TIDMDLG
RNS Number : 0045V
Direct Line Insurance Group PLC
04 August 2020
Direct Line Insurance Group plc
Half year report 2020
GOOD PROGRESS ON STRATEGIC TRANSFORMATION, RESILIENT FINANCIAL
PERFORMANCE
4 August 2020
PENNY JAMES, CEO of Direct Line Group, commented
"I am very proud of what we have achieved so far this year. We
have launched initiatives with an estimated investment of GBP80 to
GBP90 million to support our customers, people and local
communities through the uncertainty caused by Covid-19. When the
Covid-19 pandemic hit, we prioritised phone lines for existing
customers, created new online journeys and offered additional value
through various initiatives including mileage refunds and payment
deferrals. We did not access Government support and chose to
protect all roles and salaries at the Group through to the autumn
and our Community Fund is providing GBP3.5million to help people in
communities across the UK.
"Despite the significant disruption caused by Covid-19 we have
continued the trading momentum we saw at the end of 2019, growing
direct own brands by 2% and improving the quality of our earnings
with an improved current-year loss ratio. We have also demonstrated
financial resilience in the face of Covid-19 disruption, which has
enabled us to declare our 2020 interim dividend as well as a
catch-up of our cancelled 2019 final dividend.
"We have seen just how quickly people change their behaviour and
I am proud that we've been able to adapt rapidly whilst still
making good progress on our strategic transformation. We still have
a huge amount to do, both operationally and technically, but even
in the midst of a pandemic we have made excellent progress on our
technology transformation. Delivering so much change whilst over
9,000 of our people worked from home was an exceptional
achievement.
"I would like to thank Mike Biggs, who after eight years stands
down as Chairman today, for all of his support, wisdom and for
building the dynamic Board that we have today. I would also like to
welcome Danuta Gray as our new Chair, who brings with her a wealth
of experience and a deep understanding of the Group, and look
forward to working with her and the Board to help realise the
immense potential of the Group."
Results summary H1 2020 H1 2019 Change
GBPm GBPm
==================================================== ======= ======= =======
In-force policies (thousands) 14,633 14,882 (1.7%)
Of which: direct own brands(1,2,3) (thousands) 7,370 7,225 2.0%
Gross written premium 1,580.8 1,575.1 0.4%
Of which: direct own brands(1,2) 1,090.3 1,076.9 1.2%
Operating profit 264.9 274.3 (3.4%)
Combined operating ratio(4) 90.3% 92.5% 2.2pts
Profit before tax 236.4 261.3 (9.5%)
Return on tangible equity annualised(5) 19.9% 20.9% (1.0pt)
Dividend per
share - interim (pence)(6) 7.4 7.2 2.8%
- special (pence) 14.4 - -
30 Jun 31 Dec Change
2020 2019
======= ======= =======
Solvency capital ratio(7,8) 192% 165% 27pts
==================================================== ======= ======= =======
Financial highlights
- Direct own brand in-force policies grew 2.0% with continued
growth across Motor, Green Flag and Commercial direct own brands,
with Home broadly stable. Total policies reduced by 1.7% as
partnership volumes reduced.
- Gross written premium was broadly steady as strong momentum in
Q1, with growth of 4.7%, was largely offset by lower new business
shopping in Motor and Rescue in Q2 due to Covid-19.
- Operating expenses before restructuring and one-off costs of
GBP372.0 million were GBP9.0 million higher than H1 2019 following
investment in initiatives to support our customers, people and
society through the Covid-19 uncertainty. Despite an increase in
levy costs of GBP3.0 million, underlying operating expenses were
broadly stable. The Group reiterates its target of delivering a 20%
expense ratio by 2023.
- Across the Group the impact of Covid-19 on operating profit
was broadly neutral, as the additional travel and business
interruption claims, alongside a reduction in investment asset
returns and higher operating expenses, were offset by favourable
claims frequencies in Motor and Commercial. The net impacts of
Covid-19 on travel and business interruption claims are unchanged
from Q1 and estimated at GBP25 million and GBP10 million
respectively.
- Operating profit of GBP264.9 million was GBP9.4 million lower
than H1 2019 mainly due to increased weather costs of GBP30.4
million, partially offset by the change in the Ogden discount rate
to minus 0.25% in H1 2019 (H1 2019: GBP16.9 million). There was
continued improvement in current-year profitability, offset by
reduced prior year reserve releases.
- Profit before tax of GBP236.4 million was GBP24.9 million
lower than H1 2019 following the reduction in operating profit
alongside GBP15 million of restructuring and one-off costs as the
Group invests GBP60 million in cost saving initiatives across 2019
and 2020 as outlined at the Capital Markets Day in November
2019.
- Interim ordinary dividend of 7.4 pence per share, an increase
of 2.8% over the interim dividend announced at H1 2019, alongside a
special interim dividend of 14.4 pence per share reflecting a full
catch-up of the cancelled 2019 final dividend.
- Strong capital position with a solvency capital ratio of 192%
after dividends.
Strategic and operational highlights
* Strong Churchill new business growth, increased share
of new business in the price comparison website
("PCW") channel across Motor and Home.
* Darwin now live on four PCWs helping fuel rapid
policy growth.
* Further enhancements made and continued progress
towards starting the roll-out of Direct Line and
Churchill on our new IT platform before the end of
2020, which aims to deliver operational efficiencies,
improved customer experience and pricing capability.
* All Privilege Motor new business now sold on the
Group's new IT platform with renewals underway.
* Launched a new Green Flag claims system and updated
the customer 'Rescue Me' App, enabling an increasing
proportion of claims to be serviced digitally.
* Launched a new counter fraud operating system and
accelerated roll-out of digital self-service for
claims journeys.
* Successfully moved to remote working while continuing
to serve and support our customers and deliver our
change agenda at pace.
* Achieved our 2020 climate targets and now intend to
set Science Based Targets ("SBT"). From this year we
will become a 100% carbon neutral business by
offsetting our emissions whilst working towards
reducing our emissions over time and aim to be Task
Force for Climate-related Financial Disclosures
("TCFD") compliant by the end of this year.
* Launched initiatives with planned investment in the
region of GBP80-90 million to support our customers,
people and wider society through the uncertainty
caused by Covid-19 with around half of this
recognised in H1 2020.
For further information, please
contact
PAUL SMITH LISA TREMBLE
DIRECTOR OF INVESTOR RELATIONS Group corporate affairs and sustainability
director
Tel: +44 (0)1651 831756 Tel: +44 (0)1651 834211
Mobile: +44 (0)7795 811263 Mobile: +44 (0)7795 234801
Notes:
1. Direct own brands include in-force policies for Home and
Motor under the Direct Line, Churchill, Darwin and Privilege
brands, Rescue policies under the Green Flag brand and Commercial
under the Direct Line for Business and Churchill brands.
2. Commercial direct own brands include Direct Line for Business
and commercial products sold under the Churchill brand that were
previously reported within NIG and other. Prior periods have been
re-presented accordingly.
3. In-force policies, including direct own brands, as at 30 June
2019 have been restated to include 52,000 Green Flag policies
omitted from previously reported amounts.
4. A reduction in the ratio represents an improvement as a
proportion of net earned premium, while an increase in the ratio
represents a deterioration. See glossary definitions.
5. See glossary definitions and appendix A - Alternative
performance measures reconciliation to financial statement line
items.
6. The Group's dividend policy includes an expectation that
generally one-third of the regular annual dividend will be paid in
the third quarter as an interim dividend and two-thirds will be
paid as a final dividend in the second quarter of the following
year.
7. Estimates based on the Group's Solvency II partial internal
model.
8. The solvency capital ratio as reported at 31 December 2019 is
after taking into account the then expected 14.4p final dividend
and the GBP150 million share buyback declared on 3 March 2020. The
impacts of the cancellation of the dividend (as announced on 8
April 2020) and the suspension of the share buyback programme (as
announced on 19 March 2020) would have added 24 percentage points
to the ratio as reported to give an adjusted solvency capital ratio
of 189%.
Forward-looking statements disclaimer
Certain information contained in this document, including any
information as to the Group's strategy, plans or future financial
or operating performance, constitutes "forward-looking statements".
These forward-looking statements may be identified by the use of
forward-looking terminology, including the terms "aims",
"ambition", "anticipates", "aspire", "believes", "continue",
"could", "estimates", "expects", "guidance", "intends", "may",
"mission", "outlook", "over the medium term", "plans", "predicts",
"projects", "propositions", "seeks", "should", "strategy",
"targets" or "will" or, in each case, their negative or other
variations or comparable terminology, or by discussions of
strategy, plans, objectives, goals, future events or intentions.
These forward-looking statements include all matters that are not
historical facts. They appear in several places throughout this
document and include statements regarding the intentions, beliefs
or current expectations of the Directors concerning, among other
things: the Group's results of operations, financial condition,
prospects, growth, strategies and the industry in which the Group
operates. Examples of forward-looking statements include financial
targets and guidance which are contained in this document
specifically with respect to the return on tangible equity,
solvency capital ratio, the Group's combined operating ratio,
percentage targets for current-year contribution to operating
profit, prior-year reserve releases, cost reduction, reductions in
expense and commission ratios, investment income yield, net
realised and unrealised gains, capital expenditure and risk
appetite range. By their nature, all forward-looking statements
involve risk and uncertainties because they relate to events and
depend on circumstances that may or may not occur in the future
and/or are beyond the Group's control. Forward-looking statements
are not guaranteeing future performance. The Group's actual results
of operations, financial condition and the development of the
business sector in which the Group operates may differ materially
from those suggested by the forward-looking statements contained in
this document, for example directly or indirectly as a result of,
but not limited to:
- United Kingdom ("UK") domestic and global economic business
conditions;
- the direct and indirect impacts and implications of the
coronavirus Covid-19 on the economy, nationally and
internationally, on the Group, its operations and prospects, and on
the Group's customers and their behaviours and expectations;
- the outcome of discussions between the UK and the European
Union ("EU") regarding the terms, following Brexit, of any future
trading and other relationships between the UK and the EU;
- the terms of future trading and other relationships between
the UK and other countries following Brexit;
- market-related risks such as fluctuations in interest rates
and exchange rates;
- the policies and actions of regulatory authorities and bodies
(including changes related to capital and solvency requirements or
the Ogden discount rate or rates or in response to the Covid-19
pandemic and its impact on the economy and customers) and changes
to law and/or understandings of law and/or legal interpretation
following the decisions and judgements of courts;
- the impact of competition, currency changes, inflation and
deflation;
- the timing, impact and other uncertainties of future
acquisitions, disposals, partnership arrangements, joint ventures
or combinations within relevant industries; and
- the impact of tax and other legislation and other regulation
and of regulator expectations, interventions and requirements and
of court, arbitration, regulatory or ombudsman decisions and
judgements (including in any of the foregoing in connection with
Covid-19) in the jurisdictions in which the Group and its
affiliates operate.
In addition, even if the Group's actual results of operations,
financial condition and the development of the business sector in
which the Group operates are consistent with the forward-looking
statements contained in this document, those results or
developments may not be indicative of results or developments in
subsequent periods.
The forward-looking statements contained in this document
reflect knowledge and information available as of the date of
preparation of this document. The Group and the Directors expressly
disclaim any obligations or undertaking to update or revise
publicly any forward-looking statements, whether because of new
information, future events or otherwise, unless required to do so
by applicable law or regulation. Nothing in this document
constitutes or should be construed as a profit forecast.
Neither the content of Direct Line Group's website nor the
content of any other website accessible from hyperlinks on the
Group's website is incorporated into, or forms part of, this
document.
This announcement contains inside information as stipulated
under the Market Abuse Regulations (EU) No. 596/2014. The person
responsible for arranging the release of this announcement on
behalf of Direct Line Insurance Group plc is Tim Harris, Chief
Financial Officer.
Financial summary
-----------------------------------------------------------------------------------------
H1 H1 Change
2020 2019
GBPm GBPm
---------------------------------------------------- --- ------- ------- --------
In-force policies (thousands) 14,633 14,882 (1.7%)
Of which: direct own brands (thousands)(1,2) 7,370 7,225 2.0%
Gross written premium 1,580.8 1,575.1 0.4%
Of which: direct own brands(1) 1,090.3 1,076.9 1.2%
Net earned premium 1,474.4 1,482.6 (0.6%)
Underwriting profit 143.6 110.6 29.8%
Instalment and other operating income 80.0 88.0 (9.1%)
Investment return 41.3 75.7 (45.4%)
---------------------------------------------------- --- ------- ------- --------
Operating profit 264.9 274.3 (3.4%)
Restructuring and one-off costs (15.0) - -
---------------------------------------------------- --- ------- ------- --------
Operating profit after restructuring and one-off
costs 249.9 274.3 (8.9%)
Finance costs (13.5) (13.0) (3.8%)
---
Profit before tax 236.4 261.3 (9.5%)
Tax (43.8) (49.5) 11.5%
---
Profit after tax 192.6 211.8 (9.1%)
---
Key metrics
Current-year attritional loss ratio(3,4) 65.3% 73.5% 8.2pts
Loss ratio(3,4) 59.0% 61.9% 2.9pts
Commission ratio(3,4) 6.1% 6.1% -
Expense ratio(3,4) 25.2% 24.5% (0.7pts)
Combined operating ratio(3,4) 90.3% 92.5% 2.2pts
Investment income yield annualised(4) 2.1% 2.5% (0.4pts)
Net investment income yield annualised(4) 1.8% 2.1% (0.3pts)
Investment return yield annualised(4) 1.4% 2.5% (1.1pts)
Basic earnings per share (pence) 13.6 14.9 (8.7%)
Diluted earnings per share (pence) 13.4 14.7 (8.8%)
Return on tangible equity annualised(4) 19.9% 20.9% (1.0pt)
Return on equity annualised(4) 13.7% 16.0% (2.3pts)
Dividend per
share - interim (pence) 7.4 7.2 2.8%
- special (pence) 14.4 - -
30 Jun 31 Dec Change
2020 2019
Net asset value per share (pence) 203.7 193.4 5.3%
Tangible net asset value per share (pence) 148.9 142.0 4.9%
Solvency capital ratio(5,6) 192% 165% 27pts
==================================================== === ======= ======= ========
Notes:
1. Commercial direct own brands include Direct Line for Business
and commercial products sold under the Churchill brand that were
previously reported within NIG and other. Prior periods have been
re-presented accordingly.
2. In-force policies, including direct own brands, as at 30 June
2019 have been restated to include 52,000 policies omitted from
previously reported amounts.
3. A reduction in the ratio represents an improvement as a
proportion of net earned premium, while an increase in the ratio
represents a deterioration. See glossary for definitions.
4. See glossary for definitions and appendix A - Alternative
performance measures for reconciliation to financial statement line
items.
5. Estimates based on the Group's Solvency II partial internal
model.
6. The solvency capital ratio as reported at 31 December 2019
after taking into account the then expected 14.4p final dividend
and the GBP150 million share buyback declared on 3 March 2020. The
impacts of the cancellation of the dividend (as announced on 8
April 2020) and the suspension of the share buyback programme (as
announced on 19 March 2020) would have added 24 percentage points
to the ratio as reported to give an adjusted solvency capital ratio
of 189%.
CEO review
I am very proud of what we achieved so far this year. We came
into 2020 with positive trading momentum from the end of 2019 and
have grown our direct own brand policies by 2% compared with H1
2019 despite a period of limited shopping by customers during the
Covid-19 lockdown in Q2. We have also improved the quality of our
earnings, delivering an improvement in the current year attritional
loss ratio before Covid-19 impacts.
Our solvency position is strong, reflecting our financial
resilience. We recognise the importance of dividends to our
shareholders and are therefore delighted to bring our cancelled
2019 final dividend back in full alongside a 2020 interim
dividend.
A key focus for us throughout lockdown has been to support our
customers, people and local communities. We have implemented a
range of initiatives including mileage refunds and payment
deferrals for customers, moving over 9,000 office-based colleagues
to remote working and protecting roles through to the autumn and
setting up a community fund for local charities.
We have also managed to make good progress on our strategic
transformation, continuing major technical deliveries in the remote
working environment, whilst also focusing on business
transformation as we change the way we operate so we can take
advantage of the tools we are building.
Covid-19 response
At the heart of our strategy is the vision to become a force for
good and so, a key focus for us during H1 has been on supporting
our customers, people and wider society through the Covid-19
uncertainty. As we outlined at Q1, we have implemented a range of
initiatives that we estimate will cost in the region of GBP80-90
million during 2020, with around half of this having been incurred
in H1.
Customers
We have offered customers greater flexibility during the last
few months, recognising that individual customer circumstances may
have changed, particularly for customers in financial difficulty
who may have lost their jobs or seen reduced hours. As a result of
offering payment deferrals and mileage refunds for motor customers,
waiving cancellation fees and reducing cover we have supported over
300,000 customers.
Our Travel team have supported over 10,000 customers with
refunds, including those who have seen their travel plans cancelled
or curtailed due to Covid-19 and repatriated 800 customers stranded
abroad. We have trebled the size of the travel claims department to
help customers with their queries.
People
The majority of our people, including frontline colleagues,
continue to work from home and we are planning the gradual return
of up to 20% of colleagues to our main office sites beginning in
the autumn through to the end of the year.
All roles remain protected through to the autumn and we continue
to give flexibility and support to colleagues reflecting their
personal circumstances.
Our accident repair centres have remained open, with full social
distancing throughout, to keep key workers' vehicles on the
roads.
Society
We have continued to make a difference in the communities we
serve through our GBP3.5 million Community Fund and by contributing
GBP3.6 million to the ABI's Covid-19 Support Fund.
Since its launch in April, over GBP2 million from the Group's
Community Fund has funded 13 charities supporting vulnerable
people, and in addition we have provided 180 small local charities,
nominated by our people, with grants of up to GBP5,000. In total
the fund has supported over 100,000 households.
Today, the Group has announced it will allocate the remainder of
its Community Fund to support recovery efforts focused on four
prominent public policy challenges: social mobility, marginalised
groups, food poverty and public health, as well as supporting
Business in the Community's 'Build Back Responsibly' campaign.
In recognition of the commitment of all NHS key workers, we have
provided free Green Flag breakdown cover and during H1 completed
rescues in every part of the UK. We have also provided free home
emergencies cover and personal possessions cover together with a
fast track claims system.
We supported suppliers through accelerating payments and in
Rescue, directly supporting small-to-medium sized enterprise
roadside assistance firms.
We have not accessed the Government's furlough or other support
schemes.
Business performance
In the half year we delivered GBP264.9 million of operating
profit, a combined operating ratio of 90.3% and an annualised
return on tangible equity of 19.9% (H1 2019: operating profit
GBP274.3 million; combined operating ratio 92.5%; return on
tangible equity 20.9%).
In-force policies of 14.6 million were 1.7% lower than H1 2019
(14.9 million), with continued growth in direct own brand in-force
policies of 2.0% more than offset by lower Travel policies as
packaged bank account volumes reduced and lower Motor and Home
partner volumes reflecting previously announced partner exits. The
growth in direct own brands compared to H1 2019 was driven by Green
Flag, Commercial direct and Motor, despite some slowdown in growth
in Q2 following Covid-19 disruption when we saw new business levels
reduce but retention levels increase.
We achieved strong premium momentum in Q1 2020, growing 4.7%
over Q1 2019 due to a positive motor performance, up 6.2%,
alongside continued growth in Green Flag of 11.3% and Commercial of
10.2%. Following the impact of Covid-19 in Q2 average premiums
reduced in Motor and new business sales in Green Flag slowed,
delivering gross written premium for H1 2020 which was broadly in
line with H1 2019.
Operating profit of GBP264.9 million was GBP9.4 million lower
than the prior year due predominantly to higher major weather costs
in H1 2020 partially offset by the change in the Ogden discount
rate to minus 0.25% in H1 2019 (GBP16.9 million). The estimated
impact of Covid-19 was broadly neutral, as lower claims costs in
Motor were offset by higher claims costs in Travel, higher
operating expenses following investment in initiatives to protect
our customers, people and society, and lower investment return.
Underlying profitability continued its progress towards our
targeted, more sustainable current year profitability, with a
reduction in prior-year reserve releases offset by increased
current year operating profitability.
Costs of major weather incidents were GBP30.4 million in the
first half of 2020 compared with benign conditions in H1 2019 (H1
2019: GBPnil).
Adjusting for normal weather and the Ogden discount rate, the
combined operating ratio for H1 2020 was approximately 90.4%
compared with 93.5% in H1 2019. This reduction of 3.1 percentage
points was largely due to reduced claims frequency in Motor
following the Covid-19 restrictions.
Motor performance
In H1 2020, Motor delivered an operating profit of GBP220.5
million and a combined operating ratio of 81.9% (H1 2019: GBP153.8
million and 95.1% respectively), these improvements from H1 2019
were largely due to Covid-19 restrictions reducing claims frequency
alongside underlying progress on current-year profitability.
Covid-19 restrictions led to a 70% reduction in claims
notifications in April, which has increased each month since then
but remains below normal levels. Severity was higher than usual due
to a number of factors including repair capacity across the market
and increased credit hire durations. Considerable uncertainty
remains over both the frequency and severity of accidents over the
remainder of the year as customer behaviour changes.
Positive progress was made in increasing the quality of
profitability, with an estimated 8 percentage point improvement in
the underlying current year attritional loss ratio compared to the
first half of 2019. This was delivered by underwriting and counter
fraud initiatives introduced throughout 2019. We started
recognising the benefits from these initiatives in the second half
of 2019 meaning the 2020 full year improvement in the underlying
current year loss ratio will be lower than in the first half of
this year. Prior-year reserve releases continued to reduce as
expected.
Motor delivered strong gross written premium growth of 6.2% in
Q1 2020 compared to the same period in 2019. The reduction in new
car sales and the number of young drivers entering the market
following the implementation of lockdown reduced average premiums
across Q2. This delivered broadly flat gross written premium across
H1 2020 compared to H1 2019.
We continued to price for our view of underlying long-term
claims inflation on new business, with some caps placed on renewal
price increases in Q2 as the Group focused on delivering strong
retention. Overall, risk-adjusted prices increased by 1.8%.
Motor grew in-force policies by 1.2% compared to H1 2019 and
in-force policy count was higher than December 2019 driven by
strong Churchill and Darwin growth demonstrating progress on our
PCW strategy.
Home performance
In H1 2020 Home delivered an operating profit of GBP35.3 million
and a combined operating ratio of 92.4% (2019: GBP71.1 million and
82.2% respectively). This was a strong result considering the
exceptional performance in 2019, the GBP17.7 million of significant
storm events in H1 2020 (H1 2019: GBPnil) and the reduction in
prior-year reserve releases.
Normalised for weather, the Home combined operating ratio was
approximately 94.2% compared to 89.3% in 2019, driven by reduced
prior-year reserve releases, partially offset by an improved
current-year loss ratio following actions taken on escape of water
claims.
Home own brand in-force policies were stable at 1.8 million
compared to H1 2019 and grew 0.6% across H1 2020 driven by improved
competitiveness on PCWs, with Direct Line broadly flat.
This shift towards PCWs drove a reduction in risk mix and
average premiums which led to a 2.5% reduction in gross written
premium compared to H1 2019. In direct own brands, a 0.3% increase
in risk-adjusted prices was more than offset by an improvement of
2.7% in risk mix.
Rescue and other personal lines performance
This division comprises Rescue, including our challenger brand
Green Flag, as well as other personal lines products - Pet, Travel,
Creditor and our mid-to-high-net-worth business, UK Select.
Rescue operating profit grew by GBP3.2 million to GBP24.0
million, compared to H1 2019, and reported a combined operating
ratio of 78.1% reflecting a reduction in claims frequency following
Covid-19 restrictions.
Other personal lines reported a loss of GBP40.2 million largely
due to GBP25 million of claims costs in Travel due to the impact of
Covid-19. In order to ensure we could support all our customers
through the Covid-19 disruption we also trebled the number of our
people working on Travel. Overall, Rescue and other personal lines
reported a loss of GBP16.2 million in the first half of 2020 versus
a profit of GBP17.5 million in H1 2019. The combined operating
ratio was 111.3%.
Rescue and other personal lines gross written premium was
GBP210.1 million, 3.0% lower than H1 2019 due to the impact of
Covid-19 on customer shopping, while in-force policies fell 3.8%
over the same period.
In Rescue, Green Flag delivered double digit growth in Q1 2020,
growing in-force policies by 12.0% and gross written premium by
11.3% compared to Q1 2019. Following Covid-19 restrictions, Rescue
experienced a material reduction in new business volumes due to
fewer customers shopping, reducing Green Flag premium growth across
H1 to 3.2%.
Since the beginning of July, as lockdown restrictions have
started to ease, Green Flag policy sales and claims have returned
to more normal levels.
Commercial performance
Within Commercial we have two main businesses, NIG and other and
Commercial direct own brands. Commercial direct own brands include
Direct Line for Business and commercial products sold under the
Churchill brand primarily on PCWs.
Commercial delivered operating profit of GBP25.3 million in H1
2020 and a combined operating ratio of 94.9% (H1 2019: GBP31.9
million and 93.8% respectively). The GBP6.6 million reduction in
operating profit was predominantly driven by the GBP12.7 million of
major weather losses in H1 2020 (2019: GBPnil), partially offset by
an improved current-year loss ratio due to pricing improvements.
The impact of Covid-19 was broadly neutral with an estimated GBP10
million excess of usual claims costs in relation to business
interruption, offset by reduced claims frequency during April and
May.
Commercial gross written premium increased by 5.3% in H1 2020,
with strong growth across both Commercial direct own brands and NIG
and other. Direct own brands delivered double digit gross written
premium growth in Q1 2020 which slowed in Q2 following the
disruption of Covid-19. In-force policies increased by 2.7%, a
lower rate than gross written premium, reflecting focus on
improving technical pricing to support profitability.
Strategic update
Introduction
The Group aims to create a world where insurance is personal,
inclusive and a force for good. We aim to do this by helping people
carry on with their lives, giving them peace of mind, now and in
the future - because that's how we believe we will secure long-term
sustainability in the changing world ahead.
Our six strategic objectives set out a clear path for us to
realise our potential. The first three aim to ensure that our
products are easy to use and available everywhere:
- Best at direct: to be the UK's leading direct player because
we anticipate our customers' needs and develop services and
products they want to buy.
- Win on PCWs: to deliver a step change in our pricing and
trading capability so that our leading PCW brands can win customers
from our competitors.
- Extend our reach: to utilise our investments to win more
customers through acquisitions and partnerships.
The second three are underlying skills which are designed to
help us deliver great value and an excellent customer
experience:
- Technical edge: to use our data, scale, skill and insight
across claims, pricing and underwriting to deliver value to
customers.
- Nimble and cost efficient: to transform into an agile, cost
effective business to drive efficiency and simplicity for us and
our customers.
- Great people: a home for empowered people who celebrate
difference and challenge the status quo to deliver for our
customers.
Core strengths that are hard to replicate
As a UK-focused company, we have the ability to be a deep
specialist in a market unlike any other in the world, while the
range of channels and products gives us real diversification and
scale that many of our peers do not have. This lets us pivot as
dynamics shift in the market and this flexibility has supported our
track record of delivering good returns.
Across the business, we have a number of real strengths. First
and foremost, we are a people business, which means we really care
and have a passion to serve our customers. Secondly, we have a
strong balance sheet with further opportunities to improve its
effectiveness. And thirdly, we successfully combine strong brands
and rich data because we are a direct player and have leading
claims skills supported, for example, by our own accident repair
centres. This combination is hard to replicate and we believe this
provides a platform for real long-term value.
Investing in technology and new ways of working
While these core strengths persist today, we recognise that to
succeed in the future we need to continue to change and we are on
an ambitious transformation journey to increase the competitiveness
of our business.
Like many data driven consumer markets, ours is digitising fast
and our success will be predicated on combining great
customer-focused brands with a strong technology foundation. Our
journey has three overlapping phases, with each of our different
parts of the business moving through these phases at a different
pace.
The first has been building the key technology blocks, which is
characterised by high investment expenditure. The run costs are
being managed alongside careful expenditure on organisational
change and on existing systems that are set to be phased out.
That technology is beginning to land and although there is still
much to do in this ambitious and complex programme, we are now
moving into the second phase: our business transformation. From
this phase, we plan to improve our cost position by reducing double
run-costs and improving efficiency. We also aim to increase further
the accuracy and speed of our pricing and underwriting; improve our
competitiveness and responsiveness to change; and enhance our
customer experience.
Progress against strategic objectives and 2020 priorities
This period is probably one of the most disruptive we've seen in
our lifetime. Overnight, customers changed their behaviour
dramatically. We've seen an acceleration in digitalisation as
customers quickly shifted online as well as indicating an appetite
for more personalisation and flexibility on the products and
services they buy.
Whilst there has been a recent acceleration, we knew that
behavioural changes were coming and our strategy was built with
this in mind. The combination of our technology transformation and
our business transformation has enabled us to continue to meet the
changing needs of our customers as we can adapt more quickly and
continue to innovate in this market.
As a business we quickly adapted to remote working and our
technology transformation continued at pace. We have made
considerable progress in creating an organisation that is capable
of change and rapidly adapting to customer demands, having
increased the pace of technology drops during 2019 and into 2020,
and we are increasingly confident in our ability to deliver
technology change.
Strategic objectives Why Progress to date
==================== =============================== ===========================================================
Best at direct A direct relationship with
our customers provides * Direct Line: Launched a new 'superhero' creative
an opportunity for growth campaign highlighting the brand's unique propositions
by meeting a broader set
of customer needs, and
the foundation for future * Direct Line: Fractional products under development,
product and service innovation. including acquisition of Brolly announced
* Green Flag: Delivered continued growth and
exceptional claims Net Promoter Scores
* Direct Line for business: New Van proposition
launched on new platform
==================== =============================== ===========================================================
Win on PCWs PCWs will continue to be
the biggest channel for * Churchill: Delivered growth in new business market
new business and therefore share and Motor passed one and a half million
our primary route for growth policies milestone
opportunities.
* Darwin: Launched on two more PCWs helping fuel rapid
growth
* Privilege Motor: All new business is now sold through
the new platform
==================== =============================== ===========================================================
Extend our reach Our new customer platforms
make it easier for us to * Exploring inorganic growth opportunities as new
onboard new books of business. systems make it easier to onboard new books of
We will use this to explore business
inorganic growth opportunities
through partnerships and
acquisitions.
==================== =============================== ===========================================================
Technical edge We aim to create a great
experience for our customers * Motor: Launched a new Counter Fraud operating system
and embed a sustainable
competitive advantage by
leveraging our strengths * Motor: Introduced new online claims registration for
in repair, data and claims single vehicle accidents
insight and management.
* Home: Expanded the online claims system
* Green Flag: Launched a new claims system and updated
the 'Rescue Me' app, driving greater volumes through
this digital channel
* Travel: Launched an online claims form for
cancellation and curtailment claims
==================== =============================== ===========================================================
Nimble and cost We aim to bring our cost
efficient base in line with the market * Agile and organisational change: Completed collective
to compete more effectively, consultation on proposal to move away from functional
in particular through PCWs structures
and partnerships. We will
introduce new ways of working
to better utilise our * New ways of working further embedded and supporting
advantages faster pace of change in key areas
within each product and
channel.
* Site closures announced in Q1
==================== =============================== ===========================================================
Great people As disruption in our market
increases, we need to become * High employee engagement score in H1
brilliant at innovation
and change. We can only
do this by empowering and * Delivered remote training for approximately 1,500
developing the best people. people on a range of transformation projects
* Donated over GBP110,000 to Stand up to Cancer in this
year's "Virtual Sprintathon"
==================== =============================== ===========================================================
H2 2020 priorities
Our 2020 priorities are all aligned to our six strategic
objectives and in the second half of 2020 we will focus on
continuing the development and roll-out of our technology change
while gaining momentum on our business transformation.
Our plans for the second half of 2020 include:
- Moving towards launching Direct Line and Churchill motor new
business onto our new platform.
- Embedding an enterprise agile operating model to increase pace
and reduce the cost of change.
- Continuing to support our "Force for Good" initiatives, with
our current estimate of the cost of this investment being GBP80-90
million for 2020.
- Getting our cost base on track to meet our 20% 2023 expense
ratio target.
We know we have a very special business, but the world doesn't
stand still so neither can we. I'm proud of the way our people have
adapted to the challenges of remote working and continued to
deliver change at pace which gives me great confidence for the
future.
To be ahead we need to move quicker than our competitors,
particularly given the economic uncertainty and dramatic changes in
customer behaviour that Covid-19 has brought. We need to be able to
respond quickly and creatively to reach customers in new ways and
meet their changing needs - and that's what our business
transformation is designed to help us to do.
Supporting our activities and central to the long-term
sustainability of the business, we have deeply embedded our
fundamental principles:
- Our values sit at the very heart of our everyday behaviours.
They were created ground up and are a great representation of our
identity.
- Our sustainability pillars bring environmental, social and
governance ("ESG") factors into the heart of our strategic
thinking, whether that's our customers, our people, our society,
our planet or the importance of strong governance - they all play
central roles in helping deliver our business in a sustainable
way.
External factors
Regulation
We have continued to operate within a highly dynamic and
evolving regulatory landscape, influenced by views and initiatives
from several parties, including the UK Government, the FCA and the
PRA. During the first half of 2020, both the FCA and the PRA have
been focused on the impact of Covid-19.
At the start of the pandemic, the FCA set out its expectation
for firms to consider the needs of customers and show flexibility
as customer behaviour changes. The FCA has published guidance for
firms to ensure that products continue to deliver value to
customers, as well as measures that firms should put in place to
help customers experiencing financial difficulty as a result of the
coronavirus. The FCA also stated it would delay the majority of its
work due to the pandemic but would prioritise where there is
greater consumer harm. The outcome from the FCA Market Study On
General Insurance Pricing Practices is still outstanding whilst the
output of its continued work regarding vulnerable customers is
expected to be published in winter 2020.
Prior to Covid-19, the PRA continued to focus generally on the
pillars of its financial risk framework. During the pandemic, the
PRA has focused on the potential financial impacts of Covid-19 and
has performed industry-wide resilience testing. Recent regulatory
interaction is returning to normal levels, with the PRA publishing
its thematic feedback on firms' implementation plans for managing
climate-related financial risks.
Covid-19
We are closely monitoring developments in connection with the
spread of Covid-19, including guidance and directions provided by
HM Government and public health advisers. Like all businesses, we
are subject to the consequences of disruption to financial markets,
supply chains, the business's general operations and its customers'
behaviour, which over time could impact the performance of the
Group. The further implications of the Covid-19 pandemic are
uncertain and we monitor the situation on an ongoing basis. Further
details on the potential risks and uncertainties associated with
Covid-19 can be found in the Principal risks and uncertainties
section.
Planet
Fundamentally we believe that embracing sustainable practices
leads to a better corporate culture, more reliable products and
greater long-term sustainability. We have long been conscious of
our impact on the planet and we are on track to meet our 2020
targets which we set in 2017:
- 57% reduction in carbon emissions (Scope 1(1) and 2(1) ) by
the end of 2020 against a 2013 baseline. We are currently at a 67%
reduction; already exceeding our target for the end of the
year.
- 30% reduction in energy consumption by the end of 2020 against
a 2013 baseline: we have already hit this target.
We now want to go further to protect our business from the
impact of climate change and give back more to the planet than we
take out. To help the business achieve this we are committing to
set Science Based Targets(1) , including our supply chain, that is
at a minimum consistent with holding the global temperature rise to
2degC above pre-industrial levels. From this year, we will become a
100% carbon neutral business by offsetting our emissions by
investing in high impact projects for the next three years whilst
working towards reducing our emissions(2) over time. Finally, we
aim to be TCFD compliant by the end of this year.
Notes:
1. See glossary for definitions.
2. Against 2019 baseline Scope 1, 2 and Scope 3 under our direct
control.
Brexit
We prepared for the possibility of a disruptive Brexit. The UK
left the EU on 31 January 2020 ("Brexit") and entered into a
transition period such that there have been no substantive changes
in practice to the trading and other arrangements between the UK
and the EU, at least during the transition period which is due to
last until 31 December 2020, unless extended. Nonetheless, the
terms, if any, of any future trading relationship between the UK
and the EU, and between the UK and other key countries, are not yet
known and there remains uncertainty and at least the possibility of
a disruptive end to the transition period.
Although we are predominantly a UK business, we do, for example,
have exposure to financial markets and we import goods and services
to fulfil insurance claims. We have been monitoring events
carefully and have proactively taken steps to mitigate the likely
impact 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 end to the transition period
the Group would not be immune.
Dividend and capital management
In the light of significant uncertainty from the Covid-19
pandemic, during H1 the Group took the difficult decision to
suspend the share buyback and cancel the final dividend announced
with the 2019 full year results. The Board has now declared an
interim dividend of 7.4 pence (2019: 7.2 pence) alongside a further
special dividend of 14.4 pence to replace the cancelled 2019 final
dividend. This reflects the Board's continued confidence in the
Group's capital position and earnings, the financial performance in
H1 2020, as well as some greater certainty around issues that led
to the cancellation of the dividend in April.
The Group issued GBP260 million of Tier 2 debt in June 2020 in
order to secure the Group's long-term finances, at a 4.0%
coupon.
Strong capital generation during H1 reflecting the Group's
performance during the period, alongside the issue of GBP260
million of Tier 2 debt, delivered a solvency capital ratio at 30
June 2020 of 213% before dividends and 192% after the interim and
special dividend declared. The Group has outstanding Tier 2 debt
issued in 2012 with nominal value of GBP250 million and a first
call date during the first half of 2022. Excluding this debt, the
Group's solvency ratio after dividends would be 173%.
Since the cancellation of the 2019 final dividend in April,
there has been greater stability in the financial markets and
increased certainty about claims costs on business lines negatively
impacted by the pandemic, including travel and business
interruption.
Nonetheless, whilst in normal circumstances, the Board would
expect the Group to operate around the middle of its solvency
capital ratio risk appetite range of 140% to 180%, the Board
consider current circumstances to be exceptional. The uncertainty
surrounding Covid-19, its impact on the wider economy, and other
factors such as Brexit, have led the Board to conclude that at this
time it is appropriate for the Company to take a cautious approach
when considering liquidity and the distribution of solvency
capital. The Board will keep the appropriate level of capital and
liquidity under review as the pandemic and Brexit and their
consequences, and other uncertainties, develop, including when
reviewing the Group's 2020 full year results.
Outlook
- For 2020, we reiterate our target of a combined operating
ratio of 93% to 95% normalised for weather and anticipate our
restructuring costs of GBP60 million over 2019 and 2020 will be
incurred in full as we strive to maximise the opportunity for
operational efficiencies.
- We reiterate our targets of achieving a combined operating
ratio of 93% to 95% normalised for weather in 2021 and over the
medium term, and of improving the current-year contribution to
operating profit to at least 50% by 2021, but acknowledge these
will inevitably depend on the duration and uncertainties of the
Covid-19 pandemic, and the pace of economic recovery and
consequential impact on customer behaviour.
- We are reiterating our expense ratio target of 20% by 2023.
Our trajectory to get there has been modestly delayed following the
Covid-19 disruption and so we may not be able to achieve the GBP50m
savings by 2021 as outlined at our Capital Markets Day in November
2019.
- The Group expects a net investment yield of approximately 1.8%
in 2020.
- We reiterate our target of achieving at least a 15% return on
tangible equity per annum over the long term.
Penny james
CHIEF EXECUTIVE OFFICER
Finance review
Performance
Operating profit(1)
H1 H1
2020 2019
GBPm GBPm
-------------------------------------- ------ ------
Underwriting profit 143.6 110.6
Instalment and other operating income 80.0 88.0
Investment return 41.3 75.7
-------------------------------------- ------ ------
Total operating profit 264.9 274.3
====================================== ====== ======
Of which:
Current-year operating profit(1) 141.7 102.7
Prior-year reserve releases 123.2 171.6
-------------------------------------- ------ ------
Note:
1. See glossary for definitions and appendix A - Alternative
performance measures for reconciliation to financial statement line
items.
Operating profit decreased by GBP9.4 million to GBP264.9 million
(H1 2019: GBP274.3 million), predominantly due to the major weather
events in H1 partially offset by the change to the Ogden discount
rate to minus 0.25% in H1 2019 (GBP16.9 million). Underlying
trading saw an improvement in the quality of earnings with a
reduction in prior-year reserve releases (GBP48.4 million) offset
by improvements in current-year operating profit. The impact of the
Covid-19 pandemic on total operating profit was broadly neutral,
with lower current-year claims costs offset by lower instalment and
other income, higher operating expenses and lower investment
return.
The combined operating ratio was 90.3% (H1 2019: 92.5%). The
current-year attritional loss ratio improved by 8.2 percentage
points to 65.3% (H1 2019: 73.5%), due to reduced claims frequency
in Motor following Covid-19 disruption alongside improvements in
the underlying current-year loss ratio as trading actions continued
to take effect. This was partially offset by a reduction in
prior-year reserve releases.
The loss ratio relating to major weather events was 2.1% (H1
2019: nil), whilst the commission ratio remained steady. The
expense ratio increased by 0.7 percentage points driven primarily
by additional Covid-19 related expenses and higher insurance
levies. Overall, the current-year combined operating ratio improved
by 5.4 percentage points to 98.7%.
Underwriting profit increased by GBP33.0 million to GBP143.6
million primarily due to the favourable impact that the Covid-19
pandemic had on Motor and Rescue claims partially offset by a
GBP48.4 million reduction in prior year reserve releases, the
effect of the major weather events in early 2020 on Home and
Commercial and Covid-19-related claims on travel and business
interruption policies.
Instalment and other operating income decreased to GBP80.0
million (H1 2019: GBP88.0 million), due primarily to lower volumes
relating to the Covid-19 pandemic impacting on referral income and
vehicle recovery and repair services and a small reduction in
instalment income.
Investment return was GBP41.3 million (H1 2019: GBP75.7
million), a decrease of GBP34.4 million, driven primarily by the
economic effects of the Covid-19 pandemic alongside the non-repeat
of gains in H1 2019. Realised losses were incurred as a result of
the Group maintaining its investment discipline by selling
positions downgraded outside of the Group's risk appetite and write
downs in the valuation of the investment property portfolio.
Impact of Covid-19 on operating profit
The estimated impact of the Covid-19 pandemic on the Group's
operating profit has been broadly neutral, with reductions in
claims frequency during lockdown offset by higher travel and
business interruption claims costs, higher operating expenses,
lower instalment and other income and reduced investment
return.
Motor, Rescue and Commercial benefited from reductions in claims
frequency across the lockdown period, partially offset by an
increase in severity in the claims that were registered. The Group
experienced higher claims levels in its Travel business, and in
business interruption for a small cohort of policies that were not
written on the Group's standard wordings. Extending mobility
provisions and business unoccupancy terms have also led to small
increases in net insurance claims.
Additional costs associated with enabling the Group's
office-based employees to work from home, and payments made
directly to local charities supporting community groups affected by
the Covid-19 pandemic and into the ABI's Covid-19 fund have led to
an additional GBP8.6 million of operating expenses. Commission
expenses have reduced due to reductions in profit share payments in
relation to Creditor business.
In-force policies and gross written premium
In-force policies (thousands)
30 Jun 31 Mar 31 Dec 30 Sep 30 Jun
At 2020(1) 2020(1) 2019(1) 2019(1) 2019(1,2)
-------------------------------- -------- -------- -------- -------- ----------
Direct own brands 3,972 3,944 3,921 3,910 3,909
Partnerships 119 121 122 127 133
================================ ======== ======== ======== ======== ==========
Motor 4,091 4,065 4,043 4,037 4,042
Direct own brands 1,782 1,771 1,765 1,769 1,786
Partnerships 814 826 829 836 844
Home 2,596 2,597 2,594 2,605 2,630
Rescue 3,380 3,424 3,450 3,470 3,479
Travel 3,567 3,607 3,648 3,675 3,686
Pet 152 155 157 158 158
Other personal lines 62 63 122 123 123
================================ ======== ======== ======== ======== ==========
Rescue and other personal lines 7,161 7,249 7,377 7,426 7,446
Of which: Green Flag direct 1,070 1,082 1,063 1,039 999
Direct own brands 546 547 541 535 531
NIG and other 239 238 234 234 233
-------------------------------- -------- -------- -------- -------- ----------
Commercial 785 785 775 769 764
-------------------------------- -------- -------- -------- -------- ----------
Total in-force policies 14,633 14,696 14,789 14,837 14,882
-------------------------------- -------- -------- -------- -------- ----------
Of which: direct own brands 7,370 7,344 7,290 7,253 7,225
-------------------------------- -------- -------- -------- -------- ----------
Notes:
1. Commercial direct own brands include Direct Line for Business
and commercial products sold under the Churchill brand that were
previously reported within NIG and other. Prior periods have been
re-presented accordingly.
2. In-force policies, including direct own brands, as at 30 June
2019 have been restated to include 52,000 Green Flag policies
omitted from previously reported amounts.
Total in-force policies reduced to 14.6 million (30 June 2019:
14.9 million), primarily due to small reductions in Rescue, Travel
and Creditor business. Motor and Home in-force policies remained
broadly steady. Own brands in-force policies grew to 7.4 million
(30 June 2019: 7.2 million), with growth in Motor, Green Flag and
Commercial direct own brands and Home broadly steady.
Gross written premium
Q2 Q2 H1 H1
2020 2019(1) 2020 2019(1)
GBPm GBPm GBPm GBPm
================================ ====== ========= ======= =========
Direct own brands 382.4 399.0 778.9 771.6
Partnerships 12.0 14.5 26.4 28.9
================================ ====== ========= ======= =========
Motor 394.4 413.5 805.3 800.5
Direct own brands 97.2 97.1 193.6 193.7
Partnerships 41.1 45.0 82.5 89.6
Home 138.3 142.1 276.1 283.3
Rescue 41.0 43.8 81.0 82.9
Travel 32.1 38.2 71.3 76.2
Pet 18.1 18.2 36.4 36.2
Other personal lines 10.6 10.9 21.4 21.2
================================ ====== ========= ======= =========
Rescue and other personal lines 101.8 111.1 210.1 216.5
Of which: Green Flag direct 19.5 20.3 39.2 38.0
Direct own brands 39.3 38.0 78.6 73.6
NIG and other 117.4 116.5 210.7 201.2
================================ ====== ========= ======= =========
Commercial 156.7 154.5 289.3 274.8
================================ ====== ========= ======= =========
Total gross written premium 791.2 821.2 1,580.8 1,575.1
================================ ====== ========= ======= =========
Of which: direct own brands 538.4 554.4 1,090.3 1,076.9
================================ ====== ========= ======= =========
Note:
1. Commercial direct own brands include Direct Line for Business
and commercial products sold under the Churchill brand that were
previously reported within NIG and other. Prior periods have been
re-presented accordingly.
Gross written premium of GBP1,580.8 million (H1 2019: GBP1,575.1
million) increased by 0.4% as the strong premium growth seen in Q1
was offset by Covid-19-related disruption in Q2. Increases in Motor
and Commercial were partially offset by modest declines in Home and
Rescue and other personal lines. Direct own brands gross written
premium of GBP1,090.3 million (H1 2019: GBP1,076.9 million)
increased by 1.2% driven by increases in Motor, Green Flag and
Commercial direct own brands.
Motor
Motor in-force policies increased by 1.2% to 4.1 million with
gross written premium also increasing by 0.6% to GBP805.3 million
as favourable retention partially offset adverse new business sales
in Q2 following Covid-19-related disruption.
Own brands in-force policies increased by 1.6% driven by strong
new business in Churchill and increased retention rates across all
brands partially offset by a reduction in new business in Direct
Line as customer shopping behaviour was affected by the Covid-19
pandemic.
Motor risk-adjusted prices increased by 1.8% in H1 2020. Whilst
the Group continued to reflect its view of claims inflation in new
business pricing, some caps were placed on renewal price increases
in Q2 as new business sales slowed and the Group focused on
delivering strong retention. A reduction in new car sales and young
drivers entering the market drove a reduction in the risk mix of
3.5% and a 1.2% fall in Motor average premium(1) in 2020.
Home
In-force policies for Home's direct own brands remained broadly
stable year-on-year at 1.8 million policies, although direct own
brands in-force policies grew steadily across H1 2020. Retention
rates were up across all brands and on new business there has been
a continued shift towards the PCW channel reflecting increased
competitiveness.
Gross written premium was 2.5% lower at GBP276.1 million due
primarily to continuing run-off of a number of partnership schemes.
Own brands gross written premium was steady at GBP193.6
million.
Home own brand risk-adjusted prices increased by 0.3% as claims
inflation was factored in, offset by other pricing actions. Risk
mix improved by 2.7%, partially due to increased sales in the PCW
channel, giving a reduction in average premium(2) of 2.4%.
Notes:
1. Average incepted written premium excluding IPT for Motor
direct own brands (excluding Darwin and Privilege policies
underwritten on the Group's new IT platform) for the year to 30
June 2020.
2. Average incepted written premium excluding IPT for Home
direct own brands for the year to 30 June 2020.
Rescue and other personal lines
Rescue and other personal lines in-force policies reduced by
3.8% to 7.2 million, gross written premium also decreased by 3.0%
to GBP210.1 million compared to H1 2019 with reductions across most
products as a result of changes in customer shopping caused by the
Covid-19 lockdown.
Green Flag Rescue saw strong trading in Q1 before the lockdown
and experienced a steep decline in new business in April and May
before returning to growth again in June. In-force policies grew by
7.1% to 1.1 million compared to H1 2019. Gross written premium
increased by 3.2% to GBP39.2 million.
In-force policies for the Group's linked Rescue channel, where
cover can be purchased with a Group Motor policy, reduced by 10% to
807,000, as new business suffered as a result of the pandemic
including a pause in the sale of European cover. Rescue
partnerships in-force policies reduced by 4.2%, where margins tend
to be lower than for direct business, driven primarily by continued
reductions in packaged bank account volumes.
Total Other personal lines (comprising Travel, Pet and other)
in-force policies reduced by 4.7% to 3.8 million primarily due to
lower packaged bank account volumes in Travel and a Creditor
partnership ending at the end of 2019. Some small growth in Travel
own brands was reversed in Q2 as the Group suspended Travel
insurance sales as a result of the Covid-19 lockdown and changes to
FCO advice on foreign travel. Pet in-force policies reduced by 3.8%
in H1 2020 and insurance packages tailored for UK Select Home and
Motor customers saw strong growth of 5.4% in Q1 and remained
broadly stable in Q2, again due to the effect of the Covid-19
lockdown on customer shopping behaviour.
Gross written premium for total Other personal lines decreased
by 3.4%.
Commercial
Commercial in-force policies increased by 2.7%, compared with H1
2019, to 785,000, with Commercial direct own brands and NIG and
other both growing at similar rates.
Commercial direct own brands grew in-force policies by 2.8%
supported by the launch of the van product and despite a slowdown
in new business sales due to Covid-19 in Q2. Commercial products
sold under the Churchill brand, although relatively small, have
grown volumes by over 50% year-on-year driven by PCW sales. Gross
written premium increased by 6.8% to GBP78.6 million with increases
across all product lines driven by both increased volumes and
premium rates.
NIG and other in-force policies numbers were 2.6% higher than in
H1 2019 and gross written premium grew by 4.7% to GBP210.7 million,
reflecting NIG's focus on underwriting discipline and underwriting
margins.
Underwriting profit and combined operating ratio
H1 H1
2020 2019
---------------------------------- ------ ------
Underwriting profit (GBP million) 143.6 110.6
Loss ratio 59.0% 61.9%
Commission ratio 6.1% 6.1%
Expense ratio 25.2% 24.5%
---------------------------------- ------ ------
Combined operating ratio 90.3% 92.5%
---------------------------------- ------ ------
The Group's combined operating ratio of 90.3% (H1 2019: 92.5%)
improved by 2.2 percentage points primarily due to the reduction in
the loss ratio due to reduced claims frequency following the
Covid-19 lockdown alongside a change of the Ogden discount rate to
minus 0.25% in H1 2019 (1.1 percentage points).
The loss ratio improved by 2.9 percentage points to 59.0% (H1
2019: 61.9%) following reduced claims frequency in Motor and Rescue
as a result of the Covid-19 lockdown, alongside actions taken to
improve the current-year loss ratio. This was partially offset by
significant increases in Travel claims volumes due to the Covid-19
pandemic, higher major weather costs and a reduction in prior-year
releases.
The commission ratio remained steady as commissions reduced
slightly, offset by a small reduction in net earned premium.
The expense ratio increased to 25.2% driven by operating
expenses excluding restructuring and one-off costs increasing
GBP9.0 million to GBP372.0 million following investment in "Force
for Good" initiatives, alongside a modest reduction in net earned
premium.
Ratio analysis by division
Rescue
and other
personal Total
Motor Home lines Commercial Group
Notes GBPm GBPm GBPm GBPm GBPm
-------------------------------- ------ ------- ------ ---------- ---------- -------
For the period ended 30 June
2020
Net earned premium 4 740.4 277.8 213.2 243.0 1,474.4
================================ ====== ======= ====== ========== ========== =======
Net insurance claims 4 401.8 162.2 179.3 125.7 869.0
Prior-year reserve releases 21 83.4 2.5 4.0 33.3 123.2
Major weather events n/a (17.7) n/a (12.7) (30.4)
================================ ====== ======= ====== ========== ========== =======
Attritional net insurance
claims 485.2 147.0 183.3 146.3 961.8
================================ ====== ======= ====== ========== ========== =======
Loss ratio - current-year
attritional 65.5% 53.0% 86.0% 60.2% 65.3%
Loss ratio - prior-year reserve
releases (11.2%) (0.9%) (1.9%) (13.7%) (8.4%)
Loss ratio - major weather
events(1) n/a 6.4% n/a 5.2% 2.1%
================================ ====== ======= ====== ========== ========== =======
Loss ratio - reported 4 54.3% 58.5% 84.1% 51.7% 59.0%
Commission ratio 4 2.9% 6.8% 3.0% 17.7% 6.1%
Expense ratio 4 24.7% 27.1% 24.2% 25.5% 25.2%
================================ ====== ======= ====== ========== ========== =======
Combined operating ratio 4 81.9% 92.4% 111.3% 94.9% 90.3%
================================ ====== ======= ====== ========== ========== =======
Current-year combined operating
ratio 93.1% 93.3% 113.2% 108.6% 98.7%
================================ ====== ======= ====== ========== ========== =======
For the period ended 30 June
2019
Net earned premium 4 749.6 288.0 209.5 235.5 1,482.6
================================ ====== ======= ====== ========== ========== =======
Net insurance claims 4 518.7 138.7 141.6 119.4 918.4
Prior-year reserve releases 21 106.1 20.7 5.3 39.5 171.6
Major weather events n/a n/a n/a n/a n/a
================================ ====== ======= ====== ========== ========== =======
Attritional net insurance
claims 624.8 159.4 146.9 158.9 1,090.0
================================ ====== ======= ====== ========== ========== =======
Loss ratio - current-year
attritional 83.4% 55.3% 70.1% 67.5% 73.5%
Loss ratio - prior-year reserve
releases (14.2%) (7.2%) (2.5%) (16.8%) (11.6%)
Loss ratio - major weather n/a n/a n/a n/a n/a
events(1)
================================ ====== ======= ====== ========== ========== =======
Loss ratio - reported 4 69.2% 48.1% 67.6% 50.7% 61.9%
Commission ratio 4 2.5% 7.6% 4.1% 17.5% 6.1%
Expense ratio 4 23.4% 26.5% 24.5% 25.6% 24.5%
================================ ====== ======= ====== ========== ========== =======
Combined operating ratio 4 95.1% 82.2% 96.2% 93.8% 92.5%
================================ ====== ======= ====== ========== ========== =======
Current-year combined operating
ratio 109.3% 89.4% 98.7% 110.6% 104.1%
================================ ====== ======= ====== ========== ========== =======
Note:
1. Home and Commercial claims for major weather events,
including inland and coastal flooding and storms.
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 Group's current-year attritional loss ratio of 65.3%
improved by 8.2 percentage points compared to H1 2019, due to
trading actions taken across Motor and Commercial, alongside the
reduction in claims frequency following the Covid-19 lockdown in
Motor and Rescue, partially offset by the estimated impact of the
pandemic on Travel and Commercial claims.
Prior-year reserve releases reduced to GBP123.2 million (H1
2019: GBP171.6 million), equivalent to 8.4% of net earned premium
(H1 2019: 11.6%). Assuming current claims trends continue, in line
with the Group's financial target to deliver at least 50% operating
profits from the current-year, prior-year reserve releases are
expected to continue to reduce further in future years, although
they are expected to remain a significant contribution to
profits.
The Group's current-year combined operating ratio improved by
5.4 percentage points to 98.7% (H1 2019: 104.1%) as the 8.2
percentage point improvement in the attritional loss ratio was
partially offset by 2.1 percentage points of weather events in
early 2020 and a 0.7 percentage point increase in the expense ratio
due primarily to additional costs incurred in response to the
Covid-19 pandemic.
Motor
The current-year attritional loss ratio in Motor improved by
17.9 percentage points to 65.5% (H1 2019: 83.4%). Motor claims
frequency reduced significantly during the early stages of lockdown
and, whilst there has been an increase since lockdown restrictions
have been eased, frequency remained below expected levels. Higher
levels of claims severity were experienced during the lockdown
period following lengthening of repair times resulting in higher
credit hire costs. The Group continued to assume its long-term
underlying view of claims inflation in the range of 3% to 5%,
albeit with higher levels of claims severity offset by lower
frequency.
Prior-year reserve releases were GBP22.7 million lower
year-on-year at GBP83.4 million as they continued to reduce in line
with expectations.
Motor's reported combined operating ratio improved by 13.2
percentage points to 81.9% (H1 2019: 95.1%). Large improvements in
the current-year attritional loss ratio were offset partially by
increases in expense and commission ratios and a reduction in
prior-year reserve releases.
Home
The current-year attritional loss ratio, excluding major weather
event claims, improved by 2.3 percentage points to 53.0%, following
actions taken on escape of water claims. Claims inflation remained
within the Group's long-term expectations of 3% to 5%.
The commission ratio of 6.8% was 0.8 percentage points lower
compared to H1 2019 as the effects of the weather events in early
2020 resulted in lower profit share payments to partners.
Home's combined operating ratio increased by 10.2 percentage
points to 92.4% (H1 2019: 82.2%). This was driven primarily by
weather events in the winter contributing 6.4 percentage points,
with no weather events in H1 2019, and lower prior-year reserve
releases contributing a further 6.3 percentage points, offset by
improvements to the current-year attritional loss ratio and
commission ratio. Normalised for weather, the combined operating
ratio was 4.9 percentage points higher than H1 2019 at 94.2%(1) (H1
2019: 89.3%).
Rescue and other personal lines
The combined operating ratio for Rescue and other personal lines
increased by 15.1 percentage points to 111.3% (H1 2019: 96.2%) due
primarily to the elevated levels of travel claims registered
following the change to the FCO travel advice at the beginning of
the lockdown.
Rescue's combined operating ratio of 78.1% was 5.0 percentage
points better than H1 2019's ratio of 83.1%, as it benefited from
significant declines in claims volumes during the lockdown coupled
with a decrease in claims severity as the lockdown restrictions
were eased. Other personal lines combined operating ratio increased
by 27.7 percentage points to 132.1%, due primarily to the increase
in expected travel claims. The Group has currently provided for
GBP25 million additional travel claims above planned levels, net of
reinsurance, and has utilised an automatic reinstatement of its
Travel reinsurance per the terms of the original policy.
Commercial
The current-year attritional loss ratio in Commercial improved
by 7.3 percentage points to 60.2% as risk selection remained the
priority alongside a reduction in claims frequency as a result of
the Covid-19 pandemic, partially offset by a GBP10 million increase
in Covid-19-related business interruption estimated claims on a
minority of policies not written on the Group's standard wordings.
Prior-year reserve releases were GBP6.2 million lower at GBP33.3
million, primarily due to a non-repeat of releases from disease
perils in H1 2019.
The combined operating ratio for Commercial increased by 1.1
percentage points to 94.9% (H1 2019: 93.8%) as improvements to the
current-year attritional loss ratio were more than offset by the
reduction in prior-year reserve releases and the impact of the
severe weather in early 2020.
Note:
1. See glossary for definitions and appendix A - Alternative
performance measures for reconciliation to financial statement line
items.
Operating expenses before restructuring and one-off costs
H1 H1
2020 2019
Note GBPm GBPm
============================================== ==== ====== ======
Staff costs(1) 10 132.3 134.1
IT and other operating expenses(1,2) 10 100.2 81.5
Marketing 10 54.2 59.3
Insurance levies(3) 10 49.9 46.9
Depreciation and amortisation(4) 10 35.4 41.2
============================================== ==== ====== ======
Total operating expenses before restructuring
and one-off costs 372.0 363.0
============================================== ==== ====== ======
Notes:
1. Staff costs and other operating expenses attributable to
claims handling activities are allocated to the cost of insurance
claims.
2. IT and other operating expenses include professional fees and
property costs.
3. Insurance levies were previously reported in other operating
expenses. Comparative data for the period ended 30 June 2019 has
been re-presented accordingly.
4. Includes depreciation on right-of-use assets of GBP7.2
million (H1 2019: GBP7.4 million).
Operating expenses before restructuring and one-off costs
increased by GBP9.0 million to GBP372.0 million (H1 2019: GBP363.0
million) resulting in an increased expense ratio of 25.2% (H1 2019:
24.5%). The Group saw reductions in staff costs, marketing and
depreciation and amortisation, and increases in IT and other
operating expenses and insurance levies, where there have been
increases in the Motor Insurers Bureau and the Financial Services
Compensation Scheme levies.
Increases in IT and other operating expenses are due primarily
to additional expenditure as part of the Group's response to the
Covid-19 pandemic including costs associated with enabling home
working for all office-based employees and charitable donations as
well as a reduction in deferred acquisition costs due to the
phasing of marketing expenditure.
Instalment and other operating income
H1 H1
2020 2019
Note GBPm GBPm
------------------------------------------------------- ---- ------ ------
Instalment income 54.8 56.3
Other operating income:
Revenue from vehicle recovery and repair services(1) 7 11.2 14.4
Vehicle replacement referral income 7 6.3 9.0
Legal services income 7 4.7 5.3
Other income(1,2) 7 3.0 3.0
Other operating income 7 25.2 31.7
------------------------------------------------------- ---- ------ ------
Total instalment and other operating income 80.0 88.0
------------------------------------------------------- ---- ------ ------
Notes:
1. Revenue from vehicle recovery and repair services includes
salvage income previously reported in other income. Comparative
data for the period ended 30 June 2019 has been re-presented
accordingly.
2. Other income primarily includes fee income from insurance
intermediary services.
Instalment and other operating income decreased by GBP8.0
million, due primarily to lower volumes as a result of the Covid-19
pandemic impacting referral income and vehicle recovery and repair
services and a 2.7% reduction in instalment income.
Investment return
H1 H1
2020 2019
Note GBPm GBPm
--------------------------------------------- ---- ------ ------
Investment income 64.8 75.4
Hedging to a sterling floating rate basis (9.6) (12.1)
--------------------------------------------- ---- ------ ------
Net investment income 55.2 63.3
Net realised and unrealised (losses) / gains
excluding hedging (13.9) 12.4
--------------------------------------------- ---- ------ ------
Total investment return 6 41.3 75.7
--------------------------------------------- ---- ------ ------
Investment yields
H1 H1
2020 2019
------------------------------- ------ ------
Investment income yield(1) 2.1% 2.5%
Net investment income yield(1) 1.8% 2.1%
Investment return yield(1) 1.4% 2.5%
------------------------------- ------ ------
Note:
1. See glossary for definitions and appendix A - Alternative
performance measures for reconciliation to financial statement line
items.
Total investment return decreased by GBP34.4 million to GBP41.3
million (H1 2019: GBP75.7 million). Investment income accounted for
GBP10.6 million of this variance as a result of a reduction of
assets under management following management actions to ensure
liquidity by not reinvesting credit maturities or coupons between
March and May 2020. Asset values were affected by the impact of
Covid-19, and net realised and unrealised gains and losses
excluding hedging were lower by GBP26.3 million compared to H1
2019. The fair value of investment property at 30 June 2020 was
GBP10.3 million lower than at the start of the year (H1 2019:
GBP0.7 million reduction in fair value) and realised losses on bond
disposals were GBP3.6 million for H1 2020 compared to realised
gains of GBP13.2 million in H1 2019.
The annualised investment income yield for H1 2020 reduced to
2.1% (H1 2019: 2.5%). The net investment income yield was lower at
1.8% (H1 2019: 2.1%)
The Group's 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 periodic payment orders ("PPO") and non-PPO
liabilities in an optimal manner; and
- to deliver a suitable risk-adjusted investment return
commensurate with the Group's risk appetite.
Investment holdings
30 Jun 31 Dec
2020 2019
At GBPm GBPm
----------------------------------------- ------- -------
Investment-grade credit(1) 3,460.4 3,676.8
High yield 365.1 390.8
Investment-grade private placements 104.0 104.0
Credit 3,929.5 4,171.6
Sovereign 41.9 99.8
----------------------------------------- ------- -------
Total debt securities 3,971.4 4,271.4
Infrastructure debt 271.2 278.1
Commercial real estate loans 204.1 205.7
Cash and cash equivalents(2) 1,434.9 896.3
Investment property 281.4 291.7
Available-for-sale equity investments(3) 3.2 -
----------------------------------------- ------- -------
Total investment holdings 6,166.2 5,943.2
----------------------------------------- ------- -------
Notes:
1. Asset allocation at 30 June 2020 includes investment
portfolio derivatives, which have been included and have a
mark-to-market liability value of GBP71.4 million included in
investment grade credit (31 December 2019 mark-to-market asset
value of GBP81.8 million). This excludes non-investment derivatives
that have been used to hedge interest on subordinated debt and
operational cash flows.
2. Net of bank overdrafts: includes cash at bank and in hand and
money market funds.
3. Available-for-sale equity investments consist of an equity
fund which is designated on initial recognition at fair value
through other comprehensive income.
At 30 June 2020, total investment holdings of GBP6,166.2 million
were 3.8% higher than at the start of the year, primarily
reflecting the cash proceeds from the new GBP260 million
twelve-year fixed Tier 2 debt issuance completed on 5 June 2020.
Total debt securities were GBP3,971.4 million (31 December 2019:
GBP4,271.4 million), of which 2.5% were rated as 'AAA' and a
further 54.7% were rated as 'AA' or 'A'. The average duration at 30
June 2020 of total debt securities was 2.7 years (31 December 2019:
2.5 years).
At 30 June 2020, total unrealised gains, net of tax, on
available-for-sale ("AFS") investments were GBP11.9 million (31
December 2019: GBP47.5 million).
Reconciliation of operating profit
HY HY
2020 2019
Notes GBPm GBPm
------------------------------------------------- ----- ------ ------
Motor 4 220.5 153.8
Home 4 35.3 71.1
Rescue and other personal lines 4 (16.2) 17.5
Commercial 4 25.3 31.9
================================================= ===== ====== ======
Operating profit 4 264.9 274.3
Restructuring and one-off costs (15.0) -
Operating profit after restructuring and one-off
costs 4 249.9 274.3
Finance costs 11 (13.5) (13.0)
================================================= ===== ====== ======
Profit before tax 236.4 261.3
Tax (43.8) (49.5)
------------------------------------------------- ----- ------ ------
Profit for the year attributable to the owners
of the Company 192.6 211.8
------------------------------------------------- ----- ------ ------
Operating profit by segment
Motor, Home and Commercial divisions contributed to operating
profit in H1 2020. The Rescue and other personal lines division saw
an operating loss, primarily as a result of elevated travel claims
following the Covid-19 pandemic. Motor operating profit increased
as it saw the benefit of falling claims frequency without the full
earned impact of changes to customer shopping behaviour on new
business. Home and Commercial operating profit reduced primarily
due to the weather events in early 2020 and lower prior-year
reserve releases. Rescue operating profit of GBP24.0 million (H1
2019: GBP20.8 million) is included in the Rescue and other personal
lines result.
Restructuring and one-off costs
The Group has incurred GBP15.0 million restructuring and one-off
costs to support its cost reduction targets that were announced at
its Capital Markets Day in November 2019, which in aggregate
resulted in a cumulative total of GBP26.2 million incurred in H2
2019 and H1 2020, with a total of GBP60 million expected by the end
of 2020. Operating profit as reported at H1 2019 included GBP2.6
million of costs within operating expenses that were subsequently
reclassified as restructuring and other one-off costs in the second
half of the year.
Finance costs
Finance costs increased by GBP0.5 million to GBP13.5 million (H1
2019: GBP13.0 million) due to interest payable on the recent GBP260
million debt raised in June 2020.
Effective corporation tax rate
The effective tax rate for H1 2020 was 18.5% (H1 2019: 18.9%),
which is less than the standard rate due to the tax deduction for
the Restricted Tier 1 coupon which is accounted for as a dividend,
net of disallowable expenses. Both of these factors are broadly in
line year-on-year, with the main difference being the deferred tax
rate which was 17% last year but increased to 19% following the
March 2020 Budget where the rate of corporation tax was maintained
at 19%.
Earnings per share
Basic earnings per share decreased by 8.7% to 13.6 pence (H1
2019: 14.9 pence). Diluted earnings per share decreased by 8.8% to
13.4 pence (H1 2019: 14.7 pence) mainly reflecting the reduction in
profit after tax.
Net asset value
30 Jun 31 Dec
2020 2019
At Note GBPm GBPm
--------------------------------------------- ---- ------- -------
Net assets(1) 15 2,756.5 2,643.6
Goodwill and other intangible assets 15 (741.2) (702.5)
--------------------------------------------- ---- ------- -------
Tangible net assets 15 2,015.3 1,941.1
--------------------------------------------- ---- ------- -------
Closing number of Ordinary Shares (millions) 15 1,353.3 1,366.6
--------------------------------------------- ---- ------- -------
Net asset value per share (pence) 15 203.7 193.4
Tangible net asset value per share (pence) 15 148.9 142.0
============================================= ==== ======= =======
Note:
1. See glossary for definitions and appendix A - Alternative
performance measures for reconciliation to financial statement line
items.
Net assets at 30 June 2020 increased to GBP2,756.5 million (31
December 2019: GBP2,643.6 million) and tangible net assets
increased to GBP2,015.3 million (31 December 2019: GBP1,941.1
million). The increases mainly reflect H1 2020 retained profit
offset by the effects of the share buyback and reductions in
available-for-sale reserves. There has been an increase in
expenditure on intangible assets as the Group continued to invest
in the business.
Balance sheet management
Capital management and the Group's dividend policy
The Group's dividend policy states:
"The Group aims to manage its capital efficiently and generate
long-term sustainable value for shareholders, while balancing
operational, regulatory, rating agency and policyholder
requirements.
"The Group aims to grow its regular dividend in line with
business growth.
"Where the Board believes that the Group has capital which is
expected to be surplus to the Group's requirements for a prolonged
period, it would intend to return any surplus to shareholders. In
normal circumstances, the Board expects that a solvency capital
ratio around the middle of its risk appetite range of 140% to 180%
of the Group's solvency capital requirement ("SCR") would be
appropriate and it will therefore take this into account when
considering the potential for special distributions.
"In the normal course of events the Board will consider whether
or not it is appropriate to distribute any surplus capital to
shareholders once a year, alongside the full year results.
"The Group expects that one-third of the annual dividend will
generally be paid in the third quarter as an interim dividend, and
two-thirds will be paid as a final dividend in the second quarter
of the following year. The Board may revise the dividend policy
from time to time. The Company may consider a special dividend
and/or a repurchase of its own shares to distribute surplus capital
to shareholders."
The Board is very aware of the importance of dividends to
shareholders and has declared an interim dividend of 7.4 pence
(2019: 7.2 pence) alongside a further special dividend of 14.4
pence in order to replace the cancelled 2019 final dividend. This
reflects the Board's continued confidence in the Group's capital
position and earnings, as well as some greater certainty around
issues that led to the cancellation of the dividend in April,
including greater stability in the financial markets and increased
certainty about claims costs on business lines negatively impacted
by the pandemic, including travel and business interruption.
Nonetheless, whilst in normal circumstances, the Board would
expect to operate as envisaged by its dividend policy, the Board
consider current circumstances to be exceptional. The uncertainty
surrounding Covid-19, its impact on the wider economy, and other
factors such as Brexit, lead the Board to conclude that at this
time it is appropriate for the Company to take a cautious approach
when considering liquidity and the distribution of solvency
capital. The Board will keep the appropriate level of capital and
liquidity under review as the pandemic and Brexit and their
consequences, and other uncertainties, develop, including when
reviewing the Group's 2020 full year results and considering any
distributions.
After dividends, the estimated solvency capital ratio was 192%
as at 30 June 2020. The Group has outstanding Tier 2 debt issued in
2012 with nominal value of GBP250 million and a first call date
during the first half of 2022. Excluding this debt, the Group's
solvency ratio after dividends would be 173%.
The interim dividends are scheduled to be paid on 4 September
2020 to shareholders on the register on 14 August 2020. The
ex-dividend date will be 13 August 2020.
Whilst it is not envisaged that the Board would need to, or be
required to, exercise any power of cancellation of the interim
dividends, the interim dividends are capable of being cancelled by
the Board at any time before actual payment, and therefore they
would not be payable, if at any stage the Board considers it
necessary or appropriate to do so. This complies with the PRA's
rules relating to the implementation of the Solvency II Directive
(as it relates to regulated insurance companies) which in essence
require any dividend to be capable of being cancelled if necessary
or appropriate to do so for regulatory capital purposes.
Capital analysis
The Group is regulated under Solvency II requirements by the PRA
on both a Group basis and for the Group's principal underwriter, U
K Insurance Limited. In its results, the Group has estimated its
Solvency II own funds, SCR and solvency capital ratio as at 30 June
2020.
Capital position
At 30 June 2020, the Group held a Solvency II capital surplus of
GBP1.26 billion above its regulatory capital requirements, which
was equivalent to an estimated solvency capital ratio of 192%,
after the proposed interim dividend and the special interim
dividend which represents a catch-up of the cancelled 2019 final
dividend.
The Group's SCR and solvency capital ratio are as follows:
30 Jun 31 Dec
At 2020 2019
--------------------------------------------------- ------ ------
Solvency capital requirement (GBP billion) 1.39 1.32
Capital surplus above solvency capital requirement
(GBP billion) 1.26 0.85
Solvency capital ratio post-capital distributions 192% 165%
=================================================== ====== ======
Movement in capital surplus
30 Jun 31 Dec
2020 2019
At GBPbn GBPbn
--------------------------------------------------- ------ ------
Capital surplus at 1 January 0.85 0.89
--------------------------------------------------- ------ ------
Capital generation excluding market movements 0.35 0.60
Market movements (0.08) 0.06
--------------------------------------------------- ------ ------
Capital generation 0.27 0.66
Change in solvency capital requirement (0.07) (0.06)
--------------------------------------------------- ------ ------
Surplus generation 0.20 0.60
Capital expenditure (0.07) (0.19)
Tier 2 debt issue 0.26 -
Cancellation of capital distribution(1) 0.32 -
Capital distribution - ordinary dividends(2) (0.10) (0.30)
Capital distribution - special dividends(2) (0.20) -
Capital distribution - share buyback - (0.15)
--------------------------------------------------- ------ ------
Net surplus movement 0.41 (0.04)
--------------------------------------------------- ------ ------
Capital surplus at 30 June 2020 / 31 December 2019 1.26 0.85
=================================================== ====== ======
Notes:
1. Relates to the cancellation of the cash dividend (GBP197
million) and the suspension of share buyback (GBP120 million).
2. Foreseeable dividends included above are adjusted to exclude
the expected dividend waivers in relation to shares held by the
employee share trusts, which are held to meet obligations arising
on the various share option awards.
In H1 2020, the Group's capital surplus increased by GBP0.41m
after expected dividends. The impact of the cancellation of the
2019 final dividend and share buyback was GBP0.32bn. Capital
surplus was also strengthened further by the issue of GBP0.26bn of
Tier 2 debt in June. The Group generated GBP0.27 billion of
Solvency II capital, offset by HY 2020 dividends of GBP0.30 billion
and GBP0.07 billion of capital expenditure. The increase in capital
expenditure reflects the significant investment the Group is making
in building future capability through technology transformation. In
2020, the level of expenditure is expected to be approximately
GBP150 million. Thereafter, annual expenditure levels are expected
to reduce to around GBP100 million from 2021.
Change in solvency capital requirement
2020
GBPbn
------------------------------------------ ------
Solvency capital requirement at 1 January 1.32
Model and parameter changes 0.04
Exposure changes 0.03
Solvency capital requirement at 30 June 1.39
-------------------------------------------- ------
The Group's SCR has increased by GBP0.07 billion in the year.
Model and parameter changes increased the SCR by GBP0.04 billion,
reflecting increased credit spread and default volatility as a
result of Covid-19; and increased motor premium volatility.
Exposure changes, due to reduced investment return and increased
investment risk; and a lower expected deferred tax asset, led to an
increase in the SCR of GBP0.03 billion.
Scenario and sensitivity analysis
The following table shows the impact on the Group's estimated
solvency capital ratio in the event of the following scenarios as
at 30 June 2020. The impact on the Group's solvency capital ratio
arises from movements in both the Group's SCR and own funds.
Impact on solvency
capital ratio
--------------------
30 Jun 31 Dec
Scenario 2020 2019
----------------------------------------------------- ---------- --------
Deterioration of 2018/19 small bodily injury motor (7pts) (7pts)
claims equivalent to that experienced in 2008/09
One-off catastrophe loss equivalent to the 1990 storm (8pts) (9pts)
"Daria"
One-off catastrophe loss based on extensive flooding (8pts) (9pts)
of the River Thames
Change in Solvency II reserving basis for PPOs to (10pts) (8pts)
use a real discount rate of minus 1%(1)
100bps increase in credit spreads(2) (9pts) (9pts)
100bps decrease in interest rates with no change in (2pts) 1pt
the PPO real discount rate
===================================================== ========== ========
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 EIOPA discount rate curve.
2. Only includes the impact on AFS assets (excludes illiquid
assets such as infrastructure debt) and assumes no change to the
SCR.
Own funds
The following table splits the Group's own funds by tier on a
Solvency II basis.
30 Jun 31 Dec
2020 2019
At GBPbn GBPbn
--------------------------------------------------------------- ------- ------
Tier 1 capital before foreseeable capital distributions 1.92 1.80
Foreseeable capital distributions (0.30) (0.35)
--------------------------------------------------------------- ------- ------
Tier 1 capital - unrestricted 1.62 1.45
Tier 1 capital - restricted 0.38 0.37
--------------------------------------------------------------- ------- ------
Tier 1 capital 2.00 1.82
Tier 2 capital - subordinated debt 0.54 0.26
Tier 3 capital - deferred tax 0.11 0.09
--------------------------------------------------------------- ------- ------
Total own funds 2.65 2.17
=============================================================== ======= ======
During H1 2020, the Group's own funds increased from GBP2.17 billion
to GBP2.65 billion. Tier 1 capital after foreseeable capital distributions
represents 75% of own funds and 144% of the estimated SCR. Tier
2 capital relates solely to the Group's GBP0.54 billion subordinated
Tier 2 notes. The amount of Tier 2 and Tier 3 capital permitted
under the Solvency II regulations is 50% of the Group's SCR and
of Tier 3 alone is less than 15%. Therefore, the Group currently
has no ineligible capital. The maximum amount of Restricted Tier
1 capital permitted as a proportion of total Tier 1 capital under
the Solvency II regulations is 20%. Restricted Tier 1 capital relates
solely to the Tier 1 notes issued in 2017.
Reconciliation of IFRS shareholders' equity to Solvency II own
funds
30 Jun 31 Dec
2020 2019
At GBPbn GBPbn
-------------------------------------------- ------ ------
Total shareholders' equity 2.76 2.64
Goodwill and intangible assets (0.74) (0.70)
Change in valuation of technical provisions 0.05 (0.06)
Other asset and liability adjustments (0.15) (0.08)
Foreseeable capital distributions (0.30) (0.35)
-------------------------------------------- ------ ------
Tier 1 capital - unrestricted 1.62 1.45
Tier 1 capital - restricted 0.38 0.37
-------------------------------------------- ------ ------
Tier 1 capital 2.00 1.82
Tier 2 capital - subordinated debt 0.54 0.26
Tier 3 capital - deferred tax 0.11 0.09
============================================ ====== ======
Total own funds 2.65 2.17
============================================ ====== ======
Leverage
The Group's financial leverage increased by 5.3 percentage
points and continued to remain conservative at 23.9% (2019: 18.6%).
The increase was primarily due to an increase in subordinated debt
following the issuance of GBP260 million of Tier 2 notes in June
2020.
30 Jun 31 Dec
2020 2019
At GBPm GBPm
----------------------------------- ------- -------
Shareholders' equity 2,756.5 2,643.6
Tier 1 notes 346.5 346.5
Financial debt - subordinated debt 517.9 259.0
----------------------------------- ------- -------
Total capital employed 3,620.9 3,249.1
=================================== ======= =======
Financial-leverage ratio(1) 23.9% 18.6%
=================================== ======= =======
Note:
1. Total IFRS financial debt and Tier 1 notes as a percentage of
total IFRS capital employed.
Credit ratings
Moody's Investors Service provide insurance financial-strength
ratings for U K Insurance Limited, the Group's principal
underwriter. Moody's rate U K Insurance Limited as 'A1' for
insurance financial strength (strong) with a stable outlook
(reiterated on 14 July 2020).
Reserving
The Group makes provision for the full cost of outstanding
claims from its general insurance business at the balance sheet
date, including claims estimated to have been incurred but not yet
reported at that date and claims handling costs. The Group
considers the class of business, the length of time to notify a
claim, the validity of the claim against a policy, and the claim
value. Claims reserves could settle across a range of outcomes, and
settlement certainty increases over time. However, for bodily
injury claims the uncertainty is greater due to the length of time
taken to settle these claims. The possibility of annuity payments
for injured parties also increases this uncertainty.
The Group seeks to adopt a conservative approach to assessing
liabilities, as evidenced by the favourable development of
historical claims reserves. Reserves are based on management's best
estimate, which includes a prudence margin that exceeds the
internal actuarial best estimate. This margin is set by reference
to various actuarial scenario assessments and reserve distribution
percentiles. It also considers other short and long-term risks not
reflected in the actuarial inputs, as well as management's view on
the uncertainties in relation to the actuarial best estimate.
The most common method of settling bodily injury claims is by a
lump sum. When this includes an element of indemnity for recurring
costs, such as loss of earnings or ongoing medical care, the
settlement calculations apply the statutory discount rate (known as
the Ogden discount rate) to reflect the fact that payment is made
on a one-off basis rather than periodically over time. The discount
rate increased from minus 0.75% to minus 0.25% for England and
Wales in July 2019 but has remained at minus 0.75% in Scotland and
at 2.5% in Northern Ireland.
The Group reserves its large bodily injury claims at the
relevant discount rate for each jurisdiction, with the overwhelming
majority now reserved at minus 0.25% as most will be settled under
the law in England and Wales. There has been an ongoing reduction
in large bodily injury exposures as a result of continued positive
prior-year development of claims reserves, and a higher proportion
of reserves being covered by reinsurance as a result of the
decision to opt for a lower reinsurance attachment point from 2014
onwards.
If the claimant prefers, large bodily injury claims can be
settled using a periodical payment order ("PPO"). This is an
alternative way to provide an indemnity for recurring costs, making
regular payments, usually for the rest of the claimant's life.
These claims are reserved for using an internal discount rate,
which is progressively unwound over time. As it is likely to take
time to establish whether a claimant will prefer a PPO or a lump
sum, until a settlement method is agreed, the Group makes
assumptions about the likelihood that claimants will opt for a
PPO.
The Group's prior-year reserve releases were GBP123.2 million
(H1 2019: GBP171.6 million) with good experience in large bodily
injury claims being a key contributor. On current year, the
Covid-19 pandemic adversely affected the Group's reserves on Travel
and Commercial business interruption whilst also leading to reduced
claims frequency on Motor with a corresponding reduction in claims
provisions.
Looking forward, the Group expects to continue setting its
initial management best estimate conservatively. Assuming current
claims trends continue, prior-year reserve releases are expected to
continue to reduce further in future years, although they are
expected to remain a significant contribution to profits.
Claims reserves net of reinsurance
30 Jun 31 Dec
2020 2019
At GBPm GBPm
-------------------------------- ------- -------
Motor 1,682.6 1,799.1
Home 288.6 266.3
Rescue and other personal lines 138.9 88.5
Commercial 519.7 516.1
-------------------------------- ------- -------
Total 2,629.8 2,670.0
-------------------------------- ------- -------
Sensitivity analysis - the discount rate used in relation to
PPOs and changes in the assumed Ogden discount rate
The table below provides a sensitivity analysis of the potential
net impact of a change in a single factor (the internal discount
rate used for PPOs and separately the Ogden discount rate) with all
other assumptions left unchanged. Other potential risks beyond the
ones described could have additional financial impacts on the
Group.
Increase / (decrease)
in profit before
tax(1,2)
=======================
30 Jun 31 Dec
2020 2019
At GBPm GBPm
======================================================== =========== ==========
PPOs (3)
Impact of an increase in the discount rate used in
the calculation of present values of 100 basis points 48.7 48.5
Impact of a decrease in the discount rate used in
the calculation of present values of 100 basis points (66.8) (66.5)
-------------------------------------------------------- ----------- ----------
Ogden discount rate (4)
Impact of the Group reserving at a discount rate of
0.75% compared to minus 0.25% (2019: 0.75% compared
to minus 0.25%) 43.8 53.3
Impact of the Group reserving at a discount rate of
minus 1.25% compared to minus 0.25% (2019: minus 1.25%
compared to minus 0.25%) (62.6) (75.0)
-------------------------------------------------------- ----------- ----------
Notes:
1. These sensitivities are net of reinsurance and exclude the
impact of taxation.
2. These sensitivities reflect one-off impacts at at the balance
sheet date and should not be interpreted as predictions.
3. The sensitivities relating to an increase or decrease in the
internal 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 internal discount rate with all other factors
remaining unchanged.
4. Ogden discount rate sensitivity has been calculated as the
direct impact of a permanent change in the discount rate in England
and Wales 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 was 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 PPO sensitivity above is calculated on the basis of a change
in the internal discount rate used for the actuarial best estimate
("ABE") reserves as at 30 June 2020. It does not take into account
any second order impacts such as changes in PPO propensity or
reinsurance bad debt assumptions.
Principal risks and uncertainties
We carefully assess the principal risks facing us. Principal
risks are defined as having a residual risk impact of GBP40 million
or more on a 1-in-200 years basis, taking into account customer,
financial and reputational impacts. Save as referred to in the
non-exhaustive section below relating to the Covid-19 pandemic
(immediately following the table of 'Principal risks'), the Group
considers that the Risk profile remains broadly unchanged over the
last six months and since the profile disclosed in the Annual
Report and Accounts 2019 risk management section pages 54 to
55.
Principal risks
==========================================================================
Insurance risk
The risk of loss due to fluctuations in the timings, amount, frequency
and severity of an insured event relative to the expectations at
the time of underwriting. Insurance risk includes reserve, underwriting,
distribution, pricing and reinsurance risks.
==========================================================================
Market risk
The risk of loss resulting from fluctuations in the level and in
the volatility of market prices of assets, liabilities and financial
instruments. Key drivers of market risk are the sensitivity of
the values of our assets to changes in credit spreads, and our
exposure to losses as a result of changes in interest rate term
structure or volatility.
==========================================================================
Operational risk
The risk of loss due to inadequate or failed internal processes
or systems, human error or from external events. The principal
risks within this category are information security, operational
resilience, partnership contractual obligations, change, outsourcing
and technology & infrastructure risks.
==========================================================================
Regulatory and conduct risk
The risks arising out of breaches of and/or changes to regulation,
law, regulatory policy or legal or regulatory interpretation, or
to supervisory expectations or approach, that have an adverse operational
and financial impact as a result of reputational damage, regulatory
or legal censure, fines or prosecutions, and any other type of
non-budgeted operational risk or other losses, associated with
our conduct and activities.
==========================================================================
Credit risk
The risk resulting from a default in cash inflows and/or changes
in market value of issuers of securities, counterparties and any
debtors to which the Group is exposed.
==========================================================================
Strategic risk
The risk of direct or indirect adverse effects resulting from strategies
not being optimally chosen, implemented or adapted to changing
conditions.
==========================================================================
The Covid-19 pandemic has and will have far reaching impacts,
including the responses of governments, regulators, customers and
markets to the pandemic
The outbreak of Covid-19 spread rapidly globally and disrupted
various markets, resulting in uncertainty about the development of
the economies affected by the outbreak. The Group responded quickly
to the initial period of unprecedented upheaval and uncertainty due
to the Covid-19 virus, with staff operating effectively from home.
The Group is entering the next phase as UK lockdown restrictions
are altered.
The Group is affected by the Covid-19 outbreak through its
direct and indirect impact on customers, counterparties, employees
and other stakeholders of the Group, as a result of, among others,
public health measures, such as business closings and restrictions
on travel and gatherings. The exact consequences of the Covid-19
outbreak are highly uncertain and it is not possible to predict
with any certainty the spread or duration of the pandemic or its
full effect on global and local economies. There can be no
assurances that the adverse impact of the outbreak will not lead to
a tightening of liquidity conditions or funding uncertainty.
Covid-19 could, depending on the nature, length and severity of
the disease, adversely impact the Group, including for example by
way of increased claims and decreased financial performance of the
Group's travel insurance business and other types of cover such as
business interruption and employers' liability and public
liability; it could impact the Group's investments and capital if
investments decrease in value; it could adversely impact the
Group's counter-parties, and their ability to fulfil their
obligations to the Group, the Group's staff/employees/contractors
and consultants, and their ability to assist the Group and
therefore lead to the delay to or hindrance of IT and change
programmes, and the Group's supply chain, and cause the fulfilment
of claims to be delayed and/or be more costly if goods required to
fulfil claims (e.g. household or motor goods/parts) cannot be
obtained as readily as usual. The Group is also subject to the
consequences of operational responses due to these types of events,
including the large majority of its people working from home and
changes in working practices or operating on a reduced service.
Customer needs, preferences and/or behaviours may also evolve as a
result of Covid-19, which could affect the nature of the Group's
customer risk exposures.
The FCA may take other actions that it considers appropriate for
the furtherance of its strategic objectives. On 1 May 2020 the FCA
announced that, in the light of business interruption caused by
Covid-19 and its awareness of legal uncertainty as regards whether
commercial policyholders are covered by certain business
interruption insurance policies, the FCA would seek an
authoritative declaratory judgment from the English courts
regarding the meaning and effect of some business interruption
insurance policy wordings. The FCA has selected a sample of policy
wordings written by eight defendant insurers that provide examples
of certain business interruption issues the FCA wants reviewed by
the courts in a test case, which has been heard by the court in
July 2020. The Group has not been named as a defendant in this
court process and at this stage interpretation of the Group's
standard business interruption policy wordings in the context of
the Covid-19 pandemic is not expected to be affected by the test
case. How the Group deals with claims under policies written on the
very small proportion of relevant policies written on non-standard
wordings is also not expected to be affected by the test case.
As a result of the Covid-19 pandemic, and/or if further diseases
emerge that give rise to similar macroeconomic effects,
macroeconomic conditions may be adversely affected potentially
resulting in an economic downturn in the countries in which the
Group operates and the global economy more widely, which could
materially adversely impact the business, results of operations,
and financial condition of the Group.
Potential effects of Brexit
The UK left the EU ('Brexit') on 31 January 2020. At the date of
this report there remains some uncertainty as to when the
transition period will end; it is due to end on 31 December 2020,
although it could yet be extended, albeit requiring a change to the
law. There also remains uncertainty as to what, if any, trading
agreement may or may not be agreed between the UK and EU to take
effect subsequent to the transition period. There is also
uncertainty as to what trading agreements may or may not be agreed
with key non-EU countries to supersede such arrangements previously
subject to EU trade agreements. Accordingly, there remains
uncertainty as to the effect of Brexit on the Group.
If there is a smooth end to the transition period with an agreed
future trading agreement between the UK and the EU (and other key
countries), and accordingly without significant disruption to the
UK economy and to business generally, then any adverse impact on
the Group (if any) would also not be expected to be significant.
If, however, trade discussions (or the failure of them) were to
lead to significant disruption then the impact on the Group could
correspondingly also be disruptive and potentially material.
Internal review
Following the EU referendum result in 2016, the Group
established a Brexit Working Group comprising representatives from
across the Group. It was identified that there was a risk that the
UK could enter a prolonged period of reduced growth due to Brexit,
potentially reducing insurance sales and the value of our
investment portfolio. Whilst our operations are based mainly in the
UK, Brexit-related issues which could impact adversely on the Group
could include: changes to the value of sterling which impact claims
and non-claims supplier costs; inflation; impacts on credit spreads
which in turn could impact on the Group's investments and capital;
recession; recruitment and retention of people; impacts on the
speed of delivery and cost of goods and services required by the
business including for fulfilling insurance claims made by
customers, for example because of delays at borders caused by
increased border regulations and by additional costs caused by
increased tariffs and devaluation of sterling; availability of
reinsurers authorised to write business in the UK; data
transfers; the removal of the European Health Insurance Card
("EHIC") leading to greater reliance on travel insurance; travel
disruption; increased use of Green Cards (internationally
recognised certificates that act as proof of insurance, including
in the EU); potential changes to direct and indirect tax; and the
regulatory impact on our capital position.
Possible implications
The Group has proactively considered a variety of possible
implications of a disruptive end to existing trading and other
arrangements between the UK and the EU, including of a financial
and operational nature; for example:
The Group's investment portfolio
The impact on the Group's investment portfolio and in particular
credit spreads related to its debt securities and therefore Group
solvency: A sensitivity analysis relating to credit spreads is
provided in these interim results. The Group has also considered
Brexit impacts in its Investment Committee, and further information
is provided on the work of the Investment Committee in the Group's
Annual Report & Accounts. A disruptive end to previous
arrangements between the UK and EU could impact adversely on the
Group's investments and therefore capital and the solvency capital
coverage ratio and the appropriateness of paying dividends.
Procurement and supply chain
In particular as part of the Group's ability to deal with claims
made under insurance policies, the Group needs to acquire a wide
range of goods and services. A significant amount and spread of
goods, for example such as car parts, are sourced from within the
EU. The Group has been in discussion with principal suppliers who
took steps to increase stocks within the UK in the event of a
potential 'hard' Brexit leading to disruption at borders. However,
in the event of a lack of appropriate trading arrangements with the
EU (and other countries) following the transition period and for
example in the event of the imposition of tariffs and quotas and
border controls, the Group's ability to deal with claims in its
normal ordinary course of business manner could be adversely
impacted and there could be delays and extra costs.
The Republic of Ireland
The Group has a small amount of business in the Republic of
Ireland, servicing a small Irish part of a UK partner's wider
business. The Group had obtained approval in principle from the
Central Bank of Ireland for the establishment of a formal third
country branch in the Republic of Ireland, in order to be able to
continue with this business post a 'hard' no-deal Brexit, should
that have become necessary. It remains to be seen whether similar
arrangements will be needed at the end of the transition
period.
Crisis management
The Group has also been focusing on Brexit from a potential
crisis management perspective, with the objective of maintaining
operational resilience in the event of a disruptive Brexit and with
a view to being able to react better to events as they unfold,
including during and following the transition period.
Emerging risks
The Group's definition of emerging risks is new or developing
risks which are often difficult to quantify; they are also usually
highly uncertain and external to the Group. Emerging risks are
identified by management and the latest information is maintained
within an Emerging Risk Register. Each emerging risk is owned by a
business subject matter expert and members of the second line of
defence provide challenge and oversight of activity taking place.
The Group reports emerging risks to the Board Risk Committee for
review and challenge. The Group's emerging risks processes aim
to:
- identify emerging risks on a timely basis;
- manage emerging risks proactively;
- mitigate the impact of emerging risks which could affect the
delivery of the strategic plan; and
- reduce the uncertainty and volatility of our business's
results.
The Group considers its main emerging risks to be:
Climate change
The Group recognises that climate change potentially poses
material long-term financial risks to the business, and is
receiving increased scrutiny from regulators and investors. Climate
change risks can be divided into three categories: physical,
transition, and liability risks, all of which can manifest
themselves through a range of existing risks within the material
risk register, including insurance, market, operational, strategic
and reputational risks.
- Physical risks are the direct risks which arise from
weather-related events, including the potential to affect both the
frequency and severity of natural catastrophe and other
weather-related events in the UK. These are not only financial
risks but also risks arising from the operational impacts of
weather events; for example, having to vacate an office due to
flooding, as happened to the Group in 2015.
- Transitional risks arise because efforts to mitigate against
climate change are driving a transition towards a lower-carbon
economy, which creates risks and opportunities. For example:
- whilst insuring electric vehicles does not fundamentally
change the business model, electric vehicles have their own unique
risk profile, and pose different challenges to motor underwriters,
accident repair centres, and to rescue products;
- increased operating costs due to potential increase in carbon
costs and regulatory burden is also likely to impact all
participants in the industry. The Group monitors its own impact on
the climate and has an established environmental management
programme; and
- the Group's business depends on the strength of its brands and
its reputation with customers and distributors and, as consumers
become more aware and educated of climate change and environmental
issues, research shows that they are putting their faith in brands
that take their corporate responsibility seriously.
- Liability risks arise when parties, who have suffered losses
from climate change, seek to recover from those they believe may
have been responsible. There is some potential exposure to
liability risk through commercial liability insurance. There are
two types of coverage that may have an elevated exposure to climate
liability risk: pollution covers on agricultural insurance, and
professional indemnity covers. Both of these are heavily
reinsured.
In addition to the above risks, the impacts of potential
physical, transition and liability risks arising in the wider
economy can also have an indirect impact on the investment
portfolio through their influence on the value of assets. The
Group's largest asset portfolios are focused on corporate bonds.
During 2018, the Group approved a significant new investment
initiative which incorporates a greater focus on indices weighted
by environmental, social and governance factors, which tilt the
composition of the portfolio towards higher holdings and weightings
of issuers with strong environmental, social and governance
scores.
The risks and impacts of climate change are wide ranging. The
Group is focusing increasingly on climate change, with related risk
management activity including the monitoring of climate change
through the Emerging Risk process, the formation of a Climate
Change working group, and commencing the implementation of the
recommendations of the Financial Stability Board's Taskforce on
Climate-related Financial Disclosures which the Group aims to
implement by the end of 2020.
Technological developments change consumer needs for
insurance
In the near term, the Group expects data to emerge as a key area
of innovation, as insurers learn to access and use new sources of
customer data to improve their understanding of risk and improve
customer journeys; the Group also expects a greater focus on
transparency and fairness; new car technology including automated
driving and electric vehicles will also continue to develop as a
new area for the Group to understand and compete in; and finally,
the Group expects price comparison websites to use digital
technology and data to continue to build their role with customers.
These changes could significantly affect the size and nature of the
insurance market and the role of insurers.
The Group believes leveraging the capabilities it is developing
through new platforms and building on these to extend its in-house
pricing and underwriting and data integration capabilities will
support it in responding to these changes. The Group has also
started working groups to look at how to capitalise on these
changes through what it believes may be its inherent customer
journey and claims data advantages across all channels. The Group
is also continuing to focus on its objective of delivering a
sustainable cost base that supports a competitive position, in
particular through price comparison websites, brokers and
partnerships and looking at new ways of working with the aim of
providing greater flexibility to compete effectively across a wide
range of products and channels.
Potential UK recession
Prior to the Covid-19 pandemic striking in Q1 2020, the most
likely potential trigger of a UK recession would have been from a
disorderly exit of the UK from the EU.
In the light of the Covid-19 pandemic, in Q1 2020, according the
Office of National Statistics, UK GDP decreased by 2.2%, the
biggest fall since Q3 1979. The Bank of England has commented that
the UK is expected to see its sharpest recession on record and
estimated that if the lockdown was eased in June, the economy would
shrink 14% for 2020.
In addition, the UK could enter a prolonged period of reduced
growth if Brexit negotiations were to break down without any deal
being agreed with the EU, potentially reducing insurance sales and
the value of our investment portfolio. In a complete separation
from the EU and its legal rules, free movement of goods, capital,
services and labour could cease.
Whilst the Group's operations are based mainly in the UK,
management continues to monitor implications surrounding Brexit
negotiations, and their uncertain outcomes, including: the
consequences of higher than expected claims inflation; potential
increases in UK credit spreads; recruitment and retention of
people; potential changes to direct and indirect tax; and the
regulatory impact on the Group's capital position.
The Group is actively considering all aspects of Brexit and has
a working group to monitor developments to help the Group respond
accordingly. Furthermore, the investment portfolio is positioned
relatively defensively; however, if the UK recession were to worsen
significantly, further steps could be taken such as moving the
portfolio further towards defensive sectors or increasing further
the allocation to cash.
Changes to traditional insurance business models
Changes to traditional insurance business models was reported as
an emerging risk in the Group's 2019 Annual Report & Accounts.
This is still considered to be an emerging risk, however the risk
profile has not changed significantly since 31 December 2019.
CONDENSED Consolidated income statement
For the six months ended 30 June 2020
6 months 6 months Full year
2020 2019 2019
GBPm GBPm GBPm
Notes unaudited unaudited audited
============================================ ===== ========== ========== =========
Gross earned premium 5 1,585.3 1,590.3 3,202.6
Reinsurance premium 5 (110.9) (107.7) (217.7)
============================================ ===== ========== ========== =========
Net earned premium 5 1,474.4 1,482.6 2,984.9
Investment return 6 41.3 75.7 134.6
Instalment income 54.8 56.3 114.0
Other operating income 7 25.2 31.7 66.2
============================================ ===== ========== ========== =========
Total income 1,595.7 1,646.3 3,299.7
============================================ ===== ========== ========== =========
Insurance claims 8 (738.2) (845.5) (1,917.3)
Insurance claims (payable to) / recoverable
from reinsurers 8 (130.8) (72.9) 69.7
============================================ ===== ========== ========== =========
Net insurance claims 8 (869.0) (918.4) (1,847.6)
============================================ ===== ========== ========== =========
Commission expenses 9 (89.8) (90.6) (211.5)
Operating expenses (including restructuring
and one-off costs) 10 (387.0) (363.0) (704.9)
============================================ ===== ========== ========== =========
Total expenses (476.8) (453.6) (916.4)
Finance costs 11 (13.5) (13.0) (26.0)
Profit before tax 236.4 261.3 509.7
Tax charge 12 (43.8) (49.5) (89.8)
============================================ ===== ========== ========== =========
Profit for the year attributable to owners
of the Company 192.6 211.8 419.9
============================================ ===== ========== ========== =========
Earnings per share:
============================================ ===== ========== ========== =========
Basic (pence) 14 13.6 14.9 29.5
Diluted (pence) 14 13.4 14.7 29.2
============================================ ===== ========== ========== =========
CONDENSED Consolidated statement of comprehensive income
For the six months ended 30 June 2020
6 months 6 months Full year
2020 2019 2019
GBPm GBPm GBPm
unaudited unaudited audited
===================================================== ========== ========== =========
Profit for the period 192.6 211.8 419.9
====================================================== ========== ========== =========
Other comprehensive (loss) / income
Items that will not be reclassified subsequently
to the income statement:
Actuarial loss on defined benefit pension
scheme - - (7.3)
Tax relating to item that will not be reclassified 0.2 - 1.3
====================================================== ========== ========== =========
0.2 - (6.0)
===================================================== ========== ========== =========
Items that may be reclassified subsequently
to the income statement:
Cash flow hedges (0.3) - (0.7)
Fair value (loss) / gain on AFS investments (46.1) 90.4 118.1
Less: realised net losses / (gains) on
AFS investments included in the income
statement 3.6 (13.2) (16.5)
Tax relating to items that may be reclassified 6.9 (13.1) (17.3)
====================================================== ========== ========== =========
(35.9) 64.1 83.6
===================================================== ========== ========== =========
Other comprehensive (loss) / income for
the year net of tax (35.7) 64.1 77.6
====================================================== ========== ========== =========
Total comprehensive income for the year
attributable to owners of the Company 156.9 275.9 497.5
====================================================== ========== ========== =========
CONDENSED Consolidated balance sheet
As at 30 June 2020
30 Jun 31 Dec
2020 2019
GBPm GBPm
Notes unaudited audited
============================================== ===== ========== ========
Assets
Goodwill and other intangible assets 741.2 702.5
Property, plant and equipment 142.0 143.4
Right-of-use assets 142.6 149.2
Investment property 281.4 291.7
Reinsurance assets 16 1,048.2 1,251.3
Current tax assets 1.4 -
Deferred acquisition costs 175.6 176.2
Insurance and other receivables 869.0 846.5
Prepayments, accrued income and other assets 123.3 120.2
Derivative financial instruments 16.1 121.5
Retirement benefit asset 9.7 9.7
Financial investments 17 4,521.3 4,673.4
Cash and cash equivalents 18 1,500.0 948.6
Total assets 9,571.8 9,434.2
============================================== ===== ========== ========
Equity
Shareholders' equity 2,756.5 2,643.6
Tier 1 notes 19 346.5 346.5
============================================== ===== ========== ========
Total equity 3,103.0 2,990.1
============================================== ===== ========== ========
Liabilities
Subordinated liabilities 20 517.9 259.0
Insurance liabilities 21 3,589.9 3,819.6
Unearned premium reserve 1,501.5 1,506.0
Borrowings 18 65.1 52.3
Derivative financial instruments 77.3 30.5
Provisions 80.8 74.3
Trade and other payables, including insurance
payables 480.7 478.1
Lease liabilities 155.5 164.4
Deferred tax liabilities 0.1 9.6
Current tax liabilities - 50.3
Total liabilities 6,468.8 6,444.1
============================================== ===== ========== ========
Total equity and liabilities 9,571.8 9,434.2
============================================== ===== ========== ========
CONDENSED Consolidated statement of changes in equity
For the six months ended 30 June 2020
Tier
Available- Foreign 1
Employee for-sale exchange notes
Share trust Capital revaluation translation Retained Shareholders' (note Total
capital shares reserves reserve reserve earnings equity 19) equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================ ======== ======== ========= ============ ============ ========= ============= ====== =======
Balance at 1
January
2019 (audited) 150.0 (35.2) 1,450.0 (36.8) 0.8 1,029.4 2,558.2 346.5 2,904.7
Profit for the
year - - - - - 419.9 419.9 - 419.9
Other
comprehensive
loss - - - 84.3 (0.7) (6.0) 77.6 - 77.6
Dividends and
appropriations
paid (note 13) - - - - - (420.7) (420.7) - (420.7)
Shares acquired
by
employee trusts - (10.4) - - - - (10.4) - (10.4)
Credit to equity
for
equity-settled
share-based
payments - - - - - 18.4 18.4 - 18.4
Shares
distributed
by employee
trusts - 15.4 - - - (15.4) - - -
Tax on
share-based
payments - - - - - 0.6 0.6 - 0.6
Balance at 31
December
2019 (audited) 150.0 (30.2) 1,450.0 47.5 0.1 1,026.2 2,643.6 346.5 2,990.1
Profit for the
year - - - - - 192.6 192.6 - 192.6
Other
comprehensive
income - - - (35.6) (0.3) 0.2 (35.7) - (35.7)
Dividends and
appropriations
paid (note 13) - - - - - (8.3) (8.3) - (8.3)
Share redemption (1.1) - 1.1 - - - - - -
Shares cancelled
through buyback - - - - - (30.0) (30.0) - (30.0)
Shares acquired
by
employee trusts - (14.9) - - - - (14.9) - (14.9)
Credit to equity
for
equity-settled
share-based
payments - - - - - 9.0 9.0 - 9.0
Shares
distributed
by employee
trusts - 8.8 - - - (8.8) - - -
Tax on
share-based
payments - - - - - 0.2 0.2 - 0.2
Balance at 30
June
2020
(unaudited) 148.9 (36.3) 1,451.1 11.9 (0.2) 1,181.1 2,756.5 346.5 3,103.0
================ ======== ======== ========= ============ ============ ========= ============= ====== =======
Balance at 1 January
2019 (audited) 150.0 (35.2) 1,450.0 (36.8) 0.8 1,029.4 2,558.2 346.5 2,904.7
Profit for the year - - - - - 211.8 211.8 - 211.8
Other comprehensive
profit - - - 64.1 - - 64.1 - 64.1
Dividends and appropriations
paid (note 13) - - - - - (313.8) (313.8) - (313.8)
Shares acquired by
employee trusts - (0.5) - - - - (0.5) - (0.5)
Credit to equity
for equity-settled
share-based payments - - - - - 10.0 10.0 - 10.0
Shares distributed
by employee trusts - 11.6 - - - (11.6) - - -
Tax on share-based
payments - - - - - 0.5 0.5 - 0.5
Balance at 30 June
2019 (unaudited) 150.0 (24.1) 1,450.0 27.3 0.8 926.3 2,530.3 346.5 2,876.8
============================= ===== ====== ======= ====== === ======= ======= ===== =======
CONDENSED Consolidated cash flow statement
For the six months ended 30 June 2020
6 months 6 months Full year
2020 2019(1) 2019
GBPm GBPm GBPm
Notes unaudited unaudited audited
============================================== ===== ========== ========== =========
Net cash generated from operating activities
before investment of insurance assets 50.8 50.6 88.2
Cash generated from investment of insurance
assets 368.9 364.4 373.9
============================================== ===== ========== ========== =========
Net cash generated from operating activities 419.7 415.0 462.1
============================================== ===== ========== ========== =========
Cash flows used in investing activities
Purchases of goodwill and other intangible
assets (59.4) (83.7) (175.7)
Purchases of property, plant and equipment (6.2) (6.4) (11.9)
Net cash used in investing activities (65.6) (90.1) (187.6)
============================================== ===== ========== ========== =========
Cash flows used in financing activities
Dividends and appropriations paid 13 (8.3) (313.8) (420.7)
Finance costs (including lease interest) (13.0) (13.2) (26.4)
Principal element of lease payments (6.5) (6.6) (13.1)
Purchase of employee trust shares (14.9) (0.5) (10.4)
Proceeds on issue of subordinated Tier 2
notes 257.2 - -
Share buyback (30.0) - -
Net cash generated from / (used in) financing
activities 184.5 (334.1) (470.6)
============================================== ===== ========== ========== =========
Net increase / (decrease) in cash and cash
equivalents 538.6 (9.2) (196.1)
Cash and cash equivalents at the beginning
of the year 18 896.3 1,092.4 1,092.4
Cash and cash equivalents at the end of
the period 18 1,434.9 1,083.2 896.3
============================================== ===== ========== ========== =========
Note:
1. Presentational amendments included GBP0.2 million of
'Proceeds on disposal of property, plant and equipment' previously
presented separately, are now presented within 'Net cash generated
from operating activities before investment of insurance assets' on
the condensed consolidated cash flow statement.
Notes to the CONDENSED consolidated financial statements
Corporate information
Direct Line Insurance Group plc is a public limited company
registered in England and Wales (company number 02280426).
The address of the registered office is Churchill Court,
Westmoreland Road, Bromley BR1 1DP, England.
1. General information
The financial information for the year ended 31 December 2019
and included in the condensed consolidated financial statements
does not constitute statutory accounts as defined in S.434 of the
Companies Act 2006 but has been abridged from the statutory
accounts for that year which have been delivered to the Registrar
of Companies. The independent auditor's report on the Group
accounts for the year ended 31 December 2019 is unqualified, does
not draw attention to any matters by way of emphasis and does not
include a statement under S.498(2) or (3) of the Companies Act
2006.
2. Accounting polices
Basis of preparation
The annual financial statements of the Group are prepared in
accordance with International Financial Reporting Standards as
adopted by the European Union. The unaudited condensed consolidated
financial statements included in this half-yearly financial report
have been prepared in accordance with International Accounting
Standard 34 'Interim Financial Reporting' as adopted by the
European Union.
Going concern
The Group has sufficient financial resources to meet its
financial needs, including managing a mature portfolio of insurance
risk. The Directors believe the Group is well positioned to manage
its business risks successfully in the current economic climate.
The Finance review describes the Group's capital management
strategy, including the capital actions taken in the last six
months to ensure the continued strength of the balance sheet. The
Group's financial position is also covered in that section,
including a commentary on cash and investment levels, reserves,
currency management, insurance liability management, liquidity and
borrowings.
The Directors have assessed the principal risks of the Group
over the duration of the planning cycle and have considered
potential impacts of the Covid-19 pandemic using, in particular,
two stress scenarios that considered the impacts of variations in
the restrictions and regulations and economic recovery period on
the future profitability, liquidity and solvency of the Group. The
first scenario was based on the Bank of England's illustrative
scenario for economic outlook, published in May 2020, which assumes
a sharp contraction and a similarly fast recovery in the economy.
The second scenario was based on the effects of the pandemic being
more severe and having a longer economic impact before the economy
recovers to pre-pandemic levels. The key judgement applied to both
is the likely time period of the restrictions and the impact on
customer behaviour. The results of the stress impacts on the
Group's solvency did not result in a breach of risk appetite in any
year covered by the scenarios (2020 to 2022). Therefore, having
made due enquiries, the Directors reasonably expect that the Group
has adequate resources to continue in operational existence for at
least 12 months from 3 August 2020 (the date of approval of the
condensed consolidated financial statements). Accordingly, the
Directors have adopted the going concern basis in preparing the
condensed consolidated financial statements.
Accounting policies and developments
The Group's accounting policies, presentation and methods of
computation that are followed in the preparation of condensed
consolidated financial statements are the same as applied in the
Group's latest annual audited financial statements.
The Group has adopted a number of new amendments to
International Financial Reporting Standards and International
Accounting Standards that became effective for the Group for the
first time during 2020. However, these have had no impact on the
condensed consolidated financial statements.
The Group adopted IFRS 16 'Leases' for the first time in 2019 on
a fully retrospective basis.
In September 2019, the IASB issued 'Interest Rate Benchmark
Reform - Amendments to IFRS 9, IAS 39 and IFRS 7' which, although
not mandatory for the Group until 2020, was also adopted in
2019.
The Group has not early adopted any other standard,
interpretation or amendment that has been issued but is not yet
effective.
3. Critical accounting judgements and key sources of estimation
uncertainty
Full details of critical accounting judgements and key sources
of estimation uncertainty used in applying the Group's accounting
policies are outlined on pages 167 to 168 of the Annual Reports
& Accounts 2019. The judgements and assumptions involved in the
Group's accounting policies that are considered by the Board to be
the most important to the portrayal of its financial condition have
been reviewed by the Board in light of the potential impacts of the
Covid-19 pandemic and are discussed below.
3.1 Impairment provisions - financial assets
The Group's financial assets are classified as
available-for-sale ("AFS") or held-to-maturity ("HTM") debt
securities or loans and receivables. The Group makes a judgement
that financial assets are impaired when there is objective evidence
that an event or events since the initial recognition of the asset
have adversely affected the amount or timing of future cash flows
from the asset. The performance of the Group's financial assets is
closely monitored and, since the Covid-19 pandemic began to affect
financial markets, the financial markets have seen large amounts of
volatility. The Group's investment strategy limits exposure to
individual asset classes and the amount of illiquid investments
held.
The majority of the Group's financial assets are classified as
AFS (30 June 2020: GBP3,938.8 million; 31 December 2019: GBP4,085.6
million). Impairment losses and exchange differences arising from
translating the amortised cost of foreign currency monetary AFS
financial assets are recognised in the income statement. Other
changes in fair value are recognised in a separate component of
equity. No impairments have been recognised in the AFS portfolio in
respect of Covid-19, however should the decline in asset values in
the period from 1 January 2020 to 30 June 2020 have been recognised
in the income statement on the basis of the criteria explained on
page 167 of the 2019 Annual Report & Accounts, this would have
resulted in a loss of GBP38.2 million (year ended 31 December 2019:
loss GBP4 million).
The Group has a small portfolio of investments classified as HTM
(30 June 2020: GBP104.0 million; 31 December 2019: GBP104.0
million). These assets are measured at amortised cost and there
have been no impairment losses as a result of Covid-19.
The Group has a small portfolio of investments classified as
loans and receivables, comprising infrastructure debt and
commercial real estate loans (total 30 June 2020: GBP475.3 million;
31 December 2019: GBP483.8 million). In relation to the Group's
commercial real estate loan portfolio, some loan interest income
and loan amortisation payments have been deferred in H1 with
repayments for all loan interest agreed over the next 12 months and
for amortisation over the next 12 to 24 months. There have been no
impairment losses for either infrastructure or commercial real
estate loans as a result of Covid-19 included in the condensed
consolidated financial statements for the six months ending 30 June
2020, and the Group will continue to monitor developments
accordingly.
3.2 Impairment provisions - intangible assets
The Group applies judgement in assessing whether there are
indicators of impairment to intangible assets. Intangible assets
(excluding goodwill) were GBP527.0 million at 30 June 2020 (31
December 2019: GBP488.3 million). The economic benefits associated
with the intangible assets will continue to be assessed throughout
the development cycle of each programme and it has been concluded
that there were no indicators of impairments to the assets in
development. Therefore, no impairment losses have been reported in
the condensed consolidated financial statements for the six months
ending 30 June 2020 as a result of Covid-19.
3.3 General insurance: outstanding claims provisions and related
reinsurance recoverables
General insurance claims provisions are GBP3,589.9 million at 30
June 2020 (31 December 2019: GBP3,819.6 million) and reinsurance
recoverables are GBP960.1 million at 30 June 2020 (31 December
2019: GBP1,149.6 million).
At the beginning of the pandemic, as lockdown commenced, there
was considerable uncertainty relating to the claims reserves
required for Travel and Commercial business interruption and the
risks surrounding those estimates. At the half year, the position
is clearer, but still subject to material risk.
The Group has booked claims reserves for Travel of GBP25 million
net of reinsurance at 30 June 2020. The claims data continues to be
closely monitored, in line with ongoing developments in official
advice.
The impact from the pandemic on business interruption is
expected to be limited. Pandemic cover is not provided for under
the Group's standard wordings, which account for approximately
99.5% of these policies. For the remaining approximately 0.5%, not
written on the Group's standard wordings, the Group currently
estimates claims costs of approximately GBP10 million as at 30 June
2020.
For Motor business, the impact of the pandemic has been
favourable. Claims frequency has reduced as the number of journeys
fell significantly during lockdown. However, this was partially
offset by increased claims severity. As the economy reopens and
restrictions are eased, there is uncertainty about how quickly
these factors will revert to their longer-term trends.
There have been no other significant changes to the principles
or assumptions of these critical accounting judgements and key
sources of estimation uncertainty during the six months to 30 June
2020.
4. Segmental analysis
The table below analyses the Group's revenue and results by
reportable segment for the period ended 30 June 2020.
Rescue
and other
personal Total
Motor Home lines Commercial Group
GBPm GBPm GBPm GBPm GBPm
============================================ ======= ======= ========== ========== =======
Gross written premium 805.3 276.1 210.1 289.3 1,580.8
============================================ ======= ======= ========== ========== =======
Gross earned premium 813.7 290.6 214.8 266.2 1,585.3
Reinsurance premium (73.3) (12.8) (1.6) (23.2) (110.9)
============================================ ======= ======= ========== ========== =======
Net earned premium 740.4 277.8 213.2 243.0 1,474.4
Investment return 27.4 4.3 1.5 8.1 41.3
Instalment income 40.2 9.7 1.4 3.5 54.8
Other operating income 18.9 0.1 4.9 1.3 25.2
============================================ ======= ======= ========== ========== =======
Total income 826.9 291.9 221.0 255.9 1,595.7
============================================ ======= ======= ========== ========== =======
Insurance claims (255.8) (169.9) (198.2) (114.3) (738.2)
Insurance claims (payable to) / recoverable
from reinsurers (146.0) 7.7 18.9 (11.4) (130.8)
============================================ ======= ======= ========== ========== =======
Net insurance claims (401.8) (162.2) (179.3) (125.7) (869.0)
============================================ ======= ======= ========== ========== =======
Commission expenses (21.4) (19.0) (6.4) (43.0) (89.8)
Operating expenses (183.2) (75.4) (51.5) (61.9) (372.0)
============================================ ======= ======= ========== ========== =======
Total expenses (204.6) (94.4) (57.9) (104.9) (461.8)
============================================ ======= ======= ========== ========== =======
Operating profit / (loss) 220.5 35.3 (16.2) 25.3 264.9
============================================ ======= ======= ========== ========== =======
Restructuring and one-off costs (15.0)
=======
Operating profit after restructuring
and one-off costs 249.9
Finance costs (13.5)
=======
Profit before tax 236.4
=======
Underwriting profit / (loss) 134.0 21.2 (24.0) 12.4 143.6
============================================ ======= ======= ========== ========== =======
Loss ratio 54.3% 58.5% 84.1% 51.7% 59.0%
Commission ratio 2.9% 6.8% 3.0% 17.7% 6.1%
Expense ratio 24.7% 27.1% 24.2% 25.5% 25.2%
============================================ ======= ======= ========== ========== =======
Combined operating ratio 81.9% 92.4% 111.3% 94.9% 90.3%
============================================ ======= ======= ========== ========== =======
The table below analyses the Group's revenue and results by
reportable segment for the period ended 30 June 2019.
Rescue
and other
personal Total
Motor Home lines Commercial Group
GBPm GBPm GBPm GBPm GBPm
============================================ ======= ======= ========== ========== =======
Gross written premium 800.5 283.3 216.5 274.8 1,575.1
============================================ ======= ======= ========== ========== =======
Gross earned premium 822.5 300.3 210.5 257.0 1,590.3
Reinsurance premium (72.9) (12.3) (1.0) (21.5) (107.7)
============================================ ======= ======= ========== ========== =======
Net earned premium 749.6 288.0 209.5 235.5 1,482.6
Investment return 49.9 9.3 3.1 13.4 75.7
Instalment income 41.4 10.3 1.3 3.3 56.3
Other operating income 25.6 0.3 5.2 0.6 31.7
============================================ ======= ======= ========== ========== =======
Total income 866.5 307.9 219.1 252.8 1,646.3
============================================ ======= ======= ========== ========== =======
Insurance claims (452.8) (138.8) (141.5) (112.4) (845.5)
Insurance claims (payable to) / recoverable
from reinsurers (65.9) 0.1 (0.1) (7.0) (72.9)
============================================ ======= ======= ========== ========== =======
Net insurance claims (518.7) (138.7) (141.6) (119.4) (918.4)
============================================ ======= ======= ========== ========== =======
Commission expenses (19.0) (21.9) (8.5) (41.2) (90.6)
Operating expenses (175.0) (76.2) (51.5) (60.3) (363.0)
============================================ ======= ======= ========== ========== =======
Total expenses (194.0) (98.1) (60.0) (101.5) (453.6)
============================================ ======= ======= ========== ========== =======
Operating profit 153.8 71.1 17.5 31.9 274.3
============================================ ======= ======= ========== ========== =======
Finance costs (13.0)
============================================ ======= ======= ========== ========== =======
Profit before tax 261.3
============================================ ======= ======= ========== ========== =======
Underwriting profit 36.9 51.2 7.9 14.6 110.6
============================================ ======= ======= ========== ========== =======
Loss ratio 69.2% 48.1% 67.6% 50.7% 61.9%
Commission ratio 2.5% 7.6% 4.1% 17.5% 6.1%
Expense ratio 23.4% 26.5% 24.5% 25.6% 24.5%
============================================ ======= ======= ========== ========== =======
Combined operating ratio 95.1% 82.2% 96.2% 93.8% 92.5%
============================================ ======= ======= ========== ========== =======
The table below analyses the Group's revenue and results by
reportable segment for the year ended 31 December 2019
(audited).
Rescue
and other
personal Total
Motor Home lines Commercial Group
GBPm GBPm GBPm GBPm GBPm
============================================= ========= ======= ========== ========== =========
Gross written premium 1,651.6 586.6 436.0 528.9 3,203.1
============================================= ========= ======= ========== ========== =========
Gross earned premium 1,653.2 598.8 427.4 523.2 3,202.6
Reinsurance premium (145.5) (25.2) (2.2) (44.8) (217.7)
============================================= ========= ======= ========== ========== =========
Net earned premium 1,507.7 573.6 425.2 478.4 2,984.9
Investment return 88.6 16.7 5.6 23.7 134.6
Instalment income 83.8 20.5 2.8 6.9 114.0
Other operating income 51.3 0.6 11.1 3.2 66.2
============================================= ========= ======= ========== ========== =========
Total income 1,731.4 611.4 444.7 512.2 3,299.7
============================================= ========= ======= ========== ========== =========
Insurance claims (1,086.8) (276.2) (285.2) (269.1) (1,917.3)
Insurance claims recoverable from reinsurers 43.5 7.8 0.8 17.6 69.7
============================================= ========= ======= ========== ========== =========
Net insurance claims (1,043.3) (268.4) (284.4) (251.5) (1,847.6)
============================================= ========= ======= ========== ========== =========
Commission expenses (39.9) (55.7) (27.2) (88.7) (211.5)
Operating expenses (345.6) (136.7) (94.0) (117.4) (693.7)
============================================= ========= ======= ========== ========== =========
Total expenses (385.5) (192.4) (121.2) (206.1) (905.2)
============================================= ========= ======= ========== ========== =========
Operating profit 302.6 150.6 39.1 54.6 546.9
============================================= ========= ======= ========== ========== =========
Restructuring and one-off costs (11.2)
=========
Operating profit after restructuring
and one-off costs 535.7
Finance costs (26.0)
=========
Profit before tax 509.7
=========
Underwriting profit 78.9 112.8 19.6 20.8 232.1
============================================= ========= ======= ========== ========== =========
Loss ratio 69.3% 46.8% 66.9% 52.7% 61.9%
Commission ratio 2.6% 9.7% 6.4% 18.5% 7.1%
Expense ratio 22.9% 23.8% 22.1% 24.5% 23.2%
============================================= ========= ======= ========== ========== =========
Combined operating ratio 94.8% 80.3% 95.4% 95.7% 92.2%
============================================= ========= ======= ========== ========== =========
5. Net earned premium
6 months Full year
6 months 2019 2019
2020 GBPm GBPm
GBPm audited
=================================================== ======== ======== =========
Gross earned premium:
Gross written premium 1,580.8 1,575.1 3,203.1
Movement in unearned premium reserve 4.5 15.2 (0.5)
=================================================== ======== ======== =========
1,585.3 1,590.3 3,202.6
=================================================== ======== ======== =========
Reinsurance premium paid and payable:
Premium payable (97.2) (87.0) (215.9)
Movement in reinsurance unearned premium reserve (13.7) (20.7) (1.8)
=================================================== ======== ======== =========
(110.9) (107.7) (217.7)
=================================================== ======== ======== =========
Total 1,474.4 1,482.6 2,984.9
=================================================== ======== ======== =========
6. Investment return
6 months Full year
6 months 2019 2019
2020 GBPm GBPm
GBPm audited
==================================================== ======== ======== =========
Investment income:
Interest income from debt securities 49.6 55.5 108.4
Interest income from cash and cash equivalents 2.2 4.8 7.9
Interest income from infrastructure debt 3.2 3.6 7.0
Interest income from commercial real estate loans 3.3 3.3 6.9
Interest income 58.3 67.2 130.2
Rental income from investment property 6.5 8.2 16.2
64.8 75.4 146.4
---------------------------------------------------- -------- -------- ---------
Net realised (losses) / gains:
Available-for-sale debt securities (3.6) 13.2 16.5
Derivatives (6.3) 46.3 (9.5)
Investment property - - (0.7)
(9.9) 59.5 6.3
==================================================== ======== ======== =========
Net unrealised losses:
Derivatives (3.3) (58.4) (12.6)
Investment property (10.3) (0.8) (5.5)
==================================================== ======== ======== =========
(13.6) (59.2) (18.1)
==================================================== ======== ======== =========
Total 41.3 75.7 134.6
==================================================== ======== ======== =========
The table below analyses the realised and unrealised gains and
losses on derivative instruments included in investment return.
Realised Unrealised Realised Unrealised
-------- ---------- -------- ----------
6 months 6 months 6 months 6 months
2020 2020 2019 2019
GBPm GBPm GBPm GBPm
======== ==========
Derivative (losses) / gains:
Foreign exchange forward contracts(1) (17.2) (113.7) 15.7 (33.0)
Associated foreign exchange risk 21.5 100.7 32.7 (30.6)
========================================= ======== ========== ======== ==========
Net gains / (losses) on foreign exchange
forward contracts 4.3 (13.0) 48.4 (63.6)
========================================= ======== ========== ======== ==========
Interest rate swaps(1) (17.9) (39.4) (7.7) (41.9)
Associated interest rate risk on hedged
items 7.3 49.1 5.6 47.1
========================================= ======== ========== ======== ==========
Net (losses) / gains on interest rate
derivatives (10.6) 9.7 (2.1) 5.2
Total (6.3) (3.3) 46.3 (58.4)
========================================= ======== ========== ======== ==========
Note:
1. Foreign exchange forward contracts are measured at fair value
through profit and loss and interest rate swaps are designated as
hedging instruments.
Realised Unrealised
--------- ----------
Full year Full year
2019 2019
GBPm GBPm
audited audited
Derivative losses:
Foreign exchange forward contracts(1) (56.8) 103.4
Associated foreign exchange risk 53.4 (123.8)
================================================== ========= ==========
Net losses on foreign exchange forward contracts (3.4) (20.4)
================================================== ========= ==========
Interest rate swaps(1) (16.8) (33.6)
Associated interest rate risk on hedged items 10.7 41.4
================================================== ========= ==========
Net (losses) / gains on interest rate derivatives (6.1) 7.8
Total (9.5) (12.6)
================================================== ========= ==========
Note:
1. Foreign exchange forward contracts are measured at fair value
through profit and loss and interest rate swaps are designated as
hedging instruments.
7. Other operating income
6 months Full year
6 months 2019 2019
2020 GBPm GBPm
GBPm audited
===================================================== ======== ======== =========
Revenue from vehicle recovery and repair services(1) 11.2 14.4 28.3
Vehicle replacement referral income 6.3 9.0 19.1
Legal services income 4.7 5.3 11.3
Other income(1,2) 3.0 3.0 7.5
===================================================== ======== ======== =========
Total 25.2 31.7 66.2
===================================================== ======== ======== =========
Notes:
1. Revenue from vehicle recovery and repair services includes
salvage income previously reported in other income. Comparative
data for the period ended 30 June 2019 has been re-presented
accordingly.
2. Other income includes mainly fee income from insurance
intermediary services.
8. Net insurance claims
Gross Reinsurance Net Gross Reinsurance Net
======== =========== ======== ======== =========== ========
6 months 6 months 6 months 6 months 6 months 6 months
2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
================================== ======== =========== ======== ======== =========== ========
Current accident year claims
paid 409.5 - 409.5 479.9 - 479.9
Prior accident year claims
paid 558.4 (58.7) 499.7 586.9 (13.9) 573.0
Decrease in insurance liabilities (229.7) 189.5 (40.2) (221.3) 86.8 (134.5)
================================== ======== =========== ======== ======== =========== ========
Total 738.2 130.8 869.0 845.5 72.9 918.4
================================== ======== =========== ======== ======== =========== ========
Gross Reinsurance Net
========= =========== =========
Full year Full year Full year
2019 2019 2019
GBPm GBPm GBPm
audited audited audited
================================== ========= =========== =========
Current accident year claims
paid 1,232.9 (0.2) 1,232.7
Prior accident year claims
paid 870.7 (25.1) 845.6
Decrease in insurance liabilities (186.3) (44.4) (230.7)
===================================== ========= =========== =========
Total 1,917.3 (69.7) 1,847.6
===================================== ========= =========== =========
Claims handling expenses(1) for the period ended 30 June 2020 of
GBP93.5 million (30 June 2019: GBP100.1 million, 31 December 2019:
GBP202.9 million) have been included in the claims figures
above.
Note
1. Includes costs in respect of low value leases of GBP0.1
million (30 June 2019: GBP0.1 million, 31 December 2019: GBP0.3
million).
9. Commission expenses
6 months 6 months Full year
2020 2019 2019
GBPm GBPm GBPm
audited
============================================== ======== ======== =========
Commission expenses 87.6 82.3 171.2
Expenses incurred under profit participations 2.2 8.3 40.3
============================================== ======== ======== =========
Total 89.8 90.6 211.5
============================================== ======== ======== =========
10. Operating expenses
6 months Full year
6 months 2019 2019
2020 GBPm GBPm
GBPm audited
================================================== ======== ======== =========
Staff costs(1,2) 142.3 134.1 267.3
IT and other operating expenses(2,3,4) 105.2 81.5 163.4
Marketing 54.2 59.3 113.9
Insurance levies(4) 49.9 46.9 81.5
Depreciation and amortisation(5) 35.4 41.2 78.8
================================================== ======== ======== =========
Total operating expenses (including restructuring
and one-off costs) 387.0 363.0 704.9
================================================== ======== ======== =========
Of which restructuring and one-off costs 15.0 - 11.2
================================================== ======== ======== =========
Total excluding restructuring and one-off costs 372.0 363.0 693.7
================================================== ======== ======== =========
Notes:
1. Restructuring and one-off costs of GBP15.0 million (31
December 2019: GBP11.2 million) are included as follows: staff
costs of GBP10.0 million (31 December 2019: GBP5.8 million) and
other operating expenses of GBP5.0 million (31 December 2019:
GBP5.4 million).
2. Staff costs and other operating expenses attributable to
claims handling activities are allocated to the cost of insurance
claims.
3. IT and other operating expenses include professional fees and
property costs.
4. Insurance levies were previously reported in other operating
expenses. Comparative data for the period ended 30 June 2019 has
been re-presented accordingly.
5. Includes depreciation on right-of-use assets of GBP7.2
million (30 June 2019: GBP7.4 million, 31 December 2019: GBP14.2
million).
11. Finance costs
6 months Full year
6 months 2019 2019
2020 GBPm GBPm
GBPm audited
========================================================== ======== ======== =========
Interest expense on subordinated liabilities 12.2 11.5 23.1
Net interest received on designated hedging instrument(1) (1.8) (1.7) (3.4)
Unrealised (gains) / losses on designated hedging
instrument(1) (1.2) (1.4) 0.1
Unrealised losses / (gains) on associated interest
rate risk on hedged item(1) 0.9 1.0 (0.8)
Amortisation of arrangement costs and discount
on issue of subordinated liabilities 0.2 0.2 0.3
Interest expense on lease liabilities 3.2 3.4 6.7
========================================================== ======== ======== =========
Total 13.5 13.0 26.0
========================================================== ======== ======== =========
Note:
1. As described in note 20, on 27 April 2012 the Group issued
subordinated guaranteed dated notes with a nominal value of GBP500
million at a fixed rate of 9.25%. On the same date, the Group also
entered into a 10-year designated hedging instrument to exchange
the fixed rate of interest on the notes for a floating rate of
3-month LIBOR plus a spread of 706 basis points, which increased to
707 basis points with effect from 29 July 2013. On 8 December 2017,
the Group redeemed GBP250 million nominal value of the notes. On 5
June 2020, the Group issued subordinated Tier 2 notes at a fixed
rate of 4.0%. The notes have a redemption date of 5 June 2032 and
may be redeemed at the option of the Group commencing on 5 December
2031 until the maturity date.
12. Tax charge
6 months Full year
6 months 2019 2019
2020 GBPm GBPm
GBPm audited
================================================ ======== ======== =========
Current taxation:
Charge for the period 46.3 51.9 101.9
Over provision in respect of the prior period - (0.3) (1.1)
================================================ ======== ======== =========
46.3 51.6 100.8
================================================ ======== ======== =========
Deferred taxation:
Credit for the period (2.5) (1.9) (5.4)
Over provision in respect of the prior period - (0.2) (5.6)
================================================ ======== ======== =========
(2.5) (2.1) (11.0)
================================================ ======== ======== =========
Current taxation 46.3 51.6 100.8
Deferred taxation (2.5) (2.1) (11.0)
================================================ ======== ======== =========
Tax charge for the period 43.8 49.5 89.8
================================================ ======== ======== =========
13. Dividends and appropriations
6 months Full year
6 months 2019 2019
2020 GBPm GBPm
GBPm audited
=================================================== ======== ======== =========
Amounts recognised as distributions to equity
holders in the period:
2018 final dividend of 14.0 pence per share paid
on 16 May 2019 - 191.8 191.8
2019 first interim dividend of 7.2 pence per
share paid on 6 September 2019 - - 98.6
2018 special dividend of 8.3 pence per share
paid on 16 May 2019 - 113.7 113.7
- 305.5 404.1
Coupon payments in respect of Tier 1 notes(1) 8.3 8.3 16.6
8.3 313.8 420.7
=================================================== ======== ======== =========
Note:
1. Coupon payments on the Tier 1 notes issued in December 2017
are treated as an appropriation of retained profits and,
accordingly, are accounted for when paid.
Following the cancellation of the dividend as announced on 8
April 2020, no dividends were paid during the period ended 30 June
2020. For the period ended 30 June 2019, the trustees of the
employee share trusts waived their entitlement to dividends on
shares held to meet obligations arising on the Long-Term Incentive
Plan, Deferred Annual Incentive Plan and Restrictive Share Plan
awards, which reduced the total dividends paid by GBP1.1
million.
14. Earnings per share
Earnings per share is calculated by dividing earnings
attributable to the owners of the Company less coupon payments in
respect of Tier 1 notes by the weighted average number of Ordinary
Shares during the year.
Basic
Basic earnings per share is calculated by dividing the earnings
attributable to the owners of the Company less coupon payments in
respect of Tier 1 notes by the weighted average number of Ordinary
Shares during the period, excluding Ordinary Shares held as
employee trust shares.
6 months Full year
6 months 2019 2019
2020 GBPm GBPm
GBPm audited
====================================================== ======== ======== =========
Earnings attributable to owners of the Company 192.6 211.8 419.9
Coupon payments in respect of Tier 1 notes (8.3) (8.3) (16.6)
====================================================== ======== ======== =========
Profit for the calculation of earnings per share 184.3 203.5 403.3
====================================================== ======== ======== =========
Weighted average number of Ordinary Shares (millions) 1,355.6 1,366.5 1,367.2
====================================================== ======== ======== =========
Basic earnings per share (pence) 13.6 14.9 29.5
====================================================== ======== ======== =========
Diluted
Diluted earnings per share is calculated by dividing the
earnings attributable to the owners of the Company less coupon
payments in respect of Tier 1 notes by the weighted average number
of Ordinary Shares during the period adjusted for the dilutive
potential Ordinary Shares. The Company has share options and
contingently issuable shares as categories of dilutive potential
Ordinary Shares.
6 months Full year
6 months 2019 2019
2020 GBPm GBPm
GBPm audited
====================================================== ======== ======== =========
Earnings attributable to owners of the Company 192.6 211.8 419.9
Coupon payments in respect of Tier 1 notes (8.3) (8.3) (16.6)
Profit for the calculation of earnings per share 184.3 203.5 403.3
Weighted average number of Ordinary Shares (millions) 1,355.6 1,366.5 1,367.2
Effect of dilutive potential of share options
and contingently issuable shares (millions) 16.6 14.4 15.3
====================================================== ======== ======== =========
Weighted average number of Ordinary Shares for
the purpose of diluted earnings per share (millions) 1,372.2 1,380.9 1,382.5
====================================================== ======== ======== =========
Diluted earnings per share (pence) 13.4 14.7 29.2
====================================================== ======== ======== =========
15. Net assets per share and return on equity
Net asset value per share is calculated as total shareholders'
equity (which excludes Tier 1 notes) divided by the number of
Ordinary Shares at the end of the period excluding shares held by
employee share trusts.
Tangible net asset value per share is calculated as total
shareholders' equity less goodwill and other intangible assets
divided by the number of Ordinary Shares at the end of the period
excluding shares held by employee share trusts.
The table below analyses net asset and tangible net asset value
per share.
Full year
30 June 2019
2020 GBPm
GBPm audited
================================================ ======= =========
Net assets 2,756.5 2,643.6
Goodwill and other intangible assets(1) (741.2) (702.5)
Tangible net assets 2,015.3 1,941.1
================================================ ======= =========
Number of Ordinary Shares (millions) 1,364.6 1,375.0
Shares held by employee share trusts (millions) (11.3) (8.4)
================================================ ======= =========
Closing number of Ordinary Shares (millions) 1,353.3 1,366.6
================================================ ======= =========
Net asset value per share (pence) 203.7 193.4
Tangible net asset value per share (pence) 148.9 142.0
================================================ ======= =========
Note:
1. The increase in goodwill and other intangible assets for the
period ended 30 June 2020 is primarily comprised of additional
capitalised software development costs.
Return on equity
The table below details the calculation of return on equity.
6 months Full year
6 months 2019 2019
2020 GBPm GBPm
GBPm audited
================================================ ======== ======== =========
Earnings attributable to owners of the Company 192.6 211.8 419.9
Coupon payments in respect of Tier 1 notes (8.3) (8.3) (16.6)
================================================ ======== ======== =========
Profit for the calculation of return on equity 184.3 203.5 403.3
================================================ ======== ======== =========
Annualised profit for the calculation of return
on equity(1) 368.6 407.0 403.3
Opening shareholders' equity 2,643.6 2,558.2 2,558.2
Closing shareholders' equity 2,756.5 2,530.3 2,643.6
======== ======== =========
Average shareholders' equity 2,700.1 2,544.3 2,600.9
================================================ ======== ======== =========
Return on equity for period 6.8% 8.0% 15.5%
Return on equity annualised 13.7% 16.0% 15.5%
================================================ ======== ======== =========
Note:
1. Profit has been annualised using the profit for the period
ended 30 June 2020 (2019: period ended 30 June 2019).
16. Reinsurance assets
Full year
30 June 2019
2020 GBPm
GBPm audited
=================================================== ======= =========
Reinsurers' share of general insurance liabilities 1,002.1 1,190.1
Impairment provision(1) (42.0) (40.5)
==================================================== ======= =========
Total excluding reinsurers' unearned premium
reserves 960.1 1,149.6
Reinsurers' unearned premium reserve 88.1 101.7
==================================================== ======= =========
Total 1,048.2 1,251.3
==================================================== ======= =========
Note:
1. Impairment provision relates to reinsurance debtors, allowing
for the risk that reinsurance assets may not be collected, or where
the reinsurer's credit rating has been significantly downgraded and
may have difficulty in meeting its obligations.
17. Financial investments
Full year
30 June 2019
2020 GBPm
GBPm audited
========================================= ======= =========
Available-for-sale debt securities
Corporate 3,839.7 3,925.6
Supranational 21.4 31.3
Local government 35.8 29.2
Sovereign 41.9 99.5
Total 3,938.8 4,085.6
Held to maturity debt securities
Corporate 104.0 104.0
Total debt securities 4,042.8 4,189.6
========================================= ======= =========
Total debt securities
Fixed interest rate(1) 4,019.7 4,166.5
Floating interest rate 23.1 23.1
========================================= ======= =========
Total 4,042.8 4,189.6
Loans and receivables
Infrastructure debt 271.2 278.1
Commercial real estate loans 204.1 205.7
========================================= ======= =========
Total loans and receivables 475.3 483.8
========================================= ======= =========
Available-for-sale equity investments(2) 3.2 -
========================================= ======= =========
Total 4,521.3 4,673.4
========================================= ======= =========
Notes:
1. The Group swaps a fixed interest rate for a floating rate of
interest on its US Dollar and Euro corporate debt securities by
entering into interest rate derivatives. The hedged amount at 30
June 2020 was GBP985.4 million (31 December 2019: GBP955.8
million).
2. Available-for-sale equity investments consist of an equity
fund which is designated on initial recognition at fair value
through other comprehensive income.
18. Cash and cash equivalents and borrowings
Full year
30 June 2019
2020 GBPm
GBPm audited
================================================ ======= =========
Cash at bank and in hand 237.4 223.1
Short-term deposits with credit institutions(1) 1,262.6 725.5
================================================ ======= =========
Cash and cash equivalents 1,500.0 948.6
Bank overdrafts(2) (65.1) (52.3)
Cash and bank overdrafts(3) 1,434.9 896.3
================================================ ======= =========
Notes:
1. This represents money market funds.
2. Bank overdrafts represent short-term timing differences
between transactions posted in the records of the Group and
transactions flowing through the accounts at the bank.
3. Cash and bank overdrafts disclosure note is included for the
purposes of the condensed consolidated cash flow statement.
The effective interest rate on short-term deposits with credit
institutions for the period ended 30 June 2020 was 0.46% (31
December 2019: 0.79%) and average maturity was 10 days (31 December
2019: 10 days).
19. Tier 1 notes
Full year
30 June 2019
2020 GBPm
GBPm audited
============= ======= =========
Tier 1 notes 346.5 346.5
============= ======= =========
On 7 December 2017, the Group issued GBP350 million of fixed
rate perpetual Tier 1 notes with a coupon rate of 4.75% per
annum.
The Group has an optional redemption date of 7 December 2027. If
the notes are not repaid on that date, a fixed rate of interest per
annum will be reset. The notes are direct, unsecured and
subordinated obligations of the issuer ranking pari passu and
without any preference amongst themselves.
The Tier 1 notes are treated as a separate category within
equity and the coupon payments are recognised outside of the profit
after tax result and directly in shareholders' equity.
The Group has the option to cancel the coupon payment; this
becomes mandatory if the Solvency Condition(1) is not met at the
time of or following coupon payment, non-compliance with the SCR,
non-compliance with the minimum capital requirement, where the
Group has insufficient distributable reserves or where the relevant
regulator requires the coupon payment to be cancelled.
Note:
1. All payments shall be conditional upon the Group being
solvent at the time of payment and immediately after payment. The
Issuer will be solvent if (i) it is able to pay its debts owed to
senior creditors as they fall due and (ii) its assets exceed its
liabilities.
20. Subordinated liabilities
Full year
30 June 2019
2020 GBPm
GBPm audited
==================================== ======= =========
Subordinated guaranteed dated notes 517.9 259.0
==================================== ======= =========
GBP250 million 9.25% subordinated Tier 2 noted due 2042
Subordinated guaranteed dated notes with a nominal value of
GBP500 million were issued on 27 April 2012 at a fixed rate of
9.25%. On the same date, the Group also entered into a 10-year
designated hedging instrument to exchange the fixed rate of
interest for a floating rate of 3-month LIBOR plus a spread of 706
basis points which was credit value adjusted to 707 basis points
with effect from 29 July 2013.
On 8 December 2017, the Group repurchased GBP250 million nominal
value of the subordinated guaranteed dated notes for a purchase
price of GBP330.1 million including accrued interest of GBP2.7
million and associated transaction costs of GBP0.6 million.
The remaining notes, with a nominal value of GBP250 million,
have a redemption date of 27 April 2042 with the option to repay
the notes on 27 April 2022. If the notes are not repaid on that
date, the rate of interest will be reset at a rate of the 6-month
LIBOR plus 7.91%.
The Group has the option, in certain circumstances, to defer
interest payments on the notes but to date has not exercised this
right.
The notes are unsecured, subordinated obligations of the Group,
and rank pari passu without any preference among themselves. In the
event of a winding-up or of bankruptcy, they are to be repaid only
after the claims of all other senior creditors have been met.
GBP260 million 4.0% subordinated Tier 2 notes due 2032
On 5 June 2020, the Group issued subordinated Tier 2 notes at a
fixed rate of 4.0%. The notes have a redemption date of 5 June 2032
and may be redeemed at the option of the Group commencing on 5
December 2031 until the maturity date.
The Group has the option, in certain circumstances, to defer
interest payments on the notes. The Notes will constitute direct,
unsecured and subordinated obligations of the Issuer and will rank
pari passu and without any preference among themselves. In the
event of a winding-up or liquidation of the issuer, the notes will
be subordinated to the claims of all senior creditors and will rank
at least pari passu with the claims of holders of other Tier 2
capital.
21. Insurance liabilities
Movements in gross and net insurance liabilities
Gross Reinsurance Net
GBPm GBPm GBPm
========================================= ========= =========== =========
Claims reported 3,001.0 (809.8) 2,191.2
Incurred but not reported 924.9 (295.4) 629.5
Claims handling provision 80.0 - 80.0
At 1 January 2019 (audited) 4,005.9 (1,105.2) 2,900.7
Cash paid for claims settled in the year (2,103.6) 25.3 (2,078.3)
Increase / (decrease) in liabilities:
Arising from current-year claims 2,311.3 (169.2) 2,142.1
Arising from prior-year claims (394.0) 99.5 (294.5)
At 31 December 2019 (audited) 3,819.6 (1,149.6) 2,670.0
========================================= ========= =========== =========
Claims reported 2,916.0 (829.3) 2,086.7
Incurred but not reported 825.4 (320.3) 505.1
Claims handling provision 78.2 - 78.2
========================================= ========= =========== =========
At 31 December 2019 (audited) 3,819.6 (1,149.6) 2,670.0
Cash paid for claims settled in the year (967.9) 58.7 (909.2)
Increase / (decrease) in liabilities:
Arising from current-year claims 1,064.2 (72.0) 992.2
Arising from prior-year claims (326.0) 202.8 (123.2)
At 30 June 2020 3,589.9 (960.1) 2,629.8
========================================= ========= =========== =========
Claims reported 2,780.5 (800.6) 1,979.9
Incurred but not reported 731.2 (159.5) 571.7
Claims handling provision 78.2 - 78.2
========================================= ========= =========== =========
At 30 June 2020 3,589.9 (960.1) 2,629.8
========================================= ========= =========== =========
Movement in prior-year net insurance liabilities by operating
segment
6 months Full year
6 months 2019 2019
2020 GBPm GBPm
GBPm audited
================================ ======== ======== =========
Motor (83.4) (106.1) (180.5)
Home (2.5) (20.7) (41.4)
Rescue and other personal lines (4.0) (5.3) (7.6)
Commercial (33.3) (39.5) (65.0)
Total (123.2) (171.6) (294.5)
================================ ======== ======== =========
22. Fair Value
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date, regardless of whether
that price is directly observable or estimated using another
valuation technique.
For disclosure purposes, fair value measurements are classified
as level 1, 2 or 3 based on the degree to which fair value is
observable.
- Level 1 financial assets are measured in whole or in part by
reference to published quotes in an active market. In an active
market quoted prices are readily and regularly available from an
exchange, dealer, broker, industry group, pricing service or
regulatory agency and those prices represent actual and regularly
occurring market transactions on an arm's length basis.
- Level 2 financial assets and liabilities are measured using a
valuation technique based on assumptions that are supported by
prices from observable current market transactions. These are
assets for which pricing is obtained via pricing services, but
where prices have not been determined in an active market, or
financial assets with fair values based on broker quotes or assets
that are valued using the Group's own models whereby the majority
of assumptions are market-observable.
- Level 3 fair value measurements used for investment
properties, held-to-maturity debt securities, available-for-sale
equity investments, infrastructure debt and commercial real estate
loans are those derived from a valuation technique that includes
inputs for the asset that are unobservable.
These classifications remain unchanged from those outlined on
page 208 of the Annual Report & Accounts 2019.
Comparison of carrying value to fair value of financial
instruments and assets carried at fair value
The following table compares the carrying value and the fair
value of financial instruments and other assets where the Group
discloses a fair value.
Carrying Level Level Level
value 1 2 3 Fair value
At 30 June 2020 GBPm GBPm GBPm GBPm GBPm
====================================== ======== ===== ======= ===== ==========
Assets held at fair value:
Investment property 281.4 - - 281.4 281.4
Derivative assets 16.1 - 16.1 - 16.1
Available-for-sale debt securities
(note 17) 3,938.8 41.9 3,896.9 - 3,938.8
Available-for-sale equity investments
(note 17) 3.2 - - 3.2 3.2
Other financial assets:
Held-to-maturity debt securities
(note 17) 104.0 - 14.2 91.7 105.9
Infrastructure debt (note 17) 271.2 - - 268.5 268.5
Commercial real estate loans (note
17) 204.1 - - 194.9 194.9
====================================== ======== ===== ======= ===== ==========
Total assets held at fair value 4,818.8 41.9 3,927.2 839.7 4.808.8
====================================== ======== ===== ======= ===== ==========
Liabilities held at fair value:
Derivative liabilities 77.3 - 77.3 - 77.3
Other financial liabilities:
Subordinated liabilities (note
20) 517.9 - 556.7 - 556.7
====================================== ======== ===== ======= ===== ==========
Total liabilities held at fair
value 595.2 - 634.0 - 634.0
====================================== ======== ===== ======= ===== ==========
Carrying Level Level Level
value 1 2 3 Fair value
At 31 December 2019 (audited) GBPm GBPm GBPm GBPm GBPm
=================================== ======== ===== ======= ===== ==========
Assets held at fair value:
Investment property 291.7 - - 291.7 291.7
Derivative assets 121.5 - 121.5 - 121.5
Available-for-sale debt securities
(note 17) 4,085.6 99.5 3,986.1 - 4,085.6
Other financial assets:
Held-to-maturity debt securities
(note 17) 104.0 - 14.1 94.0 108.1
Infrastructure debt (note 17) 278.1 - - 285.6 285.6
Commercial real estate loans (note
17) 205.7 - - 203.0 203.0
Total assets held at fair value 5,086.6 99.5 4,121.7 874.3 5,095.5
=================================== ======== ===== ======= ===== ==========
Liabilities held at fair value:
Derivative liabilities 30.5 - 30.5 - 30.5
Other financial liabilities:
Subordinated liabilities (note
20) 259.0 - 297.8 - 297.8
=================================== ======== ===== ======= ===== ==========
Total liabilities held at fair
value 289.5 - 328.3 - 328.3
=================================== ======== ===== ======= ===== ==========
Differences arise between carrying value and fair value where
the measurement basis of the assets or liabilities is not fair
value (e.g. assets and liabilities carried at amortised cost). Fair
values of the following assets and liabilities approximate their
carrying values:
- insurance and other receivables;
- cash and cash equivalents;
- borrowings; and
- trade and other payables including insurance payables
(excluding provisions).
The movements in assets held at fair value and classified as
level 3 in the fair value hierarchy are within investment property
and equity investments. There were no changes in the categorisation
of assets between levels 1, 2 and 3 for assets and liabilities held
by the Group since 31 December 2019.
The table below shows the unobservable inputs used by the Group
in the fair value measurement of its investment property.
Fair value Valuation Unobservable Range
30 June 2020 GBPm technique input (weighted average)
Investment property 277.4(1) Income capitalisation Equivalent yield 3.50 % - 7.81%
(average 4.89%)
========== ===================== ================= ===================
Estimated rental GBP1.81 - GBP32.97
value per square (average GBP12.22)
foot
========== ===================== ================= ===================
Equity investment 3.2 An equity fund which is valued based
on external valuation reports received
from the fund manager
========== =============================================================
Note:
1. The methodology of valuation reflects commercial property
held within U K Insurance Limited.
The table below analyses the movement in assets classified as
level 3 in the fair value hierarchy.
Investment Equity
property investment
GBPm GBPm
================================================== ========== ===========
At 31 December 2019 (audited) 291.7 -
Additions - 3.0
(Decrease) / increase in fair value in the period (10.3) 0.2
At 30 June 2020 281.4 3.2
================================================== ========== ===========
23. Related party transactions
During the first half of 2020, there have been no related party
transactions that have materially affected the financial position
or results for the period. There have been no changes to the nature
of the related party transactions as disclosed in note 43 on page
209 of the Annual Report and Accounts for the year ended 31
December 2019.
Glossary
Term Definition and explanation
======================== ===============================================================
Actuarial best The probability-weighted average of all future claims
estimate ("ABE") and cost scenarios. It is calculated using historical
data, actuarial methods and judgement. A best estimate
of reserves will therefore normally include no margin
for optimism or, conversely, caution.
======================== ===============================================================
Assets under management This represents all assets managed or administered
("AUM") by or on behalf of the Group, including those assets
managed by third parties.
======================== ===============================================================
Available-for-sale Available-for-sale investments are non-derivative
("AFS") investment financial assets that are designated as such, or
are not classified as loans and receivables, held-to-maturity,
or financial assets at fair value through profit
or loss.
======================== ===============================================================
Average written The total written premium at inception divided by
premium the number of policies.
======================== ===============================================================
Capital The funds invested in the Group, including funds
invested by shareholders and in Tier 1 notes. In
addition, subordinated loan capital in the Group's
balance sheet is classified as Tier 2 capital for
Solvency II purposes.
======================== ===============================================================
Carbon emissions Scope 1 - covers direct emissions from owned or controlled
sources, including fuels used in office buildings,
accident repair centres and owned vehicles.
Scope 2 - covers indirect emissions from the generation
or purchased electricity, steam, heating and cooling
of office buildings and accident repair centres.
Scope 3 - includes all other indirect emissions that
occur in the Company's value chain such as waste
disposal, business travel and staff commuting.
======================== ===============================================================
Claims frequency The number of claims divided by the number of policies
per year.
======================== ===============================================================
Claims handling Funds the Group sets aside to meet the estimated
provision (provision cost of settling claims and related expenses that
for losses and the Group considers it will ultimately need to pay.
loss-adjustment
expense)
======================== ===============================================================
Combined operating The sum of the loss, commission and expense ratios.
ratio The ratio measures the amount of claims costs, commission
and operating expenses, compared to net earned premium
generated. A ratio of less than 100% indicates profitable
underwriting. Normalised combined operating ratio
adjusts loss and commission ratios for weather and
changes to the Ogden discount rate. (See alternative
performance measures.)
======================== ===============================================================
Commission expenses Payments to brokers, partners and PCWs for generating
business.
======================== ===============================================================
Commission ratio The ratio of commission expense divided by net earned
premium. (See alternative performance measures.)
======================== ===============================================================
Company Direct Line Insurance Group plc.
======================== ===============================================================
Current-year attritional The loss ratio for the current accident year, excluding
loss ratio the movement of claims reserves relating to previous
accident years and claims relating to major weather
events. (See alternative performance measures.)
======================== ===============================================================
Current-year combined This is calculated using the combined operating ratio
operating ratio less movement in prior-year reserves. (See alternative
performance measures.)
======================== ===============================================================
Current-year normalised This is calculated using the normalised operating
operating profit profit adjusted for prior-year reserve movements.
(See alternative performance measures.)
======================== ===============================================================
Direct own brands Direct own brands include Home and Motor under the
Direct Line, Churchill, Darwin and Privilege brands,
Rescue under the Green Flag brand and Commercial
under the Direct Line for Business and Churchill
brands.
======================== ===============================================================
Earnings per share The amount of the Group's profit after deduction
of the Tier 1 coupon payments allocated to each Ordinary
Share of the Company.
======================== ===============================================================
Expense ratio The ratio of operating expenses divided by net earned
premium. (See alternative performance measures.)
======================== ===============================================================
Finance costs The cost of servicing the Group's external borrowings
and includes the interest on right-of-use assets.
======================== ===============================================================
Financial Conduct The independent body responsible for regulating the
Authority ("FCA") UK's financial services industry.
======================== ===============================================================
Financial leverage Tier 1 notes and financial debt (subordinated guaranteed
ratio dated notes) as a percentage of total capital employed.
======================== ===============================================================
Gross written The total premiums from contracts that were accepted
premium during the period.
======================== ===============================================================
Group (or "Direct Direct Line Insurance Group plc and its subsidiaries.
Line Group")
======================== ===============================================================
Incremental borrowing The rate of interest that a lessee would have to
rate ("IBR") pay to borrow over a similar term and security, the
funds necessary to obtain an asset of a similar value
to the right-of-use asset in a similar economic environment.
======================== ===============================================================
Incurred but not Funds set aside to meet the cost of claims for accidents
reported ("IBNR") that have occurred, but have not yet been reported
to the Group. This includes an element of uplift
on the value of claims reported.
======================== ===============================================================
In-force policies The number of policies on a given date that are active
and against which the Group will pay, following a
valid insurance claim.
======================== ===============================================================
Insurance liabilities This comprises insurance claims reserves and the
claims handling provision, which the Group maintains
to meet current and future claims.
======================== ===============================================================
International A not-for-profit public interest organisation that
Accounting Standards is overseen by a monitoring board of public authorities.
Board ("IASB") It develops IFRS standards that aim to make worldwide
markets transparent, accountable and efficient.
======================== ===============================================================
Investment income The income earned from the investment portfolio,
yield recognised through the income statement during the
period divided by the average assets under management
("AUM"). This excludes unrealised and realised gains
and losses, impairments, and fair value adjustments.
The average AUM derives from the period's opening
and closing balances for the total Group. (See alternative
performance measures.)
======================== ===============================================================
Investment return The investment return earned from the investment
portfolio, including unrealised and realised gains
and losses, impairments and fair value adjustments.
======================== ===============================================================
Investment return The investment return divided by the average AUM.
yield The average AUM derives from the period's opening
and closing balances. (See alternative performance
measures.)
------------------------ ---------------------------------------------------------------
Loss ratio Net insurance claims divided by net earned premium.
(See alternative performance measures.)
======================== ===============================================================
Management's best These reserves are based on management's best estimate,
estimate which includes a prudence margin that exceeds the
internal ABE.
======================== ===============================================================
Net asset value The difference between the Group's total assets and
total liabilities, calculated by subtracting total
liabilities (including Tier 1 notes) from total assets.
======================== ===============================================================
Net earned premium The element of gross earned premium less reinsurance
premium ceded for the period where insurance cover
has already been provided.
======================== ===============================================================
Net insurance The cost of claims incurred in the period less any
claims claims costs recovered under reinsurance contracts.
It includes claims payments and movements in claims
reserves.
======================== ===============================================================
Net investment This is calculated in the same way as investment
income income yield but includes the cost of hedging. (See
yield alternative performance measures.)
======================== ===============================================================
Ogden discount The discount rate set by the Lord Chancellor and
rate used by courts to calculate lump sum awards in bodily
injury cases.
======================== ===============================================================
Operating expenses These are the expenses relating to business activities
excluding restructuring and one-off costs. (See alternative
performance measures.)
======================== ===============================================================
Operating profit The pre-tax profit that the Group's activities generate,
including insurance and investment activity, but
excluding finance costs, restructuring and one-off
costs. Normalised operating profit is operating profit
adjusted for weather and changes to the Ogden discount
rate. (See alternative performance measures.)
======================== ===============================================================
Periodic payment These are claims payments as awarded under the Courts
order ("PPO") Act 2003. PPOs are used to settle some large personal
injury claims. They generally provide a lump-sum
award plus inflation-linked annual payments to claimants
who require long-term care.
======================== ===============================================================
Prudential Regulation The PRA is a part of the Bank of England. It is responsible
Authority ("PRA") for regulating and supervising insurers and financial
institutions in the UK.
======================== ===============================================================
Reinsurance Contractual arrangements where the Group transfers
part or all of the accepted insurance risk to another
insurer.
======================== ===============================================================
Reserves Funds that have been set aside to meet outstanding
insurance claims and IBNR claims.
======================== ===============================================================
Restructuring These are costs incurred in respect of the business
costs activities where the Group has a constructive obligation
to restructure its activities
======================== ===============================================================
Return on equity This is calculated by dividing the profit attributable
to the owners of the Company after deduction of the
Tier 1 coupon payments by average shareholders' equity
for the period.
======================== ===============================================================
Return on tangible This is adjusted profit after tax divided by the
equity ("RoTE") Group's average shareholders' equity less goodwill
and other intangible assets. Profit after tax is
adjusted to exclude restructuring and one-off costs
and to include the Tier 1 coupon payments. It is
stated after charging tax using the UK standard rate
of 19% and for 2019 it is stated after charging tax
using the effective income tax rate of 18.9%. (See
alternative performance measures.)
======================== ===============================================================
Right-of-use ("ROU") A lessee's right to use an asset over the life of
asset a lease, calculated as the initial amount of the
lease liability, plus any lease payments made to
the lessor before the lease commencement date, plus
any initial direct costs incurred, minus any lease
incentives received.
======================== ===============================================================
Science-based Science-based targets are a set of goals developed
targets ("SBT") by a business to provide it with a clear route to
reduce greenhouse gas emissions. An emissions reduction
target is defined as 'science-based' if it is developed
in line with the scale of reductions required to
keep global warming below 2degC from pre-industrial
levels.
======================== ===============================================================
Scope 1, Scope Please refer to the glossary definition for carbon
2, Scope 3 emissions
======================== ===============================================================
Solvency II The capital adequacy regime for the European insurance
industry, which became effective on 1 January 2016.
It establishes capital requirements and risk management
standards.
It comprises three pillars: Pillar I, which sets
out capital requirements for an insurer; Pillar II,
which focuses on systems of governance; and Pillar
III, which deals with disclosure requirements.
======================== ===============================================================
Solvency capital The ratio of Solvency II own funds to the solvency
ratio capital requirement.
======================== ===============================================================
Tangible equity This shows the equity excluding Tier 1 notes and
intangible assets for comparability with companies
who have not acquired businesses or capitalised intangible
assets. (See alternative performance measures.)
======================== ===============================================================
Tangible net assets This shows the equity excluding Tier 1 notes and
per share intangible assets for comparability with companies
who have not acquired businesses or capitalised intangible
assets. (See alternative performance measures.)
======================== ===============================================================
Underwriting result The profit or loss from operational activities, excluding
profit / (loss) investment return and other operating income. It
is calculated as net earned premium less net insurance
claims and total expenses, excluding restructuring
and one-off costs.
======================== ===============================================================
APPIX A - ALTERNATIVE PERFORMANCE MEASURES
The Group has identified Alternative Performance Measures
("APMs") in accordance with the European Securities and Markets
Authority's published Guidelines. The Group uses APMs to improve
comparability of information between reporting periods and
reporting segments, by adjusting for either uncontrollable or
one-off costs which impact the IFRS measures, to aid the user of
the report in understanding the activity taking place across the
Group. These APMs are contained within the main narrative sections
of this document, outside of the condensed consolidated financial
statements and notes, and may not necessarily have standardised
meanings for ease of comparability across peer organisations.
Further information is presented below, defined in the glossary
and reconciled to the most directly reconcilable line items in the
financial statements and notes. Note 4 of the condensed
consolidated financial statements presents a reconciliation of the
Group's business activities on a segmental basis to the condensed
consolidated income statement. All note references in the table
below are to the notes to the condensed consolidated financial
statements.
Group APM Closest Definition and / or reconciliation Rationale for APM
equivalent
IFRS measure
============== ============= ================================== =====================================
Combined Profit Combined operating ratio This is a measure of underwriting
operating before is defined profitability and excludes
ratio tax in the glossary and non-insurance income, whereby
is reconciled in a ratio of less than 100%
note 4 represents an underwriting
profit and a ratio of more
than 100% represents an underwriting
loss.
============== ============= ================================== =====================================
Commission Commission Commission ratio is defined Expresses commission expense,
ratio expense in the glossary on and in relation to net earned
is reconciled in note premium.
4.
============== ============= ================================== =====================================
Current-year Net insurance Current-year attritional Expresses claims performance
attritional claims loss ratio is defined in the current accident year
loss ratio in the glossary on and in relation to net earned
is reconciled to the premium.
loss ratio
(discussed below) in
the ratio analysis table.
============== ============= ================================== =====================================
Current-year Profit Current-year combined This is a measure of underwriting
combined before operating profitability, excluding
operating tax ratio is defined in the effect of prior-year
ratio the glossary and is reconciled reserve movements.
in the ratio analysis
table.
============== ============= ================================== =====================================
Current-year Profit Current-year normalised Expresses a relationship
normalised before operating profit ratio between current-year normalised
operating tax is defined in the glossary operating profit and normalised
profit ratio and reconciled in the operating profit.
normalised combined operating
ratio table.
============== ============= ================================== =====================================
Expense ratio Total Expense ratio is defined Expresses underwriting and
expenses in the policy expenses in relation
glossary and is reconciled to net earned premium.
in note 4.
============== ============= ================================== =====================================
Investment Investment Investment income yield Expresses a relationship
income yield income is defined in the glossary between the investment income
and is reconciled in and the associated opening
the investment income and closing assets adjusted
and return yields table. for portfolio hedging instruments.
============== ============= ================================== =====================================
Investment Investment Investment return yield Expresses a relationship
return yield return is defined in between the investment return
the glossary and is and the associated opening
reconciled in the investment and closing assets net of
income and return yields any associated liabilities.
table.
============== ============= ================================== =====================================
Loss ratio Net insurance Loss ratio is defined Expresses claims performance
claims in the glossary in relation to net earned
and is reconciled in premium.
note 4.
============== ============= ================================== =====================================
Net investment Investment Net investment income Expresses a relationship
income yield income yield is between the investment income
defined in the glossary and the associated opening
and is reconciled in and closing assets adjusted
the investment income for portfolio hedging instruments.
and return yields table.
============== ============= ================================== =====================================
Normalised Profit Combined operating ratio This is a measure of underwriting
combined before is defined profitability, excluding
operating tax in the glossary and the effects of weather, Ogden
ratio reconciled in the normalised discount rate changes and
operating profit table. restructuring and one-off
costs and excluding non-insurance
income, whereby a ratio of
less than 100% represents
an underwriting profit and
a ratio of more than 100%
represents an underwriting
loss.
============== ============= ================================== =====================================
Operating Total Operating expenses are This shows the expenses relating
expenses expenses defined in to business activities excluding
the glossary and reconciled restructuring and one-off
in note 4. costs.
============== ============= ================================== =====================================
Operating Profit Operating profit is defined This shows the underlying
profit before in the glossary less performance (before tax and
tax restructuring and one-off excludes finance costs and
costs and reconciled restructuring and one-off
in note 4. costs) of the business activities.
============== ============= ================================== =====================================
Return on Return Return on tangible equity This shows performance against
tangible on equity is defined a measure of equity that
equity in the glossary and is more easily comparable
is reconciled in to that of other companies.
the return in the tangible
equity table.
============== ============= ================================== =====================================
Tangible Equity Tangible equity is defined This shows the equity excluding
equity in the glossary and is Tier 1 notes and intangible
reconciled return in assets for comparability
the tangible equity with companies who have not
table. acquired businesses or capitalised
intangible assets.
============== ============= ================================== =====================================
Tangible Net assets Tangible net assets per This shows the equity excluding
net assets per share share is Tier 1 notes and intangible
per defined in the glossary assets per share for comparability
share and is reconciled in with companies who have not
note 15. acquired businesses or capitalised
intangible assets.
============== ============= ================================== =====================================
Underwriting Profit Underwriting profit is This shows underwriting performance
profit before defined in the glossary calculated as net earned
tax and is reconciled in premium less net claims and
note 4. operating expenses, excluding
restructuring and one-off
costs.
============== ============= ================================== =====================================
Investment income and return yields(1)
H1 H1
2020 2019
Notes(2) GBPm GBPm
============================================= ======== ======= =======
Investment income 6 64.8 75.4
Hedging to a sterling floating rate basis(3) 6 (9.6) (12.1)
============================================= ======== ======= =======
Net investment income 55.2 63.3
Net realised and unrealised (losses) / gains
excluding hedging (13.9) 12.4
============================================= ======== ======= =======
Investment return 6 41.3 75.7
============================================= ======== ======= =======
Opening investment property 291.7 322.1
Opening financial investments 4,673.4 4,737.8
Opening cash and cash equivalents 948.6 1,154.4
Opening borrowings (52.3) (62.0)
Opening derivatives asset(4) 81.8 11.8
============================================= ======== ======= =======
Opening investment holdings 5,943.2 6,164.1
============================================= ======== ======= =======
Closing investment property 281.4 321.4
Closing financial investments 17 4,521.3 4,657.6
Closing cash and cash equivalents 18 1,500.0 1,139.6
Closing borrowings 18 (65.1) (56.4)
Closing derivatives liability(4) (71.4) (63.1)
============================================= ======== ======= =======
Closing investment holdings 6,166.2 5,999.1
============================================= ======== ======= =======
Average investment holdings 6,054.7 6,081.6
============================================= ======== ======= =======
Investment income yield 2.1% 2.5%
Net investment income yield 1.8% 2.1%
Investment return yield 1.4% 2.5%
============================================= ======== ======= =======
Notes:
1. See glossary for definitions.
2. See notes to the condensed consolidated financial
statements.
3. Includes net realised and unrealised losses of derivatives in
relation to AUM.
4. See footnote 1 (Investment holdings).
Normalised combined operating ratio(1)
Home Home Commercial Commercial Total Total
H1 2020 H1 2019 H1 2020 H1 2019 H1 2020 H1 2019
==================================== ======== ======== ========== ========== ======== ========
Loss ratio 58.5% 48.1% 51.7% 50.7% 59.0% 61.9%
Commission ratio 6.8% 7.6% 17.7% 17.5% 6.1% 6.1%
Expense ratio 27.1% 26.5% 25.5% 25.6% 25.2% 24.5%
==================================== ======== ======== ========== ========== ======== ========
Combined operating ratio 92.4% 82.2% 94.9% 93.8% 90.3% 92.5%
==================================== ======== ======== ========== ========== ======== ========
Effect of weather
Loss ratio 1.9% 7.7% (1.5%) 4.3% 0.1% 2.2%
Commission ratio (0.1%) (0.6%) - - - (0.1%)
==================================== ======== ======== ========== ========== ======== ========
Combined operating ratio normalised
for weather 94.2% 89.3% 93.4% 98.1% 90.4% 94.6%
==================================== ======== ======== ========== ========== ======== ========
Effect of Ogden discount rate
Loss ratio - - - (0.4%) - (1.1%)
==================================== ======== ======== ========== ========== ======== ========
Combined operating ratio normalised
for weather and Ogden discount
rate 94.2% 89.3% 93.4% 97.7% 90.4% 93.5%
==================================== ======== ======== ========== ========== ======== ========
Note:
1. See glossary for definition.
Normalised operating profit(1)
Total Total
H1 2020 H1 2019
GBPm GBPm
================================== ======== ========
Operating profit 264.9 274.3
Effect of:
Ogden discount rate - 16.9
Normalised weather - claims (1.5) (32.4)
Normalised weather - profit
share 0.4 1.7
====================================== ======== ========
Normalised operating profit 263.8 260.5
====================================== ======== ========
Prior-year adjustments
Prior-year reserve movement 123.2 171.6
Ogden discount rate - 16.9
====================================== ======== ========
Prior-year normalised operating
profit 123.2 188.5
====================================== ======== ========
Current-year normalised operating
profit 140.6 72.0
====================================== ======== ========
Current-year normalised operating
profit ratio 53.3% 27.6%
====================================== ======== ========
Note:
1. See glossary for definition.
Operating expenses(1)
H1 H1
2020 2019
Note(2) GBPm GBPm
============================================ ======= ====== ======
Operating expenses (including restructuring
and one-off costs) 10 387.0 363.0
Less restructuring and one-off costs (15.0) -
============================================ ======= ====== ======
Operating expenses 372.0 363.0
============================================ ======= ====== ======
Notes:
1. See glossary for definition.
2. See notes to the condensed consolidated financial
statements.
Return on tangible equity(1)
H1 H1
2020 2019
GBPm GBPm
============================================= === ======= =======
Profit before tax 236.4 261.3
Add back restructuring and one-off costs 15.0 -
Coupon payments in respect of Tier 1 notes (8.3) (8.3)
-------------------------------------------------- ------- -------
Adjusted profit before tax 243.1 253.0
Tax charge - (49.5)
Tax charge (using the UK standard tax rate
of 19%) (46.2)
Adjusted profit after tax 196.9 203.5
================================================== ======= =======
Annualised adjusted profit after tax 393.8 407.0
================================================== ======= =======
Opening shareholders' equity 2,643.6 2,558.2
Opening goodwill and other intangible assets (702.5) (566.8)
Opening shareholders' tangible equity 1,941.1 1,991.4
================================================== ======= =======
Closing shareholders' equity 2,756.5 2,530.3
Closing goodwill and other intangible assets (741.2) (629.3)
================================================== ======= =======
Closing shareholders' tangible equity 2,015.3 1,901.0
================================================== ======= =======
Average shareholders' tangible equity(2) 1,978.2 1,946.2
================================================== ======= =======
Return on tangible equity annualised 19.9% 20.9%
================================================== ======= =======
Notes:
1. See glossary on for definition.
2. Mean average of opening and closing balances.
ADDITIONAL INFORMATION
We confirm that to the best of our knowledge:
1. the condensed consolidated financial statements, which have
been prepared in accordance with International Accounting Standard
34 'Interim Financial Reporting' as adopted by the European Union,
give a true and fair view of the assets, liabilities, financial
position and profit or loss of Direct Line Insurance Group plc and
the undertakings included in the consolidation taken as a whole as
required by Disclosure and Transparency Rule 4.2.4R;
2. the interim management report includes a fair review of the
information required by:
- Disclosure and Transparency Rule 4.2.7R being an indication of
important events that have occurred during the first six months of
the current financial year and their impact on the condensed set of
financial statements, and a description of the principal risks and
uncertainties for the remaining six months of the financial year;
and
- Disclosure and Transparency Rule 4.2.8R being related parties
transactions that have taken place in the first six months of the
current financial year and that have materially affected the
financial position or the performance of the entity during that
period, and any changes in the related parties transactions
described in the last Annual Report & Accounts that could do
so.
Signed on behalf of the Board
PENNY JAMES TIM HARRIS
Chief Executive Officer Chief Financial Officer
3 August 2020 3 August 2020
LEI: 213800FF2R23ALJQOP04
INDEPENDENT REVIEW REPORT TO DIRECT LINE INSURANCE GROUP PLC
We have been engaged by the Company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2020 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated balance sheet,
the condensed consolidated statement of changes in equity, the
condensed consolidated cash flow statement and related notes 1 to
23. We have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the Directors. The Directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the
Group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34 "Interim
Financial Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Financial Reporting Council for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2020 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Use of our report
This report is made solely to the Company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Financial
Reporting Council. Our work has been undertaken so that we might
state to the Company those matters we are required to state to it
in an independent review report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company, for our review
work, for this report, or for the conclusions we have formed.
Deloitte LLP
Statutory Auditor
London, UK
3 August 2020
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR PJMMTMTAMTBM
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