Direct Line Insurance Group plc now and Annual Report & Accounts 2019 in the future ANNUAL REPORT & ACCOUNTS 2019 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. Protecting customers when it matters the most through our powerful brands offering a range of products. Reaching customers however and wherever they shop. We believe that by serving the needs of our customers we can create value for our people, our society, our planet and our shareholders. 2019 HIGHLIGHTS CONTENTS STRATEGIC REPORT Profit before Return on tangible Strategic report 1 tax equity Group highlights 1 Our segments 2 £509.7m 20.8% Our brands 4 (2018: £580.5m)2 (2018: 21.6%)2 Our routes to market 6 Investment case 8 Combined Solvency capital Chairman’s statement 10 operating ratio1,3 ratio1,4 Chief Executive Officer’s review 14 Vision and purpose 20 92.2% 165% Strategy in action 22 (2018: 91.6%)2 (2018: 170%) Business model 24 Our key performance indicators 26 Finance review 28 Operating Capital Market overview 43 profit1 returns5 Operating review 44 Risk management 52 GOVERNANCE £546.9m £447.0m Sustainability 59 (2018: £606.4m)2 (2018: £401.3m) Approach to ESG6 and disclosure 72 Governance Chairman’s introduction 74 Notes: 1. See glossary on pages 222 to 224 for definitions and Appendix A Board of Directors 76 – Alternative performance measures on pages 225 to 228 for reconciliation to financial statement line items. Executive Committee 79 2. Results for the year ended 31 December 2018 have been restated to reflect the fully retrospective adoption of IFRS 16 ‘Leases’, see note 44. Corporate Governance report 81 3. A reduction in the ratio represents an improvement as a proportion of net earned premium, while an increase in the ratio represents a deterioration. Committee reports 93 See glossary on page 222 for definitions. 4. Estimates based on the Group’s Solvency II partial internal model. Directors’ remuneration report 106 5. See page 35 for the dividend policy. Directors’ report 139 6. ESG refers to environmental, social and governance issues. Financial statements Contents 143 Independent Auditor’s report 144 Consolidated financial statements 153 Notes to the consolidated 158 FINANCIAL STATEMENTS financial statements For more information please visit Parent Company financial 212 www.directlinegroup.co.uk statements Notes to the Parent Company 214 financial statements Other information Additional information 220 Glossary and appendices 222 Forward-looking statements 229 disclaimer Contact information 230 WWW.DIRECTLINEGROUP.CO.UK 1 when it matters 2 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019 We’ve built a new technology platform to better support customers who become ill on holiday, easily accessible through any device. PLEASE SEE DETAILS ON PAGE 49. We operate across four market segments, providing peace of mind to our customers through a range of products, supported by a caring team. Motor Home We are Britain’s leading personal motor insurer We are one of Britain’s leading personal home measured by in-force policies1, mainly represented insurers measured by in-force policies1. We reach through our well-known brands Direct Line, our customers by selling home insurance products Churchill, Privilege, and our new Darwin brand, through our brands Direct Line, Churchill and Privilege, and also through our partners. and our partners RBS and NatWest. Rescue and other personal lines Commercial We are one of the leading providers of rescue, We protect commercial businesses through our travel and pet insurance in the UK. Green Flag is brands, NIG, Direct Line for Business and Churchill. NIG the third largest roadside recovery provider2. We are sell products exclusively through brokers operating also the second largest travel and the fourth largest across the UK, whilst Direct Line for Business sell pet insurer3, as well as providing insurance for insurance policies direct via phone and online and mid-to-high-net worth customers. Churchill sell insurance policies direct via phone, online and through price comparison websites (“PCWs”). Notes: 1. Includes Direct Line, Churchill, Privilege, Darwin and partner brands: RBS, NatWest, © Ipsos MORI Financial Research Survey (FRS) six months ended January 2020, 13,999 adults interviewed for motor insurance and 12,749 for home insurance. 2. Mintel Vehicle Recovery – UK, September 2019. 3. Mintel Pet Insurance August 2019 & Mintel Travel Insurance February 2020. WWW.DIRECTLINEGROUP.CO.UK 3 Darwin, our first new personal lines brand in 25 years, uses innovative pricing technology to provide great value insurance for customers. PLEASE SEE DETAILS ON PAGE 22. 4 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019 well known and cutting-edge Our strong brands, each with their own personality, enable our customers to choose the right cover to protect their cars, homes, holidays, businesses and pets. Direct Line stands for Churchill effortlessly takes Green Flag offers an hassle-free insurance care of real life problems, award-winning service that fixes problems like so customers can relax. at a lower cost, using local no other. Our insurance Our insurance products garages across the UK products are available are available by phone, to provide a smarter by phone and online. online and through PCWs. alternative solution for breakdown. Available direct, via our insurance brands and through PCWs. Direct Line for Business Darwin is an evolution Privilege offers quick and keeps up with the in motor insurance, efficient insurance at the changing business smart and simple, the way best price. Our insurance needs of small and it should be. Our motor products are available medium-sized enterprises. insurance is available direct and through PCWs. Our business insurance through PCWs. products are available by phone and online. DLG Partnerships DLG Auto Services is NIG are experts at specialises in providing our network of bodyshops commercial insurance. personal insurance as across the UK, repairing We sell via brokers across well as roadside rescue more than 90,000 cars a number of specialisms and recovery products every year for our including small and to some of the UK’s most customers. medium-sized enterprise, well-known brands. real estate and agriculture. WWW.DIRECTLINEGROUP.CO.UK 5 Direct We give our customers a reason to shop direct with our powerful brands and great propositions, because we want to deliver excellent value for our customers. Price comparison websites Strong brands and propositions are important but so are great prices. Our IT investment aims to improve our speed to market and enhance our pricing capabilities for customers. Partnerships however it We partner with big brands to offer insurance to their customers and look suits them for ways to innovate to give people choice about how they insure the things they love. Brokers Consumers’ buying behaviours Many small and medium-sized are changing and we want to commercial enterprises be everywhere our customers choose to arrange their insurance using shop. That’s why our insurance brokers who is offered through the four understand their specific needs. We have main routes to market. an extensive, well- established broker network that offer our NIG insurance products to these customers. 6 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019 Our partnership with Starling Bank is reaching new customers through a simple digital system making it easy to apply for insurance. PLEASE SEE DETAILS ON PAGE 23. WWW.DIRECTLINEGROUP.CO.UK 7 INVESTMENT CASE A strongly cash generative business Total shareholder return (%) 10 10 120 100 1 1 1 1 1 1 2015 2015 2016 2017 2018 2019 L TSE 0 We have a track record of delivering strong returns to shareholders, having distributed £2.2 billion in dividends over the past five years. This together with our share price performance has delivered an attractive total shareholder return. G Operating profit 2019 (£m) 528.9 54.6 39.1 436.0 3,203.1 546.9 586.6 1,651.6 150.6 302.6 Rescue and other Commercial Motor Home personal lines See page 182 8 DIRECT LINE GROUP ANNUAL REPORT & ACCOUNTS 2019 STRATEGIC REPORT Transforming to drive competitiveness GOVERNANCE We are transforming our technology and changing the way we work to increase the competitiveness of our business. Our aim is to improve the quality of the earnings of the group, with a greater proportion coming from current-year business, reflecting the Group’s improved competitiveness. WE ARE DRIVING TO ACHIEVE THIS THROUGH OUR SIX NEW STRATEGIC OBJECTIVES: Best Win on Extend Technical Nimble Great at direct price our reach edge and cost people comparison efficient websites See pages 15 and 21 to 23 OUR FINANCIAL TARGETS FINANCIAL STATEMENTS Costs: Current-year Combined operating Return on tangible Expense ratio1 operating profit1: ratio (“COR”)1: equity (“RoTE”)1: of 20% in 2023 At least 50% Between 93-95% At least 15% per annum by 20213 throughout over the long term the medium term4 2019: 23.2%2 2019: 39% 2019: 93.5% 2019: 20.8% See page 10 Notes: 1. See glossary on pages 222 to 224 for definitions and Appendix A – Alternative performance measures on pages 225 to 228 for reconciliation to financial statement line items. 2. Applies to operating expenses excluding restructuring and one-off costs. 3. Excludes restructuring and one-off costs. 4. Normalised for weather and changes to the Ogden discount rate. WWW.DIRECTLINEGROUP.CO.UK 9 CHAIRMAN’S STATEMENT Transforming our business for the long term 2019 was a year of delivering good results in a competitive environment and of building the capability to underpin the 2019 was an exciting year for Direct Line Group as long-term we launched three major new IT platforms aimed at improving the service we provide to our customers, sustainability announced the next stage of our strategy at the Capital Markets Day in November 2019, redefined our vision and of our business.