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Annual report

Providing stability for our customers and shareholders

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 partnership capabilities are bearing fruit.

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Financial highlights
  • Gross written premium for Ongoing operations up 3.9% to £3,274.1m (2015: £3,152.4m), driven by growth in Motor and Home own-brand in-force policies (up 4.3%)
  • 2016 results reflect the one-off impact of using the new Ogden discount rate of minus 0.75%. Operating profit from Ongoing operations of £403.5m (pre-Ogden discount rate reduction: £578.6m; 2015: £520.7m) and profit before tax of £353.0m (pre-Ogden: £570.3m; 2015: £507.5m). Return on tangible equity of 14.2%, (pre-Ogden: 20.2%; 2015: 18.5%)
  • Combined operating ratio from Ongoing operations of 97.7% (pre-Ogden: 91.8%; 2015: 94.0%), increased as a result of the reduction in the Ogden discount rate, partially offset by improved current-year underwriting performance and favourable weather claims. Adjusted for normal weather and before the Ogden discount rate change, the combined operating ratio was 93.5%, towards the lower end of the target range of 93% to 95%
  • 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 ratio post dividend is 165%, above the middle of the Group’s risk appetite range of 140% – 180% (pre-dividend: 174%)
Strategic and operational highlights
  • Direct Line Motor and Home new business growth at the highest annual level since IPO, demonstrating the success of the investment in brand, proposition and customer service
  • Total costs for Ongoing operations of £923.7m broadly flat year on year before non-cash impairment charge of £39.3m, after absorbing £24.1m Flood Re levy and supporting growth in Motor and Home own brands
  • Extended Home and Private Insurance partnership with RBS for a further three years, and implemented faster and easier sales journeys using cloud-based technology making connectivity and future change easier
  • Invested in innovation, including partnership with PSA Peugeot Citroën for telematics extended for 4 more years, introducer role developed with Tesla, and MOVE_UK project brought into data collection stage
  • Received approval from the Prudential Regulation Authority (“PRA”) to use the Group’s Solvency II PIM
A great retailer

The differentiation of our brands remained a key focus in 2016 as we broadened our proposition and enhanced customer experience.

For Direct Line we have built strong foundations since our ‘reboot’ of the brand just over two years ago, introducing new enhancements such as a three-hour emergency plumbing service for our Home Plus customers. Our success in articulating this broadened proposition directly to customers was recognised when we won the Gold Institute of Practitioners in Advertising award for marketing effectiveness. Outside the personal lines sector, Direct Line for Business continued to grow strongly in the year, highlighting the value of this brand asset.

Our effectiveness on PCWs via the Churchill and Privilege brands has also increased, particularly in Home as we improved the customer journey. This contributed to strong new sales growth through this channel. Our Green Flag brand also continued to perform well, with our new 'Alert Me' and 'Rescue Me' features on the app improving customers' rescue experience.

Operating as a smart and efficient manufacturer

We aim to improve efficiency and effectiveness across the organisation every day to deliver better claims and customer service at lower cost.

Our underlying costs (excluding higher non-cash impairments to intangible assets than in recent years) were stable compared to 2015, having absorbed the £24m Flood Re levy and still supporting 4.3% in-force policy growth in our Motor and Home own brands. Excluding the impairment, H2 2016 costs were lower than H2 2015, primarily due to lower claims handling expenses.

In our Partnerships, we extended our Home and Private Insurance arrangement with RBS for a further three years and our Travel insurance contract with Nationwide Building Society until the end of 2018.

We agreed an extension of our Home and Motor insurance partnership with Prudential for a further two years. As part of this, we will renew policies under the Prudential brand until 2019. We’ve also launched our first Affinity Partnership scheme to offer access to Churchill-branded Home and Motor policies to Prudential Group customers who do not currently have such insurance with us. This partnership demonstrates our ability to deliver tailored propositions to meet the needs of our partners and their customers.

The Group also increased the number of accident repair centres it owns to 18 in 2016 strengthening its ability to control indemnity spend and improve customer experience.

Leading and disrupting the market

We continued to build on our strong market position by identifying and investing in developments we believe can contribute to future growth, launching new and exciting products and services to put us at the forefront of disruptive market changes. In 2016, partnerships were particularly key to growing our offerings.

We have extended our partnership with PSA Finance UK (part of Peugeot Citroën) for a further four years, allowing us to create propositions based on the technology being fitted to the car. We are working with Tesla to understand the role advanced technology and driving aids can play in enhancing road safety and therefore insurance. Furthermore, in 2017 Tesla became an introducer appointed representative to be able to refer customers to Direct Line to insure their Tesla.

In 2016, we formed a partnership called MOVE_UK with the UK government, technology providers and car manufacturers to accelerate the development, market readiness and deployment of Automated Driving Systems (“ADS”). With ADS systems observing and recording in the background while MOVE_UK vehicles are driven normally, this is a unique opportunity to learn how ADS technology would respond in real life situations.

Within Commercial, we continued to be recognised for our leading capabilities in eTrade and direct Commercial insurance, both of which are expected to continue to grow.

Harnessing the power of data and technology

Technology remains at the heart of our operations, as we continue upgrading our IT systems and capabilities, improving the digital offering, customer experience and operational efficiency While progress has been made in each of these three areas, implementation and integration of a range of new IT systems is inherently complex and challenging. We remained focused on adopting the right capabilities and will take the time necessary to do so.

By implementing integrated systems that are flexible and efficient, over time we aim to reduce costs while improving customer interactions such as self-service. We also enjoy a wealth of data from being a major insurer for a number of years, which we can use to make our business better for our customers. Ongoing areas of focus include developing future capability, and managing risks associated with IT systems’ stability and cyber security.

Developing our culture and capability

We are continuing to invest in our employees’ skills. This will help us to improve effectiveness and customer experiences. We aim to create excellent Group-wide employee engagement by focusing on leadership and people management at all levels. This has helped improve our employee engagement metrics year on year.

We are committed to broadening the diversity of our talent pool and this year signed up to the Women in Finance Charter, seeking to increase the number of women in senior roles in the organisation. In addition, we launched a new graduate scheme and apprentice recruitment drive to build a stronger organic talent pool.

We also launched a major new training programme for our people, designed to help flex their approaches to improve engagement with customers. Not only has this strengthened our front office staff skills, as they handle customers in often difficult situations, but it has also strengthened the way our people interact with one another. This has in turn helped the engagement rate to continue to improve through the year from an already improved level in 2015.

Maintaining strong capital and risk management

Our risk and capital management policy seeks to maintain an appropriate level of capital and solvency for the risk appetite agreed by the Board to support our business, while aiming where to grow dividends annually in real terms.

During 2016, we received approval from the PRA to use the Group’s PIM, successfully concluding a multi-year project. We have embedded this model at the centre of the risk management framework and now use it to report our Solvency II capital coverage. We have used the PIM to establish a clear capital target range which provides additional security over the regulatory SCR.

We were well prepared for the UK’s referendum on leaving the European Union (“EU”) and have actively managed the impacts from the subsequent volatile financial markets. We are a UK-based business underwriting risk within the UK, and the day-to-day operations remain largely unaffected. We continue to monitor the consequences of the devaluation of Sterling and uncertain financial markets.


Click here to read the full Q&A with Paul Geddes

Annual Report & Accounts 2016

Annual Report 2016


Strategic report


Directors' remuneration report



Read Full Q&A

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