Annual ReportAnnual 2015 & Accounts Direct Line Insurance Group plc Annual Report & Accounts 2015 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. That is why our customers are at the centre of everything we do. For all the latest news and announcements visit www.directlinegroup.com Contents Strategic report Governance Financial statements 2 Group highlights 46 Chairman’s introduction 100 Contents 4 Group at a glance 48 Board of Directors 101 Independent Auditor’s report 6 Market overview 50 Executive Committee 106 Consolidated 8 Business model 51 Corporate governance report financial statements 10 Chairman’s statement 58 Committee reports 111 Notes to the consolidated financial statements 12 Chief Executive Officer’s review 70 Directors’ remuneration report 164 Parent Company 14 Our strategy 96 Directors’ report financial statements 24 Our key performance indicators 167 Notes to the Parent Company 26 Risk management financial statements 30 Corporate social responsibility 34 Operating review Other information 38 Finance review 172 Additional information 174 Glossary 176 Forward-looking statements disclaimer Contact information Our strategic pillars p18 p20 p22 Smart & efficient Lead & disrupt Great retailer manufacturer the market www.directlinegroup.com 1 Group highlights Delivering for our customers and shareholders We achieved good results in 2015 while making progress on implementing our strategy. We remained focused on operating efficiency and disciplined underwriting which helped us to improve operating profit from ongoing operations. Financial highlights • Gross written premium from ongoing operations1 up 1.7% to £3,152.4 million, with 4.8% growth in Motor for 2015 and 7.1% in the fourth quarter. Motor and Home own brands in-force policies1 up 1.4% • Operating profit from ongoing operations increased to £520.7 million for 2015 (2014: £506.0 million). Combined operating ratio1 from ongoing operations of 94.0% for 2015, an improvement of 1.0 percentage point • Return on tangible equity1 of 18.5% for 2015 (2014: 16.8%). Profit before tax for continuing operations1 increased to £507.5 million (2014: £456.8 million) • Results benefited from our disciplined underwriting, prior-year reserve releases from ongoing operations of £378.9 million (2014: £397.6 million) which were higher than expected, together with lower costs, partially offset by higher claims from major weather events and lower volumes • 4.5% increase in final dividend per share to 9.2 pence per share and additional special dividend of 8.8 pence per share. Total dividends for 2015, including special interim dividend of 27.5 pence per share following sale of International division, of 50.1 pence per share (2014: 27.2 pence per share) Strategic and operational highlights • Investment in brand differentiation through further enhancements, a succession of initiatives to Direct Line proposition and improved trading capability across Churchill and Privilege, particularly on price comparison websites • Improved customer retention rates for motor and home products, and Net Promoter Score for Direct Line brand • Reduced total costs1 for ongoing operations by 4.6% in 2015 while investing in technical pricing, claims management and self-service initiatives • Doubled Motor telematics insurance in-force policies; and growth in Commercial in-force policies through eTrade and direct channels • Invested in digital capability, including the roll out of new quote and buy journeys for Home and Green Flag insurance products, and development of next generation of customer systems Note: 1. See glossary on pages 174 and 175 2 Direct Line Group Annual Report & Accounts 2015 Strategic report Return on tangible equity1 Combined operating ratio1 Gross written premium1 (%) Ongoing operations1 (%) Ongoing operations (£m) 1 8.5% 94.0% £3,152.4m Governance 18.5 Target 95.2 95.0 94.0 16.8 16.0 3,222.1 3,222.1 At least 15% 3,152.4 3,099.4 Financial statements Financial 13y 14y 15y 13y 14y 15y 13y 14y 15y Total costs1 Operating profit Profit before tax Ongoing operations (£m) Ongoing operations (£m) Continuing operations1 (£m) £884.7m £520.7m £5 07. 5m 5 0 7. 5 520.7 509.9 506.0 506.0 985.0 456.8 9 2 7. 7 884.7 4 0 7. 3 13y 14y 15y 13y 14y 15y 13y 14y 15y Dividend per share2 Adjusted diluted earnings Basic earnings per share (pence) per share1 Continuing operations (pence) (pence) 50.1p 26.6p 27.9p 2 7. 5 2 7.9 26.6 25.5 25.0 24.0 20.8 14.0 8.8 8.0 13.2 13.8 12.6 13y 14y 15y 13y 14y 15y 13y 14y 15y Notes: 1. See glossary on pages 174 and 175 2. The Board is proposing a final dividend of 9.2 pence per share, making a total regular dividend for 2015 of 13.8 pence per share. A first special dividend of 27.5 pence per share was paid in relation to the sale of the International division. In addition, the Board has resolved to pay a further special interim dividend of 8.8 pence per share. www.directlinegroup.com 3 Group at a glance Protecting our customers We have multiple brands, products and distribution channels. Each allows our customers to choose the right cover to protect their cars, homes, holidays, businesses and pets. Personal lines Motor We are Britain’s leading personal motor insurer measured by in-force policies1, mainly represented through our highly £1,406.7m 3.7m Gross written premium In-force policies recognised brands Direct Line, Churchill and Privilege, and also through our partners. We insure around one in seven cars on the road, representing 3.7 million in-force policies. 92.4% £338.0m Combined operating ratio Operating profit Home We are Britain’s leading personal home insurer measured by in-force policies1 £866.3m 3.4m . We reach our customers by selling Gross written premium In-force policies home insurance products through our brands, Direct Line, Churchill and Privilege, and our partners – Sainsbury’s Bank, RBS, NatWest and Prudential. 92.2% £109.9m Combined operating ratio Operating profit Rescue and other personal lines We are one of the leading providers of rescue and other £394.1m 8.3m 2,3 personal lines insurance in the UK with 8.3 million in-force Gross written premium In-force policies policies. This includes providing roadside assistance and recovery for customers through Green Flag, the UK’s third- largest roadside recovery provider2. We also offer customers protection for their pets and holidays, and we are the third 91.2% £52.0m Combined operating ratio Operating profit largest insurer in the UK for these insurance products3. Commercial We protect small and medium-sized enterprises (“SMEs”) through our brands, NIG, Direct Line for Business and Churchill, and through our partners RBS and NatWest. £485.3m 655k NIG sells its products exclusively through brokers operating Gross written premium In-force policies across the UK. Direct Line for Business provides business, van and landlord insurance products direct to customers. Churchill sells van insurance direct to customers and through 104.5% £20.8m price comparison websites (“PCWs”). Combined operating ratio Operating profit Notes: 1. Includes Direct Line, Churchill, Privilege and partner brands: RBS, Nationwide (home only), NatWest, Prudential and Sainsbury’s © GfK Financial Research Survey (FRS) 6 months ending December 2015, 13,729 adults interviewed for motor insurance and 13,148 for home insurance 2. Mintel Vehicle Recovery – UK, September 2015 3. Mintel Pet Insurance – UK, August 2015 and Mintel Travel Insurance – UK, February 2015 4 Direct Line Group Annual Report & Accounts 2015 Strategic report Governance Financial statements Financial Our brands Direct Line has maintained its brand Churchill is a household name. Privilege targets customers who heritage by selling products direct We market our products by phone mainly buy through PCWs. We focus to customers exclusively by phone and internet, including PCWs. on making sure they experience and internet. We target customers We target customers who have a quick service at the best price. with a high affinity to the brand, a high affinity to the brand, and and focus on providing a fast and who need an extra helping hand. straightforward service. www.directline.com www.churchill.com www.privilege.com Green Flag is our roadside Direct Line for Business NIG is our specialist Brand Partners is the rescue and recovery provider. is an extension of our Direct commercial insurance brand, Group’s partnerships arm. We sell it as a standalone Line brand. It is our direct focused on SMEs. We sell We specialise in providing service and an additional commercial insurance brand our products through brokers, personal lines insurance, optional product alongside for small businesses that have including an in-house and roadside rescue and motor insurance. straightforward commercial intermediary that arranges recovery products to some insurance requirements. RBS1 and NatWest well-known brands. commercial insurance. www.greenflag.com www.directlineforbusiness.co.uk www.nig.com Note: 1. The Royal Bank of Scotland Group plc, including National Westminster Bank plc www.directlinegroup.com 5 Market overview Our changing environment We operate in a dynamic environment and the way we interact with customers is evolving. Customer expectations of insurance are being shaped by changes both inside and outside the industry with technology and regulation important parts of this. Providing excellent customer service and managing claims remain key aspects. Digitalisation New services and escalating risk The retail world continues to digitalise. Insurance needs to keep pace with customers who expect great service using different types of devices, and to interact directly with products and services themselves. Customers are willing to buy multiple products from one source, where businesses can provide what the customer needs and wants.