Direct Line Insurance Group plc Group Insurance Line Direct Annual Report &Accounts2018 Annual Report & Accounts 2018 & Accounts Report Annual Contents Strategic report Governance Other information 1 Group highlights 60 Chairman’s introduction 189 Additional information 2 Our Group 62 Board of Directors 191 Glossary and appendices 4 Our brands 65 Executive Committee 195 Forward-looking statements 6 Our segments 66 Corporate Governance report disclaimer 8 Our routes to market 76 Committee reports 196 Contact information 10 Our investment case 88 Directors’ remuneration report 12 Chairman’s statement 118 Directors’ report 15 Chief Executive Officer’s review Financial statements 18 Market overview 122 Contents 19 Strategy 123 Independent Auditor’s report 22 Our business model 131 Consolidated financial statements 24 Our key performance indicators 136 Notes to the consolidated 26 Finance review financial statements 38 Operating review 182 Parent Company financial statements 44 Risk management 184 Notes to the Parent Company 50 Responsibility financial statements 56 People and culture ESG – our approach Information on our environmental, social and governance (“ESG”) related activities is structured according to the five pillars of our approach to responsibility. These pillars, activities in the year relating to responsibility, and where to find ESG related information are set out in the Responsibility section. This also contains information on how we satisfy the requirements of the Non-Financial Reporting Directive. For more information please visit Read more on pages 50 – 51 www.directlinegroup.co.uk/en/ investors/esg.html Group highlights STRATEGIC REPORT Our performance reflects GOVERNANCE our focus on satisfying customers with the aim of delivering sustainable, profitable growth FINANCIAL STATEMENTS Profit before tax Return on tangible equity1 £582.6m 21.5% (2017: £539.0m) (2017: 23.0%)2 Combined Solvency operating ratio1,3 capital ratio1,4 91.7% 170% (2017: 90.8%)2 (2017: 165%) Operating profit1 Dividend per share5 £601.7m 29.3p (2017: £642.8m)2 (2017: 35.4p) Notes: 1. See glossary on pages 191 to 192 for definitions and Appendix A – Alternative performance measures on pages 193 and 194 for reconciliation to financial statement line items. 2. Results for the year ended 31 December 2018 are based on total Group operations including restructuring costs and the Run-off segment. Comparative data has been re-presented accordingly to include restructuring costs and Run-off profits within the Motor segment. The adjusted profit after tax reported in 2017 was £462.9 million and the return on tangible equity was 21.7%. 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. See glossary on page 191 for definitions. 4. Estimates based on the Group’s solvency II partial internal model. The 2017 comparative has been updated to reflect the amounts in the Group Solvency and Financial Condition Report for the year ended 31 December 2017. 5. See page 32 for the dividend policy. WWW.DIRECTLINEGROUP.CO.UK 1 One Group We give people the protection they need to do the things they love in life. Whether that be driving their car, enjoying their home and possessions, exploring the world, caring for their pets or building their businesses. Our strength lies in the diversity of our propositions, offering a range of products, powerful brands and multiple routes to market, underpinned by a determination always to aim higher for our customers, people, shareholders and wider stakeholders. WWW.DIRECTLINEGROUP.CO.UK 3 Eight brands Direct Line stands for speed, simplicity and a Churchill is one of Britain’s most recognisable common-sense human touch. We sell products direct brands, providing car, home, business, pet and travel to customers by phone and online. insurance. Our products are available by phone and Direct Line customers want a premium product with online, including price comparison websites. exceptional customer care that is tailored to their Churchill customers are looking for a dependable needs at a competitive price. partner which is reliable, trustworthy, and will spend time making sure they are happy. Direct Line for Business understands that our Green Flag is our roadside rescue and recovery customers’ businesses are their livelihoods, so the service. It is a standalone and optional product offered right type of cover is vital. Our policies cover a alongside motor insurance across all of our brands. range of trades, from start-ups, to growing businesses, Green Flag customers receive an award-winning from renting out a property to working as a single breakdown service at a much cheaper price than tradesman. We sell products direct via phone its two biggest rivals. and online. Privilege targets customers who mainly buy through NIG is our commercial insurance brand dedicated price comparison websites. to the broker market and is focused on a number Privilege customers want a quick and efficient service of specialisms including small and medium-sized at the best price. enterprises, agriculture and real estate. DLG Partnerships is the Group’s partnerships arm. DLG Auto Services is the Group’s UK network It specialises in providing personal insurance, and of bodyshops, repairing around 90,000 accident roadside rescue and recovery products to some damaged vehicles every year, and supports our well-known brands. seven day repair proposition for Direct Line customers. Find more details on our website WWW.DIRECTLINEGROUP.CO.UK 5 Four segments Motor Home Rescue and other Commercial personal lines We are Britain’s leading We are one of Britain’s We are one of the leading We protect commercial personal motor insurer leading personal home providers of rescue and other businesses through our measured by in-force insurers measured by personal lines insurance in brands, NIG, Direct Line for policies1, mainly represented in-force policies1. We reach the UK2,3, with 7.5 million Business and Churchill. NIG through our well-known our customers by selling home in-force policies. This includes sells its products exclusively brands Direct Line, Churchill insurance products through providing roadside assistance through brokers operating and Privilege, and also our brands Direct Line, and recovery for customers across the UK. through our partners. Churchill and Privilege, through Green Flag, the and our partners RBS, UK’s third largest roadside NatWest and Prudential. recovery provider2. We offer customers protection for their holidays and pets and are the third largest travel and the third largest pet insurer3. We also offer insurance packages tailored for mid-to high-net worth customers. Gross written Gross written Gross written Gross written premium premium premium premium £1,671.2m £606.9m £422.8m £511.0m Operating Operating Operating Operating profit profit profit profit £415.2m £83.1m £43.4m £60.0m Find more details on pages 38 – 43 Notes: 1. Includes Direct Line, Churchill, Privilege and partner brands: RBS, NatWest, Prudential and Sainsbury’s © GfK Financial Research Survey six months ending January 2018, 14,063 adults interviewed for motor insurance and 12,214 for home insurance. 2. Mintel Vehicle Recovery – UK, September 2018. 3. Mintel Pet Insurance – UK, August 2018 and Mintel Travel Insurance – UK, February 2019. WWW.DIRECTLINEGROUP.CO.UK 7 Three routes to market Every customer is unique and we want our products to reach customers wherever they shop. But we don’t stop there. We also want to give them choices about their insurance and we offer our products through the three main routes to market: Price comparison Direct websites Partnerships We give our customers a Strong brands and We partner with big brands reason to come direct with propositions are important to offer insurance to their our strong brands and great but so are great prices. We customers and look for propositions, because we are investing in the latest ways to be innovative to want to deliver excellent generation IT to improve give people choice about value for our customers our speed to market and how they insure the things and shareholders. pricing capabilities. they love. 1 million 710,000 173,000 Motor partnerships customers drove Policies sold their new car Own brand through price away with our policies added comparison complimentary since 2014 websites1 insurance2 Find more details on page 19 Note: 1. Number of new policies sold through Churchill and Privilege for Motor and Home in 2018. 2. www.directlinegroup.co.uk/en/brands/dlg-partnerships.html WWW.DIRECTLINEGROUP.CO.UK 9 Six years of returns Creating shareholder value through customer focus We have a track record of delivering strong returns to shareholders having distributed £2.5 billion in dividends over the past six years. This together with our share price performance has delivered an attractive total shareholder return. Total shareholder return (%) 300 DLG 250 200 150 FTSE 350 (excluding investment trusts) 100 16 Oct 2012 31 Dec 2012 31 Dec 2013 31 Dec 2014 31 Dec 2015 31 Dec 2016 31 Dec 2017 31 Dec 2018 Our successful customer focused strategy, built around our ‘rocket’ (see page 19), also enables us to invest in future capabilities with the aim of sustaining our strong performance. Medium-term financial targets Combined Return on Grow our Maintain operating tangible equity regular dividend solvency capital ratio 93% – 95% of at least 15% in line with around the business middle of the growth 140% – 180% solvency II target