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1、Annual Report&Accounts2018Strategic report1Group highlights2Our Group4Our brands6Our segments8 Our routes to market10Our investment case 12Chairmans statement 15Chief Executive Officers review 18Market overview 19 Strategy 22Our business model 24 Our key performance indicators 26 Finance review 38 O
2、perating review 44 Risk management 5056 ResponsibilityPeople and culture ContentsRead more on pages 50 51ESG our approachInformation on our environmental,social and governance(“ESG”)related activitiesis structured according to the five pillars of our approach to responsibility.These pillars,activiti
3、es in the year relating to responsibility,and where to find ESGrelated information are set out in the Responsibility section.This also containsinformation on how we satisfy the requirements of the Non-Financial Reporting Directive.Governance60 Chairmans introduction62 Board of Directors65 Executive
4、Committee66 Corporate Governance report76 Committee reports88Directors remuneration report118 Directors reportFinancial statements122 Contents123 Independent Auditors report131 Consolidated financial statements136 Notes to the consolidated financial statements182 Parent Company financial statements1
5、84 Notes to the Parent Company financial statementsOther information189 Additional information191 Glossary and appendices195 Forward-looking statements disclaimer196 Contact informationFor more information please visit www.directlinegroup.co.uk/en/investors/esg.htmlGroup highlightsOur performance re
6、flects our focus on satisfying customers with the aim of delivering sustainable,profitable growthProfit before tax 582.6m(2017:539.0m)Return on tangibleequity121.5%(2017:23.0%)2 Combined operatingratio1,391.7%(2017:90.8%)2 Solvency capitalratio1,4(2017:165%)Operating profit1 601.7m(2017:642.8m)2 Div
7、idend pershare529.3p(2017:35.4p)Notes:1.See glossary on pages 191 to 192 for definitions and Appendix A Alternative performance measures onpages 193 and 194 for reconciliation tofinancial statement line items.2.Results for the year ended 31 December 2018 are based on total Group operations including
8、 restructuring costs and the Run-off segment.Comparative data has been re-presented accordingly to include restructuring costs and Run-off profits within the Motor segment.The adjusted profit after tax reported in 2017 was 462.9 million and the return on tangible equity was 21.7%.3.A reduction in th
9、e ratio represents an improvement as a proportion of net earned premium,while an increase in the ratio represents a deterioration.Seeglossary on page 191 for definitions.4.Estimates based on the Groups solvency II partial internal model.The 2017 comparative has been updatedto reflect the amounts in
10、the Group Solvency and Financial Condition Report for the year ended31December 2017.5.See page 32 for the dividend policy.170%WWW.DIRECTLINEGROUP.CO.UK1STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOne GroupWe give people the protection they need to do the things they love in life.Whether that be dr
11、iving their car,enjoying their home and possessions,exploring the world,caring for their pets or building their businesses.Our strength lies in the diversity of our propositions,offering a range of products,powerful brands and multiple routes to market,underpinned by a determination always to aim hi
12、gher for our customers,people,shareholders and wider stakeholders.WWW.DIRECTLINEGROUP.CO.UK3Eight brandsDirect Line stands for speed,simplicity and a common-sense human touch.We sell products direct tocustomers by phone and online.Direct Line customers want a premium product with exceptional custome
13、r care that is tailored to their needsat a competitive price.Churchill is one of Britains most recognisable brands,providing car,home,business,pet and travel insurance.Our products are available by phone and online,including price comparison websites.Churchill customers are looking for a dependable
14、partner which is reliable,trustworthy,and will spendtime making sure they are happy.Green Flag is our roadside rescue and recovery service.It is a standalone and optional product offered alongside motor insurance across all of our brands.Green Flag customers receive an award-winning breakdown servic
15、e at a much cheaper price than itstwo biggest rivals.Direct Line for Business understands that our customers businesses are their livelihoods,so the righttype of cover is vital.Our policies cover a rangeof trades,from start-ups,to growing businesses,from renting out a property to working as a single
16、 tradesman.We sell products direct via phone andonline.Privilege targets customers who mainly buy through price comparison websites.Privilege customers want a quick and efficient service atthe best price.NIG is our commercial insurance brand dedicated to the broker market and is focused on a number
17、ofspecialisms including small and medium-sized enterprises,agriculture and real estate.DLG Partnerships is the Groups partnerships arm.It specialises in providing personal insurance,and roadside rescue and recovery products to some well-known brands.DLG Auto Services is the Groups UK network ofbodys
18、hops,repairing around 90,000 accident damaged vehicles every year,and supports our seven day repair proposition for Direct Line customers.Find more details on our websiteWWW.DIRECTLINEGROUP.CO.UK5F our segmentsMotorHomeWe are Britains leading personal motor insurer measured by in-force policies1,mai
19、nly represented through our well-known brands Direct Line,Churchill and Privilege,and also through our partners.We are one of Britains leading personal home insurers measured by in-force policies1.We reach our customers by selling home insurance products through our brands Direct Line,Churchill and
20、Privilege,andour partners RBS,NatWest and Prudential.Gross written premium606.9mGross written premium1,671.2mCommercialWe protect commercial businesses through our brands,NIG,Direct Line for Business and Churchill.NIG sells its products exclusively through brokers operating across the UK.Gross writt
21、en premium511.0mOperating profit60.0mOperating profit83.1mOperating profit415.2mFind more details on pages 38 43Notes:1.Includes Direct Line,Churchill,Privilege and partner brands:RBS,NatWest,Prudential and Sainsburys GfK Financial Research Survey six months ending January2018,14,063 adults intervie
22、wed for motor insurance and 12,214 for home insurance.2.Mintel Vehicle Recovery UK,September 2018.3.Mintel Pet Insurance UK,August 2018 and Mintel Travel Insurance UK,February 2019.Gross written premium422.8mOperating profit43.4mWe are one of the leading providers of rescue and other personal lines
23、insurance in the UK2,3,with 7.5 million in-force policies.This includes providing roadside assistance and recovery for customers through Green Flag,the UKsthird largest roadside recovery provider2.We offer customers protection for their holidays and pets and are thethird largest travel and thethird
24、largest pet insurer3.We also offer insurance packages tailored for mid-to high-net worth customers.Rescue and other personal linesWWW.DIRECTLINEGROUP.CO.UK7Three routesto marketFind more details on page 19Note:1.Number of new policies sold through Churchill and Privilege for Motor and Home in 2018.2
25、.www.directlinegroup.co.uk/en/brands/dlg-partnerships.htmlEvery customer is unique and we want our products toreachcustomers wherever they shop.But we dont stopthere.We also want to give them choices about theirinsurance and we offer our products through the threemain routestomarket:We give our cust
26、omers a reason to come direct with our strong brands and great propositions,because we want to deliver excellent value for our customers andshareholders.DirectWe partner with big brands to offer insurance to their customers and look for waysto be innovative to give people choice about how they insur
27、e the things they love.PartnershipsStrong brands and propositions are important but so are great prices.We are investing in the latest generation IT to improve ourspeed to market and pricing capabilities.Price comparison websites710,000 Policies sold through price comparison websites1173,000Motor pa
28、rtnerships customers drove their new car awaywith our complimentary insurance21 million Own brand policiesadded since 2014WWW.DIRECTLINEGROUP.CO.UK9Six years of returnsCreating shareholder value through customer focusWe have a track record of delivering strong returns to shareholders having distribu
29、ted 2.5 billion in dividends over the past six years.This together with our share price performance has delivered an attractive total shareholder return.Our successful customer focused strategy,built around our rocket(see page 19),also enables us to invest in future capabilities with the aim of sust
30、aining our strong performance.Total shareholder return(%)Medium-term financial targets2018 resultsCombined operating ratio93%95%Return on tangible equity of at least 15%Grow our regular dividend in line with business growthMaintain solvency capital around the middle of the 140%180%solvency II target
31、range91.7%21.5%21.0p170%100150200250300FTSE 350(excluding investment trusts)16 Oct 201231 Dec 201231 Dec 201331 Dec 201431 Dec 201531 Dec 201631 Dec 201731 Dec 2018DLGFind more details on pages 24 25WWW.DIRECTLINEGROUP.CO.UK11CHAIRMANS STATEMENTIn 2018,the Group delivered profit before tax of 582.6m
32、illion(2017:539.0 million).The Groups diversified product and channel portfolio,disciplined underwriting and our engaged employees have helped ustoachieve this commendable result.Delivering sustainable returnsGovernance highlightsLeadershipYour Board seeks to ensure that decisions are of the highest
33、 standard.It challenges strategic proposals,performance delivery and management responsibilities.See page 66EffectivenessThe effectiveness ofyour Boards anditsCommittees performance is considered annually inan effectiveness review.See page 70AccountabilityYour Board provides shareholders with anasse
34、ssment of theGroups position and prospects.We monitor and review theeffectiveness of theGroups risk management and internal control systems.See page 74RemunerationYour Remuneration Committee ensures aclose correlation between creating valuefor shareholders,and remunerating Executive Directors andsen
35、ior executives appropriately.See pages 75 and 88Relations with shareholders andstakeholdersYour Board maintains strong relationships and regular interaction with shareholders.Their continued support for the strategic aims is important.Your Board also has regard totheinterests of otherstakeholders.Se
36、e pages 66 and 7512DIRECT LINE GROUP 2018 ANNUAL REPORT&ACCOUNTSto market losses due to credit spread widening and continued capital expenditure as the Group invests with the aim of improving its capabilities and efficiency.The Group aims to grow the dividend in line with business growth.Accordingly
37、,the Board has recommended a final dividend of 14.0 pence per share(2017:13.6 pence),anincrease of 0.4 pence per share.If approved,the total regular dividend of 21.0 pence per share will represent 2.9%growth on 2017s regular dividend(20.4 pence per share).This reflects the Boards continued confidenc
38、e in the Groups earnings and the progress the business continued to make.The Board also resolved to pay a special interim dividend of8.3 pence per share.After both dividends,the solvency capitalratio will be 170%as at 31 December 20181.The Board has taken into account the high level of political and
39、economic uncertainty,including in relation to the UKs exit from the EU(“Brexit”)and considers it appropriate for the time being to maintain a prudent solvency capital ratio towards the upper end of the solvency capital ratio risk appetite range of 140%to 180%.The Board will keep this position under
40、review as it monitors developments in the political and economic environment.In normal circumstances,the Board expects the Group to operate around the middle of its solvency capital ratio risk appetite range.BrexitBrexit,when the UK is due to leave the EU,is scheduled totakeplace on 29 March 2019.Al
41、though the Group is predominantly a UK business,it does,for example,have exposure to financial markets and it imports goods and services in order to fulfil insurance claims,including from the EU.The Group has been monitoring events carefully and proactively taken steps to mitigate the likely impact
42、on the Group to the extent we consider it to be appropriate and proportionate to do so,given the considerable uncertainties;however,in the event of a disruptive Brexit the Group will not be immune.We have more information on this in the Risk section,on page 48.ESG practicesThe Board subscribes to th
43、e principle that a business model thatis sustainable in the long term will be better able to drive value for its shareholders and other stakeholders,contributing tothe development of a sustainable economy.The Group has strong values and is customer focused to ensure it is continuing to meet customer
44、 needs.The Board is proud of the high level engagement of its people,whose wellbeing is one of the pillars in our approach to ESG,reflected in our support for Mind and the Scottish Association for Mental Health as well as numerous wellbeing initiatives across the Group.Our investment portfolio has s
45、tarted to be weighted towards green bonds and investments which attract higher ESG ratings.Each of our UK offices seeks to act constructively with the local community and we encourage our people to allocate at least a day each year out of their working lives to support charitable or community initia
46、tives.Our people donated nearly 4,800 hours of company time to volunteer within their communities during 2018.CEO successionFollowing a rigorous search process,the Group was delighted to announce,on 26 February 2019,that Penny James,Chief Financial Officer(“CFO”)had been selected to succeed Paul Ged
47、des as Chief Executive Officer(“CEO”)with effect from the conclusion of the Annual General Meeting(“AGM”)on 9 May 2019.Paul will step down as a member of the Board and will leave the Group at the end of July 2019.Penny joined the Board on 1 November 2017 and succeededJohn Reizenstein as CFO on 1 Mar
48、ch 2018.Pennys deep understanding of our sector,combined with outstanding leadership skills,financial and risk expertise and deep strategic thinking,gives the Board confidence that Penny is ideally suited to leading the delivery of the Groups short-term strategic imperatives,including technological
49、and business transformation,and the development of the next stage of ourstrategy.This year marks the 10th anniversary of Pauls appointment asCEO.In that time Paul has made a huge contribution to theGroup and the Company is deeply indebted to him for his strong leadership.During his tenure,Paul has b
50、een leading the management team which successfully separated the business from the Royal Bank of Scotland Group,floated it on the London Stock Exchange and turned it into a successful FTSE100 company.The Board thanks Paul for his enormouscontribution and wishes him well for the future.StrategyThe Gr
51、oup aims to make insurance much easier and better value for our customers.The Board supports and challenges theGroups management to develop and execute a strategy which is aligned to this aim.Our strategy looks to position us as a multi-brand,multi-product and multi-channel business,to enable us to
52、meet our customers needs now and in the future,regardless of their channel preference.Supporting this strategy is a substantial and ongoing change and investment agenda.We look to continue to invest in our direct offering,as we believe it enables us to deliver the best value for our customers and ou
53、r shareholders,through our differentiated brands and propositions and simple customer journeys.Our investments in technology and digitisation are intended to improve competitiveness,agility and efficiency.This also supports our ambition to grow our profitable share of the price comparison websites m
54、arket,particularly by moving us towards best-in-class pricing.By leveraging our manufacturing strengths and investments in digital capabilities,we are continuing to support our aim of winning new partnerships.Dividends and capital managementThe Groups solvency capital ratio prior to all proposed div
55、idends was 194%,resulting from good capital generation from the business and lower capital requirements due in part to increasing the level of reinsurance purchased by the Group in recent years.This was partially offset by higher unrealised mark Note:1.Further information can be found on page 32.WWW
56、.DIRECTLINEGROUP.CO.UK13STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSLinking remuneration to performanceWe remain committed to ensuring that executive pay is alignedwith the Companys strategy of targeting sustainable shareholder and customer value.This is primarily achieved by the Annual Incentive
57、Plan(“AIP”)and Long Term Incentive Plan(“LTIP”)being aligned to performance measures shareholders consider important.This is underpinned by the delivery of a significant proportion of remuneration through shares and shareholding requirements.The Group achieved a return on tangible equity(“RoTE”)of 2
58、1.5%for 2018.A decrease of 16.5%(2017:an increase of 3.3%)in the share price over the year to 318.7 pence(2017:381.7 pence)at 31 December 2018,together with dividend payments,provided a total shareholder return(“TSR”)of minus 7.7%for the year(2017:8.1%).This compares favourably to the FTSE 350 which
59、 had an overall return of minus 9.5%at 31December 2018 as financial markets reacted to global trade tensions and Brexit.Over the past five years,shareholders have received a TSR of 87%compared to the FTSE 350(excluding investment trusts)of 22%.The Group has continued to deliver good results each yea
60、r,which has enabled the Board to declare cumulative dividends,including special dividends,equivalent to approximately 106%of the Initial Public Offering(“IPO”)share price.More information on the Groups remuneration policy and share awards are disclosed in the Directors remuneration report on pages 8
61、8 117.IT infrastructureThe Board continues to provide oversight of the ambitious programme of activity to upgrade and better integrate the major IT systems within the Groups technology infrastructure,aimed at improving the Groups digital offering,customer experience and operational efficiency.Good p
62、rogress has been made in this area and 2019 is set to be an important year for the Group in terms of the delivery of the new platform.Customer,culture and conductMeeting the needs of our customers is central to the Groups strategy and sustainability.The Board recognises that opportunities will arise
63、 to improve further the services offered tocustomers,and along with its investment in IT capability to improve the efficiency and effectiveness of the business,it has also encouraged a range of customer experience initiatives which are designed todeliver increased levels of customer satisfaction.The
64、 Group maintains active relationships with its insurance regulators through constructive dialogue.The Board promotes anopen and collaborative culture,and provides oversight of the Groups conduct with customers.It oversees the Groups culture and the conduct policy,which aims to ensure that fair custo
65、mer outcomes are achieved and that employees behave with integrity.The Group also has an Employee Code of Conduct which sets out standards to which our employees are required toadhere.Board and Committee membership changesFurther to the announcement of the new CEO you will recall from my statement l
66、ast year that John Reizenstein and Andrew Palmer stepped down from the Board at the conclusion of the AGM in May 2018.Three Non-Executive Directors(“NEDs”)joined the Board in 2018:Mark Gregory and Gregor Stewart were appointed on 1 March;and Fiona McBain joined us on 1 September.The Board is already
67、 benefiting from their skills and experiences.Clare Thompson,independent NED,has decided to step down from the Board at the conclusion of the 2019 AGM.Having served as a Director since 2012,Clare has made an immense contribution to the Group.Her experience and wisdom have been invaluable in helping
68、the Board and senior management to deliver excellent results for shareholders and customers.She leaves the Board with our thanks and best wishes for the future.The Chairs of three Board Committees also changed during 2018.Gregor and Mark were appointed as Chair of the AuditCommittee and Investment C
69、ommittee respectively replacing Andrew Palmer.Danuta Gray also replaced ClareThompson as Chair of the Remuneration Committee.I would like to thank each member of the Board for their significant contribution,commitment and service,and look forward to working with them in 2019 as the Group continuesto
70、 strive to build on its success to date.EmployeesThe Groups employees are fundamental to the Groups success and sustainability and to ensuring a high level of service to our customers.I would like to thank each of them fortheir hard work,initiative and commitment to our mission.Their positive energy
71、,embodiment of the Groups values andunwavering dedication to our customers have helped ourbusinesses progress over the successful years since theIPO,and have put us in a strong position for the future.MICHAEL N BIGGSCHAIRMANCHAIRMANS STATEMENT CONTINUED14DIRECT LINE GROUP 2018 ANNUAL REPORT&ACCOUNTS
72、CHIEF EXECUTIVE OFFICERS REVIEWFocusing on our customer-centric missionI am pleased to announce a strong set of results driven by our resilient business model which performed well ina highly competitive market.I am pleased to report another strong set of results in a highlycompetitive market driven
73、by the Groups resilient andcustomer-centric business model.We continued to make significant operational progress in 2018 and we head into apivotal year of delivery in 2019,with the aim of delivering aspringboard from which to grow the contribution from current-year profitability.We maintained good c
74、ost discipline in 2018 and are determined to leverage our investment in the business to stepchange our efficiency.The new technology and greater efficiency are,in turn,designed to support our ambition to innovate more rapidly and find new ways to serveour customers as their demands evolve.Financiall
75、y,wecontinued to see the benefits of improving the efficiency ofour balance sheet,which has contributed to another attractive dividend,while continuing to invest in the businessand maintaining a prudent solvencymargin.Trusted brands and direct growthOnce again,the growth we achieved across Direct Li
76、ne,Direct Line for Business and Green Flag demonstrated that by giving customers a reason to come to us direct,they will.Since 2014,our own brand in-force policies have grown by over one million,to over seven million policies.In Direct Line we launched another two new unique propositions in Home and
77、 Motor.Our new Motor propositionremoved one of our customers greatest frustrations and protected their no claim discount on no-fault claims.Wenow offer a combination of nine Direct Line propositions that our customers cannot get anywhere else in the market.Direct Line for Business achieved its 11th
78、consecutive yearofpremium growth.This time last year,we launched amore personalised approach for our business customers,fromstart-ups to growing businesses.Starting with Hair and Beauty and followed by Bed&Breakfast in 2017,this year weramped up our delivery by releasing cover for over 500 new trade
79、s,taking us to 75%of our target trades on the new platform.A national marketing campaign was launched in theyear and the early campaign metrics have been positive.This has driven higher volumes to the website and there has been a100%increase in brand searches.Work is underway to re-launch two of our
80、 biggest products on our new system,Vanand Tradesman in 2019.This continues to demonstrate our increased ability to work in an agile way and to launch new,innovative products quickly to meet the ever-changing needs ofour customers.WWW.DIRECTLINEGROUP.CO.UK15STRATEGIC REPORTGOVERNANCEFINANCIAL STATEM
81、ENTSAnd finally Green Flag,our challenger brand in the Rescue market,continued to display great growth potential and demonstrated this again by achieving another period of doubledigit percentage growth in policy count and premiums.Our Rescue network dealt with over 640,000 breakdowns in2018,which is
82、 one every 49 seconds.There has been great progress in Rescue in 2018,launching a five-year transformational plan and the team have relocated to a Centre of Excellence,bringing together multi-skilled teams to recognise efficiencies and offer greater flexibility.The Rescue Me app,which is rated 4.8 i
83、n the Apple App store,was rebuilt usingin-house digital capabilities and was used in over 35,000 claims.Moving towards best in class in the price comparison website marketWe see a real opportunity in strengthening our capabilities on price comparison websites.We increased our focus in 2018 and creat
84、ed a new trading hub in Motor and Home to support this.We made some tactical pricing changes driven by improved anti-fraud capabilities and this helped increase Churchill and Privilege Motor new business volumes by 18%.We believe there is an opportunity to strengthen margins in this channel.Investin
85、g in technologyWhilst we have already made significant progress in delivering our Direct Line for Business systems,most of our transformational work has been going on behind the scenes on our core personal lines technology,as we continued our ambitious programme to build our latest generation IT cap
86、abilities.These systems,which started to go into testing at the end of2018,are designed to make insurance much easier for ourcustomers by introducing more self-service and customer focused innovations.In addition they are designed also to enable a step change in our ability to use internal and exter
87、nal data more effectively to improve our pricing accuracy and improve our competitiveness.Our new pricing engine is designed to make it much easier and quicker to develop,test and deploy new models.This is intended to allow us to tailor our models better to the price comparison website channel and i
88、mprove our speed to market.We are also in the process of testing our new digital Travel platform.2019 is an important year in starting to deliver these systems which we see as a keyenabler in transforming our business.We continue to make good progress on our alternative pricingproject which we expec
89、t to give us new capability by applying new data science methods and machine learning.We believe this approach will enable us to deepen our competitive footprint with more granular and flexible pricing capabilities.Testing is progressing well and we are aiming tolaunch in Q22019 under a new brand.Im
90、proving our efficiencyIn order to be able to give our customers the best value for money,we recognise it is imperative to operate efficiently.Over the past five years,weve made significant strides inreducing our costs,such as through improved marketing efficiency,where we reduced marketing spend by
91、over 30%whilst returning our direct own brands to growth,and reducing our number of sites by nearly a half and annual rental costs by around 40%.Over the past two years we have been expanding our roboticprocess automation capability and are now managing concurrently 28 processes and approximately 50
92、0,000 automated transactions each quarter.But we dont intend to stop there and have already identified a strong pipeline of processes to add to our existing portfolio and which has the potential to increase our transaction volume capability by a further500,000 in 2019.The actions weve taken supporte
93、d the reduction in the operating expense ratio and we aim to continue to transform our business and improve our efficiency and long-term competitiveness.Leveraging our scale via partnershipsIn Home,we leveraged our capabilities in digital and data to streamline the customer experience.Our improved c
94、apabilities in digital are helping us have conversations with potential newpartners.In Travel,we are building a new system that is designed to enable customers to self-serve and interact with us day or night,offering greater support and helping us renew our partnerships with RBS Group and Nationwide
95、.In Motor,our new partnership with Volkswagen Insurance Service(Great Britain)Limited is going well.We provide bothannual insurance cover and complimentary 5day driveaway cover for customers buying new and used cars fromVolkswagen,Volkswagen Commercial Vehicles,SEAT,Audi and KODA dealers.Investing i
96、n our talented peopleThe success of the business is due to the commitment and dedication of our people who use their expertise to serve our customers.We rightly celebrate our diversity and are united inour customer focus.This focus is reflected in our unique propositions and the fact that on average
97、 we manage one claim every single minute of every single hour,every day of theyear.The freezing weather earlier in the year hit many drivers,households and businesses hard,and the way our people helped our customers get their lives back on track during this difficult period demonstrated the value of
98、 our insurance cover and gives customers a reason to keep coming back to us.Nearly 10,000 of our people now own shares in our company which gives them a real sense of ownership and investment in our future success.Our engagement scores CHIEF EXECUTIVE OFFICERS REVIEW CONTINUED16DIRECT LINE GROUP 201
99、8 ANNUAL REPORT&ACCOUNTSincreased again in 2018 and Im proud that this year wecame third in the Sunday Times list of the 25 Best Big Companies to Work For in 20191.This is a huge achievement and is testament to the value we place in our people.Business performanceWe ended 2018 having delivered a six
100、th successive year of strong financial performance and a return on tangible equity of 21.5%(2017:23.0%),well ahead of our target of at least a 15%return on tangible equity.Our direct own brands gross written premium increased by1.8%whereas total gross written premium was lower as expected due to the
101、 exits from Nationwide and Sainsburys Home partnerships.We achieved an operating profit of 601.7 million(2017:642.8 million).The reduction in operating profit was primarily due to lower prior-year reserve releases and investment return.Both years benefited from reserve releases relating to the Ogden
102、 discount rate.In respect of 2018,we have now assumed a higher Ogden discount rate of 0%,following Royal Assent of the Civil Liability Act 2018 which contributed 55 million to operating profit(2017:49 million)of which 51 million related to the prior years.Weather returned to normal levels in 2018 af
103、ter a benign 2017 and this offset the non-repeat in 2018 of the 57 million non-cash impairment charge incurred in 2017 in relation to IT projects.Normalised for weather and adjusted for the assumed Ogden discount rate change,the combined operating ratio was approximately 93.5%,towards the lower end
104、of our medium-term target range of 93%to 95%.Overall,our current-year combined operating ratio was stable,demonstrating the value in the Groups diversified product base and channel portfolio,as well as lower operating expenses.RegulationThe Group has continued to operate within a highly dynamic and
105、evolving regulatory landscape,where there are a number of reviews and initiatives,including those that have been announced by the UK Government,the FCA and the PRA.In 2018 both the FCA and PRA have been focused on Brexit preparations and the implementation of the Senior Managers and Certification Re
106、gime.The PRAs focus continues to be onthe pillars of its financial risk framework,namely reserving,pricing,reinsurance and investments.The FCA has also been focused on pricing practices including the launch of its market study.The Group is supportive of the FCAs market study.Atthis early stage howev
107、er,the outcomes are not yet known.PAUL GEDDESCHIEF EXECUTIVE OFFICERThe insurance market is very competitive with high levels of switching and lots of introductory discounts which leads to most people shopping around for the best deal.For those customers who dont shop around it is crucial that insur
108、ers have active pricing processes for all their long-term customers.We have had these measures in place for several years and increasing numbers of long-standing customers have seen their renewal premium either frozen or reduced as a result.We worked closely with the Association of British Insurers
109、on their pricing principles and actions on premiums which we hope will embed best practice across the whole industry.OutlookThe Group targets a combined operating ratio of 93%to 95%for 2019 and over the medium term,normalised for weather.Over time,the Group expects to increase the contribution from
110、current-year underwriting as the contribution from prior-year reserve releases reduces.The latter is predominantly as a result of increasing the level of reinsurance purchased by the Group in recent years which has reduced the risk profile of the Group.The targeted improvement in current-year underw
111、riting profitability is supported by the significant investment the Groupis making in building future capability.This aims to improve the current-year loss ratio by delivering additional pricing sophistication and supporting multiple initiatives to combat fraud.In addition,the Group is targeting to
112、improve efficiency through self-service and digitalisation.These improvements are targeted to emerge over a number of years.In 2019,the Group expects to make further progress in reducing operating costs and is targeting operating expenses below 700 million.We reiterate our ongoing target of achievin
113、g at least a 15%return on tangible equity.As I prepare to hand over the reins to Penny not only do Ilookback over the last ten years with great pride,I also looktothe future with great excitement for our customers,people and shareholders.Over the next 12 months,as we begin the roll-out of our new co
114、re personal lines IT applications,we planto increase our flexibility to deal with changing business requirements,offer more self-service and deliver more straight-through processing.This combined with our leading brands and great people will help Direct Line Group with itsmissiontomake insurance muc
115、h easier and better value foritscustomers.1.www.b.co.uk/the-lists/big-companies/WWW.DIRECTLINEGROUP.CO.UK17STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSMARKET OVERVIEWNew customer expectationsThe pace of technological change and new regulatory requirements demands an agile response,combined with sm
116、art investment choices,to deliver what our customers want.TechnologyRegulationFind out more about our Strategy on pages 19 21MarketClaimsClaims inflation has returned to long-term expected trends.We have once again added to our accident and repair centre network,helping us to manage costs.CustomersC
117、ustomers are increasingly looking for unique insurance products,tailored to their needs.We have launched a combination of nine new Direct Line propositions unique in the insurancemarket.Direct Line for Business has extended its proposition to target over 500 small and micro trades.PartnershipsPartne
118、rships enable us to leverage unique distribution and/or access data to streamline the customer experience and create competitive advantage in ourpricing and underwriting.We continued to grow the number of home insurance policies through our partnership with RBS Group,and renewed our Travelagreements
119、 with Nationwide and RBS Group for anotherfive years.We also signed a five-year deal with Volkswagen Insurance Service(Great Britain)Limited,providing motor insurance usingfive Volkswagen Group brands.DevelopmentImpactActionDigital technologyDigital innovation allows insurers to interact with consum
120、ers in new,more effective ways.Our latest generation IT capabilities went into testing at the endof 2018.These are designed to allow us to provide more targeted products with improved customer journeys,by delivering greater pricing agility with increased data flows,more product flexibility and incre
121、ased self-service,amongst other benefits.DataInsurers are gaining greater data insight as devices become ever-more connected.We are driving performance through advanced analytics,for instance by creating better understanding of rescue claims in our Green Flag business.Artificial Intelligence,Machine
122、 Learning and RoboticsNew systems enable customers to accessquicker self-service at lower costand pricing to become fairer andmore accurate.We are exploring the use of new approaches across our value chain,including the use of machine learning techniques in pricing and the use of robotics across our
123、 business,which iscurrently delivering 500,000 transactions a quarter.SecurityDigitalisation and technology bring arisk to information security.We have invested in a range of cloud-enabling security measures and have been working closely with a range of peer groups to tackle security risks affecting
124、 the entire industry.In-Car TechnologySophisticated technology is changing vehicles,including the advent of electricand autonomous cars.We remain partners in leading in-car technology projects StreetWise and MOVE_UK,helping us to gain insight into the development of autonomous vehicles and the impac
125、t on liability and claims.Civil Liability ActThe Act will introduce new measures toreform the soft-tissue whiplash injury compensation system and introduce a new framework for setting the Ogden discount rate.We are working with the Government to help design the newonline portal for whiplash claims t
126、hat will come into force in 2020.PricingThe Financial Conduct Authority haslaunched a General Insurance Pricing Practices Market Study.We have signed up to the Association of British Insurers guidingprinciples and action points to help with how renewal premiums are dealt with,building on our review
127、of long-term andpotentially vulnerable customers.Increasing numbers of long-standing customers have seen their renewal premium eitherfrozen or reduced.18DIRECT LINE GROUP 2018 ANNUAL REPORT&ACCOUNTSSTRATEGYA strategy targeting sustainable growthOur strategy looks to position us as a multi-brand,mult
128、i-product and multi-channel business to enable us to meet our customers needs now and in the future,regardless of how and where they buy our products.Supporting this strategy isa substantial and ongoing change and investment agenda.Great retailerWe have compelling brands and multiplecustomer proposi
129、tions and deliver a strong customer experience which we constantly evolve to meet the needs of our customers.Smart and efficient manufacturerOur scale and data allow us the efficiency and flexibility to deliver better customer and claims service and better risk insights.Lead and disruptBy embracing
130、the future,we aim to shape it and launch new products and services which anticipate consumer trends so that we continue our tradition of disruptive change.Data and technologyWe aim to harness the power of technology and the scale of our data tomake things easier for our customers and our people.Cult
131、ure and capabilityWe invest in our people to help them realise their potential because it leads tobetter customer experience and more sustainable business performance.Capital and risk managementWe maintain an appropriate level ofcapital and solvency to manage ourcustomers pool of risks while underst
132、anding,monitoring and managing our own existing and emerging risks within carefully defined parameters.DirectThe growth in Direct Line and Green Flag demonstrates that if you give customers a reason to come direct then they will,as we strive to deliver excellent value for ourcustomers and our shareh
133、olders.Price comparison websitesStrong brands and propositions are important but so are great prices.We are improving our effectiveness on price comparison websites through our work on pricing and in dealing with fraud,supported by our investment in latest generation IT systems.PartnershipsWe are le
134、veraging our manufacturing strength through our digital capabilities toseek to develop innovative and profitable partnerships.Make insurance much easier and better value for our customersOur key enablers Our multi-channel approach Our strategic pillars Read about our progress in 2018 on pages 20 21W
135、WW.DIRECTLINEGROUP.CO.UK19STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSSTRATEGY CONTINUEDStrategy in action Latest generation ITsystemsWe continue to build our latest generation IT capabilities designed to enable much more customer self-service and straight-through processing and to give our custom
136、ers easier and quicker service at a lower cost whilst improving the efficiency and flexibility of the business.Over the next few years we also plan to wind down and then removeour existing mainframe,while growing our use of the cloud.This is planned to give us flexibility inthe future to deal with c
137、hanging business requirements and changes in technology.Strategy in action As a forward-looking and proactive business,we are constantly evolving our offer to meet our customers needs and taking advantage of significant advances in technology.In 2018 we continued to improve our competitiveness,agili
138、ty and efficiency across the business.Connecting with our customersOur people are committed to doing their very best for our customers and our business every day.We are particularly proud of how our people step up to thechallenge to get our customers lives back on track during severe weather periods
139、 such as the freezing weather we saw in Q1 2018.One of our values is to aim higher and we actively encourage everyone to push themselves and learn new strengths.We know that customers have differing needs when it comes to buying insurance,which is why we use our frontline experience to develop new p
140、ropositions based on customer feedback.It is also why we introduced a training programme called CONNECT,whichhas been accredited by the Institute of Customer Service,for our people ina customer facing role.This training helps to ensure that our customers receivea personalised service which matches t
141、heir expectations and needs.Theprogramme enables our people to learn about the different approaches customers may take and gives them the skills to respond with empathy,whilst also taking responsibility and accountability.This is important for our customers who are dealing with difficult situations
142、such as illness or bereavement and vulnerable customers who need additional help to ensure that their cover is theright cover for them.Based on the CONNECT training,our people who successfully demonstrate high levels of customer service receive a certificate of accreditation from the Institute of Cu
143、stomer Service.The impact is clear from customer benchmarking studies which measure the willingness of customers torecommend products or services,adding to our ability to maintain strong customer retention rates.BristolOur new Bristol office,The Core,has created a new and dynamic environment for our
144、 people to serve our customers.It has given our people a variety of new workspaces to support collaboration and flexible working,all in a fully refurbished building half the size of our previoussite.Environmental considerations were central to the design.LED lighting,new chillers,heating,ventilation
145、 andan air conditioning system have made the site more energy efficient.Run costs are now 55%lower than they were in 2016.The Core is thelatest example of how we are looking to shape our technology andworkspaces for the future,whilemeeting our environmental objectives.We are proud it has reduced our
146、 carbon emissions in ourBristol office by 62%.20DIRECT LINE GROUP 2018 ANNUAL REPORT&ACCOUNTSPrice comparison websitesThis year a working group has focused on establishing a price comparison website hub aiming to drive capability across the Group by assessing customer needs throughout the entire pri
147、ce comparison website sales journey.A dedicated team,using digital resource and data analytics,is seeking to build greater expertise and agility in real time,enabling better insight on pricing and the opportunity for swifter decision-making.This is important for a sales platform that operates on ver
148、y different market dynamics compared to selling direct.By working across product lines the working group has instilled a price comparison website-focusedphilosophy to safeguard against functional thinking that can otherwise restricteffectiveness.In-car technologyThe automotive industry is undergoing
149、 dramatic change with improvements inin-car technology and the advent of electric,connected and autonomous vehicles.We are embracing these changes and the opportunities they may present for us to evolve our products.We are maintaining our industry-leading position through our partnerships with MOVE_
150、UK in Greenwich and our participation in StreetWise,which aims to put driverless cars on the streets of Croydon in 2019.We also continue to work with motor manufacturers such asVolkswagen,Peugeot,Citron and Tesla,evolving our products to match theircustomers needs.Accident repair centresWe continued
151、 to expand our network of accident repair centres and now have 20 sites across theUK,giving us more capability todeliver our seven day repair proposition for Direct Line customers.This year alone,we repaired over 85,000 vehicles,building on our excellent record of customer service.By investing in th
152、e latest technology we are preparing the business for the future by better understanding how technology will affect the design and manufacture of cars.Our high operating efficiency has also allowed us to deliver excellent cost control while meeting our environmental targets through lowering emission
153、s and increasedrecycling of parts.Green FlagWe believe our challenger brand has great growth potentialand demonstrated this again by achieving another period ofdouble digit growth in policy count and premiums.Our marketing targets the two-thirds of major competitors customers who renew without much
154、thought and aims to wake them up by dramatising how we match the best things about their servicewhilst saving half their renewal premium.We know that service matters a lot in this market customers wont sacrifice it for price.Weve brought in new leadership and brought the business together not only i
155、n reporting lines but also physically to create rescue centres of excellence to deliver this great service.We will be using many of the same agile techniques that have proved successful in delivering fast and affordable change for Direct Line for Business.Renewal pricing principlesThe lack of barrie
156、rs to shopping around for insurance brings substantial benefits to consumers who benefit from cheaper prices.However,we recognise that whilst shopping around can bring benefits to those who do it,it does create differences between new customer premiums and subsequent renewal premiums.The Group has t
157、aken several steps to tackle this issue in recent years.In 2016 we backed the Association of British Insurers and the British Insurance Brokers Associations Code of Good Practice to ensure that our people were trained toidentify potential vulnerable consumers.We believe that renewal premiums should
158、not become excessive over time so we put in place checks and balances for our long-standing customers.Increasing numbers of long-standing customers have seen their renewal premium either frozen or reduced as a result.This year we welcomed the Association ofBritish Insurers principles which are inten
159、ded tohelp embed best practice across the industry.Find out more in our Market overview on page 1885,000+vehicles repaired640,000breakdowns responded to in 2018 thats 1 every 49 secondsWWW.DIRECTLINEGROUP.CO.UK21STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOUR BUSINESS MODELCreating value for our s
160、takeholdersOur multi-brand,multi-product and multi-channel business offers different propositions to maximise choice for customers.We believe this approach enables us to provide good value for customers and sustainable returns for ourshareholders.We reach diverse customers by offering arange of prod
161、ucts through many routes to market.Multiple channelsso that customers can choose how they wish to engage with usOur core strengthsOur diverse propositionReinvest in the businessEight brandsso that our customers can choose the proposition that suits themFour segmentsrepresenting a range of products a
162、nd servicesDirect Price comparison websitesPartnershipsFind out more on pages 19 21 Find out more on pages 4 9Customer focusCustomers are at the heart of everything we do.Our brands,products and distribution channels aim to make insurance much easier and better value for our customers.Talented peopl
163、eWe invest in our people,encouraging everyone toaim higher.Our talented people constantly strive to improve and innovate to exceed the current and future expectations of our customers.Brand powerOur well-known and trusted brands offer customers decades of experience,knowledge and service.The scale o
164、f being Britains leading motor insurer and one of its leading home insurers1 gives us a platform for product development.Data and technologyContinuing our history of disrupting the insurance market,we are harnessing the power of technology and data to make life easier for both our customers and our
165、people.Capital and financial strengthOur cash-generative business model underpinned byproven underwriting discipline,claims excellence and cost control helps us to meet our customers needs whilst targeting sustainable returns for ourshareholders.Note:1.Measured by in-force policies(see page 7).22DIR
166、ECT LINE GROUP 2018 ANNUAL REPORT&ACCOUNTSHow we generate returnsSustainable valueDividendsWe target sustainable returns for our shareholders through a combination of investing in future capabilities,improving efficiency and careful riskmanagement.PricingWe seek to ensure our prices reflect the risk
167、s being underwritten by using data and actuarial techniques.ClaimsOur new propositions,such as Fast Response(seepage 41)and our expanded network of accidentrepair centres delivering our seven day repairproposition(see page 21),not only get customers lives back on track quickly but also aimtodeliver
168、high operating efficiency resulting inexcellent claims cost control.Cost controlOnce again,we reduced our expense ratio during 2018,absorbing our investment in future capability.We aim to continue to make progress against our strategic initiatives with a focus on cost and efficiency.InvestmentsAs we
169、 gather premiums and provide for future claims payments we use these assets to invest in a diversified investment portfolio.Risk frameworkThe Board has an established risk management modelthat separates responsibility into Three LinesofDefence(see page 44 for more details).Our objectives are to crea
170、te value for all our stakeholders,putting our customers first and investing in our people,to support the communities we live and work in,and to generate sustainable profits for our shareholders.CustomersNet Promoter Score145.6ptsEmployeesEngagement81%ProfitInvestment and other incomeNet claimsCostsP
171、remiumsFind out more on pages 26 37Find out more on pages 24 25 ShareholdersDividend per share 29.3pCommunitiesPercentage of staff who fundraised orvolunteered on theGroups time28%WWW.DIRECTLINEGROUP.CO.UK23STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Delivering strong performanceThese key perform
172、ance indicators assess our performance against our strategy.OUR KEY PERFORMANCE INDICATORSNotes:1.See glossary on pages 191 to 192 and alternative performance measures in Appendix A on pages 193 to 194.2.Results for the year ended 31 December 2018 are based on total Group operations including restru
173、cturing costs and the Run-off segment.Comparative data for2017 has been re-presented accordingly to include restructuring costs and Run-off segment profits within the Motor segment.3.Estimates based on the Groups solvency II partial internal model for 2016 to 2018.Solvency capital coverage based on
174、the standard formula for 31 December 2015.16.818.514.223.021.5181716151427.250.124.635.429.3181716151413.214.013.810.014.615.020.48.321.036.3181716151424.027.920.431.833.5181716151423.6 11.823.625.325.723.495.094.097.790.891.710.911.59.16.559.659.560.956.061.8 Return on tangibleequity1,2(%)Dividend
175、per share(pence)Basic earnings per share(pence)Combined operating ratio2(%)DefinitionThe return generated on the capital that shareholders have inthe business.Thisis calculated by dividing adjusted earnings byaverage tangible equity.The amount of cash paid to shareholders from the Groups retained pr
176、ofits.(See page 26 for dividend breakdown).This is calculated by dividing theearnings attributable to shareholders bythe weighted average number of Ordinary Shares in issue.A measure of financial yearunderwriting profitability.ACombined operating ratio(“COR”)of less than 100%indicates profitable und
177、erwriting.In addition to net claims,expense and commission ratiosmeasure the cost of doing business and the COR is the sumof these costs divided by netearned premium,excluding instalment and other operating income and investment return.AimWe aim to achieve at least a15%RoTE per annum over thelong te
178、rm.We aim to grow the regular dividend in line with business growth.Additionally,we look to return any capital to shareholders which is expected to be surplus to our requirements for a prolonged period.We have not set a target.However,growing earnings pershare is considered an indicator of a healthy
179、 business.We aim to make an underwriting profit.For 2019,we expect to achieve a COR inthe range of 93%to 95%normalised for weather.PerformanceSee Finance review page 31 See Finance review page 32 See Finance review page 31 See Finance review page 29 Link to Directors remunerationWe base the LTIP awa
180、rds partly on RoTE over a three-year performance period.We base LTIP awards partly on relative total shareholder return performance,which includes dividends.Directors also receive dividends on their beneficial shareholdings and accrue theseon unvested LTIP awards.This is a broad measure of earnings
181、and reflects the results of the Group after tax.We base part of the AIP awards on profit before tax and earnings per share is closely linked to this.We base part of the AIP awards on profit before tax.COR is closely linked to this.See page 90 See page 90 See page 89 See pages 89 and 96 24DIRECT LINE
182、 GROUP 2018 ANNUAL REPORT&ACCOUNTSChanges to our KPIs in 2018Our metrics are reviewed annually and updated as appropriate toensure they remain an effective measure of delivery against our objectives.For 2018,the review of these metrics resulted in the following changes:Combined operating ratio has b
183、een split into its loss ratio,commission ratio and expense ratio elements to give greater clarityof its composition Employee engagement has been added in recognition of the importance of our people in meeting our strategic objectives A five-year view,where possible,was chosen to demonstrate our trac
184、k record of performanceKey for combined operating ratioExpense ratioCommission ratioLoss ratioKey for dividend per shareOrdinarySpecial4.On an aggregated 12-month rolling basis,with 2013 rebased to 100.5.FCA complaints reporting requirements have changed for periods after 29 June 2016.Before 29 June
185、 2016,only complaints resolved after two business days were classed as FCA reportable.From July 2016 all complaints resolved are classed as FCA reportable.6.For the Groups principal underwriter,U K Insurance Limited.18171615146.0165.0165.0170.0181716151445.060.073.078.081.01817161514110.8118.3129.11
186、44.0145.6181716151.270.890.780.77Solvency capital ratio3(%)Employee engagement(%)Net promoter score4 Direct Line Brand(points)Customer complaints5Principal underwriter6(%)A risk-based measure expressing the level of capital resources held as a percentage of the level of capital that is required unde
187、r solvency II.Engagement is about being proud to work for Direct Line Group and helping us to succeed.It means that employees are not just happyorsatisfied,but doingsomethingto help us achieve ourcompany goals.Net promoter score(“NPS”)is an index that measures the willingness of customers to recomme
188、nd products or services to others.It is used to gauge customers overall experience with a product or service,and customers loyalty to a brand.The number of complaints wereceived during the year asa proportion of the average number of in-force policies.We target a solvency capital ratio in the range
189、of 140%to180%.To make the Group best for employees and best for our customers.We gauge employee engagement through our employee opinion survey and we aim to improve this year onyear.The launch of our customer experience strategy,along with a new transactional feedback tool and improved propositions
190、have increased our overall brandscore.This measure indicates the levelof customer service we provide.We aim to improve thisovertime.See Finance review page 32 See People and culture page 56 Customer claims experience programmes and improved propositions have contributed toan increase in our overall
191、brand score.While the proportion of complaints received reduced compared to 2017 we recognise we have more todoto reduce these.Risk management within risk appetite,which includes an assessment of capital strength,and acts as a gateway for the AIP awards and underpin for LTIPawards.The AIP awards inc
192、lude aweighting to a balance ofemployee metrics,includingengagement.The AIP awards include a weighting to a balance of customer metrics,includingNPS.The AIP awards include aweighting to a balance ofcustomer metrics,includingcomplaints.See pages 89 and 90 See pages 89 and 98 See pages 89 and 97 See p
193、ages 89 and 97WWW.DIRECTLINEGROUP.CO.UK25STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSFINANCE REVIEWFinancial highlights Direct own brands premium up 1.8%compared to 2017,driven by growth across all segments.Total Group premium reduced by 5.3%year on year,as a result of the exit from Nationwide and
194、 Sainsburys1 Home partnerships.Operating profit decreased by 41.1 million compared to2017,primarily due to reductions in prior-year reserve releases and investment return as expected.Operating profit included a 55 million benefit from moving to an assumed 0%Ogden discount rate(2017:49 million benefi
195、t relatingto Ogden).Demonstrating the value in the Groups diversified product base,current-year underwriting profitability was stable despite a reversal of the benign motor conditions in 2017.The expense ratio reduced to 23.4%.Profit before tax increased by 8.1%to 582.6 million(2017:539.0 million)as
196、 the decrease in operating profit was more than offset by the non-repeat of finance costs in relation to the debt repurchased in 2017.Final ordinary dividend of 14.0 pence per share,an increase of 2.9%on 2017.Special dividend of 8.3 penceper share.Total dividends of 29.3 pence per share(2017:total d
197、ividends of 35.4 pence per share includingaspecial dividend of 15.0 pence per share).Strong capital position with solvency capital ratio of 170%(after proposed dividends)reflecting prudence givencurrent political and economic uncertainties.Reiteration of financial targets for 2019 and over the mediu
198、m term of achieving a combined operating ratio in therange of 93%to 95%normalised for weather.In 2019,targeting operating expenses below 700 million.Reiteration of ongoing target of achieving at least a15%return on tangible equity.FY 2018 mFY 20172 mIn-force policies(thousands)15,03215,714Of which:d
199、irect own brands(thousands)7,1326,909 Gross written premium3,211.93,392.1Of which:direct own brands2,223.02,184.1Net earned premium3,089.53,135.0 Underwriting profit255.1288.1Instalment and other operating income192.0179.3Investment return154.6175.4Operating profit 601.7642.8Finance costs(19.1)(103.
200、8)Profit before tax582.6539.0Tax(108.9)(105.0)Profit after tax473.7434.0Key metrics Current-year attritional loss ratio372.5%69.4%Loss ratio361.8%56.0%Commission ratio36.5%9.1%Expense ratio323.4%25.7%Combined operating ratio391.7%90.8%Return on tangible equity421.5%23.0%Investment income yield42.5%2
201、.5%Net investment income yield42.0%2.1%Investment return yield42.4%2.6%Basic earnings per share(pence)33.531.8Diluted earnings per share(pence)33.131.5Return on equity17.3%16.6%Dividend per share5 interim(pence)7.06.8 final(pence)14.013.6 total ordinary(pence)21.020.4 special(pence)8.315.0 total(pen
202、ce)29.335.4 31 Dec 201831 Dec 2017Net asset value per share(pence)188.6198.9Tangible net asset value per share(pence)147.0164.4Solvency capital ratio6 post-dividends170%165%Notes:1.Exit from Sainburys in respect of new business.2.Results for the year ended 31 December 2018 are based on total Group o
203、perations including restructuring costs and the Run-off segment.Comparative data has been re-presented accordingly to include restructuring costs and Run-off profits within the Motor segment.3.A reduction in the ratio represents an improvement as a proportion of net earned premium,while an increase
204、in the ratio represents a deterioration.4.See glossary on pages 191 and 192 for definitions and Appendix A Alternative performance measures on pages 193 and 194 for reconciliation tofinancial statement line items.5.The Groups dividend policy states its expectation that one-third of the annual divide
205、nd will generally be paid in the third quarter as an interim dividend andtwo-thirds will be paid as a final dividend in the second quarter of the following year.6.Estimates based on the Groups solvency II partial internal model.Strong results in a competitive market26DIRECT LINE GROUP 2018 ANNUAL RE
206、PORT&ACCOUNTSPerformanceOperating profit FY 2018 mFY 2017 mUnderwriting profit255.1288.1Instalment and other operating income192.0179.3Investment return154.6175.4Total operating profit601.7642.8Of which:Current-year operating profit 197.3 207.4 Prior-year reserve releases 404.4 435.4 Operating profi
207、t decreased by 41.1 million to 601.7 million(2017:642.8 million)mainly due to a reduction intheunderwriting profit and investment return,partly offset byanincrease in instalment and other operating income.Overall,current-year operating profit was lower,with a stablecurrent-year combined operating ra
208、tio offset by alowerinvestmentreturn.Underwriting profit decreased to 255.1 million(2017:288.1 million)predominantly due to lower prior-year reserve releases of 31.0 million.Increased weather-related claims of 75 million,mainly associated with the major freeze event in Q1 2018(2017:13 million weathe
209、r-related claims),were mostly offset by the non-repeat in 2018 of the 56.9 million impairment charge in 2017 in relation to IT projects.The current-year attritional loss ratio increased by 3.1 percentage points to 72.5%(2017:69.4%)as the Group experienced a reversal of the benign motor conditions in
210、 2017 and a reduction in partnership business in Home.This was offset by a 2.6 percentage point reduction in the commission ratio as a result of both lower commission and profit share payments to Home partners,as a result of the exit of the Nationwide and Sainsburys partnerships and changes to other
211、partnership commissions arrangements.The current-year combined operating ratio was stable.Effect of Ogden discount rate changes Motorm Commercial m FY 2018 Totalm MotormFY 2017 TotalmPrior year47.93.551.449.049.0Current year2.70.73.4Total50.64.254.849.049.0Following Royal Assent of the Civil Liabili
212、ty Act 2018,which introduced a new framework for setting the personal injury discount rate,the Group reviewed the Ogden discount rate for reserves for large bodily injury claims and selected an assumed rate of 0%for reserving purposes.This has resulted in a release of 54.8 million in 2018 and this r
213、elease was split across the Motor and Commercial segments.Given the Groups lower reinsurance retention in recent years,the majority of the reserve release related to prior years.In 2017,the Motor segment benefited from a reserve release of 49.0 million resulting froma lower than expected increase in
214、 claims costs following the change in the Ogden discount rate to minus 0.75%.Instalment and other operating income increased to 192.0 million(2017:179.3 million)and included a 9.6 million gain on sale of a property in Bristol.Investment return decreased to 154.6 million(2017:175.4million)primarily d
215、ue to a 7.9 million reduction yearon year in investment income as a result of lower assets under management and a 12.9 million reduction year on year in realised and unrealised gains.In-force policies and gross written premiumIn-force policies(thousands)At31 Dec 201831 Dec 2017Own brands3,9503,845Pa
216、rtnerships144174Motor 4,0944,019 Own brands1,7891,794Partnerships(excluding Nationwide and Sainsburys)803823Partnerships(Nationwide andSainsburys)59631Home 2,6513,248 Rescue3,4913,591Travel3,7593,853Pet156162Other personal lines126133Rescue and other personal lines7,5327,739Of which:Green Flag direc
217、t894802 Direct Line for Business499468NIG and other256240Commercial755708Total in-force policies15,03215,714Of which:direct own brands7,1326,909Total in-force policies reduced to 15.0 million(31 December 2017:15.7 million),primarily due to lower partner volumes in Home,following the exit from the Na
218、tionwide and Sainsburys partnerships,and reductions in Rescue and other personal lines,as a result of lower packaged bank account volumes.Own brands in-force policies grew to 7.1 million(31 December 2017:6.9 million)with growth in Motor,Green Flag and Direct Line for Business,which partly offset the
219、 overall reduction.WWW.DIRECTLINEGROUP.CO.UK27STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSFINANCE REVIEW CONTINUEDGross written premium FY 2018 mFY 2017 mOwn brands1,608.81,590.9Partnerships62.479.5Motor 1,671.21,670.4 Own brands412.6409.7Partnerships(excluding Nationwide and Sainsburys)181.7195.6
220、Partnerships(Nationwide and Sainsburys)12.6193.8Home 606.9799.1 Rescue163.4161.3Travel 143.9 143.4 Pet 72.4 74.8 Other personal lines43.141.6Rescue and other personal lines422.8421.1Of which:Green Flag direct69.660.9 Direct Line for Business132.0122.6NIG and other 379.0378.9Commercial511.0501.5Total
221、 gross written premium3,211.93,392.1Of which:direct own brands2,223.02,184.1Gross written premium of 3,211.9 million(2017:3,392.1 million)decreased by 5.3%primarily due to the exit from the Nationwide and Sainsburys partnerships in Home.Direct own brands gross written premium of 2,223.0 million(2017
222、:2,184.1 million)grew by 1.8%.Underwriting profit and combined operating ratio FY 2018FY1 2017Underwriting profit(million)255.1288.1Loss ratio61.8%56.0%Commission ratio6.5%9.1%Expense ratio23.4%25.7%COR91.7%90.8%Note:1.Results for the year ended 31 December 2018 are based on total Group operations i
223、ncluding restructuring costs and the Run-off segment.Comparative data has been re-presented accordingly to include restructuring costs and Run-off segment profits within the Motor segment.The Groups combined operating ratio of 91.7%(2017:90.8%)increased by 0.9 percentage points primarily due to ahig
224、her loss ratio which was partly offset by improvements in commission and expense ratios.Weather returned to close to normal levels in 2018 after a benign 2017 and this offset the non-repeat in 2018 of the 56.9 million non-cash impairment charge incurred in 2017.Normalised for weather and adjusted fo
225、r the Ogden discount rate change,the combined operating ratio was approximately 93.5%,towards the lower end of the Groups medium-term target of 93%to 95%.The loss ratio was 5.8 percentage points higher at 61.8%(2017:56.0%)and reflected lower prior-year reserve releases,increases in Home and Commerci
226、al loss ratios due to the majorfreeze event in Q1 2018 and a reversal of benign motor conditions in 2017.The expense ratio improved by 2.3 percentage points to 23.4%(2017:25.7%),as the Group continued to reduce itsoperating expenses(0.5 percentage points excluding theimpact of impairments in 2017).T
227、he reduction in the commission ratio of 2.6 percentage points primarily reflected both lower commissions and profit share payments to Home partners,as a result of the exit of the Nationwide and Sainsburys partnerships,and changes to other partnership commissions arrangements.The remaining premium fr
228、om thesepartnerships was substantially earned in 2018 and consequently the commission ratio is expected to reduce again in 2019 albeit at a significantly slower rate.In subsequent years the direction of the commission ratio will be dependent on the Groups partnership activities.28DIRECT LINE GROUP 2
229、018 ANNUAL REPORT&ACCOUNTSRatio analysis by division NotesMotor mHome mRescue and other personal lines mCommercial mTotal Group mFor the year ended 31 December 2018 Net earned premium4 1,541.8667.8414.7465.23,089.5Net insurance claims4 980.0413.3277.2241.31,911.8Prior-year reserve releases33 276.332
230、.616.179.4404.4Major weather events n/a(65.0)n/a(10.0)(75.0)Attritional net insurance claims 1,256.3380.9293.3310.72,241.2Loss ratio current-year attritional 81.5%57.0%70.7%66.8%72.5%Loss ratio prior-year reserve releases(17.9%)(4.9%)(3.9%)(17.1%)(13.1%)Loss ratio major weather events1 n/a9.7%n/a2.1
231、%2.4%Loss ratio reported4 63.6%61.8%66.8%51.8%61.8%Commission ratio4 2.0%9.4%4.6%18.9%6.5%Expense ratio4 23.3%22.4%23.8%24.8%23.4%COR4 88.9%93.6%95.2%95.5%91.7%Current-year COR 106.8%98.5%99.1%112.6%104.8%For the year ended 31 December 20172 Net earned premium4 1,470.6790.5417.6456.33,135.0Net insur
232、ance claims4 852.9400.5273.3227.51,754.2Prior-year reserve releases33 318.623.76.886.3435.4Major weather events n/a(13.0)n/an/a(13.0)Attritional net insurance claims 1,171.5411.2280.1313.82,176.6Loss ratio current-year attritional 79.7%52.0%67.1%68.8%69.4%Loss ratio prior-year reserve releases(21.7%
233、)(3.0%)(1.7%)(18.9%)(13.9%)Loss ratio major weather events1 n/a1.6%n/an/a0.4%Loss ratio reported4 58.0%50.6%65.4%49.9%56.0%Commission ratio4 2.5%17.7%5.5%19.1%9.1%Expense ratio429.3%21.1%23.4%24.4%25.7%COR4 89.8%89.4%94.3%93.4%90.8%Current-year COR 111.5%92.4%96.0%112.3%104.7%Notes:1.Home and Commer
234、cial claims for major weather events,including inland and coastal flooding and storms.2.Results for the year ended 31 December 2018 are based on total Group operations including restructuring costs and the Run-off segment.Comparative data has been re-presented accordingly to include restructuring co
235、sts and Run-off segment profits within the Motor segment.The movement in the current-year attritional loss ratio is an indicator of underlying accident year performance as it excludes prior-year reserve releases and claims costs from major weather events.The Groups current-year attritional loss rati
236、o of 72.5%increased by 3.1 percentage points compared to 2017 primarily due to a change in business mix and a reversal of benign conditions experienced in 2017 in Motor.Prior-year reserve releases continued to be significant at 404.4 million(2017:435.4 million),were equivalent to 13.1%ofnet earned p
237、remium(2017:13.9%)and were concentrated towards more recent accident years.Reserve releases in 2018 included a 51.4 million Ogden rate-related prior-year reserve release(2017:49.0 million release).Assuming current claims trends continue,prior-year reserve releases are expected to reduce further in f
238、uture years,although they are expected to remain asignificant contribution to profits.The Groups current-year combined operating ratio remained broadly steady at 104.8%(2017:104.7%)as increases in attritional loss ratios were offset by reductions in commission and expense ratios.WWW.DIRECTLINEGROUP.
239、CO.UK29STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSFINANCE REVIEW CONTINUEDOperating expenses FY2018 mFY2017 mStaff costs1269.9280.1Other operating expenses1,2253.3273.6Marketing121.2113.7Amortisation and impairment of other intangible assets346.7111.0Depreciation31.127.9Total operating expenses72
240、2.2806.3Notes: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.Amortisation and impairment of other intangible assets
241、 includes a 1.5 million impairment charge for year ended 31 December 2018(2017:56.9 million),which relates to capitalised software development costs for ongoing ITprojects primarily relating to development of new systems.Operating expenses reduced by 84.1 million to 722.2 million(2017:806.3 million)
242、resulting in an expense ratio of 23.4%(2017:25.7%).Excluding an impairment of intangible assets of 56.9 million in 2017,operating expenses reduced by 3.6%as reductions in staff costs and other operating expenses were partially offset by an increase in marketing spend in Motor and Commercial to drive
243、 brand awareness.The Group continued to invest in its significant IT programme and operational efficiency improvements while supporting business growth and investment in future capability.The Group will apply IFRS 16 Leases from 1 January 2019.Ifthe Group had applied this standard in 2018,the impact
244、 would have been a reduction in operating expenses of approximately 5 million and an increase in finance costs ofapproximately 7 million.In 2019,the Group expects to make further progress in reducing operating costs and is targeting operating expenses below 700 million.Instalment and other operating
245、 income NoteFY 2018 mFY 2017 mInstalment income 119.9116.4Other operating income:Vehicle replacement referral income7 17.216.9Revenue from vehicle recovery and repair services7 11.711.3Legal services income7 11.211.0Other income7 32.023.7Other operating income7 72.162.9Total instalment and other ope
246、rating income 192.0179.3Instalment and other operating income increased by 12.7 million,with increased instalment income of 3.5 million due to higher Motor gross written premium partly offset by a reduction in Home due to the exit from Nationwide and Sainsburys partnerships.Other operating income in
247、creased by 9.2 million,primarily relating to a one-off gain on disposal of theBristol property of 9.6 million.Investment return NoteFY 2018 mFY 2017 mInvestment income 159.2167.1Hedging to a sterling floating rate basis(30.8)(27.0)Net investment income 128.4140.1Net realised and unrealised gains exc
248、luding hedging 26.235.3Total investment return6 154.6175.4Investment yields FY 2018FY 2017Investment income yield12.5%2.5%Net investment income yield12.0%2.1%Investment return yield12.4%2.6%Note:1.See glossary on pages 190 and 191 for definitions and Appendix A Alternative performance measures on pa
249、ges 193 and 194 for reconciliation tofinancial statement line items.Total investment return decreased by 20.8 million to 154.6 million(2017:175.4 million).This was due to a reduction ininvestment income primarily as a result of lower assets under management,and a reduction in realised and unrealised
250、 gains excluding hedging which was predominantly driven by a reduction in investment property valuations(2018:12.7 million,2017:21.6 million)and debt security disposals.The investment income yield for 2018 remained stable at 2.5%(2017:2.5%).The net investment income yield was lower at 2.0%(2017:2.1%
251、)as a result of increased hedging costs.30DIRECT LINE GROUP 2018 ANNUAL REPORT&ACCOUNTSReconciliation of operating profit FY 2018 mFY1 2017 mMotor415.2396.4Home83.1128.8Rescue and other personal lines43.443.6Commercial60.074.0Operating profit601.7642.8Finance costs(19.1)(103.8)Profit before tax582.6
252、539.0Tax(108.9)(105.0)Profit after tax473.7434.0Note:1.Results for the year ended 31 December 2018 are based on total Group operations including restructuring costs and the Run-off segment.Comparative data has been re-presented accordingly to include restructuring costs and Run-off segment profits w
253、ithin the Motor segment.Operating profit by segmentAll divisions were profitable in 2018 with Motor increasing profits by 18.8 million compared to 2017.Home reported reduced operating profits primarily due to the major freeze event in Q1 2018.Commercial also experienced higher weather costs in 2018
254、although attritional claims performance improved.Rescue and other personal lines reported slightly lower profits.Rescue operating profit of 40.2 million(2017:43.5 million)is included in the Rescue and other personal lines result.Finance costsFinance costs reduced to 19.1 million(2017:103.8 million),
255、with 2017 including costs and interest associated withthe repurchase of 250 million nominal value of the subordinated debt in December 2017.Effective corporation tax rateThe effective tax rate for 2018 was 18.7%(2017:19.5%),which was lower than the standard UK corporation tax rate of 19.0%(2017:19.2
256、5%)driven primarily by tax relief for the Tier 1 coupon payments offset by disallowable expenses.Profit for the year and return on tangibleequity1Profit for the year was 473.7 million(2017:434.0 million)as the decrease in operating profit was more than offset by the non-repeat of finance costs in re
257、lation to the debt repurchase in2017.Return on tangible equity decreased to 21.5%(2017:23.0%)due primarily to a 31.5 million decrease in adjusted profit after tax to 457.1 million(2017:488.6 million).Profit after tax in 2018 was adjusted for coupon payments in respect of Tier 1 notes,while profit af
258、ter tax in 2017 was adjusted toadd back finance costs for the one-off subordinated debt buy-back.Earnings per shareBasic earnings per share increased by 5.3%to 33.5 pence(2017:31.8 pence).Diluted earnings per share increased by 5.1%to 33.1 pence(2017:31.5 pence)mainly reflecting an increase in profi
259、t after tax.Cash flowThe Groups cash and cash equivalents decreased by 212.1 million during the year(2017:193.7 million increase),to 1,092.4 million(31 December 2017:1,304.5 million).Operating activities before investment of insurance assets generated a cash inflow of 4.2 million(2017:204.0 million
260、generated).The decrease primarily reflected a reduction in insurance liabilities and trade payables partially offset by areduction in insurance and other receivables.Investment of insurance assets generated a cash inflow of468.1 million(2017:inflow of 341.9 million).Theincreased inflow of 126.2 mill
261、ion is primarily due totheproceeds on disposal of financial investments.Investing activities generated a cash outflow of 141.8 million(2017:outflow of 95.3 million)primarily due to an increase in the purchase of intangible assets,which was partially offset by lower tangible asset purchases and proce
262、eds from the asset held for sale.Financing activities generated a cash outflow of 542.6 million(2017:outflow of 256.9 million).The increased outflow primarily reflected an increase in dividends and appropriations paid in the year.Net asset valueAt 31 DecemberNote2018 m2017 mNet assets1 162,573.12,71
263、5.1Goodwill and other intangible assets16(566.8)(471.1)Tangible net assets162,006.32,244.0Closing number of Ordinary Shares(millions)161,364.61,365.1Net asset value per share(pence)16188.6198.9Tangible net asset value per share(pence)16147.0164.4The net assets at 31 December 2018 decreased to 2,573.
264、1 million(31 December 2017:2,715.1 million)and tangible net assets decreased to 2,006.3 million(31 December 2017:2,244.0 million).These decreases mainly reflected the payment of the 2017 final and special dividends,a reduction in the available-for-sale reserves due to rising market yields and an inc
265、rease in expenditure on intangible assets as the Group continued to invest in the business,partially offset bythe 2018 retained profit.Note:1.See glossary on pages 191 and 192 for definitions and Appendix A Alternative performance measures on pages 193 and 194 for reconciliation tofinancial statemen
266、t line items.WWW.DIRECTLINEGROUP.CO.UK31STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSFINANCE REVIEW CONTINUEDBalance sheet managementCapital management and dividendpolicyThe Group aims to manage its capital efficiently and generatelong-term sustainable value for shareholders,whilebalancing operatio
267、nal,regulatory,rating agency andpolicyholder requirements.The Group aims to grow its regular dividend in line with business growth.Where the Board believes that the Group has capital which isexpected to be surplus to the Groups requirements for a prolonged period,it would intend to return any surplu
268、s to shareholders.In normal circumstances,the Board expects that asolvency capital ratio around the middle of its risk appetite range of 140%to 180%of the Groups solvency capital requirement(“SCR”)would be appropriate and it will thereforetake this into account when considering the potentialfor spec
269、ial 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
270、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 shareholder
271、s.The Board has recommended a final dividend of 14.0 pence per share(2017:13.6 pence),an increase of 0.4 pence per share(2.9%),in line with business growth.This reflects the Boards continued confidence in the Groups earnings and theprogress the business continued to make.The Board has also declared
272、a special dividend of 8.3 pence per share.After both dividends the solvency capital ratio will be 170%as at 31 December 2018.The Board has taken into account the high level of political andeconomic uncertainty,including in relation to Brexit,andconsiders it appropriate for the time being to maintain
273、 aprudent solvency capital ratio towards the upper end of the solvency capital ratio risk appetite range of 140%to 180%.The Board will keep this position under review as it monitors developments in the political and economic environment.Innormal circumstances,the Board expects the Group to operate a
274、round the middle of its solvency capital ratio risk appetite range.The final dividend and special dividend will be paid on 16 May 2019 to shareholders on the register on 5 April 2019.The ex-dividend date will be 4 April 2019.Capital analysisThe Group is regulated under solvency II requirements by th
275、ePRA on both a Group basis and for the Groups principal underwriter,U K Insurance Limited.In its results,the Group has estimated its solvency II own funds,SCR and solvency capital ratio as at 31 December 2018.Capital positionAt 31 December 2018,the Group held a solvency II capital surplus of approxi
276、mately 0.89 billion above its regulatory capital requirements,which was equivalent to an estimated solvency capital ratio of 170%,post the proposed final and special dividends.The Groups SCR and solvency capital ratio are as follows:At 31 December201820171Solvency capital requirement (billion)1.261.
277、39Capital surplus above solvency capital requirement(billion)0.890.91Solvency capital ratio post-dividend170%165%Movement in capital surplus 2018 bn20171 bnCapital surplus at 1 January0.910.91Capital generation excluding market movements0.470.54Market movements(0.06)Capital generation0.410.54Change
278、in solvency capital requirement0.130.01Surplus generation0.540.55Capital expenditure(0.15)(0.10)Management capital action0.03Capital distribution ordinary dividends2(0.30)(0.28)Capital distribution special dividends2(0.11)(0.20)Net surplus movement(0.02)Capital surplus at 31 December 0.890.91Notes:1
279、.The 2017 comparative period has been updated to reflect the amounts in the Solvency and Financial Condition Report for the year ended 31 December 2017,published on 2 May 2018.2.Foreseeable dividends included above are adjusted to exclude the expected dividend waivers in relation to shares held by t
280、he employee share trusts,which are held to meet obligations arising on the various share option awards.During 2018,the Groups own funds decreased from 2.30 billion to 2.15 billion.The Group generated 0.41 billion of solvency II capital offset by 0.15 billion of capital expenditure and capital distri
281、bution of 0.41 billion for the 2018 dividend.The increased capital expenditure reflects the significant investment the Group is making in building future capability including the development of the latest generation core personal lines IT systems.In 2019,the level of expenditure is expected to be ap
282、proximately 175 million,reducing to less than 150 million in 2020.Thereafter,expenditure levels are expected to reduce further.32DIRECT LINE GROUP 2018 ANNUAL REPORT&ACCOUNTSChange in solvency capital requirement 2018 bnSolvency capital requirement at 1 January1.39Model and parameter changes(0.07)Ex
283、posure changes(0.06)Solvency capital requirement at 31 December1.26The Groups SCR has reduced by 0.13 billion in the year.Model and parameter changes reduced the SCR by 0.07 billion.Exposure changes,as a result of the exited Home partnerships,a reduction in solvency II technical provisions including
284、 an assumed change in the Ogden discount rate to 0%,and lower assets under management,led to a reduction inthe SCR of 0.06 billion.Scenario and sensitivity analysisThe following table shows the impact on the Groups estimated solvency capital ratio in the event of the following scenarios as at 31 Dec
285、ember 2018.The impact on the Groups solvency capital ratio arises from movements in both the Groups solvency capital requirement and own funds.Impact on solvency capital ratioScenario31 Dec 201831 Dec 2017Motor small bodily injury deterioration equivalent to accident years 2008 and 2009(7pts)(7pts)O
286、ne-off catastrophe loss equivalent to the 1990 storm(8pts)(9pts)One-off catastrophe loss based onextensive flooding of the RiverThames(8pts)(9pts)Change in reserving basis for PPOsto use a real discount rate ofminus 1%1(10pts)(13pts)100bps increase in credit spreads2(11pts)(11pts)100bps decrease in
287、interest rates with no change in the PPO real discount rate(1pt)(3pts)Notes:1.The PPO real discount rate used is an actuarial judgement which is reviewed annually based on the economic outlook for wage inflation relative to the European Insurance and Occupational Pensions Authority discount rate cur
288、ve.2.These sensitivities only include the assessed impact of the above scenarios in relation to AFS investments.Own fundsThe following table splits the Groups own funds by tier on a solvency II basis.At 31 December2018 bn20171 bnTier 1 capital before foreseeable dividends1.762.04Foreseeable dividend
289、s(0.31)(0.39)Tier 1 capital unrestricted1.451.65Tier 1 capital restricted0.350.35Tier 1 capital1.802.00Tier 2 capital subordinated debt0.260.26Tier 3 capital deferred tax0.090.04Total own funds2.152.30Note:1.The 2017 comparative period has been updated to reflect the amounts in the Solvency and Fina
290、ncial Condition Report for the year ended 31 December 2017,published on 2 May 2018.Tier 1 capital after foreseeable dividends represents 84%of own funds and 143%of the estimated SCR.Tier 2 capital relates solely to the Groups 0.26 billion subordinated debt.The amount of Tier 2 and Tier 3 capital per
291、mitted under the solvency II regulations is 50%of the Groups SCR and of Tier 3 alone it is less than 15%.Therefore,the Group currently has no ineligible capital.The requirement that Tier 1 restricted capital should not exceed 20%of total Tier 1 capital,when satisfying the requirement that eligible T
292、ier 1 items should be at least 50%of SCR,is not applicable to the Group.The special dividend will be payable from surplus capital generated from continuing operations of the Group.WWW.DIRECTLINEGROUP.CO.UK33STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSReconciliation of IFRS shareholders equity to s
293、olvency II own fundsAt 31 December2018 bn20171 bnTotal shareholders equity2.572.72Goodwill and intangible assets(0.57)(0.47)Change in valuation of technical provisions(0.15)(0.13)Other asset and liability adjustments(0.09)(0.08)Foreseeable dividends(0.31)(0.39)Tier 1 capital unrestricted1.451.65Tier
294、 1 capital restricted0.350.35Tier 1 capital1.802.00Tier 2 capital subordinated debt 0.260.26Tier 3 capital deferred tax0.090.04Total own funds2.152.30Note:1.The 2017 comparative period has been updated to reflect the amounts in the Solvency and Financial Condition Report for the year ended 31 Decemb
295、er 2017,published on 2 May 2018.LeverageThe Groups financial leverage increased by 0.7 percentage points,but remained conservative at 19.1%(2017:18.4%).The increase was primarily due to the reduction in shareholders equity.While the Tier 1 notes issued during 2017 are presented as equity in the bala
296、nce sheet,the Group considers this to be part of its total leverage.At 31 December2018 m2017 mShareholders equity2,573.12,715.1Tier 1 notes346.5346.5Financial debt subordinated debt259.5264.7Total capital employed3,179.13,326.3Financial-leverage ratio119.1%18.4%Note:1.Total IFRS financial debt and T
297、ier 1 notes as a percentage of total IFRS capital employed.Credit ratingsStandard&Poors and Moodys Investors Service provide insurance financial-strength ratings for U K Insurance Limited,the Groups principal underwriter.U K Insurance Limited is currently rated A(strong)with a stable outlook by Stan
298、dard&Poors,and A2(good)with a positive outlook by Moodys.ReservingThe Group makes provision for the full cost of outstanding claims from its general insurance business at the balance sheet date,including claims estimated to have been incurred but not yet reported at that date and claims handling cos
299、ts.The Group considers the class of business,the length of time to notify a claim,the validity of the claim against a policy,and the claim value.Claims reserves could settle across a range of outcomes,and settlement certainty increases over time.However,for bodily injury claims the uncertainty is gr
300、eater due to the length of time taken to settle these claims.The possibility of annuity payments for injured parties also increases this uncertainty.The Group seeks to adopt a conservative approach toassessing liabilities,as evidenced by the favourable development of historical claims reserves.Reser
301、ves are basedon managements best estimate,which includes a prudence margin that exceeds the internal actuarial best estimate.This margin is set by reference to various actuarial scenario assessments and reserve distribution percentiles.Italsoconsiders other short and long-term risks not reflected in
302、the actuarial inputs,as well as managements view on theuncertainties in relation to the actuarial best estimate.The most common method of settling bodily injury claims is by a lump sum paid to the claimant and,in the cases where this includes an element of indemnity for recurring costs such as loss
303、of earnings or ongoing medical care,settlement calculations have reference to a standardised annuity factor at a discount rate normally referred to as the Ogden discount rate.The Ogden discount rate was 2.5%from 2001 until 2017,when itwas changed to minus 0.75%based on a 3-year average of yields on
304、index-linked government securities,in line with case law that claimants were entitled to invest their lump sum in a way which was very low or even zero risk.The Civil Liability Act 2018 changes this approach and instead requires the Government to reset the Ogden discount rate by reference tolow risk
305、 rather than very low or zero risk investments.The process is due to conclude in 2019,but there is considerable uncertainty about its outcome and the date from which a new rate will apply.The Group will continue to exercise judgement around the Ogden discount rate used in its reserves.Risks and unce
306、rtainties here are significant but the move to introduce additional asset classes into the assumed claimant portfolio points towards a higher rate than minus 0.75%.The Group has therefore made a judgement that it is likely that the Ogden discount rate will change and has selected an estimate of 0%to
307、 value its lump sum bodily injury reserves.An allowance for further movements in the Ogden rate is made within the Groups solvency II balance sheet and capital requirements.Details of the IFRS sensitivity analysis to the assumed Ogden discount rate are shown overleaf.The Groups prior-year reserve re
308、leases were 404.4 million(2017:435.4 million)with good experience in large bodily injury claims being a key contributor.Looking forward,the Group expects to continue setting its initialmanagement best estimate conservatively.Assuming current claims trends continue,the contribution from prior-year re
309、serve releases will reduce over time,although it is expected to remain significant.Claims reserves net of reinsuranceAt 31 December2018 m20171 mMotor1,946.42,187.3Home323.8293.3Rescue and other personal lines89.185.6Commercial541.4578.3Total 2,900.73,144.5Note:1.Results for the year ended 31 Decembe
310、r 2018 are based on total Group operations including restructuring costs and the Run-off segment.Comparative data has been re-presented accordingly to include Run-off segment profits within the Motor segment.FINANCE REVIEW CONTINUED34DIRECT LINE GROUP 2018 ANNUAL REPORT&ACCOUNTSSensitivity analysis
311、the discount rate used in relation to PPOs and changes in the assumed Ogden discount rateThe table below provides a sensitivity analysis of the potential net impact of a change in a single factor(the discount rate used forperiodic payment orders(“PPOs”)and separately the Ogden discount rate)with all
312、 other assumptions left unchanged.Otherpotential risks beyond the ones described could have an additional financial impact on the Group.Increase/(decrease)in profit before tax 1,2At 31 December2018 m2017 mPPOs3 Impact of an increase in the discount rate used in the calculation of present values of 1
313、00 basis points50.754.6Impact of a decrease in the discount rate used in the calculation of present values of 100 basis points(70.1)(75.1)Ogden discount rate4 Impact of the Group reserving at a discount rate of 1%compared to 0%(2017:0%compared to minus0.75%)56.268.4Impact of the Group reserving at a
314、 discount rate of minus 1%compared to 0%(2017:minus 1.5%compared to minus 0.75%)(76.3)(102.9)Notes:1.These sensitivities are net of reinsurance and exclude the impact of taxation.2.These sensitivities reflect one-off impacts at 31 December and should not be interpreted as predictions.3.The sensitivi
315、ties relating to an increase or decrease in the real discount rate used for PPOs illustrate a movement in the time value of money from the assumed level of 0%for reserving.The PPO sensitivity has been calculated as the direct impact of the change in the real discount rate with all other factors rema
316、ining unchanged.4.Ogden discount rate sensitivity has been calculated as the direct impact of a permanent change in the discount rate with all other factors remaining unchanged.The Group will consider the statutory discount rate when setting its reserves but not necessarily provide on this basis,as
317、is the case at the year ended 31 December 2018.This is intended to ensure that reserves are appropriate for current and potential future developments.The sensitivity above is calculated on the basis of a permanent change in the rate used for the actuarial best estimate reserves as at 31 December 201
318、8.It does not take into account a change in the Ogden discount rate setting regime,nor any second order impacts such as those on the Groups PPO assumptions or reinsurance bad debt assumptions.The reduction in sensitivity to a change in the Ogden discount rate since 31 December 2017 primarily reflect
319、s the overall reduction in bodily injury exposures.The reduction in exposure is due to continued positive prior-year development of claims reserves for large bodily injury claims,and a higher proportion of reserves benefiting from a lower reinsurance retention.ReinsuranceThe objectives of the Groups
320、 reinsurance strategy are to reduce the volatility of earnings,facilitate effective capital management,and transfer risk outside the Groups risk appetite.This is achieved by transferring risk exposure throughvarious reinsurance programmes:Catastrophe reinsurance to protect against an accumulation of
321、 claims arising from a natural perils event.The retained deductible is 14.88%of gross earned premium(126.5 million at 31 December 2018)and cover is placed annually on 1 July up to a modelled 1-in-200 year loss event of 128.88%of gross earned premium(1,095.5 million at 31December 2018).At the last re
322、newal,1 July 2018,approximately 60%of the reinsurance programme was placed on a fixed price basis(reinsurers rate on line)as thesecond year of a three-year contract.Motor reinsurance to protect against a single claim or an accumulation of large claims which renews on 1 January.The retained deductibl
323、e is at an indexed level of 1 million per claim,providing a substantial level of protection against large motor bodily injury claims.This programme was renewed on 1 January 2019.Commercial property risk reinsurance to protect against large individual claims with a retained deductible of 4.0 million
324、which renews annually on 1 July.Investment portfolioThe investment strategy aims to deliver several objectives,which are summarised below:to ensure there is sufficient liquidity available within the investment portfolio to meet stressed liquidity scenarios to match PPO and non-PPO liabilities in an
325、optimal manner to deliver a suitable risk-adjusted investment return commensurate with the Groups risk appetiteWWW.DIRECTLINEGROUP.CO.UK35STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSFINANCE REVIEW CONTINUEDAsset and liability managementThe following table summarises the Groups high-level approach
326、to asset and liability management.LiabilitiesAssetsCharacteristicsMore than 10 years,for example PPOsProperty and infrastructure debtInflation linked or floatingShort and medium term all other claimsInvestment-grade credit,short-term high yield andsubordinated financial debtKey rate duration matched
327、Tier 1 equityInvestment-grade creditFixedTier 2 sub-debt(swapped fixed to floating)Commercial real estate loans and cashFloatingSurplus tangible equityInvestment-grade credit,cash and government debt securitiesFixed or floatingAsset allocation and benchmarksThe current strategic asset benchmarks for
328、 the Group are detailed in the following table:At 31 DecemberBenchmark holding 2018Actual holding 2018Benchmark holding 2017Actual holding 2017Investment-grade credit65.0%58.5%60.0%58.1%High-yield6.0%6.4%6.0%5.8%Investment-grade private placements3.0%1.6%4.0%1.5%Credit74.0%66.5%70.0%65.4%Sovereign5.
329、0%2.6%8.0%3.4%Total debt securities79.0%69.1%78.0%68.8%Infrastructure debt5.0%4.7%5.0%4.7%Commercial real estate loans4.0%3.3%3.0%2.5%Cash and cash equivalents7.0%17.7%9.0%19.4%Investment property5.0%5.2%5.0%4.6%Total100.0%100.0%100.0%100.0%Investment holdings and yields total Group 20182017 Allocat
330、ion(m)Income(m)Yield(%)Allocation(m)Income(m)Yield(%)Investment-grade credit13,606.699.62.7%3,893.1 109.22.8%High-yield393.918.84.8%388.6 19.7 4.9%Investment-grade private placements 101.02.82.7%103.6 2.4 2.6%Credit4,101.5121.22.9%4,385.3 131.3 3.0%Sovereign156.92.81.5%224.8 6.2 2.2%Total debt secur
331、ities4,258.4124.02.8%4,610.1 137.5 3.0%Infrastructure debt289.66.92.3%316.4 6.8 2.1%Commercial real estate loans201.66.23.7%169.0 3.7 3.0%Cash and cash equivalents21,092.46.20.5%1,304.5 2.9 0.2%Investment property322.115.95.1%309.3 16.2 5.1%Total Group6,164.1159.22.5%6,709.3 167.1 2.5%Notes:1.Asset
332、allocation at 31 December 2018 includes investment portfolio derivatives,which have been included and have a mark-to-market asset value of 11.8 million included in investment grade credit(31 December 2017:mark-to-market asset value of 55.1 million).This excludes non-investment derivatives that have
333、been used to hedge interest on subordinated debt and operational cash flows.2.Net of bank overdrafts:includes cash at bank and in hand and money market funds with no notice period for withdrawal.At 31 December 2018,total investment holdings of 6,164.1 million were 8.1%lower than at the start of the year reflecting primarily the cash paid in 2018 for dividends and a decline in fair value of debt se
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