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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 | |
---|---|---|---|---|---|---|---|---|---|---|
1.00 | 0.54% | 186.50 | 186.40 | 186.90 | 187.50 | 185.20 | 185.20 | 1,673,666 | 16:35:25 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
Fire, Marine, Casualty Ins | 2.86B | 222.9M | 0.1700 | 10.98 | 2.45B |
TIDMDLG
RNS Number : 6649M
Direct Line Insurance Group PLC
01 August 2017
Half Year Report 2017
1 August 2017
Strong H1 results, rebasing dividend and refreshing targets
Paul Geddes, CEO of Direct Line Group, commented
"The Group delivered another strong first half performance, as we continued to focus on giving customers what they want. In particular, we are pleased with the continued momentum in our Direct Line brand, which shows that customers value the great service and unique insurance propositions we are offering in both Personal Lines and Commercial Lines. "Today the Board is rebasing the Group's regular dividend upwards to reflect its confidence in the Group's earnings and the progress the business has made since the IPO nearly 5 years ago when the Group's dividend policy was previously set. We aim to grow the regular dividend in line with business growth, which we expect to be in the region of 2% to 3% per annum over the medium term. "The investments we have made and continue to make in our business have delivered value for our customers and shareholders. As a result, we reiterate our 93% to 95% combined operating ratio target for 2017 and also extend this ambition over the medium term."
Results summary
H1 H1 Change 2017 2016 GBPm GBPm ------------------------------------------ -------- -------- --------- Gross written premium 1,694.2 1,613.1 +5.0% Operating profit - Ongoing operations 354.2 323.6 +9.5% Commission ratio(1) 8.9% 10.9% (2.0pts) Expense ratio(1) 24.6% 25.3% (0.7pts) Combined operating ratio(1) 88.9% 89.6% (0.7pts) Return on tangible equity annualised(2) 26.1% 23.1% +3.0pts Dividend per share - regular interim (pence)(3) 6.8p 4.9p +38.8% -------- -------- 30 Jun 31 Dec 2017 2016 Change -------- -------- --------- Solvency II capital coverage ratio post-dividend 173% 165% +8pts ------------------------------------------ -------- -------- ---------
Highlights and outlook
-- Motor continued to grow gross written premiums, up 10% with Direct Line driving the growth -- Commercial launched the first of its flexible and bespoke business insurance policies, a part of our digital transformation, leveraging our strong Direct Line brand and our goal of making insurance much easier and better value for our customers -- The Board is rebasing the regular dividend up 38.8%, increasing the interim dividend to 6.8p(3) . In addition, the Group expects to operate around the middle of its Solvency II capital coverage ratio range of 140% to180%, in the normal course of business -- Reiterate the current financial targets for 2017: combined operating ratio in the range of 93% to 95% and investment income yield at 2.4% -- In addition, management targets maintaining a 93% to 95% combined operating ratio over the medium term, reflecting its ambition to maintain strong annual financial performance
For further information, please contact:
Andy Broadfield Jennifer Thomas Director of Investor Head of Financial Communications Relations Tel: +44 (0)1651 831022 Tel: +44 (0)1651 831686 Notes: 1. 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 definition. 2. See glossary for definitions and appendix A - Alternative performance measures for reconciliation to financial statements line items. 3. 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. 15B15BForward-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, which are contained in this document specifically with respect to the return on tangible equity, Solvency II capital coverage ratio, the Group's combined operating ratio, prior-year reserve releases, cost reduction, investment income yield, net realised and unrealised gains, results from the run-off segment, restructuring costs, 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 result of the referendum and the negotiations relating to the UK's withdrawal from the European Union, the result of the UK general election, 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. 16B16BInside information Prior to publication, this document contained inside information for the purposes of Article 7 of European Union Regulation 596/2014. Financial summary -------------------------------------------- -------- -------- --------- H1 H1 Change 2017 2016 GBPm GBPm -------------------------------------------- -------- -------- --------- Ongoing operations: In-force policies (thousands) 15,811 15,736 0.5% Gross written premium 1,694.2 1,613.1 5.0% Net earned premium 1,547.5 1,479.9 4.6% Underwriting profit 172.0 154.2 11.5% Investment return 92.6 91.0 1.8% Instalment and other operating income 89.6 78.4 14.3% -------------------------------------------- -------- -------- --------- Operating profit - Ongoing operations 354.2 323.6 9.5% Run-off 10.0 23.6 (57.6%) Restructuring costs (4.5) (30.3) 85.1% -------------------------------------------- -------- -------- --------- Operating profit 359.7 316.9 13.5% Finance costs (18.3) (18.4) 0.5%
Profit before tax 341.4 298.5 14.4% Tax (65.9) (62.6) (5.3%) Profit after tax 275.5 235.9 16.8% Of which Ongoing operations 271.2 244.2 11.1% -------------------------------------------- -------- -------- --------- Key metrics - Ongoing operations Current-year attritional loss ratio(1) 68.8% 68.5% 0.3pts Loss ratio(1) 55.4% 53.4% 2.0pts Commission ratio(1) 8.9% 10.9% (2.0pts) Expense ratio(1) 24.6% 25.3% (0.7pts) Combined operating ratio(1) 88.9% 89.6% (0.7pts) Adjusted diluted earnings per share(2) (pence) 19.7 17.6 11.9% Return on tangible equity annualised(2) 26.1% 23.1% 3.0pts -------------------------------------------- -------- -------- --------- Key metrics Investment income yield annualised(2) 2.5% 2.5% - Investment return annualised(2) 2.8% 2.8% - Basic earnings per share (pence) 20.2 17.2 17.4% Return on equity annualised 21.3% 17.8% 3.5pts Dividend per share - regular interim (pence) 6.8 4.9 38.8% - special interim (pence) - 10.0 - - total (pence) 6.8 14.9 (54.4%) 30 Jun 31 Dec 2017 2016 Change ======== ======== ========= Solvency II capital coverage ratio 173% 165% 8pts Net asset value per share (pence) 194.4 184.7 5.3% Tangible net asset value per share (pence) 156.5 147.4 6.2% ============================================ ======== ======== ========= Notes: 1. A reduction in the ratio represents an improvement as a proportion of net earned premium, while an increase in the ratio represents deterioration 2. See glossary for definition and appendix A - Alternative performance measures for reconciliation to the financial statement line items
Business update
0B0BOverview Direct Line Group (the "Group") delivered a strong performance in the first half of 2017, grew gross written premium 5.0%, reduced expense and commission ratios compared to the first half of 2016 and achieved a return on tangible equity of 26.1%. Solvency II capital coverage ratio remained strong at 173% as at 30 June 2017 after taking into account the interim regular dividend of 6.8 pence per share (H1 2016: 4.9 pence per share). Throughout its transformation, the Group has remained focussed on developing its future capabilities, with investments in the Group's digital offering, customer experience and operational efficiency. H1 2017 saw one of these investments reach a significant milestone with the launch in April of Commercial's first trade segment, Hair and Beauty, on its new digital platform. The benefits of the Group's long-term investment approach were clear in H1 2017, with continued momentum in the Direct Line brand as it grew policy count and gross written premium again across Motor, Home and Commercial. Since 2013, the Group's own brands in-force policies have grown on average between 2% to 3% p.a. 17B17BMotor The Group continued to benefit from its strong competitive position in Motor, growing gross written premium 9.9% and in-force policies 4.9% in the first half of 2017, principally driven by the strength of the Direct Line brand. In the first half of the year, the Direct Line proposition was further enhanced with the addition of onward travel by taxi if the customer's car is not driveable. The growth was achieved while also improving the current-year loss ratio from 84.6% in H1 2016 to 81.7% in H1 2017. Bodily injury claims continued to trend more favourably than expected. In addition, detailed case reviews conducted in Q2 of the additional costs arising from the lowering of the Ogden discount rate indicated a lower than expected increase to claims costs. This has resulted in a reserve release of GBP49m, leading to a total prior-year reserve release of GBP174.6m in the first half of 2017 (H1 2016 GBP134.0m). The Group continued to reserve prudently and assumes a minus 0.75% Ogden discount rate. 18B18BCommercial Direct Line for Business ("DL4B") launched its first product on its new digital platform, initially for Hair and Beauty professionals, with more professions planned to follow. This key strategic step aligns a new customer-centric digital approach with leveraging the Group's strong, proposition led, Direct Line brand. The Group sees the under-served and growing small and micro business segment as an important medium term prospect. At the same time, DL4B's current portfolio of predominantly landlord, tradesman and van products continued to grow well, with gross written premium up 13.4% compared to the first half of 2016. DL4B also enhanced its proposition in the first half of 2017 with its rent guarantee cover offer for landlord insurance, and won What Mortgage? 'Best Landlord Insurance Provider' for the fifth year running. In addition to the direct channel, NIG and other continues to support commercial insurance brokers by using technology to improve trading efficiency through more on-line products, improved eTrade quotability and a fully paperless offering for all products. 19B19BHome Home's results were robust, helped by low weather losses, partially offsetting higher than expected claims inflation from the escape of water ("EoW") peril. The first half of 2016 benefitted from an unusually high reserve release resulting from 2015 weather events (14.8pts). These weather releases were not repeated in H1 2017. The impact of EoW on the 2017 loss ratio (on both prior and current year) was partially offset through lower profit share commission due to partners. The commission ratio also reduced due to changes to partner arrangements and business mix. The Home business has taken a number of significant actions across pricing, underwriting and claims management to mitigate EoW inflation. These actions are intended to help return profitability to more normal levels in 2018. While these actions saw reduced new business sales in the first half, Home was still able to maintain its year on year retention levels. In own brands, this supported in-force policy growth of 1.5% and gross written premium growth of 0.8%. Partnership premiums declined 7.9% as in-force policies fell 7.6%. 20B20BRescue Rescue had a strong half, benefitting from lower than normal claims frequency while growing gross written premium 2.1%. Green Flag, the Group's direct rescue brand, continued its growth momentum, growing in-force policies 8.0% and gross written premium 10.8%. New management has been appointed to the Rescue division and Green Flag has launched a new advertising campaign to highlight its challenger status. 1B1BDividends and capital management The Board has resolved to pay a regular interim dividend of 6.8 pence per share, an increase on H1 2016 of 1.9 pence per share, 38.8%, reflecting the Group's confidence in its earnings and the progress the business has made since the Group's initial public offering ("IPO") nearly 5 years ago. After deducting this regular interim dividend, the Group's estimated Solvency II capital coverage ratio as at 30 June 2017 was 173%. The Board previously set its dividend policy at the time of the IPO in 2012 and has now updated the policy as set out in the Dividend policy section. The Board continues to expect 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 in the second quarter of the following year. The Board aims to grow the regular dividend in line with business growth. Under normal circumstances, the Group expects to operate around the middle of its Solvency II capital coverage ratio risk appetite range of 140% to 180% of the Group's solvency capital requirement, and it will take this into account when considering the potential for any special distributions. The revised dividend policy reiterates that in the normal course of events the Board will consider whether or not it is appropriate to pay a special dividend once a year, alongside the full-year results. 2B2BOutlook For 2017, the Group targets a combined operating ratio of 93% to 95%, reductions in its expense and commission ratios, a 2.4% investment income yield and a RoTE of at least 15%. Beyond 2017, the Group targets having a 93% to 95% combined operating ratio over the medium term supported by reductions in its expense and commission ratios and reiterates its ongoing target of achieving at least a 15% return on tangible equity ("RoTE").
Finance review
Performance
Operating profit - Ongoing operations
H1 H1 2017 2016 GBPm GBPm --------------------------------------- ------ ------ Underwriting profit 172.0 154.2 Investment return 92.6 91.0 Instalment and other operating income 89.6 78.4 Total 354.2 323.6 --------------------------------------- ------ ------ Underwriting profit increased to GBP172.0m, an increase of 11.5% compared to H1 2016. This included the benefit of improved current year loss ratios in Motor, Rescue and other personal lines and Commercial as well as lower expense and commission ratios compared to H1 2016. In Home, weather costs were lower than expected, and in line with H1 2016; however higher than expected claims inflation from EoW led to higher claims costs. Prior-year reserve releases were GBP19.7m lower at GBP216.4m (H1 2016: GBP236.1m) and excluding these releases, current-year operating profits were significantly higher at GBP137.8m (H1 2016: GBP87.5m). Investment return improved to GBP92.6m (H1 2016: GBP91.0m) primarily due to a GBP1.9m increase in net realised and unrealised gains. Operating profit from Ongoing operations increased by 9.5% to GBP354.2m (H1 2016: GBP323.6m) mainly due to an improvement in the underwriting result and higher instalment and other operating income.
In-force policies and gross written premium
In-force policies - Ongoing operations (thousands)
30 Jun 31 Mar 31 Dec 30 Sep 30 Jun At 2017 2017 2016 2016 2016 --------------------------- ------- ------- ------- ------- ------- Own brands 3,761 3,691 3,642 3,607 3,541 Partnerships 205 220 231 233 238 =========================== ======= ======= ======= ======= ======= Motor total 3,966 3,911 3,873 3,840 3,779 Own brands 1,770 1,764 1,759 1,751 1,743 Partnerships 1,534 1,593 1,619 1,638 1,660 Home total 3,304 3,357 3,378 3,389 3,403 Of which Nationwide and Sainsbury's 688 706 719 723 724 Rescue 3,663 3,676 3,646 3,621 3,670 Other personal lines 4,178 4,188 4,234 4,219 4,224 =========================== ======= ======= ======= ======= ======= Rescue and other personal lines 7,841 7,864 7,880 7,840 7,894 Of which own brands 2,007 1,936 1,886 1,847 1,850 Direct Line for Business 452 441 433 428 424 NIG and other 248 245 242 239 236 --------------------------- ------- ------- ------- ------- ------- Commercial 700 686 675 667 660 --------------------------- ------- ------- ------- ------- ------- Total 15,811 15,818 15,806 15,736 15,736 --------------------------- ------- ------- ------- ------- -------
Gross written premium - Ongoing operations
Q2 Q2 H1 H1 2017 2016 2017 2016 GBPm GBPm GBPm GBPm ====================================== ====== ====== ======== ======== Own brands 412.7 362.9 781.2 694.3 Partnerships 19.0 26.7 43.2 56.0 ====================================== ====== ====== ======== ======== Motor total 431.7 389.6 824.4 750.3 Own brands 97.6 96.3 193.2 191.6 Partnerships 95.7 104.1 194.9 211.6 Home total 193.3 200.4 388.1 403.2 Of which Nationwide and Sainsbury's 46.2 50.1 97.6 105.0 Rescue 42.9 42.5 83.6 81.9 Other personal lines 66.2 58.4 129.7 115.8 ====================================== ====== ====== ======== ======== Rescue and other personal lines 109.1 100.9 213.3 197.7 Of which own brands 54.3 48.1 106.8 98.8 Direct Line for Business 31.5 27.1 60.1 53.0 NIG and other 118.3 117.3 208.3 208.9 ====================================== ====== ====== ======== ======== Commercial 149.8 144.4 268.4 261.9 ====================================== ====== ====== ======== ======== Total 883.9 835.3 1,694.2 1,613.1 ====================================== ====== ====== ======== ======== Total in-force policies for Ongoing operations during the first half of 2017 remained stable at 15.8 million (31 December 2016 15.8 million). This was due primarily to continued in-force policy growth in Motor and Home's own brands, Green Flag direct and Commercial offset by lower partner volumes in Home and Rescue and other personal lines. Gross written premium of GBP1,694.2m increased 5.0% compared with first half of 2016, reflecting continued growth as above. 21B21BMotor 22B22BIn-force policies increased 4.9%, adding 187,000 policies, compared with the first half of 2016. Motor's own brands grew by 6.2% over the same period underpinned by higher levels of new business growth combined with strong customer retention. Investment in brand differentiation through a succession of new Direct Line propositions and competitive pricing continued to drive the improved performance. Motor gross written premium increased by 9.9% in comparison to the first half of 2016 which also reflects the Group's pricing response to ongoing claims inflation including the response to the Ogden discount rate change. 23B23BMotor average written premium(1) increased by 6.6% in H1 2017, and risk-adjusted prices increased 11.1%. The Group overall sought to price for changes to the Ogden discount rate (gross of reinsurance) and general claims inflation, partially offset by underlying improvements in bodily injury cost trends. Claims inflation remained around the top of the Group's long-term expectations, although bodily injury costs for prior years continued to improve over initial expectations. 24B24BHome 25B25BIn-force policies for Home's own brands increased by 1.5% compared with the first half of 2016, while partnership volumes reduced by 7.6% due to the cessation of new business in Sainsbury's and a slow-down in other partnership arrangements. The Group's partnership with Nationwide is now expected to continue to the end of 2017. Gross written premium was 3.7% lower than the first half of 2016, due to partners which were 7.9% lower, while own brands experienced a small increase of 0.8%. Home own brands' average written premium(2) decreased by 0.9% compared with the first half of 2016 driven by lower risk mix partially offset by low single-digit price increases in a highly competitive market. Claims inflation continued to rise in the quarter ahead of price increases. In addition to price increases, the Group is also taking action in underwriting and claims management to mitigate higher claims inflation. Retention in Home own brands continued to be strong. Notes: 1. Average incepted written premiums excluding IPT for total Motor for year to date 30 June 2017. 2. Average incepted written premiums excluding IPT for Home own brands for year to date 30 June 2017. Rescue and other personal lines Rescue and other personal lines experienced a small reduction in in-force policies of 0.7% in the first half of 2017 compared with the first half of 2016, primarily resulting from lower partner volumes. Gross written premium for Rescue and other personal lines increased by 7.9% compared with the first half of 2016, mainly due to price increases in Travel and strong growth in Green Flag. Commercial Commercial in-force policies were 6.1% higher than for the first half of 2016, reflecting growth in both Direct Line for Business and NIG and other. The increase in gross written premium of 2.5%, compared to the first half of 2016, reflected continuing strong growth in Direct Line for Business, with NIG and other premiums slightly lower primarily due to product mix.
Underwriting profit - Ongoing operations
H1 H1 2017 2016 ---------------------------- ------ ------ Underwriting profit (GBPm) 172.0 154.2 Loss ratio 55.4% 53.4% Commission ratio 8.9% 10.9% Expense ratio 24.6% 25.3% ---------------------------- ------ ------ Combined operating ratio 88.9% 89.6% ---------------------------- ------ ------ The combined operating ratio for Ongoing operations of 88.9% (H1 2016: 89.6%) improved by 0.7 percentage points primarily due to improvements in the commission and expense ratios offset by a higher loss ratio. The increase in the loss ratio to 55.4% (H1 2016: 53.4%) reflected lower prior-year reserve releases, and an increase in Home's current-year loss ratio partially offset by an improvement in Motor's current-year loss ratio. The Group's expense ratio of 24.6% improved by 0.7pts as the Group kept its cost base stable
and grew its earned premium. The reduction in the commission ratio of 2.0 percentage points primarily reflected lower profit share payments to Home partners, as a result of lower prior-year reserve releases, a higher attritional loss ratio, changes to partnership arrangements and business mix. The Group achieved a combined operating ratio for Ongoing operations, normalised for weather of approximately 91% (H1 2016: approximately 91%). The Group maintains its target to achieve a combined operating ratio of 93%-95% for 2017, assuming normal weather for the year. Beyond 2017, the Group targets maintaining a 93%-95% combined operating ratio over the medium term, assuming a normal annual level of weather claims.
Loss ratio analysis by division - Ongoing operations
Rescue and other personal Total Motor Home lines Commercial Ongoing Notes(1) GBPm GBPm GBPm GBPm GBPm -------------------------- --------- -------- -------- ---------- ----------- --------- H1 2017 Net insurance claims 4 403.5 190.7 135.7 127.1 857.0 Prior-year reserve release/(strengthening) 19 174.6 16.8 (2.1) 27.1 216.4 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 Net earned premium 4 707.8 397.0 209.0 233.7 1,547.5 Loss ratio current-year attritional 81.7% 50.0% 63.9% 66.0% 68.8% Loss ratio - prior-year reserve releases (24.7%) (4.3%) 1.0% (11.6%) (14.0%) Loss ratio - major weather events n/a 2.3% n/a n/a 0.6% Loss ratio - reported 4 57.0% 48.0% 64.9% 54.4% 55.4% Commission ratio 4 2.6% 17.0% 5.0% 17.9% 8.9% Expense ratio 4 25.5% 23.8% 23.9% 23.8% 24.6% Combined operating ratio 4 85.1% 88.8% 93.8% 96.1% 88.9% ========================== ========= ======== ======== ========== =========== ========= H1 2016 Net insurance claims 4 416.1 137.7 121.4 115.1 790.3 Prior-year reserve releases 19 134.0 60.6 7.5 34.0 236.1 Major weather events n/a (13.0) n/a n/a (13.0) Attritional net insurance claims 550.1 185.3 128.9 149.1 1,013.4 Net earned premium 4 650.3 411.7 194.8 223.1 1,479.9 Loss ratio current-year attritional 84.6% 45.0% 66.2% 66.8% 68.5% Loss ratio - prior-year reserve releases (20.6%) (14.8%) (3.9%) (15.2%) (16.0%) Loss ratio - major weather events n/a 3.2% n/a n/a 0.9% Loss ratio - reported 4 64.0% 33.4% 62.3% 51.6% 53.4% Commission ratio 4 2.6% 22.2% 4.9% 19.4% 10.9% Expense ratio 4 25.7% 25.3% 25.5% 24.0% 25.3% Combined operating ratio 4 92.3% 80.9% 92.7% 95.0% 89.6% ========================== ========= ======== ======== ========== =========== ========= The movement in the current-year attritional loss ratio is a key indicator of underlying accident year performance as it excludes prior-year reserve movements and claims costs from major weather events in the Home division. The Group's current-year attritional loss ratio of 68.8% was broadly stable compared to the same period in 2016 with improvements in Motor, Rescue and other personal lines and Commercial, partially offset by a deterioration in Home as a result of rising claims inflation due to EoW. Prior-year reserve releases from Ongoing operations continued to be significant at GBP216.4m (H1 2016: GBP236.1m) and were equivalent to 14.0% of net earned premium (H1 2016: 16.0% of net earned premium). Reserve releases were high in H1 2017 as bodily injury claims continued to trend more favourably than expected. Additionally, detailed case reviews in Q2 2017, for the additional costs arising from the lowering of the Ogden discount rate, indicated a GBP49m reduction in the impact of the rate change. Prior-year reserve releases are expected to reduce in future years, although they are expected to remain a significant contribution to profits. Note: 1. See notes to the condensed consolidated financial statements. Motor The combined operating ratio for the Motor division was 85.1% (H1 2016: 92.3%), an improvement of 7.2 percentage points due to higher prior-year reserve releases, including reserve releases from the detailed case reviews, and the current-year improvement in the loss ratio. The current-year attritional loss ratio improved by 2.9 percentage points, to 81.7% due to a favourable trading environment and the recognition of benefits from our claims handling processes and initiatives. The Group expects to continue to re-invest in our customer propositions. Both the expense and commission ratios were stable compared to the first half of 2016. Home In Home, the combined operating ratio increased by 7.9 percentage points to 88.8% (H1 2016: 80.9%) with a higher loss ratio, in part offset by improving expense and commission ratios. The loss ratio was higher as a result of lower prior-year reserve releases compared with H1 2016, which benefitted from approximately 7 percentage points of one-off weather-related releases, and the impact of higher than expected claims inflation from EoW claims. The current-year attritional loss ratio, excluding major weather event claims, increased by 5.0 percentage points, also reflecting higher EoW claims inflation experience. The weather in H1 2017 was benign with GBP9.0m of claims costs from major weather events (H1 2016: GBP13.0m). The commission ratio of 17.0% was 5.2 percentage points lower than the first half of 2016 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 combined operating ratio for Rescue and other personal lines increased by 1.1 percentage points to 93.8% (H1 2016: 92.7%) due principally to an increase in the loss ratio with lower prior-year reserve releases on Travel, partly offset by a 2.3 percentage points improvement in the current-year attritional loss ratio. The expense ratio improved primarily due to lower marketing expenditure on Rescue, while the commission ratio remained stable. Commercial The combined operating ratio for Commercial increased by 1.1 percentage points to 96.1% (H1 2016: 95.0%) primarily due to an increase in the loss ratio as a result of a 3.6 percentage points lower contribution from prior-year reserve releases. The current-year attritional loss ratio improved by 0.8 percentage points to 66.0% (H1 2016: 66.8%). The higher loss ratio was partly offset by lower expense and commission ratios. Normalising for claims from weather and large claims, the combined operating ratio was approximately 99% (H1 2016: approximately 98%).
Total costs - Ongoing operations
H1 H1 2017 2016 Notes GBPm GBPm -------------------------------- ------ ------ ------ Staff costs 202.2 209.1 Other operating expenses 165.0 144.9 Marketing 59.0 62.6 Amortisation and impairment of other intangible assets 26.7 30.0 Depreciation 14.1 15.0 -------------------------------- ------ ------ ------ Total costs 467.0 461.6 ================================ ====== ====== ====== Operating expenses 4 380.4 374.6 Claims handling expenses 8 86.6 87.0 ================================ ====== ====== ====== Total costs 467.0 461.6 -------------------------------- ------ ------ ------ Total costs for Ongoing operations increased by GBP5.4m to GBP467.0m. Other operating expenses increased due to higher IT costs, offshoring fees and levies. The Group continues 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 - Ongoing operations
H1 H1 2017 2016 GBPm GBPm ------------------------------------------- ------ ------ Instalment income 55.8 51.4 Other operating income: Vehicle replacement referral income 8.3 6.8 Revenue from vehicle recovery and repair services(1) 9.8 9.4 Other income 15.7 10.8 =========================================== ====== ====== Total other operating income 33.8 27.0 ------------------------------------------- ------ ------ Total 89.6 78.4 ------------------------------------------- ------ ------ Instalment and other operating income from Ongoing operations increased by GBP11.2m, with increased instalment payments of GBP4.4m due to higher Motor gross written premium.
Investment return - Ongoing operations
H1 H1 2017 2016 GBPm GBPm ----------------------------- ---- ---- ------ ------ Investment income 82.4 82.7 Net realised and unrealised gains 10.2 8.3 ----------------------------------------- ------ ------ Total investment return 92.6 91.0 ========================================= ====== ====== Investment income remained broadly stable compared to H1 2016, despite a reduction of 25 basis points by the Bank of England in the UK base rate in August 2016 and lower assets under management. Net realised and unrealised gains were higher at GBP10.2m (H1 2016: GBP8.3m) primarily due to higher unrealised property gains.
Investment yields
H1 H1 2017 2016 ------------------------- ------ ------ Investment income yield 2.5% 2.5% Investment return yield 2.8% 2.8% ------------------------- ------ ------ The investment income yield for H1 2017 was 2.5%, which is slightly above the full year expectation of 2.4%.
Investment holdings - total Group
30 Jun 31 Dec 2017 2016 At GBPm GBPm ------------------------------ -------- -------- Investment-grade credit(2) 3,923.6 3,888.3 High yield 392.3 409.9 Investment-grade private placements 88.3 85.1 -------------------------------- -------- -------- Credit 4,404.2 4,383.3 Sovereign 363.0 341.2 -------------------------------- -------- -------- Total debt securities 4,767.2 4,724.5 Infrastructure debt 328.0 337.0 Commercial real estate loans 90.9 79.7 Cash(3) 1,047.2 1,110.8 Investment property 314.9 329.0 -------------------------------- -------- -------- Total Group 6,548.2 6,581.0 -------------------------------- -------- -------- Notes: 1. Vehicle recovery includes post-accident and pay-on-use recovery. Repair services constitute the provision of non-insurance related services. 2. Asset allocation at 30 June 2017 includes investment portfolio derivatives, which have been netted and have a mark-to-market asset of GBP30.6m included in investment-grade credit (31 December 2016: mark-to-market liability of GBP5.8m included in investment grade credit). This excludes derivatives that have been used to hedge interest on subordinated debt and operational cash flows. 3. Net of bank overdrafts, includes cash at bank and in hand and money market funds with no notice period for withdrawal. At 30 June 2017, total investment holdings of GBP6,548.2m were 0.5% lower than at the start of the year. Total debt securities were GBP4,767.2m (31 December 2016: GBP4,724.5m), of which 6.1% were rated as 'AAA' and a further 63.1% were rated as 'AA' or 'A'. The average duration at 30 June 2017 of total debt securities was 2.3 years (31 December 2016: 2.3 years). At 30 June 2017, total unrealised gains, net of tax, on available-for-sale investments were GBP86.5m (31 December 2016: GBP92.1m).
Operating profit - Ongoing operations
H1 H1 2017 2016 GBPm GBPm --------------------------------- ------ ------ Motor 233.9 168.8 Home 67.5 101.5 Rescue and other personal lines 22.6 23.4 Commercial 30.2 29.9 --------------------------------- ------ ------ Total 354.2 323.6 ================================= ====== ====== All divisions were profitable in H1 2017 with a significant increase in Motor offset by reduced operating profits in Home and Rescue and other personal lines.
Reconciliation of operating profit
H1 H1 2017 2016 GBPm GBPm --------------------------------------- ------- ------- Operating profit - Ongoing operations 354.2 323.6 Run-off 10.0 23.6 Restructuring costs (4.5) (30.3) --------------------------------------- ------- ------- Operating profit 359.7 316.9 Finance costs (18.3) (18.4) Profit before tax 341.4 298.5 Tax (65.9) (62.6) Profit after tax 275.5 235.9 --------------------------------------- ------- ------- Run-off The Run-off segment generated a profit of GBP10.0m in H1 2017 compared with GBP23.6m in H1 2016. The reduction in the result followed lower prior-year reserve releases from large bodily injury claims. It is expected that the Run-off segment will continue to contribute positively to operating profit in future years, albeit at a lower level. Restructuring costs Restructuring costs for H1 2017 of GBP4.5m (H1 2016: GBP30.3m) were significantly lower than in H1 2016. Over the four year period 2015 to 2018, the Group expects cumulative restructuring costs to be broadly offset by operating profit from the Run-off segment. Finance costs Finance costs remained stable at GBP18.3m (H1 2016: GBP18.4m). Taxation The effective tax rate in H1 2017 was 19.3% (H1 2016: 21.0%), which was higher than the standard UK corporation tax rate of 19.25% (H1 2016: 20.0%) driven primarily by disallowable expenses offset by a prior year tax credit. Profit for the period and return on tangible equity Profit for the period of GBP275.5m (H1 2016: GBP235.9m) reflected an increase on H1 2016 predominantly due to an improvement in the underwriting result, an increase in instalment and other operating income and a reduction in restructuring costs. Return on tangible equity increased to 26.1% (H1 2016: 23.1%) due to an annualised profit after tax from Ongoing operations of GBP542.4m (H1 2016: GBP488.4m) and a reduction in the average shareholders' tangible equity. Earnings per share Basic earnings per share increased by 17.4% to 20.2 pence (H1 2016: 17.2 pence). Adjusted diluted earnings per share increased by 11.9% to 19.7 pence reflecting an increase in profit after tax from Ongoing operations and a reduction in the weighted average number of Ordinary Shares. Dividends The Board has resolved to pay an interim dividend for the Company for 2017 of GBP93.5m in aggregate, representing 6.8 pence per share, an increase of 38.8% on the regular interim dividend for 2016 of 4.9 pence. The regular interim dividend will be paid on 8 September 2017 to shareholders on the register on 11 August 2017. The ex-dividend date will be 10 August 2017.
Net assets and tangible net assets
30 Jun 31 Dec 2017 2016 At GBPm GBPm --------------------------------------- -------- -------- Net assets 2,654.5 2,521.5 Goodwill and other intangible assets (517.4) (508.9) ======================================= ======== ======== Tangible net assets 2,137.1 2,012.6 Net assets per share (pence) 194.4 184.7 Tangible net assets per share (pence) 156.5 147.4 ======================================= ======== ======== The net assets at 30 June 2017 increased to GBP2,654.5m (31 December 2016: GBP2,521.5m) and tangible net assets increased to GBP2,137.1m (31 December 2016: GBP2,012.6m). These increases mainly reflect the profit in H1 2017 partially offset by the payment of the 2016 final dividend. 3B3BFinancial management Capital management Dividend 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 capital coverage ratio around the middle of its risk appetite range of 140% to 180% of the Group's solvency capital requirement ("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 ("UKI"), on a solo basis. UKI calculates its capital requirement using its PRA approved internal model, which forms part of a Group-wide partial internal model. The Board has considered the risk appetite range of the Group under its Solvency II partial internal model and considers that the appropriate range, which should enable it to meet its operational, regulatory and rating agency requirements, is 140% to 180% of its solvency capital requirement. Under normal circumstances, the group expects to operate around the middle of the risk appetite range. Sensitivity analysis The following table shows estimated sensitivities based on assessed impact of scenarios at 30 June 2017 Impact on solvency Scenario ratio --------------------------------------------- --------- Motor premium rate reduction of 10% (17pts) Motor bodily injury deterioration equivalent to accident years 2008 and 2009 (8pts) Increase in periodic payment order propensity by 10pts (5pts) One-off catastrophe loss equivalent to 1990 storm (9pts) One-off catastrophe loss equivalent based on extensive flooding of the Thames (9pts) Change in the reserving basis for PPOs to use a real discount rate of minus 1% instead of 0% (10pts) 100bps increase in credit spreads (11pts) 100bps increase in interest rates (10pts) ============================================= ========= Capital position At 30 June 2017, the Group held a capital surplus of approximately GBP1.04bn after foreseeable dividends and above its estimated Solvency II regulatory capital requirements on the Group's partial internal model basis. This was equivalent to an estimated capital coverage ratio of 173%. 30 Jun 31 Dec 2017 2016(1) At GBPbn GBPbn --------------------------------------------------- ------ -------- Solvency capital requirement 1.42 1.40 Capital surplus above solvency capital requirement 1.04 0.91 Capital coverage ratio post-dividend 173% 165% =================================================== ====== ========
The following table splits the Group's own funds by tier on a Solvency II basis.
30 Jun 31 Dec 2017 2016(1) At GBPbn GBPbn -------------------------------------------- ------ -------- Tier 1 capital before foreseeable dividends 1.97 1.87 Foreseeable dividends (0.09) (0.13) -------------------------------------------- ------ -------- Tier 1 capital 1.88 1.74 Tier 2 capital 0.53 0.54 Tier 3 capital 0.05 0.03 -------------------------------------------- ------ -------- Own funds 2.46 2.31 ============================================ ====== ======== Tier 1 capital after foreseeable dividends represents 76% of own funds and 132% of the estimated solvency capital requirement. Tier 2 capital relates solely to the Group's GBP0.53bn subordinated debt. The amount of Tier 2 and 3 capital permitted under the Solvency II Regulations is 50% of the Group's solvency capital requirement, and of Tier 3 is 15%. Therefore, the Group has no ineligible capital.
Reconciliation of IFRS shareholders' equity to Solvency II own funds
30 Jun 31 Dec 2017 2016(1) At GBPbn GBPbn -------------------------------------------- ------ -------- Shareholders' equity 2.65 2.52 Goodwill and intangible assets (0.52) (0.51) Change in valuation of technical provisions (0.08) (0.05) Other asset and liability adjustments (0.08) (0.09) Foreseeable dividends (0.09) (0.13) -------------------------------------------- ------ -------- Tier 1 capital 1.88 1.74 Tier 2 capital: subordinated debt 0.53 0.54 Tier 3 capital: deferred tax 0.05 0.03 -------------------------------------------- ------ -------- Total own funds 2.46 2.31 ============================================ ====== ======== Note: 1. The comparatives have been updated to reflect the amounts in the Solvency Financial Condition Report for the year ended 31 December 2016, published on the 15 May 2017.
Movement in capital surplus
2017 GBPbn -------------------------------------------- ------ Capital surplus at 1 January 2017 0.91 ------ Underlying movement in capital generation 0.28 Market movements - ====== Capital generation 0.28 Increase in solvency capital requirement (0.02) ====== Surplus generation 0.26 Capital expenditure (0.04) Capital distribution - regular dividend (0.09) Net surplus movement 0.13 -------------------------------------------- ------ Capital surplus at 30 June 2017 1.04 ============================================ ======
Leverage
30 Jun 31 Dec 2017 2016 At GBPm GBPm ----------------------------------------- ------- ------- Shareholders' equity 2,654.5 2,521.5 Financial debt - subordinated guaranteed dated notes 533.0 539.6 ----------------------------------------- ------- ------- Total capital employed 3,187.5 3,061.1 ========================================= ======= ======= Financial-leverage ratio(1) 16.7% 17.6% ----------------------------------------- ------- ------- During H1 2017, leverage reduced 0.9 percentage points to 16.7%, due primarily to an increase in profit for the period, partially offset by the payment of the final dividend for 2016. Credit ratings Standard & Poor's and Moody's Investors Service provide insurance financial-strength ratings for UKI. UKI is currently rated 'A' (strong) with a stable outlook by Standard & Poor's and 'A2' (good) with a stable outlook by Moody's. 4B4BRegulatory update 5B5BThe Group has continued to operate within a highly dynamic and evolving regulatory landscape, particularly in the UK motor insurance market where a number of reviews and initiatives have been announced by the UK Government, the Ministry of Justice ("MoJ"), the Financial Conduct Authority ("FCA") and the PRA. On 23 February 2017, the government announced measures to reduce the volume and cost of soft tissue damage 'whiplash' claims and stated its expectation that this will see a reduction in motor insurance premiums by GBP40 on average. On 27 February 2017 the Lord Chancellor announced a reduction in the Ogden discount rate to minus 0.75% with effect from 20 March 2017. The Group has also been engaged in the consultation to consider options for reform concerning the discount rate. 6B6BDuring the first half of 2017, the FCA's focus has been on value measures and pricing practices as well as the publication of its business plan. The PRA focus has been on the pillars of its financial risk framework, namely reserving, pricing, reinsurance and investments. 7B7BThe Group will continue to support proportionate reforms which result in a level playing field across the industry. Note: 1. Total financial debt as a percentage of total
capital employed.
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 GBP40m or more on profit before tax or net asset value on a one-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 & Accounts 2016, pages 27 to 29. 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 underwriting, reserve, distribution, pricing and reinsurance risks. The Group faces the risk that future claims on business written could be materially different from expectations resulting in losses. The risk of misstatement of reserves arises from the uncertain nature of claims, data issues and operational failures. Distribution risk is that a material change in the volume of business written may result in losses or reduced profitability. Incorrect pricing could result in the potential loss of market share or profitability. Furthermore, the inappropriate selection or placement of reinsurance arrangements could render the transfer of risk inappropriate or ineffective. ============================================================== Market risk The risk of loss resulting from fluctuations in the level and in the volatility of market prices of assets, liabilities and financial instruments. Market risk includes spread, interest rate and property risks. The Group is exposed to fluctuations in the value of assets or the income from its investment portfolio. The value of assets and investments are sensitive to changes in credit spreads above the risk-free interest rate. Asset values are sensitive to changes in interest rates. Property risk arises as a result of sensitivity of assets to market prices of property. ============================================================== 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. Concentration risk arises from inadequately diversified portfolios of assets or obligations. The Group has many suppliers, in particular reinsurers as well as a number of investment and broker counterparties. The failure of any of these parties could result in a financial loss. Counterparty risk arises from unexpected default by, or deterioration in the credit standing of, counterparties and debtors. ============================================================== 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 and business continuity, outsourcing, financial reporting, model, partnership contractual obligations, change, and technology and infrastructure risks. Information security risk includes the potential loss or corruption of data or intellectual property. IT and business continuity risk relates to the failure to recover from major external or internal events, resulting in a delay or inability to deliver services to customers. Outsourcing risk is that an outsourcing arrangement may fail to deliver services to expected levels. The financial reporting misstatement risk derives from the potential misstatement, misrepresentation or untimely delivery of financial information or regulatory returns. Model risk includes the inadequate, incorrect, ineffective or misused model outputs, or a lack of models, for decision-making, product design or for customer offerings. Partnership contractual obligations risk arises where contractual obligations are not delivered for business partners. The Group has a substantial portfolio of change underway which could result in conflicting priorities, failure to deliver strategic outcomes and impairment of intangible assets. Technology and infrastructure risk is the risk that the IT infrastructure is inadequate to deliver the Group's strategy. ============================================================== Regulatory compliance and conduct risk Regulatory compliance risk is the potential loss and reputational damage from regulatory or legal censure, fines or prosecutions arising from non-compliance with law and regulations. Conduct risk is the failure to put the customer at the heart of the business and failure to ensure that fairness is a natural outcome of the Group's activities. ============================================================== Strategic risk The risk of direct or indirect impact on the earnings, capital, or value of the business as a result of strategies not being optimally chosen, implemented or adapted to changing conditions. Strategic risk includes strategy formulation and implementation risks. These are the risks of failing to formulate and implement an appropriate strategy to deliver strategic objectives. ============================================================== Emerging risks The Group's definition of emerging risks are newly developing risks which are often difficult to quantify; they are also highly uncertain and are external to the Group. The Group records emerging risks within an Emerging Risk Register. Emerging risks are reported to the Risk Management Committee and Board Risk Committee for review and challenge. The Group's emerging risks processes aim to: -- achieve 'first mover advantage' by recognising risks and associated opportunities early; -- reduce the uncertainty and volatility of the Group's results; and -- manage emerging risks proactively. The Group considers its main emerging risks to be: Emerging risks ============================================================= 26B26B0B0BTechnological changes in driving habits reduce 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 consider new motor technologies as part of its pricing and underwriting approach. ============================================================= 27B27B1B1BChanges 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. ============================================================= 28B28B2B2BUK economy The UK could enter a prolonged period of reduced growth following its referendum vote on EU membership, 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 uncertainty surrounding Brexit negotiations could have various implications which the Group will continue to monitor. The UK Government also continues to work through the results of the UK General Election and the impact this may have on the economy and Brexit negotiations. ============================================================= 29B29B3B3BClimate 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 2017
6 months Full 2016 year 6 months GBPm 2016 2017 GBPm Notes GBPm (audited) =================================== ===== ======== ======== ========== Gross earned premium 5 1,645.0 1,579.5 3,202.8 Reinsurance premium 5 (97.5) (99.6) (202.2) =================================== ===== ======== ======== ========== Net earned premium 5 1,547.5 1,479.9 3,000.6 Investment return 6 93.0 92.7 171.5 Instalment income 55.8 51.4 107.1 Other operating income 7 33.8 27.0 58.2 =================================== ===== ======== ======== ========== Total income 1,730.1 1,651.0 3,337.4 =================================== ===== ======== ======== ========== Insurance claims 8 (768.2) (738.9) (2,179.0) Insurance claims recoverable from reinsurers 8 (79.2) (29.4) 375.2 =================================== ===== ======== ======== ==========
Net insurance claims 8 (847.4) (768.3) (1,803.8) =================================== ===== ======== ======== ========== Commission expenses 9 (138.1) (160.8) (344.0) Operating expenses 10 (384.9) (405.0) (799.4) =================================== ===== ======== ======== ========== Total expenses (523.0) (565.8) (1,143.4) =================================== ===== ======== ======== ========== Operating profit 359.7 316.9 390.2 Finance costs 11 (18.3) (18.4) (37.2) Profit before tax 341.4 298.5 353.0 Tax charge 12 (65.9) (62.6) (74.2) =================================== ===== ======== ======== ========== Profit for the period attributable to owners of the Company 275.5 235.9 278.8 =================================== ===== ======== ======== ========== Earnings per share: Basic (pence) 14 20.2 17.2 20.4 Diluted (pence) 14 20.0 17.0 20.2
Condensed consolidated statement of comprehensive income
For the six months ended 30 June 2017
6 months Full 2016 year 6 months GBPm 2016 2017 GBPm GBPm (audited) ================================================= ======== ======== ========== Profit for the period 275.5 235.9 278.8 ================================================= ======== ======== ========== Other comprehensive (loss) / income Items that will not be reclassified subsequently to the income statement: Actuarial loss on defined benefit pension scheme - - (4.4) Tax relating to items that will not be reclassified - - 0.7 ================================================= ======== ======== ========== - - (3.7) ================================================= ======== ======== ========== Items that may be reclassified subsequently to the income statement: Exchange differences on translation of foreign operations - - 0.1 Cash flow hedges (0.4) 0.9 1.4 Fair value gains on available-for-sale investments 8.0 76.7 119.6 Less: realised net gains on available-for-sale investments included in the income statement (14.8) (8.2) (15.3) Tax relating to items that may be reclassified 1.2 (12.2) (17.6) ================================================= ======== ======== ========== (6.0) 57.2 88.2 ================================================= ======== ======== ========== Other comprehensive (loss) / income for the period net of tax (6.0) 57.2 84.5 ================================================= ======== ======== ========== Total comprehensive income for the period attributable to owners of the Company 269.5 293.1 363.3 ================================================= ======== ======== ==========
Condensed consolidated balance sheet
As at 30 June 2017
31 Dec 30 Jun 2016 2017 GBPm Notes GBPm (audited) ===================================== ===== ======= ========== Assets Goodwill and other intangible assets 517.4 508.9 Property, plant and equipment 170.4 180.9 Investment property 314.9 329.0 Reinsurance assets 16 1,270.9 1,371.8 Current tax assets 0.1 0.1 Deferred acquisition costs 189.9 203.1 Insurance and other receivables 1,009.9 988.3 Prepayments, accrued income and other assets 124.3 131.0 Derivative financial instruments 77.7 79.7 Retirement benefit asset 12.0 12.0 Financial investments 17 5,155.5 5,147.0 Cash and cash equivalents 18 1,106.6 1,166.1 Assets held for sale 3.8 3.8 ===================================== ===== ======= ========== Total assets 9,953.4 10,121.7 ===================================== ===== ======= ========== Equity 2,654.5 2,521.5 Liabilities Subordinated liabilities 533.0 539.6 Insurance liabilities 19 4,409.0 4,666.6 Unearned premium reserve 1,597.1 1,547.9 Borrowings 18 59.4 55.3 Derivative financial instruments 13.3 45.1 Trade and other payables including insurance payables 613.9 699.2 Deferred tax liabilities 35.6 46.0 Current tax liabilities 37.6 0.5 Total liabilities 7,298.9 7,600.2 ===================================== ===== ======= ========== Total equity and liabilities 9,953.4 10,121.7 ===================================== ===== ======= ==========
Condensed consolidated statement of changes in equity
For the six months ended 30 June 2017
Foreign Employee AFS exchange Total Share trust Capital revaluation Non-distributable translation Retained shareholders' capital shares reserves reserve reserve reserve earnings equity Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ================== ==== ======= ======== ======== =========== ================= =========== ======== ============= Balance at 1 January 2016 150.0 (20.4) 1,450.0 5.4 152.9 (0.1) 892.2 2,630.0 Profit for the period - - - - - - 278.8 278.8 Other comprehensive income - - - 86.7 - 1.5 (3.7) 84.5 Dividends 13 - - - - - - (450.6) (450.6) Transfer to non-distributable reserve - - - - (152.9) - 152.9 - Shares acquired by employee trusts - (39.5) - - - - - (39.5) Credit to equity for equity-settled share-based payments - - - - - - 16.8 16.8 Shares distributed by employee trusts - 25.6 - - - - (25.6) - Tax on share-based payments - - - - - - 1.5 1.5 ================== ==== ======= ======== ======== =========== ================= =========== ======== ============= Balance at 31 December 2016 (audited) 150.0 (34.3) 1,450.0 92.1 - 1.4 862.3 2,521.5 Profit for the period - - - - - - 275.5 275.5 Other comprehensive loss - - - (5.6) - (0.4) - (6.0) Dividends 13 - - - - - - (132.4) (132.4) Shares acquired by employee trusts - (10.5) - - - - - (10.5) Credit to equity for equity-settled share-based payments - - - - - - 6.3 6.3 Shares distributed by employee trusts - 12.9 - - - - (12.9) - Tax on share-based payments - - - - - - 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
================== ==== ======= ======== ======== =========== ================= =========== ======== ============= Balance at 1 January 2016 150.0 (20.4) 1,450.0 5.4 152.9 (0.1) 892.2 2,630.0 Profit for the period - - - - - - 235.9 235.9 Other comprehensive income - - - 56.2 - 1.0 - 57.2 Dividends 13 - - - - - - (246.6) (246.6) Transfer to non-distributable reserve - - - - (152.9) - 152.9 - Shares acquired by employee trusts - (17.5) - - - - - (17.5) Credit to equity for equity-settled share-based payments - - - - - - 10.0 10.0 Shares distributed by employee trusts - 15.4 - - - - (15.4) - Tax on share-based payments - - - - - - (0.2) (0.2) ================== ==== ======= ======== ======== =========== ================= =========== ======== ============= Balance at 30 June 2016 150.0 (22.5) 1,450.0 61.6 - 0.9 1,028.8 2,668.8 ================== ==== ======= ======== ======== =========== ================= =========== ======== =============
Condensed consolidated cash flow statement
For the six months ended 30 June 2017
6 months Full 2016 year 6 months GBPm 2016 2017 GBPm Notes GBPm (audited) ===================================== ===== ======== ======== ========== Net cash generated from / (used by) operating activities before investment of insurance assets 27.3 (63.6) 35.0 Cash generated from investment of insurance assets 109.6 518.1 827.4 ===================================== ===== ======== ======== ========== Net cash generated from operating activities 136.9 454.5 862.4 ===================================== ===== ======== ======== ========== Cash flows from investing activities Purchases of property, plant and equipment (3.8) (37.4) (49.9) Purchases of goodwill and other intangible assets (35.2) (46.5) (80.8) Proceeds from disposals of assets held for sale - - 5.1 Net cash used by investing activities (39.0) (83.9) (125.6) ===================================== ===== ======== ======== ========== Cash flows from financing activities Dividends paid 13 (132.4) (246.6) (450.6) Finance costs (18.6) (19.2) (38.3) Purchase of employee trust shares (10.5) (17.5) (39.5) Net cash used by financing activities (161.5) (283.3) (528.4) ===================================== ===== ======== ======== ========== Net (decrease) / increase in cash and cash equivalents (63.6) 87.3 208.4 Cash and cash equivalents at the beginning of the period 1,110.8 902.4 902.4 Cash and cash equivalents at the end of the period 18 1,047.2 989.7 1,110.8 ===================================== ===== ======== ======== ==========
Notes to the condensed consolidated financial statements
8B8BCorporate 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. 9B9B1. General information The financial information for the year ended 31 December 2016 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 2016 is unqualified, does not draw attention to any matters by way of emphasis and does not include a statement under S498(2) or (3) of the Companies Act 2006. 10B10B2. 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 Interim Report have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' as adopted by the European Union. The Group has not adopted any new standard, interpretation or amendment since 31 December 2016. 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 of accounting in preparing the interim condensed consolidated financial statements. Accounting policies and accounting developments The same accounting policies, presentation and methods of computation are followed in the condensed consolidated financial statements as applied in the Group's latest annual audited financial statements. 11B11B3. Critical accounting estimates and judgements Pages 134 to 136 of the Annual Report & Accounts 2016 provide full details of critical accounting estimates and judgements used in applying the Group's accounting policies. There have been no significant changes to the principles or assumptions of these critical accounting estimates and judgements during the period. 12B12B4. Segmental analysis There have been no significant changes to the Group's reportable segments as set out on page 150 of the Annual Report & Accounts 2016. The table below is an analysis of the Group's revenue and results by reportable segment for the six months ended 30 June 2017: Rescue and other personal Total Motor Home lines Commercial Ongoing Run-off Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm ============================= ======= ======= ========= ========== ======== ======= ======= Gross written premium 824.4 388.1 213.3 268.4 1,694.2 - 1,694.2 ============================= ======= ======= ========= ========== ======== ======= ======= Gross earned premium 773.5 409.1 209.8 252.6 1,645.0 - 1,645.0 Reinsurance premium (65.7) (12.1) (0.8) (18.9) (97.5) - (97.5) ============================= ======= ======= ========= ========== ======== ======= ======= Net earned premium 707.8 397.0 209.0 233.7 1,547.5 - 1,547.5 Investment return 62.2 11.2 2.4 16.8 92.6 0.4 93.0 Instalment income 40.5 11.4 1.0 2.9 55.8 - 55.8 Other operating income 25.7 0.4 6.3 1.4 33.8 - 33.8 ============================= ======= ======= ========= ========== ======== ======= ======= Total income 836.2 420.0 218.7 254.8 1,729.7 0.4 1,730.1 ============================= ======= ======= ========= ========== ======== ======= ======= Insurance claims (348.9) (191.1) (136.2) (133.2) (809.4) 41.2 (768.2) Insurance claims recoverable from reinsurers (54.6) 0.4 0.5 6.1 (47.6) (31.6) (79.2) ============================= ======= ======= ========= ========== ======== ======= ======= Net insurance claims (403.5) (190.7) (135.7) (127.1) (857.0) 9.6 (847.4) ============================= ======= ======= ========= ========== ======== ======= ======= Commission expenses (18.3) (67.4) (10.5) (41.9) (138.1) - (138.1) Operating expenses (180.5) (94.4) (49.9) (55.6) (380.4) - (380.4) ============================= ======= ======= ========= ========== ======== ======= ======= Total expenses (198.8) (161.8) (60.4) (97.5) (518.5) - (518.5) ============================= ======= ======= ========= ========== ======== ======= ======= Operating profit before restructuring costs 233.9 67.5 22.6 30.2 354.2 10.0 364.2 ============================= ======= ======= ========= ========== ======== =======
Restructuring costs (4.5) ======= Operating profit 359.7 Finance costs (18.3) ======= Profit before tax 341.4 ======= Underwriting profit 105.5 44.5 12.9 9.1 172.0 ============================= ======= ======= ========= ========== ======== Loss ratio 57.0% 48.0% 64.9% 54.4% 55.4% Commission ratio 2.6% 17.0% 5.0% 17.9% 8.9% Expense ratio 25.5% 23.8% 23.9% 23.8% 24.6% ============================= ------- ======= ========= ========== ======== COR 85.1% 88.8% 93.8% 96.1% 88.9% ============================= ======= ======= ========= ========== ======== The table below is an analysis of the Group's revenue and results by reportable segment for the six months ended 30 June 2016: Rescue and other personal Total Motor Home lines Commercial Ongoing Run-off Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm ============================= ======= ======= ========= ========== ======== ======= ======= Gross written premium 750.3 403.2 197.7 261.9 1,613.1 - 1,613.1 ============================= ======= ======= ========= ========== ======== ======= ======= Gross earned premium 710.7 427.4 195.6 245.8 1,579.5 - 1,579.5 Reinsurance premium (60.4) (15.7) (0.8) (22.7) (99.6) - (99.6) ============================= ======= ======= ========= ========== ======== ======= ======= Net earned premium 650.3 411.7 194.8 223.1 1,479.9 - 1,479.9 Investment return 63.0 11.0 2.1 14.9 91.0 1.7 92.7 Instalment income 36.2 11.6 0.9 2.7 51.4 - 51.4 Other operating income 19.6 0.1 6.2 1.1 27.0 - 27.0 ============================= ======= ======= ========= ========== ======== ======= ======= Total income 769.1 434.4 204.0 241.8 1,649.3 1.7 1,651.0 ============================= ======= ======= ========= ========== ======== ======= ======= Insurance claims (397.4) (137.9) (121.4) (117.3) (774.0) 35.1 (738.9) Insurance claims recoverable from reinsurers (18.7) 0.2 - 2.2 (16.3) (13.1) (29.4) ============================= ======= ======= ========= ========== ======== ======= ======= Net insurance claims (416.1) (137.7) (121.4) (115.1) (790.3) 22.0 (768.3) ============================= ======= ======= ========= ========== ======== ======= ======= Commission expenses (16.7) (91.2) (9.6) (43.3) (160.8) - (160.8) Operating expenses (167.5) (104.0) (49.6) (53.5) (374.6) (0.1) (374.7) ============================= ======= ======= ========= ========== ======== ======= ======= Total expenses (184.2) (195.2) (59.2) (96.8) (535.4) (0.1) (535.5) ============================= ======= ======= ========= ========== ======== ======= ======= Operating profit before restructuring costs 168.8 101.5 23.4 29.9 323.6 23.6 347.2 ============================= ======= ======= ========= ========== ======== ======= Restructuring costs (30.3) ======= Operating profit 316.9 Finance costs (18.4) Profit before tax 298.5 Underwriting profit 50.0 78.8 14.2 11.2 154.2 ============================= ======= ======= ========= ========== ======== Loss ratio 64.0% 33.4% 62.3% 51.6% 53.4% Commission ratio 2.6% 22.2% 4.9% 19.4% 10.9% Expense ratio 25.7% 25.3% 25.5% 24.0% 25.3% ============================= ======= ======= ========= ========== ======== COR 92.3% 80.9% 92.7% 95.0% 89.6% ============================= ======= ======= ========= ========== ======== The table below shows the Group's revenue and results by reportable segment for the year ended 31 December 2016 (audited): Rescue and other personal Total Motor Home lines Commercial Ongoing Run-off Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm ============================= ========= ======= ========= ========== ========= ======= ========= Gross written premium 1,539.1 834.4 400.8 499.8 3,274.1 - 3,274.1 ============================= ========= ======= ========= ========== ========= ======= ========= Gross earned premium 1,461.3 851.0 396.1 494.4 3,202.8 - 3,202.8 Reinsurance premium (124.2) (34.7) (1.7) (41.6) (202.2) - (202.2) ============================= ========= ======= ========= ========== ========= ======= ========= Net earned premium 1,337.1 816.3 394.4 452.8 3,000.6 - 3,000.6 Investment return 116.9 19.9 3.9 27.4 168.1 3.4 171.5 Instalment income 76.1 23.5 1.9 5.6 107.1 - 107.1 Other operating income 40.9 0.8 13.5 3.0 58.2 - 58.2 ============================= ========= ======= ========= ========== ========= ======= ========= Total income 1,571.0 860.5 413.7 488.8 3,334.0 3.4 3,337.4 ============================= ========= ======= ========= ========== ========= ======= ========= Insurance claims (1,297.3) (332.1) (243.0) (297.7) (2,170.1) (8.9) (2,179.0) Insurance claims recoverable from reinsurers 295.6 0.1 - 47.2 342.9 32.3 375.2 ============================= ========= ======= ========= ========== ========= ======= ========= Net insurance claims (1,001.7) (332.0) (243.0) (250.5) (1,827.2) 23.4 (1,803.8) ============================= ========= ======= ========= ========== ========= ======= ========= Commission expenses (42.9) (184.4) (28.4) (88.3) (344.0) - (344.0) Operating expenses (377.3) (177.4) (96.4) (108.2) (759.3) (0.2) (759.5) ============================= ========= ======= ========= ========== ========= ======= ========= Total expenses (420.2) (361.8) (124.8) (196.5) (1,103.3) (0.2) (1,103.5) ============================= ========= ======= ========= ========== ========= ======= ========= Operating profit before restructuring costs 149.1 166.7 45.9 41.8 403.5 26.6 430.1 ============================= ========= ======= ========= ========== ========= ======= ========= Restructuring costs (39.9) ========= Operating profit 390.2 Finance costs (37.2) Profit before tax 353.0 Underwriting (loss) / profit (84.8) 122.5 26.6 5.8 70.1 ============================= ========= ======= ========= ========== ========= Loss ratio 74.9% 40.7% 61.6% 55.3% 60.9% Commission ratio 3.2% 22.6% 7.2% 19.5% 11.5% Expense ratio 28.2% 21.7% 24.5% 23.9% 25.3% ============================= ========= ======= ========= ========== ========= COR 106.3% 85.0% 93.3% 98.7% 97.7% ============================= ========= ======= ========= ========== =========
5. Net earned premium
6 months 6 months Full 2017 2016 year GBPm GBPm 2016 GBPm (audited) ======================================= ======== ======== ========== Gross earned premium: Gross written premium 1,694.2 1,613.1 3,274.1 Movement in unearned premium reserve (49.2) (33.6) (71.3) ======================================= ======== ======== ========== 1,645.0 1,579.5 3,202.8 ======================================= ======== ======== ========== Reinsurance premium: Premium payable (81.6) (83.1) (206.2) Movement in reinsurance unearned premium reserve (15.9) (16.5) 4.0 ======================================= ======== ======== ========== (97.5) (99.6) (202.2) ======================================= ======== ======== ========== Total 1,547.5 1,479.9 3,000.6 ======================================= ======== ======== ==========
6. Investment return
6 months 6 months Full 2017 2016 year GBPm GBPm 2016 GBPm (audited) ========================================= ======== ======== ========== Investment income: Interest income from debt securities 68.0 69.2 136.5 Cash and cash equivalent interest income 1.7 2.3 4.2 Interest income from infrastructure debt 3.6 4.0 7.8 Interest income from commercial real estate loans 1.1 - 1.0 ----------------------------------------- -------- -------- ---------- Interest income 74.4 75.5 149.5 Rental income from investment property 8.4 8.9 18.4 ----------------------------------------- -------- -------- ---------- 82.8 84.4 167.9 ----------------------------------------- -------- -------- ---------- Net realised gains / (losses): Available-for-sale debt securities 14.8 8.2 15.3 Derivatives 109.3 (15.9) (282.3) Investment property (0.3) - 1.3 123.8 (7.7) (265.7) ========================================= ======== ======== ========== Net unrealised (losses) / gains: Impairment of loans and receivables (3.4) - - Derivatives (120.1) 15.5 265.2 Investment property 9.9 0.5 4.1 ========================================= ======== ======== ========== (113.6) 16.0 269.3 ========================================= ======== ======== ========== Total 93.0 92.7 171.5 ========================================= ======== ======== ========== The table below analyses the realised and unrealised gains / (losses) on derivative instruments included in investment return. Realised Unrealised Realised Unrealised ======== ========== ======== ========== 6 months 6 months 6 months 6 months 2017 2017 2016 2016 GBPm GBPm GBPm GBPm ====================================== ======== ========== ======== ========== Derivative gains / (losses): Foreign exchange forward contracts(1) 41.8 54.6 (68.7) (149.3) Associated foreign exchange risk 61.5 (166.6) 42.8 177.5 ====================================== ======== ========== ======== ========== Net gains / (losses) on foreign exchange forward contracts 103.3 (112.0) (25.9) 28.2 ====================================== ======== ========== ======== ========== Interest rate swaps(1) 9.4 (18.4) 5.0 (62.4) Associated interest rate risk (3.4) 10.3 5.0 49.7 ====================================== ======== ========== ======== ========== Net gains / (losses) on interest rate derivatives 6.0 (8.1) 10.0 (12.7) Total 109.3 (120.1) (15.9) 15.5 ====================================== ======== ========== ======== ========== Realised Unrealised =========== ========== Full Full year year 2016 2016 (audited) (audited) GBPm GBPm ========================================= =========== ========== Derivative (losses) / gains: Foreign exchange forward contracts(1) (425.7) 19.1 Associated foreign exchange risk 151.0 253.0 ========================================= =========== ========== Net (losses) / gains on foreign exchange forward contracts (274.7) 272.1 ========================================= =========== ========== Interest rate swaps(1) (16.9) 20.7 Associated interest rate risk 9.3 (27.6) ========================================= =========== ========== Net losses on interest rate derivatives (7.6) (6.9) Total (282.3) 265.2 ========================================= =========== ========== 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 Full 2016 year 6 months GBPm 2016 2017 GBPm GBPm (audited) ==================================== ======== ======== ========== Vehicle replacement referral income 8.3 6.8 14.1 Revenue from vehicle recovery and repair services 9.8 9.4 19.3 Other income(1) 15.7 10.8 24.8 ==================================== ======== ======== ========== Total 33.8 27.0 58.2 ==================================== ======== ======== ========== Note: 1. Other income includes legal services revenue, salvage income and fee income from insurance intermediary services.
8. Net insurance claims
Gross Reinsurance Net Gross Reinsurance Net ======== =========== ======== ======== =========== ======== 6 months 6 months 6 months 6 months 6 months 6 months 2017 2017 2017 2016 2016 2016 GBPm GBPm GBPm GBPm GBPm GBPm ====================== ======== =========== ======== ======== =========== ======== Current accident year claims paid 452.4 (0.1) 452.3 436.4 - 436.4 Prior accident year claims paid 573.4 (5.7) 567.7 577.3 (7.2) 570.1 Movement in insurance liabilities (257.6) 85.0 (172.6) (274.8) 36.6 (238.2) ====================== ======== =========== ======== ======== =========== ======== Total 768.2 79.2 847.4 738.9 29.4 768.3 ====================== ======== =========== ======== ======== =========== ======== Gross Reinsurance Net ========== =========== ========== Full Full Full year year year 2016 2016 2016 GBPm GBPm GBPm (audited) (audited) (audited) ================================== ========== =========== ========== Current accident year claims paid 1,131.7 - 1,131.7 Prior accident year claims paid 905.2 (18.8) 886.4 Movement in insurance liabilities 142.1 (356.4) (214.3)
================================== ========== =========== ========== Total 2,179.0 (375.2) 1,803.8 ================================== ========== =========== ========== The table below analyses the claims handling expenses included in the net insurance claims. 6 months Full 2016 year 6 months GBPm 2016 2017 GBPm GBPm (audited) ======================= ========== ========= ============ Ongoing operations 86.6 87.0 164.4 Run-off - 1.0 1.2 ======================= ========== ========= ============ Total 86.6 88.0 165.6 ======================= ========== ========= ============
9. Commission expenses
6 months Full 2016 year 6 months GBPm 2016 2017 GBPm GBPm (audited) ============================================== ======== ======== ========== Commission expenses 117.1 123.1 246.8 Expenses incurred under profit participations 21.0 37.7 97.2 ============================================== ======== ======== ========== Total 138.1 160.8 344.0 ============================================== ======== ======== ==========
10. Operating expenses
Total Restructuring Total Ongoing costs Run-off Group ======== ============= ======== ======== 6 months 6 months 6 months 6 months 2017 2017 2017 2017 GBPm GBPm GBPm GBPm =============================== ======== ============= ======== ======== Staff costs(1) 131.6 4.5 - 136.1 Other operating expenses(1,2) 149.0 - - 149.0 Marketing 59.0 - - 59.0 Amortisation and impairment of other intangible assets 26.7 - - 26.7 Depreciation 14.1 - - 14.1 =================================== ======== ============= ======== ======== Total 380.4 4.5 - 384.9 =================================== ======== ============= ======== ======== Total Restructuring Total Ongoing costs Run-off Group ======== ============= ======== ======== 6 months 6 months 6 months 6 months 2016 2016 2016 2016 GBPm GBPm GBPm GBPm ================================ ======== ============= ======== ======== Staff costs(1) 137.2 8.7 - 145.9 Other operating expenses(1,2,3) 129.8 21.6 0.1 151.5 Marketing 62.6 - - 62.6 Amortisation and impairment of other intangible assets 30.0 - - 30.0 Depreciation 15.0 - - 15.0 ==================================== ======== ============= ======== ======== Total 374.6 30.3 0.1 405.0 ==================================== ======== ============= ======== ======== Total Restructuring Total Ongoing costs Run-off Group ========== ============= ========== ========== Full Full Full Full year year year year (audited) (audited) (audited) (audited) 2016 2016 2016 2016 GBPm GBPm GBPm GBPm ================================ ========== ============= ========== ========== Staff costs(1) 269.0 16.0 - 285.0 Other operating expenses(1,2,3) 250.9 23.9 0.2 275.0 Marketing 112.6 - - 112.6 Amortisation and impairment of other intangible assets 96.7 - - 96.7 Depreciation 30.1 - - 30.1 ==================================== ========== ============= ========== ========== Total 759.3 39.9 0.2 799.4 ==================================== ========== ============= ========== ========== 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 include IT costs, insurance levies, professional fees and property costs. 3. A property site in Bristol comprising of freehold property and fixtures and fittings was transferred from freehold property to assets held for sale in 2016. The property with a carrying value of GBP23.5 million was re-measured on transfer to its fair value of GBP3.8 million resulting in a charge to other operating expense in Restructuring costs of GBP19.7 million.
11. Finance costs
6 months Full 2016 year 6 months GBPm 2016 2017 GBPm GBPm (audited) ======================================= ======== ======== ========== Interest expense on subordinated liabilities 23.1 23.0 46.3 Net interest received on designated hedging instrument(1) (4.5) (3.9) (8.0) Unrealised loss / (gain) on designated hedging instrument(1) 6.3 (30.9) (19.6) Unrealised (gain) / loss on associated interest rate risk on hedged item(1) (6.9) 29.9 17.8 Amortisation of arrangement costs and discount on issue of subordinated liabilities 0.3 0.3 0.7 ======================================= ======== ======== ========== Total 18.3 18.4 37.2 ======================================= ======== ======== ========== Note: 1. 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 rate of three-month LIBOR plus a spread of 706 basis points, which increased to 707 basis points with effect from 29 July 2013.
12. Tax charge
6 months Full 2016 year 6 months GBPm 2016 2017 GBPm GBPm (audited) ====================================== ======== ======== ========== Current taxation: Charge for the period 69.9 65.0 84.4 Under / (over) provision in respect of the prior period 6.4 - (7.7) -------------------------------------- -------- -------- ---------- 76.3 65.0 76.7 ====================================== ======== ======== ========== Deferred taxation: Credit for the period (2.2) (2.4) (5.1) (Over) / under provision in respect of the prior period (8.2) - 2.6 ====================================== ======== ======== ========== (10.4) (2.4) (2.5) ====================================== ======== ======== ========== Current taxation 76.3 65.0 76.7 Deferred taxation (10.4) (2.4) (2.5) ====================================== ======== ======== ========== Tax charge for the period 65.9 62.6 74.2
====================================== ======== ======== ==========
13. Dividends
6 months 6 months Full 2017 2016 year GBPm GBPm 2016 GBPm (audited) ======================================== ======== ======== ========== Amounts recognised as distributions to equity holders in the period: 2016 final dividend of 9.7p per share paid on 18 May 2017 132.4 - - 2015 final dividend of 9.2p per share paid on 19 May 2016 - 126.0 126.0 2016 first interim dividend of 4.9p per share paid on 9 September 2016 - - 67.1 2016 first special interim dividend of 10.0p per share paid on 9 September 2016 - - 136.9 2015 second special interim dividend of 8.8p per share paid on 19 May 2016 - 120.6 120.6 ======================================== ======== ======== ========== Total 132.4 246.6 450.6 ======================================== ======== ======== ========== 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 dividend paid for the six months ended 30 June 2017 by GBP1.0 million (six months ended 30 June 2016: GBP0.9 million and year ended 31 December 2016: GBP1.8 million). 14. Earnings per share 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. 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 Full 2016 year 6 months GBPm 2016 2017 GBPm GBPm (audited) ==================================== ======== ======== ========== Earnings attributable to owners of the Company 275.5 235.9 278.8 ==================================== ======== ======== ========== Weighted average number of Ordinary Shares (millions) 1,365.5 1,370.2 1,368.7 ==================================== ======== ======== ========== Basic earnings per share (pence) 20.2 17.2 20.4 ==================================== ======== ======== ========== 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 dilutive potential Ordinary Shares. The Company has share options and contingently issuable shares as categories of dilutive potential Ordinary Shares. 6 months Full 2016 year 6 months GBPm 2016 2017 GBPm GBPm (audited) ========================================= ======== ======== ========== Earnings attributable to owners of the Company 275.5 235.9 278.8 ========================================= ======== ======== ========== Weighted average number of Ordinary Shares (millions) 1,365.5 1,370.2 1,368.7 Effect of dilutive potential of share options and contingently issuable shares (millions) 12.7 15.5 13.1 ========================================= ======== ======== ========== Weighted average number of Ordinary Shares for the purpose of diluted earnings per share (millions) 1,378.2 1,385.7 1,381.8 ========================================= ======== ======== ========== Diluted earnings per share (pence) 20.0 17.0 20.2 ========================================= ======== ======== ========== 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. 31 Dec 30 Jun 2016 2017 GBPm At GBPm (audited) ============================================= ======= ========== Net assets 2,654.5 2,521.5 Goodwill and other intangible assets (517.4) (508.9) Tangible net assets 2,137.1 2,012.6 ============================================= ======= ========== 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) 194.4 184.7 Tangible net asset value per share (pence) 156.5 147.4 ============================================= ======= ========== Return on equity The table below details the calculation of return on equity and annualised return on equity. 6 months Full 2016 year 6 months GBPm 2016 2017 GBPm GBPm (audited) ================================ ======== ======== ========== Earnings attributable to owners of the Company 275.5 235.9 278.8 ================================ ======== ======== ========== Annualised(1) 551.0 471.8 278.8 Opening shareholders' equity 2,521.5 2,630.0 2,630.0 Closing shareholders' equity 2,654.5 2,668.8 2,521.5 ================================ ======== ======== ========== Average shareholders' equity 2,588.0 2,649.4 2,575.8 ================================ ======== ======== ========== Return on equity for period 10.6% 8.9% 10.8% Return on equity annualised(1) 21.3% 17.8% 10.8% ================================ ======== ======== ========== Note: 1. Earnings have been annualised using profits for the 6 months ended 30 June 2017 (2016: 6 months ended 30 June 2016).
16. Reinsurance assets
31 Dec 30 Jun 2016 2017 GBPm At GBPm (audited) ======================================= ======= ========== Reinsurers' share of general insurance liabilities 1,250.6 1,329.0 Impairment provision (57.3) (50.7) ======================================= ======= ========== 1,193.3 1,278.3 Reinsurers' unearned premium reserve 77.6 93.5 ======================================= ======= ========== Total 1,270.9 1,371.8 ======================================= ======= ==========
17. Financial investments
31 Dec 30 Jun 2016 2017 GBPm At GBPm (audited) =================================== ======= ========== Available-for-sale debt securities Corporate 4,174.9 4,183.7 Supranational 98.1 98.6 Local government 12.3 21.7 Sovereign 363.0 341.2 Total 4,648.3 4,645.2 Held-to-maturity debt securities Corporate 88.3 85.1 =================================== ======= ========== Total debt securities 4,736.6 4,730.3 =================================== ======= ========== Total debt securities Fixed interest rate(1) 4,720.2 4,709.6 Floating interest rate 16.4 20.7 =================================== ======= ========== Total 4,736.6 4,730.3
Loans and receivables Infrastructure debt 328.0 337.0 Commercial real estate loans 90.9 79.7 =================================== ======= ========== Total 5,155.5 5,147.0 =================================== ======= ========== 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 2017 was GBP1,543.1 million (31 December 2016: GBP1,593.6 million).
18. Cash and cash equivalents and borrowings
31 Dec 30 Jun 2016 2017 GBPm At GBPm (audited) ================================================ ======= ========== Cash at bank and in hand 215.8 166.6 Short-term deposits with credit institutions(1) 890.8 999.5 ================================================ ======= ========== Cash and cash equivalents 1,106.6 1,166.1 Bank overdrafts(2) (59.4) (55.3) Cash and bank overdrafts(3) 1,047.2 1,110.8 ================================================ ======= ========== 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 transactions flowing through the accounts at the bank. 3. Cash and bank overdrafts are included for the purposes of the condensed consolidated cash flow statement. The effective interest rate on short-term deposits with credit institutions for the six months ended 30 June 2017 was 0.39% (year ended 31 December 2016: 0.45%) and average maturity at 30 June 2017 was 10 days (31 December 2016: 10 days).
19. Insurance liabilities
Movements in gross and net insurance liabilities
Gross Reinsurance Net GBPm GBPm GBPm ====================================== ========= =========== ========= Claims reported 2,732.2 (375.0) 2,357.2 Incurred but not reported 1,697.9 (546.9) 1,151.0 Claims handling provision 94.4 - 94.4 ====================================== ========= =========== ========= At 1 January 2016 (audited) 4,524.5 (921.9) 3,602.6 Cash paid for claims settled in the year (2,036.9) 18.8 (2,018.1) Increase / (decrease) in liabilities: Arising from current-year claims 2,329.3 (235.4) 2,093.9 Arising from prior-year claims (150.3) (139.8) (290.1) At 31 December 2016 (audited) 4,666.6 (1,278.3) 3,388.3 ====================================== ========= =========== ========= 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 31 December 2016 (audited) 4,666.6 (1,278.3) 3,388.3 Cash paid for claims settled in the period (1,025.8) 5.8 (1,020.0) Increase / (decrease) in liabilities: Arising from current-year claims 1,204.0 (130.6) 1,073.4 Arising from prior-year claims (435.8) 209.8 (226.0) At 30 June 2017 4,409.0 (1,193.3) 3,215.7 ====================================== ========= =========== ========= Claims reported 2,956.6 (694.2) 2,262.4 Incurred but not reported 1,373.1 (499.1) 874.0 Claims handling provision 79.3 - 79.3 ====================================== ========= =========== ========= At 30 June 2017 4,409.0 (1,193.3) 3,215.7 ====================================== ========= =========== =========
Movement in prior-year net claims liabilities by operating segment
Full year 6 months 6 months 2016 2017 2016 GBPm GBPm GBPm (audited) ================================ ======== ======== ========== Motor (174.6) (134.0) (123.5) Home (16.8) (60.6) (75.9) Rescue and other personal lines 2.1 (7.5) (17.5) Commercial (27.1) (34.0) (49.8) Total Ongoing (216.4) (236.1) (266.7) Run-off (9.6) (22.0) (23.4) Total (226.0) (258.1) (290.1) ================================ ======== ======== ========== 20. Fair value The following table compares the carrying value and the fair value of financial instruments and other assets where the Group discloses fair value. Carrying Level Level Level Fair value 1 2 3 value At 30 June 2017 GBPm GBPm GBPm GBPm GBPm ============================= ======== ===== ======= ===== ======= Assets held at fair value: Investment property 314.9 - - 314.9 314.9 Derivative assets 77.7 - 77.7 - 77.7 Available-for-sale debt securities (note 17) 4,648.3 363.0 4,285.3 - 4,648.3 Other financial assets: Held-to-maturity debt securities (note 17) 88.3 - 14.5 76.9 91.4 Infrastructure debt (note 17) 328.0 - - 336.3 336.3 Commercial real estate loans (note 17) 90.9 - - 90.9 90.9 ============================= ======== ===== ======= ===== ======= Total assets 5,548.1 363.0 4,377.5 819.0 5,559.5 ============================= ======== ===== ======= ===== ======= Liabilities held at fair value: Derivative liabilities 13.3 - 13.3 - 13.3 Other financial liabilities: Subordinated liabilities 533.0 - 653.1 - 653.1 ============================= ======== ===== ======= ===== ======= Total liabilities 546.3 - 666.4 - 666.4 ============================= ======== ===== ======= ===== ======= Carrying Level Level Level Fair value 1 2 3 value At 31 December 2016 GBPm GBPm GBPm GBPm GBPm ============================= ======== ===== ======= ===== ======= Assets held at fair value: Investment property 329.0 - - 329.0 329.0 Derivative assets 79.7 - 79.7 - 79.7 Available-for-sale debt securities (note 17) 4,645.2 341.2 4,304.0 - 4,645.2 Other financial assets: Held-to-maturity debt securities (note 17) 85.1 - 13.6 74.6 88.2 Infrastructure debt (note 17) 337.0 - - 339.2 339.2 Commercial real estate loans (note 17) 79.7 - - 79.8 79.8 Total assets 5,555.7 341.2 4,397.3 822.6 5,561.1 ============================= ======== ===== ======= ===== ======= Liabilities held at fair value: Derivative liabilities 45.1 - 45.1 - 45.1 Other financial liabilities: Subordinated liabilities 539.6 - 625.0 - 625.0 ============================= ======== ===== ======= ===== ======= Total liabilities 584.7 - 670.1 - 670.1 ============================= ======== ===== ======= ===== ======= 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). The movements in assets held at fair value and classified as level 3 in the fair value hierarchy are all within Investment property. There were no changes in the categorisation of assets between levels 1, 2 and 3 during the current period for assets and liabilities held at 31 December 2016. The table below analyses the movement in assets classified as Level 3 in the fair value hierarchy. Investment property GBPm ============================================ ========== At 1 January 2016 (audited) 347.4 Additions 1.4 Increase in fair value in the year (note 6) 5.4
Disposals (25.2) ========== At 31 December 2016 (audited) 329.0 Increase in fair value in the period (note 6) 9.6 Disposals (23.7) ============================================ ========== At 30 June 2017 314.9 ============================================ ==========
Glossary
Term Definition and explanation ==================== ================================================= Adjusted diluted Adjusted diluted earnings per share is earnings per calculated by dividing the adjusted profit share after tax of Ongoing operations by the weighted average number of Ordinary Shares during the period adjusted for dilutive potential Ordinary Shares (see alternative performance measures). ==================== ================================================= Adjusted profit Profit after tax is adjusted to exclude after tax the Run-off segment and restructuring costs, and is stated after charging tax using the UK standard tax rate of 19.25%; (2016: 20.00%). See alternative performance measure. ==================== ================================================= Available-for-sale Financial assets that are classified ("AFS") investment as available-for-sale. Please refer to the accounting policy note 1.12 on page 130 of the Annual Report and Accounts 2016. ==================== ================================================= Capital The funds invested in the Group, including funds invested by shareholders and retained profits. ==================== ================================================= Capital coverage The ratio of Solvency II own funds to ratio the solvency capital requirement. ==================== ================================================= Claims frequency The number of claims divided by the number of policies per year. ==================== ================================================= Claims handling Funds the Group sets aside to meet the provision estimated cost of paying claims and related (provision expenses that the Group considers it for losses will ultimately need to pay. and loss-adjustment expense) ==================== ================================================= Combined operating The sum of the loss, commission and expense ratio ("COR") ratios. The ratio measures the amount of claims costs, commission and expenses, compared to net earned premium generated. A ratio of less than 100% indicates profitable underwriting. ==================== ================================================= Commission Payments to brokers, partners and PCWs for generating business. ==================== ================================================= Commission The ratio of commission expense divided ratio by net earned premium. ==================== ================================================= Current-year The loss ratio for the current accident attritional year, excluding the movement of claims loss ratio reserves relating to previous accident years, and claims relating to major weather events in the Home division. ==================== ================================================= Earnings per The amount of the Group's profit allocated share 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 premium began during the period. ==================== ================================================= International A not-for-profit public interest organisation Accounting that is overseen by a monitoring board Standards of public authorities. Board ("IASB") It develops IFRS: standards that aim to make worldwide markets transparent, accountable and efficient. ==================== ================================================= Incurred but Funds set aside to meet the cost of claims not reported for accidents that have occurred, but ("IBNR") 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 This comprises insurance claims reserves liabilities and claims handling provision, which the Group maintains to meet current and future claims. ==================== ================================================= Investment The income earned from the investment income yield portfolio, 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 The income earned from the investment return portfolio, including unrealised and realised gains and losses, impairments, and fair value adjustments. ==================== ================================================= Investment The return earned from the investment return yield portfolio, 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. ==================== ================================================= Loss ratio Net insurance claims divided by net earned premium. ==================== ================================================= Net asset The net asset value of the Group is calculated value 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 The element of gross earned premium less premium reinsurance premium ceded for the period where insurance cover has already been provided. ==================== ================================================= Ongoing operations Ongoing operations comprise Direct Line Group's Ongoing divisions: Motor, Home, Rescue and other personal lines, and Commercial. It excludes discontinued operations, the Run-off segment, and restructuring costs. ==================== ================================================= Operating The pre-tax profit that the Group's activities profit generate, including insurance and investment activity, but excluding finance costs. ==================== ================================================= Prudential The PRA is a part of the Bank of England. Regulation It is responsible for regulating and Authority supervising insurers
("PRA") 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 Return on equity is calculated by dividing equity the profit attributable to the owners of the Company by average Ordinary Shareholders' equity for the period. ==================== ================================================= Return on Return on tangible equity is adjusted tangible equity profit after tax from Ongoing operations, ("RoTE") divided by the Group's average shareholders' equity, less goodwill and other intangible assets. Profit after tax is adjusted to exclude the Run-off segment and restructuring costs. It is stated after charging tax using the UK standard tax rate of 19.25% (2016: 20.0%). See alternative performance measures. ==================== ================================================= Risk and business Risk and business mix measures the premium mix impact of channel, tenure and underlying risk mix. It reflects the risk models used in the period, the outputs of which are revised when models are updated. ==================== ================================================= Run-off Where the Group no longer underwrites new business, but continues to meet its claims liabilities under existing contracts. ==================== ================================================= 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. ==================== ================================================= Total costs Total costs comprise operating expenses and claims handling expenses for Ongoing operations. ==================== ================================================= Underwriting The profit or loss from operational activities, result excluding investment return and other (profit or operating income. It is calculated as loss) 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 on IFRS measures, to aid the user of the Half Year 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 condensed consolidated 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 condensed consolidated financial statements presents a reconciliation of the Group's business activities on a segmental basis to the condensed consolidated income statement including Ongoing operations of the Group. Equivalent Adjustment to reconcile Group IFRS primary statements and APM measure where calculated Rationale for adjustments ============ ========== ================================= ============================ Adjusted Diluted Adjusted diluted earnings This is a representation diluted earnings per share is defined of the underlying earnings per in the glossary and earnings over the per share share is reconciled below. number of shares in issue adjusted for potential dilutions from the exercise of options. ============ ========== ================================= ============================ Current-year Loss Current-year attritional Expresses claims attritional ratio loss ratio is defined performance in the loss in the glossary and current accident ratio is reconciled to loss year in relation ratio in the Finance to net earned premium. review. ============ ========== ================================= ============================ COR Operating COR is defined in the This is a measure profit glossary. The constituent of underwriting parts: operating profit profitability whereby - Ongoing operations a ratio of less is discussed below; than 100% represents and net earned premium an underwriting (note 5). profit and a ratio of more than 100% represents an underwriting loss and excludes non-insurance income. ============ ========== ================================= ============================ Investment Investment Investment income yield Expresses a relationship income income is defined in the glossary between the investment yield and is reconciled below. income and the associated opening and closing assets adjusted for portfolio hedging instruments. ============ ========== ================================= ============================ Investment Investment Investment return yield Expresses a relationship return return is defined in the glossary between the investment yield and is reconciled below. income and the associated opening and closing assets adjusted for portfolio hedging instruments. ============ ========== ================================= ============================ Loss Net Loss ratio is defined Expresses claims ratio insurance in the glossary and performance in relation claims is reconciled in note to net earned premium. 4. ============ ========== ================================= ============================ Operating Operating Operating profit from This measure shows profit profit Ongoing operations is the underlying performance from defined as operating (before tax and Ongoing profit (see glossary) finance costs) operations less operating profit of the business from run-off segment activities without plus restructuring costs the impact (see note 4) and is of business that reconciled below. is in run-off and non-repeating restructuring costs. ============ ========== ================================= ============================ Profit Profit Operating profit from This measure shows after after Ongoing operations (as the underlying performance tax from tax above) less finance (after tax and finance
Ongoing costs and tax at standard costs) operations rate and is reconciled of the business below. activities without the impact of business that is in run-off and non-repeating restructuring costs. ============ ========== ================================= ============================ RoTE Return RoTE is defined in the This shows underlying on Equity glossary and is reconciled performance against 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 equity as equity less intangible excluding intangible assets and is reconciled assets for comparability below. with companies who have not acquired businesses or capitalised intangible assets. ============ ========== ================================= ============================ Tangible Net Tangible net asset per This shows the equity net asset assets share is defined as excluding intangible per share per tangible equity assets per share share (as above) expressed for comparability as a value per share with companies who and is reconciled have not acquired in note 15. businesses or capitalised intangible assets. ============ ========== ================================= ============================ Total Operating Total costs from Ongoing This represents costs expenses operations is defined the total value from as operating expenses of operating expenses Ongoing adjusted to remove restructuring including those operations costs and operating allocated to the expenses charged to insurance claims the run-off segment line as claims handling (reconciled in note expenses. 10) plus claims handling expenses incurred in net insurance claims on Ongoing operations (note 8). This is reconciled in the Finance review. ============ ========== ================================= ============================ 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(1)
H1 H1 2017 2016 Note(2) GBPm GBPm ============================================ ======= ======= ======= Operating profit 4 359.7 316.9 Add back: restructuring costs 4 4.5 30.3 Exclude: operating profit from run-off 4 (10.0) (23.6) ============================================ ======= ======= ======= Operating profit from Ongoing operations 4 354.2 323.6 Finance costs 11 (18.3) (18.4) ============================================ ======= ======= ======= Adjusted profit before tax from Ongoing operations 335.9 305.2 Tax charge (using the UK standard tax rate of 19.25% and 20.0% respectively) (64.7) (61.0) ============================================ ======= ======= ======= Adjusted profit after tax from Ongoing operations 271.2 244.2 ============================================ ======= ======= ======= Annualised adjusted profit after tax 542.4 488.4 ============================================ ======= ======= ======= Opening shareholders' equity 2,521.5 2,630.0 Opening goodwill and other intangible assets (508.9) (524.8) Opening shareholders' tangible equity 2,012.6 2,105.2 ============================================ ======= ======= ======= Closing shareholders' equity 2,654.5 2,668.8 Closing goodwill and other intangible assets (517.4) (541.4) ============================================ ======= ======= ======= Closing shareholders' tangible equity 2,137.1 2,127.4 ============================================ ======= ======= ======= Average shareholders' tangible equity(3) 2,074.8 2,116.3 ============================================ ======= ======= ======= Return on tangible equity annualised 26.1% 23.1% ============================================ ======= ======= =======
Adjusted diluted earnings per share(1)
H1 H1 2017 2016 Note(2) GBPm GBPm ======================================= ======= ======= ======= Adjusted profit after tax from Ongoing operations 271.2 244.2 Weighted average number of Ordinary Shares for the purpose of diluted earnings per share (millions) 14 1,378.2 1,385.7 ======================================= ======= ======= ======= Adjusted diluted earnings per share (pence) 19.7 17.6 ======================================= ======= ======= ======= Notes: 1. See glossary for definitions 2. See notes to the condensed consolidated financial statements 3. Mean average of opening and closing balances
Investment income and return yields(1)
H1 H1 2017 2016 Note(2) GBPm GBPm =================================== ======= ======= ======= Investment income 6 82.8 84.4 Investment return 6 93.0 92.7 =================================== ======= ======= ======= Investment income annualised 165.6 168.8 Investment return annualised 186.0 185.4 =================================== ======= ======= ======= Opening investment property 329.0 347.4 Opening financial investments 5,147.0 5,614.6 Opening cash and cash equivalents 1,166.1 963.7 Opening borrowings (55.3) (61.3) Opening derivatives(3) (5.8) (45.7) =================================== ======= ======= ======= Opening investment holdings 6,581.0 6,818.7 =================================== ======= ======= ======= Closing investment property 314.9 348.6 Closing financial investments 5,155.5 5,515.7 Closing cash and cash equivalents 1,106.6 1,055.1 Closing borrowings (59.4) (65.4) Closing derivatives(3) 30.6 (257.5) =================================== ======= ======= ======= Closing investment holdings 6,548.2 6,596.5 =================================== ======= ======= ======= Average investment holdings 6,564.6 6,707.6 =================================== ======= ======= ======= Investment income yield annualised 2.5% 2.5% Investment return yield annualised 2.8% 2.8% =================================== ======= ======= ======= Notes: 1. See glossary for definitions 2. See notes to the consolidated financial statements 3. Asset allocation at 30 June 2017 includes investment portfolio derivatives, which have been netted and have a mark-to-market asset of GBP30.6m included in investment-grade credit (31 December 2016: mark-to-market liability of GBP5.8m included in investment grade credit). This excludes 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 John Reizenstein Chief Executive Officer Chief Financial Officer 31 July 2017 31 July 2017
Independent review report to Direct Line Insurance Group plc
We have been engaged by Direct Line Insurance Group plc (the "Company") to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2017 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 20. 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 Auditing Practices Board. 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 Auditing Practices Board 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 2017 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 2017
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