Annual Report & Accounts 2016 Report & Accounts Annual Building our brands Direct Line Insurance Group plc Annual Report & Accounts 2016 Contents Strategic report 2 Group highlights 4 Group at a glance 6 Market overview 8 Business model 10 Chairman’s statement 12 Chief Executive Officer’s review 14 Our strategy 24 Our key performance indicators 26 Risk management 30 Corporate social responsibility 34 Operating review 38 Finance review Governance 48 Chairman’s introduction 50 Board of Directors 52 Executive Committee 53 Corporate governance report 64 Committee reports 82 Directors’ remuneration report 110 Directors’ report Financial statements 114 Contents 115 Independent Auditor’s report 122 Consolidated financial statements 127 Notes to the consolidated For all the latest news financial statements and announcements visit www.directlinegroup.com 179 Parent Company financial statements 182 Notes to the Parent Company financial statements Other information 187 Additional information 189 Glossary and appendices 195 Forward-looking statements disclaimer 196 Contact information Building our brands Our mission: To make insurance much easier and better value for our customers Our strategy supports our aspiration to be the leading personal and small business general insurer in the UK. Our customers are at the centre of everything we do, as we remain focused on protecting an ever-changing Britain. Building a culture of great service Find out more on page 18 Building our brands by offering more Find out more on page 22 Building our technology and data capabilities Find out more on page 20 www.directlinegroup.com 1 Group highlights Providing stability for our customers and shareholders Profit before tax1 Return on tangible equity2 Combined operating ratio2 (£m) (%) Ongoing operations2 (%) 9 7. 7 95.0 94.0 Target 3,222.1 18.5 5 0 7. 5 16.8 456.8 At least 15% 14.2 353.0 14y 15y 16y 14y 15y 16y 14y 15y 16y £353.0m 14.2% 9 7. 7 % Gross written premium1 Total costs2 Operating profit2 (£m) Ongoing operations (£m) Ongoing operations (£m) 9 2 7. 7 3,222.1 3,222.1 923.7 3,274.1 520.7 3,152.4 884.7 3,099.4 506.0 403.5 14y 15y 16y 14y 15y 16y 14y 15y 16y £3,274.1m £923.7m £403.5m Basic earnings per share1 Dividend per share3 Adjusted diluted earnings (pence) (pence) per share2 (pence) 2 7. 5 2 7.9 26.6 25.5 24.0 21.2 20.4 14.0 10.0 8.8 14.6 13.8 13.2 14y 15y 16y 14y 15y 16y 14y 15y 16y 20.4p 24.6p 21.2p Notes: 1. Results for the years ended 31 December 2015 and 31 December 2014 are based on continuing operations and exclude discontinued operations 2. See glossary on pages 189 and 190 and Alternative performance measures (“APM”) in Appendix A on page 191 and Appendix B – Proforma results on page 194 presents the Group’s results excluding the recent impact of the Ogden discount rate reduction 3. The Board is proposing a final dividend of 9.7 pence per share, making a total regular dividend for 2016 of 14.6 pence per share 2 Direct Line Group Annual Report & Accounts 2016 Strategic report Governance We had a successful 2016, absorbing a reduction in the discount rate applicable to personal injury lump sum damages awards to minus 0.75% and the Flood Re levy, while at the same time investing in the business and making progress on implementing our strategy. Our investments in our direct brands, competitiveness on price comparison websites and Financial statements partnership capabilities are bearing fruit. Financial highlights Strategic and operational highlights • Gross written premium for Ongoing operations1,2 up 3.9% • Direct Line Motor and Home new business growth at the to £3,274.1m (2015: £3,152.4m), driven by growth in highest annual level since IPO, demonstrating the success of Motor and Home own-brand in-force policies (up 4.3%) the investment in brand, proposition and customer service • 2016 results reflect the one-off impact of using the new • Total costs for Ongoing operations of £923.7m broadly Ogden discount rate of minus 0.75%. Operating profit flat year on year before non-cash impairment charge of from Ongoing operations of £403.5m (pre-Ogden £39.3m, after absorbing £24.1m Flood Re levy and discount rate reduction3: £578.6m; 2015: £520.7m) supporting growth in Motor and Home own brands 3 and profit before tax of £353.0m (pre-Ogden : £570.3m; • Extended Home and Private Insurance partnership with 2015: £507.5m). Return on tangible equity1,2 of 14.2%, 3 RBS for a further three years, and implemented faster and (pre-Ogden : 20.2%; 2015: 18.5%) easier sales journeys using cloud-based technology making • Combined operating ratio1 from Ongoing operations of connectivity and future change easier 3 97.7% (pre-Ogden : 91.8%; 2015: 94.0%), increased • Invested in innovation, including partnership with PSA as a result of the reduction in the Ogden discount rate, Peugeot Citroën for telematics extended for 4 more years, partially offset by improved current-year underwriting introducer role developed with Tesla, and MOVE_UK performance and favourable weather claims. Adjusted project brought into data collection stage for normal weather and before the Ogden discount rate change, the combined operating ratio was 93.5%, • Received approval from the Prudential Regulation Authority towards the lower end of the target range of 93% to 95% (“PRA”) to use the Group’s Solvency II PIM • 5.4% increase in final dividend per share to 9.7 pence per share, (2015: 9.2 pence). Total dividends per share for 2016, including special interim dividend of 10.0 pence per share paid in September 2016 following the approval of the Group’s partial internal model (“PIM”), of 24.6 pence per share (2015: 50.1 pence) • The Group’s estimated Solvency II capital coverage ratio4 post dividend is 165%, above the middle of the Group’s risk appetite range of 140% – 180% (pre-dividend: 174%) Notes: 1. See glossary on pages 189 and 190 2. See appendix A – Alternative performance measures on page 191 for reconciliation to financial statement line items 3. See appendix B – Proforma results on page 194 for the Group’s results excluding the recent impact of the Ogden discount rate reduction 4. Estimates based on the Group’s Solvency II PIM for 31 December 2016 www.directlinegroup.com 3 Group at a glance Protecting our customers We have multiple brands, products and distribution channels. Each enables our customers to choose the right cover to protect their cars, homes, holidays, businesses and pets. Our brands Churchill is a household name. We market our products by phone and internet, including PCWs. We target customers who have a high affinity to the Privilege targets Direct Line has maintained its brand heritage by brand, and who need customers who mainly selling products direct to customers exclusively an extra helping hand. buy through PCWs. We by phone and internet. We target customers focus on making sure www.churchill.com with a high affinity to the brand, and focus on they experience a quick providing a fast and straightforward service. service at the best price. www.directline.com www.privilege.com Brand Partners Direct Line for Business is the is an extension of our Group’s partnerships Direct Line brand. It is our arm. We specialise direct commercial insurance in providing personal NIG is our specialist lines insurance, and brand for small businesses commercial insurance that have straightforward roadside rescue and brand. We sell our recovery products commercial insurance products through brokers, Green Flag is our to some well-known requirements. including an in-house roadside rescue and brands. intermediary that www.directlineforbusiness.co.uk recovery provider. We arranges RBS1 and sell it as a standalone NatWest commercial service and an insurance. additional optional product alongside www.nig.com motor insurance. www.greenflag.com Note: 1. The Royal Bank of Scotland Group plc, including National Westminster Bank plc 4 Direct Line Group Annual Report & Accounts 2016 Strategic report Governance Personal lines Motor Home Rescue and other We are Britain’s leading personal motor We are Britain’s leading personal home personal lines 1 1 insurer measured by in-force policies , insurer measured by in-force policies . We are one of the leading providers of mainly represented through our highly We reach our customers by selling home rescue and other personal lines insurance Financial statements recognised brands Direct Line, Churchill insurance products through our brands, in the UK2,3 with 7.9 million in-force and Privilege, and also through our Direct Line, Churchill and Privilege, policies. This includes providing partners. We insure around one in and our partners – RBS, NatWest roadside assistance and recovery for six insured cars on the road in the UK, and Prudential. customers through Green Flag, the UK’s representing 3.9 million in-force policies. third-largest roadside recovery provider2. We also offer customers protection for their pets and holidays and are the second largest travel and the third largest pet insurer respectively3. £1,539.1m £834.4m £400.8m Gross written premium Gross written premium Gross written premium 3.9m 3.4m 7.9 m In-force policies In-force policies In-force policies 106.3% 85.0% 93.3% Combined operating ratio Combined operating ratio Combined operating ratio £149.1m £166.7m £45.9m Operating profit Operating profit Operating profit Commercial We protect commercial businesses through our brands, NIG, Direct Line for Business and Churchill, and through our partners RBS and NatWest. NIG sells its products exclusively through £499.8m 675k brokers operating across the UK.