Annual Financial Report

RNS Number : 5636A

Direct Line Insurance Group PLC

21 March 2013

 



2012 ANNUAL REPORT & ACCOUNTS 

Direct Line Insurance Group plc has today posted the following document on its website at: ara2012.directlinegroup.com.

·     2012 Annual Report & Accounts

Direct Line Insurance Group plc has submitted its 2012 Annual Report & Accounts to the UK Listing Authority and it will be available shortly for public inspection on the National Storage Mechanism: www.hemscott.com/nsm.do

Hard copies of these documents can be obtained free of charge on request from the General Counsel & Company Secretary, whose contact details are as follows:

Mr Humphrey Tomlinson

General Counsel & Company Secretary

Direct Line Insurance Group plc

Churchill Court

Westmoreland Road

Bromley

BR1 1DP

In accordance with the requirements of Rules 4.1 and 6.3.5 of the UK Listing Authority's Disclosure and Transparency Rules, the Director' Responsibility Statement, Principal Risks and Uncertainties and Related Party Transactions affecting the Group are set out in the appendix to this announcement.

Enquiries:

Ines Watson

Senior Assistant Company Secretary, Governance

Direct Line Insurance Group plc

Tel: [phone]

[e-mail]

 

APPENDIX

Directors' Responsibility Statement

Each of the current Directors, whose names and function are listed on pages 56 to 57 of  Direct Line Group's 2012 Annual Report & Accounts confirm that, to the best of their knowledge:

1.   the financial statements, prepared in accordance withInternational Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

2.   the management report, which is incorporated into the Directors' report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

Principal risks and uncertainties

The Group writes products that are subject to a number of uncertainties and risks. It is a key role of the Riskfunction to ensure that these risks have been identified, measured and considered throughout the business.

Principal risks	Impact	Management and mitigation
Strategic risk The economic climate could put at risk our ability to meet our strategic objectives in the areas of distribution, pricing, claims, costs, Commercial and International.  We may fail to execute our ongoing strategic transformation plan, and the expected benefits of that plan may not be achieved at the time or to the extent expected, or at all.	The value of the Group decreases, resulting in a lack of shareholder confidence.	·     Constant monitoring and management of agreed strategic targets ·     Monitoring of cost savings to ensure they remain on track ·     Investment in brand awareness, and improved pricing and claims models ·     Upgrading and enhancement of numerous operational processes and systems
Underwriting and pricing risk We are subject to the risk that inappropriate business could be written (or not specifically excluded) and inappropriate prices charged.  This includes catastrophe risk arising from losses due to unpredictable natural and man-made events affecting multiple covered risks particularly given the concentration of our home business in the UK.	Adverse loss experience impacting current year and future year business performance.	·     Underwriting guidelines for all business transacted, restricting the types and classes of business that may be accepted ·     Exception reports and underwriting monitoring tools ·     Internal quality assurance programmes ·     Pricing policies by product line and by brand ·     Analysis of comprehensive data to refine pricing ·     Insurance governance forums whose remit include examination of data ·     Central control of policy wordings ·     Purchase of catastrophe reinsurance to limit the exposure ·     Quarterly analysis of all property portfolios to determine expected maximum losses ·     Investment in enhanced external data to mitigate exposures (for example, flood and individual underwriting risk through Geospatial)
Reserving risk Due to the uncertain nature and timing of the risks to which we are exposed, we cannot precisely determine the amounts that we will ultimately pay to meet the liabilities covered by the insurance policies written.	Adverse development in prior year reserves resulting in a financial loss.	·     Technical reserves are estimated by: -     A range of actuarial and statistical techniques, with projections of ultimate claims cost involving assumptions across a range of variables, including estimates of trends in claims frequency and average claim amounts based on facts and circumstances at a given point in time -      Making assumptions on other variable factors including; the legal, social, economic and regulatory environments; Ogden discount rate and the process by which it is set; results of litigation; and the extent and terms on which periodical payment orders ("PPOs") are made by the Courts. Other factors considered include rehabilitation and mortality trends, business mix, consumer behaviour, market trends, underwriting assumptions, risk pricing models, inflation in medical care costs, future earnings inflation and other relevant forms of inflation, the performance and operation of reinsurance assets and future investment returns -     Stress and scenario testing -     Management's best estimate of reserves being equal to or in excess of the actuarial best estimate
Operational risk The risks of direct or indirect losses resulting from inadequate or failed internal processes, fraudulent claims or from systems and people, or from external events including changes in the competitor, regulatory or legislative environments. In particular we have IT systems risk, as the Group is highly dependent on the use of third-party information technology, software, data and service providers.	Adverse events with potential financial, reputational, legal and customer impacts.	·     We have upgraded and enhanced many of our operational processes and systems, including the claims system and the fraud detection system. This includes enhancing our ERM framework to integrate risk, business and capital strategies ·     We maintain a robust internal control environment ·     We have developed a bespoke risk capture, management and reporting system ·     Migration of IT onto a new enhanced platform
Investment risk Market risk - the risk of adverse financial impact due to changes in fair values of future cash flows of instruments held in the investment portfolio as a result of changes in interest rates, credit spread, foreign exchange rates, credit spread, foreign exchange rates and property vales. Credit risk - the risk of exposure if another party fails to perform its financial obligations, including failing to perform them in a timely manner. Liquidity risk - the risk of maintaining insufficient financial resources to meet business obligations as and when they fall due.	Adverse movements due to asset value reduction, mismatch in assets and liabilities, and default of third parties. Inability to meet cash flows under stress.	Our investment portfolio is managed and controlled, through: ·     Investment Strategy and Guidelines proposed to the Board by the Investment Committee and monitored by the Asset and Liability Committee ·     Diverse holding of types of assets including geographies, sectors and credit ratings ·     Utilisation of risk reduction techniques, for example hedging ·     Maintenance of standby facilities ·     Stress testing and scenario analysis
Counterparty risk We partner with many suppliers and the failure of any of these to perform their financial obligations or perform them in a timely manner could result in a financial loss.  The principal area of counterparty risk is our use of reinsurance against catastrophe risk.	Loss due to default of banks, reinsurers, brokers or other third parties.	·    Credit limits are set for counterparties, particularly banks ·    Requirement for minimum credit ratings credit limits for reinsurers ·    Broker credit exposures are monitored by the business
Regulatory risk Changes in law and regulations are not identified, understood, or are inappropriately and incorrectly interpreted, or adopted, or business practices are not efficiently modified.  Further, there is a risk that current legal or regulatory requirements are not complied with.  For example, in the beginning of 2012, the FSA imposed a £2.17 million fine on the Group in relation to complaint file alterations.	Customer impact, financial loss and regulatory censure. Regulatory sanction, legal action or revenue loss.	·     We have a constructive and open relationship with its regulators and other official bodies (for example the Ministry of Justice and the  Office of Fair Trading), in addition to specific risk management tools and resources to minimise our exposure to Regulatory risk
Conduct risk The risk of failing to deliver the appropriate treatment for our customers throughout all stages of the customer journey and that our people fail to behave with integrity.	Potential customer detriment, financial loss and regulatory censure and sanction.	·     Our organisational culture prioritises a consistent approach towards customers and the interests of customers are at the heart of how we operate ·     We have developed a robust customer conduct risk management framework, to minimise our exposure to conduct risk
Brand and reputational risk We are dependent on the strength of our brands, our reputation with customers and distributors in the sale of products and services. We have entered into various strategic partnerships that are important to the marketing, sale and distribution of our products.	Loss of brand value negatively impacts our ability to retain and write new business.	·     Our brand and reputation risk is regularly reviewed by various governance committees ·     A key focus for us is to build our brands business through marketing, whilst regularly monitoring performance using a range of brand metrics, ·     We  seek to offer a superior service to customers and to treat customers fairly in line with FSA principles

As long as RBS Group remains a significant shareholder, there are certain risks that apply to the RBS Group and, should they arise, may have an adverse impact on our business. For example, RBS Group will continue to exert substantial influence overus while it has a substantial shareholding; RBS Group could face the risk of full nationalisation or other resolution procedures; our contractual arrangements may be impacted by events that occur within RBS Group; and RBS Group is subject to a variety of risks as a result of implementing the state aid restructuring plan which could adversely affect us. RBS Group has a legalobligation to divest its controlling interest in the Group by the end of 2013 and completely divest by the end of 2014. The manner and exact timing of any divestment is uncertain.

Notes to the Financial Statements

40.  Related parties

On 1 December 2008, the UK Government through HM Treasury became the ultimate controlling party of The Royal Bank of Scotland Group plc and is therefore the ultimate controlling party of Direct Line Group. The UK Government's shareholding is managed by UK Financial Investments Limited, a company wholly owned by the UK Government. This gives rise to related party transactions and balances, specifically in respect of tax with HMRC and debt security investments with the UK Government.

Direct Line Group's immediate holding company is The Royal Bank of Scotland Group plc which is incorporated in the United Kingdom and registered in Scotland.

As at 31 December 2012, The Royal Bank of Scotland Group plc heads the largest group in which Direct Line Group is consolidated. Copies of the consolidated financial statements of The Royal Bank of Scotland Group plc may be obtained from The Secretary, The Royal Bank of Scotland Group plc, Gogarburn, PO Box 1000, Edinburgh EH12 1HQ.

The following transactions were carried out with related parties, who are all members of RBS Group.

i. Sales of insurance contracts and other services

	2012 £m	2011 £m
Parent	(0.1)	-
Fellow subsidiaries	7.0	17.6
Total	6.9	17.6

ii. Purchases of services

	2012 £m	2011 £m
Parent	223.8	287.9
Fellow subsidiaries	46.9	63.9
Total	270.7	351.8

Purchases of services are charged on an arm's length basis.

Employee costs recharged by RBS Group include the full costs of key managers and other staff in respect of share‑based payments. The attribution among members of the RBS Group has regard to the needs of RBS Group as a whole.

iii. Compensation of key management

	2012 £m	2011 £m
Short-term employee benefits	5.6	4.2
Post-employment benefits	0.6	0.4
Other long-term benefits	1.5	2.1
Termination benefits	2.2	0.1
Share based payments	0.5	0.1
Total	10.4	6.9

For the purposes of IAS24 'Related party disclosures', key management personnel comprise the Directors of the Company, Non-Executive Directors and members of the Executive Committee. 

iv. Year-end balances arising from cash and investment transactions with members of the RBS Group

	2012 £m	2011 £m
Cash at bank held with related parties (note 25)	69.1	48.4
Short-term bank deposits held with related parties (note 25)	28.8	148.4
Bank overdrafts held with related parties (note 32)	(90.9)	(64.2)
Derivative financial assets and liabilities (Note 23)	23.0	0.1
Term deposits held with related parties (note 24)	50.0	147.0
Total	80.0	279.7

Debt securities held with related parties (note 24)

	2012 £m	2011 £m
RBS Group issuers	75.0	304.6

v. Year-end balances arising from sales and purchases of products and services.

Receivables from related parties (note 22)

	2012 £m	2011 £m
Parent	0.3	0.1
Fellow Subsidiaries	4.8	7.6
Total	5.1	7.7

Movements in receivables from related parties were as follows:

	2012 £m	2011 £m
At 1 January	7.7	7.6
Transactions in the year	68.0	7.3
Settled in the year	(70.6)	(7.2)
At 31 December	5.1	7.7

Included in the above is an amount of £69.5 million in the year ended 31 December 2012, invoiced to and paid by RBS Group for the purchase of investment properties.

Due to related parties (note 35)

	2012 £m	2011 £m
Parent	5.4	75.1
Fellow Subsidiaries	29.3	83.6
Total	34.7	158.7

Movements due to related parties were as follows:

	2012 £m	2011 £m
At 1 January	158.7	44.7
Transactions in the year	294.6	261.0
Settled in the year	(418.6)	(147.0)
At 31 December	34.7	158.7

Included in the above is an amount of £39.3 million in the year ended 31 December 2012, invoiced by and paid to RBS Group for the acquisition of furniture, fittings and IT hardware. Furthermore, also included is an amount of £31.3 million paid to the RBS Group pension scheme (see note 33 for further details).

vi. Loans from related parties (note 32)

	2012 £m	2011 £m
Parent	-	12.5
Fellow Subsidiary	-	235.2
Total	-	247.7

Movements in loans to related parties were as follows:

	2012 £m	2011 £m
At 1 January	247.7	249.2
Loans received during the year	-	205.0
Loan repayments made	(246.4)	(205.5)
Interest charged	2.7	2.3
Interest settled	(2.7)	(2.3)
Exchange movements	(1.3)	(1.0)
At 31 December	-	247.7

During the year ended 31 December 2012, the Group repaid its loans from RBS Group in preparation for operational separation.

 

END

 

 

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