Unlocking value

It has been a momentous year for Direct Line Group and our people have worked diligently to deliver good progress towards our strategic targets

Portrait of Chief Executive Officer, Paul Geddes

“The flotation of Direct Line Group on the London Stock Exchange marked an important milestone in our history. Our strong business model and transformation plan proved attractive to the market despite considerable economic and market headwinds.”

Paul Geddes, Chief Executive Officer

Overview of financial performance

Welcome to our first Annual Report & Accounts as a listed company in our own right. I am pleased to report that we have made good progress against our business transformation plan and delivered an operating profit from ongoing operations of £461.2 million for 2012, an increase of 9.3% compared to 2011 (£421.9 million). All divisions were profitable in 2012. This was driven by a return to underwriting profit, demonstrating the effective use of our pricing and data, improved claims processes, as well as the strength of our distribution platform in serving our customers.

Helping our customers

As one of the leading motor and home insurers in the UK, our responsibility to motorists and homeowners is more than just processing a claim when an accident or loss has occurred. We consider road safety to be an important element of our work within the community. As such, we have developed partnerships with key road safety stakeholders, such as the charity, Brake, working with them to raise motorists’ awareness of road safety issues.

Moving from the roads and into the home, some of our home insurance customers have had to endure another unprecedented year of rainfall and flooding. Our advisers were immediately on the ground in heavily affected areas to help customers through the claims process and provide them with alternative accommodation where needed.

Separation from RBS Group

Following the implementation of a comprehensive programme of initiatives, we are now operating on a substantially stand-alone basis from RBS Group. These initiatives included appointing the Direct Line Group Board of Directors, harmonising employee service contracts, developing a stand-alone risk and compliance department, and agreeing an arm’s length Transitional Services Agreement with RBS Group for residual services. We have also recently appointed Capgemini to support the migration of our IT as well as to design, deliver and run a new IT infrastructure to support the business.

Listing on the London Stock Exchange

In October, we successfully completed our IPO on the London Stock Exchange. RBS Group sold 520.8 million Ordinary Shares in Direct Line Group, representing 35% of our issued share capital, generating gross proceeds of £911 million for RBS Group. In December, Direct Line Group became a constituent of the FTSE 250 Index.

The journey so far

In the midst of tough economic and competitive conditions, we have delivered a clear turnaround in performance, most visibly a £667 million improvement in operating profit from ongoing operations since 2010. We have maintained a focus on underwriting for profit by methodically reducing our level of risk, taking stringent steps to improve our pricing capability, and exiting lines of business that have proven unprofitable.

Since the beginning of our transformation plan in 2010, we have taken action to improve our capital efficiency and to benefit from our scale by consolidating four underwriting entities into one, U K Insurance Limited. We received an ‘A’ credit rating from Standard & Poor’s and an ‘A2’ credit rating from Moody’s, issued £500 million of long-term subordinated debt and prior to the IPO returned £1 billion in dividends to RBS Group.

As a result of these actions, we have strengthened and improved our business, making good progress towards achieving our strategic targets.

The strategic plan

With the first part of our transformation plan – to return to profit – complete, we have redefined our strategic plan through five key pillars: distribution, pricing, claims, costs, and Commercial and International.


We renewed existing strategic partnerships, including Nationwide Building Society and RBS Group, and secured new ones, notably Sainsbury’s Bank. We also launched our Churchill and Privilege motor and home products on comparethemarket.com, which means we have a presence on the four major UK price comparison websites.


Since 2010, we have de-risked the motor portfolio and repriced to reflect the risk and cost of bodily injury claims, particularly with younger drivers and certain postcodes. We built capability through implementing a new pricing model and rating engine across the Motor and Home divisions, contributing to significant improvements in our loss ratio performance.


We have undergone a significant transformation in our claims function, including a strategic investment in a new claims system, ClaimCenter, which is now operational for the majority of Motor and Home claims. The benefits are being realised through improved claims processes, including shorter settlement times for customers and improved legal case management.


The first phase of our cost reduction programme focused on our operational cost base. We reduced the number of our sites from 32 locations to 16 and delivered 15% efficiency savings across our UK sales operations. In August 2012, we announced the target of gross annual cost savings of £100 million in 2014.

Commercial and International

We are working towards reducing our costs and improving operational efficiency in Commercial, targeting a combined operating ratio below 100% in 2014. In International, we are leveraging our UK expertise in pricing and claims as well as driving through operational efficiencies to produce returns consistent with our strong market position as a leading direct insurer in both Italy and Germany.

Priorities for 2013

During 2013 we aim to make progress towards delivering the strategic financial targets we set out at the time of the IPO. In particular we aim to deliver a 98% combined operating ratio in 2013 and to make progress towards our £100 million gross annual cost savings target.

We aim to achieve this by, for example, deploying the capability built in our pricing and claims functions over the last couple of years and, in 2013, we aim to supplement this by prioritising our distribution and cost initiatives.

To enhance our distribution, we are already fine-tuning our propositions with the implementation of new offers and pricing structures adapted to the evolving needs of our customers. We will continually monitor the business to ensure we are addressing the needs of our customers, the competitiveness of the markets in which we operate, the engagement of our staff and the returns expected by our shareholders.

Regulatory environment

We are operating in an industry that is preparing for substantial regulatory change. With the ongoing debates in the motor market surrounding referral and legal fees, the increase in whiplash claims and the implementation of the gender directive, we aim to be leaders through this period of change and lobby for reform to provide the best outcome for our customers and shareholders.


The UK personal lines market remains competitive, particularly in the Motor division. In this environment, the Group will continue its strategy of disciplined underwriting that prioritises maintaining margin over volume. We expect to see improvements to the loss ratio in 2013 as investments in pricing and claims capabilities, together with the improved risk profile of the underwriting portfolio, especially in Motor and Commercial, are recognised. In 2014 we expect to have delivered the £100 million gross annual cost savings and we will continue to look at our expense base as market conditions evolve. Overall we continue to target a 98% combined operating ratio for ongoing operations in 2013.

Investment markets remain tough with continued low reinvestment yields and therefore, within our risk appetite, we are planning various actions intended to mitigate pressures on investment returns. We will continue to invest in the business with the objective of both sustaining our leadership position and meeting our 15% return on tangible equity.

We have made great strides since the beginning of our transformation journey in 2010. I am extremely grateful for the hard work, dedication and expertise demonstrated by our people, and I am excited about developing the business even further for the next phase of our journey.

Paul Geddes

Paul Geddes, Chief Executive Officer

The right team to deliver the evolving customer agenda

We now have the right structure in place to help us specifically address our customers’ needs and to protect their interests. In light of the new structure of the Financial Services Authority (“FSA”) and the creation of the Financial Conduct Authority we are well placed to respond to the changing landscape of how businesses interact with their customers.

Image of select Direct Line Group Executive Committee members Image of select Direct Line Group Executive Committee members Image of select Direct Line Group Executive Committee members Image of select Direct Line Group Executive Committee members