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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Direct Line Insurance Group Plc | LSE:DLG | London | Ordinary Share | GB00BY9D0Y18 | ORD 10 10/11P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -3.00 | -1.56% | 189.50 | 189.70 | 190.00 | 192.40 | 187.20 | 190.60 | 7,642,593 | 16:35:01 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Fire, Marine, Casualty Ins | 2.86B | 222.9M | 0.1700 | 11.18 | 2.49B |
TIDMDLG
RNS Number : 3938W
Direct Line Insurance Group PLC
01 August 2018
Hot Features
Premium
Direct Line Insurance Group plc
Half Year Report 2018
1 August 2018
Successful H1 2018: strategic progress on track
Paul Geddes, CEO of Direct Line Group, commented
"This is a good set of results - growing our own brand policies and profits
(normalised for weather) in a competitive, albeit to date, rational market -
again showing the strength of our business model. We have also made progress
on our strategic initiatives which we believe will improve our competitiveness
in each of our channels and we are focused on improving our efficiency. This
strategic agenda, combined with our disciplined value over volume focus, gives
us the confidence in our outlook, for us to reiterate our financial targets.
"As you will have seen from our announcement today, I will step down as Chief
Executive Officer in the summer of 2019. I have been privileged to lead the
Group over a long period of transformation. As I approach my tenth anniversary,
it is right to put a successor in place to lead the company in the years ahead.
In the meantime, we have a very busy and exciting agenda, which I look forward
to delivering."
Results summary
H1 H1
2018 2017(1)
GBPm GBPm Change
------------------------------------------------------ -------- ---------- ---------
Gross written premium 1,610.3 1,694.2 (5.0%)
Excluding Nationwide and Sainsbury's(2) 1,604.6 1,596.6 0.5%
Of which direct own brands 1,099.0 1,063.9 3.3%
Operating profit 303.1 359.7 (15.7%)
Commission ratio(3) 6.5% 8.9% (2.4pts)
Expense ratio(3) 24.4% 24.9% (0.5pts)
Combined operating ratio(3) 93.0% 88.6% 4.4pts
Profit before tax 293.8 341.4 (13.9%)
Return on tangible equity annualised(4) 21.8% 26.6% (4.8pts)
Dividend per share - interim (pence)(5) 7.0 6.8 2.9%
-------- ---------- ---------
30 Jun 31 Dec
2018 2017 Change
Solvency capital ratio post-dividend - estimated(6) 169% 165% 4pts
------------------------------------------------------ -------- ---------- ---------
Highlights
* Direct own brand premiums up 3.3% driven primarily by
continued growth in Motor, also up 3.3% compared to
H1 2017. Total Group premiums excluding Nationwide
and Sainsbury's grew 0.5% despite reductions in Motor
premium rates.
* Normalised for weather, operating profit was up
slightly; H1 2017 also included GBP49 million of
benefit from revised Ogden reserve releases. The
headline decline in operating profit of GBP56.6
million compared to the prior year is driven by
higher weather-related claims (H1 2018: GBP75.0
million, H1 2017: GBP9.0 million).
* Expense ratio down 0.5 percentage points as costs
remained broadly stable. Commission ratio lower as
the Group's business mix continued to shift towards
direct own brands.
* Continued positive progress with strategic
initiatives including the launch of two further
Direct Line differentiating propositions, signing of
a new Motor partnership deal and, in July, reaching
over 500 trades on the Direct Line for Business
platform. Programme to deliver latest generation
systems benefiting both business and customers on
track.
* Interim dividend of 7.0 pence, in line with the
Group's policy which aims to grow the dividend in
line with business growth.
* Reiteration of the current financial targets for 2018
and over the medium term: of achieving a combined
operating ratio in the range of 93% to 95% adjusted
for normal weather and assuming no further change to
the Ogden discount rate, supported by reductions in
expense and commission ratios. For 2018, the Group
expects total investment return in the region of
GBP150 million.
For further information, please
contact
Andy Broadfield Lisa Tremble
Director of Investor Relations Head of External Affairs
Tel: +44 (0)1651 831022 Tel: +44 (0)1651 834211
Notes:
1. Results for the period ended 30 June 2018 are based on total Group operations
including restructuring and Run-off. Comparative data has been re-presented
accordingly to include restructuring costs and Run-off profits within Motor
segment.
2. Nationwide and Sainsbury's exited Home partnerships.
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 for definitions.
4. See glossary for definitions and appendix A - Alternative performance measures
for reconciliation to financial statement line items.
5. The Group's dividend policy states its expectation that one-third of the
annual dividend will generally be paid in the third quarter as an interim dividend
and two-thirds will be paid as a final dividend in the second quarter of the
following year.
6. Estimates based on the Group's solvency II partial internal model.
Forward-looking statements disclaimer
Certain information contained in this document, including any information as
to the Group's strategy, plans or future financial or operating performance,
constitutes "forward-looking statements". These forward-looking statements may
be identified by the use of forward-looking terminology, including the terms
"aims", "ambition", "anticipates", "aspire", "believes", "continue", "could",
"estimates", "expects", "guidance", "intends", "may", "mission", "outlook",
"over the medium term", "plans", "predicts", "projects", "propositions", "seeks",
"should", "strategy", "targets" or "will" or, in each case, their negative or
other variations or comparable terminology, or by discussions of strategy, plans,
objectives, goals, future events or intentions. These forward-looking statements
include all matters that are not historical facts. They appear in a number of
places throughout this document and include statements regarding the intentions,
beliefs or current expectations of the Directors concerning, among other things:
the Group's results of operations, financial condition, prospects, growth, strategies
and the industry in which the Group operates. Examples of forward-looking statements
include financial targets and guidance which are contained in this document
specifically with respect to the return on tangible equity, solvency capital
ratio, the Group's combined operating ratio, prior-year reserve releases, cost
reduction, reductions in expense and commission ratios, investment income yield,
net realised and unrealised gains and risk appetite range. By their nature,
all forward-looking statements involve risk and uncertainties because they relate
to events and depend on circumstances that may or may not occur in the future
or are beyond the Group's control.
Forward-looking statements are not guarantees of future performance. The Group's
actual results of operations, financial condition and the development of the
business sector in which the Group operates may differ materially from those
suggested by the forward-looking statements contained in this document, for
example directly or indirectly as a result of, but not limited to, UK domestic
and global economic business conditions, the outcome of the negotiations relating
to the UK's withdrawal from the European Union, market-related risks such as
fluctuations in interest rates and exchange rates, the policies and actions
of regulatory authorities (including changes related to capital and solvency
requirements or the Ogden discount rate), the impact of competition, currency
changes, inflation and deflation, the timing impact and other uncertainties
of future acquisitions, disposals, joint ventures or combinations within relevant
industries, as well as the impact of tax and other legislation and other regulation
in the jurisdictions in which the Group and its affiliates operate. In addition,
even if the Group's actual results of operations, financial condition and the
development of the business sector in which the Group operates are consistent
with the forward-looking statements contained in this document, those results
or developments may not be indicative of results or developments in subsequent
periods.
The forward-looking statements contained in this document reflect knowledge
and information available as of the date of preparation of this document. The
Group and the Directors expressly disclaim any obligations or undertaking to
update or revise publicly any forward-looking statements, whether as a result
of new information, future events or otherwise, unless required to do so by
applicable law or regulation. Nothing in this document should be construed as
a profit forecast.
Neither the content of Direct Line Group's website nor the content of any other
website accessible from hyperlinks on the Group's website is incorporated into,
or forms part of, this document.
Financial summary
----------------------------------------------------------------------------
H1 H1
2018 2017(1)
GBPm GBPm Change
---------------------------------------------- ------- --------- --------
Total Group
In-force policies (thousands) 15,326 15,811 (3.1%)
Of which direct own brands (thousands) 7,018 6,742 4.1%
Gross written premium 1,610.3 1,694.2 (5.0%)
Of which direct own brands 1,099.0 1,063.9 3.3%
Net earned premium 1,559.6 1,547.5 0.8%
Underwriting profit 108.6 177.1 (38.7%)
Instalment and other operating income 99.1 89.6 10.6%
Investment return 95.4 93.0 2.6%
---------------------------------------------- ------- --------- --------
Operating profit 303.1 359.7 (15.7%)
Finance costs (9.3) (18.3) 49.2%
Profit before tax 293.8 341.4 (13.9%)
Tax (55.0) (65.9) 16.5%
Profit after tax 238.8 275.5 (13.3%)
Key metrics - total Group
Current-year attitional loss ratio(2) 70.5% 68.8% 1.7pts
Loss ratio(2) 62.1% 54.8% 7.3pts
Commission ratio(2) 6.5% 8.9% (2.4pts)
Expense ratio(2) 24.4% 24.9% (0.5pts)
Combined operating ratio(2) 93.0% 88.6% 4.4pts
Return on tangible equity annualised(3) 21.8% 26.6% (4.8pts)
Investment income yield annualised(3) 2.5% 2.5% -
Net investment income yield annualised(3) 2.0% 2.2% (0.2pts)
Investment return yield annualised(3) 2.9% 2.8% 0.1pts
Basic earnings per share (pence) 16.9 20.2 (16.3%)
Diluted earnings per share (pence) 16.7 20.0 (16.5%)
Return on equity annualised 17.7% 21.3% (3.6pts)
Dividend per
share - interim (pence) 7.0 6.8 2.9%
30 Jun 31 Dec Change
2018 2017
Net asset value per share (pence) 181.7 198.9 (8.6%)
Tangible net asset value per share (pence) 145.1 164.4 (11.7%)
Solvency capital ratio post-dividend 169% 165% 4pts
============================================== ======= ========= ========
Notes:
1. Results for the period ended 30 June 2018 are based on total
Group operations including restructuring and Run-off. Comparative
data has been re-presented accordingly to include restructuring
costs and Run-off profits within Motor segment.
2. A reduction in the ratio represents an improvement as a proportion
of net earned premium, while an increase in the ratio represents
a deterioration.
3. See glossary for definitions and appendix A - Alternative performance
measures for reconciliation to financial statement line items.
Business update
Overview
Direct Line Group (the "Group") had a successful H1 2018, delivering
a strong result and making progress against its key priorities.
The Group grew direct own brands, with in-force policies up 4.1%
to 7.0 million (H1 2017: 6.7 million) and gross written premiums
up 3.3% to GBP1,099.0 million (H1 2017: GBP1,063.9 million). Total
gross written premiums were GBP1,610.3 million (H1 2017: GBP1,694.2
million). The Group delivered a combined operating ratio ("COR")
of 93.0% (H1 2017: 88.6%) which, when normalised for major weather
events, was approximately 91.0% (H1 2017: approximately 90.5%).
The Group also continued to make progress against its financial
targets of reducing commission and expense(1) ratios: down 2.4 percentage
points and 0.5 percentage points respectively. These improvements
helped the Group deliver a return on tangible equity ("RoTE") of
21.8%. The solvency capital ratio was 169% after dividend, demonstrating
the strong capital generation of the business.
The Group's operating profit was GBP56.6 million lower at GBP303.1
million (H1 2017: GBP359.7 million), although when normalised for
large weather-related claims (H1 2018: GBP75 million, H1 2017: GBP9
million), operating profit was slightly up; H1 2017 also included
GBP49 million of benefit from revised Ogden reserve releases.
The Group remained focused on improving its efficiency by investing
in its future capabilities, making good progress in its IT systems
development and winning the UK partnership with Volkswagen Insurance
Service (Great Britain) Limited. The Direct Line brand launched
two new propositions in the first half of 2018, adding further value
to customers and helping to give Direct Line a distinctive edge
in competitive markets, while in July Direct Line for Business ("DL4B")
undertook the largest of its product releases, over 500 trades,
and alongside these launched a national marketing campaign.
Motor
The Motor division grew in-force polices 2.1% in the year to 4.0
million and premiums grew 1.9% to GBP839.8 million. This growth
was across both direct and price comparison website ("PCWs") channels.
Direct Line continued to differentiate its customer offering, launching
a new proposition in the first quarter: a "Fair claim commitment"
which protects customers from losing their no claims discount for
a range of common non-fault claims.
In the market, premium rates continued to fall quarter-on-quarter,
adjusting rationally to the Government's proposals to revise the
process for setting the Ogden discount rate and benign claims experience
in 2017. The Group saw claims inflation return to more normal levels
in the first half of 2018 and is mindful of the delay to the Government's
whiplash proposals which are now expected to take effect in April
2020, 12 months later than previously indicated. The Group will
continue to prioritise its target loss ratios over volume.
Motor current-year attritional loss ratio improved to 78.5% (H1
2017: 81.7%) as the Group earned through the strong margins achieved
on business written in 2017, although higher reinsurance costs in
2018 (+16%) and premium deflation means margins on policies written
in 2018 are likely to return to levels similar to those achieved
in 2016. Prior-year releases were GBP46.5 million lower year-on-year,
as H1 2017 benefited from GBP49 million of releases relating to
the Group's Ogden provision.
Home
The Home division in-force policies fell 10.9% as a result of the
Nationwide exit while direct own brands grew 1.3% due to modest
growth in both PCW and direct channels. Direct own brand premiums
grew 0.6% compared to the prior year while overall Home premiums
fell 25.1% as expected, primarily as a result of the Nationwide
and Sainsbury's exit.
Underwriting performance was impacted by higher weather losses of
GBP65 million (H1 2017: GBP9.0 million), mainly as a result of the
freeze losses in Q1 2018. This was partially offset by higher prior-year
reserve releases of GBP24.7 million (H1 2017: GBP16.8 million),
as 2017 saw lower releases due to escape of water ("EoW") inflation.
Management actions taken throughout 2017 on pricing, claims and
underwriting helped return EoW inflation to more normal levels in
2018.
The change in distribution of Home's insurance business from partners
to PCWs continued in 2018. The Group remained competitive across
all channels and successfully grew its PCWs policies in 2018, helping
to support the strong profitability of the category.
As with Motor, the Group's focus on being a great retailer was demonstrated
again with the launch of a further Direct Line Home proposition
in 2018 with 'Fast Response'; this proposition sees the Group agreeing
a plan of action within 24 hours in the event of major water damage.
A proposition such as this continues to differentiate Direct Line
from its peers and gives customers a strong reason to look beyond
PCWs. The Group's investment in its digital capabilities has strengthened
its partnership capabilities and H1 2018 saw growth again in its
partnership with RBS and NatWest.
Note:
1. Results for the period ended 30 June 2018 are based on total Group operations
including restructuring and Run-off. Comparative data has been re-presented
accordingly to include restructuring costs and Run-off profits within Motor
segment. Expense ratio for H1 2017 was previously reported as 24.6%.
Commercial
The Commercial business grew in-force policies 4.3% to 730,000 with
DL4B up 7.3% to 485,000 driving the growth. Commercial premiums
were up 0.6% to GBP269.9 million, as the growth in DL4B up 6.5%,
was offset by a 1.2% reduction in NIG. Commercial business profitability
was broadly in-line with H1 2017, with operating profit of GBP29.1
million (H1 2017: GBP30.2 million). Weather claims in H1 2018 were
GBP10 million (H1 2017: GBPnil) compared to full year normal expectations
of GBP20 million.
In July, DL4B continued to deliver against its plan of adding trades
to its new commercial platform, with the launch of office, professionals
and retail segments. This took DL4B up to 75% of its targeted trades
enabling it to launch its first broad marketing campaign in July
2018, in line with its target timeline.
Rescue and other personal lines
Rescue and other personal lines in-force policies fell by 3.0% to
7.6 million but the product mix continued to improve. The Rescue
business is made up of three distribution channels: the Group's
direct brand (Green Flag), sales from the Group's insurance brands
(linked) and partnerships. Green Flag grew in-force policies by
11.5% to 846,000. In addition, Green Flag sales continued to shift
towards higher premium products, resulting in 13.3% premium growth
overall. However, rescue partnership premiums decreased by 34.0%
following the sale of fewer packaged products and a small partnership
exit.
In the Rescue category, Green Flag is positioned as the market disruptor
and is seeking to challenge the rescue market. Green Flag followed
up on its provocative advertising campaign in the second half of
2017 with a new launch in H1 2018, where it continued to highlight
the value of Green Flag policies compared to its main competitors.
Investments
Assets under management decreased to GBP6,283.5 million (FY 2017:
GBP6,709.3 million), reflecting the regular and special dividend
payments in the first half and the continued run-off of the back
book of reserves offset in part by business growth.
Total investment return was GBP95.4 million (H1 2017: GBP93.0 million),
giving annualised investment return yield of 2.9% (H1 2017: 2.8%).
Gains were higher in H1 2018 as property revaluations continued
to be favourable (H1 2018: GBP12.1 million, H1 2017: GBP9.9 million)
and the Group realised gains of GBP18.4 million (H1 2017: GBP14.5
million). However, for 2018, the Group expects total investment
return in the region of GBP150 million after taking into account
hedging costs and lower assets under management.
Total unrealised gains, net of tax, on available-for-sale ("AFS")
investments reduced by GBP72.5 million in the period to GBP7.7 million
(FY 2017: GBP80.2 million) as a result of widening credit spreads,
higher interest rates and realisation of gains.
Data and technology
The Group continues to focus on data and technology as a key enabler.
This includes developing future capability and managing risks associated
with IT systems' stability and cyber security. As announced in the
Full Year 2017 Preliminary results, the Group has plans for a phased
programme of build, testing and roll out of activities in 2018,
2019 and beyond in Personal Lines and Commercial and is making progress
against these plans. The Group expects to incur capital expenditure
on average of around GBP80 million to GBP100 million per annum over
the period 2017 to 2019.
Dividends and capital management
The Group's capital requirements remained broadly flat. This, coupled
with the Group's strong capital generation, resulted in solvency
capital ratio at H1 2018 of 176% before dividend.
The Group's tangible net asset value was lower at GBP1,982.1 million
(FY 2017: GBP2,244 .0 million) due to payment of the final and special
dividends in H1 2018 (GBP399.7 million) and lower revaluation reserves
for AFS investments partially offset by 2018 retained earnings.
The Board has proposed an interim dividend of 7.0 pence, (2017:
6.8 pence) taking the solvency capital ratio at H1 2018 to 169%
post-dividend.
In normal circumstances, the Group expects to operate around the
middle of its solvency capital ratio risk appetite range of 140%
to 180%. The Board will normally only review the potential for any
further special distribution once a year with the full year results,
taking into consideration the Group's solvency position, financial
outlook and strategic opportunities.
Outlook
For 2018 and over the medium term, the Group targets achieving a
93% to 95% COR assuming a normal annual level of claims from major
weather events and no further change to the Ogden discount rate,
supported by reductions in its expense and commission ratios; and
reiterates its ongoing target of achieving at least a 15% return
on tangible equity.
For 2018, the Group expects total investment return in the region
of GBP150.0 million.
Finance review
Performance
Operating profit - total Group
----------------------------------------------------------------------------------------------
H1 H1
2018 2017
GBPm GBPm
--------------------------------------------------------------------- ----------- ----------
Underwriting profit 108.6 177.1
Instalment and other operating income 99.1 89.6
Investment return 95.4 93.0
--------------------------------------------------------------------- ----------- ----------
Total operating profit 303.1 359.7
--------------------------------------------------------------------- ----------- ----------
Operating profit decreased by 15.7% to GBP303.1million (H1 2017:
GBP359.7 million) mainly due to a reduction in the underwriting
profit partly offset by an increase in instalment and other operating
income. Normalised for weather, operating profit was slightly up.
Underwriting profit decreased to GBP108.6 million (H1 2017: GBP177.1
million) predominantly due to GBP75 million of weather claims mainly
associated with the major freeze in Q1 2018 (H1 2017: GBP9 million
weather-related claims) and the non-repeat of GBP49 million of Ogden
related prior-year reserve releases in 2017. Excluding the weather-related
claims, 2018 underwriting profit remained broadly stable and benefited
from a current-year loss ratio improvement in Motor, as well as
lower expense and commission ratios compared to H1 2017. Prior-year
reserve releases in total were GBP19.5 million lower at GBP206.5
million (H1 2017: GBP226.0 million).
Instalment and other operating income increased to GBP99.1 million
(H1 2017: GBP89.6 million) and included a GBP9.6 million gain on
sale of the asset held for sale property in Bristol.
Investment return improved to GBP95.4 million (H1 2017: GBP93.0
million) primarily due to an increase in net realised and unrealised
gains.
In-force policies and
gross written
premium
In-force policies - total Group (thousands)
----------------------------------------------------------------------------------------
30 Jun 31 Mar 31 Dec 30 Sep 30 Jun
At 2018 2018 2017 2017 2017
------------------------- ---------- ---------- ----------- ----------- -----------
Own brands 3,894 3,874 3,845 3,805 3,761
Partnerships 155 160 174 188 205
========================= ========== ========== =========== =========== ===========
Motor total 4,049 4,034 4,019 3,993 3,966
Own brands 1,793 1,795 1,794 1,783 1,770
Partnerships (excluding
Nationwide
and Sainsbury's) 815 822 823 834 846
Partnerships (Nationwide
and Sainsbury's) 335 472 631 665 688
========================= ========== ========== =========== =========== ===========
Home total 2,943 3,089 3,248 3,282 3,304
Rescue 3,537 3,544 3,591 3,635 3,663
Other personal lines 4,067 4,083 4,148 4,159 4,178
========================= ========== ========== =========== =========== ===========
Rescue and other personal
lines 7,604 7,627 7,739 7,794 7,841
Of which Green Flag
direct 846 820 802 788 759
Direct Line for Business 485 477 468 462 452
NIG 245 242 240 244 248
------------------------- ---------- ---------- ----------- ----------- -----------
Commercial 730 719 708 706 700
------------------------- ---------- ---------- ----------- ----------- -----------
Total in-force policies 15,326 15,469 15,714 15,775 15,811
------------------------- ---------- ---------- ----------- ----------- -----------
Of which direct own
brands 7,018 6,966 6,909 6,838 6,742
------------------------- ---------- ---------- ----------- ----------- -----------
Total in-force policies reduced to 15.3 million (30 June 2017: 15.8
million). This reduction was primarily due to lower partner volumes
in Home with the exit from the Nationwide and Sainsbury's partnerships
and reductions in Rescue and other personal lines, while continued
in-force policy growth in Motor and Home's own brands, Green Flag
direct and Commercial partly offset the reduction.
Gross written premium of GBP1,610.3 million (30 June 2017: GBP1,694.2
million) decreased 5.0% due to the reduction in Home partnerships
partly offset by an increase in Motor own brand premiums.
Gross written premium - total Group
----------------------------------------------- ------- ------- ------- -------
Q2 Q2 H1 H1
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
=============================================== ======= ======= ======= =======
Own brands 419.2 412.7 807.3 781.2
Partnerships 16.6 19.0 32.5 43.2
=============================================== ======= ======= ======= =======
Motor total 435.8 431.7 839.8 824.4
Own brands 98.5 97.6 194.4 193.2
Partnerships (excluding Nationwide
and Sainsbury's) 45.9 49.5 90.6 97.3
Partnerships (Nationwide and Sainsbury's) 3.1 46.2 5.7 97.6
=============================================== ======= ======= ======= =======
Home total 147.5 193.3 290.7 388.1
Rescue 42.4 42.9 80.1 83.6
Other personal lines 63.8 66.2 129.8 129.7
=============================================== ======= ======= ======= =======
Rescue and other personal lines 106.2 109.1 209.9 213.3
Of which Green Flag direct 18.0 15.4 33.3 29.4
Direct Line for Business 32.9 31.5 64.0 60.1
NIG 118.0 118.3 205.9 208.3
=============================================== ======= ======= ======= =======
Commercial 150.9 149.8 269.9 268.4
=============================================== ======= ======= ======= =======
Total gross written premium 840.4 883.9 1,610.3 1,694.2
=============================================== ======= ======= ======= =======
Of which direct own brands 568.6 557.2 1,099.0 1,063.9
=============================================== ======= ======= ======= =======
Motor
In-force policies increased 2.1% to 4.0 million policies, compared
with the first half of 2017. Motor's own brands grew by 3.5% over
the same period despite lower levels of shopping in the market due
to lower premiums. This growth was underpinned by the strength of
the direct channel's customer retention. The growth in in-force
policies slowed in the second quarter of 2018 compared to the first
quarter as pricing pressure increased. As a result Motor average
written premium(1) increased by just 0.7% in H1 2018 compared with
the first half of 2017, and risk-adjusted prices increased 2.9%.
Motor gross written premium increased by 1.9% in comparison to the
first half of 2017, while own brands premiums increased by 3.3%
over the same period.
The Motor premium environment has responded rationally to a number
of significant changes to claims experience and outlook since the
start of 2017. In February 2017, the Ministry of Justice reduced
the discount rate used to calculate large bodily injury claims to
minus 0.75% from 2.5% before announcing in September 2017 that it
intended to adjust the process which could result in the discount
rate increasing to between 0% and 1%. Throughout 2017, claims frequency
was also significantly below our long-term expectation of 3% to
5%. In the first half of 2018, claims inflation returned to long-term
trend levels, while the Ministry of Justice announced a 12 month
delay to the implementation of the whiplash reforms to April 2020.
The Group continues to assume claims inflation over the long-term
of 3% to 5% per annum. The Group will continue to prioritise its
target loss ratios over volume.
Home
In-force policies for Home's own brands increased by 1.3% to 1.8
million policies, compared with the first half of 2017, while partnership
volumes reduced by 25.0% predominantly due to the exit from the
Nationwide and Sainsbury's partnerships. New business volumes declined
as shopping levels slowed, compared to the high levels triggered
in 2017, following new rules requiring last year's premium to be
included on renewal documents. Retention in Home own brands, however,
continued to be strong. Gross written premium was 25.1% lower than
the first half of 2017, predominantly due to the reduction in partners,
partly offset by a small increase of 0.6% in own brands.
Home own brands average written premium(2) remained broadly flat
compared with the first half of 2017 with risk mix substantially
offsetting a 4.7% price increase as the Group grew particularly
strongly in the PCW channel, where premiums are typically lower
than in the direct channel. Claims inflation, excluding the impact
of major weather events, was more settled and continued to converge
during the first half of the year towards the Group's long-term
expectation of 3% to 5%.
Notes:
1. Average incepted written premium excluding IPT for total Motor for year to
date 30 June 2018.
2. Average incepted written premium excluding IPT for Home own brands for year
to date 30 June 2018.
Rescue and other personal lines
Rescue and other personal lines in-force policies reduced 3.0% compared
with the first half of 2017, primarily resulting from a reduction
in partner volumes, while Green Flag direct increased by 11.5% compared
to first half of 2017 to 846,000 policies. Gross written premium
for Rescue and other personal lines decreased by 1.6% compared with
the first half of 2017, mainly due to the reduction in partner volumes
partly offset by strong growth in Green Flag direct which increased
by 13.3% to GBP33.3 million.
Commercial
Commercial in-force policies increased 4.3% to 730,000 compared
with the first half of 2017, reflecting strong growth in Direct
Line for Business which was up 7.3% to 485,000, partly offset by
NIG. Commercial gross written premium increased 0.6%, compared with
the first half of 2017, reflecting continued strong growth in Direct
Line for Business, with NIG and other premiums slightly lower as
the Group continued to seek to price for risk and improved profitability.
Underwriting profit and combined operating ratio -
total Group
------------------------------------------------------------- ------- -------
H1 H1(1)
2018 2017
------------------------------------------------------------- ------- -------
Underwriting profit (GBP million) 108.6 177.1
Loss ratio 62.1% 54.8%
Commission ratio 6.5% 8.9%
Expense ratio 24.4% 24.9%
------------------------------------------------------------- ------- -------
COR 93.0% 88.6%
------------------------------------------------------------- ------- -------
Note:
1. Results for the period ended 30 June 2018 are based on total Group operations
including restructuring and Run-off. Comparative data has been re-presented
accordingly to include restructuring costs and Run-off profits within Motor
segment.
The Group's COR of 93.0% (H1 2017: 88.6%) increased by 4.4 percentage points
primarily due to a higher loss ratio which was partly offset by improvements
in the commission and expense ratios. The increase in the loss ratio to 62.1%
(H1 2017: 54.8%) reflected lower prior-year reserve releases and an increase
in Home's loss ratio due to the weather freeze event in Q1 2018. The expense
ratio improved by 0.5 percentage points to 24.4% (H1 2017: 24.9%), as the Group
reduced its operating expenses and grew earned premium. The reduction in the
commission ratio of 2.4 percentage points primarily reflected lower profit share
payments to Home partners, as a result of the higher loss ratio and changes
to partnership arrangements.
The Group achieved a combined operating ratio, normalised for weather
of approximately 91.0% (H1 2017: approximately 90.5%).
Loss ratio analysis by division - total Group
Rescue
and other
Notes personal Total
Motor Home lines Commercial(1) Group
GBPm GBPm GBPm GBPm GBPm
---------------------------- ------ ------- ------ ---------- ------------- -------
For the period ended 30
June 2018
Net earned premium 4 765.8 354.6 205.5 233.7 1,559.6
============================ ====== ======= ====== ========== ============= =======
Net insurance claims 4 463.6 229.4 144.7 130.9 968.6
Prior-year reserve releases 21 137.7 24.7 5.7 38.4 206.5
Major weather events n/a (65.0) n/a (10.0) (75.0)
============================ ====== ======= ====== ========== ============= =======
Attritional net insurance
claims 601.3 189.1 150.4 159.3 1,100.1
============================ ====== ======= ====== ========== ============= =======
Loss ratio - current-year
attritional 78.5% 53.3% 73.2% 68.2% 70.5%
Loss ratio - prior-year
reserve releases (18.0%) (7.0%) (2.8%) (16.5%) (13.2%)
Loss ratio - major weather
events(1) n/a 18.4% n/a 4.3% 4.8%
============================ ====== ======= ====== ========== ============= =======
Loss ratio - reported 4 60.5% 64.7% 70.4% 56.0% 62.1%
Commission ratio 4 1.8% 10.7% 4.2% 17.5% 6.5%
Expense ratio 4 24.4% 25.2% 23.7% 24.2% 24.4%
============================ ====== ======= ====== ========== ============= =======
COR 4 86.7% 100.6% 98.3% 97.7% 93.0%
============================ ====== ======= ====== ========== ============= =======
For the period ended 30
June 2017(2)
Net earned premium 4 707.8 397.0 209.0 233.7 1,547.5
============================ ====== ======= ====== ========== ============= =======
Net insurance claims 4 393.9 190.7 135.7 127.1 847.4
Prior-year reserve release
/ (strengthening) 21 184.2 16.8 (2.1) 27.1 226.0
Major weather events n/a (9.0) n/a n/a (9.0)
============================ ====== ======= ====== ========== ============= =======
Attritional net insurance
claims 578.1 198.5 133.6 154.2 1,064.4
============================ ====== ======= ====== ========== ============= =======
Loss ratio - current-year
attritional 81.7% 50.0% 63.9% 66.0% 68.8%
Loss ratio - prior-year
reserve releases (26.0%) (4.3%) 1.0% (11.6%) (14.6%)
Loss ratio - major weather
events(1) n/a 2.3% n/a n/a 0.6%
============================ ====== ======= ====== ========== ============= =======
Loss ratio - reported 4 55.7% 48.0% 64.9% 54.4% 54.8%
Commission ratio 4 2.6% 17.0% 5.0% 17.9% 8.9%
Expense ratio 4 26.1% 23.8% 23.9% 23.8% 24.9%
============================ ====== ======= ====== ========== ============= =======
COR 4 84.4% 88.8% 93.8% 96.1% 88.6%
============================ ====== ======= ====== ========== ============= =======
Notes:
1. Home and Commercial claims for major weather events, including
inland and coastal flooding and storms.
2. Results for the period ended 30 June 2018 are based on total
Group operations including restructuring and Run-off. Comparative
data has been re-presented accordingly to include restructuring
costs and Run-off profits within Motor segment.
The movement in the current-year attritional loss ratio is an indicator
of underlying accident year performance as it excludes prior-year
reserve movements and claims costs from major weather events. The
Group's current-year attritional loss ratio of 70.5% increased by
1.7 percentage points, compared to the same period in 2017. While
the Nationwide exit is creating some impact on different lines of
the income statement, overall the Group continued to make progress
on growing its current year profitability.
Prior-year reserve releases continued to be significant at GBP206.5
million (H1 2017: GBP226.0 million) and were equivalent to 13.2%
of net earned premium (H1 2017: 14.6%). Reserve releases were lower
in H1 2018, as H1 2017 included a GBP49 million one-off reserve
release. Assuming current claims trends continue, prior-year reserve
releases are expected to reduce in future years, although they are
expected to remain a significant contribution to profits.
Motor
The COR for the Motor division was 86.7% (H1 2017: 84.4%), an increase
of 2.3 percentage points, as a result of a higher loss ratio due
to lower prior-year reserve releases, with H1 2017 including a GBP49
million release after a detailed review of the Group's Ogden provision
within case reserves. This was partially offset by a current-year
loss ratio improvement. The current-year attritional loss ratio
improved by 3.2 percentage points to 78.5%, primarily as a result
of a favourable 2017 Motor margin contribution and volume growth
earning through. In the second half of the year the Group expects
the loss ratio to return to higher levels as the higher reinsurance
costs and lower premiums begin to earn through. Both the expense
and commission ratios improved compared to the first half of 2017.
Home
In Home, the COR increased by 11.8 percentage points to 100.6% (H1
2017: 88.8%) with higher loss and expense ratios, in part offset
by an improving commission ratio. Normalised for weather the COR
was approximately 91% (H1 2017: approximately 93%), approximately
2 percentage points lower. The loss ratio was higher by 16.7 percentage
points at 64.7% compared to H1 2017 primarily as a result of the
major freeze event in Q1 2018. The impact of the major weather events
in H1 2018 is approximately GBP65 million (H1 2017: GBP9 million),
resulting in the annual weather claims budget being utilised in
H1 2018. The current-year attritional loss ratio, excluding major
weather event claims, increased by 3.3 percentage points to 53.3%,
reflecting changes in business mix, offset to some extent by lower
commission.
The commission ratio of 10.7% was 6.3 percentage points lower than
the first half of 2017, reflective of lower profit commission payments
to partners resulting from the impact of elevated claims experience
and changes to partner arrangements.
Rescue and other personal lines
The COR for Rescue and other personal lines increased by 4.5 percentage
points to 98.3% (H1 2017: 93.8%), principally due to an increase
in the loss ratio due mainly to higher weather-related losses, partnerships
and timing of reserve reviews. The higher loss ratio was partially
offset by lower expense and commission ratios. The COR for Rescue
was 85.8% (H1 2017: 82.8%).
Commercial
The COR for Commercial increased by 1.6 percentage points to 97.7%
(H1 2017: 96.1%), primarily due to a 1.6 percentage points increase
in the loss ratio as a result of the Q1 2018 major weather events
and a higher current-year loss ratio, partly offset by a higher
contribution of prior-year reserve releases. The current-year attritional
loss ratio increased by 2.2 percentage points to 68.2% when compared
to the favourable H1 2017 ratio (H1 2017: 66.0%). When compared
to full year 2017, the H1 2018 current year attritional loss ratio
was broadly stable. The higher loss and expense ratios were partly
offset by a lower commission ratio. The impact of the weather events
in H1 2018 was approximately GBP10 million.
Total costs - total Group
-----------------------------------------------------------------
H1 H1(1)
2018 2017
Notes GBPm GBPm
------------------------------- --- --- ------ ------ ------
Staff costs 207.5 206.7
Other operating expenses 158.3 165.0
Marketing 10 65.9 59.0
Amortisation and impairment of
other intangible assets 10 24.4 26.7
Depreciation 10 16.2 14.1
========================================= ====== ====== ======
Total costs 472.3 471.5
========================================= ====== ====== ======
Operating expenses 10 381.2 384.9
Claims handling expenses 8 91.1 86.6
Total costs 472.3 471.5
----------------------------------------- ------ ------ ------
Note:
1. Results for the period ended 30 June 2018 are based on total Group operations
including restructuring and Run-off. Comparative data has been re-presented
accordingly to include restructuring costs within Motor segment.
Total costs increased by GBP0.8 million to GBP472.3 million (H1
2017: GBP471.5 million) and operating expenses were lower by GBP3.7
million at GBP381.2 million (H1 2017: GBP384.9 million) resulting
in an expense ratio of 24.4% (H1 2017: 24.9%). Total costs remained
broadly stable with an increase in marketing spend to drive brand
awareness offsetting reductions in other operating expenses. The
Group continued to invest in its significant IT programme and operational
efficiency improvements while supporting business growth and investment
in future capability.
Instalment and other operating income
- total Group
------------------------------------------------- -----------------------------
H1 H1
2018 2017
Note GBPm GBPm
------------------------------------------------- ---- ---- ------ ---------
Instalment income 59.1 55.8
Other operating income:
Vehicle replacement referral income 7 8.4 8.3
Revenue from vehicle recovery and repair
services 7 5.8 9.8
Legal services income 7 5.8 5.6
Other income 7 20.0 10.1
Other operating income 7 40.0 33.8
------------------------------------------------------- ---- ------ ---------
Total instalment and other operating
income 99.1 89.6
------------------------------------------------------- ---- ------ ---------
Instalment and other operating income increased by GBP9.5 million,
with increased instalment payments of GBP3.3 million due to higher
Motor gross written premium; a GBP9.9 million increase in other
income primarily, relating to a one-off gain on disposal of the
Bristol property of GBP9.6 million; partly offset by a GBP4.0 million
decrease in revenue from recovery and repair services which included
a refinement in the basis of allocation in H2 2017.
Investment return - total Group
--------------------------------------------------------------------------------
H1 H1
2018 2017(1)
Note GBPm GBPm
------------------------------------------------- ---- ---- ------ ---------
Investment income 79.6 82.8
Hedging to a sterling floating rate basis (14.7) (10.8)
------------------------------------------------------- ---- ------ ---------
Net investment income 64.9 72.0
Net realised and unrealised gains excluding
hedging 30.5 21.0
------------------------------------------------------- ---- ------ ---------
Total investment return 6 95.4 93.0
------------------------------------------------------- ---- ------ ---------
Note:
1. Results for the period ended 30 June 2018 are based on total Group operations
including Run-off. Comparative data has been re-presented accordingly to include
restructuring costs and Run-off profits within Motor segment.
Investment yields - total Group
-----------------------------------------------
H1 H1
2018 2017
------------------------------- ------ ------
Investment income yield(1) 2.5% 2.5%
Net investment income yield(1) 2.0% 2.2%
Investment return yield(1) 2.9% 2.8%
------------------------------- ------ ------
Note:
1. See glossary for definitions.
Total investment return increased to GBP95.4 million (H1 2017: GBP93.0
million) due to higher unrealised property gains and realised gains
from debt securities offset by lower investment income and higher
hedging costs.
Net realised and unrealised gains were higher at GBP30.5 million
(H1 2017: GBP21.0 million) primarily due to higher unrealised property
gains and higher H1 2018 realised gains from debt securities. The
Group has sought to lock in realised gains, given the rising yield
environment and its impact on the AFS reserve.
The investment income yield for H1 2018 remained stable at 2.5%
(H1 2017: 2.5%).
The net investment income yield was lower at 2.0% (H1 2017: 2.2%)
as a result of US dollar hedging costs impacting the yield.
Investment holdings - total Group
30 Jun 31 Dec
2018 2017
At GBPm GBPm
------------------------------------ ------- -------
Investment-grade credit(1) 3,873.6 3,893.1
High yield 398.9 388.6
Investment-grade private placements 102.3 103.6
Credit 4,374.8 4,385.3
Sovereign 165.8 224.8
------------------------------------- ------- -------
Total debt securities 4,540.6 4,610.1
Infrastructure debt 301.0 316.4
Commercial real estate loans 183.3 169.0
Cash and cash equivalents(2) 937.2 1,304.5
Investment property 321.4 309.3
------------------------------------- ------- -------
Total investment holdings 6,283.5 6,709.3
------------------------------------- ------- -------
Notes:
1. Asset allocation at 30 June 2018 includes investment portfolio
derivatives, which have been included and have a mark-to-market asset
value of GBP28.4 million included in investment grade credit (31 December
2017 mark-to-market asset value of GBP55.1 million). This excludes
non-investment derivatives that have been used to hedge interest on
subordinated debt and operational cash flows.
2. Net of bank overdrafts: includes cash at bank and in hand and
money market funds with no notice period for withdrawal.
At 30 June 2018, total investment holdings of GBP6,283.5 million
were 6.3% lower than at the start of the year primarily reflecting
the cash paid to settle the 2017 final and special dividends paid
in May 2018. Total debt securities were GBP4,540.6 million (31 December
2017: GBP4,610.1 million), of which 4.9% were rated as 'AAA' and
a further 61.0% were rated as 'AA' or 'A'. The average duration
at 30 June 2018 of total debt securities was 2.5 years (31 December
2017: 2.3 years).
At 30 June 2018, total unrealised gains, net of tax, on AFS investments
were GBP7.7 million (31 December 2017: GBP80.2 million).
Reconciliation of operating profit
--------------------------------------------------------------------------------------
H1 H1(1)
2018 2017
GBPm GBPm
--------------------------------------------------- ----- ---- --------- ---------
Motor 238.0 239.4
Home 21.1 67.5
Rescue and other personal lines 14.9 22.6
Commercial 29.1 30.2
---------------------------------------------------------------- --------- ---------
Operating profit 303.1 359.7
Finance costs (9.3) (18.3)
Profit before tax 293.8 341.4
Tax (55.0) (65.9)
Profit after tax 238.8 275.5
---------------------------------------------------------------- --------- ---------
Note:
1. Results for the period ended 30 June 2018 are based on total
Group operations including restructuring and Run-off. Comparative
data has been re-presented accordingly to include restructuring
costs and Run-off profits within Motor segment.
Operating profit by segment
All divisions were profitable in H1 2018 with Motor and Commercial
remaining broadly in line with H1 2017. Home reported reduced operating
profits primarily due to the weather freeze event in Q1 2018, while
Rescue and other personal lines also reported lower profits. Rescue
operating profit of GBP19.2 million (H1 2017: GBP21.7 million) is
included in the Rescue and other personal lines result.
Finance costs
Finance costs reduced to GBP9.3 million (H1 2017: GBP18.3million)
due to the repurchase of GBP250 million nominal value of the subordinated
dated notes in December 2017.
Taxation
The effective tax rate in H1 2018 was 18.7% (H1 2017: 19.3%), which
was lower than the standard UK corporation tax rate of 19.0% (H1
2017: 19.25%), driven primarily by relief for the Tier 1 notes coupon
payment offset by disallowable expenses.
Profit for the period and return on tangible equity(1)
Profit for the period of GBP238.8 million (H1 2017: GBP275.5 million)
reflected a reduction in operating profit predominantly within the
Home segment as a result of the major weather events, offset by
lower finance costs and a reduced tax charge.
Return on tangible equity decreased to 21.8% (H1 2017: 26.6%) due
to an annualised profit after tax of GBP461.0 million (H1 2017:
GBP551.0 million) and a reduction in the average shareholders' tangible
equity.
Earnings per share
Basic earnings per share decreased by 16.3% to 16.9 pence (H1 2017:
20.2 pence). Adjusted diluted earnings per share decreased by 16.5%
to 16.7 pence (H1 2017: 20.0 pence) mainly reflecting a decrease
in profit after tax.
Dividend
The Board has resolved to pay an interim dividend for the Company
for 2018 of GBP96.2 million in aggregate, representing 7.0 pence
per share (30 June 2017: 6.8 pence).
The interim dividend will be paid on 7 September 2018 to shareholders
on the register on 10 August 2018. The ex-dividend date will be
9 August 2018.
Net asset value
--------------------------------------------------------------------
30 Jun 31 Dec
2018 2017
At Note GBPm GBPm
------------------------------------------- ----- ------- -------
Net assets 15 2,482.1 2,715.1
Goodwill and other intangible assets 15 (500.0) (471.1)
------------------------------------------- ----- ------- -------
Tangible net assets 15 1,982.1 2,244.0
------------------------------------------- ----- ------- -------
Closing number of Ordinary Shares 15 1,365.7 1,365.1
------------------------------------------- ----- ------- -------
Net asset value per share (pence) 15 181.7 198.9
Tangible net asset value per share (pence) 15 145.1 164.4
=========================================== ===== ======= =======
The net assets at 30 June 2018 decreased to GBP2,482.1million (31
December 2017: GBP2,715.1 million) and tangible net assets decreased
to GBP1,982.1 million (31 December 2017: GBP2,244.0 million). These
decreases mainly reflect the payment of the 2017 final and special
dividends, a reduction in the AFS reserves due to rising market
yields, partially offset by the 2018 retained profit.
Note:
1. See glossary for definitions and appendix A - Alternative performance
measures for reconciliation to financial statement line items.
Reserving
The Group makes provision for the full cost of outstanding claims
from its general insurance business at the balance sheet date, including
claims estimated to have been incurred but not yet reported at that
date and claims handling provision. The Group considers the class
of business, the length of time to notify a claim, the validity
of the claim against a policy, and the claim value. Claims reserves
could settle across a range of outcomes, and settlement certainty
increases over time. However, for bodily injury claims the uncertainty
is greater due to the length of time taken to settle these claims.
The possibility of annuity payments for injured parties also increases
this uncertainty.
The Group seeks to adopt a conservative approach to assessing liabilities,
as evidenced by the favourable development of historical claims
reserves. Reserves are based on management's best estimate, which
includes a prudence margin that exceeds the internal actuarial best
estimate. This margin is made in reference to various actuarial
scenario assessments and reserve distribution percentiles. It also
considers other short and long-term risks not reflected in the actuarial
inputs, as well as management's view on the uncertainties in relation
to the actuarial best estimate. The most common method of settling
bodily injury claims is by a lump sum paid to the claimant and,
in the cases where this includes an element of indemnity for recurring
costs such as loss of earnings or ongoing medical care, settlement
calculations have reference to a standardised Ogden annuity factor
at a discount rate of minus 0.75% in 2018 (2017: minus 0.75%). This
is normally referred to as the Ogden discount rate.
Other estimates are also required for case management expenses,
loss of pension, court protection fees, alterations to accommodation
and transportation fees. In 2017, the Lord Chancellor changed the
Ogden discount rate from 2.5% to minus 0.75% based on a 3-year average
of yields on index-linked Government securities. The Government
are currently reviewing the Ogden discount rate again based on 'low
risk' investments rather than 'very low risk' investments, however,
there is considerable uncertainty over whether, when and how a change
might be made.
The Group continues to exercise judgement around the Ogden discount
rate used in its reserves allowing for the possibility for it to
change in the future. It considers the uncertainties around the
legal framework and its implementation risks to the future rate
as being significant but broadly balanced and therefore provisions
at the current rate of minus 0.75%. An allowance for further movements
in the Ogden discount rate is made within the Group's solvency II
balance sheet and capital requirement. Details of the IFRS sensitivity
analysis to the assumed Ogden discount rate are shown overleaf.
However, it should be noted that the Government is considering not
only the appropriate level for the rate but also the methodology
of how it is applied, so any sensitivity has considerable limitations
and uncertainty.
The Group's prior-year reserve releases were GBP206.5 million (H1
2017: GBP226.0 million) with good experience in large bodily injury
claims being a key contributor.
Looking forward, the Group expects to continue setting its initial
management best estimate for future accident years conservatively.
Over time, the proportion of the Group's underwriting profit attributable
to the current-year is expected to increase. This includes targeted
improvements in the expense and commission ratios. Assuming current
claims trends continue, the contribution from prior-year reserve
releases will reduce over time, although it is expected to remain
significant.
Claims reserves net of reinsurance
---------------------------------------------------- ---------- -------------
30 Jun 31 Dec(1)
2018 2017
At GBPm GBPm
---------------------------------------------------- ---------- -------------
Motor 2,042.4 2,187.3
Home 334.0 293.3
Rescue and other personal lines 94.6 85.6
Commercial 574.4 578.3
---------------------------------------------------- ---------- -------------
Total Group 3,045.4 3,144.5
---------------------------------------------------- ---------- -------------
Note:
1. Results for the period ended 30 June 2018 are based on total Group operations
including Run-off. Comparative data has been re-presented accordingly to include
restructuring costs and Run-off profits within Motor segment.
Sensitivity analysis - the discount rate used in relation to periodic
payment orders ("PPOs") and changes in assumed Ogden discount rate
The table below provides a sensitivity analysis of the potential
impact of a change in a single factor with all other assumptions
left unchanged. Other potential risks beyond the ones described
could have an additional financial impact on the Group.
Increase / (decrease)
in profit before
tax and equity(3,4)
=======================
30 Jun 31 Dec
2018 2017
GBPm GBPm
==================================================================== ========== ===========
PPOs(1)
Impact of an increase in the discount rate used in
the calculation of present values of 100 basis points 54.6 54.6
Impact of a decrease in the discount rate used in
the calculation of present values of 100 basis points (75.1) (75.1)
-------------------------------------------------------------------- ---------- -----------
Ogden discount rate(2)
Impact of the Group reserving at a discount rate of
0% compared to minus 0.75% 54.1 68.4
Impact of the Group reserving at a discount rate of
minus 1.5% compared to minus 0.75% (82.1) (102.9)
-------------------------------------------------------------------- ---------- -----------
Notes:
1. The PPO sensitivities are updated annually due to their long
term nature. These sensitivities relating to an increase or decrease
in the real discount rate used for PPOs illustrate a movement in
the time value of money from the assumed level of 0.0%. The PPO
sensitivity has been calculated on the direct impact on the change
in the real discount rate with all factors remaining unchanged.
2. Ogden discount rate sensitivity has been calculated on the direct
impact of a permanent change in the discount rate with all other
factors remaining unchanged. The Group will consider the statutory
discount rate when setting its reserves but not necessarily provide
on this basis. This is to ensure that reserves are appropriate for
current and potential future developments.
3. These sensitivities exclude the impact of taxation.
4. These sensitivities reflect one-off impacts at 30 June and should
not be interpreted as predictions.
The Ogden discount rate sensitivity above is calculated on the basis
of a permanent change in the rate on the actuarial best estimate
reserves as at 30 June 2018. It does not take into account a change
in the Ogden discount rate setting regime, nor any second order
impacts such as those on the Group's PPO assumptions or reinsurance
bad debt assumptions. The reduction in sensitivity to a change in
the Ogden discount rate since 31 December 2017 reflects the overall
reduction in bodily injury exposures. This is due to continued positive
prior-year development of claims reserves for large bodily injury
claims, particularly for accident years where the reinsurance retention
level was higher than the current level of GBP1 million.
Capital management
Capital management policy
The Group aims to manage its capital efficiently and generate long-term sustainable
value for shareholders, while balancing operational, regulatory, rating agency
and policyholder requirements.
The Group aims to grow its regular dividend in line with business growth.
Where the Board believes that the Group has capital which is expected to be
surplus to the Group's requirements for a prolonged period, it would intend
to return any surplus to shareholders. In normal circumstances, the Board expects
that a solvency capital ratio around the middle of its risk appetite range of
140% to 180% of the Group's solvency capital requirements ("SCR") would be appropriate
and it will therefore take this into account when considering the potential
for special distributions.
In the normal course of events the Board will consider whether or not it is
appropriate to distribute any surplus capital to shareholders once a year, alongside
the full year results.
The Group expects that one-third of the annual dividend will generally be paid
in the third quarter as an interim dividend, and two-thirds will be paid as
a final dividend in the second quarter of the following year. The Board may
revise the dividend policy from time to time. The Company may consider a special
dividend and/or a repurchase of its own shares to distribute surplus capital
to shareholders.
Solvency II
The Group is regulated under solvency II requirements by the Prudential Regulation
Authority ("PRA") on both a Group basis and for the Group's principal underwriter,
U K Insurance Limited. In its results, the Group has estimated its solvency
II own funds, SCR and solvency capital ratio as at 30 June 2018.
Sensitivity analysis
The following table shows the Group's estimated solvency capital ratio sensitivities
based on the assessed impact of scenarios as at 30 June 2018.
Impact on solvency
capital ratio
--------------------
30 Jun 31 Dec
Scenario 2018 2017
---------------------------------------------------------------------- ---------- --------
Motor bodily injury deterioration equivalent to accident (7pts) (7pts)
years 2008 and 2009
One-off catastrophe loss equivalent to the1990 storm (9pts) (9pts)
One-off catastrophe loss based on extensive flooding (9pts) (9pts)
of the River Thames
Change in reserving basis for PPOs to use a real discount (10pts) (13pts)
rate of minus 1%(1)
100bps increase in credit spreads(2) (11pts) (11pts)
100bps decrease in interest rates with no change in (2pts) (3pts)
the PPO real discount rate
====================================================================== ========== ========
Note:
1. The PPO real discount rate used is an actuarial judgement which is reviewed
annually based on the economic outlook for wage inflation relative to the EIOPA
discount rate curve.
2. These sensitivities only include the assessed impact of the above scenarios
in relation to AFS investments.
Capital surplus
At 30 June 2018, the Group held a solvency II capital surplus of approximately
GBP0.98 billion above its regulatory capital requirements and was equivalent
to an estimated solvency capital ratio of 169%, post-dividend.
The Group's SCR and solvency capital ratio are as
follows:
------------------------------------------------------------------- -------- ------------
30 Jun 31 Dec
At 2018 2017(1)
------------------------------------------------------------------- -------- ----------
Solvency capital requirement (GBP billion) 1.41 1.39
Capital surplus above solvency capital requirement
(GBP billion) 0.98 0.91
Solvency capital ratio post-dividend 169% 165%
=================================================================== ======== ==========
The following table splits the Group's own funds by
tier on a solvency II basis.
------------------------------------------------------------------- -------- ------------
30 Jun 31 Dec
2018 2017(1)
At GBPbn GBPbn
------------------------------------------------------------------- -------- ----------
Tier 1 capital before foreseeable dividends 1.83 2.04
Foreseeable dividends (0.10) (0.39)
------------------------------------------------------------------- -------- ----------
Tier 1 capital - unrestricted 1.73 1.65
Tier 1 capital - restricted 0.35 0.35
------------------------------------------------------------------- -------- ----------
Tier 1 capital 2.08 2.00
Tier 2 capital - subordinated debt 0.26 0.26
Tier 3 capital - deferred tax 0.05 0.04
------------------------------------------------------------------- -------- ----------
Total own funds 2.39 2.30
=================================================================== ======== ==========
Tier 1 capital after foreseeable dividends represents 87% of own funds and 147%
of the estimated SCR. Tier 2 capital relates solely to the Group's GBP0.26 billion
subordinated debt. The amount of Tier 2 and Tier 3 capital, permitted under
the solvency II regulations, is 50% of the Group's SCR and of Tier 3 it is less
than 15%. Therefore, the Group currently has no ineligible capital. The requirement
that Tier 1 restricted capital should not exceed 20% of total Tier 1 capital,
when satisfying the requirement that eligible Tier 1 items should be at least
50% of SCR, is not applicable to the Group.
The interim dividend will be payable from surplus capital generated from continuing
operations of the Group.
Reconciliation of IFRS shareholders' equity to solvency II own funds
-------------------------------------------------------------------------------------------
30 Jun 31 Dec
2018 2017(1)
At GBPbn GBPbn
------------------------------------------------------------------- -------- ------------
Total shareholders' equity 2.48 2.72
Goodwill and intangible assets (0.50) (0.47)
Change in valuation of technical provisions (0.06) (0.13)
Other asset and liability adjustments (0.09) (0.08)
Foreseeable dividends (0.10) (0.39)
------------------------------------------------------------------- -------- ------------
Tier 1 capital - unrestricted 1.73 1.65
Tier 1 capital - restricted 0.35 0.35
------------------------------------------------------------------- -------- ------------
Tier 1 capital 2.08 2.00
Tier 2 capital - subordinated debt 0.26 0.26
Tier 3 capital - deferred tax 0.05 0.04
=================================================================== ======== ============
Total own funds 2.39 2.30
=================================================================== ======== ============
Note
1. The 2017 comparative period has been updated to reflect the amounts
in the Solvency and Financial Condition Report for the year ended
31 December 2017, published on 2 May 2018.
Movement in capital surplus
----------------------------------------------------------------------
H1 FY
2018 2017(1)
GBPbn GBPbn
--------------------------------------------------- ------- --------
Capital surplus at 1 January 0.91 0.91
--------------------------------------------------- ------- --------
Capital generation excluding market movements 0.31 0.54
Market movements (0.06) -
--------------------------------------------------- ------- --------
Capital generation 0.25 0.54
Change in solvency capital requirement (0.02) 0.01
--------------------------------------------------- ------- --------
Surplus generation 0.23 0.55
Capital expenditure (0.06) (0.10)
Management capital action - 0.03
Capital distribution - ordinary dividends(2) (0.10) (0.28)
Capital distribution - special dividends(2) - (0.20)
--------------------------------------------------- ------- --------
Net surplus movement 0.07 -
--------------------------------------------------- ------- --------
Capital surplus at 30 June 2018 / 31 December 2017 0.98 0.91
=================================================== ======= ========
Notes:
1. The 2017 comparative period has been updated to reflect the amounts
in the Solvency and Financial Condition Report for the year ended
31 December 2017, published on 2 May 2018.
2. Foreseeable dividends included above are adjusted to exclude
the expected dividend waivers in relation to shares held by the
employee share trusts, which are held to meet obligations arising
on the various share option awards.
During H1 2018, the Group's own funds increased from GBP2.30 billion
to GBP2.39 billion. The Group generated GBP0.25 billion of solvency
II capital offset by GBP0.06 billion of capital expenditure and
capital distribution of GBP0.10 billion for the 2018 interim dividend.
Leverage
The Group's financial leverage increased 1.3 percentage points,
but remained conservative at 19.7% (2017: 18.4%). The increase was
primarily due to the reduction in shareholders' equity. While the
Tier 1 notes issued during 2017 are presented as equity in the balance
sheet, the Group considers this to be part of its total leverage.
30 Jun 31 Dec
2018 2017
At GBPbn GBPbn
---------------------------------------------------- ---------- ----------
Shareholders' equity 2,482.1 2,715.1
Tier 1 notes 346.5 346.5
Financial debt - subordinated debt 260.9 264.7
---------------------------------------------------- ---------- ----------
Total capital employed 3,089.5 3,326.3
==================================================== ========== ==========
Financial-leverage ratio(1) 19.7% 18.4%
==================================================== ========== ==========
Note:
1. Total IFRS financial debt and Tier 1 notes as a percentage of
total IFRS capital employed.
Credit ratings
Standard & Poor's and Moody's Investors Service provide insurance
financial-strength ratings for U K Insurance Limited, the Group's
principal underwriter. U K Insurance Limited is currently rated
'A' (strong) with a stable outlook by Standard & Poor's, and 'A2'
(good) with a positive outlook by Moody's.
Regulatory update
The Group has continued to operate within a highly dynamic and evolving
regulatory landscape, particularly in the UK motor insurance market
where there are a number of reviews and initiatives, including those
that have been announced by the UK Government, the Financial Conduct
Authority ("FCA") and the PRA. The Group still awaits the passing
of the Civil Liability Bill through Parliament which will bring
in new measures to reform the soft-tissue whiplash injury compensation
system and introduce a new framework for setting the Personal Injury
Discount rate.
In 2018 the FCA's focus has been on Brexit and pricing practices.
The PRA's focus has been on the pillars of its financial risk framework,
namely reserving, pricing, reinsurance and investments. The Group
is exposed to the risk of changes to regulatory rules, policy or
interpretation, and to supervisory expectations or approach, by
regulators or other bodies or authorities; and of changes to law,
tax, monetary or fiscal policies or their interpretation by Government
or Government authorities, any of which may have adverse operational
and financial impacts. The Group will continue to support proportionate
reforms which result in a level playing field across the industry.
Principal risks and uncertainties
The Group carries out a robust assessment of the principal risks
facing it in the current and future financial years. Principal risks
are defined as having a residual risk impact of GBP40 million or
more on profit before tax or net asset value on a 1-in-200 years
basis, accounting for customer, financial and reputational impacts.
The Group considers that the risk profile remains broadly unchanged
over the last six months, since the profile disclosed in the Annual
Report and Accounts 2017 risk management section, pages 22 to 25
and financial statements, pages 127 to 138.
Principal risks
=============================================================================
Insurance risk
The risk of loss due to fluctuations in the timings, amount, frequency
and severity of an insured event relative to the expectations at
the time of underwriting. Insurance risk includes reserve, underwriting,
distribution, pricing and reinsurance risks.
=============================================================================
Market risk
The risk of loss resulting from fluctuations in the level and volatility
of market prices of assets, liabilities and financial instruments.
Market risk includes spread, interest rate and property risks.
=============================================================================
Credit risk
The risk of loss resulting from fluctuations in the credit standing
of issuers of securities, counterparties and any debtors to which
the Group is exposed. Credit risk includes concentration and counterparty
default risks.
=============================================================================
Operational risk
The risk of loss due to inadequate or failed internal processes,
people, systems or from external events. Operational risk includes
information security, IT resilience and business resilience, partnerships,
change, supplier management and outsourcing, financial reporting,
model and technology and infrastructure risks.
Regulatory and conduct risk
The risks arising out of changes to laws, regulatory rules, policy
or interpretation, or to supervisory expectations or approach, that
have an adverse operational and financial impact as a result of
reputational damage, regulatory or legal censure, fines or prosecutions,
and any other type of non-budgeted operational risk losses, associated
with the Group's conduct and activities. Regulatory and conduct
risk includes compliance risk.
=============================================================================
Strategic risk
The risk of direct or indirect adverse impact on the earnings, capital,
or value of the Group's business resulting from the strategies not
being optimally chosen, implemented or adapted to changing conditions.
Strategic risk includes strategy formulation and implementation
risks.
=============================================================================
Emerging risks
The Group's definition of emerging risks is new or developing risks
which are often difficult to quantify; they are also highly uncertain
and are external to the Group. Emerging risks are identified by
management and are recorded within an Emerging Risk Register. Emerging
risks are reported to the Board Risk Committee for review and challenge.
The Group's emerging risks processes aim to:
-- identify emerging risks on a timely basis;
-- manage emerging risks proactively;
-- mitigate the impact of emerging risks which could affect the delivery
of the strategic plan; and
-- reduce the uncertainty and volatility of the Group's results.
The Group considers its main emerging risks to be:
========================================================================
Technological change in driving habits reduces consumer need for
motor insurance
New car technologies, such as crash-prevention technologies and
driverless cars, could significantly affect the size and nature
of the insurance market and the role of insurers. In addition
to the Group's partnership with the Government on automated Driving
systems (MOVE_UK), the Group continues to build strong collaborative
relationships, including with key manufacturers of driverless
cars.
------------------------------------------------------------------------
Changes to traditional insurance business models
New market entrants and changes in consumer expectations could
result in significant changes to the structure of the general
insurance market and require the Group to update its business
model. The Group's strategy, aligned to its mission to make insurance
much easier and better value for its customers, is positioned
to take advantage of changes in technology and customer behaviours,
and to build the Group's partnership capabilities.
========================================================================
UK economy
The UK could enter a prolonged period of reduced growth due to
the exit from the European Union, potentially reducing insurance
sales and the value of the Group's investment portfolio. Whilst
the Group's operations are based mainly in the UK, the Group continues
to monitor implications surrounding Brexit negotiations, including:
changes to the value of sterling which impact claims and non-claims
supplier costs; inflation; recruitment and retention of people;
potential changes to direct and indirect tax; and the regulatory
impact on the Group's capital position.
========================================================================
Climate change
Climate change could increase the frequency of severe weather
events in the UK and, in particular, flooding claims costs. The
Group continues to monitor changes in claims experience and considers
weather trends as part of its pricing and underwriting approach.
========================================================================
Condensed consolidated income statement
For the six months ended 30 June 2018
6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
Notes (audited)
============================================= ===== ========= ======== ==========
Gross earned premium 5 1,665.4 1,645.0 3,339.7
Reinsurance premium 5 (105.8) (97.5) (204.7)
============================================= ===== ========= ======== ==========
Net earned premium 5 1,559.6 1,547.5 3,135.0
Investment return 6 95.4 93.0 175.4
Instalment income 59.1 55.8 116.4
Other operating income 7 40.0 33.8 62.9
============================================= ===== ========= ======== ==========
Total income 1,754.1 1,730.1 3,489.7
============================================= ===== ========= ======== ==========
Insurance claims 8 (1,005.0) (768.2) (1,571.1)
Insurance claims recoverable from / (payable
to) reinsurers 8 36.4 (79.2) (183.1)
============================================= ===== ========= ======== ==========
Net insurance claims 8 (968.6) (847.4) (1,754.2)
============================================= ===== ========= ======== ==========
Commission expenses 9 (101.2) (138.1) (286.4)
Operating expenses 10 (381.2) (384.9) (806.3)
============================================= ===== ========= ======== ==========
Total expenses (482.4) (523.0) (1,092.7)
============================================= ===== ========= ======== ==========
Operating profit 303.1 359.7 642.8
Finance costs 11 (9.3) (18.3) (103.8)
Profit before tax 293.8 341.4 539.0
Tax charge 12 (55.0) (65.9) (105.0)
============================================= ===== ========= ======== ==========
Profit for the period attributable to
owners of the Company 238.8 275.5 434.0
============================================= ===== ========= ======== ==========
Earnings per share:
Basic (pence) 14 16.9 20.2 31.8
Diluted (pence) 14 16.7 20.0 31.5
Condensed consolidated statement of comprehensive income
For the 6 months ended 30 June 2018
6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
(audited)
======================================================= ======== ======== ==========
Profit for the period 238.8 275.5 434.0
======================================================= ======== ======== ==========
Other comprehensive loss
Items that will not be reclassified subsequently
to the income statement:
Actuarial gain on defined benefit pension scheme - - 2.1
Tax relating to item that will not be reclassified - - (0.4)
======================================================= ======== ======== ==========
- - 1.7
======================================================= ======== ======== ==========
Items that may be reclassified subsequently
to the income statement:
Cash flow hedges (0.5) (0.4) (1.1)
Fair value (loss) / gains on AFS investments (69.0) 8.0 8.8
Less: realised net gains on AFS investments
included in income statement (18.4) (14.8) (23.2)
Tax relating to items that may be reclassified 14.9 1.2 2.5
======================================================= ======== ======== ==========
(73.0) (6.0) (13.0)
======================================================= ======== ======== ==========
Other comprehensive loss for the period net
of tax (73.0) (6.0) (11.3)
======================================================= ======== ======== ==========
Total comprehensive income for the period attributable
to owners of the Company 165.8 269.5 422.7
======================================================= ======== ======== ==========
Condensed consolidated balance sheet
As at 30 June 2018
30 Jun 31 Dec
2018 2017
GBPm GBPm
Notes (audited)
============================================== ===== ======= ==========
Assets
Goodwill and other intangible assets 500.0 471.1
Property, plant and equipment 164.1 174.4
Investment property 321.4 309.3
Reinsurance assets 16 1,191.2 1,178.5
Current tax assets - 0.1
Deferred acquisition costs 177.6 185.4
Insurance and other receivables 944.3 981.2
Prepayments, accrued income and other assets 130.5 146.2
Derivative financial instruments 87.3 84.4
Retirement benefit asset 14.4 14.4
Financial investments 17 4,996.5 5,040.4
Cash and cash equivalents 18 1,000.5 1,358.6
Assets held for sale - 4.2
============================================== ===== ======= ==========
Total assets 9,527.8 9,948.2
============================================== ===== ======= ==========
Equity
Shareholders' equity 2,482.1 2,715.1
Tier 1 notes 19 346.5 346.5
---------------------------------------------- ----- ------- ----------
Total equity 2,828.6 3,061.6
---------------------------------------------- ----- ------- ----------
Liabilities
Subordinated liabilities 20 260.9 264.7
Insurance liabilities 21 4,152.0 4,225.7
Unearned premium reserve 1,545.2 1,600.3
Borrowings 18 63.3 54.1
Derivative financial instruments 46.1 12.0
Trade and other payables, including insurance
payables 569.7 658.0
Deferred tax liabilities 17.7 31.1
Current tax liabilities 44.3 40.7
============================================== ===== ======= ==========
Total liabilities 6,699.2 6,886.6
============================================== ===== ======= ==========
Total equity and liabilities 9,527.8 9,948.2
============================================== ===== ======= ==========
Condensed consolidated statement of changes in equity
For the six months ended 30 June 2018
Tier
Foreign 1
Employee AFS exchange notes
Share trust Capital revaluation translation Retained Shareholders' (note Total
capital shares reserves reserve reserve earnings equity 19) equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================ ======== ======== ========= ============ ============ ========= ============= ====== =======
Balance at 1
January
2017 (audited) 150.0 (34.3) 1,450.0 92.1 1.4 862.3 2,521.5 - 2,521.5
Profit for the
year - - - - - 434.0 434.0 - 434.0
Other
comprehensive
(loss) / profit - - - (11.9) (1.1) 1.7 (11.3) - (11.3)
Dividends paid - - - - - (225.3) (225.3) - (225.3)
Shares acquired
by
employee trusts - (19.6) - - - - (19.6) - (19.6) Credit to equity for equity-settled share-based payments - - - - - 14.8 14.8 - 14.8 Shares distributed by employee trusts - 19.8 - - - (19.8) - - - Tax on share-based payments - - - - - 1.0 1.0 - 1.0 Issue of Tier 1 notes - - - - - - - 346.5 346.5 ================ ======== ======== ========= ============ ============ ========= ============= ====== ======= Balance at 31 December 2017 (audited) 150.0 (34.1) 1,450.0 80.2 0.3 1,068.7 2,715.1 346.5 3,061.6 Profit for the year - - - - - 238.8 238.8 - 238.8 Other comprehensive loss - - - (72.5) (0.5) - (73.0) - (73.0) Dividends and appropriations paid - - - - - (399.7) (399.7) - (399.7) Shares acquired by employee trusts - (11.3) - - - - (11.3) - (11.3) Credit to equity for equity-settled share-based payments - - - - - 11.8 11.8 - 11.8 Shares distributed by employee trusts - 13.8 - - - (13.8) - - - Tax on share-based payments - - - - - 0.4 0.4 - 0.4 Balance at 30 June 2018 150.0 (31.6) 1,450.0 7.7 (0.2) 906.2 2,482.1 346.5 2,828.6 ================ ======== ======== ========= ============ ============ ========= ============= ====== ======= Balance at 1 January 2017 (audited) 150.0 (34.3) 1,450.0 92.1 1.4 862.3 2,521.5 -2,521.5 Profit for the year - - - - - 275.5 275.5 - 275.5 Other comprehensive loss - - - (5.6) (0.4) - (6.0) - (6.0) Dividends paid - - - - - (132.4) (132.4) -(132.4) Shares acquired by employee trusts - (10.5) - - - - (10.5) - (10.5) Credit to equity for equity-settled share-based payments - - - - - 6.3 6.3 - 6.3 Shares distributed by employee trusts - 12.9 - - - (12.9) - - - Tax on share-based payments - - - - - 0.1 0.1 - 0.1 Balance at 30 June 2017 150.0 (31.9) 1,450.0 86.5 1.0 998.9 2,654.5 -2,654.5 ============================ ===== ====== ======= ===== ===== ======= ======= =======
Condensed consolidated cash flow statement
For the six months ended 30 June 2018
6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
Notes (audited)
============================================== ===== ======== ======== ==========
Net cash (used in) / generated from operating
activities before investment of insurance
assets (26.8) 27.3 204.0
Cash generated from investment of insurance
assets 125.6 109.6 341.9
============================================== ===== ======== ======== ==========
Net cash generated from operating activities 98.8 136.9 545.9
============================================== ===== ======== ======== ==========
Cash flows from investing activities
Purchases of property, plant and equipment (6.1) (3.8) (22.4)
Purchases of intangible assets (53.4) (35.2) (73.2)
Proceeds on disposals of property, plant
and equipment - - 0.3
Proceeds on disposal of assets held for
sale 13.8 - -
Net cash used in investing activities (45.7) (39.0) (95.3)
============================================== ===== ======== ======== ==========
Cash flows from financing activities
Net proceeds from issue of Tier 1 notes 19 - - 346.5
Repayment of subordinated liabilities - - (326.8)
Dividends and appropriations paid 13 (399.7) (132.4) (225.3)
Finance costs (9.4) (18.6) (31.7)
Purchase of employee trust shares (11.3) (10.5) (19.6)
============================================== ===== ======== ======== ==========
Net cash used in financing activities (420.4) (161.5) (256.9)
============================================== ===== ======== ======== ==========
Net (decrease) / increase in cash and
cash equivalents (367.3) (63.6) 193.7
Cash and cash equivalents at the beginning
of the year 18 1,304.5 1,110.8 1,110.8
Cash and cash equivalents at the end
of the year 18 937.2 1,047.2 1,304.5
============================================== ===== ======== ======== ==========
Notes to the condensed consolidated financial statements
Corporate information Direct Line Insurance Group plc is a public limited company registered in England and Wales (company number 02280426). The address of the registered office is Churchill Court, Westmoreland Road, Bromley BR1 1DP, England. 1. General information The financial information for the year ended 31 December 2017 and included in the condensed consolidated financial statements does not constitute statutory accounts as defined in S434 of the Companies Act 2006, but has been abridged from the statutory accounts for that year which have been delivered to the Registrar of Companies. The independent auditor's report on the Group accounts for the year ended 31 December 2017 is unqualified, does not draw attention to any matters by way of emphasis and does not include a statement under S498(2) of (3) of the Companies Act 2006. 2. Accounting policies Basis of preparation The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The condensed consolidated financial statements included in this half-yearly financial report have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' as adopted by the European Union. The Group has adopted IFRS 15 'Revenue from Contracts with Customers' for the first time during 2018 which has had no significant impact on the condensed consolidated financial statements. The Group has also adopted a number of new amendments to International Financial Reporting Standards and International Accounting Standards that became effective for the Group for the first time during 2018. However, these have had no impact on the condensed consolidated financial statements. Going concern The Directors, having assessed the principal risks of the Group over the full duration of the planning cycle, consider it appropriate to adopt the going concern basis in preparing the interim consolidated financial statements. Accounting policies and accounting developments The Group has elected to apply the exemption within IFRS 4 'Insurance Contracts' that allows insurers to defer the application of IFRS 9 'Financial Instruments: Recognition and Measurement' for the period commencing I January 2018 to the period commencing 1 January 2021 and will therefore continue applying IAS 39 'Financial Instruments: Recognition and Measurement' to its financial assets and financial liabilities during the period of the exemption. This is a change in accounting policy to those applied in the Group's latest annual audited financial statements when the application of IAS 39 was mandatory. In accordance with the requirements of IFRS 4 the Group made an assessment of its liabilities arising from contracts within the scope of IFRS 4 as at 31 December 2015 and determined that they were more than 90% of the total carrying amounts of all its liabilities. The Group will continue to apply the temporary exemption until 1 January 2021 unless there is a change in the Group's activities and they are no longer predominantly connected with insurance activities. With the exception of the accounting policy change explained above the Group's other accounting policies, presentation and methods of computation that are followed in the condensed consolidated financial statements are the same as applied in the Group's latest annual audited financial statements. The Group will adopt IFRS 16 'Leases' from 1 January 2019 on a fully retrospective basis. The Group continues to assess the impact of the prior year adjustment on transition and does not expect the
impact on operating expenses or finance costs to be material. 3. Critical accounting estimates and judgements Full details of critical accounting estimates and judgements used in applying the Group's accounting policies are outlined on pages 125 to 126 of the Annual Reports & Accounts 2017. There have been no significant changes to the principles or assumptions of these critical accounting estimates and judgements during the period.
4. Segmental analysis
The table below analyses the Group's revenue and results by reportable segment for the six months ended 30 June 2018.
Rescue
and
other
personal Total
Motor Home lines Commercial Group
GBPm GBPm GBPm GBPm GBPm
================================== ======= ======= ========= ========== =========
Gross written premium 839.8 290.7 209.9 269.9 1,610.3
================================== ======= ======= ========= ========== =========
Gross earned premium 835.0 370.7 206.4 253.3 1,665.4
Reinsurance premium (69.2) (16.1) (0.9) (19.6) (105.8)
================================== ======= ======= ========= ========== =========
Net earned premium 765.8 354.6 205.5 233.7 1,559.6
Investment return 65.4 9.7 3.2 17.1 95.4
Instalment income 44.0 10.9 1.1 3.1 59.1
Other operating income 26.8 2.6 7.1 3.5 40.0
================================== ======= ======= ========= ========== =========
Total income 902.0 377.8 216.9 257.4 1,754.1
================================== ======= ======= ========= ========== =========
Insurance claims (496.2) (230.1) (144.6) (134.1) (1,005.0)
Insurance claims recoverable from
/ (payable to) reinsurers 32.6 0.7 (0.1) 3.2 36.4
================================== ======= ======= ========= ========== =========
Net insurance claims (463.6) (229.4) (144.7) (130.9) (968.6)
================================== ======= ======= ========= ========== =========
Commission expenses (13.6) (38.1) (8.7) (40.8) (101.2)
Operating expenses (186.8) (89.2) (48.6) (56.6) (381.2)
================================== ======= ======= ========= ========== =========
Total expenses (200.4) (127.3) (57.3) (97.4) (482.4)
================================== ======= ======= ========= ========== =========
Operating profit 238.0 21.1 14.9 29.1 303.1
================================== ======= ======= ========= ========== =========
Finance costs (9.3)
================================== ======= ======= ========= ========== =========
Profit before tax 293.8
================================== ======= ======= ========= ========== =========
Underwriting profit / (loss) 101.8 (2.1) 3.5 5.4 108.6
================================== ======= ======= ========= ========== =========
Loss ratio 60.5% 64.7% 70.4% 56.0% 62.1%
Commission ratio 1.8% 10.7% 4.2% 17.5% 6.5%
Expense ratio 24.4% 25.2% 23.7% 24.2% 24.4%
================================== ======= ======= ========= ========== =========
COR 86.7% 100.6% 98.3% 97.7% 93.0%
================================== ======= ======= ========= ========== =========
Note:
1. Results for the six months ended 30 June 2018 are based on total Group operations
including restructuring and Run-off.
The table below analyses the Group's revenue and results by reportable segment for the six months ended 30 June 2017.
Rescue
and other
personal Total
Motor(1,2) Home lines Commercial Group(2)
GBPm GBPm GBPm GBPm GBPm
================================ ========== ======= ========== ========== =========
Gross written premium 824.4 388.1 213.3 268.4 1,694.2
================================ ========== ======= ========== ========== =========
Gross earned premium 773.5 409.1 209.8 252.6 1,645.0
Reinsurance premium (65.7) (12.1) (0.8) (18.9) (97.5)
================================ ========== ======= ========== ========== =========
Net earned premium 707.8 397.0 209.0 233.7 1,547.5
Investment return 62.6 11.2 2.4 16.8 93.0
Instalment income 40.5 11.4 1.0 2.9 55.8
Other operating income 25.7 0.4 6.3 1.4 33.8
================================ ========== ======= ========== ========== =========
Total income 836.6 420.0 218.7 254.8 1,730.1
================================ ========== ======= ========== ========== =========
Insurance claims (307.7) (191.1) (136.2) (133.2) (768.2)
Insurance claims (payable to) /
recoverable from reinsurers (86.2) 0.4 0.5 6.1 (79.2)
================================ ========== ======= ========== ========== =========
Net insurance claims (393.9) (190.7) (135.7) (127.1) (847.4)
================================ ========== ======= ========== ========== =========
Commission expenses (18.3) (67.4) (10.5) (41.9) (138.1)
Operating expenses (185.0) (94.4) (49.9) (55.6) (384.9)
================================ ========== ======= ========== ========== =========
Total expenses (203.3) (161.8) (60.4) (97.5) (523.0)
================================ ========== ======= ========== ========== =========
Operating profit 239.4 67.5 22.6 30.2 359.7
================================ ========== ======= ========== ========== =========
Finance costs (18.3)
================================ ========== ======= ========== ========== =========
Profit before tax 341.4
================================ ========== ======= ========== ========== =========
Underwriting profit 110.6 44.5 12.9 9.1 177.1
================================ ========== ======= ========== ========== =========
Loss ratio 55.7% 48.0% 64.9% 54.4% 54.8%
Commission ratio 2.6% 17.0% 5.0% 17.9% 8.9%
Expense ratio 26.1% 23.8% 23.9% 23.8% 24.9%
================================ ========== ======= ========== ========== =========
COR 84.4% 88.8% 93.8% 96.1% 88.6%
================================ ========== ======= ========== ========== =========
Note:
1. Motor segment for the six months ended 30 June 2017 include Run-off
and restructuring. These results were total income GBP0.4 million,
net insurance claims GBP9.6 million and restructuring costs GBP4.5
million.
2. Comparative ratios for Motor segment, prior to the re-presentation
of Run-off and restructuring, are shown below:
Total
Motor Ongoing
================= ===== ========
Loss ratio 57.0% 55.4%
Commission ratio 2.6% 8.9%
Expense ratio 25.5% 24.6%
COR 85.1% 88.9%
================= ===== ========
The table below analyses the Group's revenue and results by reportable segment for the year ended 31 December 2017 (audited).
Rescue
and other
personal Total
Motor(1,2) Home lines Commercial Group(2)
GBPm GBPm GBPm GBPm GBPm
================================ ========== ======= ========== ========== =========
Gross written premium 1,670.4 799.1 421.1 501.5 3,392.1
================================ ========== ======= ========== ========== =========
Gross earned premium 1,603.0 819.4 419.2 498.1 3,339.7
Reinsurance premium (132.4) (28.9) (1.6) (41.8) (204.7)
================================ ========== ======= ========== ========== =========
Net earned premium 1,470.6 790.5 417.6 456.3 3,135.0
Investment return 117.9 21.1 4.6 31.8 175.4
Instalment income 85.3 23.1 2.1 5.9 116.4
Other operating income 43.0 0.9 12.9 6.1 62.9
================================ ========== ======= ========== ========== =========
Total income 1,716.8 835.6 437.2 500.1 3,489.7
================================ ========== ======= ========== ========== =========
Insurance claims (717.1) (403.3) (273.8) (176.9) (1,571.1)
Insurance claims (payable to) /
recoverable from reinsurers (135.8) 2.8 0.5 (50.6) (183.1)
================================ ========== ======= ========== ========== =========
Net insurance claims (852.9) (400.5) (273.3) (227.5) (1,754.2)
================================ ========== ======= ========== ========== =========
Commission expenses (36.7) (139.7) (22.9) (87.1) (286.4)
Operating expenses (430.8) (166.6) (97.4) (111.5) (806.3)
================================ ========== ======= ========== ========== =========
Total expenses (467.5) (306.3) (120.3) (198.6) (1,092.7)
================================ ========== ======= ========== ========== =========
Operating profit 396.4 128.8 43.6 74.0 642.8
================================ ========== ======= ========== ========== =========
Finance costs (103.8)
================================ ========== ======= ========== ========== =========
Profit before tax 539.0
================================ ========== ======= ========== ========== =========
Underwriting profit 150.2 83.7 24.0 30.2 288.1
================================ ========== ======= ========== ========== =========
Loss ratio 58.0% 50.6% 65.4% 49.9% 56.0%
Commission ratio 2.5% 17.7% 5.5% 19.1% 9.1%
Expense ratio 29.3% 21.1% 23.4% 24.4% 25.7%
================================ ========== ======= ========== ========== =========
COR 89.8% 89.4% 94.3% 93.4% 90.8%
================================ ========== ======= ========== ========== =========
Note:
1. Motor segment for the period ended 31 December 2017 include Run-off
and restructuring. These results were total income GBP0.7 million,
net insurance claims GBP43.1 million and restructuring costs GBP11.9
million.
2. Comparative ratios for Motor segment, prior to the re-presentation
of Run-off and restructuring, are shown below:
Total
Motor Ongoing
================= ===== ========
Loss ratio 60.9% 57.4%
Commission ratio 2.5% 9.1%
Expense ratio 28.5% 25.3%
COR 91.9% 91.8%
================= ===== ========
5. Net earned premium
6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
(audited)
=================================================== ======== ======== ==========
Gross earned premium:
Gross written premium 1,610.3 1,694.2 3,392.1
Movement in unearned premium reserve 55.1 (49.2) (52.4)
=================================================== ======== ======== ==========
1,665.4 1,645.0 3,339.7
=================================================== ======== ======== ==========
Reinsurance premium:
Premium payable (93.1) (81.6) (208.4)
Movement in reinsurance unearned premium reserve (12.7) (15.9) 3.7
=================================================== ======== ======== ==========
(105.8) (97.5) (204.7)
=================================================== ======== ======== ==========
Total 1,559.6 1,547.5 3,135.0
=================================================== ======== ======== ==========
6. Investment return
6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
(audited)
============================================== ======== ======== ==========
Investment income:
Interest income from debt securities 62.7 68.0 137.5
Cash and cash equivalent interest income 3.0 1.7 3.0
Interest income from infrastructure debt 3.3 3.6 6.8
Interest income from commercial real estate
loans 2.7 1.1 3.6
---------------------------------------------- -------- -------- ----------
Interest income 71.7 74.4 150.9
Rental income from investment property 7.9 8.4 16.2
---------------------------------------------- -------- -------- ----------
79.6 82.8 167.1
---------------------------------------------- -------- -------- ----------
Net realised gains / (losses):
AFS debt securities 18.4 14.8 23.2
Derivatives 23.7 109.3 175.0
Investment property - (0.3) 1.6
42.1 123.8 199.8
============================================== ======== ======== ==========
Net unrealised (losses) / gains:
Impairment of loans and receivables - (3.4) (9.5)
Derivatives (38.4) (120.1) (202.0)
Investment property 12.1 9.9 20.0
============================================== ======== ======== ==========
(26.3) (113.6) (191.5)
============================================== ======== ======== ==========
Total 95.4 93.0 175.4
============================================== ======== ======== ==========
The table below analyses the realised and unrealised gains and losses on derivative instruments included in investment return.
Realised Unrealised Realised Unrealised
-------- ---------- -------- ----------
6 months 6 months 6 months 6 months
2018 2018 2017 2017
GBPm GBPm GBPm GBPm
======== ==========
Derivative gains / (losses):
Foreign exchange forward contracts(1) (3.6) (58.7) 41.8 54.6
Associated foreign exchange risk 36.2 11.3 61.5 (166.6)
========================================= ======== ========== ======== ==========
Net gains / (losses) on foreign exchange
forward contracts 32.6 (47.4) 103.3 (112.0)
========================================= ======== ========== ======== ==========
Interest rate swaps(1) 6.3 32.3 9.4 (18.4)
Associated interest rate risk on hedged
items (15.2) (23.3) (3.4) 10.3
========================================= ======== ========== ======== ==========
Net (losses) / gains on interest rate
derivatives (8.9) 9.0 6.0 (8.1)
Total 23.7 (38.4) 109.3 (120.1)
========================================= ======== ========== ======== ==========
Realised Unrealised
=========== ===========
Full year Full year
2017 2017
(audited) (audited)
GBPm GBPm
=========================================================== =========== ===========
Derivative gains / (losses):
Foreign exchange forward contracts(1) 107.8 62.5
Associated foreign exchange risk 68.4 (259.1)
=========================================================== =========== ===========
Net gains / (losses) on foreign exchange forward contracts 176.2 (196.6)
=========================================================== =========== ===========
Interest rate swaps(1) 1.8 (1.7)
Associated interest rate risk (3.0) (3.7)
=========================================================== =========== ===========
Net losses on interest rate derivatives (1.2) (5.4)
Total 175.0 (202.0)
=========================================================== =========== ===========
Note:
1. Foreign exchange forward contracts are at fair value through the income statement
and interest rate swaps are designated as hedging instruments.
7. Other operating income
6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
(audited)
================================================== ======== ======== ==========
Vehicle replacement referral income 8.4 8.3 16.9
Revenue from vehicle recovery and repair services 5.8 9.8 11.3
Legal services income 5.8 5.6 11.0
Other income(1,2) 20.0 10.1 23.7
================================================== ======== ======== ==========
Total 40.0 33.8 62.9
================================================== ======== ======== ==========
Notes:
1. Other income includes salvage income and fee income from insurance intermediary
services.
2. Other income includes a GBP9.6 million gain on the sale of a property in
Bristol.
8. Net insurance claims
Gross Reinsurance Net Gross Reinsurance Net
======== =========== ======== ======== =========== ========
6 months 6 months 6 months 6 months 6 months 6 months
2018 2018 2018 2017 2017 2017
GBPm GBPm GBPm GBPm GBPm GBPm
================================== ======== =========== ======== ======== =========== ========
Current accident year claims
paid 503.8 (0.1) 503.7 452.4 (0.1) 452.3
Prior accident year claims
paid 574.9 (10.9) 564.0 573.4 (5.7) 567.7
Movement in insurance liabilities (73.7) (25.4) (99.1) (257.6) 85.0 (172.6)
================================== ======== =========== ======== ======== =========== ========
Total 1,005.0 (36.4) 968.6 768.2 79.2 847.4
================================== ======== =========== ======== ======== =========== ========
Gross Reinsurance Net
========== =========== ==========
Full year Full year Full year
2017 2017 2017
GBPm GBPm GBPm
(audited) (audited) (audited)
================================== ========== =========== ==========
Current accident year claims paid 1,165.0 (0.2) 1,164.8
Prior accident year claims paid 847.0 (13.8) 833.2
Movement in insurance liabilities (440.9) 197.1 (243.8)
================================== ========== =========== ==========
Total 1,571.1 183.1 1,754.2
================================== ========== =========== ==========
6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
(audited)
=================================================== ======== ======== ==========
Claims handling expenses included in net insurance
claims 91.1 86.6 174.8
=================================================== ======== ======== ==========
Note:
1. Results for the period ended 30 June 2018 are based on total Group operations
including Run-off. Comparative data has been re-presented accordingly.
9. Commission expenses
6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
(audited)
============================================== ======== ======== ==========
Commission expenses 97.7 117.1 225.4
Expenses incurred under profit participations 3.5 21.0 61.0
============================================== ======== ======== ==========
Total 101.2 138.1 286.4
============================================== ======== ======== ==========
10. Operating expenses
6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
(audited)
================================================ ======== ======== ==========
Staff costs(1) 137.0 136.1 280.1
Other operating expenses(1,2) 137.7 149.0 273.6
Marketing 65.9 59.0 113.7
Amortisation and impairment of other intangible
assets 24.4 26.7 111.0
Depreciation 16.2 14.1 27.9
================================================ ======== ======== ==========
Total 381.2 384.9 806.3
================================================ ======== ======== ==========
Notes:
1. Staff costs and other operating expenses attributable to claims handling
activities are allocated to the cost of insurance claims.
2. Other operating expenses includes IT costs, insurance levies, professional
fees and property costs.
11. Finance costs
6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
(audited)
==================================================== ======== ======== ==========
Interest expense on subordinated liabilities 11.5 23.1 44.8
Net interest received on designated hedging
instrument(1) (2.2) (4.5) (8.0)
Unrealised loss on designated hedging instrument(1) 3.7 6.3 10.4
Unrealised gain on associated interest rate
risk on hedged item(1) (3.9) (6.9) (11.7)
Realised gain on associated interest rate risk
on hedged item(1) - - (11.3)
Premium paid to repurchase subordinated liabilities
and associated transaction costs - - 77.4
Amortisation of arrangement costs and discount
on issue of subordinated liabilities 0.2 0.3 2.2
==================================================== ======== ======== ==========
Total 9.3 18.3 103.8
==================================================== ======== ======== ==========
Note:
1. As described in note 20, on 27 April 2012 the Group issued subordinated guaranteed
dated notes with a nominal value of GBP500 million at a fixed rate of 9.25%.
On the same date, the Group also entered into a 10-year designated hedging instrument
to exchange the fixed rate of interest on the notes for a floating rate of three-month
LIBOR plus a spread of 706 basis points, which increased to 707 basis points
with effect from 29 July 2013. On 8 December 2017, the Group redeemed GBP250
million nominal value of the notes.
12. Tax charge 6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
(audited)
============================================= ======== ======== ==========
Current taxation:
Charge for the period 56.9 69.9 114.4
(Over) / under provision in respect of the
prior period (2.8) 6.4 5.3
--------------------------------------------- -------- -------- ----------
54.1 76.3 119.7
============================================= ======== ======== ==========
Deferred taxation:
Credit for the period (2.1) (2.2) (5.8)
Under / (over) provision in respect of the
prior period 3.0 (8.2) (8.9)
============================================= ======== ======== ==========
0.9 (10.4) (14.7)
============================================= ======== ======== ==========
Current taxation 54.1 76.3 119.7
Deferred taxation 0.9 (10.4) (14.7)
============================================= ======== ======== ==========
Tax charge for the period 55.0 65.9 105.0
============================================= ======== ======== ==========
13. Dividends and appropriations 6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
(audited)
============================================== ======== ======== ==========
Amounts recognised as distributions to equity
holders in the period:
2017 final dividend of 13.6p per share paid
on 17 May 2018 186.1 - -
2016 final dividend of 9.7p per share paid
on 18 May 2017 - 132.4 132.4
2017 first interim dividend of 6.8p per share
paid on 8 September 2017 - - 92.9
2017 special dividend of 15.0p per share paid
on 17 May 2018 205.3 - -
Coupon payments in respect of Tier 1 notes(1)
paid on 7 June 2018 8.3 - -
============================================== ======== ======== ==========
399.7 132.4 225.3
============================================== ======== ======== ==========
Note:
1. Coupon payments on the Tier 1 notes issued in December 2017 are
treated as an appropriation of retained profits and, accordingly,
are accounted for when paid.
The trustees of the employee share trusts waived their entitlement
to dividends on shares held to meet obligations arising on certain
share awards, which reduced the total dividends paid for the six
months ended 30 June 2018 by GBP1.8 million (six months ended 30
June 2017: GBP1.0 million and year ended 31 December 2017: GBP1.6
million).
14. Earnings per share
Earnings per share is calculated by dividing earnings attributable
to the owners of the Company by the weighted average number of Ordinary
Shares during the year.
Basic
Basic earnings per share is calculated by dividing the earnings
attributable to the owners of the Company by the weighted average
number of Ordinary Shares for the purposes of basic earnings per
share during the period, excluding Ordinary Shares held as employee
trust shares. 6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
(audited)
=============================================== ======== ======== ==========
Earnings attributable to owners of the Company 238.8 275.5 434.0
Coupon payments in respect of Tier 1 notes (8.3) - -
----------------------------------------------- -------- -------- ----------
Profit for the calculation of earnings per
share 230.5 275.5 434.0
----------------------------------------------- -------- -------- ----------
Weighted average number of Ordinary Shares
(millions) 1,366.5 1,365.5 1,366.1
=============================================== ======== ======== ==========
Basic earnings per share (pence) 16.9 20.2 31.8
=============================================== ======== ======== ==========
Diluted
Diluted earnings per share is calculated by dividing the earnings attributable
to the owners of the Company by the weighted average number of Ordinary Shares
during the period adjusted for the dilutive potential Ordinary Shares. The Company
has share options and contingently issuable shares as categories of dilutive
potential Ordinary Shares.
6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
(audited)
=============================================== ======== ======== ==========
Earnings attributable to owners of the Company 238.8 275.5 434.0
Coupon payments in respect of Tier 1 notes (8.3) - -
=============================================== ======== ======== ==========
Profit for the calculation of earnings per
share 230.5 275.5 434.0
=============================================== ======== ======== ==========
Weighted average number of Ordinary Shares
(millions) 1,366.5 1,365.5 1,366.1
Effect of dilutive potential of share options
and contingently issuable shares (millions) 14.5 12.7 12.9
=============================================== ======== ======== ==========
Weighted average number of Ordinary Shares
for the purpose of diluted earnings per share
(millions) 1,381.0 1,378.2 1,379.0
=============================================== ======== ======== ==========
Diluted earnings per share (pence) 16.7 20.0 31.5
=============================================== ======== ======== ==========
15. Net assets per share and return on equity
Net asset value per share is calculated as total shareholders' equity divided
by the number of Ordinary Shares at the end of
the period excluding shares held by employee share trusts.
Tangible net asset value per share is calculated as total shareholders' equity
less goodwill and other intangible assets divided
by the number of Ordinary Shares at the end of the period excluding shares
held by employee share trusts.
The table below analyses net asset and tangible net asset value per share.
30 Jun Full year
2018 2017
GBPm GBPm
At (audited)
=================================================================================== ============= ================
Net assets 2,482.1 2,715.1
Goodwill and other intangible assets(1) (500.0) (471.1)
Tangible net assets 1,982.1 2,244.0
=================================================================================== ============= ================
Number of Ordinary Shares (millions) 1,375.0 1,375.0
Shares held by employee share trusts (millions) (9.3) (9.9)
=================================================================================== ============= ================
Closing number of Ordinary Shares (millions) 1,365.7 1,365.1
=================================================================================== ============= ================
Net asset value per share (pence) 181.7 198.9
Tangible net asset value per share (pence) 145.1 164.4
=================================================================================== ============= ================
Note:
1. Goodwill has arisen on acquisition by the Group of subsidiary companies.
Intangible assets are primarily comprised of software development costs.
Return on equity
The table below details the calculation of return on equity.
6 months 6 months Full year
2018 2017 2017
GBPm GBPm GBPm
(audited)
================================================ ======== ======== ==========
Earnings attributable to owners of the Company 238.8 275.5 434.0
Coupon payments in respect of Tier 1 notes (8.3) - -
================================================ ======== ======== ==========
Profit for the calculation of return on equity 230.5 275.5 434.0
================================================ ======== ======== ==========
Annualised profit for the calculation of return
on equity (1) 461.0 551.0 434.0
================================================ ======== ======== ==========
Opening shareholders' equity 2,715.1 2,521.5 2,521.5
Closing shareholders' equity 2,482.1 2,654.5 2,715.1
======== ==========
Average shareholders' equity 2,598.6 2,588.0 2,618.3
================================================ ======== ======== ==========
Return on equity for period 8.9% 10.6% 16.6%
Return on equity annualised(1) 17.7% 21.3% 16.6%
================================================ ======== ======== ==========
Note:
1. Profit has been annualised using profit for the 6 months ended 30 June 2018
(2017: 6 months ended 30 June 2017).
16. Reinsurance assets
Note 30 Jun Full year
2018 2017
GBPm GBPm
At (audited)
==================================================== ==== ======= ==========
Reinsurers' share of general insurance liabilities 1,161.5 1,141.1
Impairment provision(1) (54.9) (59.9)
==================================================== ==== ======= ==========
Total excluding reinsurers unearned premium reserve 21 1,106.6 1,081.2
Reinsurers' unearned premium reserve 84.6 97.3
==================================================== ==== ======= ==========
Total 1,191.2 1,178.5
==================================================== ==== ======= ==========
Note:
1. Impairment provision relates to reinsurance debtors allowing for the risk
that reinsurance assets may not be collected or where the reinsurer's credit
rating has been significantly downgraded and may have difficulty in meeting
its obligations.
17. Financial investments
30 Jun Full year
2018 2017
GBPm GBPm
At (audited)
================================= ======= ==========
AFS debt securities
Corporate 4,162.7 4,170.5
Supranational 43.2 43.9
Local government 38.2 12.2
Sovereign 165.8 224.8
Total 4,409.9 4,451.4
Held-to-maturity debt securities
Corporate 102.3 103.6
Total debt securities 4,512.2 4,555.0
================================= ======= ==========
Total debt securities
Fixed interest rate(1) 4,475.8 4,540.1
Floating interest rate 36.4 14.9
================================= ======= ==========
Total 4,512.2 4,555.0
Loans and receivables
Infrastructure debt 301.0 316.4
Commercial real estate loans 183.3 169.0
================================= ======= ==========
Total 4,996.5 5,040.4
================================= ======= ==========
Note:
1. The Group swaps a fixed interest rate for a floating rate of
interest on its US Dollar, Euro and a small amount of its Sterling
corporate debt securities by entering into interest rate derivatives.
The hedged amount at 30 June 2018 was GBP1,329.0 million (31 December
2017: GBP1,591.5 million).
18. Cash and cash equivalents and borrowings
30 Jun Full year
2018 2017
GBPm GBPm
(audited)
================================================ ======= ==========
Cash at bank and in hand 165.5 258.0
Short-term deposits with credit institutions(1) 835.0 1,100.6
================================================ ======= ==========
Cash and cash equivalents 1,000.5 1,358.6
Bank overdrafts(2) (63.3) (54.1)
Cash and bank overdrafts(3) 937.2 1,304.5
================================================ ======= ==========
Notes:
1. This represents money market funds with no notice period for
withdrawal.
2. Bank overdrafts represent short-term timing differences between
transactions posted in the records of the Group and transactions
flowing through the accounts at the bank.
3. Cash and bank overdrafts disclosure note is included for the
purposes of the consolidated cash flow statement.
The effective interest rate on short-term deposits with credit institutions
for the six months ended 30 June 2018 was 0.49%
(31 December 2017: 0.29%) and average maturity at 30 June 2018
was 10 days (31 December 2017: 10 days).
19. Tier 1 notes
30 Jun Full year
2018 2017
GBPm GBPm
(audited)
================================= ================ ==========================
Tier 1 notes 346.5 346.5
================================= ================ ==========================
On 7 December 2017, the Group issued GBP350 million of fixed rate
perpetual Tier 1 notes with a coupon rate of 4.75% per annum.
The Group has an optional redemption date of 7 December 2027. If
the notes are not repaid on that date, a fixed rate of interest
per annum will be reset. The notes are direct, unsecured and subordinated
obligations of the issuer ranking pari passu and without any preference
amongst themselves.
The Tier 1 notes are treated as a separate category within equity
and the coupon payments are recognised outside of the profit after
tax result and directly in shareholders' equity.
The Group has the option to cancel the coupon payment which becomes
mandatory upon breach of non-compliance with the Group SCR, a breach
of the minimum capital requirement or where the Group has insufficient
distributable reserves.
20. Subordinated liabilities
30 Jun Full year
2018 2017
GBPm GBPm
(audited)
================================================== ========= =============
Subordinated guaranteed dated notes 260.9 264.7
================================================== ========= =============
The subordinated guaranteed dated notes with a nominal value of
GBP500 million were issued on 27 April 2012 at a fixed rate of 9.25%.
On the same date, the Group also entered into a 10-year designated
hedging instrument to exchange the fixed rate of interest for a
floating rate of three-month LIBOR plus a spread of 706 basis points
which was credit value adjusted to 707 basis points with effect
from 29 July 2013.
On 8 December 2017, the Group repurchased GBP250 million nominal
value of the subordinated guaranteed dated notes for a purchase
price of GBP330.1 million including accrued interest of GBP2.7 million
and associated transaction costs of GBP0.6 million.
The remaining notes, with a nominal value of GBP250 million, have
a redemption date of 27 April 2042 with the option to repay the
notes on 27 April 2022. If the notes are not repaid on that date,
the rate of interest will be reset at a rate of the six-month LIBOR
plus 7.91%.
The Group has the option, in certain circumstances, to defer interest
payments on the notes but to date has not exercised this right.
The notes are unsecured, subordinated obligations of the Group,
and rank pari passu without any preference among themselves.
In the event of a winding-up or of bankruptcy, they are to be repaid
only after the claims of all other senior creditors have been met.
21. Insurance liabilities
Movements in gross and net insurance liabilities
Gross Reinsurance Net
GBPm GBPm GBPm
========================================= ========= =========== =========
Claims reported 2,584.5 (388.3) 2,196.2
Incurred but not reported 2,002.8 (890.0) 1,112.8
Claims handling provision 79.3 - 79.3
At 1 January 2017 (audited) 4,666.6 (1,278.3) 3,388.3
Cash paid for claims settled in the year (2,012.0) 14.0 (1,998.0)
Increase / (decrease) in liabilities:
Arising from current-year claims 2,389.9 (200.3) 2,189.6
Arising from prior-year claims (818.8) 383.4 (435.4)
At 31 December 2017 (audited) 4,225.7 (1,081.2) 3,144.5
========================================= ========= =========== =========
Claims reported 3,003.7 (742.5) 2,261.2
Incurred but not reported 1,142.7 (338.7) 804.0
Claims handling provision 79.3 - 79.3
========================================= ========= =========== =========
At 31 December 2017 (audited) 4,225.7 (1,081.2) 3,144.5
Cash paid for claims settled in the year (1,078.7) 11.0 (1,067.7)
Increase / (decrease) in liabilities:
Arising from current-year claims 1,256.8 (81.7) 1,175.1
Arising from prior-year claims (251.8) 45.3 (206.5)
At 30 June 2018 4,152.0 (1,106.6) 3,045.4
========================================= ========= =========== =========
Claims reported 3,024.2 (767.0) 2,257.2
Incurred but not reported 1,043.5 (339.6) 703.9
Claims handling provision 84.3 - 84.3
========================================= ========= =========== =========
At 30 June 2018 4,152.0 (1,106.6) 3,045.4
========================================= ========= =========== =========
Movement in prior-year net insurance liabilities by operating segment
6 months 6 months Full year
2018 2017(1) 2017(1)
GBPm GBPm GBPm
(audited)
================================ ======== ======== ==========
Motor (137.7) (184.2) (318.6)
Home (24.7) (16.8) (23.7)
Rescue and other personal lines (5.7) 2.1 (6.8)
Commercial (38.4) (27.1) (86.3)
================================ ======== ======== ==========
Total (206.5) (226.0) (435.4)
================================ ======== ======== ==========
Note:
1. Results for the period ended 30 June 2018 are based on total Group operations
including Run-off. Comparative data has been re-presented accordingly to include
Run-off prior year claims movements within the Motor segment (six months ended
30 June 2017: GBP9.6 million, year ended 31 December 2017: GBP43.1 million).
22. Fair value
For disclosure purposes, fair value measurements are classified
as level 1, 2 or 3 based on the degree to which fair value is observable.
Level 1 financial assets are measured in whole or in part by reference
to published quotes in an active market. In an active market quoted
prices are readily and regularly available from an exchange, dealer,
broker, industry group, pricing service or regulatory agency and
those prices represent actual and regularly occurring market transactions
on an arm's length basis.
Level 2 financial assets and liabilities are measured using a valuation
technique based on assumptions that are supported by prices from
observable current market transactions. These are assets for which
pricing is obtained via pricing services, but where prices have
not been determined in an active market, or financial assets with
fair values based on broker quotes or assets that are valued using
the Group's own models whereby the majority of assumptions are market-observable.
Level 3 fair value measurements used for investment properties,
HTM debt securities, infrastructure debt and commercial real estate
loans are those derived from a valuation technique that includes
inputs for the asset that are unobservable.
These classifications remain unchanged from those outlined on page
162 of the Annual Report & Accounts 2017.
The following table compares the carrying value and the fair value
of financial instruments and other assets where the Group discloses
a fair value.
Carrying Level Level Level
value 1 2 3 Fair value
At 30 June 2018 GBPm GBPm GBPm GBPm GBPm
========================================== ========== ====== ========= ===== ===========
Assets held at fair value:
Investment property 321.4 - - 321.4 321.4
Derivative assets 87.3 - 87.3 - 87.3
AFS debt securities (note 17) 4,409.9 165.8 4,244.1 - 4,409.9
Other financial assets:
Held-to-maturity debt securities
(note 17) 102.3 - 14.1 89.5 103.6
Infrastructure debt (note 17) 301.0 - - 305.2 305.2
Commercial real estate loans (note
17) 183.3 - - 183.2 183.2
========================================== ========== ====== ========= ===== ===========
Total assets 5,405.2 165.8 4,345.5 899.3 5,410.6
========================================== ========== ====== ========= ===== ===========
Liabilities held at fair value:
Derivative liabilities 46.1 - 46.1 - 46.1
Other financial liabilities:
Subordinated liabilities 260.9 - 309.9 - 309.9
========================================== ========== ====== ========= ===== ===========
Total liabilities 307.0 - 356.0 - 356.0
========================================== ========== ====== ========= ===== ===========
Carrying Level Level Level
value 1 2 3 Fair value
At 31 December 2017 GBPm GBPm GBPm GBPm GBPm
=================================== ======== ===== ======= ===== ==========
Assets held at fair value:
Investment property 309.3 - - 309.3 309.3
Derivative assets 84.4 - 84.4 - 84.4
AFS debt securities (note 17) 4,451.4 224.8 4,226.6 - 4,451.4
Other financial assets:
Held-to-maturity debt securities
(note 17) 103.6 - 14.4 92.8 107.2
Infrastructure debt (note 17) 316.4 - - 326.0 326.0
Commercial real estate loans (note
17) 169.0 - - 169.0 169.0
Total assets 5,434.1 224.8 4,325.4 897.1 5,447.3
=================================== ======== ===== ======= ===== ==========
Liabilities held at fair value:
Derivative liabilities 12.0 - 12.0 - 12.0
Other financial liabilities:
Subordinated liabilities 264.7 - 328.7 - 328.7
=================================== ======== ===== ======= ===== ==========
Total liabilities 276.7 - 340.7 - 340.7
=================================== ======== ===== ======= ===== ==========
Differences arise between carrying value and fair value where the measurement
basis of the assets or liabilities is not fair value (e.g. assets and liabilities
carried at amortised cost). Fair values of the following assets and liabilities
approximate their carrying values:
-- insurance and other receivables;
-- cash and cash equivalents;
-- borrowings; and
-- trade and other payables including insurance payables (excluding
provisions).
Only investment property, held within level 3, is held at fair value in the
condensed consolidated balance sheet. There were no changes in the categorisation
of assets between levels 1, 2 and 3 for assets and liabilities held by the Group
since 31 December 2017.
The table below analyses the movement in assets classified as level 3 in the
fair value hierarchy.
Investment
property
GBPm
================================================================ =============
At 31 December 2017 (audited) 309.3
Increase in fair value in the period (note 6) 12.1
At 30 June 2018 321.4
================================================================ =============
Glossary
Term Definition and explanation
======================== ===========================================================
Available-for-sale Financial assets that are classified as AFS. Please
("AFS") investment refer to the accounting policy note 1.12 on page
120 of the Annual Report and Accounts 2017.
======================== ===========================================================
Average written Average written premium is the total written premium
premium at inception divided by the number of policies.
======================== ===========================================================
Capital The funds invested in the Group, including funds
invested by shareholders and retained profits.
======================== ===========================================================
Claims frequency The number of claims divided by the number of policies
per year.
======================== ===========================================================
Claims handling Funds the Group sets aside to meet the estimated
provision (provision cost of settling claims and related expenses that
for losses and the Group considers it will ultimately need to pay.
loss-adjustment
expense)
======================== ===========================================================
Combined operating The sum of the loss, commission and expense ratios.
ratio ("COR") The ratio measures the amount of claims costs, commission
expenses and operating expenses, compared to net
earned premium generated. A ratio of less than 100%
indicates profitable underwriting. Normalised COR
adjusts loss and commission ratios for a normal level
of expected major weather events in the period.
======================== ===========================================================
Commission expenses Payments to brokers, partners and PCWs for generating
business.
======================== ===========================================================
Commission ratio The ratio of commission expense divided by net earned
premium.
======================== ===========================================================
Current-year attritional The loss ratio for the current accident year, excluding
loss ratio the movement of claims reserves relating to previous
accident years, and claims relating to major weather
events.
======================== ===========================================================
Direct own brands Direct own brands include Home and Motor under the
Direct Line, Churchill and Privilege brands, Rescue
under the Green Flag brand and Commercial under the
Direct Line for Business brand.
======================== ===========================================================
Earnings per share The amount of the Group's profit after deduction
of the Tier 1 coupon payments allocated to each Ordinary
Share of the Company
======================== ===========================================================
Expense ratio The ratio of operating expenses divided by net earned
premium.
======================== ===========================================================
Finance costs The cost of servicing the Group's external borrowings.
======================== ===========================================================
Gross written The total premiums from contracts that began during
premium the period.
======================== ===========================================================
International A not-for-profit public interest organisation that
Accounting Standards is overseen by a monitoring board of public authorities.
Board ("IASB") It develops IFRS: standards that aim to make worldwide
markets transparent, accountable and efficient.
======================== ===========================================================
Incurred but not Funds set aside to meet the cost of claims for accidents
reported ("IBNR") that have occurred, but have not yet been reported
to the Group. This includes an element of uplift
on the value of claims reported. Where the Group
has determined that the value currently held in reserves
is not sufficient to meet the estimated ultimate
costs of the claim is referred to as incurred but
not enough reported ("IBNER").
======================== ===========================================================
In-force policies The number of policies on a given date that are active
and against which the Group will pay, following a
valid insurance claim.
======================== ===========================================================
Insurance liabilities This comprises insurance claims reserves and claims
handling provision, which the Group maintains to
meet current and future claims.
======================== ===========================================================
Investment income The income earned from the investment portfolio,
yield recognised through the income statement during the
period, and divided by the average assets under management
("AUM"). This excludes unrealised and realised gains
and losses, impairments, and fair value adjustments.
The average AUM derives from the period's opening
and closing balances for the total Group (see alternative
performance measures).
======================== ===========================================================
Investment return The return earned from the investment portfolio,
including unrealised and realised gains and losses,
impairments, and fair value adjustments.
======================== ===========================================================
Investment return The return earned from the investment portfolio,
yield recognised through the income statement during
the period divided by the average AUM. This includes
unrealised and realised gains and losses, impairments,
and fair value adjustments. The average AUM derives
from the period's opening and closing balances (see
alternative performance measures).
======================== ===========================================================
Leverage Tier 1 notes and financial debt (subordinated guaranteed
dated notes) as a percentage of total capital employed.
======================== ===========================================================
Loss ratio Net insurance claims divided by net earned premium.
======================== ===========================================================
Net asset value The net asset value of the Group is calculated by
subtracting total liabilities from total assets.
======================== ===========================================================
Net claims The cost of claims incurred in the period less any
claims costs recovered under reinsurance contracts.
It includes claims payments and movements in claims
reserves.
======================== ===========================================================
Net earned premium The element of gross earned premium less reinsurance
premium ceded for the period where insurance cover
has already been provided.
======================== ===========================================================
Net investment The net investment income yield is calculated in
income the same way as investment income yield but includes
yield the cost of hedging (see alternative performance
measures).
======================== ===========================================================
Operating profit The pre-tax profit that the Group's activities generate,
including insurance and investment activity,
but excluding finance costs.
======================== ===========================================================
Periodic payment These are claims payments as awarded under the Courts
order ("PPO") Act 2003. PPOs are used to settle large personal
injury claims. They generally provide a lump-sum
award plus inflation-linked annual payments to claimants
who require long-term care.
======================== ===========================================================
Prudential Regulation The PRA is a part of the Bank of England. It is responsible
Authority ("PRA") for regulating and supervising insurers
and financial institutions in the UK.
======================== ===========================================================
Reinsurance Contractual arrangements where the Group transfers
part or all of the accepted insurance risk
to another insurer.
======================== ===========================================================
Return on equity Return on equity is calculated by dividing the profit
attributable to the owners of the Company after deduction
of the Tier 1 coupon payments by average shareholders'
equity for the period.
======================== ===========================================================
Return on tangible Return on tangible equity is profit after tax from
equity ("RoTE") total Group operations after deduction of the Tier
1 coupon payments divided by the Group's average
shareholders' equity, less goodwill and other intangible
assets (see alternative performance measures).
======================== ===========================================================
Solvency II The capital adequacy regime for the European insurance
industry, which became effective on
1 January 2016. It establishes capital requirements
and risk management standards.
It comprises three pillars: Pillar I, which sets
out capital requirements for an insurer; Pillar II,
which focuses on systems of governance; and Pillar
III, which deals with disclosure requirements.
======================== ===========================================================
Solvency capital The ratio of solvency II own funds to the solvency
ratio capital requirement.
======================== ===========================================================
Underwriting result The profit or loss from operational activities, excluding
profit / (loss) investment return and other operating income. It
is calculated as net earned premium less net insurance
claims and total expenses.
======================== ===========================================================
Appendix A - Alternative performance measures
The Group has identified Alternative Performance Measures ("APMs") in accordance with the European Securities and Markets Authority's published Guidelines. The Group uses APMs to improve comparability of information between reporting periods and reporting segments, by adjusting for either uncontrollable or one-off costs which impact the IFRS measures, to aid the user of the Annual Report in understanding the activity taking place across the Group. These APMs are contained within the main narrative sections of this document, outside of the financial statements and notes, and may not necessarily have standardised meanings for ease of comparability across peer organisations.
Further information is presented below, defined in the glossary and reconciled to the most directly reconcilable line items in the financial statements and notes. Note 4 of the consolidated financial statements presents a reconciliation of the Group's business activities on a segmental basis to the statutory income statement. All note references in the table below are to the notes to the consolidated financial statements.
Group APM Closest Definition and / or reconciliation Rationale for APM
equivalent
IFRS
measure
============== ============= ================================== =====================================
Current-year Loss Current-year attritional loss Expresses claims performance
attritional ratio ratio is defined in the glossary in the current accident year
loss ratio and is reconciled to loss ratio in relation to net earned premium.
(discussed below) in the Finance
review.
============== ============= ================================== =====================================
COR Operating COR is defined in the glossary. This is a measure of underwriting
profit profitability whereby a ratio
of less than 100% represents
an underwriting profit and
a ratio of more than 100% represents
an underwriting loss and excludes
non-insurance income.
============== ============= ================================== =====================================
Investment Investment Investment income yield is Expresses a relationship between
income yield income defined in the glossary and the investment income and the
is reconciled below. associated opening and closing
assets adjusted for portfolio
hedging instruments.
============== ============= ================================== =====================================
Investment Investment Investment return yield is Expresses a relationship between
return yield return defined in the glossary and the investment return and the
is reconciled below. associated opening and closing
assets net of any associated
liabilities.
============== ============= ================================== =====================================
Loss ratio Net insurance Loss ratio is defined in the Expenses claims performance
claims glossary and is reconciled in relation to net earned premium.
below.
============== ============= ================================== =====================================
Net investment Investment Net investment income yield Expresses a relationship between
income yield income is defined in the glossary the investment income and the
and is reconciled below. associated opening and closing
assets adjusted for portfolio
hedging instruments.
============== ============= ================================== =====================================
RoTE Return RoTE is defined in the glossary This shows performance against
on Equity and is reconciled below. a measure of equity that is
more able to be compared with
other companies.
============== ============= ================================== =====================================
Tangible Equity Tangible equity is defined This shows the equity excluding
equity as equity less intangible assets intangible assets for comparability
within the balance sheet and with companies who have not
is reconciled below. acquired businesses or capitalised
intangible assets.
============== ============= ================================== =====================================
Tangible Net assets Tangible net asset per share This shows the equity excluding
net asset per share is defined as tangible equity intangible assets per share
per share (as above) expressed as a value for comparability with companies
per share and is reconciled who have not acquired businesses
in note 15. or capitalised intangible assets.
============== ============= ================================== =====================================
Additionally, the current-year attritional loss ratio within the analysis by division section and total costs have also been identified as alternative performance measures, similarly reconciled to the financial statements and notes in the Finance review, and defined in the glossary.
Return on tangible equity ("RoTE")(1)
H1 H1
2018 2017
Note(2) GBPm GBPm
============================================= ======== ======= =======
Profit after tax 238.8 275.5
Coupon payments in respect of Tier 1 notes (8.3) -
======================================================= ======= =======
Profit attributable to ordinary shareholders 230.5 275.5
======================================================= ======= =======
Annualised profit attributable to ordinary
shareholders 461.0 551.0
======================================================= ======= =======
Opening shareholders' equity 2,715.1 2,521.5
Opening goodwill and other intangible assets (471.1) (508.9)
Opening shareholders' tangible equity 2,244.0 2,012.6
======================================================= ======= =======
Closing shareholders' equity 2,482.1 2,654.5
Closing goodwill and other intangible assets (500.0) (517.4)
======================================================= ======= =======
Closing shareholders' tangible equity 1,982.1 2,137.1
======================================================= ======= =======
Average shareholders' tangible equity(3) 2,113.0 2,074.8
======================================================= ======= =======
Return on tangible equity annualised 21.8% 26.6%
======================================================= ======= =======
Investment income and return yields
H1 H1
2018 2017
Notes GBPm GBPm
============================================= ===== ======= =======
Investment income 6 79.6 82.8
Hedging to a sterling floating rate basis(4) 6 (14.7) (10.8)
--------------------------------------------- ----- ------- -------
Net investment income 64.9 72.0
Net realised and unrealised gains excluding
hedging 30.5 21.0
============================================= ===== ======= =======
Investment return 6 95.4 93.0
============================================= ===== ======= =======
Investment income annualised 159.2 165.6
Net investment income annualised 129.8 144.0
Investment return annualised 190.8 186.0
============================================= ===== ======= =======
Opening investment property 309.3 329.0
Opening financial investments 5,040.4 5,147.0
Opening cash and cash equivalents 1,358.6 1,166.1
Opening borrowings (54.1) (55.3)
Opening derivatives asset / (liability)(5) 55.1 (5.8)
============================================= ===== ======= =======
Opening investment holdings 6,709.3 6,581.0
============================================= ===== ======= =======
Closing investment property 321.4 314.9
Closing financial investments 17 4,996.5 5,155.5
Closing cash and cash equivalents 18 1,000.5 1,106.6
Closing borrowings 18 (63.3) (59.4)
Closing derivatives asset(5) 28.4 30.6
============================================= ===== ======= =======
Closing investment holdings 6,283.5 6,548.2
============================================= ===== ======= =======
Average investment holdings 6,496.4 6,564.6
============================================= ===== ======= =======
Annualised investment income yield 2.5% 2.5%
Annualised net investment income yield 2.0% 2.2%
Annualised investment return yield 2.9% 2.8%
============================================= ===== ======= =======
Notes:
1. See glossary for definitions.
2. See notes to the consolidated financial statements.
3. Mean average of opening and closing balances.
4. Includes net realised and unrealised gains / (losses) of derivatives
in relation to AUM.
5. Asset allocation at 30 June 2018 includes investment portfolio
derivatives, which have been included and have a mark-to-market
asset value of GBP28.4 million included in investment grade credit.
This excludes non-investment derivatives that have been used to
hedge interest on subordinated debt and operational cash flows.
Directors' responsibility statement
We confirm that to the best of our knowledge:
1. the condensed consolidated financial statements, which have
been prepared in accordance with International Accounting Standard
34 'Interim Financial Reporting' as adopted by the European
Union, give a true and fair view of the assets, liabilities,
financial position and profit or loss of Direct Line Insurance
Group plc and the undertakings included in the consolidation
taken as a whole as required by Disclosure and Transparency
Rule 4.2.4R;
2. the interim management report includes a fair review of the
information required by:
-- Disclosure and Transparency Rule 4.2.7R being an indication
of important events that have occurred during the first six
months of the financial year and their impact on the condensed
set of financial statements, and a description of the principal
risks and uncertainties for the remaining six months of the
financial year; and
-- Disclosure and Transparency Rule 4.2.8R being related parties
transactions that have taken place in the first six months of
the current financial year and that have materially affected
the financial position or the performance of the entity during
that period; and any changes in the related parties transactions
described in the last Annual Report & Accounts that could do
so.
Signed on behalf of the Board
Paul Geddes Penny James
Chief Executive Officer Chief Financial Officer
31 July 2018 31 July 2018
LEI: 213800FF2R23ALJQOP04
Independent review report for Direct Line Insurance Group plc
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated statement of changes in equity, the condensed consolidated cash flow statement and related notes 1 to 22. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Deloitte LLP
Statutory Auditor
London, UK
31 July 2018
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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