y Re sults e brua ry 2014 e liminar 26 F 2013 Pr Age nda and pr - - PDF document

2013 Pr e liminar y Re sults 26 F e brua ry 2014

2 2

Age nda and pr e se nte r s

Que stions and answe rs Ke y me ssa g e s Pa ul Ge dde s - CE O Summa ry a nd outlook Pa ul Ge dde s - CE O F ina nc ia ls John Re ize nste in - CF O Stra te g ic upda te Pa ul Ge dde s - CE O

3 3

Age nda and pr e se nte r s

Que stions and answe rs Ke y me ssa g e s Pa ul Ge dde s - CE O Summa ry a nd outlook Pa ul Ge dde s - CE O F ina nc ia ls John Re ize nste in - CF O Stra te g ic upda te Pa ul Ge dde s - CE O

4

Ke y me ssage s

• Ope ra ting profit1 of £526.5m, up 14.2% ;

profit be fore ta x of £423.9m, up 70.2%

1 Ope rating pro fit fro m Ong o ing o pe ratio ns 2 Co mb ine d o pe rating ratio fro m Ong o ing o pe ratio ns 3 Ro T E is adjuste d pro fit afte r tax fro m o ng o ing o pe ratio ns divide d b y the Gro up’ s ave rag e tang ib le share ho lde rs’ e q uity. Pro fit afte r tax is adjuste d to e xc lude run-o ff o pe ratio ns and re struc turing and o the r

• ne -o ff c o sts and is state d afte r c harg ing tax (using UK standard tax rate o f 23.25%).

4 T

• 22 F

e b ruary 2014

• Pe r

for manc e r e fle c ts foc us on value ove r volume toge the r with be ne fits fr

• m our

tr ansfor mation plan

• 5% growth in final divide nd plus a se c ond

spe c ial divide nd of 4.0p – total divide nds

• f 20.6p for 2013
• Mar

ke ts r e main highly c ompe titive ; g uida nc e of 95% - 97% COR for 2014 (nor malising for we athe r )

• Pr

e liminar y e stimate of YT D Home flood a nd stor m c la ims of £70- 90m a nd a pprox. £20m for Comme rc ia l4 1 2 3 4 5

2011 2012 2013 Target

COR

2

2012 2011 2013 Target 2013 101.8% 99.2% 96.1% 98.0%

ROT E

3

Ongoing Target 2012 Pro forma 2011 2013 10.0% 13.4% 16.0% 15.0%

5 5

Age nda and pr e se nte r s

Que stions and answe rs Ke y me ssa g e s Pa ul Ge dde s - CE O Summa ry a nd outlook Pa ul Ge dde s - CE O F ina nc ia ls John Re ize nste in - CF O Stra te g ic upda te Pa ul Ge dde s - CE O

6

F inanc ial highlights

Obse rva tions

12.0p 12.6p

• Re g ula r divide nds pe r sha re

21.8p 25.0p

• Adjusted EPS4 – diluted
• 98.2%

76.3 69.7 90.9

108.7

50.2 42.7 15.8 873.0

4Q 13

• 97.9%

79.2 42.5 60.2

113.3

42.0 51.5 19.8 905.4

4Q 12 8.0p

16.0% 2.5% 96.1% 375.2 312.8 423.9

526.5

208.1 180.2 138.2 3,826.6

F Y 13

• 13.4%

2.8% 99.2% 326.5 184.3 249.1

461.2

234.7 198.3 28.2 3,990.6

F Y 12 Spe c ial divide nds pe r share

RoTE3 Combined operating ratio Of whic h Ong o ing o pe ratio ns1 Investment return2 Instalment and other income Gross written premium Underwriting profit/(loss) Investment return (£m unless stated)

Ong oing ope rations Ope rating profit – Ong oing

• pe r

ations

Profit before tax Net income / profit after tax

• GWP of £3,826.6m down 4.1% ve rsus 2012
• 14.2% inc re ase in ope rating pr
• fit fr
• m
• ng oing ope ra tions
• COR of 96.1% , a 3.1ppt improve me nt
• £110m improve me nt in unde rwriting

profit

• RoT

E

• f 16.0% , a 2.6ppt improve me nt
• F

inal divide nd of 8.4 pe nc e pe r share , re fle c ting 5% g rowth a nd a furthe r spe c ia l divide nd of 4.0 pe nc e pe r sha re , ta king tota l divide nds to 20.6 pe nc e pe r sha re

1 2 3 4 5 4 1 5 3 2

1 Pro fit fro m Ong o ing o pe ratio n le ss financ e c o sts and tax (UK standard tax rate 23.25%: 2012 24.5%) 2 I nc lude s re alise d g ains and lo sse s and unre alise d g ains and lo sse s to the inc o me state me nt 3 Ro T E is adjuste d pro fit afte r tax fro m o ng o ing o pe ratio ns divide d b y the Gro up’ s ave rag e tang ib le share ho lde rs’ e q uity. Pro fit afte r tax is adjuste d to e xc lude run-o ff o pe ratio ns and re struc turing and o the r o ne -

• ff c o sts and is state d afte r c harg ing tax (using UK standard tax rate o f 23.25%; 2012 24.5%). Pro -fo rma Ro T

E assume s that the c apital ac tio ns take n b y the Gro up prio r to I PO (£1b n divide nd and £500m de b t issue o c c urre d o n 1 January 2012 4 Adjuste d E PS c alc ulate d using pro fit fro m Ong o ing o pe ratio ns afte r tax (se e 1)

7

62.6% 73.0% 67.1% 73.0%

8.7% 2.8% 12.4% 2.0%

Stable c ur r e nt ye ar unde r wr iting pe r for manc e

£322m

L

• ss ra tio a na lysis - ong oing ope ra tions

F Y 2012 F Y 2013

Prior year development Home major weather events Full year 2012 current year attritional Prior year development Home major weather events Full year 2012 reported £105m £435m £69m Full year 2013 reported Includes c. 1.2ppts of German hail and Commercial weather above normal Full year 2013 current year attritional Includes c. 0.6ppts of Commercial large losses above normal

8 203 184 313 337 54 58 156 129 207

282 246 23.0% 22.3%

1.1% 1.9%

FY 2012 Impact of NEP Reduction in expenses FY 2013

Impr

• ving e xpe nse r

atio

Obse rva tions

1 I nc lude d in lo ss ratio 2 Re duc tio n in 2012 c laims handling c o sts o f c . £8m c o mpare d with the fig ure re po rte d due to a re allo c atio n b e twe e n Ong o ing and Run-o ff

E xpe nse a na lysis - ong oing ope ra tions

23.0% Expense ratio 22.3%

Full year 2012 Full year 2013

Staff costs Marketing costs Management fees

E xpe nse ra tio move me nt - ong oing ope ra tions

• E

xpe nse r atio down 0.7ppts to 22.3%

• Ope ra ting e xpe nse s down 9.2% or £105m to

£1,032m

• Q4 2013 c osts of £248m
• Good prog re ss towa rds tota l c ost ta rg e t of

a pproxima te ly £1,000m in 2014

Other costs Depreciation / amortisation Claims handling expenses1

£1,137m £1,032m

£786m £855m

2

9

Motor highlights

85.4% 85.3% Loss ratio – current year (10.8%) (20.2%) Loss ratio – prior years 74.6% 65.1% Loss ratio 2.0% 2.5% Commission ratio 25.0% 25.6% Expense ratio

101.6% 93.2% Combine d ope r ating r atio 4,050 3,762 In- forc e polic ie s (000s)1

174.3 291.9 Of whic h prio r ye ar re le ase s 140.0 122.8 Investment return

261.8 347.7 Ope rating profit

1,629.2 1,444.8 Net earned premium 126.8 98.1 1,421.1

F Y 2013

148.1 (26.3) 1,623.5

F Y 2012

Instalment and other income2 Gross written premium1 Underwriting profit / (loss) (£m unless stated)

Re sults Obse rva tions

1

• IF

Ps down 7.1% sinc e De c e mbe r 2012, or 5.4% a djusting for va n re c la ssific a tion; broa dly sta ble sinc e Q2 2013

• GWP down 12.5% ve rsus 2012 or 10.8%

a djusting for va n re c la ssific a tion

• 9.5ppt improve me nt in loss ra tio
• £124.4m improve me nt in unde rwriting profit
• 8.4ppt improve me nt in c ombine d
• pe ra ting ra tio
• Insta lme nt a nd othe r inc ome down £21.3m

due to re duc e d volume s a nd the ba nning of solic itors’ re fe rra l fe e s

• 32.8% improve me nt in ope ra ting profit

2 1 2 4 3 3 6 4 5 5 6

1 Adjustme nt made to GWP and I F Ps fo r DL 4B Van histo ric ally re po rte d in pe rso nal line s Mo to r (GWP: £19.8m F Y 2013, £29.8m F Y 2012. I F Ps: 61k De c 2013, 74k De c 2012). Ne w b usine ss writte n in Co mme rc ial divisio n sinc e Se pte mb e r 2010 2 T rac ke r dispo se d in F e b ruary 2014 – 2013 re sult inc lude s T rac ke r re late d inc o me and e xpe nse s - £18.4m in o the r inc o me and £19.8m in o the r e xpe nse s (inc lude d in e xpe nse ratio )

10

60% 65% 70% 75% 80% 85% 90% 95% 100% 105%

2005 2006 2007 2008 2009 2010 2011 2012 2013

50 100 150 200 250

2004 2005 2006 2007 2008 2009 201 201 1 201 2 201 3

Motor c laims tr e nds

BI c appe d1 burn c ost vs T PWP

2 (inde xe d)

BI c appe d se ve rity inflation

93.6 90.3 91.2 79.5 Inflation at settlement point 97.4 97.4 97.1 92.8 Inflation in booked best estimate3 (2.6%) 0.0% (0.3%) (4.5%) Inflation in booked best estimate3

Inde xe d (2009 = 100)

1.0%

2012 vs. 2011

(3.5%)

2011 vs. 2010

(6.4%)

2010 vs. 2009

(12.9%)

2013 vs. 2012

Inflation at latest settlement rate point

Motor booke d loss ra tio de ve lopme nt (g ross4)

Ac c ide nt ye ar

1 Small b o dily injury c laims c appe d at £50k (in 1999) 2 T PWP: I F OA T hird Party wo rking party pre liminary re po rt 2013. T he me asure s are se ttle me nt spe e d adjuste d e xc luding nils 3 E xc lude s marg in 4 Base d o n manag e me nt b e st e stimate , g ro ss o f re insuranc e and e xc lude s c laims handling c o sts

TPWP Direct Line Group Delivering lower than market average burn cost At the end of 2009 At the end of 2010 At the end of 2011 At the end of 2012 At the end of 2013

11

Home highlights

51.3% 51.1% Loss ratio – current year attritional 62.3% 58.7% Loss ratio – current year incl. weather (3.9%) (4.8%) Loss ratio – prior years 58.4% 53.9% Loss ratio 16.2% 19.6% Commission ratio 22.0% 20.3% Expense ratio

96.6% 93.8% Combine d ope r ating r atio 4,239 3,719 In- forc e polic ie s (000s)

37.4 43.3 Of whic h prio r ye ar re le ase s 34.1 24.1 Investment return

93.3 106.2 Ope rating profit

950.8 908.9 Net earned premium 25.9 56.2 943.1

F Y 2013

26.5 32.7 989.0

F Y 2012

Instalment and other income Gross written premium Underwriting profit / (loss) (£m unless stated)

Re sults Obse rva tions

• IF

Ps down 12.3% sinc e De c e mbe r 2012 mainly due to re moval of HR241 fr

• m some

pa c ka g e d ba nk a c c ounts; unde rlying fa ll of 2%

• GWP down 4.6% ve rsus the prior ye a r
• Curre nt ye a r a ttritiona l loss ra tio of 51.1% in

line with the prior ye a r

• 2013 we a the r- re la te d c laims of £69m

ve rsus £105m in 2012

• £43.3m of prior ye a r re se rve re le a se s

due to positive c la ims de ve lopme nt

• 2.8ppt improve me nt in c ombine d ope ra ting

ra tio

• £12.9m improve me nt in ope ra ting profit

1 2 1 2 3 5 4 5 3 4

1 Ho me re spo nse po lic ie s re mo ve d fro m so me pac kag e d b ank ac c o unts during 1H 2013, c irc a 420k po lic ie s

12

• Re duc tion in IF

Ps due to re duc e d volume s in pa c ka g e d ba nk a c c ounts, pa rtia lly offse t by g rowth in Gre e n F la g dire c t sa le s

• 1.6% re duc tion in GWP; 4.4% inc re a se in

Re sc ue GWP

• L
• ss ra tio inc re a se d by c . 9.2ppts to 60.1%

due to non re pe a t of positive one - offs in 2012

• E

xc luding Cre ditor

2 and L

ife 3 profit a nd othe r

• ne - offs, profit wa s a round £37m in 2013, in

line with the prior ye a r

• £9m re duc tion in Re sc ue profit due to non

re pe a t of one - offs in 2012 and highe r ma rke ting spe nd in 2013

Re sc ue and othe r pe r sonal line s highlights

57.2% 62.5% Loss ratio – current year (6.3%) (2.4%) Loss ratio – prior years 50.9% 60.1% Loss ratio 6.0% 7.5% Commission ratio 25.8% 24.8% Expense ratio

82.7% 92.4% Combine d ope r ating r atio 9,431 8,801 In- forc e polic ie s (000s)1

46.9 38.1 Of whic h Re sc ue 23.9 9.0 Of whic h prio r ye ar re le ase s 7.5 8.2 Investment return

84.4 46.5 Ope rating profit

382.8 365.8 Net earned premium 10.4 27.9 383.4

F Y 2013

10.7 66.2 389.8

F Y 2012

Instalment and other income Gross written premium1 Underwriting profit (£m unless stated)

Re sults Obse rva tions

2 3 4 2 1 3 4 5 5

1 ROPL is made up o f a numb e r o f pro duc ts, inc luding Re sc ue , Pe t, T rave l , Cre dito r and L ife 2 Cre dito r is in run-o ff 3 L ife b usine ss dispo se d in No ve mb e r 2013. Ge ne rate d £6.4m pro fit in 2013 1

1

13

Comme r c ial highlights

77.0% 74.1% Loss ratio – current year (13.9%) (11.8%) Loss ratio – prior years 63.1% 62.3% Loss ratio 21.6% 21.2% Commission ratio 23.5% 23.3% Expense ratio

108.2% 106.8% Combine d ope r ating r atio 466 583 In- forc e polic ie s (000s)

56.2 51.6 Of whic h prio r ye ar re le ase s 29.4 29.6 Investment return

2.2 9.5 Ope rating profit / (loss)

402.8 434.6 Net earned premium 9.5 (29.6) 474.5

F Y 2013

5.9 (33.1) 435.6

F Y 2012

Instalment and other income Gross written premium Underwriting loss (£m unless stated)

Re sults Obse rva tions

1 3 5 2

• 25.1% g rowth in IF

Ps ma inly drive n by Dire c t L ine for Busine ss, inc luding van transfe r from Motor

• 8.9% inc re ase in GWP mainly due to the

transfe r of the Van busine ss (unde rlying g rowth 2% )

• 0.8ppt loss r

atio impr

• ve me nt
• 2.9ppt improve me nt in c urre nt ye a r
• Continue to re se rve prude ntly a nd

e xpe c t positive re se rve re le a se s

• COR improve d to 106.8% with re duc tion in

e xpe nse a nd c ommission ra tio

• COR norma lise d for we a the r c la ims

a pproxima te ly 104%

• Ope ra ting profit of £9.5m, up £7.3m ve rsus

the prior ye a r de spite hig he r we a the r re la te d c la ims in 2013

1 2 3 4 4 5

1 Adjustme nt made to GWP and I F Ps fo r DL 4B Van histo ric ally re po rte d in pe rso nal line s Mo to r (GWP: £19.8m F Y 2013, £29.8m F Y 2012. I F Ps: 61k De c 2013, 74k De c 2012). Ne w b usine ss writte n in Co mme rc ial divisio n sinc e Se pte mb e r 2010

14

Inte r national highlights

104.6% 109.8% Of whic h Ge rmany 13.1% 10.8% Expense ratio 12.1% 15.8% Commission ratio 86.9% 88.0% Loss ratio – current year (8.8%) (10.7%) Loss ratio – prior years 78.1% 77.3% Loss ratio

103.3% 103.9% Combine d ope r ating r atio 1,462 1,610 In- forc e polic ie s (000s)

14.0 14.1 Of whic h I taly 5.5 2.5 Of whic h Ge rmany 30.2 39.3 Of whic h prio r ye ar re le ase s 102.9% 101.6% Of whic h I taly 23.7 23.4 Investment return

19.5 16.6 Ope rating profit

343.1 366.5 Net earned premium 7.6 (14.4) 604.5

F Y 2013

7.1 (11.3) 552.7

F Y 2012

Instalment and other income Gross written premium Underwriting loss (£m unless stated)

Re sults Obse rva tions

1

• IF

Ps up 10.1% and GWP up 9.4% , dr ive n by strong pe rformanc e in Ge rman 1 January re ne wa ls a t the be g inning of 2013

• Inte rna tiona l c urre nt ye a r loss ra tio inc lude s

c irc a . 2ppts of we a the r re la te d c osts from hail storms in Ge r many

• Ove ra ll COR broa dly fla t
• Ope ra ting profit down £2.9m to £16.6m
• Profit in Ge rma ny down £3m, with c irc a

£8m of hig he r we a the r re la te d c osts e ve nts

• Profit in Italy broa dly flat re fle c ting

disc ipline in c ha lle ng ing ma rke t

3 1 2 3 4 4 2

15

48% 6% 3% 20% 1% 22% 57% 4% 2% 3% 16% 3% 15%

Inve stme nts

Obse rva tions Inve stme nt asse ts by type

50.2

3.9 46.3

Q4 13 42.0

(0.2) 42.2

Q4 12 208.1

32.6 175.5

F Y 13 234.7

54.8 179.9

F Y 12

Investment income Net realised and unrealised gains1

T

• tal

2.1% 2.0% 2.5% 2.8%

FY 2012 FY 2013

• Ongoing inve stme nt r

e tur n of £208m with a yie ld inc luding ne t r e alise d gains of 2.5%

• Re duc tion c ompa r

e d with 2012 mainly due to lowe r gains ar ising fr

• m por

tfolio r e str uc tur ing in 2012 and lowe r AUM

• T

arg e t alloc ation in c r e dit r e a c he d in 1H 2013 and c ontinue to build out pr

• pe r

ty por tfolio

• Se c ur

itise d c r e dit intr

• duc e d in Q4 2013
• Inc ome yie ld of 2.1% mode stly highe r

than 2012 (2.0% )

Inve stme nt re turn - ong oing ope ra tions (£m)

31 De c 12: 9.4bn

Group inve stme nt yie lds

31 De c 13: £8.6bn Local Government Investment property Sovereign Corporate bonds Supranationals Securitised credit Cash and cash equivalents Return Income

1 Unre alise d g ains re late to de rivative he dg e s and pro pe rty

16

2.25% 2.0% 2.4% 0.1% 0.15% 0.15%

1.8% 1.9% 2.0% 2.1% 2.2% 2.3% 2.4% 2.5%

Inve stme nt yie ld outlook

Inc ome yie ld

30%

0.4yrs 0.8% 2.7% Securitised credit

• 6.5%

2.6% Investment property

2.1%

0.4% 1.9% 2.6%

Inc ome yie ld 100.0%

15.1% 16.4% 63.2%

Alloc ation 2.0yrs T

• tal
• 1.6yrs

2.7yrs

Dura tion 31 De c 13

Credit Sovereign Cash and cash equivalents

Obse rva tions Inc ome yie ld outlook

Reinvestment rates 2015 yield pre move to target asset mix 2013 running yield 2015 yield post mgt actions

• Re inve stme nt ra te s ha ve be ne fite d from move

to targ e t asse t mix and inc re ase in rate s

• Re vise d asse t mix inc lude s inc lude 6% targ e t

for se c uritise d c re dit a nd inc re a se d we ig hting to BBB c orpora te s

Move to target asset mix 2.1% 2.4% Uplift from mgt actions taken in 2013

17 80 40 60 40 160 30

Ope rating profit re c onc iliation

• Run- off se gme nt pr
• fit of £63.6m due ma inly to

fa voura ble prior ye a r de ve lopme nt

• Run- off se g me nt e xpe c te d to be profita ble but

lowe r tha n 2013 le ve l g oing forwa rd

• Re struc turing and othe r one - off c osts of

£140.5m in 2013 in line with g uida nc e with c osts e xpe c te d to be £80m in 2014 Obse rva tions Re struc turing and othe r one - off c osts bre a kdown

• 12.0

Gain on disposal of Direct Line Life

184.3 312.8 Pr

• fit afte r

tax / ne t inc ome 12.3 20.9 E PS – re porte d (pe nc e ) 21.8 25.0 E PS – a djuste d1 (pe nc e ) 249.1 423.9 Pr

• fit be for

e tax

(64.8) (111.1) Tax (37.7)

449.6

(140.5) 63.6

526.5 F Y 2013

6.1 Run-off (189.5) Restructuring and other one-off costs

277.8 Ope rating profit

(28.7) Finance costs

461.2 F Y 2012 £m Ope rating profit - ong oing ope rations

Ope ra ting profit

£190m

IT migration Cost reduction initiatives Separation, divestment and other activities

£140m £80m

1 Adjuste d E PS c alc ulate d using pro fit fro m Ong o ing o pe ratio ns le ss financ e c o sts (UK standard tax rate 23.25%; 2012 24.5%) (se e appe ndix fo r c alc ulatio n)

FY 2012 FY 2013 FY 2014 forecast

18

Divide nd growth in line with guidanc e

Divide nd g rowth a nd pa yout ra tios Obse rva tions F Y11 1H12

• Re c omme nding a fina l divide nd of 8.4 pe nc e

pe r sha re re pre se nting 5% g rowth on 2012

• De c la ring se c ond spe c ia l divide nd of 4.0

pe nc e pe r sha re re la ting to profit from Run- off se g me nt a nd disposa l of T ra c ke r

• T
• ta l divide nds of 20.6 pe nc e pe r sha re

Re gular divide nds 12.01 12.6 T

• ta l re g ula r divide nds

8.0 8.4 Final dividend

• 4.2

Interim dividend

12.01 20.6 T

• tal divide nds
• 4.0

Disposal of Life business

• 4.0

Run-off segment profit/disposal of Tracker

• 8.0

T

• tal spe c ial divide nds

5%

2013

• Regular dividend growth

2012 Pe nc e pe r share Spe c ial divide nds

Divide nd payout r atios

97.6% 55.8% 98.6% 50.4%

1 2012 pro -fo rma divide nd 2 Calc ulate d using adjuste d E PS (se e appe ndix fo r c alc ulatio n)

2012 2013 2012 2013

Adjusted payout ratio Total payout ratio

1 1

19

148.7% 145.4%

0.0% 25.0% 50.0% 75.0% 100.0% 125.0% 150.0% 175.0% 200.0%

Post divide nds 2013 2012

Leverage ratio1 15.7% 16.3% IGD coverage 272% 268% Risk based capital coverage 148.7% 145.4%

De ve lopme nt of c apital c ove rage

Ca pita l le ve ra g e re ma ins within ta rg e t ra ng e post divide nds

• Post fina l 2013 re g ula r divide nd a nd spe c ia l

divide nd, the risk ba se d c a pita l c ove ra g e be c ome s 148.7% , a t uppe r e nd of 125% - 150% ta rg e t ra ng e

• L

e ve ra g e of 15.7% post fina l divide nds

• Conside r re turn of c a pita l if RBC surplus

e xpe c te d to re ma in a bove 150% for a prolong e d pe riod De ve lopme nt of risk ba se d c a pita l c ove ra g e Obse rva tions

125% - 150%

Risk based capital coverage Dec 2012 post final dividend and TPF 2 Dec 2013 post dividends

1 T

• tal financ ial de bt as a pe rc e ntag e o f to tal c apital e mplo ye d

2 T PF No te and £3.5 millio n o f so lve nc y c apital pro vide d b y T PF in re latio n to the T PF life insuranc e b usine ss re c lassifie d fro m no n-c o ntro lling inte re st to sub o rdinate d liab ilitie s and fully re paid o n 8 January 2013

20

Ca pita l drive rs in 2014 a nd be yond

Ca pita l ta ilwinds Ca pita l he a dwinds Ca pita l unc e rtaintie s Obse rva tions

• New ICAS+ process to assess the Group’s

future individual capital guidance

• Introduction of Solvency II from 2016
• Business flows, e.g. GWP, reserves
• Move to target asset mix
• Continued investment in new systems
• Restructuring costs
• Pull to par effect on bond portfolio
• Ongoing operating profit
• Progress on transformation plan

Pote ntia l impa c t

• Increase in market risk
• Increase in intangible assets
• Lower growth in book value

?

• Growth in book value
• Reduction in operational risk

Curre nt c a pita l position se e n a s appropria te ; position to be re vie we d a s c la rity improve s

21

Obse rva tions

Book value and T NAV

Move me nt in ta ng ible ne t a sse t va lue

Net income TNAV FY 2012 TNAV FY 2013 Movement in unrealised gains Movement in intangible assets Other TNAV FY 2013 pre dividend Dividends paid 2,410

NAV a nd T NAV pe r sha re

2,533 2,290

243 11 79 100 313 Pe nc e 2013 2012

Net asset value per share 186.6 189.1 Tangible net asset value per share 153.2 161.0

+5.1%

• He a dline re duc tion in T

NAV ma inly due to divide nds pa id

• Ne t inc ome pa rtia lly offse t by move me nts in

unre a lise d g a ins a nd inta ng ible s

• £59m of ne t unre a lise d g a ins a t the ye a r e nd
• E

xc luding divide nds, unde rlying T NAV g rowth 5.1%

£m

22 22

Age nda and pr e se nte r s

Ke y me ssa g e s Pa ul Ge dde s - CE O F ina nc ia ls John Re ize nste in - CF O Stra te g ic upda te Pa ul Ge dde s - CE O Que stions and answe rs Summa ry a nd outlook Pa ul Ge dde s - CE O Pa ul Ge dde s - CE O

23 23

We ar e tr ansfor ming Dir e c t L ine Gr

• up thr
• ugh five str

ate gic pr ior itie s

Cla ims Costs Pric ing Distr ibution Comme r c ial a nd Inte rnational

E nhanc e e ffe c tive ne ss to impr

• ve Custome r

L ife time Value 1 Build supe r ior pric ing c apabilitie s to utilise sc ale advantage in data 2 Attain mar ke t le ading position in c laims manage me nt 3 Re alise the signific ant c ost

• ppor

tunity 4 L e ve r age c or e skills to impr

• ve pe r

for manc e 5

• 15% re turn on

ta ng ible e quity

• Be low 100% COR for

Comme rc ia l division in 2014

• Approx. £1,000

million c ost ba se in 2014

• Ma inta in c a pita l

re sourc e s c onsiste nt with c re dit ra ting in the ‘A’ range

T ar ge ts

Cle a r stra te g ic pla ns in pla c e to a c hie ve our ta rg e ts

24 24

Distr ibution

1

Wha t we sa id la st ye a r F

• c us on dig ita l c a pa bility a nd c ustome r va lue

2013 prog re ss Prioritie s for 2014

Re duc e d ma rke ting spe nd

while diffe re ntia ting produc t

• ffe r

ings

De ve lope d a nd la unc he d

two T e le matic s pr

• positions –

bla c k box a nd sma rtphone a pp

Inve stme nt in dig ita l c onte nt

pla tform a nd we b tool a na lytic s

• Comple te the roll- out of
• ur ne w sma rtphone a nd

ta ble t optimise d we bsite s a nd le ve ra g e the ne w dig ita l pla tform

• T
• c ontinue to de ve lop

a nd diffe re ntia te the Dire c t L ine c ustome r proposition

• T
• e volve the T

e le ma tic s propositions ba se d on c ustome r fe e dba c k a nd pe rforma nc e

• Re fr

e sh mar ke ting c ampaigns and c ustome r pr

• position
• Impr
• ve digital c apability
• F
• c us on c ustome r

r e te ntion and c r

• ss sale s
• De ploy impr
• ve d pr

ic ing c apabilitie s Prioritie s for 2013 and be yond

25

Ad bre a k

26 26

Pr ic ing

2

Wha t we sa id la st ye a r L e ve ra g e our substa ntia l da ta 2013 prog re ss Prioritie s for 2014

L

a unc he d upda te d te c hnic a l pric ing mode ls in Motor, with furthe r g ra nula rity

Use d improve d ra ting

mode ls to optimise e xposure in highe r pre mium se gme nts

Imple me nte d e nha nc e d

re ne wa l ma na g e me nt c a pa bilitie s in Motor a nd Home

• 30 major progra mme s due to

be de live re d in 2014

• A numbe r of spe c ific pric ing

initia tive s to e nha nc e tra ding c a pa bility on PCWs

• Use T

e le matic s e xpe rie nc e a nd da ta to support te c hnic a l pric ing

Prioritie s for 2013 and be yond

• Continue to optimise the r

ating e ngine to impr

• ve te c hnic al

pr ic ing

• Faster links to external

data

• Real-time deployment of

pricing changes

• Imple me nt e nhanc e d r

e ne wal pr ic ing str ate gie s

• L

e ve r age pr ic ing sophistic ation to tar ge t mor e ar e as of the mar ke t

27 27

Claims

3

Wha t we sa id la st ye a r Ma inta in c la ims pe rforma nc e in the top qua rtile of the se c tor 2013 prog re ss Prioritie s for 2014

Comple te d c la ims

tra nsforma tion in Motor a nd Home with Cla imCe nte r rollout a nd ne w ope ra ting mode l, inc luding the use of soc ial ne tworking te c hnique s to c omba t fra ud

Making full use of our

c laims fulfilme nt ne twork to offe r improve d c ustome r propositions (e .g. c ar re pla c e me nt se rvic e )

L

a ying the founda tions for DL G L e gal Se rvic e s

• Continue to improve

c ustome rs’ e xpe rie nc e by rolling out furthe r c la ims initia tive s e .g . using sma rtphone te c hnolog y

• F

urthe r e nha nc e c la ims le a ka g e a nd fra ud ide ntific a tion

• Ge ne ra te furthe r e ffic ie nc y

throug h the re pa ir ne twork

Prioritie s for 2013 and be yond

• Maintain mome ntum on

c laims tr ansfor mation pr

• gr

amme in Motor and Home

• E

xte nd to Comme r c ial and apply le ar nings to Inte rnational

• Pr
• ac tive ly e mbr

ac e r e gulator y c hange in the c oming ye ar s

28 28

Costs

4

Wha t we sa id la st ye a r De live ry of c ost sa ving s we ll a dva nc e d 2013 prog re ss Prioritie s for 2014

Ac hie ve d c ost re duc tion

ta rg e t se t a t the time of IPO a nd ta ke n furthe r ste ps to improve e ffic ie nc y throug hout the org a nisa tion, pa rtic ula rly in he a d offic e

Built ne w da ta c e ntre s in

c onjunc tion with Ca pg e mini

Sta rte d roll- out of ne w voic e

a nd de sk- top tools to improve e ffic ie nc y throug hout the org a nisa tion

• Ma ke substa ntia l prog re ss on

the migration of IT a pplic a tions, re duc ing de pe nde nc y on RBS Gr

• up

syste ms

• Build a low- c ost se lf- se rvic e

dig ita l infra struc ture

• Re duc e tota l c osts to

a pproxima te ly £1,000 million

Prioritie s for 2013 and be yond

• De live r

y of c ost saving pr

• gr

amme in line with tar ge t

• Continue to build on c ost

ambitions thr

• ugh r

e infor c ing c ultur e of e ffic ie nc y

• L

e ve r age off IT syste m c hange s to e nhanc e digital c apability and automation

• Lower costs and

improved service

29 29

Comme r c ial

Wha t we sa id la st ye a r T a rg e ting COR of be low 100% in 2014 2013 prog re ss Prioritie s for 2014

F

ull c yc le e T ra ding pla tform la unc he d

De live re d e ffic ie nc ie s

throug h c onsolida tion of unde rwriting c e ntre s a nd se pa ra ting tra ding a c tivitie s

Rolle d- out ne w c laims

syste m for va n (Cla imCe nte r)

• Ac hie ve COR ta rg e t of be low

100% 1

• E

mbe d a nd e xtra c t va lue from ClaimCe nte r and e trade roll- out

• De ve lop Va n proposition

inc luding T e le ma tic s a nd Churc hill bra nd

Prioritie s for 2013 and be yond

• Continue to dr

ive gr

• wth to

mic r

• and SME

se gme nts

• Complete roll out of

NIG’s eTrading platform

• De live r

savings and e ffic ie nc y assoc iate d with r e str uc tur ing of r e gional offic e ne twor k and c onsolidation of bac k offic e

• pe r

ations

• L

e ve r age data fr

• m pe r

sonal line s to e nhanc e pr ic ing and unde r wr iting de c isions

5a

1 Assume s no rmal le ve l o f c laims fro m we athe r e ve nts and larg e lo sse s

30 30

Inte r national

Wha t we sa id la st ye a r F

• c us on pr
• fitability in Italy, ma inta ining g rowth in Ge rma ny

2013 prog re ss Prioritie s for 2014

Imple me nte d Cla imCe nte r in

Italy

Improve d profita bility in Ita ly

with a lowe r COR

Sig nific a nt g rowth in

pre miums in Ge rmany for both ye ar on busine ss and Ja n 2013 ye a r e nd busine ss

• F

ur the r dr ive e ffic ie nc ie s in Inte rna tiona l

• Imple me nt a ne w ra ting

e ngine in Italy

• Ma inta in prog re ss in Ge rma n

ye a r- e nd busine ss

• Ove r 9% g rowth in IF

Ps in Ja n 2014

5b

Prioritie s for 2013 and be yond

• Dr

ive ope r ational e ffic ie nc ie s and fur the r le ve r age pan- E ur

• pe an

e xpe r tise in pr ic ing, c laims and digital

• F
• c us on profitability in Italy
• Careful approach to new

business given economic conditions

• Ac c e le r

ate Ge r man IF P gr

• wth
• Opportunity in PCWs and

partners

• Over 100k new IFPs incepting
• n 1 Jan 13; IFPs now in excess
• f 500k

31 31

Age nda and pr e se nte r s

Ke y me ssa g e s Pa ul Ge dde s - CE O Summa ry a nd outlook Pa ul Ge dde s - CE O F ina nc ia ls John Re ize nste in - CF O Stra te g ic upda te Pa ul Ge dde s - CE O Que stions and answe rs Pa ul Ge dde s - CE O

32

UK motor mar ke t r e mains c ompe titive

Motor a ve ra g e pre mium move me nt Q1 obse rva tions T e le ma tic s pe ne tra tion in Q4 (Dire c t L ine ) RT A porta l volume s (inde xe d)

Maintaining unde rwr iting disc ipline

Risk mix: Pr ic e :

Q1 2013

• 6%

Q2 2013

Cha ng e in IF Ps in the qua rte r

1

• 4%
• 2%

+1%

• 3%
• 5%

UK Motor ye ar

• n ye ar
• 3%
• 1%
• 1%

Q3 2013

• 3%
• 4%

Q4 2013

• 1%

60 80 100 120 140

Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13

Industry2 Direct Line Group volume adjusted

• Ma rke t re ma ins hig hly c ompe titive
• Continue our stra te g y of pric ing ba se d on
• ur c la ims e xpe rie nc e
• Motor GWP in Q1 2014 e xpe c te d to be

a pprox 10% lowe r tha n Q1 2013

11% 30% 18%

Under 25s 17-20 21-25

1 Adjuste d fo r Van transfe r into Co mme rc ial 2 Po rtal So urc e http:// c laimspo rtal.o rg .uk/ me dia/158934/rta-ad-ho c -mo j-po rtal-mi-and-g raphs-31_12_13-ve r.1.0.xlsx

33

2 4 6 8 10 12 14 16 18 20 1 11 21 31 41 51 61 71 81

• Combination of flood and

storm claims

• Lower severity than tidal

surge albeit pushed up by southern England location

• All storm claims, no flood
• Low severity
• Circa. £1,000 per claim

UK we athe r e ve nts

Ke y fa c ts

St Jude stor m (Oc t 2013)

Mix E ve nt Home - we a the r e ve nt notific a tions

Claims numbers Development day

Christmas weather (22-31 Dec) Jan 14 Feb 14 Tidal surge (6-7 Dec) St Jude (27-28 Oct)

T idal sur ge (e a rly De c 2013) Chr istmas we athe r (late De c 2013) Stor ms and floods (Jan and F e b 2014)

• Combination of flood and

storm claims

• High flood severity
• Flooding exacerbated by

salt water damage

• Flood volumes are currently less than

1/10th of 2007

• Preliminary view £70-90m of Home

claims as at 22 Feb, with approx £20m of Commercial claims

• Elevated ground water levels means the

potential for future claims has increased Ca ta strophe re insuranc e

• £150m per event retention; £1,300m upper

limit

• ‘Hours’ clause:
• 7 consecutive days for flood
• 3 consecutive days for storm

St St F l St F l F lood and stor m £64m

Home claims

34

UK re gulatory update

F lood Re Road safe ty Compe tition Commission Whiplash

What’s happe ning? What’s happe ning?

Motor le gal e xpe nse s insuranc e Consume r c r e dit Re fe r r al fe e s Add ons

• FCA market study looking at whether there

are common features of the add-on market that weaken competition or drive poor consumer outcomes

• FCA expected to publish its report during Q1

2014

• Thematic review in 2013 which looked at the

positioning and wording of motor legal expenses insurance (MLEI)

• DLG switched MLEI from default in to opt in

ahead of regulatory action

• The FCA confirmed MLEI will be reviewed

again in 2014

• Solicitors’ referral fees were banned from

April 2013 as part of the LASPO reforms

• The CC is considering measures to control

the cost of temporary replacement vehicles (TRVs), including banning fees

• The FCA takes over responsibility for

Consumer Credit from the OFT on 1 April 2014

• The FCA has defined all insurance

companies as ‘high risk’ for the purposes of providing credit

• Industry and UK Government aim to establish

Flood Re by summer 2015

• Until then, insurers have agreed voluntarily to

meet the commitments set out in the ABI Statement of Principles on the Provision of Flood Insurance

• (UK) Minister of State for Justice outlined further

plans to be in place by July 2014:

• Independent medical examination and

reporting

• Improved communication between

insurers and lawyers

• Better data
• CC investigation focused on determining

whether any feature, or combination of features, of the UK private motor insurance markets prevents, restricts or distorts competition.

• CC has identified potential detriment and

published notice of possible remedies

• The UK Government talked about a range of

measures aimed at improving road safety for young drivers

• Graduated driver licencesing is the umbrella

term for a range of measures including:

• Extended learning periods for new

drivers

• A review of driving ages

Supportive of a le ve l pla ying fie ld

35

2014 outlook a nd g uida nc e

COR

1

Comme r c ial COR T

• tal c ost

base 2 £m RoT E

3

T a rg e ts/ g uida nc e Obse rva tions

2011 2012 2013 2014 target 2011 2012 2013 2014 target

• Assume s normal c laims from

we a the r e ve nts a nd la rg e losse s

2011 2012 2013 2014 guidance

• Assume s normal c laims from

we a the r e ve nts

• Q4 tota l c ost ba se of £248m
• T

a rg e t inc lude s unde rlying infla tion a nd impa c t of inve stme nt spe nd

2011 2012 2013 Ongoing target

1 Co mb ine d o pe rating ratio fro m Ong o ing o pe ratio ns 2 Ong o ing o pe rating e xpe nse s inc luding c laims handling c o sts 3 Ro T E is adjuste d pro fit afte r tax fro m o ng o ing o pe ratio ns divide d b y the Gro up’ s ave rag e tang ib le share ho lde rs’ e q uity. Pro fit afte r tax is adjuste d to e xc lude run-o ff o pe ratio ns and re struc turing and o the r

• ne -o ff c o sts and is state d afte r c harg ing tax (using UK standard tax rate o f 23.25%; 2012 24.5%). Pro -fo rma Ro T

E assume s that the c apital ac tio ns take n b y the Gro up prio r to I PO (£1b n divide nd and £500m de bt issue o c c urre d o n 1 January 2012

101.8% 99.2% 96.1% 95.0% - 97.0% 112.3% 108.2% 106.8% 100.0% 1,134 1,137 1,032 Appr

• x

1,000 10.0% 13.4% 16.0% 15.0%

36

Ke y me ssage s

• Ope ra ting profit1 of £526.5m, up 14.2% ;

profit be fore ta x of £423.9m, up 70.2%

1 Ope rating pro fit fro m Ong o ing o pe ratio ns 2 Co mb ine d o pe rating ratio fro m Ong o ing o pe ratio ns 3 Ro T E is adjuste d pro fit afte r tax fro m o ng o ing o pe ratio ns divide d b y the Gro up’ s ave rag e tang ib le share ho lde rs’ e q uity. Pro fit afte r tax is adjuste d to e xc lude run-o ff o pe ratio ns and re struc turing and o the r

• ne -o ff c o sts and is state d afte r c harg ing tax (using UK standard tax rate o f 23.25%).

4 T

• 22 F

e b ruary 2014

• Pe r

for manc e r e fle c ts foc us on value ove r volume toge the r with be ne fits fr

• m our

tr ansfor mation plan

• 5% growth in final divide nd plus a se c ond

spe c ial divide nd of 4.0p – total divide nds

• f 20.6p for 2013
• Mar

ke ts r e main highly c ompe titive g uida nc e of 95% - 97% COR for 2014 (nor malising for we athe r )

• Pr

e liminar y e stimate of YT D Home flood a nd stor m c la ims of £70- 90m a nd a pprox. £20m for Comme rc ia l4 1 2 3 4 5

2011 2012 2013 Target

COR

2

2012 2011 2013 Target 2013 101.8% 99.2% 96.1% 98.0%

ROT E

3

Ongoing Target 2012 Pro forma 2011 2013 10.0% 13.4% 16.0% 15.0%

37 37

Age nda and pr e se nte r s

Ke y me ssa g e s Pa ul Ge dde s - CE O F ina nc ia ls John Re ize nste in - CF O Stra te g ic upda te Pa ul Ge dde s - CE O Pa ul Ge dde s - CE O Que stions and answe rs Summa ry a nd outlook Pa ul Ge dde s - CE O

38

Appe ndic e s

38

39

Instalme nt and othe r ope rating inc ome

Insta lme nt a nd othe r ope ra ting inc ome Obse rva tions

• Insta lme nt a nd othe r ope ra ting inc ome of

£180.2m down £18.1m from 2012

• Re duc tion ma inly due to the c e ssa tion of

solic itors’ re fe rra l fe e inc ome from 1 April 2013

• Insta lme nt inc ome re duc tion broa dly re fle c ts

pre mium tre nds

• Re ve nue from ve hic le re c ove ry a nd re pa ir

se rvic e s inc lude s c . £18m of T ra c ke r inc ome

198.3 180.2 T

• tal – ongoing ope rations

72.9 62.4 Other operating income 125.4 117.8 Instalment income

F Y 2013 F Y 2012 (£m) 72.9 62.4 Othe r ope r a ting inc ome

17.2 15.7 Vehicle replacement referral fee income 25.9 31.8 Revenue from vehicle recovery and repair services 1.9 1.7 Fee income from insurance intermediary services 6.3 6.9

F Y 2013

6.8 21.1

F Y 2012 (£m)

Solicitors’ referral fee income Other income

Bre a kdown of othe r ope ra ting inc ome

40 43.3 56.2 51.6 30.2 39.3 291.9 174.3 37.4 9.0 23.9 FY 2012 FY 2013

Continuation of favour able pr ior ye ar r e se r ve r e le ase s

• Inc re a se d prior ye a r re le a se s

for ong oing ope ra tions of £435m c ompa re d with £322m in 2012

• F

a voura ble run- off from re c e nt a c c ide nt ye a rs prima rily due to unde rwriting a c tions a nd c la ims tra nsforma tion in Motor

• Re se rving assumptions r

e main c onse rva tive

• Assuming unde r

lying tre nds c ontinue , e xpe c t sig nific a nt re se rve re le a se s in 2014, pa rtic ula rly in Motor

1 All fig ure s are ne t o f re insuranc e

Re se rve r e le ase s by division1 Obse rva tions £322m £435m

Motor Home RoPL Commercial International % NEP

8.7% 12.4%

322.0 435.1 F ull ye a r

124.0 71.9 116.0 123.2

2013

105.4 Q2 2013 58.4 Q3 2013

2012 Ong oing

• pe r

ations £m

35.2 Q4 2013 123.0 Q1 2013

Re le a se s by qua rte r

174.3 291.9 F ull ye a r

143.3 148.6

2013

65.8 H2 2013

2012 UK Motor £m

108.5 H1 2013

41

304 226 95 104 104 86 93 100 102 88 107 123 104 102 114 137 111 113 171 132 113 137 201 139 123 142 386 367 364 342 440 409 433 256 227 239 267 234 238 246 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 905 1,006 970 978 873

4,050 3,865 3,829 3,790 3,762 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13

Compe titive marke t c onditions re fle c te d in IF Ps and GWP

IF Ps/ Qua rte rly IF Ps – ong oing ope ra tions GWP - ong oing ope ra tions a djuste d for va n1 (£m)

19,648

1,462 466 9,431 4,239 4,050

31 De c 12 18,475

1,610 583 8,801 3,719 3,762

31 De c 13 18,743

1,586 561 9,014 3,753 3,829

30 Jun 13

Rescue and other personal lines Commercial International Motor Home2

T

• tal

(4.8% )

8.9% (0.6%) (1.9%) (4.0%) (10.6%)

3Q vs. prior ye ar (3.6% )

3.2% 2.8% 2.0% (4.8%) (9.1%)

4Q vs. prior ye ar (4.1% )

9.4% 2.0% (1.6%) (4.6%) (10.8%)

F Y vs. prior ye ar

3

Rescue and other personal lines Commercial International Motor Home

T

• tal

1 DL 4B Van no w re po rte d in Co mme rc ial 2 Ho me Re spo nse po lic ie s re mo ve d fro m so me pac kag e d b ank ac c o unts during 1H 2013. Circ a. 420k po lic ie s 3 Adjustme nt made to GWP and I F Ps fo r DL 4B Van histo ric ally re po rte d in pe rso nal line s Mo to r (GWP: £19.8m F Y 2013, £29.8m F Y 2012. I F Ps: 61k De c 2013, 74k De c 2012). Ne w b usine ss writte n in Co mme rc ial se g me nt fro m S e pte mb e r 2010 1

1,053 1,006 1,028

4,239 4,199 3,753 3,753 3,719 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Quar te r ly IF Ps - Motor Quar te r ly IF Ps - Home

Motor Home RoPL Commercial International

42

51.1% 58.4% 51.3% 53.9%

7.6% 4.8% 11.0% 3.9%

Stability in Home attritional loss ratio

£37m

L

• ss ra tio a na lysis - ong oing ope ra tions

F Y 2012 F Y 2013

Prior year development Home major weather events Full year 2012 current year attritional Prior year development Full year 2012 reported £105m £43m £69m Full year 2013 current year attritional £69m £5m in Q3 £64m relating to St. Jude storm and December floods and storms Home major weather events Full year 2013 reported

43

Ca pita l ma na g e me nt upda te

Capital Manage me nt Polic y

• Objective of ensuring appropriate level of capitalisation and solvency with respect to Board, regulatory and

rating agency requirements

• Capital management set with reference to internal risk based capital model
• Regulatory capital minimum requirements to be covered at all times
• Capital risk appetite consistent with maintaining credit ratings within the ‘A’ range
• Aim to grow the regular dividend annually in real terms

Re insur anc e

• Reinsurance used to reduce capital requirements by:

− UK Motor excess of loss retention reduced to £1m for 2014 − UK Property catastrophe excess of loss retention of £150m with limit of £1.3bn − Italian motor quota share arrangements in place Risk Base d Capital

• A risk based capital model is used to determine

capital requirements for the Group as part of its Internal Capital Assessment (ICA)

• The model is calibrated to a 99.5% confidence

interval over a one year period.

• The risk based capital model has been

enhanced and will meet Solvency II requirements

• Direct Line Group seeks to hold capital

coverage in the range of 125% -150% of risk based capital requirements

46% 26% 13% 6% 8% Reserving risk Underwriting risk Operational risk Market risk Counterparty risk

44

UK r e gulator y update – c laims

Whiplash

What’s happe ning? Our re sponse

Compe tition Commission Road safe ty

• MOJ reforms announced in 2013
• Justice minister outlined further plans to be place by July 2014:
• Independent medical examination and reporting - looking

at accreditation of experts, better reports and fixed fees for reports

• Improved communication between insurers and lawyers
• Better data – improved data collection and improved

sharing of fraud data between lawyers and insurers

• We welcome the reforms
• Disappointed by MOJ decision not to

increase small claims track to £5k

• Considerable amount of detail to work

through with the ABI

• Timetable for implementation appears

challenging

• The CC investigation focused on determining whether any feature,
• r combination of features, of the private motor insurance markets

prevents, restricts or distorts competition. Main focus areas:

• Garage repair costs
• Credit hire
• PCW most favoured nation clauses
• CC has identified potential detriment as part of its provisional

findings, and published a notice of possible remedies

• Formal responses submitted
• Multiparty hearing scheduled for 26

Feb

• CC must consider cost of

implementation vs cost to the industry and ultimately the customer

• In favour of some measures but not all

– key detriment is credit hire

• We were disappointed that the

Government chose not to publish a green paper

• We continue to lobby the Department

for Transport to improve road safety for young drivers

• Proven international evidence of

substantive improvements

• The Government talked some time ago about a range of

measures aimed at improving road safety for young drivers

• Graduated driver licencesing is the umbrella term for a range of

measures including:

• Extending learning periods for new drivers
• A review of driving ages
• Potential restrictions for a period after passing the test (e.g.
• n the number of passengers)

45

• The FCA takes over responsibility for Consumer Credit from

the OFT on 1 April 2014

• The FCA has defined all insurance companies as ‘high risk’

for the purposes of providing credit

• We continue to lobby HMT and FCA to

ensure the GI sector receives a proportionate, pragmatic and risk based approach to the regulation of consumer credit

UK r e gulator y update – othe r inc ome

Motor le gal e xpe nse s insuranc e Consume r c r e dit

• Thematic review looked at the positioning and wording of

motor legal expenses insurance (MLEI). Review concluded:

• MLEI is a complex product, but can be useful for

consumers

• Firms need to review practices, particularly relating to

sales processes and quality of explanation.

• The FCA confirmed MLEI will be reviewed again in 2014

Re fe r r al fe e s Add ons

• FCA market study looking at whether there are common

features of the add-on market that weaken competition

• r drive poor consumer outcomes
• FCA intends to publish its report during Q1 2014

What’s happe ning? Our re sponse

• Solicitors’ referral fees were banned from April 2013 as part
• f the LASPO reforms
• The CC are considering measures to control the cost of

temporary replacement vehicles (TRVs) including banning fees

• Engaged with the regulator
• We welcome a high regulatory baseline
• Actively engaged with the CC
• In favour of reducing credit hire rates

and durations, which may lead to a reduction and ultimate removal of fees

• Not in favour of outright ban in isolation
• Our customers value this product
• Our practices were already in line with

the FCA’s recommendations

46

Re gulatory update – F lood Re

Bac kgr

• und

What’s happe ning? Ge ospa tia l tool

De tails T iming

• Memorandum of Understanding agreed between the

Government and insurance industry in June 2013

• Flood Re confirmed as the preferred solution to availability and

affordability of flood insurance

• Flood Re is not-for-profit mutual scheme that offers reinsurance

for flood losses on risks ceded to it by home insurers

• In addition to premiums ceded, Flood Re will be funded by a levy
• n all home insurers, equating to £10.50 on an annual household

premium

• Certain proposed exceptions – properties built from Jan 2009,

properties in the highest council tax bands and commercial property

• Industry and Government aim to establish Flood Re by summer

2015

• Until then, insurers have agreed to voluntarily meet the

commitments set out in the ABI Statement of Principals on the Provision of Flood Insurance

• DLG is working to understand the implications of Flood Re

although the impact on insurers is expected to be neutral

• Accurate modelling of risks and

review of events

• Manage accumulation
• Leverage data / modelling for

Commercial risks

• Enable overlays of additional data

sets

47

Se gme ntal pe rformanc e : 2013

96.1% 103.9% 106.8% 92.4% 93.8% 93.2% Combine d ope r ating r atio (391.6)

(57.9) (92.2) (27.3) (177.9) (36.3) Commission expenses

(2,639.5)

(322.7) (322.2) (228.8) (533.7) (1,232.1) Net claims – current year

435.1

39.3 51.6 9.0 43.3 291.9 Net claims – prior years

(12.4% )

(10.7%) (11.8%) (2.4%) (4.8%) (20.2%) Loss ratio - PY

(786.4)

(39.6) (101.4) (90.8) (184.4) (370.2) Operating expenses

3,520.6

366.5 434.6 365.8 908.9 1,444.8 Net earned premium

208.1

23.4 29.6 8.2 24.1 122.8 Investment return

138.2 (14.4) (29.6) 27.9 56.2 98.1 Unde r wr iting r e sult 11.2%

15.8% 21.2% 7.5% 19.6% 2.5% Commission ratio

22.3%

10.8% 23.2% 24.8% 20.3% 25.6% Expense ratio 62.5%

46.5

10.4 383.4 Re sc ue and

• the r pe rsona l

line s 58.7%

106.2

25.9 943.1 Home 88.0%

16.6

7.6 604.5 Inte rnationa l 74.1%

9.5

9.5 474.5 Comme rc ial £m Motor T

• tal Ongoing

GWP 1,421.1

3,826.6

Instalment income and other

• perating income

126.8

180.2 Ope r ating pr

• fit/ (loss)

347.7 526.5

Loss ratio - CY 85.3%

75.0%

48

Se gme ntal pe rformanc e : 2012

99.2% 103.3% 108.2% 82.7% 96.6% 101.6% Combine d ope r ating r atio (337.5)

(41.5) (87.0) (22.9) (154.2) (31.9) Commission expenses

(2,810.2)

(298.2) (310.3) (218.8) (592.1) (1,390.8) Net claims – current year

322.0

30.2 56.2 23.9 37.4 174.3 Net claims – prior years

(8.7% )

(8.8%) (13.9%) (6.3%) (3.9%) (10.8%) Loss ratio - PY

(854.8)

(44.9) (94.8) (98.8) (209.2) (407.1) Operating expenses

3,708.7

343.1 402.8 382.8 950.8 1,629.2 Net earned premium

234.7

23.7 29.4 7.5 34.1 140.0 Investment return

28.2 (11.3) (33.1) 66.2 32.7 (26.3) Unde r wr iting r e sult 9.1%

12.1% 21.6% 6.0% 16.2% 2.0% Commission ratio

23.0%

13.1% 23.5% 25.8% 22.0% 25.0% Expense ratio 57.2%

84.4

10.7 389.8 Re sc ue and

• the r pe rsona l

line s 62.3%

93.3

26.5 989.0 Home 86.9%

19.5

7.1 552.7 Inte rnationa l 77.0%

2.2

5.9 435.6 Comme rc ial £m Motor T

• tal Ongoing

GWP 1,623.5

3,990.6

Instalment income and other

• perating income

148.1

198.3 Ope r ating pr

• fit/ (loss)

261.8 461.2

Loss ratio - CY 85.4%

75.8%

49 3% 9% 1%

2%

5% 19% 31% 4% 9% 6% 11%

F ixe d inc ome portfolio

F ixe d inc ome by se c tor F ixe d inc ome by ra ting

T

• tal de bt se c uritie s £7.0bn

T

• tal de bt se c uritie s £7.0bn

13% 31% 39% 16% AAA rated AA and above A and above BBB- and above

Communications Consumer goods Energy Financial Sovereign - UK Supranational Local Government Mortgage backed securities Other Utilities Sovereign other

50

F ixe d inc ome portfolio

Sove re ig n e xposure by c ountry Sove re ig n e xposure by ra ting

• Spain

20.4 Italy 4.4 Belgium

• Ireland
• Germany

30.8 T OT AL

4.3 Netherlands

• 1.8

31 De c 13

France Austria Key Eurozone countries £m

T

• tal sove r

e ign £1.4bn

Corpora te e xposure by c ountry

23.2 Spain 39.3 Italy 47.0 Belgium 0.3 Ireland 267.4 Germany

701.5 T OT AL

53.9 Netherlands 7.1 263.3

31 De c 13

France Finland Key Eurozone countries £m

Corpora te e xposure by ra ting

T

• tal c orporate £3.5bn

98% 2% 12% 11% 49% 29%

AAA rated AA and above A and above BBB- and above

AAA rated BBB and above

51

F ixe d inc ome portfolio

Ba nk a nd othe r fina nc ia l institutions e xposure

39.8 Investment hedge derivatives

1,625.2 T

• tal banks

469.6 Other financial institutions

2,134.5 T

• tal

135.9 Secured 191.9 Subordinated 1,297.3

31 De c 13

Unsecured £m

Ba nk a nd othe r fina nc ia l institutions by ra ting

T

• ta l ba nk a nd F

I £2.1bn

• Portugal

6.2 Finland 8.0 Spain 10.0 Italy 1.8 Belgium 3.8 Ireland 197.7 Germany

519.0 T OT AL

173.4 Netherlands

• 118.1

31 De c 13

France Greece Key Eurozone countries £m

26.2 T

• tal

48.6 RBS Group debt held (17.0) Interest rate swaps (1.5) FX derivatives

74.8 T

• ta l c a sh a nd inve stme nt

tr ansac tion

35.0 Term deposits 64.7 Cash (55.1) Overdrafts

• 31 De c 13

Short term deposits RBS Group Exposure £m

23% 21% 50% 6%

AAA rated AA and above A and above BBB- and above

52 11.5% 2,828.1

2,410.1 3,246.1

326.5

(106.0) 432.5 (28.7) 461.2

2012 (£m) 2013

Ongoing operating profit 526.5 Less: Finance costs (37.7) Profit before tax (ongoing operations) 488.8 Less: tax1 (113.6)

Pr

• fit afte r

tax 375.2

Invested tangible equity b/f 2,410.1 Invested tangible equity c/f 2,289.9

Ave r age inve ste d tang ible e quity 2,350.0 Re tur n on tangible e quity 16.0%

RoT E c alc ulation

1 Standard UK tax rate 24.5% F

Y 2012, 23.25% F Y 2013

RoT E c alc ula tion Adjuste d E PS c a lc ulation

1,500.0 1,501.2 Weighted ave number of shares (diluted)

21.8 21.8

1,500.0

326.5

(106.0) 432.5 (28.7) 461.2

2012 (£m) 2013

Ongoing operating profit 526.5 Less: Finance costs (37.7) Profit before tax (ongoing operations) 488.8 Less: tax1 (113.6)

Pr

• fit afte r

tax 375.2

Weighted average number of shares 1,500.0

Adjuste d E PS (pe nc e ) 25.1 Adjuste d E PS (dilute d) (pe nc e ) 25.0

53 53

Ge ne r al disc laime r

F

• r

wa r d-looking state me nts

This document has been prepared for, and only for, the members of Direct Line Insurance Group plc (the “Company”) as a body, and no other

• persons. The Company, its Directors, employees, agents or advisers do not accept responsibility to any other person to whom this document is shown
• r into whose hands it may come and any such responsibility or liability is expressly disclaimed.

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”, “anticipates”, “believes”, “estimates”, “expects”, “guidance”, “intends”, “may”, “plans”, “predicts”, “projects”, “seeks”, “should”, “targets” or “will” or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this document and include statements regarding the intentions, beliefs or current expectations of the Directors concerning, amongst other things: the Group’s results of operations, financial condition, prospects, growth, strategies and the industry in which the Group operates. Examples of forward-looking statements include financial targets which are contained in this document specifically with respect to RoTE, the Group’s COR, the COR for the Group’s Commercial business, and cost savings. By their nature, all forward-looking statements involve risk and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future or are beyond the Group’s control. Forward-looking statements are not guarantees of future performance. The Group’s actual results of operations, financial condition and the development of the business sector in which the Group operates may differ materially from those suggested by the forward- looking statements contained in this document including, but not limited to, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements or the Ogden discount rate), the impact of competition, currency changes, inflation, deflation, the timing impact and

• ther uncertainties of future acquisitions or disposals or combinations within relevant industries, as well as the impact of tax and other legislation and
• ther regulation in the jurisdictions in which the Group and its affiliates operate. In addition, even if the Group’s actual results of operations, financial

condition, and the development of the business sector in which the Group operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. The forward-looking statements contained in this document reflect knowledge and information available as of the date of preparation of this

• document. The Company and the Directors expressly disclaim any obligations or undertaking to update or revise publicly any forward-looking

statements, whether as a result of new information, future events or otherwise, unless required to do so by applicable law or regulation. Nothing in this document should be construed as a profit forecast.