Appointed
November 2021
Committees
Sustainability Committee
Remuneration Committee
Key Skills and Experience
– Deep understanding of the development
of corporate and digital strategy.
– International experience with
broad perspective of business
and capital markets.
– Deep understanding of the operation
– Expertise in digital transformation,
of strategy and culture in the
insurance industry.
customer analytics and stakeholder
communications.
Neil has held several roles in Finance and
Strategy since joining the Group in 2011,
including Director of Investor Relations,
Managing Director of NIG and Chief Strategy
Officer. He was instrumental in the Group’s
successful IPO in 2012. He brings extensive
industry and capital markets experience to
the Board. Prior to joining the Group, Neil
held roles at Brit Insurance, Merrill Lynch
and Fox-Pitt, Kelton. He is an Associate of
the Institute of Chartered Accountants in
England and Wales.
External Appointments
– None.
Tracy’s professional background spans
financial journalism, digital media and
corporate strategy in the media industry.
Most recently Tracy was Dow Jones’ Chief
Strategy Officer where she was responsible
for global strategy, customer insight and
commercial policy, and had oversight of the
digital transformation of the business. 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, including Editor
of FT.com and Editor of the Lex Column,
at the Financial Times.
External Appointments
– Non-Executive Director and member of
the Remuneration Committee of Barclays
Bank UK plc.
– Non-Executive Director and member of
the Audit, Nomination and Sustainability
committees of Domino’s Pizza Group plc.
– Non-Executive Director and Chair of the
Investment Committee of The Scott Trust.
Penny James served as Chief Executive Officer throughout the 2022 financial year and stepped down from the Board
with effect from 27 January 2023.
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Direct Line Group Annual Report and Accounts 2022
Key for Committee membership
AC Audit Committee
BR Board Risk Committee
IC
Investment Committee
NG Nomination and Governance Committee
RC Remuneration Committee
SC Sustainability Committee
Committee chair
BR
RC
IC AC
SC NG
RC
SC
Mark Gregory
Independent Non-Executive Director
Sebastian James
Independent Non-Executive Director
Adrian Joseph OBE
Independent Non-Executive Director
Appointed
March 2018
Committees
Board Risk Committee (Chair)
Remuneration Committee
Investment Committee
Audit Committee
Key Skills and Experience
– Extensive experience in both general and
life insurance.
– Deep understanding of capital markets.
– Strategically orientated with a detailed
understanding of the retail sector.
Mark was CEO of Merian Global Investors
from January 2019 to August 2020.
He previously held the role of Group CFO
and Executive Director at Legal & General
until 2017. Mark acted in a variety of senior
roles in his 19-year career at Legal & General,
including CEO of the Savings business,
Managing Director of the With-Profits
business, and Resources and International
Director. Earlier in his career, 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.
External Appointments
– Non-Executive Director and member of
the Risk Committee of Phoenix Group
Holdings plc with effect from 1 April 2023.
Appointed
August 2014
Committees
Sustainability Committee (Chair)
Nomination and Governance Committee
Remuneration Committee
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
– Managing Director of Boots UK,
a subsidiary of Walgreens Boots
Alliance, Inc.
– Senior Vice President of Walgreens
Boots Alliance, Inc.
Appointed
January 2021
Committees
Sustainability Committee
Key Skills and Experience
– Leading expertise in digital,
data science and analytics.
– Track record of using data and AI
to drive business transformation.
– Recognised Diversity and Inclusion leader
and a passionate advocate on this topic.
Adrian is Managing Director, Group Data
and Artificial Intelligence at BT Group. He
has significant industry and consultancy
experience and has held senior roles at EY
and Google. Between 2016 and 2020, Adrian
was a NED at the Home Office 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 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. Adrian has been
awarded an OBE for services to equality and
diversity in business.
External Appointments
– Member of HM Government’s AI Council.
– Managing Director, Group Data and
Artificial Intelligence at BT Group.
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Board of directors continued
Key for Committee membership
AC Audit Committee
BR Board Risk Committee
IC
Investment Committee
NG Nomination and Governance Committee
RC Remuneration Committee
SC Sustainability Committee
Committee chair
IC AC
BR
AC
BR
RC NG
BR
Fiona McBain
Independent Non-Executive Director
Gregor Stewart
Independent Non-Executive Director
Dr. Richard Ward
Senior Independent Director
Appointed
September 2018
Committees
Investment Committee (Chair)
Audit Committee
Board Risk Committee
Key Skills and Experience
– Extensive experience in retail financial
services.
Appointed
March 2018
Committees
Audit Committee (Chair)
Board Risk Committee
Key Skills and Experience
– Strong audit background having worked
as a partner in Ernst & Young’s Financial
Services practice.
– Strong background in M&A and
– 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.
developing strategic partnerships.
– Expertise in audit having worked as an
auditor and serving as Audit Committee
Chair of other listed companies.
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 a Fellow 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.
– Senior Independent Director, Chair of
Audit Committee and Non-Executive
Director of Monzo Bank Limited.
Appointed
January 2016
Committees
Remuneration Committee (Chair)
Nomination and Governance Committee
Board Risk Committee
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, Chief Executive
of Lloyd’s of London, and CEO of the
International Petroleum Exchange. He
also held the roles 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 the Geneva
Association.
External Appointments
– Non-Executive Chair of CFC Group Limited.
– Non-Executive Chair of Mrald Limited.
On 17 February 2023, the Board announced that Mark Lewis will be appointed as an independent Non-Executive
Director with effect from 30 March 2023. For more information please see page 94.
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Direct Line Group Annual Report and Accounts 2022
Board independence1
Chair and NED tenure
10% Chair (1)
20% Executive Directors (2)
70% Independent Non-Executive Directors (7)
25% 0-3 Years (2)
50% 4-6 Years (4)
25% 7-9 Years (2)
Board gender2
1. As at 31 December 2022.
Following Penny James’ resignation on 27 January 2023, the
Board comprised the Chair (11%), 1 Executive Director (11%)
and 7 Independent Non-Executive Directors (78%).
2. As at 31 December 2022.
Following Penny James’ resignation on 27 January 2023, the
Board gender split was 67% Men (6) and 33% Women (3).
40% Women (4)
60% Men (6)
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Executive Committee
Jon Greenwood, Acting CEO, chairs the Executive Committee. Neil Manser is also a member of the Executive Committee, please
see page 96 for his biography. Penny James chaired the Executive Committee until she stepped down on 27 January 2023.
Jon Greenwood
Acting CEO and Chief Commercial Officer
Key Skills and Experience:
– Responsible, as Acting CEO, for
delivery of the Group’s strategic
and operational plans.
– Responsible for all aspects of commercial
lines, including strategy, product
development, sales and service,
and marketing.
– Executive Committee responsibility
for the oversight of Green Flag
operations and the delivery of
major change programmes.
Jessie Burrows
Managing Director, Customer Sales,
Service & Claims
Key Skills and Experience:
– Responsible for all aspects of personal
lines and commercial lines claims,
customer sales and service; and the
Group’s counter-fraud activities.
– Focus on creating value for customers
by providing them with exceptional
service and value for money.
– Jessie 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.
Jazz Gakhal
Managing Director, Motor
Key Skills and Experience:
– Responsible for creating, leading and
delivering the Group’s Motor insurance
strategy and financial forecasts to
achieve profitable growth.
– Responsible for design and manufacture
of Motor products intended for
retail customers.
– Extensive Group experience having
previously been Chief Strategy Officer
and Managing Director of Direct Line
for Business.
External Appointments
– Non-Executive Director
of Auto Trader Group Plc.
Gender diversity of our Executive Committee1
Gender diversity of Senior Management2
60%
Women (6)
40%
Men (4)
44.6%
Women (37)
55.4%
Men (46)
Notes:
1. As at 31 December 2022.
Following Penny James’ resignation on 27 January 2023, the Executive Committee gender split is 44% Men (4) and 56% Women (5).
2. Senior Management in this context is defined as the Executive Committee, Company Secretary and direct reports (excluding
administrative and support staff) as at 31 December 2022.
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Direct Line Group Annual Report and Accounts 2022
Kate Syred
Chief Customer Officer & Managing
Director Household, Partnerships, Data
and Pricing & Underwriting
Key Skills and Experience:
– Responsible for the design and delivery
of the Group’s Household, Partnerships
and Other personal lines strategy and
products for retail customers.
– Defines the principles and standards
for the customer experience ensuring
the ‘look and feel’ and ‘tone of voice’
are consistent.
– Sets and implements the customer
and business advanced analytics (data
science) strategy.
Humphrey Tomlinson
General Counsel
Vicky Wallis
Chief People Officer
Key Skills and Experience:
– Responsible for the Group Legal function
and oversees a range of legal advice and
services across the Group.
– Over 30 years’ experience as a solicitor
in private practice and in-house.
– Experience includes advising on corporate
and commercial matters and on disputes,
steering corporate transactions in the
UK and internationally, managing
legal risk and dealing with corporate
governance matters.
Key Skills and Experience:
– Responsible for ensuring there is a
human resources function which has
responsibility for all aspects of talent
and employee relations, including
engagement surveys, diversity
and sustainability initiatives.
– Extensive experience in building
HR functions and developing
cultural frameworks.
– Focus on enhancing people capabilities.
Ash Jokhoo
Chief Information Officer
Aurore Lecanon
Chief Risk Officer
Key Skills and Experience:
– Responsible for the development and
Key Skills and Experience:
– Responsible for providing expert advice
maintenance of the Group’s technology,
with a focus on technology in the
customer journey.
– Develops Information Security policies
and procedures, including cyber security
and operational resilience policies.
– Passionate advocate for
technology and diversity.
and opinion on risk matters to the Group
through identification, assessment and
monitoring of risk in line with risk appetite.
– Responsible for validation of the Group’s
internal economic capital model and for
identifying and managing financial risks
from climate change.
– Previously held several Risk roles at
M&G/Prudential including Chief Risk
and Compliance Officer of Prudential
International Assurance.
www.directlinegroup.co.uk
101
Strategic reportGovernanceFinancial statements Corporate Governance
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 2022. 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 162 to 166.
The Company complied with 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:
Board leadership and
company purpose
• The role of the Board
• The role of the Board in the Company’s
culture
• Board activity and meeting attendance
• Consideration of section 172(1) factors
• How the Board engages with
stakeholders
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
• Board’s approach to diversity, inclusion
and succession planning
• Board and Committee effectiveness review
Audit, risk and internal control
Pages
102
109
110
• Preparation of the Annual Report
114
and Accounts
• Assessing emerging and principal risks
• Risk management and internal control
systems
• Audit Committee report
• Board Risk Committee report
Remuneration
• Directors’ Remuneration report
130
Board leadership and company purpose
The role of the Board
The Board seeks to promote the long-term success of
the Company for the benefit of its shareholders and
stakeholders, and establishes the Company’s purpose,
values, culture, and strategy.
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.
The matters reserved for the Board are kept under review
to ensure they remain appropriate. Throughout 2022,
the Board acted in accordance with the Schedule of
Matters Reserved for the Board.
The Board discharges some of its responsibilities through
its Committees which focus on particular areas. 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, responsibilities and
activities of the Board and its Committees can be found
below and in the Directors’ Remuneration report which
begins on page 130. 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 oversees 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.
Strategy
The Board oversees the development of the Group’s
strategy and monitors management’s performance
and progress against the strategic aims and objectives.
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Direct Line Group Annual Report and Accounts 2022
The role of the Board in the Company’s culture
Our purpose is why we exist as a business. We help people carry on with their lives, giving them peace of
mind now, and in the future.
Our vision reminds our people of where we want to take our business in the future. We want to create
a world where insurance is personal, inclusive and a force for good.
And our culture is the unique set of behaviours and values we use to deliver our strategy and realise
our vision. We prize open dialogue, prioritise wellbeing and recognise the achievements of our people.
The Board is committed to growing and fostering a strong culture and tracks progress across the Group in a number of
ways, including:
Leading by example
Whistleblowing
The Board always seeks to act with the highest
standards of integrity, aligning its approach with the
provisions of the UK Corporate Governance Code and
leveraging its diversity to strengthen decision-making.
The Board aims to demonstrate the balance of mutual
respect, challenge and expertise that is expected at
every level of the Company.
The Board reviews reports received via Rightcall, the
Group’s confidential independent whistleblowing
helpline. The Board considers whether there are
any trends in reporting that indicate behavioural or
cultural issues that need to be addressed. For further
information on whistleblowing, please see the Board
Risk Committee report on page 122.
Customer outcomes
Group Audit
The Board closely monitors customers’ perceptions
of the Company’s performance, including the Net
Promoter Score (“NPS”), which helps the Board to
determine whether the corporate culture is delivering
the Group’s vision for customers effectively. The Board’s
new Consumer Duty Champion seeks to ensure good
customer outcomes remain at the heart of decision-
making, inside and outside the boardroom.
Environment, Social and Governance
(“ESG”) objectives
The Board views ESG as an integral part of the Group’s
culture. The Sustainability Committee has delegated
responsibility to review sustainability matters and ensure
key ESG initiatives are escalated to receive Board-level
oversight and challenge. For further information on the
work of the Sustainability Committee, please see page
126. For more information on the Group’s sustainability
strategy, please see pages 50 to 70.
Remuneration
In 2022, we further embedded ESG into our culture
by introducing a new emissions metric into our Long-
Term Incentive Plan for Executives. For more detail on
this metric, please see page 141 of the Remuneration
Committee report.
Policies
The Board oversees our policy framework, including
our Modern Slavery Statement, risk management
framework, environmental targets such as Science-
Based Targets (“SBTs”) and responsible investment
approach. Such oversight permits the Board to
articulate the standards of behaviour expected from
all those working across the business and maintains
a consistent approach at every level.
The Audit Committee receives regular reports from
the Group Audit Function which include insights
into culture and behaviour in the business. For more
information on the work of the Group Audit Function,
please see the Audit Committee report on page 118.
Wellbeing of our people
Our people are strongly encouraged to ‘bring all of
themselves to work’. Our informal dress code, combined
with our flexible working policy, are designed to create
an environment that attracts and retains a diverse,
talented workforce. The Board supports enabling
people to work in a way that is compatible with
their lifestyle choices and personal values.
Valuing diversity
The Board supports our Diversity Network Alliance
(“DNA”), which has evolved from a knowledge
and education hub to a body of colleagues who
are consulted with and lead on key diversity and
inclusion initiatives, working to improve our people’s
lived experiences. For more information on the DNA,
please see page 57.
Suppliers
The Group’s Ethical Code for Suppliers, reviewed by the
Sustainability Committee, sets out our commitments
to our suppliers and the expectations we have of them.
We pay our suppliers on time and, during the year, we
were awarded a Fast Payer Accreditation Award by
Good Business Pays.
Chief Executive awards
Annually, the business recognises and celebrates those
amongst our colleagues who best embody our values.
Our values are set out on page 11.
Seeking feedback from our people
Keeping our culture under review
The Board reviews the outputs of the employee
engagement and satisfaction survey, DiaLoGue, and
Directors regularly attend meetings of the Employee
Representative Body (“ERB”). The Board recognises
that employees who are able to grow and develop
in a safe, respectful environment are indicative of a
successfully embedded culture and an indicator of a
healthy business. For further information on colleague
engagement please see pages 56 to 57 of the Strategic
report and page 108 of the Corporate Governance report.
During 2022, the Board reviewed our culture,
considering which aspects should be protected, such
as the passion, enthusiasm and energy of colleagues
and which aspects could be dialled up e.g. a greater
focus on the skills needed for the future. In response
to this we launched our future skills academy ‘Ignite’
and enhanced recruitment activity to ensure we are
focused on attracting the skills needed for the future
in a highly competitive market. For more information
please see page 56.
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Corporate Governance continued
Board meetings and activity in 2022
Scheduled Board meetings focused on four main themes, as detailed below:
Themes
Strategy and
execution
Strategic alignment
a b c
a b c
d e f
d e f
Description
• Approving and overseeing the Group’s key strategic targets and monitoring the Group’s
performance against those targets;
• reviewing customer experience and trends and monitoring the Group’s performance against
external brand metrics;
• reviewing and approving key projects aimed at developing the business or rationalising costs;
• considering growth opportunities; and
• reviewing the individual strategy of key business lines.
a b c
a b c
d e f
d e f
a b c
d e f
Financial
performance and
investor relations
Strategic alignment
a b c
a b c
d e f
d e f
a b c
d e f
a b c
d e f
Risk management,
regulatory and other
related governance
Strategic alignment
a b c
d e f
a b c
d e fBoard and Board
Committee
governance
Strategic alignment
a b c
a b c
• 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; and
• considering the appropriateness or otherwise of possible surplus capital distributions.
• 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 Task Force on Climate-related Financial Disclosures
(“TCFD”) and Sustainability reports.
• 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
• conducting an annual review of the Group’s governance framework.
d e f
d e f
In addition to its scheduled Board meetings, the Board
held a number of ad hoc meetings to deal with urgent or
arising matters.
Link to strategy
Be best at direct
In June 2022, the Board held a strategy day to set and
monitor progress against the Group’s strategy and to
discuss the Group’s future opportunities.
Win on price comparison websites
a b c
a b c
d e f
d e f
Extend our reach
Be nimble and cost efficient
Have technical edge
Empower great people
a b c
a b c
d e f
d e f
a b c
a b c
d e f
d e f
Board and Committee meeting attendance
The Board and its Committees held a number of scheduled meetings in 2022, which senior executives, external advisers
and independent advisers were invited to attend and to present on business developments and governance matters. The
Company Secretary attended all Board meetings and he, or his nominated deputy, attended all Board Committee meetings.
The table overleaf sets out attendance at the scheduled meetings in 2022. 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.
In circumstances where a Director is unable to attend a meeting, the Director receives papers in advance and has the
opportunity to raise issues and give comments to the Chair in advance of the meeting.
Additional Board and Committee meetings were convened during the year to discuss current issues, ad hoc business
development, governance and regulatory matters.
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Direct Line Group Annual Report and Accounts 2022
Chair
Danuta Gray
Senior Independent
Director
Richard Ward
Non-Executive Directors
Tracy Corrigan1, 3
Mark Gregory3
Sebastian James
Adrian Joseph OBE
Fiona McBain2
Gregor Stewart3
Executive Directors
Neil Manser
Board
9 of 9
9 of 9
9 of 9
8 of 9
9 of 9
9 of 9
9 of 9
9 of 9
9 of 9
Former Executive Directors
Penny James3
9 of 9
Audit
Committee
Board Risk
Committee
Sustainability
Committee
Investment
Committee
–
–
–
7 of 7
–
–
7 of 7
7 of 7
–
–
–
5 of 5
–
5 of 5
–
–
4 of 5
4 of 5
–
–
–
–
4 of 4
–
4 of 4
4 of 4
–
–
–
–
–
–
4 of 4
–
–
4 of 4
–
4 of 4
3 of 4
–
Nomination
and
Governance
Committee
Remuneration
Committee
2 of 2
4 of 4
2 of 2
4 of 4
–
–
2 of 2
1 of 2
3 of 4
4 of 4
–
–
–
–
–
–
–
–
–
–
Notes:
1. Tracy Corrigan joined the Remuneration Committee on 1 April 2022.
2. Fiona McBain was unable to attend a meeting due to illness.
3. Mark Gregory, Tracy Corrigan, Gregor Stewart and Penny James were unable to attend certain meetings due to conflicting commitments.
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 16.
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 page 107.
Section 172(1)
The Directors must act in a way they consider, in good faith, what 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
the interests of the company’s employees
c
d
the need to foster the company’s business relationships with suppliers, customers and others
the impact of the company’s operations on the community and the environment
d e
the desirability of the company maintaining a reputation for high standards of business conduct
f
the need to act fairly between members of the company
Topic
Section 172(1) considerations
Outcomes
Return of capital
to shareholders
The Board considered
the distribution of surplus
capital to shareholders
during the year.
f
a
c
a
Considered shareholder expectations
in the context of the Group’s published
dividend policy.
Considered the Group’s capital position, taking
into consideration regulatory and policy holder
requirements and the long-term investment
needs of the business.
Considered the macro-economic environment
and geopolitical uncertainty that arose during
the year.
The Board approved an up to £100 million share
buyback programme (under which £50 million
of shares were repurchased) and an interim
dividend of 7.6p per share in respect of the
first half of 2022.
In July, the Board decided not to launch the
second tranche of the buyback programme, and
in 2023, took the decision not to recommend a
final dividend for 2022. (For more information
on capital management see page 30.)
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Corporate Governance continued
Topic
Section 172(1) considerations
Outcomes
Consumer Duty
implementation
The Board considered the
implementation of the
FCA’s new Consumer Duty
rules, which take effect in
July 2023.
Cost of living crisis
The Board considered how
to respond to changes in
real disposable incomes
seen during the year.
Location of London hub
The Company’s main
London hub has been
based in Bromley for a
number of years and the
Board considered whether
this continued to be the
optimal location for the hub.
c
d e
a b
c
d e
a
c
a
a b
Considered how the Group could embrace
new requirements to further strengthen
good outcomes and fair value for customers
and how implementation could tie in with
existing work streams aimed at improving
customer outcomes.
Considered feedback received via the ERB
about how the cost of living crisis was affecting
colleagues and what could be done to support
our people.
Considered how the cost of living crisis was
impacting customers’ ability to pay for their
premiums and excesses, and how the Group
could help.
Considered how to adapt the Group’s motor
products to provide customers with the choice
of a stripped-back insurance policy.
Considered the need to attract and retain the
talent and skills needed for the future of the
business by making the London hub more
accessible to a wider geographical area.
a
d
Considered long-term cost and environmental
benefits achieved from taking on a smaller
property that would not be underutilised in
the new hybrid working environment.
Approved a Consumer Duty implementation
plan and monitored progress against the plan.
Appointed Tracy Corrigan as Board Consumer
Duty Champion to ensure Consumer Duty is
being raised in all relevant Board discussions
and drive management to focus on
consumer outcomes.
A range of measures were put in place to support
colleagues. See page 56 for more information on
these measures.
Several measures were introduced to support
those facing financial difficulty. See page 53 for
more information on these measures.
The launch of the Churchill Essentials product
(see page 53 for more information).
It was decided to move the Group’s head office to
a smaller Central London property.
Science-Based Target
(“SBT”) setting
The Board considered SBTs
to be set and submitted for
validation to the SBTi.
a b
Considered feedback received from colleagues
via an ERB consultation about how the move
would impact them.
Agreed a revised Travel Assistance Policy and
measures to support neurodiverse colleagues
(see page 56 for more information).
d
a
d
f
c
The CEO (at the time) met with the MP for
Bromley and the Leader of Bromley Council to
discuss how the move could impact the local
community in Bromley and what the Group
could do to support it.
This engagement led to Bromley Council
deciding to purchase the Bromley property from
the Company to use as its own headquarters,
projecting the move would result in considerable
cost savings to the public finances.
Considered the Group’s vision to create a world
where insurance is a force for good.
Considered advice from specialist adviser
Carbon Intelligence.
Considered trends in the investor community
towards ethical investment and reducing
climate risk.
Considered engagement with suppliers as
part of the Group’s Supplier SBTi on-boarding
programme which assessed suppliers’ current
status and ambitions in respect of setting
SBTs themselves.
The Board approved five targets for validation.
These targets were subsequently validated by the
SBTi and published by the Company (see page 66
for more information).
Agreed to set a voluntary target. See page 66 for
more information.
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Direct Line Group Annual Report and Accounts 2022
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.
Our Shareholders
The Investor Relations team runs a comprehensive programme of engagement covering a broad range of the Company’s
shareholders and debt investors, which includes meetings with the Chair and Executive Directors, presentations and
conference calls to discuss performance and strategy. During the year, and following the trading update in January 2023,
the Chair attended a number of meetings with institutional investors to discuss the performance and immediate strategic
priorities of the business.
The Remuneration Committee Chair engages with shareholders on remuneration-related matters (see page 132 of the
Directors’ Remuneration Report for more information).
The AGM provides both institutional and retail shareholders with the opportunity to ask the Board questions either live or
by submitting questions in advance. In 2022, we returned to holding an in-person AGM and saw increased attendance and
engagement from retail shareholders compared to the hybrid/virtual AGMs we had held in the previous two years due to
the pandemic.
Our People
Meetings of the Group’s Employee Representative Body (“ERB”) are generally attended by the CEO and one or two Non-
Executive Directors. Attendance and information on the work of the ERB during the year can be found on page 108.
Executive Directors host interactive sessions with colleagues throughout the year to receive feedback and answer questions.
These sessions are held in various formats in order to encourage maximum participation 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.
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’.
During the year, the CEO (at the time) visited the Group’s operations in Leeds, Bristol, Aldershot, Farnham, Doncaster,
Bromley and Glasgow. All of the visits included informal Q&A sessions with colleagues.
More information about the outcomes of this engagement and actions taken in response can be found on page 56.
Our Customers
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 new Consumer Duty Regulation and appointed Tracy Corrigan, Non-Executive Director, as
Consumer Duty Champion to act as the voice of the customer in the boardroom.
During the year, the CEO (at the time) visited the Company’s operations in Doncaster, one of the Group’s main customer
contact centres. Whilst there, she listened to calls with customers and spoke with customer-facing colleagues to get a
better understanding of what our customers are telling us.
Our Suppliers
The Board receives regular updates from management on key issues with suppliers.
During the year, the CEO (at the time) met with a number of key technology suppliers and partners.
The Board reviewed and approved the Group’s Ethical Code for Suppliers and Modern Slavery Statement. 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 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.
Our Planet and Our Society
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 126 to 127.
During the year, the CEO (at the time), the Chair and several Non-Executive Directors visited the Group’s new Technology
Centre in the Stechford Accident Repair Centre, which is where we test how we can fix Electric Vehicles in a greener way.
Whilst she was CEO, Penny James represented the Group on the Sustainable Markets Initiative Insurance Taskforce, which
works with other insurers and brokers to collectively advance progress to a net-zero economy. During the year, the Group
led the initiative’s “Global Supply Chain Pledge” (see page 127 for more information).
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Corporate Governance continued
Employee Representative Body
The Group has an established Employee Representative Body, meetings of which are attended by elected representatives
from the different areas of the business and by the (former) CEO, the Chief People Officer and members of the senior
leadership team. Non-Executive Directors also attended meetings on a rotational basis (during the year, five different
Non-Executive Directors attended ERB meetings). 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.
During the year, the ERB considered at one of its meetings how effective the structure of the ERB was in representing
colleagues in the new hybrid office and home working environment. It was agreed that it was key to maintain
flexibility in the structure to ensure that all areas were appropriately represented. A session was also held where the
ERB and management considered how they could work more effectively together in the future in respect of business
change activities.
Information about Board representation at ERB meetings can be found in the table below. Information about topics
discussed and action taken in response to feedback can be found on page 56.
Meeting
March
Board
Representation
Penny James
(former CEO)
June
Penny James
(former CEO)
October
Penny James
(former CEO)
Neil Manser (CFO)
Tracy Corrigan
(Non-Executive Director)
Mark Gregory
(Board Risk
Committee Chair)
Gregor Stewart
(Audit Committee Chair)
December
Penny James
(former CEO)
Richard Ward
(Remuneration
Committee Chair)
Fiona McBain
(Investment Committee
Chair)
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Direct Line Group Annual Report and Accounts 2022
Division of responsibilities
The core elements of the governance framework are the:
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 86.
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.
– 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 86;
– Enterprise Risk Management Strategy and Framework,
which is described on page 87;
– 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’s 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.
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
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Strategic reportGovernanceFinancial statements Corporate Governance continued
Structure of the Board, Board Committees and
executive management
The following chart sets out the structure of the Board and
its Committees and highlights the responsibilities of the
Chair, the Senior Independent Director, the Non-Executive
Directors, the Executive Directors, the Company Secretary
and the Executive Committee. The role descriptions for
the CEO and Chair are set out in writing; 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 2022, 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
Board composition
As at the date of this report, the Board comprised
the Chair, who had previously served as an independent
Roles and responsibilities of the Board
Board of Directors
Chair
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.
As at 31 December 2022, the Board comprised the Chair,
seven independent NEDs, and two executive Directors
(the CFO and the (now former) CEO).
Biographies of the full Board can be found
on pages 96 to 98.
Board Committees
Full details of membership, responsibilities and activity
of each Committee throughout the year can be found
on pages 116 to 129.
Audit
Committee
Investment
Committee
Board Risk
Committee
Nomination and
Governance Committee
Remuneration
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
– Guides, develops and leads the Board.
– Plans and manages the Board’s business.
– Oversees the Group’s 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 CEO1 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 their 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.
achieve the Group’s targets; and
– Alongside the Chair, oversees the governance
– Evaluate new business initiatives and opportunities.
framework.
Biographies of the Executive Committee can be found
on pages 100 to 101.
Note:
1. Penny James served as CEO and Executive Director until 27 February 2023. Jon Greenwood, who is currently serving as Acting CEO, is
expected to be appointed to the Board as an Executive Director once regulatory approval has been obtained.
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Direct Line Group Annual Report and Accounts 2022
Non-Executive Director and was independent when
appointed as Chair; one Executive Director; and seven
independent Non-Executive Directors, including the
Senior Independent Director. During 2022, the CEO was
Penny James, who served as an Executive Director. Ms
James stepped down from the Board on 27 January 2023.
Jon Greenwood, the Group’s Acting CEO, is expected to
be appointed to the Board once outstanding regulatory
approvals have been obtained.
Biographical details of the Directors of the Company as
at the date of this report are set out on pages 96 to 98.
Details of Directors who have served throughout the
year can be found in the Directors’ Report page 162.
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 approach to
succession planning and Board appointments can be
found in the Nomination and Governance Committee’s
report on pages 124 to 125.
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, anti-bribery
and corruption, the Bank of England’s Climate Biennial
Exploratory Scenario and the International Financial
Reporting Standard 17 (the new accounting standard for
insurance contracts). In addition, a series of deep dives
into the Group’s business areas took place during the year,
including technology transformation 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 2023 AGM. You can find out more about the
activities of the Nomination and Governance Committee’s
work during the year on pages 124 to 125.
External directorships
The Board keeps Directors’ external commitments under
continual review to ensure they continue to have sufficient
time to dedicate to the Group. During the year, the Board
reviewed and approved, in advance, Tracy Corrigan’s
appointment as a Non-Executive Director of Barclays
Bank UK plc and Domino’s Pizza Group plc. The Board was
satisfied that, in taking on the new positions, Tracy would
continue to have sufficient time to dedicate to her role on
the Board.
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.
In line with best practice, and as will be required
from next year by the new Listing Rule disclosure
requirements, the Company has chosen to be an early
discloser against the board diversity targets specified
in LR 9.8.6R(9), and to disclose numerical data on
the ethnic background and sex of the Company’s
Board and executive management (see tables on
pages 99 and 100). The Company reports that as at 31
December 2022 the Board was fully compliant with
the new targets, namely that:
a. at least 40% of the Board were women;
b. at least one senior Board position was held by a
woman; and
c. at least one Board member was from a minority
ethnic background.
Board’s approach to diversity and inclusion
The Board is fully committed to promoting Diversity and
Inclusion at Board and senior management level as well as
throughout the organisation.
Since 31 December 2022, Penny James stepped down
as CEO, which means that the Company no longer meets
target a). It is the Board’s aim to meet this target again and
it recognises the challenge in doing so, noting that as the
Board’s skills and experience are refreshed over time, its
gender balance may fluctuate according to the availability
of the best candidates for new roles at any given time. The
Board will continue to make diversity, including gender
diversity, a key consideration in Board succession planning.
The Company currently meets the Parker Review’s target to
have at least one director from an ethnic minority background
by the end of 2024. As at 31 December 2022, the Company
had met the FTSE Women Leaders Review targets to have
women make up 40% of Board and Leadership Team1
positions by the end of 2025 but as explained above, has
subsequently dropped below the target in respect of Board
composition. It aims to be compliant with this target again
by or ahead of the target deadline.
Having achieved its Women in Finance target of 30% women
in senior management2 by 2021, the Group chose to adopt
an ambitious stretch target of 35% by the end of 2022.
Note:
1. Defined as Executive Committee and their direct reports excluding administrative staff.
2. Women in Finance Charter definition of senior management is based on our internal grading structure.
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Strategic reportGovernanceFinancial statements Corporate Governance continued
On 31 December 2022, 31.3% of the Group’s senior management were women. Whilst the Group missed its stretch target, it
believes the process of target setting has had value and driven the Group’s internal work to improve gender representation.
The tables below set out data about the sex and ethnicity of the Board and executive management as at 31 December 2022,
in the format prescribed by the Listing Rules.
Men
Women
Not specified/prefer not to say
Number
of Board
members
Percentage
of the
Board
Number of senior
positions on the
Board (CEO, CFO,
SID and Chair)
Number in
executive
management1
Percentage
of executive
management1
6
4
–
60%
40%
–
2
2
–
5
6
–
46%
54%
–
Note:
1. Executive management is the Executive Committee and Company Secretary.
Number
of Board
members
Percentage
of the
Board
Number of senior
positions on the
Board (CEO, CFO,
SID and Chair)
Number in
executive
management1
Percentage
of executive
management1
White British or other White
(including minority-white groups)
Mixed/Multiple Ethnic Groups
Asian/Asian British
Black/African/Caribbean/
Black British
Other ethnic group, including Arab
Not specified/prefer not to say
9
1
–
–
–
–
90%
10%
–
–
–
–
Note:
1. Executive management is the Executive Committee and Company Secretary.
4
–
–
–
–
–
9
–
2
–
–
–
82%
–
18%
–
–
–
The Group recognises the importance of understanding
diverse representation and the monitoring of differential
outcomes. It collects diversity representation information
on the basis of self-reporting across the categories of sex,
gender identity, ethnicity, religion, sexual orientation,
disability and socio-economic background.
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.
The 2022 Annual Incentive Plan includes targets for
Executive Directors, the Executive Committee and senior
management in respect of improving the gender and
ethnic diversity of the workforce in the context of leadership
succession planning (more information on this can be
found on page 124 of the Nomination and Governance
Committee report).
Board appointments and Diversity Policy
The Board has in place a Diversity Policy which sets out
the key principles to be followed in respect of the Board
appointment process. More information on this can be
found in the Nomination and Governance Committee
report on page 125.
Workforce diversity and inclusion
The Board continues to support Group-wide diversity
and inclusion activities and initiatives, many of which
are outlined on pages 57 to 59. This includes the work of
the Company’s Diversity Network Alliance (“DNA”) which
champions diversity and inclusion in the Group through
its ‘DNA strands’: Race, Ethnicity and Cultural Heritage
(‘REACH’); Belief; LGBT+; Life (working families and carers);
Neurodiversity and Disability; Social Mobility; and Thrive
(gender). During the year, Non-Executive Director Adrian
Joseph hosted a ‘lunch and learn’ for the REACH DNA
strand during Black History Month.
More information about the work of the DNA during the
year can be found on page 57 of the Strategic report.
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 2018
are embodied in the Committee’s approach to Board
evaluation and succession planning. The Chair of the
Nomination and Governance Committee goes through a
continuous process of evaluating the skill and experience
required on the Board.
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Direct Line Group Annual Report and Accounts 2022
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. In 2022, the effectiveness
review was supported externally by board evaluation
consultants, Independent Audit Limited, who have no
other connection with the Company or any Director.
The 2022 evaluation process started in the autumn of a year
in which the Group had dealt with rising claims inflation
and fundamental regulatory change, along with severe
weather events, and the resulting report was updated
following the trading update published in January 2023.
It focused on the information available to the Board to
support its oversight, the interaction between the Board
and management, and the Board’s approach to basing
immediate strategic priorities on the lessons learned
from the events of 2022.
Independent Audit Limited conducted one-to-one
interviews with Board members, senior managers
and others, and were regular attendees of Board and
Committee meetings. They reviewed meeting papers and
observed Board and Committee meetings. Independent
Audit Limited’s findings and recommendations were
considered by the Board and its Committees in early 2023.
Evaluation process
Step 1
Step 2
Step 3
The thematic priorities for the review
were established by Independent Audit
Limited in discussion with the Chair and the
Company Secretary.
Independent Audit Limited interviewed
members of the Board, senior managers
and advisers, reviewed papers and observed
Board and Committee meetings.
A report was discussed with the Chair and
the Company Secretary, updated in light
of developments since the initial review
had been completed, and submitted to the
Board and each Committee for discussion.
Step 4 An action plan was defined following
discussion of the reports.
2022 evaluation outcome
The results of the review were presented to the Board and its Committees in early 2023 and will form the basis of an action
plan for 2023 as summarised in the table on page 114, along with an update on the action plan that resulted from the 2021
review. Themes emerging from the 2022 review included potential improvements to the quality of the information available
to the Board, a reflection on how lessons learned from the challenges faced by the Group in 2022 should inform immediate
strategic priorities, and a review of how the breadth and depth of expertise in the wider management team should
be refreshed. Separately, 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 performance.
2021 focus areas and action taken during 2022
Strategic topics
The Board’s agenda was more closely aligned to the Group’s prioritised Objectives and Key Results, and included
deep dives into the FCA’s Pricing Practices Review (“PPR”) regulations; investment in innovation; digitalisation of
customer experience; development of new products; medium-term technology strategy; mobility ecosystems;
business culture; the Group’s business portfolio; new Consumer Duty regulation; and supporting capital resilience
with a quota share reinsurance programme.
Engaging more effectively with the wider Executive team
The Board continued to engage with the wider management team and workforce. Throughout the year, the
Executive Committee and members of senior management were invited to attend Board and Committee meetings,
and the Board’s annual strategy day, to provide updates on their areas of responsibility. Among other site visits,
members of the Board visited the new technology centre at the Group’s accident repair centre in Stechford,
Birmingham, the customer service centre and accident repair centre in Glasgow and attended a Chief Information
Office boardwalk in Bromley to learn about progress and innovation being led by the Group’s technology teams.
Preserving and refreshing skills and experience in future Board composition
During the year, the Nomination and Governance Committee considered the observations made during the 2021
Board effectiveness review about taking a medium- to long-term view of succession planning. The scope of a
succession planning exercise was agreed with a search firm, Teneo, which will continue its work in 2023. A further
search for a Non-Executive Director with financial services, retail and e-commerce experience was launched and
resulted in the appointment of Mark Lewis with effect from 30 March 2023.
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Strategic reportGovernanceFinancial statements Corporate Governance continued
2022 focus areas and proposed action for 2023
Reflecting on 2022 challenges
The Board, with the assistance of external experts, will assess how the lessons learned from managing the challenges
of and increased market volatility during 2022 can be used to enhance governance and oversight.
Improving Board information
The Key Performance and Risk Indicators, analysis and insight made available to the Board will be the subject of
review, with the objective of streamlining and continuing to improve the reports provided.
Succession planning
In addition to the immediate priority of searching for a new Chief Executive Officer, the Board will carry out a further
review of Board and senior management succession plans and talent pipeline development with a view to accelerate
some of the actions already in progress. These focus both on further improving diversity in management and the
Board as well as enhancing the breadth and depth of the skills and experience required to execute the Group’s
strategic plan.
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 92 and page 164;
– 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 116.
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 166. The
Group’s External Auditor explains its responsibilities on
page 176.
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 88 to 90.
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.
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Direct Line Group Annual Report and Accounts 2022
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 2022 annual assessment of the
risk management, governance and control environment
did not identify any matters that conflict with the 2022
Internal Risk and Control Assessment Statement.
On behalf of the Board, the Board Risk Committee
reviewed the 2022 Internal Risk and Control Assessment
and was satisfied with the conclusion that the Group’s
risk management systems, including its internal control
systems, were fit for purpose for managing all material risks.
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.
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 2022,
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.
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 130 to 150, 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 136.
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 2022 Internal Risk and Control Assessment process did
not identify any material financial, operating or compliance
control deficiencies; 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 pricing practices and controls, claims handling,
technology, information and system security, and change
and resilience controls.
Whilst neither the Group Audit nor the Risk functions
identified any material risk and control deficiencies in the
Group’s risk management and control framework through
the IRCA, both highlighted an increased number of control
deficiencies during the year, which were considered by
the Risk and Group Audit Functions and the Board to
not be material in the context of the Group as a whole
and the Group’s Risk and Control Framework, resulting
in an overall deterioration in the resilience of the risk and
control environment.
The issues identified in the IRCA process were in the main
caused by a unique combination of external and internal
change factors which placed notable short-term strain on
certain processes in the Group. For example, exceptional
inflation particularly in the Motor market, severe weather
events, significant regulatory change in the FCA’s Pricing
Practices Review regulations and external delays to claims
settlement in the light of significant challenges to the
supply chain, and with these also coinciding with systems
re-platforming and embedding, made for a peculiarly
challenging operating environment during the year.
Both Risk and Group Audit functions have confirmed to
the Committee that many of these issues were mitigated
by compensating controls.
To address the issues identified, some mitigating controls
have already been utilised and further actions have been
identified to further strengthen specific controls and the
resilience of the risk and control environment. Certain
enhancements are also planned to provide greater
resilience against potential future stress scenarios.
The enhancements will be overseen by the Audit
Committee and Board Risk Committee.
Notwithstanding the identified and planned risk
management and control enhancements, on the basis
of the conclusion provided by each of the Risk and Audit
functions in the IRCA process, the Audit Committee
and Board Risk Committee are satisfied that the risk
management and control environment has been
satisfactory during the year.
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Strategic reportGovernanceFinancial statements Audit Committee report
Each member has recent and relevant financial experience
gained in a number of different financial services businesses,
including insurance, enabling them to contribute diverse
expertise to the Committee’s proceedings.
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.
2022 was a particularly challenging year for the Group and
this was reflected in the matters considered by the Audit
Committee during the year.
Financial reporting
The Committee followed a review process before
recommending the Annual Report and Accounts
and Half Year report to the Board, and 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 117.
In addition, the Committee reviewed papers prepared
by management on the use of alternative performance
measures in the financial statements. It 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 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 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
were 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 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.
After reviewing the reserves, the Committee recommended
them to the Board.
The Committee also considered an external actuarial review
of material risk areas of the insurance reserves carried out
for the Committee by PricewaterhouseCoopers LLP (“PwC”).
Gregor Stewart
Chair
Committee membership
– Gregor Stewart
Chair
– Mark Gregory
Independent Non-Executive Director
– Fiona McBain
Independent Non-Executive Director
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.
Areas of focus in the reporting period
– Financial reporting: reviewing and challenging the
key accounting 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, including the associated
new finance and actuarial systems.
– Audit tender: overseeing the external audit tender
process and making a recommendation to appoint
a new auditor to the Board.
– Reviewing and challenging the Group’s Task Force
on Climate-related Financial Disclosures report.
Committee skills and experience
In line with the UK Corporate Governance Code
(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 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.
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IFRS 17 implementation
During the year, the Committee continued to be highly engaged in overseeing the implementation of IFRS 17. The
Committee: reviewed updates on the completion of the programme of works to design and implement the changes
required to accounting and reserving processes and systems; reviewed, challenged and approved accounting policy choices
and accounting judgements; and reviewed the estimated impact of transitional adjustments and external communication
arrangements. The Committee held a deep-dive meeting and a training session focused on IFRS 17 where these matters
were considered in depth.
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 35 to 36.
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 principally
comprise 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.
In 2022, 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 2022 were the assumptions made in respect of the
cost of care and damage claims inflation, as well as the more wide-
ranging impacts of the current macro-economic environment.
The Committee discussed the judgements that underpinned
the year end reserves, including those based on data received on
current and prior-year development and settlement patterns, the
development of Motor bodily injury and damage claims for both
severity and frequency patterns, and subsidence following the
dry summer, as well as severity inflation observed in older years’
claims. Because of the increased uncertainty in an inflationary
environment, the Committee reviewed detailed analysis of the
issues that significantly impacted the booked reserves, alongside
supporting data and diagnostics, and the potential range of
outcomes. The Committee also reviewed and challenged the
scenarios proposed for reserving for the severe weather event
in December.
In addition, the Committee considered the Dear Chief Actuary
letter from the PRA, which highlighted the risks of inflation for
general insurers and required them to take certain actions to
address those risks, and approved the Group’s response plan.
The Committee also obtained insight and reviewed results from
an independent actuarial review of material elements of the
reserves. The Committee was satisfied that management had
exercised appropriate control and judgement in estimating
insurance liabilities.
In 2022, 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 noted that one write down was proposed in the
investment portfolio in relation to one of the Group’s commercial
real estate loans. The Committee considered the impact of the
challenging macro-economic environment on the investment
property portfolio and noted the year end independent valuation
reflected factors in relation to the impact of ongoing economic
uncertainty on certain sectors of the portfolio, primarily in relation
to the industrial and hospitality sectors. The Committee concluded
that the carrying values in the accounts were reasonably stated.
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Task Force on Climate-related Financial
Disclosures report
The Committee reviewed the financial disclosures in the
Task Force on Climate-related Financial Disclosures 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 72.
Going concern, viability and fair, balanced
and understandable
The Committee considered the going concern assumptions
and viability statement in the 2022 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 2022 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 117.
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 92.
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 are 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 2022, the Committee received regular reports on
any control deficiencies, compensating controls and the
mitigating actions taken by management. There were no
material control deficiencies reported to the Committee
in the year. However, there has been an increase in the
number of control deficiencies identified during the
year which were considered by the Risk and Group Audit
Functions and the Board to not be material in the context
of the Group as a whole and the group’s Risk and Control
Framework. These arose mainly as a result of external and
internal changes particular to 2022 (for example, PPR,
severe inflation and supply chain challenges, and these
coinciding with systems re-platforming and embedding).
However, both Group Risk Management and Group Internal
Audit functions have confirmed to the Committee that
many of these were mitigated by compensating controls.
Nonetheless, the Group, through this Committee along
with the help of external advisers, is reviewing its controls
and processes, including relating to further automation.
The reviews will be performed with a view to establishing
potential increased resilience and improvements. 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 development
of Group Audit’s Vision and Purpose and supporting
team structure. Within Group Audit’s four Strategy and
Vision pillars a particular focus was the data enablement
workstream to upskill the team, increase the number of
audits using data analytics and to provide more timely
and impactful insights on several key audits. Group
Audit’s performance partner PwC continued to provide
independent quality assurance activity with results
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
material deficiencies 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 2022 it received sufficient, reliable and
timely information to perform its responsibilities effectively.
During the reporting period, the External Auditor and
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 scheduled Board meeting.
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Direct Line Group Annual Report and Accounts 2022
External Audit
Deloitte LLP (“Deloitte”) has served as the Company’s
Auditor since 2000. Adam Addis, ACA, was the lead audit
partner for the Company’s 2021 and 2022 audits. Andrew
Holland, FCA, will take over as lead audit partner for the
Company’s 2023 audit.
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.
External Audit tender
During 2022, the Committee oversaw a competitive tender
process to select a new auditor to be appointed for the
financial year ending 31 December 2024.
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, they could only continue as the
Company’s External Auditor until 31 December 2023 and
therefore did not participate in the tender. There were
no contractual obligations restricting the Group’s choice
of External Auditor.
A Working Group was established by the Committee to run
the day-to-day process and report back to the Committee
on a regular basis. The Working Group was led by a senior
member of the procurement function and the process was
run in line with corporate governance and procurement
best practice. An outline of the process is set out below:
– Audit firms were invited to participate in the tender
based on their general insurance industry capability
and experience. The invitation was sent to the ‘big four’
(excluding Deloitte who were not allowed to re-tender
as set out above) and a number of mid-tier firms.
– A request for information (“RFI”) was sent to the
firms who had indicated they wished to tender, and
responses were reviewed by the Working Group and
the Audit Committee.
– All firms who responded to the RFI were invited to
participate in the formal tender process.
– A request for proposal (“RFP”) was reviewed by the
Committee and issued. Responses were received
and reviewed using a score card system based
on a set of non-discriminatory selection criteria.
– The lead audit partners of the short-listed firms met
with the Committee Chair to gain greater insight
into the business and the work of the Committee.
– Key members of the short-listed firms’ audit teams
presented to the full Audit Committee in person.
– The Committee met to evaluate the proposals, following
which a recommendation was made to the Board, giving
it the option of two firms, expressing a preference for one.
As announced on 10 October 2022, the Board approved
the appointment of KPMG LLP (“KPMG”) as the Company’s
auditor for the financial year ending 31 December 2024,
subject to shareholder approval at the Company’s 2024 AGM.
The Committee will now work to oversee an efficient and
effective handover from Deloitte to KPMG.
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
The Group has in place a minimum standard in relation
to the independence of the External Auditor, which is
compliant with the Financial Reporting Council’s review of
its Ethical Standard for Auditors. This establishes parameters
for preventing or mitigating anything that compromises
the External Auditor’s independence or objectivity. The
minimum standard includes:
– a formal process for the pre-approval of certain non-audit
services by the External Auditor;
– a requirement that any non-audit services are
reviewed annually;
– restrictions on employees of the auditor working for the
Group and vice-versa; and
– a requirement that key audit partners are rotated at least
every 5 years.
The Committee reviews the standard annually, and this year
approved a new provision which sets out safeguards for the
cooling-in of a new audit firm.
The Committee’s Terms of Reference require that
the Committee meet at least once annually with the
External Auditor in the absence of management.
In addition, the Committee reviews a letter from
Deloitte which confirms that in its professional opinion
it is independent within the meaning of regulatory and
professional requirements.
Therefore the Committee is satisfied that the Group has
adequate procedures to ensure that the External Auditor
is independent and objective and that these procedures
operated effectively during the year.
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Non-Audit Fees
During the year, the Committee did not approve any
fees for services from Deloitte unrelated to audit work.
The following is a breakdown of fees paid to Deloitte
for the year ended 31 December 2022 (excluding VAT).
Audit fees
Audit-related assurance services
Non-audit services
Total fees for audit and other services
Fees
£m
Proportion
%
3.0
0.2
–
3.2
94
6
–
100
Audit-related assurance services were in respect of the
Group’s Solvency II reporting and the review of the Half Year
report 2022, for which the Company’s External Auditor must
be used. Further information in respect of audit 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 2022, 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 2023 AGM.
Committee effectiveness review
During the year, an external evaluation of the effectiveness
of the Committee was facilitated by Independent Audit
Limited as part of the wider review of the Board and the
Board Committees. 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 113 to 114.
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
21 March 2023.
Gregor Stewart
Chair of the Audit Committee
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Direct Line Group Annual Report and Accounts 2022
Board Risk Committee report
Mark Gregory
Chair
Committee membership
– Mark Gregory
Chair
– Fiona McBain
Independent Non-Executive Director
– Gregor Stewart
Independent Non-Executive Director
– Dr Richard Ward
Senior Independent Director
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.
Areas of focus in the reporting period
– Monitoring and reviewing the Group’s top risks
across its financial, operational and organisational
resilience pillars.
– Regular assessment of the Group’s emerging risks,
including monitoring of the geopolitical landscape
and its impacts on the Group.
– Overseeing and challenging progress and delivery
of the FCA’s Consumer Duty implementation
programme.
– Receiving regular updates on climate change
including in relation to the Climate Biennial
Exploratory Scenario (“CBES”) exercise.
Further detail on these areas can be found in the body
of the Committee report.
Chief Risk Officer’s Report
2022 was a particularly challenging year for the Group
and this was reflected in the matters considered by the
Board Risk Committee during the year. At each scheduled
meeting, the Committee received a report from the Chief
Risk Officer (“CRO”) which outlined the challenges and risks
being faced across the Group’s financial, operational and
organisational resilience pillars. The CRO’s report provided
an overview and status of the top and principal risks against
the Group’s appetite, as well as: key activities undertaken
by the Risk Function to further embed risk management
across the Group; outputs of regular risk monitoring
activities; and details of any current and specific financial,
non-financial or regulatory and compliance risk matters.
Alongside this report, the Committee regularly 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,
changing consumer behaviours, keeping up with digital
advancements, geopolitical tension, automotive technology
and data ethics. In addition, the Committee reviewed the
plan of risk assurance activities to be undertaken for each
quarter and the year ahead to support the Company’s key
strategic objectives and to ensure adherence to prevailing
legal and regulatory requirements, as well as the Group’s
enterprise and risk management framework.
Focused business and risk reviews
Set out below are some of the areas of focus and key
reviews that the Committee carried out during the
reporting period, to examine the risk profile of the
business, and to challenge the robustness of frameworks
in place to manage key risk exposures as well as regulatory
requirements and expectations:
– overseeing and challenging progress and delivery
of the Consumer Duty implementation programme;
– reviewing customer and conduct risk matters to ensure
that fair pricing and outcomes are being achieved
for customers across all Direct Line Group products,
including reviewing actions taken to support customers
through the cost of living crisis, the Group’s annual
pricing report, its pricing strategy and the pricing
governance and control framework;
– examining and monitoring management on its progress
to embed climate-related financial risk management
in the business, including the Group’s response to the
Bank of England’s CBES exercise, through technical
briefings and regular climate-related updates;
– regular assessment of the geopolitical landscape
and its impact on the Group;
– review of the Group’s operational resilience self-
assessment, including important business services
and associated impact tolerances;
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– review of the effectiveness of the Group’s risk
management and internal control systems and
environment, including material financial, operational
and compliance risks, the Group’s residual risk position,
associated mitigating actions and compensating controls;
– review of key and ongoing change programmes and the
Group’s change operating model, to ensure delivery in
line with the Group’s strategic plan;
– review of the Group’s adherence to privacy and data
protection legislation;
– the stability, security and capability of the Group’s
IT systems; and
– review of the Risk Function’s target operating model
and revised approach to the Group’s risk culture, risk
taxonomy and policy and minimum standard framework.
Risk appetite
The Committee undertakes an annual review of
the Group’s risk appetite framework, which includes
the overarching risk appetite and policy risk appetite
statements. It monitors the Group’s exposure against
these statements, considers key risk indicators and
assesses the key drivers that affect status against risk
appetite. At each scheduled meeting, the Committee also
monitors the Group’s performance against its capital risk
appetite through the CRO’s report. In line with regulatory
requirements, the Committee scrutinises and approves
the Group’s overall affirmative and non-affirmative cyber
insurance underwriting strategy, associated risk appetite
statements and relevant management information.
Committee members also reviewed and challenged
the Own Risk Self-Assessment (“ORSA”) process and
key content before submission to the Board for approval.
Committee challenges on elements of the ORSA during
the year included: prioritisation of resource and activities
to deliver the strategic plan; pricing and underwriting
risk; and internal model validation activity. In addition, the
Committee monitors and challenges the stress and scenario
testing plan and outputs. The Committee also reviews the
potential contingent management actions for management
to consider taking in times of stress to restore the Group’s
capital strength to within an acceptable risk appetite range.
Internal Capital Model
The Committee regularly reviewed and challenged reports
on the Group’s partial internal economic capital model
for determining regulatory capital requirements during
the year, including key assumptions, methodologies and
areas of expert judgement used within the model, activities
undertaken to validate model outputs, model changes
and future management actions.
Whistleblowing
As delegated by the Board, the Committee routinely
reviewed the arrangements by which employees may, in
confidence, raise concerns about possible improprieties
in matters of financial reporting or other matters
(“whistleblowing”) during the year. The Committee
Chair oversees the independence, autonomy and
effectiveness of the Group’s policies and procedures on
whistleblowing, including the procedures for protection
from detrimental treatment for staff who raise concerns.
During the year, 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 challenged
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.
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Direct Line Group Annual Report and Accounts 2022
The Russia/Ukraine conflict led to an unprecedented
number of new sanctions being implemented against
the Russian regime. Whilst the new sanctions led to a
significant increase in the number of sanctions list updates
in H2 2022, the impact of the Russia/Ukraine conflict on the
Group’s ability to adhere to sanctions requirements was
low. During 2022, two positive sanctions matches to the
Russian regime were identified in relation to insurance via
certain packaged bank accounts – all necessary internal
and external reporting action was taken. New sanctions on
Russia are continuously coming into effect and the Group
continues to monitor the sanctions situation and screen
against the most up-to-date key sanctions lists on a daily
basis in order to mitigate this risk.
Risk governance
During the reporting period, the Committee received
assurance from management on the process for review of
the Group’s policies and reviewed material changes to the
Group’s most significant policies. The Committee reviewed
and challenged each of these policies and recommended
them for approval by the Board as appropriate.
The Committee has unrestricted access to management
and external advisers to help discharge its duties. It is
satisfied that in 2022 it received sufficient, reliable and
timely information to perform its responsibilities effectively.
In addition to one-to-one meetings with the Chair, the
CRO also met with the Committee in the absence of the
Executive Directors. The Chair reported on matters dealt
with at each Committee meeting to the subsequent
scheduled Board meeting.
Committee effectiveness review
During the year, an external evaluation of the effectiveness
of the Committee was conducted by Independent Audit
Limited as part of the wider review of the Board and the
Board Committees. The review found that the Committee’s
effectiveness had been improved by reshaping the agenda
and improving information flow; the purpose of meetings
was clear and challenge and questioning was focused.
Further information on the Board effectiveness review
can be found on pages 113 and 114.
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 21 March 2023.
Mark Gregory
Chair of the Board Risk Committee
www.directlinegroup.co.uk
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Committee report
Main activities during the year
Board and senior management
succession planning
The Committee continuously keeps the composition of
the Board under review, with the objective of preserving
and refreshing the Board’s collective experience, expertise,
diversity and cultural alignment, and matching its expertise
with the Group’s long-term strategy.
Since the end of the year, Penny James has stepped down
as CEO and as a member of the Board. The Committee
is leading the search for a permanent successor, working
closely with the Board on specifying the skills and
experience needed by a CEO to shape the Group’s strategy
and lead the business. We have engaged international
experts Spencer Stuart (a signatory to the voluntary code
of conduct for executive search firms which has no other
connection to the Company or any individual director) to
assist with the search.
During the year, the Committee considered the board
roles that will need to be recruited for as some current
Non-Executive Directors’ tenures reach nine years
(a circumstance which is identified by the UK Corporate
Governance Code as likely to impair, or which could appear
to impair, a Non-Executive Director’s independence)
over the coming four years. Taking into consideration
observations made during the 2021 Board effectiveness
review about the approach to future Non-Executive
appointments, the Committee chose to take a longer-term
view and engaged Teneo, the global executive search and
advisory firm (which has no other connection with the
Company or any individual Director) to help conduct a
talent mapping and market scanning exercise. The object
of the exercise is to begin to identify possible candidates for
future appointment as Non-Executive Directors, focusing
on the expertise that the Board will need to oversee the
development and execution of the Group’s long-term
strategy, as well as on diversity, including gender, ethnic
and cognitive diversity, and on the succession plan for
specific Board roles. The preparatory stage of the talent
mapping review is expected to continue into 2023.
With medium-term succession planning in mind,
the Committee recommended that Tracy Corrigan,
independent Non-Executive Director, be appointed as a
member of the Remuneration Committee. Tracy Corrigan’s
appointment was approved by the Board on 24 March 2022
and took effect on 1 April 2022.
The Committee also engaged Sciteb, the international
strategy and search firm (which has no other connection
with the Company or any individual Director), to conduct a
search for a Non-Executive Director with deep and recent
financial services, retail and e-commerce experience. As
announced on 17 February 2023, this process resulted in
the appointment, with effect from 30 March 2023, of Mark
Lewis, a former CEO of Moneysupermarket Group, as an
independent Non-Executive Director.
The Committee reviewed the Chief Executive’s short and
medium-term plans for the evolution of the Executive
Committee, noting the availability of a number of senior
managers in the Group capable of being developed over
the next few years, as well as short-term emergency cover
for contingency planning purposes.
Danuta Gray
Chair
Committee membership
– Danuta Gray
Chair
– Sebastian James
Independent Non-Executive Director
– Dr Richard Ward
Senior Independent Non-Executive Director
Key responsibilities
– Review the composition of the Board and
its Committees.
– Lead the process for Board appointments and make
recommendations to 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.
Areas of focus in the reporting period
– Took a long-term view of the skills and experience
needed by the Board, given the terms of
appointment of existing Non-Executive Directors,
and started a talent-mapping and market-scanning
exercise to identify future candidates with relevant
strategic experience.
– Monitored progress on senior management
succession planning and the development of a
diverse talent pipeline.
– Oversaw a search for a Non-Executive Director with
financial services, retail and e-commerce experience.
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Direct Line Group Annual Report and Accounts 2022
Electing and re-electing Directors
Non-Executive Directors’ fees
Before recommending the proposed election or re-election
of Directors at the 2022 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.
All current Directors (plus Mark Lewis whose appointment
is effective from 30 March 2023) will submit themselves for
election or re-election at the Company’s 2023 AGM.
Diversity and inclusion
The Committee believes that diversity of gender, ethnicity,
skills and experience, as well as cognitive, regional, socio-
economic, educational and professional diversity, equips
the Board better to take a broad strategic perspective and
the management team better to lead a diverse workforce
and serve a diverse customer base.
The Board has in place a Diversity Policy, the objective of
which 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. The policy states that appointments should
embrace diversity of gender, ethnicity, skills, experience and
cognitive diversity, as well as socio-economic, educational
and professional background, among other differences. The
policy underpins appointments that are made to both the
Board and its Committees.
The Board Diversity Policy is monitored and reviewed
annually by the Nomination and Governance Committee
and made available to any executive search firm engaged
to assist with the selection and appointment process for
Board positions.
The Board Diversity Policy is available to view on the
Company’s website at www.directlinegroup.co.uk/en/
sustainability/reports-policies-and-statements.
Further information on the Board’s approach to diversity can
be found in the Corporate Governance report on pages 111
to 112, which includes progress against key external targets.
The Committee also oversees the promotion of diversity at
senior management level and Group-wide. During the year,
it has kept the Group’s diverse talent pipeline under review,
noting its focus on inclusivity and equality of opportunity,
as well as on prioritising future skills needed by the
business, and the progress made towards gender targets
among senior management positions. More information
on senior management diversity can found on page 100.
During the year, the Committee reviewed the fees
for chairmanship of the Investment and Sustainability
Committees, and for membership of the Investment
Committee. Recognising the time invested by Non-
Executive Directors in the work of those Committees,
the increasing prominence of sustainability risks and
opportunities and the strategic importance of the Group’s
investment activity, the Committee proposed an increase
in fees for chairmanship of both Committees from £10,000
to £15,000 p.a. and the introduction of a fee for membership
of the Investment Committee of £5,000 p.a. The proposal
was approved by the Board in February 2022 and took
effect from 1 April 2022.
Corporate governance
The Committee monitors arrangements made by the
Company and its subsidiaries to comply with the UK
Corporate Governance Code and other relevant governance
standards. It also considers emerging governance matters,
observance of ESG standards and developments, and
reforms which may affect the Group’s adherence to
corporate governance best practice.
The Chair reported on matters dealt with at each Committee
meeting to the subsequent scheduled Board meeting.
Committee effectiveness review
During the year, an evaluation of the effectiveness of the
Committee was facilitated by Independent Audit Limited
as part of their wider review of the effectiveness of the
Board. The review found that the Committee functions
effectively and transparently, and that an appropriate
balance is struck between the Committee’s and the
Board’s discussions about Board composition and executive
succession planning. Further information about the Board
effectiveness review can be found on pages 113 to 114.
The Committee also reviewed its activity against its Terms
of Reference and determined that its Terms of Reference
remained 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 21 March 2023.
Danuta Gray
Chair of the Nomination and Governance Committee
www.directlinegroup.co.uk
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Main activities during the year
Customer
During the year, the Committee oversaw management’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 received
updates on management’s strategy to implement the
FCA’s new Consumer Duty, and considered how this could
be used as an opportunity to reorientate the business
to meet customers’ evolving needs, as well as ensuring
regulatory compliance.
The Committee reviewed management’s activity to support
financially-distressed customers affected by the cost of
living crisis and encouraged the business to continue to be
guided by customers’ needs, including being able to drive
for work.
People
Over the course of 2022, the Committee oversaw work
to promote a culture that helps people thrive through
celebrating difference. This supported progress to
increase the representation of women, minority ethnic
and Black professionals in leadership roles. The Committee
challenged management to further improve diversity and
inclusion at all levels of the business and to strengthen
the talent pipeline by focusing on candidates’ potential
and competencies.
The Committee oversaw enhancements to the Group’s
recruitment processes and encouraged ongoing work to
grow the diversity profile of the Group’s senior leadership
team and build a culture of inclusivity. The publication of
our second ethnicity pay gap report in 2022 was seen as
an important step towards further improving inclusivity in
the Group.
The Committee monitored employee wellbeing throughout
the year, taking particular note of colleagues’ experiences
of the cost of living crisis and the uncertain economic
climate. The Committee considered the effectiveness of the
Group’s hybrid working proposition and the opportunity
to help colleagues improve their work-life balance. To
enhance understanding of colleagues’ concerns, during
the year, some Committee members attended meetings
of the Employee Representative Body (“ERB”). For more
information on the work of the ERB, please see page 108.
Sebastian
James
Chair
Committee membership
– Sebastian James
Chair
– Tracy Corrigan
Independent Non-Executive Director
– Penny James1
Former Chief Executive Officer
– Adrian Joseph
Independent Non-Executive Director
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.
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 setting, validating and tracking
progress against the Group’s Science-Based Targets.
– Considered decision making on ethical matters,
including the Group’s Ethical Code for Suppliers
and Modern Slavery Statement.
– Reviewed performance and approach on key
stakeholder matters, including compliance with
the FCA’s Consumer Duty and charitable activity
in the local community.
– Reviewed the Group’s people plans, including
improving gender and ethnic diversity at senior
leadership level and developing a culture
of inclusivity.
Note:
1. Penny James was a member of this Committee until she stepped down from the Board on 27 January 2023.
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Direct Line Group Annual Report and Accounts 2022
Planet
Governance
Throughout 2022, 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, most
notably, the Group’s achievement of setting validated
Science-Based Targets (“SBTs”). To this end, the Committee
received insights into challenges facing the three most
carbon-intensive areas of the business – Auto Services,
procurement and investments – and examined strategies
for setting meaningful targets and meeting them. For
further details on alignment of the Group’s investment
portfolio with initiatives which will support the transition
to a low-carbon economy, see the Investment Committee
report for 2022 on pages 128 to 129.
During the year, the Climate Executive Steering Group,
which reports into the Sustainability Committee, actively
monitored progress towards sustainability across the
business, including work to set, and monitor progress
against, the Group’s first SBTs. For more information on the
Group’s journey to setting SBTs, please see pages 65 to 66.
The Committee received updates on additional activities
undertaken by the Group as part of its commitment to the
environment, most notably:
The Chair reported on matters dealt with at each Committee
meeting to the subsequent scheduled Board meeting.
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.
Modern Slavery Statement
In February 2022, 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.
The Modern Slavery Statement is available to view on the
corporate website:
https://www.directlinegroup.co.uk/en/sustainability/reports-
policies-and-statements.html
– its partnership with Climate Impact Partners to support
Ethical Code for Suppliers
the Uruguay afforestation Project;
– the Global Supply Chain Pledge, part of the Sustainable
Markets Initiative sponsored by His Royal Highness King
Charles III; and
– supporting the Get Nature Positive campaign, as part of
which the Group has partnered with the nature recovery
charity Heal.
Updates on the Group’s continuing 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
and feedback responses can be found on pages 77 and 121.
Society
Over the course of the year, the Committee reviewed
the distribution of the Community Fund. A sum of over
£750,000 was allocated to help build a more inclusive
and equitable Britain by improving social mobility and
accelerating inclusion.
In 2022, funding priority was given to mentoring,
work experience and career insight opportunities for
disadvantaged young people. The Committee noted
the success of community outreach events for sixth
form students with the Executive Committee and the
Chair of the Board and the strong participation from
the wider Group population.
Additional Community Fund projects during the year
included a £15,000 contribution to a sport initiative in
Bromley and a £50,000 donation to the Pakistan disaster
emergency appeal.
The Committee received the updated Ethical Code for
Suppliers and assessed its alignment with the Group’s
wider strategy. In particular, the Committee noted that
the business was encouraging its suppliers to align with
its own commitment to reducing carbon emissions, and it
welcomed the Group’s ambition to work with suppliers with
robust diversity and inclusion programmes.
Committee effectiveness review
During the year, an external evaluation of the effectiveness
of the Committee was conducted as part of the wider
review of the Board and the Board Committees which
was facilitated by Independent Audit Limited. The review
found that the Committee pushed energetically for SBTs,
is adept at overseeing the Group’s sustainability agenda
and has organised its areas of focus appropriately. Further
information on the Board effectiveness review can be found
on pages 113 to 114.
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 21 March 2023.
Sebastian James
Chair of the Sustainability Committee
www.directlinegroup.co.uk
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Market Developments
At each scheduled meeting, the Committee received
a market update from Jim Hardie, the Director of
Investment Management & Treasury and more recently
from Nicola Hartley, the Director of Investments and Capital
Management. The updates covered: economic conditions
and key data points in the UK, the US and the Eurozone;
the outlook for growth, interest rates and inflation; and
developing issues viewed as appropriate to be brought to
the attention of the Committee.
Jim Hardie retired from his role in December 2022, I thank
him for his valued contribution and commitment over the
past ten years. I am also pleased to welcome Nicola Hartley
as Jim’s successor.
The Committee also monitored market consensus views
and forward guidance on the development of interest
rate policies set by the Bank of England, the US Federal
Reserve, and the European Central Bank, and invited
external asset managers to provide their own house
views on market developments.
During 2022, the Committee’s market discussions centered
on the consequences of inflation rates having risen to levels
materially higher than Central Bank target ranges, and the
knock-on impacts for financial markets and the Group’s
investment portfolio.
Suitability of investment strategy
Studies examining stressed liquidity requirements
and asset and liability matching were presented to the
Committee during the year. This work informed strategic
benchmark allocations and provided part of the context for
the addition of new asset classes or disposing of holdings.
During the year, the Committee agreed small increases
to minimum liquidity stress requirements covering one
month and three month time horizons, and to a small
rebalancing of benchmark weightings between GBP
investment grade credit portfolios to better align with
changes in liability duration. The Committee also examined
and challenged a tactical credit spread de-risking proposal
tabled by management which was subsequently approved
with some changes reflected in the executed strategy.
Fiona McBain
Chair
Committee membership
– Fiona McBain
Chair
– Mark Gregory
Independent Non-Executive Director
– Neil Manser
Chief Financial Officer
Key responsibilities
– Provide oversight of the Group’s investment strategy.
– Oversee the management and performance of the
Group’s investment portfolio.
Areas of focus in the reporting period
– Monitored closely the changes in valuations and
resilience of the Group’s investment assets as yields
in global financial markets rose rapidly, reflecting
aggressive monetary policy tightening by central
banks to control inflation and concerns that
higher financing costs would lead to a period
of economic recession.
– Received progress updates on the calibration of
Science-Based Targets (“SBTs”) for each asset class
in scope within the investment portfolio. The work
formed part of the Group’s wider application to the
Science-Based Targets initiative, which approved the
Group’s SBTs in November 2022. Further details on
the SBTs, which includes investment targets, can be
found on pages 64 to 68.
– Ensured the investment portfolio maintained
sufficient liquidity to meet a stress insurance or
financial market event in a 1 in 200-year insurance,
market, or credit risk event.
– Ensured the investment portfolio held appropriate
allocations and remained within agreed aggregate
risk and exposure limits.
– Reviewed a detailed analysis setting out how the
Group’s investment governance framework and key
related controls ensure investment activities and key
decisions meet the PRA’s expectations under the
Prudent Person Principle.
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Direct Line Group Annual Report and Accounts 2022
Monitoring investment activity and performance
Governance
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 the agreed ESG framework;
and compliance with an agreed framework of risk,
exposure and liquidity limits.
During the year, the Committee invited two external
managers responsible for, respectively, certain investment
grade credit portfolios and the US high yield credit portfolio,
to present updates on: their respective portfolios; their
assessments of investment conditions; and the outlook
for fixed income markets. The Committee also received
presentations from the external managers responsible
for investment property and infrastructure debt and the
internally managed credit portfolios.
Given the likelihood of a period of economic recession,
the in-house investment team undertook a comprehensive
review of the robustness of existing assets held in the
investment portfolio, which was reviewed and discussed
by the Committee.
The Trading Update provided to the market on 11 January
2023 in respect of the Group’s trading for 2022 and outlook
for 2023 set out the impact on the Group’s investment
property portfolio valuation. Information on the steps taken
to counter some of the challenges which faced the Group
last year can be found in the CEO review which begins
on page 17.
The Chair reported on matters dealt with at each Committee
meeting to the subsequent scheduled Board meeting.
Committee effectiveness review
During the year, an external evaluation of the effectiveness
of the Committee was conducted by Independent Audit
Limited. The review found that the Committee is well-run,
the level of technical discussion is suitable and Committee
members have a good mix of technical and business
expertise. Further information on the Board effectiveness
review can be found on pages 113 to 114.
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 21 March 2023.
Fiona McBain
Chair of the Investment Committee
www.directlinegroup.co.uk
129
Strategic reportGovernanceFinancial statements Directors’ Remuneration report
Dr Richard
Ward
Chair of the
Remuneration
Committee
Committee membership
– Dr Richard Ward
Chair
– Tracy Corrigan
Independent Non-Executive Director
– Danuta Gray
Chair of the Board
– Mark Gregory
Independent Non-Executive Director
– Sebastian James
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
Areas of focus in the reporting period
– Appropriate remuneration outcomes for Executive
Directors, senior management, and the wider
workforce in a difficult year for the Group. Overall
performance fell below our expectations and did not
reflect our track record of delivering strong returns
for our shareholders, and our people faced cost of
living challenges
– Reviewing the current Directors’ Remuneration
Policy, which included considering all-employee
remuneration and other stakeholder interests. The
Committee were satisfied that the Policy remains fit
for purpose
Dear Shareholders,
On behalf of the Remuneration Committee (the “Committee”),
I am pleased to introduce this year’s Directors’ Remuneration
Report, including our updated Directors’ Remuneration
Policy (the “Policy”).
During 2022, Direct Line Group faced a volatile operating
environment with elevated inflation, severe weather events,
significant regulatory changes and challenging investment
markets, which resulted in a material fall in operating
profit. Whilst our other businesses performed broadly in
line with our expectations (when normalised for weather),
Motor delivered a disappointing result. As such the Group
results fell significantly below expectations resulting in the
Board’s decision to not recommend paying a final dividend
for 2022.
These factors have inevitably impacted remuneration
outcomes for the 2022 financial year, and the Committee
carefully considered a range of factors when making
remuneration decisions in respect of 2022 performance.
In doing so we were also cognisant of the challenges faced
by our people in the context of the cost of living crisis and
the actions the Group has taken to best support them
through this period. Further details of which are set out
later in this letter.
As part of this report, we are presenting our new Policy
which, if approved, will apply from the date of the 2023
Annual General Meeting (“AGM”). No material changes
are proposed to the Policy as the Committee concluded
that the existing Policy remains largely appropriate for the
Group at the current time. However, the Committee intends
to make some changes to the implementation of the Policy
for 2023 in respect of the Annual Incentive Plan (“AIP”)
and the Long-Term Incentive Plan (“LTIP”) performance
measures, and to simplify the LTIP by moving to a single
annual grant, improving transparency and alignment with
market practice. A summary of the proposals is included on
page 132 and the full Policy is set out on pages 151 to 161.
The Committee’s objectives include:
– rewarding Directors for results that are generated within
the risk appetite set by the Board;
– setting an appropriate framework for remuneration for
the Executive Directors, Executive Committee, and other
senior management with enough flexibility so that the
Group can attract and retain the best people for the
organisation; and
– having oversight of remuneration policies throughout
the Group and ensuring all our colleagues are paid fairly.
The Report is set out in the following sections:
Section
Chair’s statement
Remuneration at a glance – summarising
the remuneration arrangements for
Executive Directors
Annual Report on Remuneration –
detailing pay outcomes for 2022 and
covering how the Group will implement
remuneration in 2023
Page
130 to 133
134
135 to 150
Directors’ Remuneration Policy
151 to 161
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Direct Line Group Annual Report and Accounts 2022
Performance and incentive outcomes for 2022
Group financial and trading results fell materially below
expectations in 2022 and although we have supported our
customers and people in these challenging circumstances,
we did not navigate these challenges as effectively as we
would have wished. Nor did we maintain our track record of
delivering strong returns for shareholders. The performance
outcomes of the AIP and LTIP awards reflect these factors
and challenges, and are set out below.
This means that the overall outcome of the March and
August 2019 LTIP awards, which vested in 2022 were both
60% of maximum (including the RoTE outcomes disclosed
last year).
The relative TSR elements of the 2020 LTIP, and therefore
the overall outcome of the March and August 2020 LTIP
awards (including the RoTE outcomes as above) will be
disclosed in next year’s report once the performance
period is complete.
AIP
Financial performance in 2022 was heavily influenced
by the challenging external environment, which was not
navigated as effectively as we would have wished. Motor,
in particular, was affected by high claims inflation, which
remained ahead of our expectations throughout the year
as well as headwinds from significant regulatory changes,
higher used car prices, higher claims costs and longer
repair times. As a result, there was a profit before tax of
£0.2m (excluding restructuring and one-off costs), which
was below the threshold level for this element of the AIP
(55% weighting).
The remainder of the AIP (45% weighting) is based on
Customer & Growth, Cost and People. Performance in
respect of Customer & Growth and Cost elements were
below the objectives set at the start of the financial year,
although performance in respect of the People element
was stronger, with delivery of industry-recognised training
programmes to address skills gaps in particular areas and
good inclusion and engagement scores.
However, the Committee and Executive Directors
recognised the adverse impact of the Group’s trading
and financial performance this year on our shareholders
(including the decision not to recommend a dividend in
respect of 2022) and agreed that no AIP awards would be
paid in respect of 2022.
Full details on the outcomes for the year are included on
pages 138 to 139.
LTIP
In accordance with the remuneration reporting regulations,
the reported figures in the single figure table for 2022
include the RoTE element of the 2019 LTIP awards and the
TSR element of the 2020 LTIP awards. The Group granted
LTIP awards in two tranches in 2019 and 2020.
– RoTE: the performance of this element (performance
period ending 31 December 2022) was 14.2%. This was
below the threshold target level of 17.5%, and therefore
this element will lapse in full.
– Relative TSR: the performance of this element
(performance period from grant to vesting date) was
below the threshold performance level (median) leading
to these elements lapsing in full.
No discretion was exercised in respect of LTIP awards vesting
during the year, which reflects the trading performance
over the last three years.
Committee decisions on remuneration outcomes
As noted, the Committee agreed with the Executive
Directors that they would not receive an AIP award in
respect of 2022, recognising the impact on the Group’s
financial performance during the year.
The level of vesting of the 2019 LTIP awards was considered
appropriate in the light of the Group’s performance over
the three-year performance period, and therefore no
discretion to adjust the outcome was exercised in relation
to these awards.
The Committee recognises that the 2020 LTIP awards (in
particular the March 2020 awards) were granted during
a period of significant market volatility in share prices at
the onset of the Covid-19 pandemic. Due to the ongoing
uncertainty at that time, the Committee determined that
it would not be appropriate to adjust awards at grant, but
would instead consider whether there had been a “windfall
gain” at vesting, in line with prevailing market practice. The
Committee considered the continued appropriateness of
this decision at each subsequent LTIP grant, but noted that
there had not been a rapid recovery in the Group’s share
price since the pandemic (which may otherwise have
been an indicator of a potential windfall gain).
In advance of the vesting of awards in March and August
2023, the Committee will conduct a final assessment of
whether there has been a windfall gain in relation to either
award. However, taking the factors above into account, and
as the Group’s share price is currently lower than it was at
the grant of the awards, the Committee considers it highly
unlikely that a windfall gain would arise on the 2020 LTIP
awards were they to vest (noting that the RoTE elements
of the awards will lapse but the TSR performance period
continues until the vesting date).
Taking the points above into account, the Committee
believes the Policy has delivered an appropriate quantum
of reward for the corporate performance achieved. The
Committee was therefore satisfied that the Group’s
Remuneration Policy has operated as intended.
www.directlinegroup.co.uk
131
Strategic reportGovernanceFinancial statements Directors’ Remuneration report continued
Wider workforce pay considerations and
engagement for 2022
The Committee considers wider employee pay as context
for the decisions it makes and this has been particularly
important this year in light of the challenging cost of living
environment. The Committee was acutely cognisant of the
wider macroeconomic environment throughout the year,
in particular the impact that high inflation and increases in
energy bills have had on our people.
The Committee was supportive of the management’s
proposal to award a 5% salary increase to all staff (excluding
Executive Directors and the Executive Committee) effective
from 1 January 2023 (3 months earlier than the usual salary
increase date of 1 April 2023). The increase was announced
to staff in August 2022 to provide greater certainty in
advance of higher energy bills over the winter period.
In addition, in early February 2023, we announced further
support to our lower paid colleagues by awarding a cash
lump sum of £1,000 to those earning less than £40,000.
Whilst the Committee and Executive Directors agreed
that there would be no AIP awards in respect of 2022,
the Committee agreed with the management team’s
recommendation to recognise personal contribution to
the business in 2022 within the wider workforce (excluding
Directors, Executive Committee and senior leadership) by
making moderate payments to this population based on
personal performance and band.
The Group has also supported colleagues by:
– continuing to provide a facility for employees to access
part of their monthly salary in advance of the normal
payroll date;
– refreshing the Group’s employee discount platform
and signposting to relevant offers; and
– continuing to provide support and options to seek
support for colleagues facing financial hardship.
The Chair of the Committee has attended at least one
meeting of the Group’s Employee Representative Body
(“ERB”) each year since 2018. I attended the ERB meeting in
December 2022, where I provided a recap of how executive
pay operates at Direct Line Group and how this aligns
with the remuneration structures in place throughout
the Group. I listened to concerns from the ERB members
regarding the extent to which our people were being
affected by the cost of living challenges and how best
to make a meaningful difference.
The Chief People Officer and Chief Executive Officer
provided further workforce reward updates to the
Committee throughout the year as part of a standing
agenda item at our Committee meetings. This year,
updates included information on the Group’s gender and
ethnicity pay gaps and cost of living interventions outlined
above. The Committee considers it important to monitor
and assess internal pay relativities, including the CEO
pay ratio disclosures, and takes these into account in its
decision making. For example, the Committee scrutinises
the reasons for movements in the CEO pay ratio year-on-
year and considers the impact of salary increases on the
total remuneration package of our Executive Directors
and Executive Committee.
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Direct Line Group Annual Report and Accounts 2022
Directors’ Remuneration Policy (the “Policy”)
In line with the usual triennial Policy approval timescales,
we will be proposing a new Policy to shareholders for
approval at the AGM in May 2023. During the year, the
Committee conducted a review of the current Policy,
considering alignment to our strategic objectives and
developments in market practice over the last three
years, as well as the broader external environment. We also
noted the high level of shareholder support received for our
current Policy at the 2020 AGM (c.98%) and the subsequent
high level of support for the implementation of the Policy
disclosed in the 2020 and 2021 Directors’ Remuneration
Reports (c.97-98%).
Considering shareholder support for the existing
arrangements and recognising the current economic
uncertainty, inflationary challenges and complexities
associated with the Insurance industry transition to IFRS 17,
the Committee concluded that the existing Policy remains
appropriate at the current time.
We are therefore proposing to roll-forward our existing
Policy for approval at the 2023 AGM, subject to wording
clarifications, in particular to remove the minimum
weighting on relative TSR of 25% in order to provide greater
flexibility in relation to LTIP targets. The Committee notes
that there are currently no plans to remove the relative
TSR measure. The Committee retains the ability to conduct
a further review of the Policy as the external landscape
evolves prior to the next scheduled shareholder vote at
the 2026 AGM.
There are some minor changes to the implementation of
the Policy for 2023 in respect of the performance measures
for the AIP and the LTIP:
In the AIP:
– replacing Profit Before Tax with Operating Profit to
align with the Group’s KPIs going forward following
the transition to IFRS 17; and
– introducing an assessment of the delivery of improved
underwriting performance during 2023 to the Strategic
metrics whilst continuing to recognise the importance
of delivering great customer outcomes and supporting
great people.
In the LTIP:
– introducing a cumulative Operating EPS measure
to provide an assessment of absolute earnings levels
over the performance period, in addition to the return
measures reflected by RoTE and relative TSR;
– changing the relative TSR comparator group from the
FTSE 350 (excluding Investment Trusts) to the FTSE 51-
150 (excluding Investment Trusts) to more appropriately
reflect companies of similar size to Direct Line Group; and
– going forward we expect to grant LTIP awards once per
year (previously twice per year in March and August) to
further simplify the remuneration structure and align
with typical market practice.
We wrote to our largest shareholders in December 2022
to share our intention to roll-forward the Policy and outline
some of the proposed changes to the implementation
of the Policy for 2023. In light of the positive feedback
received, we did not make any changes to our initial
proposals. I would like to take this opportunity to thank
them for their engagement.
Jon’s salary is set at £725,000, which is below that of the
previous CEO (£817,000). Jon’s maximum opportunity
under the AIP and LTIP is 175% and 200% of salary
respectively, consistent with the CFO and the previous CEO.
In line with the wider workforce, Jon’s pension contribution
is 9% of salary. Details of Jon’s remuneration, which took
effect from 27 January 2023, is set out on page 150.
Committee performance
During the year, an evaluation of the effectiveness of
the Committee was facilitated by Independent Audit,
as part of their wider review of the Board’s effectiveness.
The review found that Committee members bring a good
mix of skills and styles to meetings and that the Committee
benefits from a well-established agenda and good support
from the business. Further information about the Board
effectiveness review can be found on pages 113 to 114.
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
both the Remuneration Report and Policy resolutions will
receive your support at the upcoming AGM.
Should you have any questions about the
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
Further details of the changes are set out in the Directors’
Remuneration Policy on page 155 and the remuneration
arrangements for 2023 on pages 149 to 150.
Executive Director remuneration for 2023
The Committee carefully considered salary increases for
the Executive Directors (and Executive Committee) for
2023, taking into account the wider workforce level (5%) and
shareholder expectations in light of the current inflationary
environment. For the Chief Financial Officer the Committee
determined an increase of 3% appropriate, being lower
than the wider workforce, with effect from 1 April 2023
(rather than the accelerated date of 1 January 2023 for
the wider workforce).
As outlined above, the Committee intends to make some
changes to the performance measures under the incentive
schemes for 2023. The 2023 AIP will operate on a similar
basis to 2022, except that Operating Profit will replace Profit
Before Tax as the financial metric (55% weighting) to align
with the Group’s KPIs going forward following the transition
to IFRS 17.
The LTIP awards for 2023 will be based on the following
measures and weightings:
– RoTE (30% weighting)
– Cumulative Operating EPS (30% weighting)
– Relative TSR vs FTSE 51-150 (excluding Investment Trusts)
(30% weighting)
– Emissions (10% weighting)
The Committee is in the process of finalising the RoTE and
Operating EPS targets for the 2023 award to take allowance
for the move to IFRS17. The targets will be disclosed in
due course.
Further details are set out on page 150.
Executive Director changes
On 27 January 2023, Penny James agreed with the
Board to step down as Chief Executive Officer and as a
Director with immediate effect. The Board has initiated
a process to identify and appoint a successor CEO. Until
that process is complete, Jon Greenwood (previously
Chief Commercial Officer), has been appointed as Acting
Chief Executive Officer, and is to join the Board, subject to
regulatory approvals.
I would like to thank Penny James for her contribution,
dedication and commitment to the Company since joining
as CFO in late 2017, and subsequently as CEO from May
2019. Penny’s employment with the Group ceased on 28
February 2023. Further details of her terms in relation to
departure are provided on page 147, and in the Section 430
(2B) statement on the Group’s website.
In setting Jon’s remuneration as Acting CEO, the
Committee considered a range of factors, including;
– market data in respect of FTSE 51-150 companies and
other FTSE 350 insurers;
– the previous CEO’s remuneration package;
– our Directors’ Remuneration Policy; and
– the pay and conditions of the wider workforce.
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133
Strategic reportGovernanceFinancial statements Remuneration at a glance
Remuneration outcomes
Penny James
(Former CEO)
Neil Manser
(CFO)
2022
2021
2022
20211
Total pay (£’000)
£940
£3,137
£564
£1,006
£0m
£500
£1,000
£1,500
£2,000
£2,500
£3,000
Base salary
Pensions and benefits
Annual bonus
LTIP
– Find out more on page 137
Note:
1. Neil Manser was appointed to the Board on 13 May 2021. His salary, bonus, benefits and pension for 2021 have been pro-rated accordingly.
LTIP
Release of value under the LTIP
This chart illustrates the total value of the 2019 LTIP awards that vested in 2022.
Penny James (Former CEO)
Neil Manser (CFO)
Grant
Vesting
Grant
Vesting
£0m
£1.0m
£2.0m
£0m
£0.25m
£0.5m
Shares under award
Reinvested dividends
Shares under award
Reinvested dividends
> Find out more on page 140
Shareholding at 31 December 2022
This chart illustrates the number of shares held at the end of 2022 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 (Former CEO)
£0m
£1.0m
£2.0m
£3.0m
£4.0m
£5.0m
Neil Manser (CFO)
£0m
£1.0m
£2.0m
£3.0m
£4.0m
£5.0m
2022
Guideline
> Find out more on page 142
134
Direct Line Group Annual Report and Accounts 2022
Annual Report on Remuneration
Introduction
We have prepared this Report in accordance with the
requirements of the Companies Act 2006 and the Large
and Medium-sized Companies and Groups (Accounts
and Reports) Regulations 2008 (as amended) (the
“Regulations”). The Report also meets the relevant
requirements of the Listing Rules of the FCA and describes
how the Board has complied with the principles and
provisions of the Corporate Governance Code relating
to remuneration matters. Remuneration tables subject
to audit in accordance with the relevant statutory
requirements are contained in this report and stated
to be audited. Unless otherwise stated, the information
within the Report is unaudited.
Committee members and governance
The following list details members of the Committee during
2022. You can find information about each member’s
attendance at meetings on page 105. You can find their
biographies on pages 96 to 98.
Committee Chair
Dr Richard Ward
Non-Executive Directors
Danuta Gray
Tracy Corrigan1
Mark Gregory
Sebastian James
Notes:
1. Tracy Corrigan joined the Committee with effect from 1 April 2022.
Advisers to the Committee
The Committee consults with the CEO, CFO, 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 Chair of the Audit Committee and the Board
Risk Committee Chair is a member of the Remuneration
Committee. Input was received regarding target-setting
and payouts under incentive plans, and whether it
is appropriate to apply malus and/or clawback. 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 internal audit,
reserving and tax services during 2022. 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 from the Group and its Directors.
PwC’s total fees for remuneration-related advice in 2022
were £124,600 excluding VAT. PwC charged its fees on a
time and expenses basis.
Wider workforce engagement and pay
considerations for 2022
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. Since 2018 the
Committee Chair has attended meetings as appropriate.
The Committee Chair attended an ERB meeting in
December 2022 where there was an introductory session
around executive pay which included a Q&A session
covering topics such as alignment of incentive outcomes
to strategic objectives, and feedback was shared about
how our people were being affected by the cost of living
challenges and how best to make a meaningful difference.
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. For 2022 this included information on
our gender and ethnicity pay gap, updates on supporting
colleagues with cost of living and the approach to 2023
salary increases for the wider workforce. 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 2022, 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 April 2022. In August 2022, it was announced that
the wider workforce would receive a 5% salary increase,
accelerated to be effective 1 January 2023, rather than
the usual effective date of 1 April 2023.
To support continued focus on senior diversity, at the
end of 2019 the Group set new stretch targets to grow
women senior leaders to 35%, ethnic minority leaders
to 13% and Black leaders to 1.5% by the end of 2022. As
at 31 December 2022, women made up 31.3%, ethnic
minority colleagues 12.1% and Black colleagues 1.5% of
these respective populations. While we missed two out
of three stretch targets, we believe the process of target
setting has supported progress to improve representation.
Alongside, the Group has made strong progress growing
the representation of women at the most senior levels of
the business with women comprising 40% of Board, 60%
of Executive Committee, and 41.1% of direct reports to
Executive Committee, as at 31 December 2022.
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135
Strategic reportGovernanceFinancial statements Directors’ Remuneration report continued
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.
– 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 an employee portal to ensure full
understanding and demonstrates a commitment to transparency.
– Some of the feedback received from employees on the cost of living challenges (e.g. via the DiaLoGue
survey and ERB) helped us better understand the nature of the challenges and which form of support
would be most suitable and when. The feedback on the 5% salary increase, and decision to bring forward
the salary increase, was communicated via a town hall meeting with an interactive Q&A session led by the
Executive Directors.
– 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 ERB meetings, which the
Chair of the Remuneration Committee attended in December 2022. Further details are set out on pages
132 and 135.
– As part of dialogue with our investors regarding the proposed Policy, we shared further detail to better
explain the rationale for changing the constituents of the TSR peer group, as well as understanding how
we will fully reflect the experience of our shareholders during 2022 in the remuneration decisions for our
Executive Directors.
Simplicity
Remuneration structures
should avoid complexity and
their rationale and operation
should be easy to understand.
– The Group’s remuneration arrangements are intentionally simple 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”).
– For 2023, it is proposed to simplify further, via a single annual grant of LTIP, rather than the previous
approach to split into two grants, in March and August each year.
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 Committee reviews the appropriateness of targets annually, being mindful of alignment with
strategy. Whilst we endeavour to keep the measures themselves as simple as possible, we recognise
adding a fourth measure adds complexity, but better reflects underlying financial performance because
it recognises the importance of absolute earnings and growth alongside a focus on the efficient use
of capital.
– The ability to mitigate potential risks is within 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. As such, in relation to the trading
results in 2022, the Committee was in agreement with management that no AIP should be paid in respect
of performance in 2022.
– 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, 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 2022 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 and from 2023, there will
be equal focus between RoTE and EPS – 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. This is evidenced by
the decisions reached between the Remuneration Committee and management not to make any AIP
payments for 2022.
– 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. Our incentive arrangements link to
them in the following ways:
– 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, our AIP measures
include measures linked to our customer and people performance, whilst our AIP and LTIP measures
include financial metrics which measure the short-term and long-term performance of the business
including earnings and returns measures.
– 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.
136
Direct Line Group Annual Report and Accounts 2022
Implementing Policy and pay outcomes relating to 2022 performance
Single figure table (Audited)
Salary1
Benefits2
Annual
bonus3
Long-term
Incentives4,5
All-employee
share plans
Pension
contributions
and cash
allowance
in lieu of
pension
Fixed pay
and benefits
sub-total
Variable
remuneration
sub-total
2022
2021
2022
2021
817
817
515
326
49
36
2
1
–
1,201
–
479
–
1,009
–
169
–
–
1
1
74
74
46
29
940
927
564
357
–
2,210
–
649
Total
940
3,137
564
1,006
£’000
Penny James
Neil Manser6
Notes:
1. Salary – the Company operates a flexible benefits policy, and salary is reported before any personal elections are made.
2. Benefits – include a company car or allowance, private medical insurance, life assurance, income protection, health screening and
discounted insurance. The former CEO used a car service for travelling on journeys between home and office; the Group also paid for
any associated tax liability 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 pages 138-139. These deferred awards are normally subject to continuous employment. 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 2019 and reported in 2021 have
been updated. These updates are based on the actual vesting of the RoTE portion of the awards and a share price of £2.80 and £2.06 on
29 March 2022 and 30 August 2022 respectively, compared to the three-month average share price of £2.78 used in reporting this figure in
the 2021 report. The revised figures include the actual number of dividends accrued on this portion of the award at vesting. This results in
an adjusted reportable decrease of approximately £97,955 for Penny James, and a decrease of £17,092 for Neil Manser, with a corresponding
change in the single figure in 2021 reflected in the table above. Further information on LTIP awards can be found on pages 140-141.
5. The 2022 LTIP figures for Penny James and Neil Manser reflect the performance of the relative TSR element of the 2019 LTIP awards and (for
Neil only) the RoTE element of the 2020 awards (as Penny’s 2020 LTIP award lapsed on her cessation of employment with Direct Line Group
on 28 February 2023). Further information on LTIP awards can be found on pages 140-141.
6. Neil Manser was appointed to the Board on 13 May 2021. His salary, bonus, benefits, and pension for 2021 have been pro-rated accordingly.
7. Tim Harris stepped down from the Board on 13 May 2021. His pro-rated remuneration for this period was £157k in fixed pay and benefits,
and £19k in variable remuneration, a single figure of £176k.
Each Executive Director has confirmed they have not received any other form of remuneration, other than that already
disclosed in the single figure table.
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Strategic reportGovernanceFinancial statements Directors’ Remuneration report continued
Annual Incentive Plan outcomes for 2022 (Audited)
The chart illustrates the final assessment, performance measures and weightings under the AIP.
Performance measures and
weighting
Executive Director
Achievement under the 2022 AIP
Penny James
Neil Manser
0%
0%
2022 AIP
payment
nil
nil
Although the Committee recognised positive progress
in some of the strategic metrics, particularly in relation
to the People measure, the Committee agreed with
the Executive Directors that no AIP would be awarded
for 2022 in light of the financial performance and the
impact of this on shareholders.
55% Financial
15% Cost
10% People
20% Growth & Customer
Financial element (55% weighting)
The financial performance measure for 2022 was profit before tax (excluding restructuring costs and one-off costs of
£45.3 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%
Maximum 100%
2022 Actual
2022 Achievement
£413.9m
£505.9m
£0.2m
nil
138
Direct Line Group Annual Report and Accounts 2022
Strategic metrics (45% weighting)
A summary assessment of the strategic metrics is set out below.
Measure
Assessment
Growth & Customer
(20% weighting)
Growth
– In-force policies from ongoing operations were 9.7 million at the end of December 2022, 3.2%
To better align focus of
our leadership teams
on delivery of growth
without compromising
customer experience
lower than prior year with reductions across all segments except Commercial which continued
to deliver strong growth.
– Adjusted gross written premium from ongoing operations experienced a similar reduction,
falling by 3.2% to £2,974.0 million. Growth in Commercial was offset by reductions in Motor
and Home arising from the combination of challenging market conditions together with the
impact of regulatory change. Total Group in-force policies were 11.9 million and total adjusted
gross written premium was £3,098.4 million.
Customer
– During 2022, we continued to maintain NPS scores consistent with our performance over the
last five years, however the majority of our metrics ended the year below the on-target levels
set at the start of the year. This was due to internal and external factors, such as supply chain
issues caused by the macro-economic and political instability as well as inflationary pressures.
Performance improved during Q3, given the mitigating actions put in place to improve sales
and service journeys.
Although good performance was delivered against some of the Customer metrics during 2022,
the trading results did not achieve sufficient levels to assess that this element would have met
target performance.
Cost
(15% weighting)
– Despite inflationary pressures, controllable costs reduced by £27.6 million, more than off-
setting a £23.5 million increase in amortisation, depreciation and levies.
Improve our
competitiveness to
deliver better value
and experience for
customers by reducing
operating expenses
– The reduction in controllable costs was driven by a range of cost saving initiatives including
reducing the Group’s office footprint, reducing technology run costs and increased customer
adoption of digital and self-service channels.
The Committee considered a qualitative assessment of performance with reference to the
internal controllable expense savings targets in our Strategic Plan, but the results did not
achieve sufficient levels to assess that this element would have met target performance.
People
(10% weighting)
Engagement, Diversity & Inclusion
– A score of 79% was reached for our inclusion indicator, but only 72% for engagement,
A range of indicators
around diversity and
inclusion, employee
engagement and
closing the skills
gap, reflecting the
importance of these
agendas to the success
of the Group
which is below the target of 75%. However, given the external volatility and internal change
programmes during 2022, we have done extremely well to end the year with broadly the
same levels of engagement that we started with.
– While we have strengthened our approach to inclusive recruitment and promotion at the
senior levels of our business and made progress as a result, we did not meet two diversity
targets, predominantly due to higher attrition of women in senior leadership and lower
levels of ethnic minority joiners and promotions.
Closing the skills gap
– Over 2022 our focus was on building future skills, continuing to push forward promoting
diversity and inclusion in the business and engaging with our people during the cost of
living crisis.
– We launched our Ignite academies which incorporate apprenticeship programmes to develop
the vital skills needed to serve our increasingly tech savvy customers. 170 new apprentices are
already working in Data, Customer Service and Data, Software Engineering and Pricing and
Underwriting, joining the 224 we already had.
– We also launched our Data Academy so all colleagues can grow their data capability and learn
new skills, with over 1,000 engaging in courses, lunch and learn sessions and using resources
from the website.
The Committee considered these indicators, and noted that while the results did achieve
sufficient levels to assess that this element would have met target performance, it was agreed
that no AIP would be awarded for 2022.
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Strategic reportGovernanceFinancial statements Directors’ Remuneration report continued
LTIP outcomes for 2022 (Audited)
2019 LTIP awards (vesting in 2022)
Awards under the LTIP granted in March and August 2019 vested during 2022. They were subject to relative TSR
performance over the three-year period from the date of grant, and RoTE performance in 2019, 2020 and 2021.
Consistent with the Regulations, the expected RoTE vesting outcomes for the year ended 31 December 2021 (together
with the TSR elements from the 2018 awards) are included in the 2021 LTIP column of the single figure table, because the
performance period for these elements ended in 2021. The performance outcomes of these elements are included in the
table below.
The TSR elements of the 2019 awards (and the RoTE elements of the 2020 awards – see below) are included in the 2022
single remuneration figure because the performance period for those elements ended in 2022. 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 was as follows:
Award
Performance measure
Weighting
Threshold
(20% of
maximum)
60%
17.5%
Maximum
(100% of
maximum)
20.5%
Actual performance
Achievement
Outcome
21.4%
100.0%
60.0%
March 2019
August 2019
RoTE
(2021 single figure)
Relative TSR
(2022 single figure)
RoTE
(2021 single figure)
Relative TSR
(2022 single figure)
40%
Median
Upper quintile
Below threshold
0.0%
0.0%
60%
17.5%
20.5%
21.4%
100.0%
60.0%
40%
Median
Upper quintile
Below threshold
0.0%
0.0%
2020 LTIP awards (vesting in 2023)
Awards under the LTIP granted in March and September 2020 for Neil Manser will vest, subject to Committee approval,
during 2023. The March and September 2020 LTIP awards for Penny James lapsed on cessation of her employment with
Direct Line Group on 28 February 2023.
Vesting of the awards is subject to relative TSR performance over the three-year vesting period, and RoTE performance
in 2020, 2021 and 2022. The RoTE performance period for these awards ended on 31 December 2022 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 2023 and September 2023 respectively and will be disclosed in the 2023 Directors’
Remuneration Report. Vesting 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 2020 LTIP awards (together with the TSR
elements from the 2019 awards above) are included in the 2022 single remuneration figures. You can find details of this
on page 137.
Award
Performance measure
Weighting
Threshold
(20% of
maximum)
Maximum (100% of
maximum)
Actual performance
Achievement
Outcome
March 2020
RoTE
(2022 single figure)
Relative TSR
(2023 single figure)
September
2020
RoTE
(2022 single figure)
Relative TSR
(2023 single figure)
60%
17.5%
20.5%
14.2%
0.0%
0.0%
40%
Median
Upper quintile
Performance period not yet complete
60%
17.5%
20.5%
14.2%
0.0%
0.0%
40%
Median
Upper quintile
Performance period not yet complete
140
Direct Line Group Annual Report and Accounts 2022
LTIP awards granted during 2022 (Audited)
The table below shows awards granted under the LTIP to Executive Directors in 2022 in the form of nil-cost options.
Director
Position
Award as % of salary
Number of shares granted
Face value of awards (£)
Awards granted in 2022 under the LTIP1
Penny James2
Chief Executive Officer
Neil Manser
Chief Finance Officer
Notes:
100%
100%
100%
100%
297,090
390,909
187,272
246,411
817,000
817,000
515,000
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 £2.75 in March 2022
and £2.09 in August 2022.
2. As outlined on page 147 the awards granted to Penny James lapsed on cessation of her employment with the Company.
The performance conditions that apply to the LTIP awards granted in 2022 are set out below:
Performance Measure
RoTE (average over three years)
TSR (vs FTSE 350 (excluding Investment Trusts))
Emissions
Emissions targets are:
Performance conditions for awards granted in 2022 under the LTIP
Proportion of award
Performance for threshold
vesting (20%)
Performance for
maximum vesting
50%
40%
17.5%
Median
20.5%
Upper quintile
10% 1 out of 3 targets are met
All 3 targets are met
– Operational Scope 1 and 2: Reduce Scope 1 emissions by 32% by 2024 versus the 2019 baseline.
– Corporate bonds (Scope 1 and 2): Reduce Scope 1 + 2 portfolio temperature score by invested value within corporate bonds portfolio from
2.44°C in 2019 to 2.30°C in 2024.
– Corporate bonds (Scope 1, 2 and 3): Reduce Scope 1 + 2 + 3 portfolio temperature score by invested value within corporate bonds portfolio
from 2.80°C in 2019 to 2.60°C in 2024.
A straight-line interpolation occurs from threshold to maximum performance.
The performance period for the awards granted on 29 March 2022 will end on 31 December 2024 for both the RoTE and
Emission elements, and 28 March 2025 for the TSR element. The performance period for the awards granted on 30 August
2022 will also end on 31 December 2024 for the RoTE and Emission elements and 29 August 2025 for the TSR element.
DAIP awards granted during 2022 (Audited)
The table below shows the deferred share awards granted under the DAIP to Executive Directors on 29 March 2022 in
respect of the 2021 AIP. Awards will vest after three years, normally subject to continued service, and were granted in the
form of nil-cost options.
Director
Position
Value of deferred bonus (£)
Number of shares granted1
Awards granted in 2022 under the DAIP
Penny James
Chief Executive Officer
Neil Manser
Chief Financial Officer
Note:
480,396
269,247
174,689
97,908
1. The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £2.75. 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.
Direct Line Group 2012 Share Incentive Plan (“SIP”) (Audited)
During 2022, 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 in the form of a conditional
share award, e.g. the matching shares vest after 3 years subject to continued employment and continuing to hold the
purchased shares. This table details the number of shares held by Neil Manser under the SIP. Penny James did not
participate in the plan.
Neil Manser
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 20222
382
–
899
995
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.
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Strategic reportGovernanceFinancial statements Directors’ Remuneration report continued
Directors’ Share interests (Audited)
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. The table below sets out details of the Executive
Directors’ share interests as at 31 December 2022.
At 31 December 2022
Share plan interests exercised during
the year to 31 December 2022
Share plan
awards subject
to performance
conditions1,2,3
Share plan
awards subject
to continued
service1
Share plan
awards vested
but unexercised1
Shares held
outright4
Number of
options exercised1
Share price on
date of exercise5,6
Penny James
1,791,421
476,187
757,245
1,156,840
Neil Manser
Notes:
813,153
184,236
–
298,571
114,380
462,753
58,023
98,222
36,780
2.77
2.16
2.77
2.09
2.06
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
2022 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 awards granted up to 2021, 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. For awards granted in 2022, 50% is based on RoTE performance, 40% on relative TSR performance and 10% on emissions.
The targets for the 2022 awards are set out on page 141.
4. These awards include beneficial share interests acquired under the SIP. At 20 March 2023, the number of shares beneficially held by Neil
Manser has increased to 298,786. There was no change to the number of shares held by Penny James.
5. Penny James exercised options on 30 March 2022 and 28 November 2022.
6. Neil Manser exercised options on 30 March 2022, 8 August 2022, and 31 August 2022.
The table below shows the Non-Executive Directors’ beneficial interests in the Company’s shares1.
Director
Danuta Gray
Tracy Corrigan
Mark Gregory
Sebastian James
Adrian Joseph
Fiona McBain
Gregor Stewart
Richard Ward
Shares held at
31/12/2022
Shares held at
31/12/2021
26,500
26,500
–
–
–
–
5,000
5,000
–
–
2,925
–
–
–
2,925
–
Note:
This information includes holdings of any connected persons, as defined in section 253 of the Companies Act 2006.
142
Direct Line Group Annual Report and Accounts 2022
Non-Executive Directors (Audited)
Fees were the only remuneration paid to Non-Executive Directors in 2021 and 2022. 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
Danuta Gray
Tracy Corrigan
Mark Gregory
Sebastian James
Adrian Joseph
Fiona McBain
Gregor Stewart
Richard Ward3
Notes:
Fees
2022
£’000
350
88
129
104
80
109
115
150
Taxable benefits2
2021
£’000
2022
£’000
2021
£’000
Total
2022
£’000
350
13
125
100
80
101
115
143
6
–
–
–
–
11
12
0
–
–
–
–
–
–
–
0
356
88
129
104
80
120
127
150
2021
£’000
350
13
125
100
80
101
115
143
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. The value of benefits for Richard Ward in 2022 totals £454, compared to £222 in 2021, these values are rounded to 0 for consistency within
the table above.
Shareholdings (Audited)
This table sets out the Executive Directors’ share ownership guidelines and actual share ownership levels:
Name
Position
Penny James4
Chief Executive Officer
Neil Manser
Chief Financial Officer
Notes:
Share ownership guideline1
(% of salary)
Value of shares held at
31 December 20222,3
(% of salary)
250%
200%
502%
177%
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 30 December 2022 share price of £2.21.
4. Penny James will maintain a shareholding of 250% of salary for a period of two years after she has left employment, with the number of
shares to be held in order to comply with these requirements being fixed as at the date of termination of her employment.
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Strategic reportGovernanceFinancial statements Directors’ Remuneration report continued
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
2022
2021
20201
20192
Notes:
Method
25th percentile pay ratio
Median pay ratio
75th percentile pay ratio
Option A
Option A
Option A
Option A
35:1
122:1
132:1
123:1
27:1
95:1
108:1
101:1
18:1
65:1
73:1
67:1
1. The 2021 figures have been updated for Penny James’ updated 2021 single figure value (see page 137 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 2022 and remuneration figures are determined with
reference to the financial year ending on 31 December 2022 (consistent with the approach taken in previous years).
Option A, as set out under the reporting regulations, was used to calculate remuneration for 2022 as we continue to believe
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. The table below sets out the salary and total pay and benefits of the employee at the lower quartile, median
and upper quartile for the 2022 financial year.
Salary
Total pay and benefits
25th percentile (P25)
Median (P50)
75th percentile (P75)
£24,103
£27,147
£29,433
£35,158
£36,762
£52,218
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 (2021: 28:1).
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 those of the wider workforce due to the nature of the role, and this means the
ratio is likely to fluctuate depending on the performance of the business and associated outcomes of incentive plans in each
year (as has been the case in 2022).
The 2022 ratios are significantly lower than the prior year. This is primarily attributable to the CEO’s single figure of
remuneration being lower for 2022 due to the zero AIP and LTIP outcomes. Over the longer term, the CEO pay ratios have
moved broadly in line with the CEO’s single figure of remuneration.
The Group’s employees are fundamental to the Group’s strategy and to ensuring a high level of service to our customers.
We are proud that the high number of consultants in our customer service centres are employed by the Group (rather than
being outsourced) and note that the impact of these lower-paid roles is reflected in the ratios above. Further details on the
remuneration of Executive Directors and the wider workforce are set out on page 135. The Committee notes that the pay
ratios for 2022 reflect the nature of the CEO’s package being more heavily weighted towards variable pay compared to more
junior colleagues, consistent with our reward policies. Furthermore, the Committee is satisfied that our pay and broader
people policies drive the right behaviours and reinforce the Group’s values which in turn drive our culture. For these reasons,
the Committee believes that the ratios are consistent with these policies.
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Direct Line Group Annual Report and Accounts 2022
Percentage change in Executive Directors’ and Non-Executive Directors’ pay for
2020 to 2022
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
Non-Executive Directors4,5,6
Danuta Gray
Tracy Corrigan
Mark Gregory
Sebastian James
Adrian Joseph
Fiona McBain
Gregor Stewart
Richard Ward
All employees (average)
Notes:
Salary/Fees1
Benefits2
Bonus
(including deferred amount)3
2022
2021
2020
2022
2021
2020
2022
2021
2020
0.0%
0.0%
0.5%
n/a
7.6%
n/a
38.4%
37.3% (24.6%)
(100.0%)
3.0% 16.1%
3.8%
n/a
n/a
(100.0%)
n/a
n/a
0.0%
67.4%
90.1%
17.8%
3.0%
3.7%
0.0%
7.3%
0.0%
5.1%
5.6%
n/a
15.0%
4.2%
n/a
n/a
7.2%
1.0%
n/a
6.7%
14.6%
0.0%
18.9%
2.7%
0.0%
0.0%
3.5%
n/a
n/a
0.0%
0.0%
n/a
n/a
n/a
0.0% (100.0%)
n/a
n/a
0.0% (100.0%)
0.0%
0.0%
n/a
n/a
(100.0%)
(79.9%)
(100.0%)
(87.2%)
105.0%
193.3%
(5.7%)
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
57.0%
(18.6%)
(1.4%)
(40.9%) 8.8% 3.9%
1. Based on the change in average pay for employees employed in the year ended 31 December 2022 and the year ended 31 December 2021.
The increase to the CEO salary in 2020, reflected her being CFO for part of the year before promotion to CEO, the actual pay increase from
1 April 2020 was 2.1%. Non-Executive Director fee levels were unchanged between 2020 and 2021, any changes above relate to individual
changes in committee membership through the year. Some Non-Executive Director fee levels changed between 2021 and 2022.
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 and 2022 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,
and 2021 and 2022. 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. 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 decreased value of benefits in 2020 related to a decrease in travel expenses due to the Covid-19 pandemic.
5. Adrian Joseph, Neil Manser and Tracy Corrigan joined the Board during 2021, and the respective 2021 figures in the table are based on an
annualised amount to compare to the current year.
6. Danuta Gray, Fiona McBain and Gregor Stewart had expenses in 2022, however it is not possible to display as a percentage increase due
to their nil expenses in 2021. See page 143 for further information.
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Strategic reportGovernanceFinancial statements Directors’ Remuneration report continued
Chief Executive Officer’s pay between 2013 and 2022 and historical performance of TSR
The table below shows historical levels of the CEO’s pay between 2013 and 2022. It also shows vesting of annual and long-
term incentive pay awards as a percentage of the maximum available opportunity. The graph reflects the TSR for the
Company and the FTSE 350 index (excluding Investment Trusts) on a cumulative basis over the period from 31 December
2012 to 31 December 2022, as the Company is a constituent of this index.
Total Shareholder Return (%)
300
250
200
150
100
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
31 Dec
2022
DLG
FTSE 350 (excluding Investment Trusts)
CEO single figure of
remuneration (£’000s)
Annual bonus payment
(% of maximum)
LTIP vesting
(% of maximum)1
Notes:
20131
20141
2015
20162
2017
2018
20193
20193
2020
20214
2022
Paul Geddes
Penny James
2,536
5,356
4,795
4,071
4,039
3,250
774
2,773
3,286
3,137
940
63%
75%
83%
43%
88%
68%
76%
76%
82%
84%
0%
55%
88%
96%
86%
99%
71%
0%
100%
80%
75%
0%
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
£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 2021 single figure and LTIP vesting have been revised to reflect the actual vesting of the 2018 awards under the LTIP.
146
Direct Line Group Annual Report and Accounts 2022
Payments to Past Directors (Audited)
Tim Harris
Tim Harris retired as Chief Financial Officer and stepped down from the Board on 13 May 2021. Following cessation of his
Directorship with effect from 13 May 2021, Tim’s contractual salary, pension and benefits were paid in monthly instalments
until the end of his 12-month notice period on 12 May 2022. The table below details the payments received during 2022.
Tim Harris
Penny James
Salary (£’000)
Benefits (£’000)
Pension (£’000)
Total (£’000)
197
5
18
220
Penny James stepped down from the Board on 27 January 2023, and her employment with the Group ceased on
28 February 2023. Penny’s contractual salary, pension and benefits were paid in the normal way until the end of her
employment, after which an amount equivalent to salary, pension and benefits will be paid in monthly instalments in lieu
of the remainder of her contractual notice period (subject to reduction to take account of any sums earned during the
payment period in any new role that Penny begins).
DAIP
The 2020, 2021 and 2022 DAIP awards will continue to vest on their third anniversaries of award and remain subject to the
scheme rules, including malus and clawback provisions. Awards will be exercisable for 12 months after they vest.
LTIP
Awards under the 2018 and 2019 LTIP which are currently in a two-year holding period, will continue to be subject to the
holding period, and then will be exerciseable for a period of 12 months. These awards will be subject to the scheme rules,
including malus and clawback provisions.
All other awards under the LTIP lapsed on cessation of employment with the Group.
Share Ownership Guidelines
Penny is to comply with the Company’s post-employment shareholding requirements, maintaining a shareholding of 250%
of salary for a period of two years post employment. Penny’s current shareholding includes shares owned outright, as well as
unvested DAIP awards, and LTIP awards within the holding period. Penny will be permitted to sell sufficient shares to cover
any tax liability on exercise of these awards.
Outplacement and legal costs
DL Insurance Services Limited will cover the reasonable costs of outplacement support up to £50,000 (excluding VAT but
including all disbursements) and will contribute up to £13,750 (excluding VAT but including all disbursements) towards legal
fees incurred by Penny for advice in connection with the termination of her employment.
March and August 2019 LTIP
The table below sets out the awards which vested during the year to Mike Holliday-Williams (former MD, Personal Lines) and
Tim Harris (former CFO) who exited the Group on 30 September 2019 and 12 May 2022 respectively:
Award
Executive Director
March 20192
Mike Holliday-Williams
October 20193
Tim Harris
Notes:
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 (£)
178,701
446,570
11.4%
52.6%
20,299
234,701
£56,756
£435,370
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 £2.80 on the vesting date (29 March 2022).
3. Based on closing share price of £1.86 on the vesting date (1 October 2022).
The March 2019 LTIP award vested overall at 60%, with the RoTE element (60% weighting) achieving 100%, and relative TSR
(40% weighting) at 0%.
The October 2019 LTIP award vested at 60%, with the RoTE element (60% weighting) achieving 100% and relative TSR (40%
weighting) at 0%. Both former Directors have confirmed that they complied with the requirements of their individual exit
agreements, which enabled the Committee to approve the vesting of these awards.
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Strategic reportGovernanceFinancial statements Directors’ Remuneration report continued
Distribution statement
This chart shows the overall pay expenditure across all Group employees compared with the total dividend value paid to
shareholders in 2021 and 2022.
Dividend (£m)
Overall expenditure on pay (£m)
297.9
300.8
% change
(1.0)%
Ordinary
% change
(2.0%)
470.2
479.9
22
21
22
21
Notes:
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 2021 Directors’ Remuneration Report (which was put to shareholders
at the 2022 AGM) and the Policy (which was put to shareholders at the 2020 AGM).
For
Against
Number
Percentage
Number
Percentage
Number of
votes withheld
(abstentions)
Approval of Directors’ Remuneration Policy (2020 AGM)
1,051,904,620
97.55%
26,440,027
Approval of Directors’ Remuneration Report (2022 AGM)
969,196,035
96.95%
30,526,555
2.45%
3.05%
60,251
50,850,116
Dilution
The Company complies with the dilution levels that the Investment Association guidelines recommend. These levels are
10% in 10 years for all share plans and 5% in 10 years for discretionary plans. This is consistent with the rules of the Company’s
share plans.
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Direct Line Group Annual Report and Accounts 2022
Implementing the Policy in 2023
Base salary
Key features
– Reviewed annually with any increases taking effect
Implementation in 2023
– The Acting CEO’s salary will be £725,000 from his
on 1 April
– The Committee considers a range of factors when
determining salaries, including pay increases
throughout the Group, individual performance,
and market data
appointment on 27 January 2023
– 3% increase for the CFO to £530,450
– The former CEO did not receive a salary increase for
2023 and her salary remained at £817,000
Pensions
Key features
– Pension contributions are paid only in respect
Implementation in 2023
– Acting CEO and CFO pension contribution remains
of base salary
at 9% (in line with the workforce)
– The Executive Directors’ pension is set in
line with the pension level received by the
employee population
Annual Incentive Plan
Key features
– 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 for the remainder
– The outcome is assessed at the end of the
performance period with reference to 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
Deferred Annual Incentive Plan
Key features
– 40% of the AIP is deferred into shares
– Typically vesting after three years, normally subject
to continued employment
– Malus and clawback provisions apply
Implementation in 2023
– No change to the maximum opportunity
– There will be a straight-line vesting between
AIP threshold and maximum performance
– Financial measures (55%): Operating Profit
– Strategic measures (45%): Assessment against a set
of Group Objectives and Key Results related to 2023
underwriting performance as well as delivering a great
customer experience and supporting great people
– The performance targets will be set with reference to
internal and consensus forecasts and the key strategic
priorities for the Group in 2023
– The performance targets are considered commercially
sensitive and will therefore be disclosed in next
year’s Report
Implementation in 2023
– No further performance conditions apply
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Long-Term Incentive Plan
Key features
– Awards typically granted as nil-cost options
– Awards granted once per 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
Implementation in 2023
– No change to the maximum annual award levels
– Will be granted once per year
– Nil-cost options will continue to be used for the grants
– 30% will be based on RoTE; 30% on TSR; 30% on EPS and
10% on emissions
– The relative TSR comparator group will be FTSE 51-150
(excluding Investment Trusts)
– The emissions targets for the 2023 LTIP awards will
be set based on the SBTi certified targets with the
targets being:
– Operational Scope 1 and 2: Reduce Scope 1 emissions
by 36% by 2025 versus the 2019 baseline.
– Corporate bonds (Scope 1 and 2): Reduce Scope 1 + 2
portfolio temperature score by invested value within
corporate bonds portfolio from 2.44°C in 2019 to
2.23°C in 2025.
– Corporate bonds (Scope 1, 2 and 3): Reduce Scope 1
+ 2 + 3 portfolio temperature score by invested value
within corporate bonds portfolio from 2.80°C in 2019
to 2.51°C in 2025.
– The Committee is in the process of finalising the RoTE
and Operating EPS targets for the 2023 award to take
allowance for the move to IFRS17. The targets will be
disclosed in due course.
New Acting Chief Executive Officer
On 27 January 2023, following the announcement that Penny James would be stepping down, Jon Greenwood, the then
Chief Commercial Officer, was appointed Acting CEO. Jon’s annual salary is £725,000. This salary was set with consideration
to the FTSE 51-150 CEO benchmark, other FTSE 350 insurers, and is below the previous CEO’s salary level. Jon’s pension
allowance will be 9% of salary, the same as 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.
Non-Executive Directors’ fees
The fees for the Chair and Non-Executive Directors for 2023 are set out below (unchanged from 2022).
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 2023
£’000
350
75
30
30
15
10
5
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Direct Line Group Annual Report and Accounts 2022
Directors’ Remuneration Policy
This section sets out our proposed remuneration policy for the Executive and Non-Executive Directors of the Group. This
Policy will be put forward for shareholder approval at the 2023 AGM on 9 May 2023 and, if approved, will apply to payments
made from that date. Until this time, the Policy approved on 14 May 2020 will continue to apply. The existing Policy is being
rolled-forward, with only some minor wording clarifications. These are summarised in the Remuneration Committee Chair’s
statement and in the notes to the Policy table.
Policy table
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
Operation
– 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:
– general base salary movements across the Group;
– level of skill, experience and scope of responsibilities, individual and business
performance, economic climate, and market conditions; and
– 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)
– The Committee does not follow market data in isolation, and instead uses it as a
reference point when considering, in its judgement, the appropriate salary level, while
regarding other relevant factors, including corporate and individual performance, and
any changes to 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
– When determining salary increases, the Committee will consider the factors outlined
in this table under ‘Operation’
Performance measures
– Not applicable
Pension
– To remain competitive
within the marketplace
– To encourage
retirement planning
and retain flexibility
for individuals
Operation
– Pension contributions are paid only in respect of base salary
– Executive Directors are eligible to participate in the defined contribution pension
arrangement or alternatively they may choose to receive a cash allowance in lieu
of pension
– The Executive Directors’ pension will be set in line with the pension level for the
wider workforce
Maximum opportunity
– The maximum pension percentage contributions are set at the wider workforce level
(currently 9% of salary)
Performance measures
– Not applicable
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Benefits
– A comprehensive
and flexible benefits
package is offered,
emphasising individuals
being able to choose
the combination of
cash and benefits
that suits them
Operation
– Executive Directors receive a benefits package generally set by reference to market
practice 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 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
Maximum opportunity
– The costs of benefits provided may fluctuate from year to year, even if the level of
provision has remained unchanged
– 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
Performance measures
– Not applicable
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Direct Line Group Annual Report and Accounts 2022
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 and enable a
stronger focus and
alignment with the
short to medium-
term elements of
our strategic aims
– Deferral delivers
further alignment
with shareholders and
aids retention of key
executive talent
Operation
– The AIP is measured based on performance over the financial year against
performance targets which the Committee considers to be appropriate
– At least 40% of the AIP is deferred into shares (typically in the form of nil-cost options
or conditional share awards) 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 of the AIP.
These are explained in the notes to the Policy table
Maximum opportunity
– 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
– Threshold and maximum bonus levels for Executive 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 maximum will be determined on
a straight-line basis
– 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
Performance measures
– Performance measures for the AIP may be financial and non-financial (Group,
divisional, business line or individual)
– Each year, at least 50% of the AIP is based on financial measures. The remainder of
the AIP may be based on a combination of, for example, strategic, operational, ESG,
shared or individual performance measures
– The Committee sets targets at the beginning of each 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. DAIP awards vest
subject to continued employment only
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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 and deliver
market competitive
remuneration
Share ownership
guidelines
– To align the interests
of Executive Directors
with those of
shareholders
Operation
– Awards will typically be made in the form of nil-cost options or conditional share
awards, which vest to the extent performance conditions are satisfied over a period
of at least three years. Under the Plan rules, awards may also be settled in cash at the
discretion of the Committee. This may be appropriate, for example, if legal difficulties
arise with settling in shares
– Vested options will remain exercisable for up to the tenth anniversary of grant
– Malus and clawback provisions apply to the LTIP. These are explained in the notes to
the Policy table
– Executive Directors will be subject to an additional two-year holding period following
the vesting period, during which time awards may not normally be exercised
or released
– During the vesting period and additional holding period (during which time awards
cannot be exercised) the awards will continue to accrue dividends. Following the
holding period, awards will cease to accrue dividends if not exercised
Maximum opportunity
– The maximum LTIP award in normal circumstances is 200% of salary
– Awards of up to 300% of base salary are permitted in exceptional circumstances,
for example relating to recruiting or retaining an employee, as determined by
the Committee
Performance measures
– The Committee will determine the performance conditions for each award made
under the LTIP, measuring performance over a period of at least three years with no
provision to retest
– 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 measures
(including share return), as set by the Committee, to be aligned with the Group’s
long-term strategic objectives. The Committee may alter the precise measures used
for future awards
– Not less than 50% of the award shall be subject to one or more financial measures
– 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
Operation
– 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 earlier sale,
in exceptional circumstances, is permitted by the Chair of the Board
– 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 their in-employment shareholding requirement (or actual
shareholding, if lower) post their employment for a period of two years
– In exceptional circumstances, earlier sale is permitted subject to the Chair’s discretion
Maximum opportunity
– 250% of salary for the CEO and 200% for the CFO
– The Committee reserves the discretion to amend these levels in future years
Performance measures
– Not applicable
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Direct Line Group Annual Report and Accounts 2022
Notes to the policy table
Changes from 2020 Policy
Considering the shareholder support for the existing arrangements the Committee concluded that the existing Policy
remains appropriate for Direct Line Group at the current time. Therefore, the existing Policy is rolled-forward for approval
with some minor wording clarifications, in particular to remove the minimum weighting on relative TSR of 25% in order to
provide greater flexibility in relation to LTIP targets. The Committee notes that there are currently no plans to remove the
relative TSR measure (with a 30% weighting expected for the 2023 LTIP).
The Committee also intends to make changes to the implementation of the Policy for 2023, as outlined in the Chair’s
Statement, including:
– adopting an Operating Profit measure in the AIP (replacing Profit Before Tax following the transition to IFRS 17);
– introducing a cumulative Operating EPS measure in the LTIP to provide an assessment of absolute earnings levels over
the performance period;
– changing the relative TSR comparator group from the FTSE 350 (excluding Investment Trusts) to the FTSE 51-150
(excluding Investment Trusts) in the LTIP to more appropriately reflect companies of similar size to the Group; and
– moving to a single LTIP grant per year (currently twice per year) to further simplify remuneration arrangements and
align with market practice.
Malus and clawback
Malus and clawback provisions apply to the AIP (cash and deferred element) and LTIP if, in the Committee’s opinion,
any of the following has occurred:
– there has been a material misstatement of the Group’s financial results, which has led to an overpayment;
– the assessment of performance targets is based on an error, or inaccurate or misleading information or assumptions;
– circumstances warranting summary dismissal in the relevant period;
– a material failure of risk management; and
– an event during the relevant period which has, in the view of the Committee, sufficiently and adversely affected the
Company’s reputation so as to justify such action.
Amounts in respect of awards under both plans (LTIP and DAIP) may be subject to clawback for up to four years post
payment or vesting/exercise of options (with such period lengthened if there is an investigation as to whether relevant
circumstances exist) as appropriate. Consistent with developments in the market generally, the provisions clarify that
any recoupment is out of the post-tax amount, except to the extent that the participant recovers tax from the relevant
tax authority.
Exercise of discretion
In line with market practice, the Committee retains discretion relating to operating and administering the AIP, DAIP and
LTIP. This discretion includes, but is not limited to:
– timing of awards and payments;
– size of awards, within the overall limits disclosed in the policy table;
– determination of vesting;
– ability to override formulaic outcomes;
– treatment of awards in the case of change of control or restructuring;
– treatment of leavers within the rules of the plan and the termination policy shown on pages 158 and 159; and
– adjustments needed in certain circumstances, for example, a rights issue, corporate restructuring or special
interim dividend.
While performance conditions will generally remain unchanged once set, the Committee has the usual discretions
to amend the measures, weightings and targets where the original conditions would cease to operate as intended.
Any such changes would be explained in the subsequent annual remuneration report and, if appropriate, be the subject of
consultation with the Company’s major shareholders. Consistent with best practice, the LTIP rules also provide that any such
amendment must not make, in the view of the Committee, the amended condition materially less difficult to satisfy than
the original condition was intended to be before such event occurred.
Adjusting the number of shares under deferred bonus and LTIP
The number of shares subject to deferred bonus and LTIP awards may be increased to reflect the value of dividends that
would have been paid in respect of any dates falling between the grant of awards and the date of vesting (or, if later, the
expiry of any holding period) of awards.
The terms of incentive plan awards may be adjusted in the event of a variation of the Company’s share capital, demerger
or a similar event that materially affects the price of the shares, or otherwise in accordance with the plan rules.
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Remuneration payments agreed before appointment to the Board
The Committee reserves the right to make any remuneration payments and payments for loss of office (including, where
relevant, exercising any discretion available to it connected with such payments) notwithstanding that they are not in line
with the Policy set out above where the terms of the payment were agreed (i) provided the terms of the payment were
consistent with any shareholder-approved Directors’ remuneration policy in force at the time they were agreed; (ii) at a time
when the relevant individual was not a Director of the Group and, in the opinion of the Committee, the payment was not
in consideration for the individual becoming a Director of the Company. For these purposes, ‘payments’ include pension
arrangements and the Committee satisfying awards of variable remuneration. Relating to an award over shares, the terms
of the payment are ‘agreed’ at the time the award is granted.
Selecting performance measures and targets
Annual Incentive Plan
The Committee select AIP performance measures each year to incentivise Executive Directors to achieve financial targets
and specific strategic objectives for the year. These measures are aligned with the Key Performance Indicators we use as a
business to monitor performance against our strategic priorities, as shown on pages 22 and 23.
The relevant performance targets are set at or following the start of each year with reference to internal and external
forecasts and the Group’s strategic targets.
Long-Term Incentive Plan
The goal of our strategy is to provide long-term sustainable returns for our shareholders. Therefore, the 2023 LTIP awards
will be subject to performance against RoTE and Operating EPS (which are important KPIs to the business), Relative TSR
(to assess shareholder returns on a relative basis) and emissions targets (aligned with our sustainability strategy, outlined
on pages 50-51). The Committee believes this combination provides a balanced approach to measuring Group performance
over the longer term by using stated financial KPIs which incentivise individuals to keep growing the business efficiently, a
measure based on relative shareholder return and a measure which aligns with our commitment to building a sustainable
business. This combination of measures appropriately balances absolute and relative returns. The performance measures
are set with reference to internal and external forecasts and the Group’s strategic targets.
As set out in the Policy implementation table on pages 149 to 150, different performance measures may apply for awards
granted in future years.
Differences in remuneration policy from broader employee population
To ensure that the arrangements in place remain appropriate, when determining Executive Directors’ remuneration, the
Committee accounts for pay throughout the Group.
The Group has one consistent reward policy for all levels of employees. Therefore, the same reward principles guide reward
decisions for all Group employees, including Executive Directors. However, remuneration packages differ to account for
appropriate factors in different areas of the business:
– AIP – approximately 3,700 employees participate in the AIP. The corporate performance measures for all employees are
consistent with those used for Executive Directors, although the weighting attributable to those factors may differ. The
Group’s strategic leaders (approximately 60 employees) also receive part of their bonus in Company shares deferred for
three years.
– Incentive awards – approximately 3,200 employees, excluding Executive Directors, participate in a function or team
specific incentive plan which assesses personal performance over a monthly period. These incentive awards may pay
out monthly or quarterly.
– LTIP – our strategic leaders participate in the LTIP, currently based on the same performance conditions as those for
Executive Directors.
– Restricted Shares Plan (“RSP”) – RSP awards are used across the Group to help recruit and retain critical staff, and for
talent management. Executive Directors do not receive grants under the RSP (with the exception of buyout awards
which may be granted under the RSP).
– All employee share plans – the Committee considers it important for all employees to have the opportunity to become
shareholders in the Group. The HMRC-approved SIP has operated since 2013, and, in addition, the Group has made
periodic awards of free shares. These awards have no performance criteria attached and vest on the third anniversary
of the award grant date, subject to the completion of three years continuous employment. At year-end, approximately
4,000 employees throughout the Group had signed up to these schemes with 7,700 holding free shares in the Company.
– Pension and benefits – the Company currently contributes 9% of salary to the defined contribution pension scheme
without any requirement for an employee contribution. Employees may also opt for a proportion or all of this to be paid
as cash rather than into the pension scheme.
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Direct Line Group Annual Report and Accounts 2022
Remuneration Policy for Non-Executive Directors
Element
Chair
and Non-
Executive
Directors’
fees
Purpose and link to
strategy
To enable the
Group to recruit
and retain
Non-Executive
Directors of
the highest
calibre, at an
appropriate
cost
Approach to setting fees and cap
– Non-Executive Directors are paid a basic annual fee. Additional
fees may be paid to Non-Executive Directors who chair a Board
Committee, sit on a Board Committee, and for the SID to reflect
additional responsibilities, as appropriate
– The fees paid to the Chair of the Board include all Board and
Committee membership fees, and are determined by the
Remuneration Committee
Other items
– The Non-Executive
Directors are not
entitled to receive
any compensation
for loss of office,
other than fees for
their notice period
– Non-Executive Directors may receive certain expenses, including
– They do not
participate in the
Group’s bonus,
employee share
plans or pension
arrangements, and
do not receive any
employee benefits
the reimbursement of travel expenses and accommodation
or similar which, consistent with general market practice, will
be grossed-up for any tax arising on such expenses (where
the tax on those expenses is paid by the Company). It is the
Committee’s view that expenses (which are deemed to be
benefits) are covered under the aggregate cap set by the Articles
of Association and that this cap is not restricted to fees only
– Similarly, while not benefits in the normal usage of that term,
certain other items such as hospitality or retirement gifts may
also be provided
– Fee levels for Non-Executive Directors are reviewed and may be
increased at appropriate intervals by the Board, with affected
individual Directors absenting themselves from deliberations
– In setting the level of fees, the Company accounts for the role’s
expected time commitment, and fees at other companies of
a similar size, sector and/or complexity to the Group
– Fees (including expenses which are deemed to be benefits)
for Non-Executive Directors are subject to an aggregate cap
in the Articles of Association (currently £2,000,000 per annum).
The Company reserves the right to change how the elements
and weightings within the overall fees are paid, and to pay a
proportion of the fees in shares within this limit
Recruitment Remuneration Policy
To strengthen the management team and secure the skills to deliver the Group’s strategic aims, the Recruitment
Remuneration Policy aims to give the Committee enough flexibility to secure the appointment and promotion of
high-calibre executives.
Principles for recruitment remuneration
1. In terms of the principles for setting a package for a new Executive Director, the starting point for the Committee will
be to look at the Policy for Executive Directors as set out in the Policy table and structure a package in accordance with
that Policy.
2. For an internal appointment, any variable pay element awarded in respect of the prior role may either continue on its
original terms or be adjusted to reflect the new appointment, as appropriate.
3. For external and internal appointments (including a major change in role), the Committee may agree that the Company
will meet certain relocation expenses, legal and other fees involved in negotiating any recruitment, or pay expatriate
benefits in line with the Policy table, as appropriate.
4. Where it is necessary to make a recruitment-related pay award to an external candidate, the Company will not pay more
than necessary, in the view of the Committee, and will in all cases seek to deliver any such awards under the terms of the
existing incentive pay structure.
5. All such awards for external appointments, whether under the AIP, LTIP or otherwise, to compensate for awards forfeited
on leaving their previous employer (“buyout awards”) will be determined considering the commercial value of the amount
forfeited, and the nature, time horizons and performance requirements of those awards. The Committee’s starting
point will be to ensure that any awards being forfeited which remain subject to outstanding performance requirements
(other than where substantially complete) are bought out with replacement requirements, and any awards with service
requirements are bought out with similar terms. However, exceptionally, the Committee may relax those obligations
where it considers it to be in the interests of shareholders and those factors are, in the Committee’s view, equally
reflected in some other way, for example through a significant discount to the face value of the awards forfeited.
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The elements of any package for a recruit, including the maximum level of variable pay, but excluding buy-outs, will be
consistent with the Executive Directors’ Remuneration Policy described in this report, as modified by the above statement
of principles where appropriate. The Committee reserves the right to avail itself of the current Listing Rule 9.4.2 (being the
rule which permits exceptional recruitment awards on terms different from any shareholder approved ongoing plans) if
needed to facilitate, in exceptional circumstances, recruiting an Executive Director. Awards granted under this provision
will only be used for buy-out awards.
Any commitments made before promotion to the Board (except when made in connection with the appointment to the
Board) can continue to be honoured under the Policy, even if they are not consistent with the Policy prevailing when the
commitment is fulfilled.
In exceptional circumstances, the initial notice period may be longer than the Group’s 12-month policy up to a maximum of
24 months. However, this will reduce by one month for every month served, until it has reduced to 12 months in line with the
Group’s policy position.
The Remuneration Policy for the Chair and Non-Executive Directors as set out earlier in this report will apply relating to any
recruitments to those positions.
Service contracts
Subject to the discretion noted above for new recruits, it is the Group’s policy to set notice periods for Executive Directors
of no more than 12 months (by the Director or by the Company). During this period, base salary, benefits and pension will
normally continue to be paid.
The Executive Directors’ service contracts may permit a payment for the unexpired portion of the notice period to be made
in respect of base salary, benefits and pension only either a) in a lump sum or b) in monthly instalments (in which case
instalments are subject to mitigation if an alternative role is found).
The service contracts for Executive Directors have no fixed duration.
There are no further obligations which could give rise to a remuneration or loss of office payment other than those set out
in the Remuneration Policy table and the termination policy overleaf.
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Direct Line Group Annual Report and Accounts 2022
Termination policy
It is appropriate for the Committee to retain discretion to consider the termination terms of any Executive Director, having
regard to all the relevant facts and circumstances available to them at the time. A Director is deemed a ‘good’ leaver if the
following circumstances are met:
– AIP and LTIP – death, injury, disability, ill-health, redundancy, retirement, the sale of the individual’s employing company
or business out of the Group, or in such other circumstances as the Committee determines
– DAIP – for any reason other than summary dismissal or resignation. However, the Committee may determine that,
in the case of resignation only, awards may be retained
The table below sets out the general position. However, it should be noted that the Committee, consistent with most other
companies, has reserved a broad discretion to determine whether an Executive Director should be categorised as a ‘good’
leaver, and that discretion forms part of the approved policy.
Incentives
Annual Incentive
Plan
If a leaver is a ‘bad’ leaver,
for example leaving through
resignation or summary dismissal
No awards made
Deferred Annual
Incentive Plan
All awards will lapse
Long-Term
Incentive Plan
All unvested awards
will lapse. During the
holding period, awards
cease to be contingent
on employment and,
therefore, will not lapse
(except on dismissal
for cause) but may be
subject to malus
If a leaver is deemed to be
a ‘good’ leaver
Other events, for example,
change in control of Company
Bonus based on performance,
paid at the normal time and
on a time pro-rata basis, unless
the Committee determines
otherwise
Deferred shares typically vest
on the normal vesting date,
although the Committee
reserves discretion to accelerate
vesting. In the case of the
participant’s death or other
exceptional circumstances,
awards may vest immediately
Awards will vest on the
normal vesting date (plus
any applicable holding
period, unless the Committee
determines otherwise) subject
to performance and, unless
the Committee determines
otherwise, time pro-rating. In
exceptional circumstances, as
determined by the Committee,
for example, in the case of the
participant’s death, awards may
vest immediately
Bonus determined on such
basis as the Committee
considers appropriate and paid
on a time pro-rata basis, unless
the Committee determines
otherwise
Awards will vest in full.
In the event of a demerger or
similar event, the Committee
may determine that awards
vest on the same basis
Awards will vest subject to
applying the performance
conditions and, unless the
Committee determines
otherwise, time pro-rating. The
Committee may determine that
such awards shall not vest early
and, instead, be rolled over into
replacement awards (subject
to approval of the acquiring
company) granted on a similar
basis, but over shares in the
acquirer or another company
or settled in cash or other
securities. In the event of a
demerger or similar event, the
Committee may determine that
awards vest on the same basis
Service agreements for all Executive Directors provide that they are not eligible to receive any enhanced redundancy terms
which may be offered by the Group from time to time. Their rights to a statutory redundancy payment are not affected.
Depending on the circumstances of departure, an Executive Director may have additional claims under relevant
employment protection laws, and the Company may contribute to any legal fees involved in agreeing a termination.
It may also agree to incur certain other expenses such as providing outplacement services. Any such fees would be
disclosed as part of the detail of any termination arrangements. The Committee reserves the right to make any other
payments connected with a Director’s cessation of office or employment, where the payments are made in good faith
in discharge of an existing legal obligation (or by way of damages for breach of such an obligation) or by way of a
compromise or settlement of any claim arising in connection with the cessation of a Director’s office or employment.
www.directlinegroup.co.uk
159
Strategic reportGovernanceFinancial statements Directors’ Remuneration report continued
Non-Executive Director letters of appointment
Non-Executive Directors have letters of appointments (as opposed to service contracts) and are appointed for a three-
year term which may be extended by mutual agreement. In common with the Executive Directors, all Non-Executives
are subject to annual re-election by shareholders.
The Directors may appoint additional members to join the Board during the year. Directors appointed in this way will be
subject to election by shareholders at the first AGM after their appointment. In subsequent years, the Directors who wish
to remain on the Board must submit themselves for re-election at each AGM.
Terms and conditions of appointment of all the Directors are available for anyone to inspect at the Company’s registered
office and AGM.
The Chair and Non-Executive Directors have notice periods of three months from either party which do not apply in the
case of a Director not being re-elected by shareholders or retiring from office under the Articles of Association. Other
than fees for this notice period, the Chair and Non-Executive Directors are not entitled to any compensation on exit.
External directorships
The Company encourages Executive Directors to accept, subject to the Chair’s approval, an invitation to join the board of
another company outside the Group in a non-executive capacity, recognising the value of such wider experience. In these
circumstances, they are permitted to retain any remuneration from the non-executive appointment. Executive Directors
are generally limited to accepting one external directorship but may accept more with the Chair’s prior approval.
Considering employment conditions elsewhere in the Group
As explained elsewhere in this report, the Committee reviews the overall pay and bonus decisions in aggregate for the
wider Group, and, therefore, considers pay and conditions in the wider Group in determining the Directors’ Remuneration
Policy and the remuneration payable to Directors. Through the CEO and other senior management, the Committee may
receive input from employee groups in the Group, such as the Employee Representative Body, as required. The Chair of
the Remuneration Committee typically attends at least one Employee Representative Body meeting per year to explain
the alignment of executive remuneration with the wider workforce pay policy, answer employee questions and understand
employee concerns in relation to wider workforce remuneration.
In accordance with prevailing commercial practice, the Committee did not consult with employees in preparing the
Directors’ Remuneration Policy.
Considering shareholders’ views
The Committee takes into account the approval levels of remuneration-related matters at the AGM in determining
whether the current Directors’ Remuneration Policy remains appropriate. Furthermore, we consulted with our largest
shareholders on the roll-forward of our Directors’ Remuneration Policy and its implementation in the form of a letter, with
some shareholders requesting a follow up meeting via conference call and others responding via email. In light of the
positive feedback received, we did not make any changes to the proposal to roll-forward the previous Policy.
When setting the Policy the Committee, consistent with its approach of operating within the highest standards of corporate
governance, takes significant account of guidelines issued by the leading shareholder and proxy agencies.
The Committee also seeks to build an active and productive dialogue with investors on developments in the remuneration
aspects of corporate governance generally and, particularly, relating to any changes to the Company’s executive
pay arrangements.
The Committee is satisfied that no element of the Directors’ Remuneration Policy conflicts with the Group’s approach to
environmental, social and governance matters.
160
Direct Line Group Annual Report and Accounts 2022
Performance scenarios
The Directors’ Remuneration Policy has been designed to ensure that a significant proportion of total remuneration is
delivered as variable pay and, therefore, depends on performance against our strategic objectives.
The Committee has considered the level of remuneration that may be paid under different performance scenarios to
ensure it would be appropriate in each situation, in the context of the performance delivered and the value created
for shareholders.
Jon Greenwood
(Acting CEO)
Minimum
On-target
Maximum
Maximum with
growth assumption
Neil Manser
(CFO)
Minimum
100%
49%
36% 15%
26%
22%
35%
29%
39%
33%
16%
£0m
£1m
£2m
£3m
£4m
£5m
100%
On-target
45%
39% 16%
Maximum
Maximum with
growth assumption
23%
19%
36%
30%
41%
34%
17%
(£’000)
£953
£1,941
£3,672
£4,397
£580
£1,303
£2,569
£3,100
£0m
£1m
£2m
£3m
£4m
£5m
Total fixed pay
Short-term incentives
Long term incentives
Share price growth
The elements of remuneration included in each scenario are as follows:
Minimum
Consists of fixed remuneration only (that is base salary, benefits and pension):
– Base salary is the salary as at 1 April 2023
– Benefits measured as benefits paid in 2022 as set out in the single figure table on page 137, with an
estimated figure for the Acting CEO based on the assumed value of benefits for 2023
– Pension measured as the defined contribution or cash allowance in lieu of Company contributions,
as a percentage of salary
On-target
Based on the on-target remuneration receivable (excluding share price appreciation and dividends):
– Fixed remuneration as above
– AIP – as there is no target, for the purposes of this illustration, taken as vesting half-way between
threshold and maximum (55% of maximum)
– LTIP – consists of the threshold level of vesting (20% vesting)
Based on the maximum remuneration receivable (excluding share price appreciation and dividends):
– Fixed remuneration as above
– AIP – consists of the maximum bonus (175% of base salary)
– LTIP – consists of the face value of awards (200% of base salary)
Based on the above plus a 50% share price growth assumption
Maximum
Maximum
with growth
assumption
The Board reviewed and approved this Policy on 21 March 2023.
www.directlinegroup.co.uk
161
Strategic reportGovernanceFinancial statements Directors’ report
The Board of Directors present their report for the
financial year ended 31 December 2022 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 259.
Dividends
Further to the Company’s announcement on 11 January
2023, the Board has decided not to recommend a final
dividend in respect of the 2022 financial year. More
information on dividend and capital management
can be found in the CFO review, on page 30.
Directors’ report disclosures
Directors
The names of all current Directors and their biographies
are set out on pages 96 to 98. We also recently announced
that Mark Lewis will join the Board as an Independent
Non-Executive Director with effect from 30 March 2023.
All Directors will retire and those wishing to continue to
serve will be submitted for election or re-election at the 2023
AGM. This is in accordance with the Corporate Governance
Code and the Articles of Association of the Company, which
govern appointing and replacing Directors.
The Directors listed on pages 96 to 98 were the Directors
of the Company throughout the year under review. Penny
James was a Director of the Company throughout 2022
but stepped down from the Board as a Director and as the
Chief Executive Officer with effect from 27 January 2023.
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 130 to 161.
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.
During 2022, DLG Pension Trustee Limited acted as trustee
for two of the Company’s occupational pension schemes.
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 93 as
permitted by the Companies Act 2006. These matters, and
all matters referenced in the table below, are incorporated
into this Directors’ report:
Subject
Use of financial instruments
Important events since the financial year end
Likely future developments in the business
Employee engagement
Engagement with suppliers, customers and
other business relationships
Research and development
Greenhouse gas emissions, energy
consumption and energy-efficient action
Branches outside the UK
Pages
27, 33, 34
14 to 19
19
23, 56 to 57, 106
to 108, 139
52 to 54, 107
11, 54
66 to 67, 69
245
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
are 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:
Subject
Page
Interest capitalised by the Group
Not applicable
Unaudited financial information
Details of long-term incentive schemes
Directors’ waivers of emoluments
Directors’ waivers of future emoluments
Non pro-rata allotments for cash (issuer)
Non pro-rata allotments for cash
(major subsidiaries)
Note 3.5
140 to 141
Not applicable
Not applicable
Not applicable
Not applicable
Listed company is a subsidiary of another company Not applicable
Contracts of significance involving a Director
Not applicable
Contracts of significance involving a
controlling shareholder
Not applicable
Details of shareholder dividend waivers
163
Controlling shareholder agreements
Not applicable
162
Direct Line Group Annual Report and Accounts 2022
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 260.
Share capital
The Company has a premium listing on the London Stock
Exchange. As at 31 December 2022, the Company’s share
capital comprised 1,311,388,157 fully paid Ordinary Shares
of 10 10⁄11 pence each.
At the Company’s 2022 AGM, the Directors were authorised to:
authority granted in 2022) representing 1.47% of the called
up share capital of the Company as at 31 December 2022.
The aggregate consideration paid was £49,697,109.44 and
all shares purchased have been cancelled. The effect of the
share buyback has been to: reduce the weighted average
number of Ordinary Shares in issue during 2022, which is
used to calculate earnings per share, from 1,335.8 million in
2021 to 1,304.3 million in 2022 (see note 15 to the consolidated
financial statements for more details); and reduce the closing
number of Ordinary Shares at 31 December 2022 to 1,298.2
million from 1,317.3 million at 31 December 2021 (see note 16
to the consolidated financial statements for more details).
– allot shares in the Company or grant rights to
subscribe for or convert any security into shares,
up to an aggregate nominal amount of £48,326,432,
and to allot further shares up to an aggregate nominal
amount of £48,326,432 for the purpose of a rights issue;
– allot shares having a nominal amount not exceeding
in aggregate £7,248,964 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 £7,248,964 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 132,897,688 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 9 May 2023, was
used during the year under review to purchase 7,861,245
shares. The Company also used the similar authority
granted at the Company’s 2021 AGM during the year
under review to purchase 11,463,610 shares between
9 March 2022 and 10 May 2022; 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 2022, with the exception of the authority to
make market purchases of shares, as referred to above
and described in more detail below. At the 2023 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 2022 in notes 31 and 37 of the consolidated
financial statements.
On 9 March 2022, the Company announced the launch of
a share buyback programme of up to £100 million. A first
tranche of £50 million worth of shares were purchased
between 9 March 2022 and 28 June 2022. On 18 July
2022 the Company announced that the Board had
decided not to launch the second £50 million tranche
of the programme.
During 2022, the Company used the authority to purchase
its own shares in the market as granted by the shareholders
at Annual General Meetings in 2021 and 2022. A total
number of 19,324,855 ordinary shares of 10 10⁄11 pence each
were repurchased under the share buyback programme
(of which 11,463,610 were repurchased under authority
granted in 2021 and 7,861,245 were repurchased under
Further information on the Company’s share buyback
programme can be found in the CFO review on page 30.
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 235. 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.
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, and the person interested
in the relevant shares has been in default of the notice for
at least 14 days, they 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.
www.directlinegroup.co.uk
163
Strategic reportGovernanceFinancial statements Directors’ report continued
Use of financial instruments
Political donations
Information regarding the Company’s use of financial
instruments, and financial risk management objectives
and policies, can be found in the Risk Management section
of the Strategic report from page 86 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 with 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 2022 and as at 21 March 2023,
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.
Subject
FMR, LLC
31 December
2022
21 March
2023
Nature of
Holding
N/A
5.55%
Indirect
Ariel Investments
Ameriprise Financial, Inc
BlackRock, Inc.
5.09%
5.06%
5.42%
Majedie Asset Management
Limited
4.99%
T.Rowe Price Associates, Inc. 4.94%
Artemis Investment
Management LLP
abrdn plc
Norges Bank
5.07%
4.57%
2.96%
APG Asset Management N.V. 2.99%
5.09%
5.06%
Below
5%
Direct/
Indirect
Indirect
Indirect
4.99%
4.68%
Indirect
Indirect
4.82%
Indirect
4.57%
4.13%
2.99%
Indirect
Direct
Direct
The Group made no political donations during the
year (2021: nil).
Disabled and neurodivergent colleagues
The Group is committed to supporting those who are
neuro-divergent or have a disability and recognises
the benefits that diversity of thought or body brings
to an organisation.
At recruitment, we adjust and enhance our application
and selection process, and guide and provide additional
training for interviewers where necessary. We reasonably
adjust colleagues’ working environments and equipment,
and roles and role requirements (including for colleagues
who become disabled during their time working in the
Group). We also seek to ensure that everyone can access
the same opportunities.
The Neuro-Diversity & Disability strand of our Diversity
Network Alliance (“DNA”) works to celebrate and support
those who are neuro-divergent or disabled with the aim
of ensuring that all our colleagues feel understood, fully
appreciated, and empowered to be their best selves.
More information about the work of the DNA strand
can be found on page 57 of the Strategic report.
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 trading
update that was approved by the Board of Directors and
announced to the stock market on 11 January 2023 in
respect of the Group’s trading for 2022 and outlook for
2023, set out the challenging conditions that the Group
has faced, in particular with respect to the severe weather
in December 2022 and further increases in motor claims
inflation, as well as the impact on the Group’s investment
property portfolio valuation. The CFO Review describes
the Group’s capital management strategy, including the
capital actions taken in the last 12 months designed to
ensure the continued strength of the balance sheet and
sets out management actions that the Group continues
to pursue to improve capital strength. 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 of the
consolidated financial statements. This covers insurance,
market and credit risk; and the Group’s approach to
monitoring, managing and mitigating exposures to
these risks.
164
Direct Line Group Annual Report and Accounts 2022
The Directors have assessed the principal risks of the
Group over the duration of the planning cycle, which runs
until 2026, The Group’s Risk Function has carried out an
assessment of the risks to the strategic plan (“the Plan”)
and the dependencies for the success of the Plan. This
included running adverse scenarios on the Plan to consider
the downside risks to the Plan and subsequent impact on
forecast profit. The key scenarios applied to the Plan were
in relation to the impact of adverse claims inflation, delay in
pricing actions, increase in operating expenses and a fall in
asset values. The key judgements and assumptions applied
in these scenarios were as follows:
– adverse claims inflation: the Group’s Plan includes
a scenario for inflation being higher than expected,
leading to claims costs increasing by 3% with the
Group and market response delayed by six months;
– delay in pricing: future initiatives deliver 50% of
expected value;
– increase in operating expenses: there is a delay of
12 months to achieving benefits from 2023 expense
reduction initiatives; and
– fall in asset values: an increase in credit spreads of
50 basis points in the UK and 25 basis points outside
of the UK in 2023, with spreads remaining elevated.
In connection with the trading update released on
11 January 2023, a reforecast based on the Plan was
prepared without delay.
The Risk Function has also carried out an assessment of
the risks to the Group’s capital position over 2023 and 2024.
Two specific macroeconomic scenarios, a moderate and
a severe, have been run to assess the possible impact on
the Group’s own funds in the period to 31 December 2023
and 31 December 2024. The macroeconomic assumptions
for key parameters such as Consumer Price index, GDP
and bank base rate for the moderate scenario reflect
the adverse end of the Bank of England November
Monetary Policy Committee forecast range. The severe
scenario adopts the key parameters from the 2022 Bank of
England Banking Stress Test, which is described as “severe
but plausible”.
A reverse stress test was also performed to identify a
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
reverse stress test combines the severe macroeconomic
stress with the impacts from a series of three natural
catastrophes from the 2022 PRA Insurance Stress Test.
In the moderate and severe scenarios, it was concluded
that the Group’s and U K Insurance Limited’s solvency
capital requirement would not be breached following
the implementation of management actions, such as
de-risking the asset portfolio, the purchase of additional
reinsurance cover, asset disposal or, if necessary, raising equity.
Further information in relation to the sensitivity of key
factors on the Group’s financial position are included in
the financial statements. The insurance risk note (note 3.3.1)
sets out the impact on profit before tax of an increase and
a decrease in claims inflation of 200 basis points for two
consecutive years. The market risk note (note 3.3.2) sets out
the impact on profit before tax and equity of a 100 basis
points increase in spreads on financial investments and
the impact of a 100 basis points increase in interest rates
on financial investments and derivatives.
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 21 March 2023 (the date of approval
of the consolidated financial statements). Accordingly,
the Directors have adopted the going concern basis in
preparing the consolidated 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 confirmed its willingness to continue in office as
the External Auditor for the financial year ending 31 December
2023. A resolution to reappoint Deloitte will be proposed at
the forthcoming 2023 AGM. You can find an assessment of
the effectiveness of, and a recommendation for, reappointing
Deloitte in the Audit Committee report on page 120.
As announced on 10 October 2022, Deloitte will step down
following completion of the audit of the financial year
ending 31 December 2023, in line with mandatory rotation
requirements. Following a competitive tender process
led by the Audit Committee, the Board has approved the
appointment of KPMG LLP as auditor of the Company for the
financial year ending 31 December 2024, subject to approval
by shareholders at the Company’s 2024 AGM.
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.
www.directlinegroup.co.uk
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Strategic reportGovernanceFinancial statements Directors’ report continued
Directors’ responsibility statement
The Directors are responsible for preparing the Annual
Report and financial statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare such
financial statements for each financial year in accordance
with UK-adopted international accounting standards.
The Directors have elected to prepare the Parent Company
financial statements in accordance with FRS 101 “Reduced
Disclosure Framework”. Under company law, the Directors
must not approve the accounts unless they are satisfied
that they give a true and fair view of the Company’s state
of affairs and profit or loss for that period.
In preparing these financial statements, IAS 1 requires that
Directors: properly select and apply accounting policies;
present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information; provide additional disclosures
when compliance with the specific requirements in IFRS
is insufficient to enable users to understand the impact of
particular transactions, other events and conditions on the
entity’s financial position and financial performance, and to
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 in office as at the date of this report,
whose names and functions are listed on pages 96 to 98,
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 93) and Directors’
report (on pages 162 to 166) 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 21 March 2023
and signed on its behalf by:
Roger C. Clifton
Company Secretary
Registered address: Churchill Court, Westmoreland Road,
Bromley, BR1 1DP
Registered number: 02280426
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Direct Line Group Annual Report and Accounts 2022
Contents
Contents
Financial Statements
30. Assets held for sale
Independent Auditor's Report
168
31. Share capital
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.
(Loss)/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
179
180
181
182
183
184
196
198
212
215
215
216
216
216
217
218
218
219
220
220
221
222
223
224
224
225
225
225
226
226
226
227
229
230
32. Other reserves
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
230
230
231
231
231
232
234
235
236
236
237
238
238
239
241
241
242
243
Parent Company Statement of Changes in Equity 243
Notes to the Parent Company Financial
Statements
1. Accounting policies
2. Investment in subsidiary undertakings
3. Other receivables
4. Current and deferred tax
5. Derivative financial instruments
6. Financial investments
7. Cash and cash equivalents
8. Share capital, capital reserves and
distributable reserves
9. Tier 1 notes
10. Subordinated liabilities
11. Borrowings
12. Dividends
13. Share-based payments
14. Risk management
15. Employees, Directors and key management
remuneration
244
245
246
246
246
246
247
247
247
247
247
247
247
248
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Independent Auditor’s Report to the shareholders of Direct Line Insurance Group plc
Report on the audit of the financial statements
1. Opinion
In our opinion:
–
–
–
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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 2022 and of
the Group's loss 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:
–
–
–
–
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the Consolidated Income Statement;
the Consolidated and Parent Company Statement of Comprehensive Income;
the Consolidated and Parent Company Balance Sheets;
the Consolidated and Parent Company Statements of Changes in Equity;
the Consolidated Cash Flow Statement; and
the related notes 1 to 45 of the Consolidated financial statements and related notes 1 to 15 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.
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3. Summary of our audit approach
Key audit matters
Materiality
Scoping
Significant
changes in our
approach
valuation of insurance liabilities:
The key audit matters that we identified in the current year were:
–
1) The frequency, severity and inflationary assumptions for large bodily injury claims; and
2) Periodic payment orders ("PPOs") inflation and discount rates.
–
1) Commercial real estate loans, infrastructure debt and private placement bonds; and
2) Investment property;
– disclosure of the impact of adoption of IFRS 17.
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.
The materiality that we used for the Group financial statements was £24 million, which
approximates to 1.0% of the shareholder's equity.
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 shareholder's equity, 100% of the
Group's gross earned premium and 100% of the Group's insurance liabilities. 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 updated our key audit matters to include inflation assumptions with regard to bodily injury
claims and margins above the actuarial best estimate, removing our previously separate key
audit matter on these margins; and
b. We identified a new key audit matter relating to the risks arising from the opening balance sheet
disclosure as a result of transitioning to IFRS 17.
In direct response to the trading updates issued by the Group, we have further made the following
changes to our audit approach:
a. We reassessed our approach to determining materiality and changed our key benchmark from
profit before tax to shareholders’ equity including profit/loss for the period, resulting in a £4
million decrease to materiality applied;
b. We increased our Group audit scoping to include a third entity subject to a full scope, rather than
specified procedures;
c. We changed our controls testing strategy in light of the economic environment and the Group's
results; and
d. We engaged additional internal specialists to assist us in performing audit procedures to address
the incremental risks across the audit, including fair value and regulatory specialists.
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 the impact of the profit warnings issued during the year on management’s control environment and
forecasting and evaluated the impact on historical forecasts;
– we assessed the impact of management’s actions in relation to the profit warnings on the future capital position of the
Group;
– we assessed the impact of emerging issues and the current macroeconomic environment on the future capital position
of the Group;
– 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; and
– we evaluated management’s reverse stress test; independently performing sensitivity analysis to assess the impact of
various scenarios on the Group's liquidity and solvency headroom.
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4. Conclusions relating to going concern continued
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.
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 117 (Audit Committee Report), page 186 (Accounting policies), page 197 (Notes to the consolidated
financial statements - note 2.3) and page 232 (Notes to the consolidated financial statements - note 35).
The Group's gross insurance liabilities total £3.7 billion (2021: £3.7 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, severity and inflationary 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.
Furthermore, reduced traffic volumes throughout accident years 2020 and 2021 and a return to normality during 2022
increased inherent uncertainty underlying the estimation of the ultimate number of non-large bodily injury claims in the
most recent cohorts of data. This uncertainty is further amplified given the long-tailed nature of bodily injury claims.
Further, continued uncertainty regarding the impact of the Whiplash Reform in May 2021 increases inherent uncertainty
underlying bodily injury claims.
Moreover, we have identified that inflationary assumptions have a significant impact on the valuation of bodily injury
insurance liabilities and there is a significant level of estimation uncertainty inherent with these assumptions in light of the
macroeconomic environment. The allowance for inflation has been made by the Group within both their best estimate
and margin above the best estimate.
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 evaluated the data reconciliation controls and re-
performed reconciliations on the actuarial data back to the financial ledger and source systems.
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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 their team;
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 inflationary impacts. This included:
– using our in-house reserving software to help us challenge the Group's response to emerging claims trends;
– conducting sensitivity testing on the methodology and assumptions used in the current year selections and
challenging changes from prior year;
– comparing the Group's cost per claim and frequency diagnostics to market benchmarks and independent
reserve review results;
– analyse the consistency in reserving strength and reserve releases in comparison with prior years;
–
leverage 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
– perform a ‘stand back’ test to challenge the reasonableness of the overall insurance liabilities between periods in light of
the level of uncertainties that existed at each respective reporting date.
Key observations
We have concluded that the assumptions used in the calculation of the bodily injury claims reserves are reasonable.
5.1.2 Periodic Payment Orders ("PPOs") inflation and discount rates
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 £632.8 million (2021: £757.8
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 2022, the Group valued PPOs using an inflation rate curve linked to the PRA published risk free rate (2021:
fixed 3.5%). Additionally, the Group used a discount rate curve linked to the investment yield of assets used to match the
PPO liabilities (2021: fixed 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 or fraud.
How the scope of our audit responded to the key audit matter
We have gained a detailed understanding of management’s process for setting these assumptions and obtained an
understanding of the relevant controls surrounding the setting of the inflation rates across the book of the business and
the discount rate used in the PPO valuation, namely the challenge and approval of these assumptions by the reserving
committee.
We have worked with our actuarial specialists to:
–
–
–
Inspect and challenge management’s PPO inflation assumption by evaluating relevant documentation, meeting with
the Actuarial Director and their team;
Inspect and evaluate management’s sensitivity testing on the PPO inflation assumption, requesting additional sensitivity
testing from management where needed; and
Inspect and challenge management on the methodology and rational for deriving the discount rate by benchmarking
the selected discount rate against external sources and comparing with market economic data.
In addition, we performed the following procedure:
– worked with our valuations specialist to evaluate the reasonableness of the selected discount rate curve.
Key observations
We have determined that the inflation and discount rate assumptions used in the calculation of the PPO claims reserve
are reasonable.
5.2 Valuation of illiquid investments
Refer to page 117 (Audit Committee Report), pages 188 and 189 (Accounting policies) and pages 224 and 229 (Notes to
the consolidated financial statements - notes 20 and 28).
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 £535.5 million (2021: £542.8 million).
Given the Group continues to recognise and measure financial instruments under IAS 39 'Financial Instruments:
Recognition and Measurement', 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 a continuing risk of default or delinquency on these less liquid assets owing to high and sustained
levels of uncertainty in the UK economy from rising inflation and interest rates.
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5. Key audit matters continued
5.2.1 Commercial real estate loans, infrastructure debt and private placement bonds continued
How the scope of our audit responded to the key audit matter
We have obtained an understanding of 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 2022 is £278.5 million
(2021: £317.0 million). Given the current UK macroeconomic environment with inflationary pressures and increasing
interest rates affecting the cost of debt, we have identified the methodology and assumptions used for valuing the
investment property portfolio as a key audit matter in the current year. In light of the volatility across the whole investment
property market, we have expanded the scope of the key audit matter to cover the whole portfolio (£278.5 million) rather
than just the retail and alternative sectors identified in the prior year (2021: £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. Valuation methodology for investment properties are
subjective in nature and involve various key assumptions. The use of different valuation methodology and assumptions
could produce significantly different estimates of fair value. With the volatility in the UK financial market, 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. In addition, we performed the following procedures:
– worked with our real estate specialists who challenged the management’s expert on the estimated rental value, yield
and capitalisation rate assumptions and methodologies used in the valuation of the properties;
– assessed the competence, capability and objectivity of management’s expert;
–
tested the completeness and accuracy of the data inputs used in the valuation process performed by management and
their external valuer; and
tested the data inputs used in the valuation model for investment properties, by agreeing occupation rates, unit sizes,
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.
5.3 Disclosure of the impact of the adoption of IFRS 17
Key audit matter description
On 1 January 2023, the Group transitioned to IFRS 17: 'Insurance Contracts' which replaced the existing standard for
insurance contracts, IFRS 4 'Insurance Contracts'.
The estimated transitional impact is disclosed in Note 1 to the financial statements in accordance with the requirements
of IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors'. The disclosures in 2022 are intended to provide
users with an understanding of the estimated impact of the new standard and, as a result, are more limited than the
disclosures to be included in the first year of adoption, being 2023.
We have deemed the disclosure of the impact of the adoption of IFRS 17 a key audit matter as this is a new and complex
accounting standard which has required considerable judgment and interpretation in its implementation. Furthermore,
the new standard has introduced a number of significant changes, including new requirements regarding the
measurement and presentation of insurance contracts and related account balances and classes of transactions.
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The Group has disclosed that it adopted the full retrospective approach on transition to IFRS 17 and applied the Premium
Allocation Approach ("PAA") to the measurement of groups of insurance contracts issued and groups of reinsurance
contracts held at the transition date. The Group took advantage of the accounting policy choice to expense insurance
acquisition cash flows as incurred and determined the discount rates to apply to future cash flows using the “bottom-up”
approach.
In order to meet the requirements of the new standard, significant changes have also been made to the systems,
processes and controls with effect from 1 January 2023.
How the scope of our audit responded to the key audit matter
While further testing of the financial impact will be performed as part of our 2023 year end audit, we have performed the
following audit procedures for the purposes of assessing the disclosures made in accordance with IAS 8. Specifically we
have:
– gained a detailed understanding of the process to estimate the transitional adjustment and obtained an understanding
of relevant controls;
– challenged the appropriateness of key technical accounting decisions, judgments, assumptions and elections made in
–
–
determining the estimate against the requirements of the standard;
involved our internal actuarial specialists in performing procedures to challenge the Group’s IFRS 17 calculation models,
including those related to the testing of PAA eligibility, the estimate of the fulfilment cash flows, the risk adjustment
and discounting; and
tested the IAS 8 disclosures related to the transition impact and reconciled the disclosed impact to underlying
accounting records.
Key observations
Based on the procedures described above, we consider the assumptions, methodologies and models applied in preparing
the IFRS 17 transition disclosure to be reasonable.
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:
Materiality
Basis for
determining
materiality
Rationale
for the
benchmark
applied
Group financial statements
£24.0 million (2021: £28.0 million)
Parent Company financial statements
£21.6 million (2021: £25.2 million)
The materiality approximates 1.0% (2021 equivalent:
1.0%) of shareholders’ equity including profit/loss for
the period. In the prior year, we used the three-year
average profit before tax, excluding the impact of the
Ogden discount rate change to minus 0.25% in the
2019 results. However, given the profit warnings, within
the trading updates, issued in the year and the
increased focus on the capital position of the Group, we
have changed benchmark to shareholders’ equity.
In light of the economic circumstances identified in the
current year, the cancellation of the dividend and the
trading updates issued by the Group, we determined
that the critical benchmark for the Group was no
longer average profit before tax. Instead, we
determined that the critical benchmark for the Group
was shareholders’ equity (including profit/loss for the
period) given the focus on distributable reserves and
future dividend payment capability.
We also considered this measure in conjunction with
gross earned premium, with our materiality equating to
0.8% (2021: 0.9%) of gross earned premium.
The materiality approximates 1.0% (2021
equivalent: 1.0%) of shareholders’ equity and is
capped at 90% (2021: 90%) of Group
materiality.
We determined that the critical benchmark for
the Parent Company was shareholders’ equity
including profit/loss for the period. 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.
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6. Our application of materiality continued
6.1 Materiality continued
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 99% of Group insurance
liabilities, is scoped to a component materiality of £21.6 million (2021: £25.2 million). Component materiality for other
entities within the scope of our Group audit ranged from £0.7 million to £21.6 million (2021: £0.9 million to £25.2 million).
£2,281m
£24m
Group materiality £24m
Component materiality range
£0.7m to £21.6m
Audit Committee reporting
threshold £1.2m
Shareholders’ equity
Group materiality
6.2 Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected
and undetected misstatements exceed the materiality for the financial statements as a whole.
Performance
materiality
Basis and
rationale for
determining
performance
materiality
Group financial statements
Parent Company financial statements
67.5% (2021: 70%) of Group materiality
67.5% (2021: 70%) of Parent Company
materiality
In 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
the impact of the trading updates on the Group;
environment it operates in;
– our ability to rely on controls over a number of significant business processes; and
– 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.
6.3 Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £1.2 million
(2021: £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.
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7. An overview of the scope of our audit
7.1 Identification and scoping of components
7. An overview of the scope of our audit
The scope of our Group audit was determined by obtaining an understanding of the Group and its environment, including
7.1 Identification and scoping of components
group wide controls and assessing the risks of material misstatement at Group level.
The scope of our Group audit was determined by obtaining an understanding of the Group and its environment, including
Consistent with the prior period, this resulted in two entities being subject to a full scope audit and a further two were
group wide controls and assessing the risks of material misstatement at Group level.
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
Consistent with the prior period, this resulted in two entities being subject to a full scope audit and a further two were
based in the UK.
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
These four entities represent the principal trading and service operations of the Group and account for 97% (2021: 97%) of
based in the UK.
the Group's shareholder's equity, 100% (2021: 100%) of the Group's gross earned premium and 100% (2021: 100%) of the
Group's insurance liabilities. They were also selected to provide an appropriate basis for undertaking audit work to address
These four entities represent the principal trading and service operations of the Group and account for 97% (2021: 97%) of
the risks of material misstatement identified above.
the Group's shareholder's equity, 100% (2021: 100%) of the Group's gross earned premium and 100% (2021: 100%) of the
Group's insurance liabilities. 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
Shareholders' equity
Insurance liabilities
3%
100%
100%
97%
Full audit scope
Full audit scope
Full audit scope
Review at group level
At the Group level we also tested the consolidation process and carried out analytical procedures to confirm our
conclusion that there were no significant risks of material misstatement of the aggregated financial information of the
remaining components not subject to audit or audit of specified account balances.
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
The Group audit team directly performed the audit work for all of the entities listed above, including the Parent Company.
remaining components not subject to audit or audit of specified account balances.
7.2 Our consideration of the control environment
The Group audit team directly performed the audit work for all of the entities listed above, including the Parent Company.
IT Controls
7.2 Our consideration of the control environment
In planning our 2022 audit, we identified 19 systems that were material to the Group's financial reporting processes. These
IT Controls
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
In planning our 2022 audit, we identified 19 systems that were material to the Group's financial reporting processes. These
of the IT controls associated with these systems, as well as the wider general IT control environment across the Group, we
systems handled data relating to premiums, claims, expenses and payroll and we intended to rely on the IT and business
were able to rely upon the IT controls associated with 17 systems, with 1 system in the process of establishing controls and
controls associated with these systems. Having worked with our in-house IT specialists to assess the operating effectiveness
1 system having insufficient evidence.
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 17 systems, with 1 system in the process of establishing controls and
Business processes and financial reporting controls
1 system having insufficient evidence.
In planning our 2022 audit, we identified 21 business processes that were material to the Group's financial reporting and
Business processes and financial reporting controls
which we tested. 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
In planning our 2022 audit, we identified 21 business processes that were material to the Group's financial reporting and
relating to reconciliation of data. Of these, we intended to directly rely on the business controls associated with 19 of these
which we tested. These processes spanned the Group's material transactions and account balances including the
processes. Further, in response to the heightened engagement risk we changed our control rotation strategy, and tested 2
premiums, claims, reinsurance, expenses, payroll, investments and intangibles processes and part of the reserving process
more processes in the current year for operating effectiveness. Having completed our testing over the operating
relating to reconciliation of data. Of these, we intended to directly rely on the business controls associated with 19 of these
effectiveness of business controls associated with these processes, through a combination of current period testing and
processes. Further, in response to the heightened engagement risk we changed our control rotation strategy, and tested 2
reliance on prior period testing, we concluded that we were able to rely upon the business controls associated with 12
more processes in the current year for operating effectiveness. Having completed our testing over the operating
processes planned.
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 were able to rely upon the business controls associated with 12
Across 8 of these business processes, we identified deficiencies and across a further 2, we identified insights which we
processes planned.
communicated to those charged with governance and these have been remediated or are in the process of being
remediated.
Across 8 of these business processes, we identified deficiencies and across a further 2, we identified insights which we
communicated to those charged with governance and these have been remediated or are in the process of being
7.3 Our consideration of climate-related risks
remediated.
We have gained an understanding of management’s processes to address climate-related risks, including management’s
7.3 Our consideration of climate-related risks
implementation of the Climate Executive Steering Group and Group sustainability framework. We have assessed whether
these initiatives undertaken by management are aligned with the Climate Change Roadmap developed by the Association
We have gained an understanding of management’s processes to address climate-related risks, including management’s
of British Insurers. Management has performed a risk assessment for climate-related risks, further details are disclosed in
implementation of the Climate Executive Steering Group and Group sustainability framework. We have assessed whether
the Strategic report. Based on the risk assessment, management has concluded that the impact of climate-related risks is
these initiatives undertaken by management are aligned with the Climate Change Roadmap developed by the Association
not material to the financial statements in the short term as disclosed in note 3 to the financial statements. We have
of British Insurers. Management has performed a risk assessment for climate-related risks, further details are disclosed in
performed a risk assessment of the financial impact of climate risks, utilising the support of a climate change risk specialist,
the Strategic report. Based on the risk assessment, management has concluded that the impact of climate-related risks is
on the financial statements and concluded the risks of material misstatement due to climate risk factors are remote. In
not material to the financial statements in the short term as disclosed in note 3 to the financial statements. We have
doing so we considered the estimates and judgements applied to the financial statements and how climate risks impact
performed a risk assessment of the financial impact of climate risks, utilising the support of a climate change risk specialist,
their valuation.
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
We read the disclosure relating to climate risks in the Planet section of the Annual Report and considered whether they
their valuation.
were materially consistent with our understanding of the business and the financial statements.
We read the disclosure relating to climate risks in the Planet section of the Annual Report and considered whether they
were materially consistent with our understanding of the business and the financial statements.
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8. Other information
The other information comprises the information included in the annual report, other than the financial statements and
our auditor's report thereon. The directors are responsible for the other information contained within the annual report.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly
stated in our report, we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to
be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether
this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed,
we conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
9. Responsibilities of Directors
As explained more fully in the Directors' responsibilities statement, the Directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors
determine is necessary to enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group's and the Parent Company's
ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going
concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease
operations, or have no realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs
(UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.
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.
11.1 Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance
with laws and regulations, 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 2 November 2022;
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;
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.
176 Direct Line Group Annual Report and Accounts 2022
Direct Line Group Annual Report and Accounts 2022
176
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 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;
– enhancing our stand-back assessments for accounting judgements, increasing and broadening the scope of our fraud
–
inquiries in response to the trading updates issued by management;
reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing
correspondence with the PRA and FCA;
– meeting directly with the PRA and FCA and engaging a regulatory specialist to support our performance of audit
–
procedures around regulatory compliance; 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.
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 pages 164 and 165;
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 pages 92 and 93;
the Directors' statement on fair, balanced and understandable set out on page 114;
the Board's confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page
114;
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 198; and
the section describing the work of the Audit Committee set out on page 116.
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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 23 years, covering the years
ending 31 December 2000 to 31 December 2022.
15.2 Consistency of the audit report with the additional reports 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).
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
21 March 2023
178 Direct Line Group Annual Report and Accounts 2022
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178
Consolidated Income Statement
Consolidated Income Statement
For the year ended 31 December 2022
For the year ended 31 December 2022
Gross earned premium
Reinsurance premium
Net earned premium
Investment return
Instalment income
Other operating income
Total income
Insurance claims
Insurance claims (payable to)/recoverable from reinsurers
Net insurance claims
Commission expenses
Operating expenses (including restructuring and one-off costs)
Total expenses
Finance costs
(Loss)/profit before tax
Tax credit/(charge)
(Loss)/profit for the year attributable to the owners of the Company
(Loss)/earnings per share:
Basic (pence)
Diluted (pence)
Notes
5
6
7
8
8
8
9
10
11
12
2022
£m
3,132.2
(165.7)
2,966.5
51.6
92.4
55.3
3,165.8
(2,218.0)
(16.6)
(2,234.6)
(211.1)
(744.8)
(955.9)
(20.4)
(45.1)
5.6
(39.5)
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
15
15
(4.3)
(4.3)
24.5
24.1
The attached notes on pages 184 to 241 form an integral part of these consolidated financial statements.
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Strategic reportGovernanceFinancial statements
Consolidated Statement of Comprehensive Income
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2022
For the year ended 31 December 2022
(Loss)/profit for the year attributable to the owners of the Company
Other comprehensive loss
Items that will not be reclassified subsequently to the income statement:
Remeasurement (loss)/gain on defined benefit pension scheme
Tax relating to items that will not be reclassified
Items that may be reclassified subsequently to the income statement:
Cash flow hedges
Fair value loss on AFS investments
Add: net loss/(gain) on AFS investments transferred to income statement on
disposals
Tax relating to items that may be reclassified
Other comprehensive loss for the year net of tax
Notes
2022
£m
(39.5)
2021
£m
343.7
27
13
32
32
32
(9.8)
2.5
(7.3)
0.2
(295.8)
24.9
67.2
(203.5)
(210.8)
3.8
(0.8)
3.0
(0.3)
(84.1)
(7.9)
17.1
(75.2)
(72.2)
Total comprehensive (loss)/income for the year attributable to the owners of the
Company
(250.3)
271.5
The attached notes on pages 184 to 241 form an integral part of these consolidated financial statements.
180
Direct Line Group Annual Report and Accounts 2022
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180
Consolidated Balance Sheet
Consolidated Balance Sheet
As at 31 December 2022
As at 31 December 2022
Assets
Goodwill and other intangible assets
Property, plant and equipment
Right-of-use assets
Investment property
Reinsurance assets
Current tax assets
Deferred 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
Total liabilities
Total equity and liabilities
Notes
2022
£m
2021
£m
17
18
19
20
22
12
23
24
25
26
27
28
29
30
33
34
35
36
29
26
38
39
42
13
822.2
83.7
73.0
278.5
1,101.7
71.9
62.0
188.3
791.6
105.8
31.3
1.6
3,698.5
1,003.6
40.9
8,354.6
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
1,934.0
346.5
2,280.5
2,550.2
346.5
2,896.7
258.6
3,654.3
1,462.7
65.2
29.6
64.3
457.8
81.6
—
6,074.1
8,354.6
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
The attached notes on pages 184 to 241 form an integral part of these consolidated financial statements.
The financial statements were approved by the Board of Directors and authorised for issue on 21 March 2023.
They were signed on its behalf by:
NEIL MANSER
CHIEF FINANCIAL OFFICER
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Strategic reportGovernanceFinancial statements
Consolidated Statement of Changes in Equity
Consolidated Statement of Changes in Equity
For the year ended 31 December 2022
For the year ended 31 December 2022
Balance at 1 January 2021
Profit for the year
Other comprehensive (loss)/
income
Total comprehensive (loss)/
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
Total transactions with equity
holders
Balance at 31 December 2021
Loss for the year
Other comprehensive (loss)/
income
Total comprehensive (loss)/
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
148.9
(40.3) 1,451.1
83.9
— 1,056.1
2,699.7 346.5 3,046.2
—
—
—
— 343.7
343.7
— 343.7
—
—
(74.9)
(0.3)
3.0
(72.2)
—
(72.2)
—
—
(74.9)
(0.3) 346.7
271.5
— 271.5
—
—
—
(20.3)
—
(3.7)
—
3.7
—
—
—
—
—
19.2
—
—
—
—
—
—
—
—
—
—
(317.4)
(317.4)
—
(317.4)
—
—
(20.3)
—
(20.3)
—
(101.0)
(101.0)
—
(101.0)
—
17.0
17.0
—
17.0
—
—
(19.2)
0.7
—
0.7
—
—
—
0.7
(3.7)
(1.1)
3.7
—
—
(419.9)
(421.0)
—
(421.0)
145.2
(41.4) 1,454.8
9.0
(0.3) 982.9
2,550.2 346.5 2,896.7
—
—
—
—
—
(2.1)
—
—
—
—
—
—
—
(11.0)
—
—
13.4
—
—
—
—
—
—
2.1
—
—
—
—
—
(39.5)
(39.5)
(203.7)
0.2
(7.3)
(210.8)
—
—
(39.5)
(210.8)
(203.7)
0.2
(46.8)
(250.3)
—
(250.3)
—
—
—
—
—
—
—
—
—
—
—
—
—
(314.5)
(314.5)
—
(11.0)
(50.1)
(50.1)
9.5
(13.4)
0.2
9.5
—
0.2
—
—
—
—
—
—
(314.5)
(11.0)
(50.1)
9.5
—
0.2
—
(368.3)
(365.9)
—
(365.9)
Total transactions with equity
holders
(2.1)
2.4
2.1
Balance at 31 December 2022
143.1
(39.0) 1,456.9
(194.7)
(0.1) 567.8
1,934.0
346.5
2,280.5
The attached notes on pages 184 to 241 form an integral part of these consolidated financial statements.
182
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182
Consolidated Cash Flow Statement
Consolidated Cash Flow Statement
For the year ended 31 December 2022
For the year ended 31 December 2022
Net cash (used by)/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
Proceeds on disposals of assets held for sale
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
Redemption of subordinated Tier 2 notes
Shares purchased in buyback
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Notes
40
40
17
18
14
14
40
31
29
29
2022
£m
(60.3)
860.5
800.2
(108.4)
(11.7)
19.3
(100.8)
(297.9)
(16.6)
(23.0)
(8.9)
(11.0)
(250.0)
(50.1)
(657.5)
41.9
896.5
938.4
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
The attached notes on pages 184 to 241 form an integral part of these consolidated financial statements.
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Notes to the Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Corporate information
Direct Line Insurance Group plc (the "Group") 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.
The principal activity of the Group is the provision of general
insurance.
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'.
The consolidated financial statements are prepared on the
historical cost basis except for available-for-sale ("AFS") and
equity investments held at fair value through profit or loss
("FVTPL") 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.
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 2022 and
31 December 2021 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 trading
update that was approved by the Board of Directors and
announced to the stock market on 11 January 2023 in
respect of the Group's trading for 2022 and outlook for 2023,
set out the challenging conditions that the Group has faced,
in particular with respect to the severe weather in
December 2022 and further increases in motor claims
inflation, as well as the impact on the Group's investment
property portfolio valuation. The Chief Financial Officer
Review describes the Group's capital management strategy,
including the capital actions taken in the last 12 months
designed to ensure the continued strength of the balance
sheet and sets out management actions that the Group
continues to pursue to improve capital strength. 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, which runs until
2026, The Group's Risk Function has carried out an
assessment of the risks to the strategic plan ("the Plan") and
the dependencies for the success of the Plan. This included
running adverse scenarios on the Plan to consider the
downside risks to the Plan and subsequent impact on
forecast profit. The key scenarios applied to the Plan were in
relation to the impact of adverse claims inflation, delay in
pricing actions, increase in operating expenses and a fall in
asset values. The key judgements and assumptions applied
in these scenarios were as follows:
– adverse claims inflation: the Group's Plan includes a
scenario for inflation being higher than expected, leading
to claims costs increasing by 3% with the Group and
market response delayed by six months;
– delay in pricing: future initiatives deliver 50% of expected
–
–
value;
increase in operating expenses: there is a delay of 12
months to achieving benefits from 2023 expense
reduction initiatives; and
fall in asset values: an increase in credit spreads of 50
basis points in the UK and 25 basis points outside of the
UK in 2023, with spreads remaining elevated.
In connection with the trading update released on 11
January 2023, a reforecast based on the Plan was prepared
without delay.
The Risk Function has also carried out an assessment of the
risks to the Group's capital position over 2023 and 2024. Two
specific macroeconomic scenarios, a moderate and a severe,
have been run to assess the possible impact on the Group’s
own funds in the period to 31 December 2023 and 31
December 2024. The macroeconomic assumptions for key
parameters such as Consumer Price index, GDP and bank
base rate for the moderate scenario reflect the adverse end
of the Bank of England November Monetary Policy
Committee forecast range. The severe scenario adopts the
key parameters from the 2022 Bank of England Banking
Stress Test, which is described as “severe but plausible”.
A reverse stress test was also performed to identify a
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 reverse
stress test combines the severe macroeconomic stress with
the impacts from a series of three natural catastrophes from
the 2022 PRA Insurance Stress Test.
In the moderate and severe scenarios, it was concluded that
the Group's and U K Insurance Limited's solvency capital
requirement would not be breached following the
implementation of management actions, such as de-risking
the asset portfolio, the purchase of additional reinsurance
cover, asset disposal or, if necessary, raising equity.
Further information in relation to the sensitivity of key
factors on the Group's financial position are included in the
financial statements. The insurance risk note (note 3.3.1) sets
out the impact on profit before tax of an increase and a
decrease in claims inflation of 200 basis points for two
consecutive years. The market risk note (note 3.3.2) sets out
the impact on profit before tax and equity of a 100 basis
points increase in spreads on financial investments and the
impact of a 100 basis points increase in interest rates on
financial investments and derivatives.
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 21 March 2023 (the date of approval of the
consolidated financial statements). Accordingly, the
Directors have adopted the going concern basis in
preparing the consolidated financial statements.
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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 2022. None of the changes have a material impact
for the Group.
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; and
– 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.
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.
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 2022 and
31 December 2021. 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 held at fair value through other comprehensive
income ("FVOCI"), 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.
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Notes to the Consolidated Financial Statements continued
1. Accounting policies continued
1.4 Revenue recognition continued
Investment return
Interest income on financial assets is determined using the
effective interest rate method. The effective interest rate
method is a way of calculating the amortised cost of a
financial asset (or group of financial assets) and of allocating
the interest income over the expected life of the asset.
Rental income from investment property is recognised in
the income statement on a straight-line basis over the
period of the contract.
Dividend income is recognised when the right to receive
payment is established.
Instalment income
Instalment income comprises the interest income earned
on policyholder receivables, where outstanding premiums
are settled by a series of instalment payments. Interest is
earned using an effective interest rate method over the term
of the policy.
Other operating income
Vehicle replacement referral income (accounted for in
accordance with IFRS 15 'Revenue from Contracts with
Customers')
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
(accounted for in accordance with IFRS 15 'Revenue from
Contracts with Customers')
Fees in respect of services for vehicle recovery and income
from salvage are recognised at a point in time on
satisfaction of performance obligations. The cost of
providing the service is incurred as the service is rendered.
The Group's income also comprises vehicle repair services
provided to other third-party customers. Income in respect
of repairs to vehicles is recognised upon completion of the
repair obligations. The price is determined using market
rates for the services and materials used after discounts
have been deducted where applicable.
Revenue from any goods provided are accounted for at the
point of sale.
Legal services income (accounted for in accordance with
IFRS 15 'Revenue from Contracts with Customers')
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 (accounted for in accordance with IFRS 4
'Insurance Contracts')
Other income includes arrangement and administration fee
income. 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.
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
periodic payment orders ("PPOs") established under the
Courts Act 2003.
A court can award damages for future pecuniary loss in
respect of personal injury, or for other damages in respect of
personal injury and may order that the damages are wholly
or partly to take the form of PPOs. These are covered in
more detail in note 2.3. 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.
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During and after development, accumulated costs are
reviewed for impairment against the projected benefits that
the software is expected to generate. Costs incurred prior to
the establishment of technical feasibility and economic
viability are expensed as incurred, as are all training costs
and general overheads.
1.10 Property, plant and equipment
Items of property, plant and equipment (except investment
property – see note 1.13) are stated at cost less accumulated
depreciation and impairment losses. Where an item of
property, plant and equipment comprises major
components having different useful lives, they are
accounted for separately.
Depreciation is charged to the income statement on a
straight-line basis so as to write off the depreciable amount
of property, plant and equipment over their estimated
useful lives. The depreciable amount is the cost of an asset
less its residual value. Land is not depreciated. The
estimated useful lives are as follows:
Freehold and leasehold
buildings
50 years or the period
of the lease if shorter
Vehicles
3 years
Computer equipment
Up to 5 years
Other equipment, including
property adaptation costs
2 to 15 years
The gain or loss arising from the derecognition of an item of
property, plant and equipment is determined as the
difference between the disposal proceeds, if any, and the
carrying amount of the item.
1.11 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, or its
economic useful life if shorter, 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.
Reinsurance assets include balances due from reinsurance
companies for ceded insurance liabilities. Amounts
recoverable from reinsurers are estimated in a consistent
manner with the outstanding claims provisions or settled
claims associated with the reinsured policies and in
accordance with the relevant reinsurance contract.
Recoveries in respect of PPOs are discounted for the time
value of money.
A reinsurance bad debt provision is assessed in respect of
reinsurance debtors to allow for the risk that the reinsurance
asset may not be collected or where the reinsurer's credit
rating has been downgraded significantly and this is taken
as an indication of a reinsurer's difficulty in meeting its
obligations under the reinsurance contracts. This also
includes an assessment in respect of the ceded part of
claims provisions to reflect the counterparty default risk
exposure to long-term reinsurance assets particularly in
relation to PPOs. 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.
1.7 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 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.
1.9 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 acquired, is initially recognised at cost and
subsequently at cost less any accumulated impairment
losses. Goodwill arising on the acquisition of subsidiaries is
included in the balance sheet category "goodwill and other
intangible assets". The gain or loss on the disposal of a
subsidiary 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.
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Notes to the Consolidated Financial Statements continued
1. Accounting policies continued
1.11 Right-of-use assets ("ROU") and lease liabilities
continued
Where the Group is a lessee continued
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 property leases mainly relate 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 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 property,
plant and equipment or ROU assets 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,
property, plant and equipment or ROU assets is recognised
as it arises provided the increased carrying value does not
exceed the carrying amount that would have been
determined had no impairment loss been recognised.
Impairment losses on goodwill are not reversed.
1.13 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.
1.14 Financial assets
Financial assets are classified as available-for-sale, held-to-
maturity, designated at FVTPL, 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.
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AFS financial assets include insurtech-focused equity funds
which are neither classified as held for trading nor
designated at FVTPL.
Held-to-maturity ("HTM")
Non-derivative financial assets not designated as AFS, or
loans and receivables with fixed or determinable payments
and fixed maturity, where the intention and ability to hold
them to maturity exists, are classified as HTM.
Subsequent to initial recognition, HTM financial assets are
measured at amortised cost using the effective interest rate
method less any impairment losses.
Loans and receivables
Non-derivative financial assets with fixed or determinable
repayments that are not quoted in an active market are
classified as loans and receivables, except those that are
classified as AFS or HTM. Loans and receivables are initially
recognised at fair value plus directly related transaction
costs and are subsequently measured at amortised cost
using the effective interest rate method less any impairment
losses.
Equity investments held at FVTPL
Quoted equity investments are designated upon initial
recognition at FVTPL. Dividends are included in investment
return in the income statement when the right of payment
has been established. Equity investments held at FVTPL are
held on the balance sheet at fair value with net changes in
fair value included within investment return in the income
statement.
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 number of immaterial 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.
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1. Accounting policies continued
1.15 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.
1.16 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.
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.
1.17 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.
1.18 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.
1.19 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.
1.20 Short-term employee benefits
Liabilities recognised in respect of staff bonuses and rewards
are measured at the undiscounted amount of benefits
expected to be paid in exchange for the related service.
1.21 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
past service costs, together with the net interest on the net
pension liability or asset, are 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".
Insurance assets resulting from a bulk annuity insurance
policy ‘buy-in’ transaction result in the insurance asset
exactly matching the pension liability. A ‘buy-in’ is not a
settlement and the liability is not derecognised as the
Group retains ultimate responsibility for funding the plan.
1.22 Taxation
The tax charge or credit represents the proportion of the tax
payable and receivable arising in the current year only.
The current tax charge is based on the taxable profits for the
year as determined in accordance with the relevant tax
legislation, after any adjustments in respect of prior years.
Taxable profit differs from net profit as reported in the
income statement because it excludes items of income or
expense that are taxable or deductible in other years and it
further excludes items that are never taxable or deductible.
Provision for taxation is calculated using tax rates that have
been enacted, or substantively enacted, by the balance
sheet date and is allocated over profits before taxation or
amounts charged or credited to components of other
comprehensive income and equity, as appropriate.
Deferred taxation is accounted for in full using the balance
sheet liability method on all temporary differences between
the carrying amount of an asset or liability for accounting
purposes and its carrying amount for tax purposes.
Deferred tax liabilities are generally recognised for all
taxable temporary timing differences and deferred tax
assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible
temporary differences can be utilised.
Deferred tax assets are reviewed at each balance sheet date
and reduced to the extent that it is probable that they will
not be recovered.
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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.
1.23 Share-based payment
The Group operates a number of share-based compensation
plans under which it awards Ordinary Shares and share
options to its employees. Such awards are generally subject
to vesting conditions that can alter the amount of cash or
shares to which an employee is entitled.
Vesting conditions include service conditions (requiring the
employee to complete a specified period of service) and
performance conditions (requiring the Group to meet
specified performance targets).
The fair value of options granted is estimated using
valuation techniques which incorporate exercise price, term,
risk-free interest rates, the current share price and its
expected volatility.
The cost of employee services received in exchange for an
award of shares or share options granted is measured by
reference to the fair value of the shares or share options on
the date the award is granted and takes into account non-
vesting conditions and market performance conditions
(conditions related to the market price of the Company's
Ordinary Shares).
The cost is expensed on a straight-line basis over the vesting
period (the period during which all the specified vesting
conditions must be satisfied) with a corresponding increase
in equity in an equity-settled award. 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.
1.24 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.
1.25 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.
1.26 Accounting developments
1.26.1 Transition to IFRS 17 'Insurance contracts' and
IFRS 9 'Financial instruments'
Changes in accounting policies and disclosures
(a) Estimated impact of the transition to IFRS 17 and
IFRS 9
The Group will apply IFRS 17 and IFRS 9 for the first time on
1 January 2023. IFRS 17 is expected to bring a significant
change to how the Group accounts for its insurance
contracts issued and reinsurance contracts held and is
therefore expected to have a material financial impact on
the Group’s consolidated financial statements in the period
of initial application. IFRS 9 has a limited impact. The table
below summarises the expected financial impact:
Estimated reduction in the Group’s total equity
1 January 2022
Adjustments due to the adoption of IFRS 17:
Non-life contracts
Adjustments due to the adoption of IFRS 9:
Impairment of financial assets
Current tax impacts
Deferred tax impacts
Estimated impact of adoption of IFRS 17 and
9 after tax on total equity
£m
(73.9)
(4.1)
—
17.8
(60.2)
The following notes provide a summary of the main
accounting policies that the Group will adopt on transition
to IFRS 17 and IFRS 9, as well as the significant estimates
and judgements that will be made.
(b) IFRS 17 – Significant accounting policies
The Group is adopting the full retrospective approach on
transition to IFRS 17 using the Premium Allocation
Approach ("PAA").
Insurance and reinsurance contracts classification
Contract classification, as disclosed in policy note 1.3,
remains unchanged on adoption of IFRS 17.
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.
Insurance contracts accounting treatment
(i) Separating components from insurance and
reinsurance contracts
The Group assesses its insurance contracts to determine
whether they contain distinct components which must be
accounted for under another IFRS instead of under IFRS 17.
After separating any distinct components, the Group applies
IFRS 17 to all remaining components of the (host) insurance
contract. Currently, the Group’s contracts do not include any
distinct components that require separation.
(ii) Level of aggregation
IFRS 17 requires that a level of aggregation is determined
for applying its requirements. The level of aggregation is
determined firstly by dividing the business written into
portfolios. Portfolios comprise groups of contracts with
similar risks which are managed together. IFRS 17 also
requires that no group, for aggregation purposes, may
contain contracts issued more than one year apart.
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Notes to the Consolidated Financial Statements continued
1. Accounting policies continued
–
1.26 Accounting developments continued
1.26.1 Transition to IFRS 17 'Insurance contracts' and
IFRS 9 'Financial instruments' continued
Hence, within each year of issue, portfolios of contracts are
divided into three groups, as follows:
– a group of contracts that are onerous at initial
recognition;
– a group of contracts that, at initial recognition, have no
significant possibility of becoming onerous subsequently
(if any); and
– a group of the remaining contracts in the portfolio.
(iii) Recognition
The Group recognises groups of insurance contracts it issues
from the earliest of the following:
–
–
–
the beginning of the coverage period of the group of
contracts;
the date when the first payment from a policyholder in
the group is due or when the first payment is received if
there is no due date; or
for a group of onerous contracts, when facts and
circumstances indicate that the group is onerous.
The Group recognises a group of reinsurance contracts held
it has entered into from the earlier of the following:
–
–
the beginning of the coverage period of the group of
reinsurance contracts held. However, the Group delays
the recognition of a group of reinsurance contracts held
that provide proportionate coverage until the date any
underlying insurance contract is initially recognised, if
that date is later than the beginning of the coverage
period of the group of reinsurance contracts held; and
the date the Group recognises an onerous group of
underlying insurance contracts if the Group entered into
the related reinsurance contract held at or before that
date.
(iv) Contract boundary
The Group includes in the measurement of a group of
insurance contracts all the future cash flows within the
boundary of each contract in the group. Cash flows are
within the boundary of an insurance contract if they arise
from substantive rights and obligations that exist during the
reporting period in which the Group can compel the
policyholder to pay the premiums, or in which the Group
has a substantive obligation to provide the policyholder with
insurance contract services.
A liability or asset relating to expected premiums or claims
outside the boundary of the insurance contract is not
recognised. Such amounts relate to future insurance
contracts.
(v) Measurement – Premium Allocation Approach ("PAA")
The Group applies the PAA to all the insurance contracts
that it issues and expects to apply it to reinsurance contracts
that it holds, as:
–
the coverage period of each contract in the group is one
year or less, including insurance contract services arising
from all premiums within the contract boundary; or
for contracts longer than one year, the Group has
modelled possible future scenarios and reasonably
expects that the measurement of the liability for
remaining coverage for the group containing those
contracts under the PAA does not differ materially from
the measurement that would be produced by applying
the General Measurement Model. For insurance
contracts, this is expected to equate to less than 2% of
gross written premium under IFRS 4 on transition; for
reinsurance contracts, this is primarily in respect of the
Group's Motor excess of loss treaty and is also expected to
apply to the Group's quota share reinsurance agreement.
Insurance contracts – initial measurement
For a group of contracts that is not onerous at initial
recognition, the Group measures the liability for remaining
coverage as:
–
the premiums, if any, received at initial recognition; plus
– any other asset or liability previously recognised for cash
flows related to the group of contracts that the Group
pays or receives before the group of insurance contracts
is recognised.
Where facts and circumstances indicate that contracts are
onerous at initial recognition, the Group performs additional
analysis to determine if a net outflow is expected from the
contract. Such onerous contracts are separately grouped
from other contracts and the Group recognises a loss in
profit or loss for the net outflow, resulting in the carrying
amount of the liability for the group being equal to the
fulfilment cash flows. A loss component is established by
the Group for the liability for remaining coverage for any
such onerous group depicting the losses recognised.
Reinsurance contracts held – initial measurement
The Group measures its reinsurance assets for a group of
reinsurance contracts that it holds on the same basis as
insurance contracts that it issues. However, they are adapted
to reflect the features of reinsurance contracts held that
differ from insurance contracts issued, for example the
generation of expenses or reduction in expenses rather than
revenue.
Where the Group recognises a loss on initial recognition of
an onerous group of underlying insurance contracts or when
further onerous underlying insurance contracts are added to
a group, the Group establishes a loss-recovery component of
the asset for remaining coverage for a group of reinsurance
contracts held depicting the recovery of losses.
Insurance contracts – subsequent measurement
The Group measures the carrying amount of the liability for
remaining coverage at the end of each reporting period as:
–
the liability for remaining coverage at the beginning of
the period; plus
– premiums received in the period; minus
–
the amount recognised as insurance revenue for the
services provided in the period.
The Group estimates the liability for incurred claims as the
fulfilment cash flows related to incurred claims. The
fulfilment cash flows incorporate, in an unbiased way, all
reasonable and supportable information available without
undue cost or effort about the amount, timing and
uncertainty of those future cash flows; they reflect current
estimates from the perspective of the Group and include an
explicit adjustment for non-financial risk (the risk
adjustment). The Group adjusts the future cash flows for the
time value of money and the effect of financial risk for the
measurement of liability for incurred claims, including those
that are expected to be paid within one year of being
incurred.
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Reinsurance contracts held – subsequent measurement
The subsequent measurement of reinsurance contracts held
follows the same principles as those for insurance contracts
issued and has been adapted to reflect the specific features
of reinsurance held.
Insurance acquisition cash flows for insurance contracts
issued
All insurance acquisition cash flows are expensed as
incurred. This includes for a small number of contracts
where the coverage period exceeds a period of twelve
months (see 1.26.1 (b) (v)) and there are no material
amounts of acquisition costs relating to these contracts. This
differs to the Group's previous policy of deferring acquisition
costs over a 12-month period.
Insurance contracts – modification and derecognition
The Group derecognises insurance contracts when:
–
–
the rights and obligations relating to the contract are
extinguished (i.e. discharged, cancelled or expired); or
the contract is modified such that the modification
results in a change in the measurement model or the
applicable standard for measuring a component of the
contract, substantially changes the contract boundary, or
requires the modified contract to be included in a
different group. In such cases, the Group derecognises
the initial contract and recognises the modified contract
as a new contract.
When a modification is not treated as a derecognition, the
Group recognises amounts paid or received for the
modification with the contract as an adjustment to the
estimate of fulfilment cash flows.
(vi) Presentation
The Group presents separately, in the consolidated balance
sheet, the carrying amount of portfolios of insurance
contracts issued that are assets, portfolios of insurance
contracts issued that are liabilities, portfolios of reinsurance
contracts held that are assets and portfolios of reinsurance
contracts held that are liabilities.
The Group disaggregates the total amount recognised in
the income statement and insurance service result,
comprising insurance revenue and insurance service
expense and insurance finance income or expenses.
The Group does not disaggregate the change in risk
adjustment for non-financial risk between a financial and
non-financial portion and includes the entire change as part
of the insurance service result.
The Group separately presents income or expenses from
reinsurance contracts held from the expenses or income
from insurance contracts issued.
Insurance revenue
The insurance revenue for the period is the amount of
expected premium receipts (excluding any investment
component) allocated to the period. The Group allocates
the expected premium receipts to each period of insurance
contract services on the basis of the passage of time. The
liability for remaining coverage is not discounted.
Insurance finance income and expense
Insurance finance income or expenses comprise the change
in the carrying amount of the group of insurance contracts
in respect of incurred claims arising from:
–
–
the effect of the time value of money and changes in the
time value of money; and
the effect of financial risk and changes in financial risk.
The Group does not disaggregate finance income and
expenses because the related financial assets are managed
on a fair value basis and measured at FVTPL.
Net income or expense from reinsurance contracts held
The Group presents separately on the face of the income
statement the amounts expected to be recovered from
reinsurers, and an allocation of the reinsurance premiums
paid. The Group treats reinsurance cash flows that are
contingent on claims on the underlying contracts as part of
the claims that are expected to be reimbursed under the
reinsurance contract held and treats amounts not
dependent on the underlying claims, such as ceding
commissions, as a reduction in the premiums paid to the
reinsurer. Additionally, the allocation of premiums paid will
not be presented as a reduction on the face of the income
statement.
(c) IFRS 17 – accounting judgements and sources of
estimation uncertainty
It is expected that the Group will have additional
accounting judgements and sources of estimation
uncertainty on adoption of IFRS 17 as follows:
Level of aggregation
Accounting judgement
The Group defines a portfolio as insurance contracts subject
to similar risks and managed together. Contracts within the
same product line are expected to be in the same portfolio
as they have similar risks and are managed together. The
assessment of which risks are similar and how contracts are
managed requires the exercise of judgement.
Premium Allocation Approach
Accounting judgement
For a small number of insurance contracts, and reinsurance
contracts, which have a coverage period that is greater than
12 months (as described in note 1.26.1 (b) (v) above), the
Group elects to apply the PAA if at the inception of the
contract, the Group reasonably expects that it will provide a
liability for remaining coverage that would not differ
materially from the General Measurement Model. The Group
exercises judgement in determining whether the PAA
eligibility criteria are met at initial recognition.
Onerous contracts
Source of estimation uncertainty
The Group assumes that no contracts are onerous at initial
recognition unless facts and circumstances indicate
otherwise. This is based on an assessment of future cash
flows, which may be uncertain due to their timing, size and/
or probability. If at any time during the coverage period the
facts and circumstances indicate that a group of insurance
contracts is onerous, the Group establishes a loss
component as the excess of the fulfilment cash flows that
relate to the remaining coverage of the group over the
carrying amount of the liability for remaining coverage of
the group as determined above. Accordingly, by the end of
the coverage period of the group of contracts the loss
component will be zero. Where the Group recognises a loss
on initial recognition of an onerous group of underlying
insurance contracts, or when further onerous underlying
insurance contracts are added to a group, and the Group
has a corresponding reinsurance held contract, the Group
establishes a loss-recovery component of the asset for
remaining coverage for a group of reinsurance contracts
held depicting the expected recovery of the losses.
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Strategic reportGovernanceFinancial statements Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
1. Accounting policies continued
1.26 Accounting developments continued
1.26.1 Transition to IFRS 17 'Insurance contracts' and
IFRS 9 'Financial instruments' continued
Estimates of future cash flows
Source of estimation uncertainty
In estimating future cash flows, the Group will incorporate,
in an unbiased way, all reasonable and supportable
information that is available without undue cost or effort at
the reporting date. This information includes both internal
and external historical data about claims and other
experience, updated to reflect current expectations of future
events. The estimates of future cash flows will reflect the
Group's view of current conditions at the reporting date,
ensuring the estimates of any relevant market variables are
consistent with observable market prices, however these
cash flows are inherently uncertain in size, timing and are
based on probability-weighted average expectations.
Discount rates
Accounting judgement
IFRS 17 requires entities to determine discount rates using
either the ‘bottom up’ or ‘top down’ approach. The ‘top
down’ approach involves using discount rate curves derived
from a portfolio of reference assets adjusted to remove all
characteristics of the assets that are not present in insurance
contracts, but not requiring to eliminate the illiquidity
premium. The Group selected to apply the ‘bottom up’
approach which requires the use of risk-free rate curves and
adding the illiquidity premium. The standard does not
specify how to derive the illiquidity premium.
The Group will generally determine risk-free discount rates
using the Solvency II risk-free rates sourced from the Bank of
England. For cash flows that are not in respect of PPOs, a
small illiquidity premium will be added to the risk-free rate,
reflecting the short settlement tail. For PPOs, to reflect the
different liquidity characteristics of the cash flows, the risk-
free yield curves will be adjusted by a generally higher
illiquidity premium. The illiquidity premium will be
determined by using a fundamental spread approach by
deducting the risk-free rate and credit risk premium from
corresponding corporate bond reference portfolios. For non-
PPOs, the reference portfolio is A-rated bonds with terms of
1 to 3 years and for PPOs, the reference portfolio is BBB-
rated bonds with a remaining term of 15 or more years.
Judgement is applied when determining the illiquidity
premium with respect to allowances for past and future
trends, considering changes in the economic environment.
Under IFRS 4, the Group does not currently discount future
cash flows, except in respect of PPOs, which are discounted
at a rate that is consistent with the expected return backing
these long-term liabilities.
Risk adjustment
Source of estimation uncertainty
A risk adjustment for non-financial risk will be determined
to reflect the compensation that the Group would require
for bearing non-financial risk and its degree of risk aversion.
It will be determined at Group level and allocated to groups
of contracts based on the size of their reserves. The risk
adjustment for non-financial risk will be determined using a
confidence level technique.
The Group will estimate the probability distribution of the
expected present value of the future cash flows from the
contracts at each reporting date and calculate the risk
adjustment for non-financial risk as the excess of the value
at risk at the target confidence level over the expected
present value of the future cash flows allowing for the
associated risks over all future years. The target confidence
level will be at the 75th percentile for liabilities for incurred
claims. The risk adjustment is derived using the reserve risk
distribution calculated in the internal economic capital
model and consequently, is subject to model and
parameter uncertainty.
(d) IFRS 9 – Significant accounting policies
IFRS 9 'Financial Instruments' addresses the classification,
measurement, recognition and derecognition of financial
assets and financial liabilities and introduces new rules for
hedge accounting and a new impairment model for
financial assets.
The Group will apply the new rules retrospectively from 1
January 2023 and comparatives for 2022 will be restated.
The Group has reviewed its financial assets and liabilities
and is expecting the following impact from the adoption of
the new standard on 1 January 2023.
The Group's debt instruments of £4,084.6 million, that are
currently classified as AFS under IAS 39 'Financial
Instruments: Recognition and Measurement', as at 1 January
2022 (the opening date of the comparative reporting
period) will satisfy the conditions for classification as ‘held to
collect and sell’ under IFRS 9 to be measured at FVOCI.
However, the Group will apply the IFRS 9 option to
designate debt instruments, that would otherwise be
categorised as FVOCI, as FVTPL to reduce the accounting
mismatch that would arise from measuring debt
instruments at FVOCI and insurance liabilities at FVTPL and
recognising insurance finance income or expense in profit or
loss. The AFS reserve of £7.5 million will be transferred to
retained earnings on 1 January 2022.
There are no other reclassifications as a result of applying
IFRS 9 as:
– assets currently classified as HTM and loans and
receivables satisfy the IFRS 9 condition to be classified as
‘held-to-collect’ and measured at amortised cost as they
are debt instruments with contractual terms that give
rise on specified dates to cash flows that are solely
payments of principal and interest on the principal
amount outstanding and sales are infrequent or
insignificant;
– derivatives will continue to be measured at FVTPL;
– equity investments will continue to be valued at either
FVOCI when designated as such at initial recognition or
FVTPL; and
financial liabilities will continue to be measured at
amortised cost.
–
The Group's current fair value designated hedge
relationships will no longer be required. The Group will
continue to have a small number of immaterial designated
cash flow hedges; the Group will apply the IFRS 9 hedging
requirements to these cash flow hedges.
The new impairment model requires the recognition of
impairment provisions based on expected credit losses
("ECL") rather than incurred credit losses as is the case under
IAS 39. The Group has established a default probability
model for its debt securities held at amortised cost and
loans and receivables. As the majority of the Group's debt
securities will be held at FVTPL, for which no ECL
calculations are required, ECL provisions are expected to be
in the region of £2.9 million on 1 January 2023.
ECLs for other receivables will be based on a probability
matrix and are expected to be similar to the level of existing
bad debt provisions.
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(e) IFRS 9 – accounting judgements and sources of
estimation uncertainty
The critical estimates and judgement disclosure for
impairment of financial assets will be updated for ECL
calculations. The key areas of estimation relate to:
– determining when there has been a significant increase
–
in credit risk since initial recognition;
inputs and assumptions used in preparing a range of
unbiased and probability-weighted scenarios; and
– weightings to be applied to these different scenarios.
As the majority of financial instruments of the Group are
held at FVTPL, with fair value movements included in the
income statement immediately, the ECL provision is not
expected to be material.
1.26.2 Other accounting developments
New IFRS standards and amendments that are issued, but
not yet effective for the 31 December 2022 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.
The Group continues to defer the adoption of IFRS 9
(including ‘Amendments to IFRS 9: Prepayment Features
with Negative Compensation’) until it adopts IFRS 17 from 1
January 2023 as allowed by ‘Amendments to IFRS 4:
Applying IFRS 9 Financial Instruments with IFRS 4 Insurance
Contracts’ and 'Amendments to IFRS 4: Deferral of IFRS 9’ as
its activities continue to be predominately connected with
insurance, with insurance liabilities making up the largest
proportion of its total liabilities.
Further, Amendments to IFRS 4 'Applying IFRS 9 Financial
Instruments with IFRS 4 Insurance Contracts' requires
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 £285.7 million decrease (2021:
£94.5 million decrease);
– HTM debt securities £10.7 million decrease (2021:
–
£1.7 million decrease);
infrastructure debt £7.7 million decrease (2021:
£2.1 million decrease);
– commercial real estate loans £1.0 million increase (2021:
£0.5 million decrease); and
– other loans £1.0 million decrease (2021: £nil).
Derivative assets do not have contractual terms that give rise
on specified dates to cash flows that are solely payment of
principal and interest on the principal amount outstanding.
The fair value of these financial assets is disclosed in note 43
and the amount of change in the fair value during the
period was an increase of £30.9 million (2021: £26.9 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 £300.9 million (2021: £366.0 million). The carrying value
of these financial assets at 31 December 2022 was
£304.8 million (2021: £368.1 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.
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 these amendments:
–
specify that an entity’s right to defer settlement must
exist at the end of the reporting period;
– clarify that classification is unaffected by management’s
intentions or expectations about whether the entity will
exercise its right to defer settlement of a liability;
– clarify how lending conditions affect classification; and
– clarify requirements for classifying liabilities an entity will
or may settle by issuing its own equity instruments.
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. Exposure
Draft ED/2021/9 ‘Non-current Liabilities with Covenants
(Proposed amendments to IAS 1)’ published in November
2021 proposes further deferral until not earlier than 1
January 2024.
These amendments are yet to be adopted by the UK.
The following amendments are effective from I January
2023 and have 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 narrow 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. The
amendments also clarify that where payments that settle a
liability are deductible for tax purposes.
The following amendments are effective from 1 January
2024 but have not yet been adopted by the UK.
On 22 September 2022, the IASB issued ‘Lease Liability in a
Sale and Leaseback (Amendments to IFRS 16)’, which adds
subsequent measurement requirements for sale and
leaseback transactions.
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2. Critical accounting judgements and key sources of estimation uncertainty
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the
preparation of its financial information. The Group's principal accounting policies are set out on pages 184 to 195.
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 and material to the portrayal of
its financial condition are discussed below.
2.1 Impairment provisions – financial assets
Accounting judgement
The Group's financial assets are classified as AFS or HTM debt securities, FVTPL equity or loans and receivables. Excluding
those assets held at FVTPL, 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 2022: £3,147.5 million;
31 December 2021: £4,084.6 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 2022, the Group would have suffered a
loss of £262.9 million (2021: £24.8 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 2022: £98.2 million; 31 December 2021:
£91.2 million). These assets are measured at amortised cost and there have been no impairment losses (2021: £nil).
The Group has a portfolio of investments classified as loans and receivables, primarily comprising infrastructure debt and
commercial real estate loans (total 31 December 2022: £439.2 million; 31 December 2021: £451.6 million). There was an
impairment of £1.8 million within the loans and receivables portfolio in the year ended 31 December 2022 (2021: £2.1
million).
2.2 Fair value of investment properties
Sources of estimation uncertainty
The Group holds a portfolio of investment properties, with a fair value at 31 December 2022 of £278.5 million (2021: £317.0
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).
Any significant risk of a material adjustment to the carrying amount of the investment property portfolio within the next
financial year will be dependent on a number of factors including the developments in the economic outlook which could
result in volatility in market prices, rental yields or occupancy rates. Sensitivity analysis for the investment property portfolio
has been independently calculated by the Group's registered valuers by flexing inputs of internal models to a reasonable
alternative yield to ascertain the impact on property valuations (see note 20). There are no significant sources of estimation
uncertainty in relation to climate-related matters in valuing the investment property portfolio.
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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 2022 amounted to £2,608.2
million (2021: £2,548.4 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 1.5% in Northern Ireland.
The Group reserves its large bodily injury claims at the relevant discount rate for each jurisdiction, with the overwhelming
majority now 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. In 2022, the Group reviewed the estimates used to discount PPOs
as described in note 35. Given the significant changes both in the current economic environment and the longer term
outlook, the Group changed from flat rate inflation and discounting assumption to a yield curve approach, allowing for an
increase in short-term inflation and higher long-term real returns. This resulted overall in the application of a real discount
rate of 0.9% (2021: 0.0%), the combination of cash flow weighted inflation and discounting of 4.2% and 5.1% respectively,
the latter driven by an expected increase in the long-term yield of the assets backing PPO liabilities.
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 2022 and 31 December 2021 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.
Higher claims inflation remains a risk, given the continuing high level of consumer prices and wage inflation. In 2022, the
CPI was at its highest level for the past decade and is not expected to normalise until 2024. 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 scenarios for
excess inflation have been considered in the reserving process. The percentages applied range from 2% to 5% and for
future periods of up to 5 years, depending on the class of business and claim type and allowing for the level of inflation
included in the best estimate. The Group has observed a slow-down in the processing of recoveries and liabilities with third
party insurers which increases the estimation risk of these amounts. A range of data types and methods are used with
historical comparators to assess the underlying position separate from the timing effects to mitigate the uncertainty.
Changes in the climate can impact both frequency and severity of losses, particularly for wind storm and flood events. This
is taken into account in the planning process, pricing and through our capital model; the impact on reserves is only seen
when major loss events occur.
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 both the earned and unearned 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, in particular increased second-hand car costs in Motor. The sensitivity analysis in note 3.3.1 looks at a 200
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 is within the Group's booked reserve margin. The risk of material adjustments to the
Group's estimates which could affect the carrying value in 2023 is highest in relation to long tail classes where inflation has
been less evident to date. The Group therefore reserves for the risk of excess inflation on these classes within the
management margin.
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3. Risk management
3.1 Enterprise Risk Management Strategy and Framework
The Enterprise Risk Management Strategy and Framework sets out, at a high level, 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 86.
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.
The global political situation, including Russia’s invasion of Ukraine materially affecting European energy supply, has
resulted in high inflation rates, and a cost of living crisis. This, compounded with recent UK political instability, is likely to
result in a longer than expected period of low or negative growth that will significantly impact businesses and customers
across the UK well into 2024.
Inflationary pressures exacerbate the exceedingly difficult trade-offs the Bank of England faces between supporting
growth and controlling price pressures and are precipitating a cost of living crisis. The rise of inflation has prompted
Central Banks to undergo one of the fastest programmes of interest rate rises in recent history, whilst also generating a
wave of social unrest and strikes, as workers seek better pay deals to protect living standards. The Group's Investment and
Treasury function has analysed the potential impact of a recession on holdings in the investment portfolio, finding that
holdings are relatively safely positioned, helped by solid diversification and good ongoing investment management
oversight.
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 remains uncertainty as to the longer term effect of Brexit on the Group, for example the risk of
shortages in trades and care workers increasing claims costs.
The implications of these risks are referred to in the Risk management section of the Strategic report on page 86.
Claims inflation
The Group's reserves and claims from underwritten policies are exposed to the risk of changes in claims development
patterns arising from inflation. Uncertainty in claims reserves and underwriting risk has significantly increased due to the
increase in future inflation and its outlook, and the additional uncertainty when forecasting its impact on claims reserves.
The insurance sectors that the Group operates in are particularly affected by inflation and its impact on the costs of car
parts, used car prices, services and care worker labour, and construction materials. This, in addition to the supply chain
dislocation has led to materially increased claim severity on motor damage and home and commercial property claims,
with a longer term risk of care worker inflation increasing motor large bodily injury claims. Details of the Group's sensitivity
to claims inflation are included in note 3.3.1.
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, in particular large bodily injury claims;
–
– unexpected future impact of socioeconomic trends or regulatory changes, for example changes to the Ogden discount
rate;
– data issues and changes to the claims reporting process;
– operational failures;
–
failure to recognise claims trends in the market including a slow-down in the processing of recoveries and liabilities
with third party insurers which increases the estimation risk of these amounts; and
– changes in underwriting and business written so that past trends are not necessarily a predictor of the future.
Understatement of reserves may result in not being able to pay claims when they fall due. Alternatively, overstatement of
reserves can lead to a surplus of funds being retained resulting in opportunity cost; for example, lost investment return or
insufficient resource to pursue strategic projects and develop the business.
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Reserve risk is managed through a range of processes and controls:
–
–
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;
– use of reinsurance programmes, through Motor, Liability, Property catastrophe, Property risk and Travel, which are
renewable annually;
– 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 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.
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% (2021:
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%
(2021: minus 1.25% compared to minus 0.25%)
Claims inflation5
Impact of a decrease in claims inflation by 200 basis points for two consecutive years
Impact of an increase in claims inflation by 200 basis points for two consecutive years
Increase/(decrease) in profit
before tax1,2
2022
£m
2021
£m
31.0
43.0
(42.8)
(58.9)
46.7
42.5
(64.2)
(59.4)
79.4
(80.5)
74.3
(75.5)
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 0.9% 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.
5. We have updated this sensitivity across 2021 and 2022, to a 200 basis point increase/decrease in inflation in acknowledgment of the current uncertain
economic environment.
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 2022. 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.
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Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
3. Risk management continued
3.3.1 Insurance risk continued
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.
The Solvency II definition of 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.
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 2023, and
accelerate the pre-emptive management actions of repricing and reinsurance as well as the strategic management
actions relating to flood resilience and underwriting footprint following the second round of the Climate Biennial
Exploratory Scenario ("CBES") analysis in early 2022. 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. The Group expects these specific
risks to materialise in the medium to longer term (see page 74 for definition). 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 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's business is almost wholly written in the UK general insurance market. 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 the existing cover for the period 1 July 2022 to 30 June 2023
has a retention of £150 million per weather event and an upper limit of £1,350 million;
– product concentration risk – 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 to ensure this risk is mitigated.
It is important to note that none of these risk categories are independent of the others and that giving due consideration
to the relationship between these risks is an important aspect of the effective management of insurance risk.
Distribution risk
This is the risk of a material reduction in profit compared to plan due to the Group not writing its planned policy volumes
in each segment.
Pricing risk
This is 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.
200 Direct Line Group Annual Report and Accounts 2022
200 Direct Line Group Annual Report and Accounts 2022
The Group uses reinsurance to:
– protect the underwriting result against low-frequency, high-severity losses through the transfer of catastrophe claims
volatility to reinsurers;
– protect the underwriting result against unforeseen volumes of, or adverse trends in, large individual claims in order to
reduce volatility and to improve stability of earnings;
reduce the Group's capital requirements; and/or
transfer risk that is not within the Group's current risk appetite.
–
–
3.3.2 Market risk
Market risk is the risk of loss resulting from fluctuations in the level and in the volatility of market prices of assets, liabilities
and financial instruments.
The Group is mainly exposed to the following market risk factors:
spread risk;
–
–
interest rate risk;
– property risk; and
– currency risk.
The Group has policies and limits approved by the Investment Committee for managing the market risk exposure. These
set out the principles that the business should adhere to for managing market risk and establishing the maximum limits
the Group is willing to accept having considered strategy, risk appetite and capital resources.
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.
During this phase of economic uncertainty maturities from the in-house short and intermediate sterling credit portfolios
had not been reinvested up until October, significantly increasing cash reserves and liquidity. However, to improve
investment returns with a low risk to solvency, cash was reinvested into £150 million of 3 month Treasury Bills, and £41
million of government related sterling credit maturities during Q4 2022.
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. See page 68 for more information on investment portfolio targets, exclusions and
preferences and page 66 for the Group's approved Science-Based Targets.
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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Strategic reportGovernanceFinancial statements Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
3. Risk management continued
3.3.2 Market risk continued
The table below analyses the distribution of debt securities by geographical area (commercial real estate loans and
infrastructure debt are all within the UK).
Corporate
Local
government
Sovereign
Supranational
Debt securities
total
At 31 December 2022
Australia
Austria
Belgium
Canada
Cayman Islands
China
Czech Republic
Denmark
Finland
France
Germany
Hong Kong
Ireland
Italy
Japan
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Portugal
South Africa
Spain
Sweden
Switzerland
United Arab Emirates
United Kingdom
USA
Zambia
Supranational
Total
£m
£m
£m
116.0
4.3
31.6
59.8
3.7
0.6
0.7
17.9
7.7
237.0
175.7
9.3
1.4
16.1
18.8
2.6
7.0
100.0
10.0
17.7
6.7
6.0
56.5
23.9
50.0
3.5
822.0
895.5
1.3
—
—
—
—
—
—
—
—
—
—
5.9
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
480.3
31.0
—
—
2,703.3
5.9
511.3
£m
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25.2
25.2
£m
116.0
4.3
31.6
59.8
3.7
0.6
0.7
17.9
7.7
242.9
175.7
9.3
1.4
16.1
18.8
2.6
7.0
100.0
10.0
17.7
6.7
6.0
56.5
23.9
50.0
3.5
1,302.3
926.5
1.3
25.2
3,245.7
202 Direct Line Group Annual Report and Accounts 2022
202 Direct Line Group Annual Report and Accounts 2022
The table below analyses the distribution of debt securities by geographical area (commercial real estate loans and
infrastructure debt are all within the UK).
Corporate
Local
government
Sovereign
Supranational
Debt securities
total
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
£m
£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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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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203
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203
Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
3. Risk management continued
3.3.2 Market risk continued
The table below analyses the distribution of debt securities by industry sector classifications.
2022
2021
At 31 December
Basic materials
Communications
Consumer, cyclical
Consumer, non-cyclical
Diversified
Energy
Financial
Industrial
Sovereign, supranational and local government
Technology
Transport
Utilities
Total
£m
48.8
131.1
274.7
223.0
14.3
81.2
1,452.9
158.5
542.4
50.2
13.4
255.2
3,245.7
%
1%
4%
8%
7%
0%
3%
45%
5%
17%
2%
0%
8%
100%
The table below analyses the distribution of infrastructure debt by industry sector classifications.
At 31 December
Social, of which:
Education
Health
Other
Transport
Total
2022
£m
105.8
64.1
47.8
20.5
238.2
%
44%
27%
20%
9%
100%
£m
82.6
203.4
410.3
361.4
19.2
152.8
%
2%
5%
10%
9%
0%
4%
2,050.2
49%
250.5
77.7
121.5
13.4
432.8
4,175.8
2021
£m
110.3
67.2
49.0
24.3
6%
2%
3%
0%
10%
100%
%
44%
26%
20%
10%
250.8
100%
The Group uses its partial internal 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.
The Group's exposure to credit spread widening was partly de-risked in August via the sale of approximately £670 million
of longer-dated US dollar investment grade credit.
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 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 Tier 2 notes issued on 27 April 2012 were redeemed in full on 27 April 2022. On the same day, the interest rate swap
held to hedge the exposure to interest rates by exchanging the fixed rate of interest on these notes for a floating rate
expired.
The Group also invests in floating rate debt securities, whose investment income is influenced by the movement of the
short-term interest rate. A movement of the short-term interest rate will affect the expected return on these investments.
The market value of the Group's financial investments with fixed coupons is affected by the movement of interest rates. For
the majority of investments in US dollar and Euro debt securities, the Group hedges its exposure to US dollar and Euro
interest rate risk using swaps, excluding £286.8 million of US dollar short-duration, high-yield bonds (2021: £348.6 million),
£134.4 million of US dollar subordinated financial debt and £93.6 million of Euro subordinated financial debt (2021:
£123.9 million and £96.2 million, respectively).
204 Direct Line Group Annual Report and Accounts 2022
204 Direct Line Group Annual Report and Accounts 2022
The Group is exposed to the following interest rate benchmarks within its hedging relationships: GBP SONIA, USD SOFR
and EURIBOR. The first two were subject to interest rate benchmark reform during 2021 (historically both LIBOR). The
hedged items include holdings of US dollar and Euro denominated fixed rate debt securities.
Not all the infrastructure loans as at 31 December 2022 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 infrastructure loans.
Non-derivative floating rate financial
instruments prior to transition
Maturing in
Number of
instruments
Nominal
exposure
(£m) Transition progress
Infrastructure debt linked to
LIBOR
2024 - 2040
28
238.2 – 23 loans have completed transition to SONIA;
–
five loans (totalling £67.9 million) are yet to
transition to SONIA, of which:
(i) four loans are expected to transition from 6
month GBP synthetic LIBOR to SONIA on the
next roll date at the end of March 2023; and
(ii) one loan (totalling £7.6 million) will be repaid
in full early in Q2 2023.
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 2022, the value of these property investments was £278.5
million (2021: £317.0 million). The property investments are located in the UK.
Currency risk
This is the risk of loss from changes in the level or volatility of currency exchange rates. Exposure to currency risk is
generated by the Group's investments in US dollar and Euro denominated debt bonds.
The Group maintains exposure to US dollar securities through £751.0 million (2021: £1,376.5 million) of investments in US
dollar bonds and Euro securities through £165.4 million (2021: £197.7 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 2022
Derivative assets
At fair value through the income statement
Foreign exchange contracts (forwards)
Designated as hedging instruments
Foreign exchange contracts (forwards)
Interest rate swaps
Total
At 31 December 2022
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
1,014.4
24.2
—
—
24.2
3.4
240.4
1,258.2
0.1
6.0
30.3
—
0.5
0.5
—
0.5
0.5
Notional
amounts
Maturity and fair value
Less than 1
year
1 – 5 years
Over 5 years
£m
£m
£m
£m
0.1
7.0
31.3
Total
£m
1,190.4
28.4
—
—
28.4
107.6
—
1,298.0
28.4
0.2
0.2
1.0
1.0
1.2
29.6
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205
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205
Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
3. Risk management continued
3.3.2 Market risk continued
Use of derivatives continued
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
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
2,856.4
Notional
amounts
27.8
2.4
—
(0.9)
29.3
—
—
—
3.6
3.6
—
—
—
3.0
3.0
Maturity and fair value
Less than 1
year
1 – 5 years
Over 5 years
£m
£m
£m
£m
Total
£m
27.8
2.4
—
5.7
35.9
Total
£m
1,318.9
19.1
—
—
19.1
4.1
9.1
0.1
—
1,332.1
19.2
0.1
—
0.1
—
0.2
0.2
0.2
0.2
19.5
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
2022
£m
2021
£m
2022
£m
2021
£m
—
—
(82.3)
(144.3)
5.9
11.8
(70.6)
(100.6)
(41.8)
(47.5)
(41.8)
(47.5)
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. 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 equity.
3. The increase or decrease in 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
£12.1 million (2021: £13.7 million) and a 100 basis points increase in interest rates would have been £3.7 million (2021: £4.8 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.
206 Direct Line Group Annual Report and Accounts 2022
206 Direct Line Group Annual Report and Accounts 2022
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 2022, the Group has pledged
£19.2 million in cash (2021: £26.3 million) to cover initial margins and out-of-the-money derivative positions. At
31 December 2022, counterparties have pledged £7.1 million in cash and £nil in UK Gilts (2021: £5.4 million in cash and
£2.2 million in UK Gilts) to the Group to cover in-the-money derivative positions.
The terms and conditions of collateral pledged for both assets and liabilities are market-standard. When securities are
pledged they are required to be readily convertible to cash, and as such no policy has been established for the disposal of
assets not readily convertible into cash.
3.3.3 Credit risk
This is the risk of loss resulting from defaults in obligations due and/or changes in credit standing of either issuers of
securities, counterparties or any debtors to which the Group is exposed. The Group is mainly exposed to counterparty
default risk.
Counterparty default risk
This is the risk of loss from unexpected default or deterioration in the credit standing of the counterparties and debtors of
Group undertakings. This risk is monitored by three forums: the Investment Risk Forum monitors credit spreads as
indicators of potential losses on investments incurred but not yet realised; the Credit Risk Forum monitors reinsurance and
corporate insurance counterparty default risk; and the NIG Credit Committee is responsible for monitoring broker credit
risk. The main responsibility of these forums is to ensure that all material aspects of counterparty default risk within the
Group are identified, monitored and measured.
The main sources of counterparty default risk for the Group are:
–
–
investments – this arises from the investment of funds in a range of investment vehicles permitted by the investment
policy;
reinsurance recoveries – this arises in respect of reinsurance claims against which a reinsurance bad debt provision is
assessed. PPOs have the potential to increase the ultimate value of a claim and, by their very nature, to increase
significantly the length of time to reach final payment. This can increase reinsurance counterparty default risk in terms
of both amount and longevity;
– commercial credit – this arises as brokers collect premiums on behalf of the Group; and
– consumer credit – exposure from offering monthly instalments on annual insurance contracts.
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 Reinsurance and Credit Manager. 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. The
Group's maximum exposure to credit risk is represented by the carrying values of the financial assets and insurance assets
listed below. The Group does not use credit derivatives or similar instruments to mitigate exposure.
At 31 December 2022
Reinsurance assets1
Insurance and other receivables
Derivative assets
Debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents2
Other loans
Total
Neither past
due nor
impaired
Past due 1 – 90
days
Past due more
than 90 days
Carrying value
in the balance
sheet
£m
1,046.0
781.8
31.3
3,245.7
238.2
199.1
1,003.6
1.9
6,547.6
£m
—
9.6
—
—
—
—
—
—
£m
0.1
0.2
—
—
—
—
—
—
£m
1,046.1
791.6
31.3
3,245.7
238.2
199.1
1,003.6
1.9
9.6
0.3
6,557.5
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207
Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
3. Risk management continued
3.3.3 Credit risk continued
At 31 December 2021
Reinsurance assets1
Insurance and other receivables
Derivative assets
Debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents2
Total
Notes:
Neither past
due nor
impaired
Past due 1 – 90
days
Past due more
than 90 days
Carrying value
in the balance
sheet
£m
1,125.4
762.4
35.9
4,175.8
250.8
200.8
955.7
£m
—
0.3
—
—
—
—
—
£m
6.7
0.1
—
—
—
—
—
£m
1,132.1
762.8
35.9
4,175.8
250.8
200.8
955.7
7,506.8
0.3
6.8
7,513.9
1. Reinsurance assets previously included reinsurers' unearned premium reserve with comparative data for the year ended 31 December 2021 re-presented
accordingly. This change was made due to reinsurers' unearned premium reserves being assessed as having no inherent credit risks.
2. 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 2022 of £961.2 million (2021:
£1,366.2 million) that can be further analysed as: secured £11.2 million (2021: £15.5 million); unsecured £795.3 million
(2021: £1,193.7 million); and subordinated £154.7 million (2021: £157.0 million).
The tables below analyse the credit quality of debt securities that are neither past due nor impaired.
At 31 December 2022
Corporate
Supranational
Local government
Sovereign
Total
At 31 December 2021
Corporate
Supranational
Local government
Sovereign
Total
AAA
£m
67.7
25.2
—
AA+ to AA-
A+ to A-
BBB+ to BBB- BB+ and below
Not rated
£m
£m
£m
£m
158.1
1,268.5
920.1
287.2
—
—
—
—
—
—
—
—
—
31.0
480.3
123.9
644.3
1,268.5
920.1
287.2
£m
1.7
—
—
—
1.7
Total
£m
2,703.3
25.2
5.9
511.3
3,245.7
Total
£m
AA+ to AA-
A+ to A-
BBB+ to BBB- BB+ and below
£m
£m
£m
£m
334.7
1,913.3
1,439.4
352.2
4,098.1
—
18.0
29.7
—
—
—
—
—
—
—
—
—
14.0
28.1
35.6
382.4
1,913.3
1,439.4
352.2
4,175.8
—
5.9
AAA
£m
58.5
14.0
10.1
5.9
88.5
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 207.
At 31 December 2022
Reinsurance assets1
Insurance and other
receivables2
Derivative assets
Infrastructure debt
Commercial estate loans
Cash and cash equivalents3
Other loans
AA+ to AA-
A+ to A-
BBB+ to BBB- BB+ and below
Not rated
AAA
£m
£m
£m
—
533.2
511.5
—
—
—
15.7
878.8
—
9.2
7.9
—
64.1
7.8
—
48.5
23.4
38.2
88.2
116.1
—
£m
1.4
3.3
—
193.0
24.1
0.9
—
£m
—
—
—
7.0
7.0
—
—
£m
(0.1)
720.8
—
—
—
—
1.9
Total
£m
1,046.0
781.8
31.3
238.2
199.1
1,003.6
1.9
Total
894.5
622.2
825.9
222.7
14.0
722.6
3,301.9
208 Direct Line Group Annual Report and Accounts 2022
208 Direct Line Group Annual Report and Accounts 2022
At 31 December 2021
Reinsurance assets1
Insurance and other
receivables2
Derivative assets
Infrastructure debt
Commercial estate loans
Cash and cash equivalents3
Total
Notes:
AAA
£m
—
—
—
—
17.7
792.9
810.6
AA+ to AA-
A+ to A-
BBB+ to BBB- BB+ and below
Not rated
£m
£m
618.0
490.7
£m
1.9
37.6
27.3
13.0
7.9
—
73.3
26.2
763.0
9.9
67.9
66.9
133.0
795.7
18.1
175.9
34.1
3.6
Total
£m
£m
£m
—
—
—
7.0
8.8
—
14.8
1,125.4
684.5
762.4
—
—
—
—
35.9
250.8
200.8
955.7
246.6
15.8
699.3
3,331.0
1. Reinsurance assets previously included reinsurers' unearned premium reserve. Comparative data for the year ended 31 December 2021 has been re-presented
accordingly.
Includes receivables due from policyholders, agents, brokers and intermediaries which generally do not have a credit rating.
2.
3. 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 the IT infrastructure is insufficient to deliver the Group's strategy.
Supplier management and 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.
Cyber 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.
Risk concentrations and management
The Group is subject to concentration in its operational risks through, for example, its IT systems and change programmes;
which include the risk of losses in a number of scenarios such as system outages and data security breaches. Technology
remains at the heart of the Group operations and focus is on upgrading Group IT systems and capabilities, aimed at
expanding the Group's digital offerings, capitalising on the Group's data, improving customer experience and overall
increasing operational efficiency.
The Group proactively manages its operational risks to mitigate potential customer harm, regulatory or legal censure,
financial and reputational impacts. The Group has in place operational processes and systems, including prevention and
detection measures. These include processes which seek to ensure the Group can absorb and/or adapt to internal or
external events that could impact customer operations and the wider business, as well as to learn from these situations to
improve the Group's overall risk and control systems moving forward.
The Group's risk management framework is designed to enable it to capture risk information in a complete and consistent
way, enabling proactive trend analysis, root cause analysis and read across to facilitate early warnings and a ‘learning’ risk
environment.
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 is 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.
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Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
3. Risk management continued
3.3.5 Liquidity risk continued
At 31 December 2022
Debt securities
Infrastructure debt
Commercial real estate loans
Cash and cash equivalents1
Other loans
Within
1 year
£m
1 – 3 years
3 – 5 years
5 – 10 years
£m
£m
£m
798.6
979.1
807.4
531.7
18.9
55.9
1,003.6
—
34.8
63.3
—
—
41.4
79.9
—
1.9
91.5
—
—
—
Over
10 years
£m
128.9
51.6
—
—
—
Total
£m
3,245.7
238.2
199.1
1,003.6
1.9
Total
1,877.0
1,077.2
930.6
623.2
180.5
4,688.5
At 31 December 2021
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
507.0
972.7
1,293.2
1,281.0
121.9
4,175.8
14.6
87.0
955.7
34.4
54.0
—
34.2
59.8
—
101.7
65.9
—
—
—
—
250.8
200.8
955.7
1,564.3
1,061.1
1,387.2
1,382.7
187.8
5,583.1
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 2022
Subordinated liabilities
Insurance liabilities1
Borrowings
Lease liabilities
Provisions
Trade and other payables,
including insurance payables
10.4
20.8
20.8
1,316.8
924.2
438.4
65.2
10.9
63.7
—
17.6
0.5
—
14.3
0.1
451.5
6.1
0.2
306.8
390.2
—
32.2
—
—
—
1,646.4
—
27.8
—
£m
358.8
4,716.0
65.2
102.8
64.3
£m
258.6
3,654.3
65.2
81.6
64.3
—
457.8
457.8
Total
1,918.5
969.2
473.8
729.2
1,674.2
5,764.9
4,581.8
At 31 December 2021
Subordinated liabilities
Insurance liabilities1
Borrowings
Lease liabilities
Provisions
Trade and other payables,
including insurance payables
Total
Note:
Less than 1
year
1 – 3 years
3 – 5 years
5 – 10 years
Over 10 years
Total
Carrying value
£m
£m
£m
£m
£m
£m
£m
272.0
20.8
20.8
52.0
265.2
630.8
513.6
1,182.2
995.1
480.1
385.8
1,549.1
4,592.3
3,680.5
59.2
11.2
95.8
—
17.9
0.5
—
14.6
0.1
450.6
6.4
0.3
—
31.7
—
—
—
59.2
32.8
108.2
—
96.4
59.2
84.2
96.4
—
457.3
457.3
2,071.0
1,040.7
515.9
469.5
1,847.1
5,944.2
4,891.2
1.
Insurance liabilities exclude unearned premium reserves as there are no liquidity risks inherent in them.
210
Direct Line Group Annual Report and Accounts 2022
Direct Line Group Annual Report and Accounts 2022
210
The following table analyses the undiscounted cash flows of derivative financial instruments, by contractual maturity.
At 31 December 2022
Derivative assets
Derivative liabilities
Total
At 31 December 2021
Derivative assets
Derivative liabilities
Total
Within 1 year
1 – 3 years
3 – 5 years
5 – 10 years
Over 10 years
Total
Carrying value
£m
31.7
(29.6)
2.1
£m
—
—
—
£m
(0.1)
—
(0.1)
£m
—
—
—
£m
—
—
—
£m
31.6
(29.6)
2.0
£m
31.3
(29.6)
1.7
Within 1 year
1 – 3 years
3 – 5 years
5 – 10 years
Over 10 years
Total
Carrying value
£m
27.4
(19.4)
8.0
£m
3.1
(0.1)
3.0
£m
3.2
—
3.2
£m
2.8
—
2.8
£m
—
—
—
£m
36.5
(19.5)
17.0
£m
35.9
(19.5)
16.4
3.4 Capital management
At 31 December 2022, the Group's capital position was comprised shareholders' equity of £1,934.0 million (31 December
2021: £2,550.2 million) and Tier 1 notes of £346.5 million (31 December 2021: £346.5 million). In addition, the Group's
balance sheet also included £258.6 million of subordinated loan capital (31 December 2021: £513.6 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 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.
During the year, the Group and its regulated entities complied with all external capital requirements.
3.5 Capital adequacy (unaudited)
Using the Group's partial internal model, there is a capital surplus of approximately £0.57 billion above an estimated SCR of
£1.21 billion as at 31 December 2022 (31 December 2021: £1.03 billion and £1.35 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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211
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Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
4. Segmental analysis
The Chief Operating decision makers, being the Acting Chief Executive Officer and the Chief Financial Officer, regularly
review the operating results at the segmental level as described below and disclosed in the tables in this note to assess
performance and make decisions about allocation of resources.
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.
Run-off partnerships
The Group has exited, or is seeking to exit, three partnerships which will reduce its exposure to low margin packaged bank
accounts so it can redeploy capital to higher return segments. The run-off partnerships relate to a Rescue partnership with
NatWest Group that expired in December 2022 and Travel partnerships with NatWest Group and Nationwide Building
Society which expire in 2024, where the Group has indicated that it will not be seeking to renew.
The Group has excluded the results of the run-off partnerships from its ongoing results and has restated all relevant
comparatives across this review, results relating to ongoing operations will be clearly labelled. The segmental analysis has
been amended to reflect the change. The operating loss relating to run-off partnerships in 2022 was £11.5 million (2021:
£8.5 million).
No inter-segment transactions occurred in the year ended 31 December 2022 (2021: £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.
212
Direct Line Group Annual Report and Accounts 2022
Direct Line Group Annual Report and Accounts 2022
212
The table below analyses the Group's revenue and results by reportable segment for the year ended 31 December 2022.
Gross written premium
Gross earned premium
Reinsurance premium
Net earned premium
Investment return
Instalment income
Other operating income
Total income
Insurance claims
Insurance claims (payable to)/
recoverable from reinsurers
Net insurance claims
Of which:
Rescue and
other personal
lines¹
Commercial
Total Group -
ongoing
operations1
Run-off
partnerships1
Total
Group
Motor
£m
1,432.7
Home
£m
518.1
1,489.9
543.7
(77.3)
(26.4)
£m
269.7
275.1
(2.3)
1,412.6
517.3
272.8
28.9
64.7
36.2
9.9
16.5
0.5
2.5
2.7
15.6
1,542.4
544.2
293.6
(1,197.6)
(417.3)
(147.5)
£m
£m
749.3 2,969.8
700.7 3,009.4
(59.0)
(165.0)
641.7 2,844.4
51.0
92.4
55.3
3,043.1
(2,107.5)
9.7
8.5
3.0
662.9
(345.1)
£m
£m
124.4 3,094.2
122.8
3,132.2
(0.7)
(165.7)
122.1 2,966.5
51.6
0.6
—
—
122.7
(110.5)
92.4
55.3
3,165.8
(2,218.0)
(19.8)
2.6
0.3
(1,217.4)
(414.7)
(147.2)
0.2
(344.9)
(16.7)
(2,124.2)
0.1
(110.4)
(16.6)
(2,234.6)
Current-year attritional
1,283.8
315.2
148.0
Prior-year reserve releases
Major weather events
(66.4)
(19.6)
n/a
119.1
(0.8)
n/a
368.7
(54.0)
30.2
2,115.7
(140.8)
149.3
132.8 2,248.5
(22.4)
(163.2)
n/a
149.3
(47.4)
(26.3)
(10.7)
(124.5)
(208.9)
(2.2)
(211.1)
(354.8)
(111.9)
(402.2)
(138.2)
(76.0)
(86.7)
(77.2)
(8.7)
59.7
(135.2)
(259.7)
58.3
(677.9)
(886.8)
32.1
(21.6)
(23.8)
(11.5)
Commission expenses
Operating expenses before
restructuring and one-off costs
Total expenses
Operating (loss)/profit
Restructuring and one-off costs2
Finance costs
Loss before tax
Underwriting (loss)/profit
(207.0)
(35.6)
38.9
37.1
(166.6)
Loss ratio
Of which:
86.2%
80.2%
54.0%
53.7%
74.7%
Current-year attritional
90.9%
60.9%
54.3%
57.5%
Prior-year reserve releases
(4.7%)
(3.8%)
(0.3%)
(8.4%)
Major weather events
Commission ratio
Expense ratio
n/a
23.1%
3.4%
5.1%
25.1%
21.6%
Combined operating ratio
Current-year combined operating ratio
114.7%
119.4%
106.9%
110.7%
n/a
3.9%
27.9%
85.8%
86.1%
4.6%
19.4%
21.1%
94.2%
102.6%
74.4%
(5.0%)
5.3%
7.3%
23.8%
105.8%
110.8%
The table below analyses the Group's assets and liabilities by reportable segment at 31 December 20223.
(699.5)
(910.6)
20.6
(45.3)
(20.4)
(45.1)
(178.7)
75.3%
75.8%
(5.5%)
5.0%
7.1%
23.6%
106.0%
111.5%
Total
Group
£m
Goodwill
Assets held for sale
Other segment assets
Segment liabilities
Segment net assets
Notes:
Motor
£m
130.4
27.7
Home
£m
45.8
4.8
5,517.4
931.8
(4,119.4)
(705.4)
1,556.1
277.0
Rescue and
other personal
lines¹
Commercial
Total Group -
ongoing
operations1
Run-off
partnerships1
£m
£m
0.6
28.7
£m
215.0
10.1
40.6
7.5
150.7 1,434.1 8,034.0
(6,023.1)
(1,106.8)
(91.5)
344.9
2,266.5
88.5
£m
215.0
—
0.3
40.9
64.7 8,098.7
(51.0)
(6,074.1)
14.0
2,280.5
1. Ongoing operations and run-off partnerships – See glossary on pages 251 to 253 for definitions and appendix A – Alternative performance measures on pages
254 to 257 for reconciliation to financial statement line items.
2. See glossary on page 253 for definitions.
3. This segmental analysis 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.
www.directlinegroup.co.uk
1
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213
Strategic reportGovernanceFinancial statements
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 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
Of which:
Motor
£m
Home
£m
Rescue and
other personal
lines¹
Total Group -
ongoing
operations1
Run-off
partnerships1
Commercial
£m
£m
£m
£m
Total
Group
£m
1,560.8
577.8
281.1
653.0 3,072.7
98.9 3,171.6
1,597.8
579.8
274.8
617.9 3,070.3
97.7 3,168.0
(124.5)
(26.4)
(2.5)
(56.7)
(210.1)
(0.5)
(210.6)
1,473.3
553.4
272.3
561.2 2,860.2
97.2 2,957.4
99.8
69.4
33.9
12.5
18.3
1.0
2.9
3.0
9.6
30.3
145.5
0.8
146.3
6.6
2.1
97.3
46.6
—
0.1
97.3
46.7
1,676.4
585.2
287.8
600.2 3,149.6
98.1 3,247.7
(1,086.8)
(287.7)
(135.6)
(363.6)
(1,873.7)
(41.6)
(1,915.3)
139.8
7.3
—
57.6
204.7
(8.1)
196.6
(947.0)
(280.4)
(135.6)
(306.0)
(1,669.0)
(49.7)
(1,718.7)
Current-year attritional
1,074.1
307.9
144.4
348.2 1,874.6
64.7 1,939.3
Prior-year reserve releases
Major weather events
(127.1)
(45.8)
n/a
18.3
(8.8)
n/a
(61.4)
(243.1)
(15.0)
(258.1)
19.2
37.5
n/a
37.5
Commission expenses
(48.2)
(38.1)
(9.7)
(112.3)
(208.3)
(32.6)
(240.9)
(366.4)
(124.9)
(69.2)
(121.5)
(682.0)
(24.3)
(706.3)
(414.6)
(163.0)
(78.9)
(233.8)
(890.3)
(56.9)
(947.2)
314.8
141.8
73.3
60.4
590.3
(8.5)
581.8
Operating expenses before
restructuring and one-off costs
Total expenses
Operating profit
Restructuring and one-off costs2
Finance costs
Profit before tax
Underwriting profit
Loss ratio
Of which:
(101.5)
(34.3)
446.0
291.5
58.1%
65.5%
(8.7%)
1.3%
8.1%
23.9%
90.1%
98.8%
111.7
110.0
57.8
21.4
300.9
64.3%
50.7%
49.9%
54.5%
58.4%
Current-year attritional
72.9%
55.7%
53.1%
62.0%
65.6%
Prior-year reserve releases
(8.6%)
(8.3%)
(3.2%)
(10.9%)
(8.5%)
Major weather events
Commission ratio
Expense ratio
Combined operating ratio
Current-year combined operating ratio
n/a
3.3%
24.8%
92.4%
101.0%
3.3%
6.9%
22.5%
80.1%
88.4%
n/a
3.6%
25.4%
78.9%
3.4%
20.0%
21.7%
96.2%
82.1%
107.1%
1.3%
7.3%
23.8%
89.5%
98.0%
The table below analyses the Group's assets and liabilities by reportable segment at 31 December 20213.
Motor
£m
130.4
29.2
Home
£m
45.8
3.5
Rescue and
other personal
lines¹
Total Group -
ongoing
operations1
Run-off
partnerships1
Commercial
£m
£m
£m
£m
Total
Group
£m
28.7
0.6
10.1
215.0
—
215.0
7.4
40.7
0.5
41.2
6,467.2
750.1
152.2 1,566.7 8,936.2
116.2 9,052.4
(4,551.2)
(550.3)
(92.5)
(1,143.9)
(6,337.9)
(74.0)
(6,411.9)
2,075.6
249.1
89.0
440.3 2,854.0
42.7 2,896.7
Goodwill
Assets held for sale
Other segment assets
Segment liabilities
Segment net assets
Notes:
1. Ongoing operations and run-off partnerships – See glossary on pages 251 to 253 for definitions and appendix A – Alternative performance measures on pages
254 to 257 for reconciliation to financial statement line items. Run-off partnerships was previously included in Rescue and other personal lines segment and the
comparative data for year ended 31 December 2021 has been re-presented accordingly.
2. See glossary on page 253 for definitions.
3. This segmental analysis 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.
214
Direct Line Group Annual Report and Accounts 2022
www.directlinegroup.co.uk
1
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 (losses)/gains:
AFS debt securities
Hedging
Investment property (note 20)
Net unrealised (losses)/gains:
Impairment of loans and receivables
Hedging
Investment property (note 20)
Equity investments held at FVTPL
Total
2022
£m
2021
£m
3,094.2
38.0
3,132.2
(141.6)
(24.1)
(165.7)
2,966.5
3,171.6
(3.6)
3,168.0
(186.4)
(24.2)
(210.6)
2,957.4
2022
£m
2021
£m
78.7
14.0
7.9
8.8
109.4
15.6
125.0
(24.9)
(31.0)
—
(55.9)
(1.8)
25.0
(39.1)
(1.6)
(17.5)
51.6
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
Total investment return decreased by £94.7 million to £51.6 million (2021: £146.3 million) primarily driven by realised and
unrealised losses resulting from write downs in fair value adjustments of commercial property (£39.1 million) and £24.9
million of realised losses from disposals of Group debt security holdings, predominantly relating to actions taken to reduce
the Group's longer duration US dollar credit holding.
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Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
6. Investment return continued
The table below analyses the realised and unrealised gains and losses on derivative instruments included in investment
return.
Foreign exchange hedging:
Foreign exchange forward contracts1
Associated foreign exchange risk
Net gains/(losses) on foreign exchange hedging
Interest rate hedging:
Gains on interest rate swaps1 designated as hedge instruments
Change in fair value on designated hedge items
Interest rate hedging ineffectiveness
Undesignated interest rate hedging losses
Net losses on interest rate hedging
Total hedging losses
Note:
2022
£m
(184.1)
188.0
3.9
68.8
(78.5)
(9.7)
(0.2)
(9.9)
(6.0)
2021
£m
(2.6)
1.9
(0.7)
33.5
(35.1)
(1.6)
(11.0)
(12.6)
(13.3)
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.
The Group holds fixed rate USD and EUR denominated bonds whose fair value is exposed to movements in interest rates.
In order to economically hedge the interest rate risk of these bonds the Group enters into hedges paying a fixed rate and
receiving floating interest rate swaps, which are subsequently designated as hedging instruments in a fair value hedge.
At 31 December 2022 the total USD and EUR denominated bonds was £916.4 million (2021: £1,574.2 million). The notional
exposure of the interest rate swaps at 31 December 2022 was an asset of £240.4 million and a liability of £107.6 million
(2021: asset of £901.0 million and a liability of £9.1 million). The hedged risk is the change in the fair value of the bonds
which is attributable to changes in the SOFR and EURIBOR curves.
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 arrangement and administration fee income.
8. Net insurance claims
2022
£m
24.2
14.6
4.9
11.6
55.3
2021
£m
19.7
13.1
7.2
6.7
46.7
Current accident year claims paid
Prior accident years claims paid
Movement in insurance liabilities
Total
Gross
Reinsurance
2022
£m
1,355.3
888.9
(26.2)
2,218.0
2022
£m
(0.2)
(69.2)
86.0
16.6
Net
2022
£m
1,355.1
819.7
59.8
2,234.6
Gross
Reinsurance
2021
£m
1,058.6
2021
£m
(1.1)
793.2
(88.7)
63.5
(106.8)
Net
2021
£m
1,057.5
704.5
(43.3)
1,915.3
(196.6)
1,718.7
Claims handling expenses for the year ended 31 December 2022 of £188.9 million (2021: £188.4 million) have been
included in the claims figures above.
9. Commission expenses
Commission expenses
Expenses incurred under profit participations
Total
2022
£m
207.5
3.6
211.1
2021
£m
201.2
39.7
240.9
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Direct Line Group Annual Report and Accounts 2022
216
10. Operating expenses
Staff costs1
IT and other operating expenses1,2
Marketing
Insurance levies
Depreciation, amortisation and impairment of intangible and fixed assets3
Loss on termination of property lease4
Total other operating expenses (including restructuring and one-off costs)
Of which restructuring and one-off costs4,5
Total excluding restructuring and one-off costs
Notes:
2022
£m
246.8
180.1
93.5
93.4
131.0
—
744.8
45.3
699.5
2021
£m
268.8
157.0
112.0
89.0
97.1
83.9
807.8
101.5
706.3
1. Staff costs and other operating expenses attributable to claims handling activities are allocated to the cost of insurance claims.
2.
3.
IT and other operating expenses include professional fees and property costs.
Includes right-of-use ("ROU") assets and property, plant and equipment. For the year ended 31 December 2022, there were impairment charges of £16.0 million
which relate solely to impairment of intangible assets (2021: £2.6 million of which, £2.1 million relates to impairment of intangible assets and £0.5 million relates
to ROU property assets).
In 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 termination of property lease related to the Bromley site was allocated to restructuring and one-off costs. The
value of the fixed asset capitalised was £19.8 million.
4.
5. Restructuring and one-off costs of £45.3 million (2021: £101.5 million) are included as follows: staff costs of £3.1 million (2021: £7.8 million), other operating
expenses of £26.9 million (2021: £9.3 million), impairment charges of £15.2 million (2021: £nil) and depreciation of £nil (2021: £0.5 million). Restructuring and
one-off costs primarily relate to the Group's decision to exit Travel packaged bank account partnership business and the continued reduction in the number of
head office sites. It is expected that the Group will incur £2.0 million of additional restructuring and one-off costs in 2023 in relation to head office sites.
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
2022
6,523
1,508
1,356
9,387
2021
6,976
1,408
1,402
9,786
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
Total1
Note:
1. Total audit fees, excluding VAT.
2022
6,828
1,433
1,407
9,668
2022
£m
391.6
43.9
26.5
8.2
470.2
2022
£m
0.4
2.6
3.0
0.2
—
3.2
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
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217
Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
10. Operating expenses continued
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
2022
£m
2.6
1.8
4.4
2021
£m
3.5
0.8
4.3
Further information about the remuneration of individual Directors is provided in the Directors' Remuneration Report.
At 31 December 2022, no Directors (2021: no Directors) had retirement benefits accruing under the defined contribution
pension scheme in respect of qualifying service. During the year ended 31 December 2022, two Directors exercised share
options (2021: two Directors).
11. Finance costs
Interest expense on subordinated liabilities
Net interest received on interest rate swap1
Unrealised losses on interest rate swap¹
Amortisation of arrangement costs, discount on issue and fair value hedging adjustment of
subordinated liabilities
Interest expense on lease liabilities
Other interest expense
Total
Note:
2022
£m
17.8
(2.2)
2.4
(0.8)
3.1
0.1
20.4
2021
£m
33.6
(5.3)
5.8
(3.0)
3.2
—
34.3
1. 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 instrument
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 was 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 remaining notes, with a nominal value of £250
million, were redeemed in full on 27 April 2022.
12. Tax (credit)/charge
Current taxation:
(Credit)/charge
Over-provision in respect of prior year
Deferred taxation (note 13):
Charge/(credit)
Under-provision in respect of prior year
Current taxation
Deferred taxation (note 13)
Tax (credit)/charge for the year
2022
£m
(9.8)
(3.0)
(12.8)
3.2
4.0
7.2
(12.8)
7.2
(5.6)
2021
£m
102.6
(8.3)
94.3
(1.1)
9.1
8.0
94.3
8.0
102.3
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Direct Line Group Annual Report and Accounts 2022
Direct Line Group Annual Report and Accounts 2022
218
The following table analyses the difference between the actual income tax (credit)/charge and the expected income tax
(credit)/charge computed by applying the standard rate of corporation tax of 19.0%1 (2021: 19.0%).
(Loss)/profit for the year
Expected tax (credit)/charge
Effects of:
Disallowable expenses
Lease surrender
Non-taxable items
Higher tax rates on overseas earnings
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 (credit)/charge for the year
Effective income tax rate
Note:
2022
£m
(45.1)
(8.6)
3.4
—
(0.3)
0.1
0.3
1.0
1.7
(3.2)
(5.6)
12.4%
2021
£m
446.0
84.7
5.0
17.3
(0.6)
—
(1.7)
0.8
—
(3.2)
102.3
22.9%
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 (credit)/charge for the year is set out in the table above.
13. Current and deferred tax
The aggregate current and deferred tax relating to items that are credited to equity is £0.2 million (2021: £0.7 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
At 1 January 2021
(Charge)/credit to the income
statement
(Charge)/credit to other
comprehensive income
Charge direct to equity
At 31 December 2021
(Charge)/credit to the income
statement
Credit to other
comprehensive income
At 31 December 2022
Note:
£m
10.2
£m
(1.8)
£m
4.2
£m
(4.9)
(4.0)
(0.5)
(8.9)
4.9
—
—
6.2
(0.8)
—
(3.1)
—
—
(4.7)
(1.4)
0.2
(4.3)
—
4.8
2.5
(0.4)
—
(9.0)
—
—
—
—
—
—
£m
3.1
0.5
—
(0.1)
3.5
£m
(19.5)
Total
£m
(8.7)
—
(8.0)
17.1
—
(2.4)
16.3
(0.1)
(0.5)
(1.7)
—
(7.2)
—
1.8
67.2
64.8
69.7
62.0
1. The non-distributable reserve was a statutory claims equalisation reserve calculated in accordance with the rules of the PRA. With the introduction of Solvency II
on 1 January 2016, the requirement to maintain the claims equalisation reserve ceased and the balance at 31 December 2015 was released to retained
earnings. The taxation of this release was spread over six years from the change in regulation. It was provided for in deferred tax above as it represented the
future unwind of previously claimed tax deductions for transfers into the reserve. It was fully unwound at 31 December 2021.
In addition, the Group has an unrecognised deferred tax asset at 31 December 2022 of £13.0 million (2021: £12.8 million)
in relation to capital losses of which £11.8 million (2021: £10.4 million) relates to realised losses and £1.2 million (2021:
£2.4 million) relates to unrealised losses.
Deferred tax assets have been recognised in respect of AFS reserves and all other temporary differences because it is
probable that these assets will be recovered, with the exception of unrecognised capital losses where recovery is uncertain
as they are dependent on realising future capital gains. The deferred tax asset of £64.8 million in respect of AFS reserves
relates to temporary differences arising from unrealised losses. These will be relieved for tax over 10 years as a result of the
adoption of IFRS9 on 1 January 2023 triggering a tax transitional adjustment. Other deferred tax assets will be recovered
over a period of one to 13 years. Recovery of deferred tax assets is dependent on future taxable profits which are expected
to arise in future years without the one-off combination of factors which led to the trading loss for 2022. Probability of
recovery has been assessed based on the Group's forecasts for the next four years which anticipate a return to profitability,
and it is assumed that sufficient profits will continue to be realised in subsequent years for offset of the remaining future
tax deductions.
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219
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219
Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
14. Dividends and appropriations
Amounts recognised as distributions to equity holders in the period:
2022 interim dividend of 7.6 pence per share paid on 9 September 2022
2021 final dividend of 15.1 pence per share paid on 17 May 2022
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
Coupon payments in respect of Tier 1 notes1
Proposed dividends:
2021 final dividend of 15.1 pence per share
Note:
2022
£m
99.0
198.9
—
—
297.9
16.6
314.5
2021
£m
—
—
101.9
198.9
300.8
16.6
317.4
—
199.4
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 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 2022 by £2.0 million (2021: £1.7 million).
15. (Loss)/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.
(Loss)/earnings attributable to the owners of the Company
Coupon payments in respect of Tier 1 notes
(Loss)/profit for the calculation of earnings per share
Weighted average number of Ordinary Shares for the purpose of basic earnings per share
(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 (loss)/earnings per share (pence)
Diluted (loss)/earnings per share (pence)
2022
£m
(39.5)
(16.6)
(56.1)
2021
£m
343.7
(16.6)
327.1
1,304.3
15.0
1,335.8
20.8
1,319.3
(4.3)
(4.3)
1,356.6
24.5
24.1
On 8 March 2022, the Group announced that the Board had approved a share buyback programme of Ordinary Shares for
an aggregate purchase price of up to £100 million, for which an initial tranche of up to £50 million was completed in H1
2022. The Group repurchased 19,324,855 Ordinary Shares for an aggregate consideration of £50.1 million as reflected in
retained earnings (including related transaction costs). On 18 July 2022, the Group announced in its H1 2022 trading
update that the Board had decided not to launch the second £50 million tranche of the £100 million share buyback
programme announced earlier in the year.
On 8 March 2021, the Group announced a share buyback programme of Ordinary Shares for an aggregate purchase price
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 £101.0 million
(including related transaction costs).
After each share buyback, the shares were subsequently cancelled giving rise to a capital redemption reserve of an
equivalent amount to their nominal value as required by the Companies Act 2006.
220 Direct Line Group Annual Report and Accounts 2022
220 Direct Line Group Annual Report and Accounts 2022
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:
2022
£m
1,934.0
(822.2)
1,111.8
1,311.4
(13.2)
1,298.2
149.0
85.6
2021
£m
2,550.2
(822.5)
1,727.7
1,330.7
(13.4)
1,317.3
193.6
131.2
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.
Return on equity
The table below details the calculation of return on equity.
(Loss)/earnings attributable to the owners of the Company
Coupon payments in respect of Tier 1 notes
(Loss)/profit for the calculation of return on equity
Opening shareholders' equity
Closing shareholders' equity
Average shareholders' equity
Return on equity
2022
£m
(39.5)
(16.6)
(56.1)
2,550.2
1,934.0
2,242.1
(2.5%)
2021
£m
343.7
(16.6)
327.1
2,699.7
2,550.2
2,625.0
12.5%
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221
Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
17. Goodwill and other intangible assets
Cost
At 1 January 2021
Acquisitions and additions
Disposals and write-off1
At 31 December 2021
Acquisitions and additions
Disposals and write-off1
At 31 December 2022
Accumulated amortisation and impairment
At 1 January 2021
Amortisation charge for the year
Disposals and write-off1
Impairment losses2
At 31 December 2021
Amortisation charge for the year
Disposals and write-off1
Impairment losses2
At 31 December 2022
Carrying amount
At 31 December 2022
At 31 December 2021
Notes:
Goodwill
£m
Other
intangible
assets
£m
Total
£m
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
—
—
108.4
(71.7)
108.4
(71.7)
215.0
1,218.8
1,433.8
—
—
—
—
—
—
—
—
—
512.9
71.6
(12.0)
2.1
512.9
71.6
(12.0)
2.1
574.6
574.6
92.7
(71.7)
16.0
611.6
92.7
(71.7)
16.0
611.6
215.0
215.0
607.2
607.5
822.2
822.5
1. Disposals and write-off include fully amortised intangible assets no longer utilised by the Group in its operating activities.
2.
Impairment losses relate to capitalised software development costs for ongoing IT projects primarily relating to development of new systems.
Included within other intangible assets are assets still in development of £95.1 million (2021: £72.8 million). The increase of
£22.3 million is primarily due to the building of a new Home platform and of new capabilities for the Group's Motor
platform. The assets still in development at 31 December 2022 relate mainly to finance and core technology projects
which are expected to be ready for use in 2023. 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 2022, other intangible
assets additions, which are internally generated, are £106.1 million (2021: £105.9 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. There are no additions to goodwill in the year ended 31 December 2022.
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
Run-off partnerships
Total
2022
£m
130.4
45.8
28.7
10.1
—
215.0
2021
£m
130.4
45.8
28.7
10.1
—
215.0
There is no goodwill impairment for the year ended 31 December 2022 (2021: £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.
222 Direct Line Group Annual Report and Accounts 2022
Direct Line Group Annual Report and Accounts 2022
222
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.
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.
CGU
Motor
Home
Rescue and other personal lines
Commercial
Note:
Assumptions
Sensitivity: impact on recoverable amount of a:
Terminal
growth rate
Pre-tax
discount rate
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
%
11.4
11.4
11.4
11.4
£m
£m
£m
(197.0)
(283.2)
(292.0)
(33.6)
(48.8)
(65.5)
(48.7)
(69.8)
(94.4)
(53.1)
(70.5)
(99.7)
1. Reflects a 1% decrease in the profit for each year of the Group's strategic plan, which is five years.
18. Property, plant and equipment
Cost
At 1 January 2021
Additions
Disposals
Assets held for sale
At 31 December 2021
Additions
Disposals
Assets held for sale
At 31 December 2022
Accumulated depreciation and impairment
At 1 January 2021
Depreciation charge for the year
Disposals
Assets held for sale
At 31 December 2021
Depreciation charge for the year
Disposals
Assets held for sale
At 31 December 2022
Carrying amount
At 31 December 2022
At 31 December 2021
Land and
buildings
Other
equipment
£m
£m
Total
£m
79.8
19.8
—
(42.9)
56.7
—
—
(19.8)
36.9
7.5
1.2
—
(4.3)
4.4
0.8
—
(0.6)
4.6
195.9
275.7
9.5
(7.4)
(12.7)
185.3
11.7
(7.0)
(15.8)
174.2
122.1
10.9
(5.1)
(4.1)
29.3
(7.4)
(55.6)
242.0
11.7
(7.0)
(35.6)
211.1
129.6
12.1
(5.1)
(8.4)
123.8
128.2
11.6
(5.5)
(7.1)
12.4
(5.5)
(7.7)
122.8
127.4
32.3
52.3
51.4
61.5
83.7
113.8
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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223
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Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
19. Right-of-use assets
Cost
At 1 January 2021
Additions
Modifications
Disposals
At 31 December 2021
Additions
Disposals
At 31 December 2022
Accumulated depreciation and impairment
At 1 January 2021
Depreciation charge for the year
Disposals
Impairment losses
At 31 December 2021
Depreciation charge for the year
Disposals
At 31 December 2022
Carrying amount
At 31 December 2022
At 31 December 2021
20. Investment property
Property Motor vehicles
IT equipment
£m
£m
£m
Total
£m
195.4
12.6
1.2
209.2
4.5
27.8
(111.1)
116.6
4.4
—
121.0
63.6
7.3
(27.2)
0.5
44.2
7.1
—
51.3
1.2
—
(2.9)
10.9
2.4
(3.7)
9.6
7.1
3.2
(2.9)
—
7.4
2.6
(3.7)
6.3
—
—
—
5.7
27.8
(114.0)
1.2
128.7
—
(1.2)
—
0.7
0.3
—
—
1.0
0.2
(1.2)
—
6.8
(4.9)
130.6
71.4
10.8
(30.1)
0.5
52.6
9.9
(4.9)
57.6
69.7
72.4
3.3
3.5
—
0.2
73.0
76.1
At 1 January 2021
Fair value adjustments
Disposals
Transferred to assets held for
sale (note 30)
Capitalised expenditure
At 31 December 2021¹
Fair value adjustments
Capitalised expenditure
At 31 December 2022¹
Note:
Retail
Retail
warehouse Supermarkets
Office
Industrials
£m
£m
£m
£m
£m
Hotels
£m
Alternative
sector
£m
31.5
(1.5)
—
(3.4)
—
26.6
(1.6)
0.3
25.3
19.9
52.0
10.0
105.3
55.5
17.9
2.7
—
—
0.1
22.7
(1.6)
0.2
21.3
4.9
—
—
—
56.9
(5.8)
—
51.1
(0.4)
(9.6)
—
—
—
—
—
—
28.9
—
—
—
134.2
(22.3)
0.1
112.0
2.9
—
—
—
58.4
(8.1)
—
50.3
0.3
—
—
—
18.2
0.3
—
18.5
Total
£m
292.1
37.8
(9.6)
(3.4)
0.1
317.0
(39.1)
0.6
278.5
1. The cost included in the carrying value at 31 December 2022 is £216.4 million (2021: £215.8 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
2021.
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
-50bp
-5bp
Baseline as at
31 December
2022
%
£m
4.983
253.5
5.472
275.4
5.526
278.5
+5bp
5.580
280.9
+50bp
6.066
308.1
224 Direct Line Group Annual Report and Accounts 2022
224 Direct Line Group Annual Report and Accounts 2022
21. Subsidiaries
The principal subsidiary undertakings of the Group, over which it exercises 100% voting power, are shown below. Their
capital consists of Ordinary Shares which are unlisted. All subsidiaries (a full list of which is included in note 2 of the Parent
Company's financial statements) are included in the Group's consolidated financial statements.
Name of subsidiary
DL Insurance Services Limited
U K Insurance Limited
Company
registration
number
03001989
01179980
Place of incorporation
and operation
Principal activity
United Kingdom
Management services
United Kingdom
General insurance
The Group did not acquire or dispose of any subsidiaries in the year ended 31 December 2022 (31 December 2021: no
acquisitions or disposals).
22. Reinsurance assets
Reinsurers' share of general insurance liabilities
Impairment provision1
Total excluding reinsurers' unearned premium reserves
Reinsurers' unearned premium reserve
Total
Note:
Notes
35
36
2022
£m
1,078.5
(32.4)
1,046.1
55.6
1,101.7
2021
£m
1,169.6
(37.5)
1,132.1
79.7
1,211.8
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. Of this amount a total of £0.1 million is past due (2021: £6.7
million).
Movements in reinsurance asset impairment provisions
At 1 January
Additional provision
Released to income statement
At 31 December
2022
£m
(37.5)
(2.1)
7.2
(32.4)
2021
£m
(46.3)
(3.2)
12.0
(37.5)
The reinsurance asset impairment provisions include a provision for non-recovery of reinsurance receivables arising from
specific incurred claims of £6.1 million (2021: £6.1 million). The remaining provision of £26.3 million (2021: £31.4 million)
relates to potential credit risk exposure associated with the long-term nature of reinsurance receivables.
23. Deferred acquisition costs
At 1 January
Additions
Recognised in the income statement
At 31 December
2022
£m
186.6
395.7
(394.0)
188.3
2021
£m
172.2
400.7
(386.3)
186.6
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225
Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
24. Insurance and other receivables
Receivables arising from insurance contracts:
Due from policyholders
Impairment provision of policyholder receivables
Due from agents, brokers and intermediaries
Impairment provision of agent, broker and intermediary receivables
Amounts due from reinsurers
Other debtors¹
Total
Note:
1. The other debtors balance is comprised a number of smaller balances, each of which is non-material in nature.
Movement in impairment provisions during the year
2022
£m
600.8
(1.9)
119.1
(0.4)
34.5
39.5
791.6
Policyholders
Agents,
brokers and
intermediaries
£m
1.7
4.5
(4.3)
1.9
£m
0.1
0.5
(0.2)
0.4
At 1 January 2022
Additional provision
Released to income statement
At 31 December 2022
25. Prepayments, accrued income and other assets
Prepayments
Accrued income from contracts with customers 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:
1. Foreign exchange contracts (forwards) are designated as cash flow hedges in relation to supplier payments.
226 Direct Line Group Annual Report and Accounts 2022
Direct Line Group Annual Report and Accounts 2022
226
2021
£m
609.2
(1.7)
81.3
(0.1)
41.0
33.1
762.8
Total
£m
1.8
5.0
(4.5)
2.3
2022
£m
83.5
22.3
105.8
2021
£m
89.1
36.0
125.1
2022
£m
24.2
—
0.1
7.0
31.3
2021
£m
27.8
2.4
—
5.7
35.9
28.4
19.1
—
1.2
29.6
0.2
0.2
19.5
27. Retirement benefit obligations
Defined contribution scheme
The pension charge in respect of the defined contribution scheme for the year ended 31 December 2022 was £26.5 million
(2021: £26.1 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.
In October 2022, the trustee completed a £53.9 million bulk annuity insurance buy-in transaction whereby the assets of
the pension scheme were replaced with an insurance asset. The policy purchased is designed to provide cash flows that
exactly match the value and timing of the benefits to the defined benefit scheme’s members, so removing the risks
impacting funding levels such as changes in interest rates and inflation expectations or the performance of the previously
invested assets for the members covered by the policy. The non-insured assets are now primarily intended to cover the
costs of meeting any additional liability for members of the defined contribution section who have a defined benefit
underpin that exceeds the value of the defined contribution funds as well as being available to meet expenses.
The weighted average duration of the defined benefit obligations at 31 December 2022 is 17 years (2021: 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
2022
%
2.5
2.6
4.8
3.3
2021
%
2.6
2.6
2.0
3.3
No assumption has been made for salary growth as there are no obligations in the scheme that are linked to future
increases in salaries.
Post-retirement mortality assumptions
Life expectancy at age 60 now:
Males
Females
Life expectancy at age 60 in 20 years' time:
Males
Females
The table below analyses the fair value of the scheme assets by type of asset.
Insurance policies1
Index-linked bonds
Government bonds
Liquidity fund2
Dynamic bond fund3
Defined contribution section funds4
Other
Total
Notes:
2022
2021
87.2
89.2
89.2
91.0
2022
£m
48.8
0.3
0.5
0.1
—
1.7
2.0
53.4
87.5
89.4
89.3
91.2
2021
£m
—
32.3
27.9
0.5
41.6
5.4
0.5
108.2
Insurance policies are valued at the present value of the related obligations.
1.
2. The liquidity fund is an investment in an open-ended fund incorporated in the Republic of Ireland which targeted 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.
3. The dynamic bond fund targets positive returns on a three-year rolling basis. It was invested to maximise the total return from a globally diversified portfolio,
predominantly comprising high-yielding corporate and government bonds.
4. 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 228).
The majority of debt instruments held directly or through the liquidity fund have quoted prices in active markets.
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227
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227
Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
27. Retirement benefit obligations continued
Movement in net pension surplus
At 1 January 2021
Income statement:
Net interest income/(cost)¹
Administration costs
Statement of comprehensive income:
Remeasurement gains
Fair value of
defined benefit
scheme assets
Present value of
defined benefit
scheme
obligations
Net pension
surplus
£m
£m
107.7
(98.7)
1.5
(0.8)
(1.4)
—
£m
9.0
0.1
(0.8)
Return on plan assets excluding amounts included in the net interest on the
defined benefit asset
2.2
—
2.2
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
Income statement:
Net interest income/(cost)¹
Administration costs
Statement of comprehensive income:
Remeasurement losses
Return on plan assets excluding amounts included in the net interest on the
defined benefit asset
Actuarial gains of defined benefit scheme
Experience gains
Gains from change in demographic assumptions
Gains from change in financial assumptions
Benefits paid
At 31 December 2022
Note:
1. The net interest income/(cost) in the income statement has been included under other operating expenses.
The table below details the history of the scheme for the current and prior years.
—
—
—
(2.4)
108.2
2.1
(0.9)
(5.8)
0.2
7.2
2.4
(5.8)
0.2
7.2
—
(96.1)
12.1
(1.9)
—
0.2
(0.9)
(53.3)
—
(53.3)
—
—
—
(2.7)
53.4
0.3
0.5
42.7
2.7
(51.8)
0.3
0.5
42.7
—
1.6
Present value of defined benefit scheme obligations
Fair value of defined benefit scheme assets
Net pension surplus
Experience gains/(losses) on scheme liabilities
Return on plan assets excluding amounts included in
the net interest on the defined benefit asset
2022
£m
(51.8)
53.4
1.6
0.3
2021
£m
(96.1)
108.2
12.1
(5.8)
(53.3)
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
—
4.4
(3.5)
228 Direct Line Group Annual Report and Accounts 2022
228 Direct Line Group Annual Report and Accounts 2022
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.
Following the purchase of the insurance policy to cover the benefits of the defined benefit section members, the scheme’s
asset and liabilities move by the same amount in respect of these members. 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
1.0% increase in discount rate (2021: 0.25% increase in discount rate)
1.0% decrease in discount rate (2021: 0.25% decrease in discount rate)
Inflation rate
1.0% increase in inflation rate (2021: 0.25% increase in inflation rate)
1.0% decrease in inflation rate (2021: 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
2022
£m
—
—
—
—
—
—
2021
£m
—
0.2
—
—
0.1
(0.1)
2022
£m
(7.3)
8.7
2.8
(2.6)
2.6
(2.6)
2021
£m
(4.8)
4.8
2.4
(2.4)
3.0
(3.0)
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 2023 (2022: £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
Other loans
Total loans and receivables
Equity investments2
Total
Notes:
2022
£m
2021
£m
2,605.1
25.2
5.9
511.3
3,147.5
4,006.9
14.0
28.1
35.6
4,084.6
98.2
3,245.7
91.2
4,175.8
3,232.1
13.6
3,245.7
238.2
199.1
1.9
439.2
13.6
3,698.5
4,158.3
17.5
4,175.8
250.8
200.8
—
451.6
6.2
4,633.6
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 2022 was £401.8 million (2021: £1,005.6 million).
2. Equity investments consist of quoted shares and insurtech-focused equity funds. The insurtech-focused equity funds are valued based on external valuation
reports received from a third-party fund manager.
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229
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Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes 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:
2022
£m
124.8
878.8
1,003.6
(65.2)
938.4
2021
£m
162.8
792.9
955.7
(59.2)
896.5
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 2022 was 1.46%
(2021: 0.16%) and average maturity was 10 days (2021: 10 days).
30. Assets held for sale
Property, plant and equipment
Investment property
Total assets held for sale
2022
£m
37.0
3.9
40.9
2021
£m
36.8
4.4
41.2
The Group is able to reduce the number of 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 2022 relate to office sites in Bromley, Ipswich and Leeds (including retail space within
the Bromley and Leeds properties) that are no longer required. The balance at 31 December 2021 included a property in
Birmingham which was disposed of in 2022. The office site in Bromley was moved into assets held for sale in 2022.
A net impairment loss of £8.9 million (2021: £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 buyback2,3,4
At 31 December
Notes:
2022
2021
Number of
shares
millions
1,330.7
(19.3)
1,311.4
Transfer to
capital
redemption
reserve4
Share capital
£m
145.2
(2.1)
143.1
£m
4.8
2.1
6.9
Number of
shares
Share capital
millions
£m
1,364.6
(33.9)
1,330.7
148.9
(3.7)
145.2
Transfer to
capital
redemption
reserve4
£m
1.1
3.7
4.8
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 2022, the Group announced that the Board had approved a share buyback programme of Ordinary Shares for an aggregate purchase price of up to
£100 million, for which an initial tranche of up to £50 million was completed in H1 2022. The Group has repurchased 19,324,855 Ordinary Shares for an
aggregate consideration of £50.1 million as reflected in retained earnings (including related transaction costs). On 18 July 2022, the Group announced in its H1
2022 trading update, that the Board had decided not to launch the second £50 million tranche of the £100 million share buyback programme announced
earlier in the year.
3. On 8 March 2021, the Group announced a share buyback programme of Ordinary Shares for an aggregate purchase price 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 £101.0 million (including related transaction costs).
4. After each share buyback, the shares were subsequently cancelled giving rise to a capital redemption reserve of an equivalent amount to their nominal value as
required by the Companies Act 2006.
Additional information including the number of shares authorised for issue is available in the Directors' Report on page
163.
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 2022, 13,214,811 Ordinary Shares (2021: 13,442,422 Ordinary Shares) were owned by the employee share
trusts at a cost of £39.0 million (2021: £41.4 million). These Ordinary Shares are carried at cost and at 31 December 2022
had a market value of £29.2 million (2021: £37.5 million).
230 Direct Line Group Annual Report and Accounts 2022
230 Direct Line Group Annual Report and Accounts 2022
32. Other reserves
Movements in the AFS investments revaluation reserve
At 1 January
Revaluation during the year – gross
Revaluation during the year – tax
Net losses/(gains) transferred to income statement on disposals - gross
Net (losses)/gains transferred to income statement on disposals - tax
At 31 December
Capital reserves
Capital contribution reserve1
Capital redemption reserve2
Total
Notes:
2022
£m
9.0
(295.8)
73.4
24.9
(6.2)
(194.7)
2021
£m
83.9
(84.1)
15.1
(7.9)
2.0
9.0
2022
£m
100.0
1,356.9
1,456.9
2021
£m
100.0
1,354.8
1,454.8
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
£2.1 million in 2022, £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
2022
£m
346.5
2021
£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.
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
2022
£m
—
258.6
258.6
2021
£m
255.2
258.4
513.6
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.
The Group has the option, in certain circumstances, to defer interest payments on the notes but to date has not exercised
this right.
www.directlinegroup.co.uk
231
www.directlinegroup.co.uk
231
Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
34. Subordinated liabilities continued
£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%. 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 instrument was adjusted accordingly.
During 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 was 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 remaining notes, with a nominal value of £250 million and accrued interest of £11.6 million, were redeemed in full on
27 April 2022 when the Group had its first option to repay. Associated transaction costs were £0.1 million. The interest rate
swap hedging these notes expired on the same day.
£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.
35. Insurance liabilities
Insurance liabilities
Gross insurance liabilities
2022
£m
2021
£m
3,654.3
3,680.5
Accident year
Estimate of ultimate
gross claims costs:
At end of
accident year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Total
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
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 2,294.1
One year later
(117.6)
20.7
(30.0)
(86.7) (116.2)
(62.3)
(67.2) (116.8)
(52.5)
Two years later
(153.0)
(38.4) (143.5)
(53.3) (103.1)
(52.0)
(56.1)
(34.4)
Three years later
(21.0) (144.9)
(62.4)
(82.8)
(42.4)
(9.5)
(14.0)
Four years later
(102.1)
(50.2)
(22.9)
(46.1)
(21.0)
(15.4)
Five years later
(50.8)
(51.6)
(22.0)
(16.7)
(12.8)
Six years later
(27.4)
(33.6)
(9.0)
(27.0)
Seven years later
(14.0)
(6.5)
(9.3)
Eight years later
(0.3)
(17.4)
Nine years later
(3.0)
Current estimate of
cumulative claims
Cumulative
payments to date
Gross liability
recognised in
balance sheet
2012 and prior
Claims handling
provision
Total
1,694.8 1,772.6 1,819.0 1,845.1 1,921.8 2,160.9 1,973.1 1,696.1 1,903.3 2,294.1
(1,686.7) (1,715.3) (1,732.9) (1,772.1) (1,799.4) (1,913.3) (1,669.7) (1,326.3) (1,351.3) (1,208.7)
8.1
57.3
86.1
73.0
122.4
247.6
303.4
369.8
552.0
1,085.4
2,905.1
663.0
86.2
3,654.3
232 Direct Line Group Annual Report and Accounts 2022
Direct Line Group Annual Report and Accounts 2022
232
Net insurance liabilities
Accident year
Estimate of ultimate
net claims costs:
At end of
accident year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Total
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
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 2,205.2
One year later
(123.6)
(29.7)
(67.0)
(18.9)
(79.7)
(41.4)
(34.5)
(88.1)
(35.0)
Two years later
(134.4)
(42.0)
(77.8)
(38.2)
(65.3)
(27.1)
(54.5)
(44.7)
Three years later
(27.8) (100.7)
(30.4)
(43.7)
(14.0)
(27.6)
(5.7)
Four years later
(64.3)
(41.3)
(24.1)
(16.9)
(39.7)
(3.1)
Five years later
(38.9)
(52.5)
(20.7)
(12.4)
(15.1)
Six years later
Seven years later
(17.7)
(10.6)
(8.3)
(8.0)
(4.6)
(16.8)
(7.4)
Eight years later
0.4
(6.0)
(2.7)
1,674.3 1,682.5 1,694.7 1,775.3 1,803.1 2,026.7 1,846.5 1,541.7 1,756.8 2,205.2
(1,667.2) (1,670.6) (1,665.2) (1,736.2) (1,737.0) (1,888.7) (1,642.8) (1,301.9) (1,333.9) (1,208.4)
7.1
11.9
29.5
39.1
66.1
138.0
203.7
239.8
422.9
996.8
2,154.9
Nine years later
Current estimate of
cumulative claims
Cumulative
payments to date
Net liability
recognised in
balance sheet
2012 and prior
Claims handling
provision
Total
Movements in gross and net insurance liabilities
Claims reported
Incurred but not reported
Claims handling provision
At 1 January 2021
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
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 2022
Claims reported
Incurred but not reported
Claims handling provision
At 31 December 2022
367.1
86.2
2,608.2
Gross
Reinsurance
£m
£m
Net
£m
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
(1,132.1)
2,548.4
2,840.0
(885.2)
1,954.8
761.8
(246.9)
78.7
—
514.9
78.7
3,680.5
(1,132.1)
2,548.4
(2,244.2)
69.4
(2,174.8)
2,486.8
(89.0)
2,397.8
(268.8)
105.6
(163.2)
3,654.3
2,941.0
627.1
86.2
(1,046.1)
2,608.2
(835.7)
2,105.3
(210.4)
—
416.7
86.2
3,654.3
(1,046.1)
2,608.2
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233
www.directlinegroup.co.uk
233
Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
35. Insurance liabilities continued
Movement in prior-year net claims liabilities by operating segment
Motor
Home
Rescue and other personal lines - ongoing operations
Commercial
Total Group - ongoing operations
Run-off partnerships
Total Group
2022
£m
(66.4)
(19.6)
(0.8)
(54.0)
(140.8)
(22.4)
(163.2)
2021
£m
(127.1)
(45.8)
(8.8)
(61.4)
(243.1)
(15.0)
(258.1)
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 2022 and 31 December 2021. 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
2022
£m
497.0
135.8
632.8
2022
£m
2021
£m
2021
£m
1,393.2
301.3
1,694.5
564.4
1,260.9
193.4
408.7
757.8
1,669.6
(269.5)
(91.7)
(361.2)
(793.1)
(232.5)
(1,025.6)
(316.2)
(142.1)
(731.4)
(313.8)
(458.3)
(1,045.2)
227.5
44.1
271.6
600.1
68.8
668.9
248.2
51.3
299.5
529.5
94.9
624.4
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 cashflow-weighted average rate is
assumed to be 4.2% (2021: 3.5%). The Group has estimated a cashflow-weighted average rate of interest used for the
calculation of present values as 5.1% (2021: 3.5%), which results in a real discount rate of 0.9% (2021: 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 2021
Written in the period
Earned in the period
At 31 December 2021
Written in the period
Earned in the period
At 31 December 2022
Gross
Reinsurance
£m
£m
Net
£m
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
3,094.2
(141.6)
2,952.6
(3,132.2)
165.7
(2,966.5)
1,462.7
(55.6)
1,407.1
234
Direct Line Group Annual Report and Accounts 2022
234 Direct Line Group Annual Report and Accounts 2022
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"), return on tangible equity ("RoTE") and from 2022, emissions. 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 2022 over 4.5 million Ordinary Shares with an estimated fair value of
£10.7 million at the 2022 grant dates (2021: 3.6 million Ordinary Shares with an estimated fair value of £11.3 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
2022
2021
243
0
29%
41%
3 years
2.09%
315
0
26%
40%
3 years
0.16%
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 1.0 million Ordinary Shares (2021: 1.1 million Ordinary Shares) with an
estimated fair value of £2.6 million (2021: £3.2 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 1.6 million Ordinary Shares (2021: 1.4 million Ordinary Shares) under this plan with an estimated fair value
of £4.2 million (2021: £4.5 million) using the market value at the date of grant.
The awards outstanding at 31 December 2022 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.
Direct Line Group Share Incentive Plans: Buy-As-You-Earn Plan
The Buy-As-You-Earn Plan entitles employees to purchase shares from pre-tax pay for between £10 and £150 per month
and receive one matching share for every two shares purchased.
In the year ended 31 December 2022, matching share awards were granted over 0.7 million Ordinary Shares (2021: 0.6
million Ordinary Shares) with an estimated fair value of £1.7 million (2021: £1.8 million). The fair value of each matching
share award is estimated using the market value at the date of grant.
Under the plan, the shares vest at the end of a three-year period dependent upon continued employment with the Group
together with continued ownership of the associated purchased shares up to the point of vesting.
www.directlinegroup.co.uk
235
www.directlinegroup.co.uk
235
Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
37. Share-based payments continued
Movement in total share awards
At 1 January
Granted during the year1
Forfeited during the year
Exercised during the year
At 31 December
Exercisable at 31 December
Number of share awards
2022
millions
2021
millions
28.4
9.8
(4.3)
(5.2)
28.7
2.2
26.9
9.4
(2.9)
(5.0)
28.4
2.6
Note:
1.
In accordance with the rules of the LTIP, Restricted Shares Plan and DAIP, additional awards of 2.0 million shares were granted during the year ended
31 December 2022 (2021: 1.5 million) in respect of the equivalent dividend.
In respect of the outstanding options at 31 December 2022, the weighted average remaining contractual life is 1.56 years
(2021: 1.64 years). No share awards expired during the year (2021: nil).
The weighted average share price for awards exercised during the year ended 31 December 2022 was £2.41 (2021: £3.06).
The Group recognised total expenses in the year ended 31 December 2022 of £8.2 million (2021: £18.4 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 2022
Reclassification of staff entitlements to trade and other payables
Additional provision
Utilisation of provision
Released to income statement
At 31 December 2022
Regulatory
levies
Restructuring
£m
48.2
—
76.6
(70.7)
—
54.1
£m
13.7
—
11.0
(9.3)
(6.7)
8.7
Other1
£m
34.5
(28.6)
0.9
(4.8)
(0.5)
1.5
Total
£m
96.4
(28.6)
88.5
(84.8)
(7.2)
64.3
Note:
1.
In 2022, the Group has reclassified balances in respect of staff entitlements, as a result of applying IAS 19 'Employee Benefits' in place of IAS 37 'Provisions,
Contingent Liabilities and Contingent Assets'. Staff entitlements of £25.6 million (2021: £28.6 million included in provisions) are included in accruals as at 31
December 2022 (see note 39). This adjustment has not been applied retrospectively as it is considered immaterial.
Of the above, £nil (2021: £nil) is due to be settled outside of 12 months.
Regulatory levies provisions include undiscounted balances held for MIB, FSCS and other insurance levies where the Group
is charged in the following year. Restructuring includes a number of restructuring programmes within the Group, including
office site closures and staff restructuring along with an impairment charge.
39. Trade and other payables, including insurance payables
Accruals1
Trade creditors
Other taxes
Other creditors²
Due to reinsurers
Due to agents, brokers and intermediaries
Deferred income
Due to insurance companies
Total
2022
£m
132.3
70.0
98.1
92.2
57.4
3.6
3.3
0.9
457.8
2021
£m
109.3
121.6
99.1
73.6
45.4
4.0
3.2
1.1
457.3
Notes:
1.
In 2022, the Group has reclassified balances in respect of staff entitlements, as a result of applying IAS 19 'Employee Benefits' in place of IAS 37 'Provisions,
Contingent Liabilities and Contingent Assets'. See footnote 1 to note 38 for additional detail.
2. Other creditors primarily consists of balances relating to insurance policies that have been accepted but where the Group is yet to go on risk, balances relating
to unearned policyholder instalment interest income and other amounts due to policyholders.
236 Direct Line Group Annual Report and Accounts 2022
Direct Line Group Annual Report and Accounts 2022
236
40. Notes to the consolidated cash flow statement
(Loss)/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 (credit)/charge
Depreciation and amortisation charge
Impairment of intangible and ROU assets
Impairment provision movements on reinsurance contracts
Impairment 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 increase/(decrease) in net insurance liabilities including reinsurance assets,
unearned premium reserves and deferred acquisition costs
Net (increase)/decrease in insurance and other receivables
Net decrease in accrued income and other assets
Net decrease in trade and other payables, including insurance payables and
provisions
Cash generated from operations
Taxes paid
Cash flow hedges
Net cash (used by)/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
Advances made for other loans
Cash generated from investment of insurance assets
Notes
6
11
12
17/19
22
30
2022
£m
(39.5)
(51.6)
(92.4)
20.4
(0.1)
8.2
(5.6)
115.0
16.0
(5.1)
8.9
1.5
(24.3)
49.3
(28.8)
19.3
(31.6)
(16.1)
(44.5)
0.3
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
6
20
20
(60.3)
271.8
225.4
15.6
(0.6)
—
1,696.2
—
(40.8)
57.2
(1,075.9)
(7.7)
(7.0)
(1.9)
860.5
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
www.directlinegroup.co.uk
237
www.directlinegroup.co.uk
237
Strategic reportGovernanceFinancial statements
Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
40. Notes to the consolidated cash flow statement continued
The table below details changes in liabilities arising from the Group's financing activities.
At 1 January
Repayment of subordinated liabilities1
Interest paid on subordinated liabilities
Interest rate swap cash settlement
Lease repayments
Financing cash flows
Disposals of leases
Modifications of leases
Interest on lease liabilities
Amortisation of arrangement costs and discount on issue of
subordinated liabilities
Amortisation of fair value hedging
Accrued interest expense on subordinated liabilities
Net accrued interest on interest rate swap
Fair value movement in interest rate swap
Non-cash changes
At 31 December
Note:
Lease liabilities
Subordinated liabilities
2022
£m
(84.2)
—
—
—
12.0
12.0
(6.3)
—
(3.1)
—
—
—
—
—
(9.4)
(81.6)
2021
£m
(152.4)
—
—
—
105.1
105.1
(5.9)
(27.8)
(3.2)
—
—
—
—
—
(36.9)
(84.2)
2022
£m
(513.6)
250.0
22.0
—
—
272.0
—
—
—
(0.3)
1.1
(17.8)
—
—
(17.0)
(258.6)
2021
£m
(516.6)
—
33.5
—
—
33.5
—
—
—
(0.6)
3.6
(33.5)
—
—
(30.5)
(513.6)
1. As described in note 34, the Group repaid in full the £250 million 9.25% subordinated Tier 2 notes due 2042 on 27 April 2022 when it had its first option to
repay. The interest rate swap hedging these notes expired on the same date. Associated transaction costs were £0.1 million.
41. Commitments and contingent liabilities
The Group did not have any material commitments and contingent liabilities at 31 December 2022 (2021: 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
Total1,2
Notes:
2022
£m
13.8
42.9
59.8
116.5
2021
£m
13.1
38.4
70.0
121.5
1.
In the table above, the amounts disclosed for year ended 31 December 2022 exclude total future aggregate minimum lease payments receivable of £5.8 million
which relate to leases to third-party tenants on properties the Group has classified as assets held for sale.
2. At year ended 31 December 2022: £114.2 million of the total operating lease commitments where the Group is the lessor relates to the lease of investment
properties detailed in note 20 (2021: £114.4 million).
238 Direct Line Group Annual Report and Accounts 2022
238 Direct Line Group Annual Report and Accounts 2022
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(cid:13)(cid:14)(cid:20)
www.directlinegroup.co.uk
239
Strategic reportGovernanceFinancial statements Notes to the Consolidated Financial Statements continued
Notes to the Consolidated Financial Statements continued
43. Fair value continued
Comparison of carrying value to fair value of financial instruments and assets where fair value is
disclosed
At 31 December 2022
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)
Other loans (note 28)
Total
Liabilities held at fair value:
Derivative liabilities (note 26)
Other financial liabilities:
Subordinated liabilities (note 34)
Total
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
Carrying value
£m
Level 1
£m
Level 2
£m
Level 3
£m
Fair value
£m
278.5
31.3
3,147.5
13.6
98.2
238.2
199.1
1.9
—
—
—
31.3
511.2
2,636.3
—
—
—
—
—
0.3
28.6
—
—
—
278.5
—
—
13.3
61.0
235.7
198.1
1.9
278.5
31.3
3,147.5
13.6
89.6
235.7
198.1
1.9
4,008.3
511.2
2,696.5
788.5
3,996.2
29.6
—
29.6
258.6
288.2
—
—
204.9
234.5
—
—
—
29.6
204.9
234.5
Carrying value
£m
Level 1
£m
Level 2
£m
Level 3
Fair value
£m
£m
317.0
35.9
—
—
—
317.0
35.9
4,084.6
35.6
4,049.0
6.2
91.2
250.8
200.8
—
—
—
—
—
24.3
—
—
317.0
35.9
4,084.6
6.2
—
—
6.2
69.1
257.8
198.3
93.4
257.8
198.3
4,986.5
35.6
4,109.2
848.4
4,993.2
19.5
—
19.5
—
19.5
513.6
533.1
—
—
543.7
563.2
—
—
543.7
563.2
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:
– cash and cash equivalents;
– borrowings; and
–
trade and other payables.
The movements in assets held at fair value and classified as level 3 in the fair value hierarchy relate to investment property
and unquoted 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.
There were no changes in the categorisation of assets between levels 1, 2 and 3 for assets and liabilities held by the Group
since 31 December 2021. During 2021, there was one HTM debt security with fair value of £10.7 million transferred from
level 3 to level 2 due to market-observable valuation inputs.
240 Direct Line Group Annual Report and Accounts 2022
240 Direct Line Group Annual Report and Accounts 2022
The table below shows the unobservable inputs used by the Group in the fair value measurement of its investment
property.
At 31 December 2022
Fair value
£m
Valuation
technique
Unobservable
input
Range
(weighted average)
Investment property
278.5¹
Income
capitalisation
Equivalent yield
(note 20)
4.23% - 7.61%
(average 5.62%)
Estimated rental value
per square foot
£6.50 - £32.92
(average £13.59)
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 2022
Additions1
(Reduction)/increase in fair value in the period (note 6 & 20)
Foreign exchange movement
Capitalised expenditure (note 20)
At 31 December 2022
Note:
Investment
property
Unquoted
equity
investments
£m
317.0
—
(39.1)
—
0.6
278.5
£m
6.2
7.7
0.3
(0.9)
—
13.3
1. Additions to unquoted equity investments are initially recognised at fair value plus directly related transaction costs.
44. Related parties
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 2022 (2021: £nil).
Compensation of key management
Short-term employee benefits
Post-employment benefits
Share-based payments
Total
45. Post balance sheet events
2022
£m
7.6
0.2
3.5
11.3
2021
£m
11.9
0.1
7.2
19.2
On 26 January 2023, the Group announced that its principal underwriter, U K Insurance Limited, had entered into strategic
reinsurance agreements, that together comprise a 3-year structured 10% quota share arrangement. The contracts incept
with effect from 1 January 2023.
On 1 March 2023, the Group’s principal underwriter, U K Insurance Limited, and service company, DL Insurance Services
Limited, entered into arrangements relating to Motability Operations and the motor insurance needs of approximately
600,000 of its customers.
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241
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241
Strategic reportGovernanceFinancial statements
Parent Company Balance Sheet
Parent Company Balance Sheet
As at 31 December 2022
As at 31 December 2022
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
Deferred tax liabilities
Total liabilities
Total equity and liabilities
Notes
2022
£m
2021
£m
2
3
4
5
6
7
9
10
11
5
4
3,332.6
26.8
6.8
0.1
—
112.3
3,478.6
3,322.9
342.5
6.4
0.2
45.2
204.6
3,921.8
2,695.7
346.5
3,042.2
2,937.9
346.5
3,284.4
258.6
176.8
0.1
0.9
436.4
3,478.6
512.4
123.9
0.2
0.9
637.4
3,921.8
The attached notes on pages 244 to 248 form an integral part of these separate financial statements.
The profit for the year net of tax was £126.2 million (2021: £421.9 million).
The financial statements were approved by the Board of Directors and authorised for issue on 21 March 2023.
They were signed on its behalf by:
NEIL MANSER
CHIEF FINANCIAL OFFICER
Direct Line Insurance Group plc
Registration No. 02280426
242 Direct Line Group Annual Report and Accounts 2022
242 Direct Line Group Annual Report and Accounts 2022
Parent Company Statement of Comprehensive Income
Parent Company Statement of Comprehensive Income
For the year ended 31 December 2022
For the year ended 31 December 2022
Profit for the year attributable to the owners of the Company
Other comprehensive gain
Items that may be reclassified subsequently to the income statement:
Gain on fair value through other comprehensive income investments
Other comprehensive gain for the year net of tax
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
For the year ended 31 December 2022
For the year ended 31 December 2022
2022
£m
126.2
0.1
0.1
126.3
2021
£m
421.9
—
—
421.9
Share
capital
(note 8)
Capital
reserves
(note 8)
Share-
based
payment
reserve
Fair value
through other
comprehensive
income
revaluation
reserve
Retained
earnings
Shareholders
equity
Tier 1 notes
(note 9)
Total equity
£m
£m
£m
£m
£m
£m
£m
£m
148.9 1,451.1
7.2
(0.1) 1,329.5
2,936.6
346.5 3,283.1
—
—
—
—
—
421.9
421.9
—
421.9
—
—
—
421.9
421.9
—
421.9
—
—
—
—
(317.4)
(317.4)
—
(317.4)
(3.7)
3.7
—
—
(101.0)
(101.0)
—
(101.0)
—
—
—
17.0
—
(19.2)
—
—
—
17.0
—
17.0
—
(19.2)
—
(19.2)
(3.7)
3.7
(2.2)
—
(418.4)
(420.6)
—
(420.6)
Balance at 1 January 2021
Profit for the year
Total comprehensive income
for the year
Dividends and
appropriations paid
(note 12)
Shares cancelled following
buyback
Credit to equity for equity-
settled share-based
payments
Shares distributed by
employee trusts
Total transactions with
equity holders
Balance at 31 December 2021
145.2 1,454.8
5.0
(0.1) 1,333.0
2,937.9
346.5 3,284.4
Profit for the year
Other comprehensive
income
Total comprehensive income
for the year
Dividends and
appropriations paid
(note 12)
Shares cancelled following
buyback
Credit to equity for equity-
settled share-based
payments
Shares distributed by
employee trusts
Total transactions with
equity holders
—
—
—
—
—
—
—
—
(2.1)
2.1
—
—
—
—
—
—
—
—
—
9.5
(13.4)
(2.1)
2.1
(3.9)
Balance at 31 December 2022
143.1
1,456.9
1.1
—
126.2
126.2
—
0.1
126.2
126.3
(314.5)
(314.5)
(50.1)
(50.1)
—
—
9.5
(13.4)
(364.6)
(368.5)
0.1
0.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
126.2
0.1
126.3
(314.5)
(50.1)
9.5
(13.4)
(368.5)
1,094.6
2,695.7
346.5
3,042.2
The attached notes on pages 244 to 248 form an integral part of these separate financial statements.
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Strategic reportGovernanceFinancial 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 instruments, 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 FVTPL. 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.
244
Direct Line Group Annual Report and Accounts 2022
244 Direct Line Group Annual Report and Accounts 2022
2. Investment in subsidiary undertakings
At 1 January
Additional investment in subsidiary undertakings
At 31 December
2022
£m
3,322.9
9.7
3,332.6
2021
£m
3,305.9
17.0
3,322.9
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
Company
registration
number
Place of incorporation
and operation
Principal activity
02811437
United Kingdom
Intermediate holding company
03001989
United Kingdom
Management services
Finsure Premium Finance Limited1
01670887
United Kingdom
Non-trading company
Inter Group Insurance Services Limited1
02762848
United Kingdom
Dormant6
UK Assistance Accident Repair Centres Limited1
02568507
United Kingdom
Motor vehicle repair services
UK Assistance Limited1
02857232
United Kingdom
Dormant6
U K Insurance Business Solutions Limited1
05196274
United Kingdom
Insurance intermediary services
U K Insurance Limited2,3
01179980
United Kingdom
General insurance
Indirectly held by the Company:
10-15 Livery Street, Birmingham UK Limited4
JE109119
Jersey
Brolly UK Technology Limited1
10134039
United Kingdom
Dissolved7,8
Dormant6
Churchill Insurance Company Limited1
02258947
United Kingdom
General insurance
Direct Line Insurance Limited1
01810801
United Kingdom
Dormant6
DL Support Services India Private Limited5
See
footnote 5
India
Support and operational services
DLG Legal Services Limited2
DLG Pension Trustee Limited1
Farmweb Limited1
Green Flag Group Limited2
Green Flag Holdings Limited1
Green Flag Limited2
08302561
United Kingdom
Legal services
08911044
United Kingdom
03207393
United Kingdom
Dormant6
Dormant6
02622895
United Kingdom
Intermediate holding company
03577191
United Kingdom
Intermediate holding company
01003081
United Kingdom
Breakdown recovery services
Intergroup Assistance Services Limited1
03315786
United Kingdom
National Breakdown Recovery Club Limited1
02479300
United Kingdom
Nationwide Breakdown Recovery Services
Limited1
The National Insurance and Guarantee
Corporation Limited1
01316805
United Kingdom
00042133
United Kingdom
Dormant6
Dormant6
Dormant6
Dormant6
UKI Life Assurance Services Limited1
03034263
United Kingdom
Dormant6
Notes:
1. Registered office at: Churchill Court, Westmoreland Road, Bromley, BR1 1DP.
2. Registered office at: The Wharf, Neville Street, Leeds, LS1 4AZ.
3. U K Insurance Limited has a branch in the Republic of South Africa and a branch in the Republic of Ireland.
4. Registered office at: 22 Grenville Street, St Helier, JE4 8PX, Jersey.
5. Registered office at: ESC House, 155, 1st & 2nd Floor, Okhla Industrial Area Phase-3, New Delhi, 110020, India. Company registration number:
U74140DL2014FTC265567.
6. These entities have not been audited, in accordance with the exemptions available for dormant entities under section 480 of the Companies Act 2006.
7. Under the Companies (Jersey) Law 1991, there is no requirement to file individual accounts and audit a private limited company.
8. 10-15 Livery Street, Birmingham UK Limited was dissolved on 29 December 2022.
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Strategic reportGovernanceFinancial statements
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(cid:25)(cid:39)(cid:41)(cid:47)(cid:40)(cid:46)
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(cid:38)(cid:65)(cid:70)(cid:55)(cid:23)
(cid:54)(cid:52)(cid:54)(cid:54)
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(cid:75)(cid:1) (cid:1)
(cid:15)(cid:13)(cid:15)(cid:14)
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(cid:73)(cid:59)(cid:70)(cid:58)(cid:59)(cid:64)(cid:1)(cid:70)(cid:58)(cid:55)(cid:1)(cid:31)(cid:68)(cid:65)(cid:71)(cid:66)(cid:5)(cid:69)(cid:1)(cid:56)(cid:51)(cid:59)(cid:68)(cid:1)(cid:72)(cid:51)(cid:62)(cid:71)(cid:55)(cid:1)(cid:58)(cid:59)(cid:55)(cid:68)(cid:51)(cid:68)(cid:53)(cid:58)(cid:75)(cid:1)(cid:73)(cid:58)(cid:59)(cid:53)(cid:58)(cid:1)(cid:59)(cid:69)(cid:1)(cid:69)(cid:55)(cid:70)(cid:1)(cid:65)(cid:71)(cid:70)(cid:1)(cid:59)(cid:64)(cid:1)(cid:64)(cid:65)(cid:70)(cid:55)(cid:1)(cid:17)(cid:16)(cid:1)(cid:65)(cid:56)(cid:1)(cid:70)(cid:58)(cid:55)(cid:1)(cid:53)(cid:65)(cid:64)(cid:69)(cid:65)(cid:62)(cid:59)(cid:54)(cid:51)(cid:70)(cid:55)(cid:54)(cid:1)(cid:56)(cid:59)(cid:64)(cid:51)(cid:64)(cid:53)(cid:59)(cid:51)(cid:62)(cid:1)(cid:69)(cid:70)(cid:51)(cid:70)(cid:55)(cid:63)(cid:55)(cid:64)(cid:70)(cid:69)(cid:11)
(cid:13)(cid:15)(cid:17) (cid:5)(cid:33)(cid:44)(cid:29)(cid:27)(cid:46)(cid:1)(cid:13)(cid:33)(cid:40)(cid:29)(cid:1)(cid:8)(cid:44)(cid:41)(cid:47)(cid:42)(cid:1)(cid:25)(cid:64)(cid:64)(cid:71)(cid:51)(cid:62)(cid:1)(cid:42)(cid:55)(cid:66)(cid:65)(cid:68)(cid:70)(cid:1)(cid:51)(cid:64)(cid:54)(cid:1)(cid:25)(cid:53)(cid:53)(cid:65)(cid:71)(cid:64)(cid:70)(cid:69)(cid:1)(cid:15)(cid:13)(cid:15)(cid:15)
246 Direct Line Group Annual Report and Accounts 2022
7. Cash and cash equivalents
Short-term deposits with credit institutions1
Total
Note:
1. This represents money market funds.
2022
£m
112.3
112.3
2021
£m
204.6
204.6
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, £1,094.6 million (2021: £1,333.0 million), being the total of its retained earnings less
unrealised losses of £nil (2021: £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
2022
£m
—
258.6
258.6
2021
£m
254.1
258.3
512.4
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 Company has the option, in certain circumstances, to defer interest payments on the notes but to date has not
exercised this right. The aggregate fair value of subordinated guaranteed dated notes at 31 December 2022 was £204.9
million (2021: £543.7 million).
£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% with 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 and
accrued interest of £11.6 million, were redeemed in full on 27 April 2022 when the Group had its first option to repay.
Associated transaction costs were £0.1 million.
£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.
11. Borrowings
Loans from fellow subsidiaries within the Group1
2022
£m
176.8
2021
£m
123.9
Note:
1.
Included in the above is a loan of £69.2 million (2021: £93.8 million) from UK Assistance Accident Repair Centres Limited. All loans from fellow Group
subsidiaries are repayable by 31 December 2024.
12. Dividends
Full details of the dividends paid and proposed by the Company are set out in note 14 to the consolidated financial
statements.
13. Share-based payments
Full details of share-based compensation plans are provided in note 37 to the consolidated financial statements.
www.directlinegroup.co.uk
247
www.directlinegroup.co.uk
247
Strategic reportGovernanceFinancial statements
Notes to the Parent Company Financial Statements continued
Notes to the Parent Company Financial Statements continued
14. 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.
15. Employees, directors and key management remuneration
The Company has no employees. 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.
248 Direct Line Group Annual Report and Accounts 2022
248 Direct Line Group Annual Report and Accounts 2022
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.
Shareholder Information
Shareholder Information
Financial calendar1
2023
Date
13 Mar
09 May
Event
Preliminary Results 2022
announcement
Annual General Meeting
02 August
Half-year report 2023
07 November
Trading update for the third quarter
of 2023
Annual General Meeting
The 2023 AGM will be held at No 1 Minster Court,
Mincing Lane, London, EC3R 7AA on Tuesday, 9 May
2023, 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.
Share ownership
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 260. Alternatively,
shareholders can access their shareholdings online and
download a dividend mandate form from the Investor
Centre. You can find details of this below.
Note:
1. These dates are subject to change.
www.directlinegroup.co.uk
249
www.directlinegroup.co.uk
249
Strategic reportGovernanceFinancial statements Shareholder Information continued
Shareholder Information continued
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 for the tax year 2022 to
2023. This tax-free allowance will reduce to £1,000 for
the tax year 2023 to 2024 and to £500 for the tax years
2024 to 2025 and beyond. Above these amounts,
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.
250 Direct Line Group Annual Report and Accounts 2022
250 Direct Line Group Annual Report and Accounts 2022
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 gross written
premium
An amended gross written premium number that identifies the impact of a contractual
change to Green Flag premium such that a portion of income that was previously included in
gross written premium is now included in service fee income.
Adjusted solvency capital
ratio
The ratio of Solvency II own funds to the solvency capital requirement at 31 December 2021,
excludes the Tier 2 subordinated debt which was redeemed on 27 April 2022.
Annual Incentive Plan
("AIP")
Assets under
management ("AUM")
Association of British
Insurers ("ABI")
Bootstrapping
Buy-As-You-Earn Plan
Capital
Carbon emissions:
Scope 1
Scope 2
Scope 3 under our direct
control
Total scope 3
Claims frequency
Claims handling
provision (provision for
losses and loss-
adjustment expense)
Clawback
Combined operating
ratio
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.
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.
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. Current-year combined operating ratio is calculated using the
combined operating ratio less movement in prior-year reserves. (See page 257 alternative
performance measures.)
Commission ratio
The ratio of commission expense divided by net earned premium. (See page 254 alternative
performance measures.)
Current-year attritional
loss ratio
The loss ratio for the current accident year, excluding the movement of claims reserves
relating to previous accident years and claims relating to major weather events. (See page
254 alternative performance measures.)
Deferred Annual
Incentive Plan ("DAIP")
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.
Employee Representative
Body ("ERB")
Expense ratio
The forum that represents all employees, including when there is a legal requirement to
consult employees.
The ratio of operating expenses divided by net earned premium. (See page 254 alternative
performance measures).
Fair value through profit
or loss ("FVTPL")
A financial asset or liability where at each balance sheet date the asset or liability is
remeasured to fair value and any movement in that fair value is taken directly to the income
statement.
Finance costs
The cost of servicing the Group's external borrowings and including the interest on right-of-
use assets.
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Strategic reportGovernanceFinancial statements Glossary and Appendices continued
Glossary and Appendices continued
Term
Definition and explanation
Financial leverage ratio
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.
The UK's regulator for the accounting, audit and actuarial professions, promoting
transparency and integrity in business.
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
Insurance liabilities
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 insurance margin
("NIM")
Net investment income
yield
Net promoter score
("NPS")
Ogden discount rate
Ongoing operations
Funds set aside to meet the cost of claims for accidents that have occurred but have not yet
been reported to the Group. This includes an element of uplift on the value of claims
reported.
The number of policies on a given date that are active and against which the Group will pay,
following a valid insurance claim.
This comprises insurance claims reserves and claims handling provision, which the Group
maintains to meet current and future claims.
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
254 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 254 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 254 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 a proposed IFRS 17 key performance indicator based on the ratio of an insurance
service return divided by a view of net insurance contract revenue. The definition of an
insurance service return is the sum of the net insurance contract revenues, net insurance
contract claims, acquisition costs and operating expenses, compared to the net insurance
contract revenues generated. We will provide definitions of these terms reconciled to the
statutory basis in future disclosures.
This is calculated in the same way as investment income yield but includes the cost of
hedging. (See page 254 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.
The discount rate set by the Lord Chancellor and used by courts to calculate lump sum
awards in bodily injury cases.
The Group's ongoing operations include Motor, Home, Rescue and other personal lines and
Commercial segments and excludes the run-off partnerships segment. Please also refer to
run-off partnerships.
The use of the term ongoing operations is not considered equivalent to continuing
operations as defined under IFRS 5 'Non-current Assets Held for Sale and Discontinued
Operations' and run-off partnerships does not meet the criteria of a discontinued operation
and has not been accounted for as such.
(See page 255 alternative performance measures.)
252 Direct Line Group Annual Report and Accounts 2022
Direct Line Group Annual Report and Accounts 2022
252
Term
Definition and explanation
Operating expenses
Operating profit
Own Risk and Solvency
Assessment ("ORSA")
Periodic payment order
("PPO")
Prudential Regulation
Authority ("PRA")
Reserves
Restructuring and one-off
costs
Return on equity
Return on tangible
equity ("RoTE")
Run-off partnerships
Science-Based Targets
("SBT")
Solvency capital ratio
Solvency capital
requirement ("SCR")
Tangible equity
These are the expenses relating to business activities excluding restructuring and one-off
costs. (See page 255 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.
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.
Funds that have been set aside to meet outstanding insurance claims and IBNR.
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.
This is calculated by dividing the (loss)/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 (loss)/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 255 alternative performance measures.)
The Group has exited, or has initiated termination of three partnerships which will reduce its
exposure to low margin packaged bank accounts so it may redeploy capital to higher return
segments. The run-off partnerships relate to a Rescue partnership with NatWest Group that
expired in December 2022 and Travel partnerships with NatWest Group and Nationwide
Building Society which expire in 2024, where the Group has indicated to the partner that it
will not be seeking to renew.
The term run-off partnerships does not meet the criteria of a discontinued operation as
defined under IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations' and has
not been accounted for as such.
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 a global
temperature rise to well below 2°C above pre-industrial levels and ideally to limit to a 1.5°C
rise.
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 the 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
255 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 255 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
Compares share price movement with reinvested dividends as a percentage of the
share price.
This is the profit or loss from operational insurance 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.
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253
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Strategic reportGovernanceFinancial statements Glossary and Appendices continued
Glossary and Appendices continued
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 251 to 253 and reconciled to the most directly
reconcilable line items in the financial statements and notes. Note 4 on page 212 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 184 to 241.
Group APM
Adjusted gross
written
premium
Closest equivalent
IFRS measure
Gross written
premium
Adjusted gross written premium is
defined in the glossary on page 251
and reconciled on page 256.
Definition and/or reconciliation
Rationale for APM
This measure identifies the impact of a
contractual change to Green Flag Rescue
premium such that a portion of income that
was previously included in gross written
premium is now included in service fee
income. The measure supports comparability
with prior period gross written premium. This
measure was introduced with effect from 1
January 2022.
This is a measure that shows the Group's
solvency ratio at 31 December 2021, excluding
the Tier 2 subordinated debt which was
redeemed on 27 April 2022.
Adjusted solvency capital ratio is
defined in the glossary on page 251
and reconciled on page 256.
Adjusted
solvency
capital ratio
This measure is
based on the
Group's
Solvency II
balance sheet
and therefore
there is no
IFRS
equivalent
Combined
operating ratio
Profit before
tax
Combined operating ratio is defined in
the glossary on page 251 and
reconciled in note 4 on page 213.
Commission
ratio
Commission
expense
Current-year
attritional loss
ratio
Net insurance
claims
Commission ratio is defined in the
glossary on page 251 and is reconciled
in note 4 on page 213.
Current-year attritional loss ratio is
defined in the glossary on page 251
and is reconciled to the loss ratio
(discussed below) on page 213.
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.
Profit before
tax
Current-year combined operating ratio
is defined in the glossary on page 251
and is reconciled on page 213.
This is a measure of underwriting profitability,
excluding the effect of prior-year reserve
movements.
Current-year
combined
operating ratio
Expense ratio
Total
expenses
Expense ratio is defined in the glossary
on page 251 and is reconciled in note
4 on page 213.
Investment
income yield
Investment
income
Investment income yield is defined in
the glossary on page 252 and is
reconciled on page 256.
Investment
return yield
Investment
return
Investment return yield is defined in
the glossary on page 252 and is
reconciled on page 256.
Loss ratio
Net insurance
claims
Loss ratio is defined in the glossary on
page 252 and is reconciled in note 4
on page 213.
Net investment
income yield
Investment
income
Net investment income yield is defined
in the glossary on page 252 and is
reconciled on page 256.
254
Direct Line Group Annual Report and Accounts 2022
254 Direct Line Group Annual Report and Accounts 2022
Expresses underwriting and policy expenses in
relation to net earned premium. Note that
restructuring and one-off costs are not
considered as underwriting costs and are not
included in expense ratio calculations.
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.
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 251
and reconciled on page 257.
Ongoing
operations (see
also run-off
partnerships)
Multiple -
rationale for
APM
Ongoing operations and run-off
partnerships are defined in the glossary
on pages 252 and 253 and reconciled
in note 4 on page 213.
This is a measure of underwriting profitability
excluding the variances of actual weather
costs from our assumptions, 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.
As noted in the Acting CEO and CFO reviews,
the Group has exited or has initiated
termination of three low margin partnerships
in order to be able to deploy its capital where
it may obtain higher returns and has excluded
this business from its ongoing results to give
the reader a clearer view of the Group's
ongoing activities and activities that it is
seeking to exit from.
Operating
expenses
Total
expenses
Operating expenses are defined in the
glossary on page 253 and reconciled in
note 4 on page 213.
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 253 and reconciled in
note 4 on page 213.
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 253 and is
reconciled on page 257.
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 253 and is reconciled
in note 16 on page 221.
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 253
and reconciled in note 16 on page 221.
Underwriting
result
(Loss)/profit
before tax
Underwriting result is defined in the
glossary on page 253 and is reconciled
in note 4 on page 213.
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.
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255
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Strategic reportGovernanceFinancial statements Glossary and Appendices continued
Glossary and Appendices continued
Investment income and return yields1
Investment income
Hedging to a sterling floating rate basis3
Net investment income
Net realised and unrealised (losses)/gains excluding hedging
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:
1. See glossary on page 252 for definitions.
2. See notes to the consolidated financial statements.
3.
4. See footnote 1 on page 34 (Investment holdings).
5. Mean average of opening and closing balances.
Includes net realised and unrealised gains/(losses) on derivatives in relation to AUM.
Adjusted gross written premium
Notes2
6
6
6
28
29
29
2022
£m
125.0
(6.0)
119.0
(67.4)
51.6
317.0
4,633.6
955.7
(59.2)
14.3
5,861.4
278.5
3,698.5
1,003.6
(65.2)
1.6
4,917.0
5,389.2
2.3%
2.2%
1.0%
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%
FY 2022
Gross written premium
Effect of service fees recognised as other income
Adjusted gross written premium
Adjusted solvency capital ratio1
Total eligible own funds
Less: Tier 2 subordinated debt redeemed on 27 April 2022
Add back: ineligible Tier 3 capital
Solvency capital requirement
Adjusted solvency capital ratio
Note:
1. See glossary on page 251 for definition.
Rescue -
ongoing
operations
Of which:
Green Flag
direct
Total Rescue
and other
personal lines
Total Group -
ongoing
operations
Of which:
direct own
brands
£m
£m
£m
£m
£m
139.5
4.2
143.7
84.0
4.2
88.2
269.7
4.2
273.9
2,969.8
2,082.9
4.2
4.2
2,974.0
2,087.1
2021
£bn
2.38
(0.25)
0.03
2.16
1.35
160%
256 Direct Line Group Annual Report and Accounts 2022
Direct Line Group Annual Report and Accounts 2022
256
Normalised combined operating ratio - ongoing operations1,2
Commercial
Commercial
Home
2022
80.2%
5.1%
21.6%
106.9%
Home
2021
50.7%
6.9%
22.5%
80.1%
2022
53.7%
19.4%
21.1%
94.2%
(13.0%)
0.8%
5.5%
(0.4%)
(1.3%)
(0.1%)
2021
54.5%
20.0%
21.7%
96.2%
0.1%
—
Total
2022
74.7%
7.3%
23.8%
105.8%
Total
2021
58.4%
7.3%
23.8%
89.5%
(2.7%)
0.2%
1.1%
(0.1%)
94.7%
85.2%
92.8%
96.3%
103.3%
90.5%
Loss ratio
Commission ratio
Expense ratio
Combined operating ratio
Effect of weather
Loss ratio
Commission ratio
Combined operating ratio normalised for
weather
Notes:
1. Ongoing operations – see footnote 1 on page 213.
2. See glossary on page 251 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 253 for definition.
2. See notes to the consolidated financial statements.
Return on tangible equity1
(Loss)/profit before tax
Add back restructuring and other one-off costs
Coupon payments in respect of Tier 1 notes
Adjusted (loss)/profit before tax
Tax credit/(charge) (2022 and 2021 UK standard tax rate of 19%)
Adjusted (loss)/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 253 for definition.
2. Mean average of opening and closing balances.
Note2
10
10
10
2022
£m
744.8
(45.3)
699.5
2021
£m
807.8
(101.5)
706.3
2022
£m
(45.1)
45.3
(16.6)
(16.4)
3.1
(13.3)
2,550.2
(822.5)
1,727.7
1,934.0
(822.2)
1,111.8
1,419.8
(0.9%)
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%
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257
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257
Strategic reportGovernanceFinancial statements
Glossary and Appendices continued
Glossary and Appendices continued
Appendix B
In-force policies (thousands)
Direct own brands
Partnerships
Motor
Direct own brands
Partnerships
Home
Rescue - ongoing operations
Pet
Other personal lines - ongoing operations
Rescue and other personal lines - ongoing operations
Of which: Green Flag Direct
Direct own brands
NIG and other
Commercial
Total in-force policies - ongoing operations1
Of which: direct own brands
Run-off partnerships
Total in-force policies1
31 Dec
2022
3,756
80
3,836
1,732
769
2,501
2,185
128
111
2,424
1,106
651
277
928
9,689
7,245
2,188
11,877
31 Dec
2021
3,869
102
3,971
1,879
788
2,667
2,273
138
94
2,505
1,179
602
269
871
10,014
7,529
4,551
14,565
Note:
1. The reduction in in-force policies principally relates to the removal of travel insurance cover from a partner's bank account proposition.
Adjusted gross written premium1
Direct own brands
Partnerships
Motor
Direct own brands
Partnerships
Home
Rescue - ongoing operations
Pet
Other personal lines - ongoing operations
Rescue and other personal lines - ongoing operations
Of which: Green Flag direct
Direct own brands
NIG and other
Commercial
Total adjusted gross written premium - ongoing operations
Of which: direct own brands
Run-off partnerships
Total adjusted gross written premium
Note:
FY 2022
£m
1,398.5
34.2
1,432.7
FY 2021
£m
1,515.2
45.6
1,560.8
381.5
136.6
518.1
143.7
70.8
59.4
273.9
88.2
218.9
530.4
749.3
2,974.0
2,087.1
124.4
3,098.4
416.7
161.1
577.8
155.2
71.4
54.5
281.1
88.3
187.4
465.6
653.0
3,072.7
2,207.6
98.9
3,171.6
1.
See glossary on page 251 for definition and appendix A – Alternative performance measures on page 256 for reconciliation to financial statement line items.
258 Direct Line Group Annual Report and Accounts 2022
258 Direct Line Group Annual Report and Accounts 2022
Forward-looking Statement
Forward-looking statements disclaimer
This Annual Report & Accounts has been prepared for, and
only for, the members of the Company as a body, and no
other persons. The Company, its Directors, employees,
agents or advisers do not accept responsibility to any other
person to whom this document is shown, or into whose
hands it may come, and any such responsibility or liability is
expressly disclaimed.
–
–
the terms of trading and other relationships between
the UK and other countries following Brexit;
the impact of the FCA's PPR regulations 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,
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”, "vision", “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 may
appear in several places throughout this document and
include statements regarding intentions, beliefs or current
expectations, including 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 which are
contained in this document with respect to return on
tangible equity, solvency capital ratio, 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 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;
–
–
–
–
exchange rates and credit spreads, including those
created or exacerbated by the war in Ukraine following
the Russian invasion;
the policies and actions and/or new principles, rules
and/or regulations, of regulatory authorities and bodies,
and of changes to, or changes to interpretations of,
principles, rules and/or regulations (including changes
made directly or indirectly as a result of Brexit or related
to capital and solvency requirements or related to the
Ogden discount rates or made in response to the
Covid-19 pandemic and its impact on the economy and
customers) and of 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 the
forward-looking statements contained in this document,
those results or developments may not be indicative of
results or developments in subsequent periods.
The forward-looking statements contained in this
document reflect knowledge and information available as
of the date of preparation of this document. The Group and
the Directors expressly disclaim any obligation or
undertaking to update or revise publicly any forward-
looking statements, whether because of new information,
future events or otherwise, unless required to do so by
applicable law or regulation. Nothing in this document
constitutes or should be construed as a profit forecast.
Neither the content of Direct Line Group's website nor the
content of any other website accessible from hyperlinks on
the Group's website is incorporated into, or forms part of,
this document.
www.directlinegroup.co.uk
259
www.directlinegroup.co.uk
259
Strategic reportGovernanceFinancial 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
260 Direct Line Group Annual Report and Accounts 2022
260 Direct Line Group Annual Report and Accounts 2022
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Direct Line Insurance Group plc©
Registered in England & Wales No. 02280426
Registered Office:
Churchill Court
Westmoreland Road
Bromley
BR1 1DP